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 MARCH 31, 2001
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 10, 2001, there were 24,625,352 shares outstanding of the Registrant's
Common Stock (par value $0.001 per share).
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements..........................................................................3
Consolidated Balance Sheets,
March 31, 2001 (Unaudited) and December 30, 2000.....................................3
Consolidated Statements of Operations (Unaudited),
Three Months Ended March 31, 2001 and April 1, 2000..................................4
Consolidated Statements of Comprehensive Income (Unaudited),
Three Months Ended March 31, 2001 and April 1, 2000..................................5
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 2001 and April 1, 2000..................................6
Notes to Consolidated Financial Statements (Unaudited)...................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................18
Item 2. Changes in Securities........................................................................18
Item 3. Defaults Upon Senior Securities..............................................................18
Item 4. Submission of Matters to a Vote of Security Holders..........................................18
Item 5. Other Information............................................................................18
Item 6. Exhibits and Reports on Form 8-K.............................................................18
SIGNATURES..............................................................................................19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WILD OATS MARKETS, INC.
Consolidated Balance Sheets
(in thousands, except share data)
March 31, December 30,
2001 2000
(Unaudited)
----------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 12,937 $ 12,457
Inventories 56,278 55,258
Accounts receivable (less allowance
for doubtful accounts of $457
and $355, respectively) 4,196 3,936
Income tax receivable 6,179 9,973
Prepaid expenses and other current assets 1,683 2,004
Deferred income taxes 3,733 1,989
----------------- -----------------
Total current assets 85,006 85,617
Property and equipment, net 181,148 172,916
Intangible assets, net 114,137 114,461
Deposits and other assets 2,320 3,791
Long-term equity investment 228 228
----------------- -----------------
$ 382,839 $ 377,013
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 59,945 $ 56,556
Accrued liabilities 44,135 41,815
Current portion of debt and capital leases 123,687 124,215
----------------- -----------------
Total current liabilities 227,767 222,586
Long-term debt and capital leases 331 353
Deferred income taxes 1,382 989
Other long-term obligations 2,623 1,521
----------------- -----------------
232,103 225,449
----------------- -----------------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000
shares authorized; no shares issued and
outstanding
Common stock, $0.001 par value; 60,000,000 shares
authorized; 24,625,227 and 23,147,103 shares
issued and outstanding 25 23
Additional paid-in capital 159,626 149,764
Note receivable, related party (9,274)
Retained earnings 1,519 1,635
Accumulated other comprehensive income (1,160) 142
----------------- -----------------
Total stockholders' equity 150,736 151,564
----------------- -----------------
$ 382,839 $ 377,013
================= =================
The accompanying notes are an integral part of the consolidated
financial statements.
3
WILD OATS MARKETS, INC.
Consolidated Statements of Operations
(in thousands, except per-share data) (unaudited)
Three Months Ended
--------------------------------------
March 31, April 1,
2001 2000
----------------- -----------------
Sales $ 219,499 $ 211,241
Cost of goods sold and occupancy costs 153,090 144,717
----------------- -----------------
Gross profit 66,409 66,524
Operating expenses:
Direct store expenses 51,616 46,546
Selling, general and administrative expenses 11,083 7,845
Pre-opening expenses 1,430 1,354
----------------- -----------------
Income from operations 2,280 10,779
Interest expense, net 2,466 1,782
----------------- -----------------
Income (loss) before income taxes (186) 8,997
Income tax expense (benefit) (68) 3,663
----------------- -----------------
Net income (loss) $ (118) $ 5,334
================= =================
Net income (loss) per common share:
Basic $ (0.00) $ 0.23
Diluted $ (0.00) $ 0.23
Average common shares outstanding 23,587 23,000
Dilutive effect of stock options 464
----------------- -----------------
Average common shares outstanding, assuming dilution 23,587 23,464
================= =================
The accompanying notes are an integral part of the consolidated
financial statements
4
WILD OATS MARKETS, INC.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands) (unaudited)
Three Months Ended
--------------------------------------
March 31, April 1,
2001 2000
----------------- -----------------
Net income (loss) $ (118) $ 5,334
Other comprehensive income (loss):
Foreign currency translation adjustments arising
during the period (264) (172)
Cumulative effect of change in accounting principle
(see Note 3), net of tax of $352 (586)
Recognition of hedge results to interest expense during
the period, net of tax of $38 64
Change in market value of cash flow hedge during
the period, net of tax of $308 (516)
----------------- -----------------
Other comprehensive loss (1,302) (172)
----------------- -----------------
Comprehensive income (loss) $ (1,420) 5,162
================= =================
The accompanying notes are an integral part of the consolidated
financial statements
5
WILD OATS MARKETS, INC.
Consolidated Statements of Cash Flows
(in thousands) (unaudited)
Three Months Ended
--------------------------------------
March 31, April 1,
2001 2000
----------------- -----------------
Cash Flows from Operating Activities
Net income (loss) $ (118) $ 5,334
Adjustments to reconcile net
income (loss) to net cash from
operating activities:
Depreciation and amortization 6,772 7,045
Loss on disposal of property and equipment 7
Deferred tax benefit (723) (37)
Other 17
Change in assets and liabilities (net of acquisitions):
Inventories (1,097) (1,940)
Receivables and other assets 3,569 (566)
Accounts payable 3,426 2,361
Accrued liabilities 1,434 2,039
----------------- -----------------
Net cash provided by operating activities 13,287 14,236
----------------- -----------------
Cash Flows from Investing Activities
Capital expenditures (12,301) (18,085)
Payment for purchase of acquired entities, net of cash acquired (3,100)
Proceeds from sale of property and equipment 162
Long-term equity investment (38)
----------------- -----------------
Net cash used in investing activities (12,139) (21,223)
----------------- -----------------
Cash Flows from Financing Activities
Net borrowings (repayments) under line-of-credit agreement (2,486) (1,589)
Proceeds from notes payable and long-term debt 2,000
Repayments on notes payable, long-term debt & capital leases (63) (244)
Proceeds from issuance of common stock, net 13 217
----------------- -----------------
Net cash used in financing activities (536) (1,616)
----------------- -----------------
Effect of exchange rate changes on cash (132) 7
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 480 (8,596)
Cash and cash equivalents at beginning of period 12,457 21,877
----------------- -----------------
Cash and cash equivalents at end of period 12,937 $ 13,281
================= =================
Non-Cash Investing and Financing Activities
Stock issued in exchange for note receivable $ 9,274 $ 750
================= =================
Stock received in exchange for services
The accompanying notes are an integral part of the consolidated
financial statements.
6
WILD OATS MARKETS, INC.
Notes to Consolidated Financial Statements
(unaudited)
1. Nature of Operations and Basis of Presentation
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 parts of the United States of America.
The consolidated balance sheet as of March 31, 2001, the consolidated
statements of operations and comprehensive income for the three months ended
March 31, 2001 and April 1, 2000, as well as the consolidated statements of cash
flows for the three months ended March 31, 2001 and April 1, 2000 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. These consolidated financial
statements should be read in conjunction with financial statements and notes
thereto included in the Company's 2000 Annual Report on Form 10-K. The results
of operations for interim periods presented are not necessarily indicative of
the operating results for the full year.
2. Going Concern Matters
These consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The terms of the Company's
credit facility require, among other things, compliance with certain financial
ratios, including a funded debt (i.e., debt/EBITDA) ratio and a fixed charge
coverage ratio, on a quarterly basis. As a result of restructuring charges
incurred during fiscal 2000, the Company was not in compliance with the fixed
charge coverage ratio and minimum net income covenants under its credit facility
as of and for the quarter ended December 30, 2000, and as a result, its lenders
have issued a notice of default, although no acceleration of outstanding debt
has been requested. All borrowings outstanding under the credit facility at
March 31, 2001 are considered to be due on demand and accordingly are classified
as a current liability at March 31, 2001. The Company currently does not have
sufficient funds to pay all outstanding indebtedness. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company currently is negotiating an amendment of its credit facility that
may include the payment of an amendment fee, an increase in interest rates, a
security interest in assets and additional covenants relating to capital
expenditures and new leases. In conjunction with the Company's negotiations to
amend its credit facility and obtain less restrictive covenants and other terms
and conditions therein, the Company also proposes to raise approximately $30.0
million or more in equity financings to be used to provide additional liquidity,
though such equity financing is not a requirement of amending the credit
facility. If the Company's lenders accept the amendments currently proposed by
the Company, then the Company's borrowing capacity would be limited to $125
million, the maturity date of the credit facility would continue to be August 1,
2003, the interest rate would be increased periodically, and all existing events
of default would be waived as of the amendment date.
A breach of any of the terms and conditions of the amended credit
facility agreement could result in acceleration of the Company's indebtedness,
in which case the debt would become immediately due and payable. Although no
assurances can be given, management expects that it would be in compliance
throughout the term of the amended credit facility with respect to the financial
and other covenants, including those regarding funded debt ratio, fixed charge
coverage ratio, minimum year-to-date net income, tangible net worth, capital
expenditure limits, and new lease limits. Management believes that cash
generated from operations will be sufficient to satisfy the Company's currently
budgeted capital expenditure and debt service requirements through fiscal 2001
and that no additional funding will be necessary.
7
3. New Accounting Standard for Derivatives and Hedging Activities
In accordance with the Company's interest rate risk-management strategy
and as required by the terms of the Company's credit facility, the Company has
entered into a swap agreement to hedge the interest rate on $47.5 million of its
borrowings. The swap agreement locks in an average LIBOR rate of 6.7% and
expires in August 2003. The fair value of the swap at March 31, 2001 was ($1.7
million), which has been recorded in the accompanying balance sheet.
The Company adopted Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (FAS 133) on
December 31, 2000. In accordance with the transition provisions of FAS 133, as
of December 31, 2000 the Company recorded a net-of-tax cumulative loss
adjustment to other comprehensive income totaling $586,000 which relates to the
fair value of the previously described cash flow hedging relationship. Based
upon current interest rates, approximately $793,000 of the interest rate hedging
loss currently in other comprehensive income is expected to flow through
interest expense during the next twelve months.
On the date that the Company entered into the derivative contract, it
designated the derivative as a hedge of the variability of cash flows that are
to be received or paid in connection with a recognized asset or liability (a
"cash flow" hedge). The Company does not enter into derivative contracts for
trading or non-hedging purposes. Currently, the Company's swap agreement is
designated as a cash flow hedge and is recognized in the balance sheet at its
fair value. Changes in the fair value of the Company's cash flow hedge, to the
extent that the hedge is highly effective, are recorded in other comprehensive
income, until earnings are affected by the variability of cash flows of the
hedged transaction through interest expense. Any hedge ineffectiveness (which
represents the amount by which the changes in the fair value of the derivative
exceed the variability in the cash flows being hedged) is recorded in
current-period earnings.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair value, cash flow, or foreign
currency hedges to (1) specific assets and liabilities on the balance sheet or
(2) specific firm commitments or forecasted transactions. The Company also
formally assesses (both at the hedge's inception and on an ongoing basis)
whether the derivatives that are used in hedging transactions have been highly
effective in offsetting changes in the cash flows of hedged items and whether
those derivatives may be expected to remain highly effective in future periods.
When it is determined that a derivative is not (or has ceased to be) highly
effective as a hedge, the Company discontinues hedge accounting prospectively,
as discussed below.
The Company discontinues hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item (including hedged items such as
firm commitments or forecasted transactions); (2) the derivative expires or is
sold, terminated, or exercised; (3) it is no longer probable that the forecasted
transaction will occur; (4) a hedged firm commitment no longer meets the
definition of a firm commitment; or (5) management determines that designating
the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued due to the Company's
determination that the derivative no longer qualifies as an effective fair value
hedge, the Company will continue to carry the derivative on the balance sheet at
its fair value but cease to adjust the hedged asset or liability for changes in
fair value. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the Company will continue to
carry the derivative on the balance sheet at its fair value, removing from the
balance sheet any asset or liability that was recorded to recognize the firm
commitment and recording it as a gain or loss in current period earnings. When
the Company discontinues hedge accounting because it is no longer probable that
the forecasted transaction will occur in the originally expected period, the
gain or loss on the derivative remains in accumulated other comprehensive income
8
and is reclassified into earnings when the forecasted transaction affects
earnings. However, if it is probable that a forecasted transaction will not
occur by the end of the originally specified time period or within an additional
two-month period of time thereafter, the gains and losses that were accumulated
in other comprehensive income will be recognized immediately in earnings. In all
situations in which hedge accounting is discontinued and the derivative remains
outstanding the Company will carry the derivative at its fair value on the
balance sheet, recognizing changes in the fair value in current-period earnings.
4. Earnings Per Share
Earnings per share are calculated in accordance with the provisions of
FAS No. 128, Earnings Per Share. FAS No. 128 requires the Company to report both
basic earnings per share, which is based on the weighted-average number of
common shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding and all dilutive potential
common shares outstanding, except where the effect of their inclusion would be
antidilutive (i.e., in a loss period). Antidilutive stock options of 3,115,422
and 436,434 for the three months ended March 31, 2001 and April 1, 2000,
respectively, were not included in the earnings per share calculations.
5. Merger and Restructuring Charges
During the second quarter of fiscal 2000, the Company's management made
certain decisions relating to the strategic repositioning of the Company's
operations which resulted in a pre-tax restructuring charge of $22.7 million.
These decisions included the closure of three natural foods stores and one small
vitamin store during the second quarter of fiscal 2000 ($4.7 million); the
planned sale or closure of seven stores during the remainder of fiscal 2000
($9.9 million); exit costs of previously closed or abandoned sites ($5.6
million); and the discontinuation of e-commerce activities ($2.5 million).
Components of the restructuring charge consist primarily of abandonment of fixed
and intangible assets ($15.3 million); noncancelable lease obligations and lease
related liabilities ($5.3 million); and write-down of the Company's long-term
equity investment in an e-commerce business partner due to asset impairment
($2.1 million). Substantially all of the restructuring charges are non-cash
expenses. In conjunction with the restructuring charge, the Company recorded a
liability of $4.9 million for noncancelable lease obligations.
During the fourth quarter of fiscal 2000, the Company expanded its
strategic repositioning and, as a part of such expansion, decided to close or
sell up to an additional eight stores which did not meet expectations. This
decision resulted in an additional pre-tax restructuring charge in the fourth
quarter of fiscal 2000 of $21.4 million. This restructuring charge consists
primarily of costs associated with the abandonment of fixed and intangible
assets ($15.3 million) and noncancelable lease obligations and lease related
liabilities ($6.1 million). Substantially all of the restructuring charges are
non-cash expenses. In conjunction with the restructuring charge, the Company
recorded a liability of $5.9 million for noncancelable lease obligations.
The following table summarizes accruals related to all the Company's
restructuring activities during the first quarter of fiscal 2001:
(in thousands)
------------------------------------------------ -- ---------------------
Balance, December 30, 2000 $ 14,260
Cash paid (1,665)
Stock options issued (43)
Other (112)
---------------------
Balance, March 31, 2001 $ 12,450
=====================
9
6. Related Party Transaction
During the first quarter of fiscal 2001, the Company borrowed $2.0
million from Elizabeth C. Cook and Michael C. Gilliland, directors of the
Company. The loan has no maturity date, bears interest at 9.0%, and is
classified as a current liability.
7. Change in Management
Effective March 19, 2001, Michael Gilliland resigned as the Company's
Chief Executive Officer. Mr. Gilliland was replaced by Perry D. Odak as the
Company's Chief Executive Officer and President. Mr. Odak has a five-year
employment agreement with the Company. Mr. Odak purchased five percent of the
outstanding stock of the Company, on a fully diluted basis, in exchange for cash
($13,000) and a full recourse promissory note ($9.3 million) with a five-year
maturity date. His employment agreement also provides that upon the issuance of
equity in an offering within nine months after the commencement of his
employment, he will be granted options, exercisable for up to a maximum of
300,000 shares, to maintain his percentage ownership in the Company's stock.
8. Employee Stock Purchase Plan
The Board suspended participation in the Employee Stock Purchase Plan
effective January 29, 2001, when the available pool of shares was substantially
exhausted. The Company is seeking shareholder approval at its annual meeting in
May 2001 to increase the pool of stock by 500,000 shares.
10
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 Company's ability to negotiate a suitable amendment to its
outstanding line of credit facility; the timing and success of the current
comprehensive review of the Company's business operations and strategic plan;
the successful transition of operating authority to our new Chief Executive
Officer, Perry D. Odak; 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
or suppliers; changes in management information needs; changes in customer needs
and expectations; governmental and regulatory actions; 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statement Regarding Forward-Looking Statements."
Overview
Store openings, closings, sales, remodels, relocations and
acquisitions. In the first quarter of fiscal 2001, we opened four new stores in
Cleveland, Ohio; Irvine, California; Westport, Connecticut; and Omaha, Nebraska;
and we closed one store that did not meet our strategic objectives in Denver,
Colorado. We plan to open one new store in the remainder of fiscal 2001.
Our ability to open additional stores in fiscal 2001 and beyond may
depend upon our ability to successfully negotiate an amendment to our existing
credit facility. As of March 31, 2001, we were in non-monetary default as a
result of the violation of certain financial covenants contained in our credit
facility, although our lenders have not accelerated repayment on our outstanding
debt. All borrowings outstanding under the credit facility at March 31, 2001 are
considered to be due on demand and accordingly are classified as a current
liability at March 31, 2001. We are currently negotiating an amendment to the
credit facility that, if agreed upon, will waive the outstanding defaults in
exchange for limitations on our execution of new leases and capital
expenditures, as well as other financial covenants, possibly including increased
interest rates and an amendment fee. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" and Consolidated Financial Statements - Footnote 2.
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 fiscal 2001, we closed one operating grocery store that was
previously identified for closure as part of our strategic repositioning.
As a result of the March transition in our Chief Executive Officer and
a new management philosophy, the Company is currently conducting an extensive
review of all components of its business, including its previously announced
strategic repositioning initiatives, as well as current marketing, purchasing,
merchandising, and new store programs. This comprehensive review is intended to
aggressively reexamine all aspects of our business for opportunities to improve,
strengthen, streamline and reposition our business operations. The outcomes of
this review may result in significant changes to the Company's current business
strategy and may have a negative impact on the Company's financial projections
for the remainder of fiscal 2001. In conducting this review of its business, the
Company has potentially identified additional non-cash restructuring and asset
write-down charges of approximately $38 million to $45 million after tax, which
we anticipate will be recorded primarily in the second quarter. A portion of the
anticipated restructuring charge relates to severance costs for a reduction in
the Company's general and administrative workforce resulting from the
comprehensive review being conducted. The future savings from salaries and
benefits attributed to the reduction in the general and administrative workforce
will be reinvested to improve store operations, marketing programs and
technology systems. Also as part of this comprehensive review of its business,
the Company has decided to postpone any further new store openings planned for
fiscal 2001, with the exception of one Henry's Marketplace(R) store planned to
open in the fourth quarter. The sites previously planned for opening in fiscal
2001 will be rescheduled to open in 2002. The
11
Company also continues to reevaluate certain locations that it had previously
identified for sale or closure.
Results of Operations. 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
fiscal 2001 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 and the integration of the
acquired stores into our operating systems. Over time, we expect that the gross
margin and store contribution margin of acquired stores approach our company
average.
Other factors that could cause acquired stores to perform at lower than
expected levels include, among other things, turnover of regional and store
management, disruption of advertising, changes in product mix and delays in the
integration of purchasing programs. The Company continues to experience
integration difficulties with certain of the stores acquired or added to our
store base in fiscal 1999, and as a result such stores are having a negative
impact on our consolidated results of operations. We expect that these stores
will take substantially longer to show gross margin and store contribution
margin improvements.
We are actively upgrading, remodeling or relocating some of our older
stores. We plan to complete the remodeling or remerchandizing of as many as 10
of our older stores in the first half of fiscal 2001. 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. Certain remodels in fiscal 2000 took
longer to complete, resulting in greater than projected sales disruptions. We
cannot predict whether sales disruptions and the related impact on earnings may
be greater in time or volume than projected in certain remodeled or relocated
stores.
Store format and clustering strategy. We operate two store formats:
natural foods supermarkets and farmers' markets. The natural foods supermarket
format, operated under the Wild Oats Community Market(R) and other tradenames,
is generally 20,000 to 35,000 gross square feet, and the farmers' markets,
operated under the Henry's Marketplace(R) and Sun Harvest Farms(TM) tradenames,
are generally 15,000 to 25,000 gross square feet. Our profitability has been and
will continue to be affected by the mix of natural foods supermarkets and
farmers' market stores opened, acquired or relocated and whether stores are
being opened in markets where we have an existing presence. As part of the
current comprehensive review of the Company's business operations and strategic
plan, we are evaluating our current natural foods store format and design, and
may make significant changes in the future. We also plan to expand the Henry's
Marketplace farmers' market-style store format as our second, parallel store
format. We believe this format, which is primarily located in metropolitan San
Diego, California and Texas, appeals to a more value-conscious customer.
In the past, 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 prior years, when we opened a store in a market where we
had an existing presence, our sales and operating results declined at certain of
our existing stores in that market. However, over time, the affected stores
generally achieved store contribution margins comparable to prior levels on the
lower base of sales. Certain new stores opened in the past two years have caused
a greater degree of cannibalization than previously expected, and at this time
it does not appear that the store contribution margins at the older, affected
stores in these regions will rebound to their prior levels. In certain existing
markets the sales and operating results trends for other stores may 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 opened new
stores.
12
Comparable store sales results. Sales of a store are deemed to be
comparable commencing in the thirteenth full month of operations for new,
relocated and acquired stores. A variety of factors affect our comparable store
sales results, including, among others:
o the opening of stores by us or by our competitors in markets where we
have existing stores
o the relative proportion of new or relocated stores to mature stores
o the timing of advertising and promotional events
o store remodels
o store closures
o our ability to effectively execute our operating plans
o changes in consumer preferences for natural foods products
o availability of produce and other seasonal merchandise
o general economic conditions.
Past increases in comparable store sales may not be indicative of
future performance.
Our comparable store sales results have been negatively affected in the
past by, 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." Comparable store sales results in previous years were
negatively affected by higher than expected cannibalization due to the openings
of new or relocated stores in several of our existing markets. Certain stores,
such as the Henry's Marketplace format stores, which depend heavily on produce
sales, are more susceptible to sales fluctuations resulting from the
availability and price of certain produce items. As a result of operational
improvements in some recently acquired stores, new marketing programs in
selected regions and store closures of certain weaker stores, comparable store
sales results increased to 1% in the first quarter of fiscal 2001 from (3.5%) at
the end of the fourth quarter of fiscal 2000. We expect comparable store sales
results to be approximately 1% for the remainder of the year. There can be no
assurance that comparable store sales for any particular period will not
decrease in the future.
Pre-opening expenses. Pre-opening expenses include labor, rent,
utilities, supplies and certain other costs incurred prior to a store's opening.
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.
Results of Operations
The following table sets forth for the periods indicated, certain
selected income statement data expressed as a percentage of sales.
Three Months Ended March 31, 2001 April 1, 2000
--------------------------------------------- ------------------- -------------------
Sales 100.0% 100.0%
Cost of goods sold and occupancy costs 69.7 68.5
------------------- -------------------
Gross margin 30.3 31.5
Direct store expenses 23.5 22.0
Selling, general and administrative expenses 5.1 3.7
Pre-opening expenses 0.7 0.7
------------------- -------------------
Income from operations 1.0 5.1
Interest expense, net 1.1 0.9
------------------- -------------------
Income (loss) before income taxes (0.1) 4.2
Income tax expense (benefit) (0.0) 1.7
------------------- -------------------
Net income (loss) (0.1)% 2.5%
=================== ===================
Sales. Sales for the three months ended March 31, 2001, increased 3.9%
to $219.5 million from $211.2 million in the same period in fiscal 2000. The
13
increase was primarily due to the opening of four new stores, as well as the
inclusion of the 16 stores opened or acquired in fiscal 2000, offset by 20
stores closed in fiscal 2000. Comparable store sales increased to 1% for the
first quarter of fiscal 2001 from (3.5%) at the end of the fourth quarter of
fiscal 2000, as compared to (2%) for the same period in fiscal 2000 due to
operational improvements in some recently acquired stores, new marketing
programs in selected regions and store closures of certain weaker stores.
Gross Profit. Gross profit for the three months ended March 31, 2001 of
$66.4 million was relatively flat as compared to the same period in fiscal 2000,
reflecting the growth from new store openings, offset by store closures. As a
percentage of sales, gross profit decreased to 30.3% in the first quarter of
fiscal 2001 from 31.5% in the same period in fiscal 2000 due primarily to
operational weaknesses in certain new and acquired stores resulting from lower
than expected sales in those stores, as well as a 30 basis point impact from
increasing utilities costs.
Direct Store Expenses. Direct store expenses for the three months ended
March 31, 2001 increased 10.9% to $51.6 million from $46.5 million in the same
period in fiscal 2000, and as a percentage of sales, increased to 23.5% in the
first quarter of fiscal 2001 from 22.0% in the first quarter of fiscal 2000. The
increases are primarily due to higher payroll costs as a percentage of sales in
certain acquired and new stores, temporary payroll inefficiencies caused by
extended remodels and increasing insurance costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 2001 increased
41.3% to $11.1 million from $7.8 million in the same period in fiscal 2000, and
as a percentage of sales, increased to 5.1% in the first quarter of fiscal 2001
from 3.7% in the same period in fiscal 2000. The increases are primarily
attributable to the severance costs associated with the transition in Chief
Executive Officers and additions in the corporate and regional staff necessary
to support the Company's growth.
Pre-Opening Expenses. Pre-opening expenses for the three months ended
March 31, 2001, remained constant at $1.4 million compared to the same period in
fiscal 2000. As a percentage of sales, pre-opening expenses remained constant at
0.7% in the first quarter of fiscal 2001 compared to the same period in fiscal
2000, due to the opening of four new stores in the first quarter of fiscal 2001
as compared to four new stores and two relocations in the same period in fiscal
2000.
Interest Expense, Net. Net interest expense for the three months ended
March 31, 2001 increased to $2.5 million, from $1.8 million in the same period
in fiscal 2000. As a percentage of sales, net interest expense increased to 1.1%
from 0.9% in the first quarter of fiscal 2000. The increase is primarily
attributable to the increased interest rate on our line of credit and an
increase in the amount of borrowings. Interest expense may increase in the
future as a result of an expected increase in the interest rate under our credit
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" below.
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 and acquisitions.
Net cash provided by operating activities was $13.3 million during the
first three months of fiscal 2001 as compared to $14.2 million during the same
period in fiscal 2000. Cash from operating activities decreased during this
period primarily due to a reduction in net income, offset by changes in working
capital items. We have not required significant external financing to support
inventory requirements at our existing and new stores because we have been able
to rely on vendor financing for most of the inventory costs, and we anticipate
that vendor financing will continue to be available for new store openings.
Net cash used in investing activities was $12.1 million during the
first three months of fiscal 2001 as compared to $21.2 million during the same
period in fiscal 2000. The decrease is due to a reduction in capital
expenditures and acquisitions.
14
Net cash used in financing activities was $536,000 during the first
three months of fiscal 2001 as compared to $1.6 million during the same period
in fiscal 2000. The decrease reflects $2.5 million in debt payments, offset by
our receipt of cash borrowed under a $2.0 million promissory note with a related
party during the first three months of fiscal 2001.
In the third quarter of fiscal 2000, we renewed and increased our
existing revolving credit facility to $157.5 million. The facility as increased
and amended has two separate lines of credit, a revolving line for $111.2
million and the remainder in a term loan facility, each with a three-year term
expiring August 1, 2003. The facility currently bears interest at the default
rate, which is the prime rate plus 0.25%. The credit agreement includes certain
financial and other covenants, as well as restrictions on payments of dividends.
As of December 30, 2000, we were in violation of two financial covenants, and
the lending group issued a notice of default, although it has not accelerated
our repayment obligations. All borrowings outstanding under the credit facility
at March 31, 2001 are considered to be due on demand and accordingly are
classified as a current liability at March 31, 2001. As a result of the covenant
violations, our borrowings under the credit facility have been limited to $125
million. We are currently negotiating an amendment to the credit facility to
waive the defaults and modify certain of the covenants that may include an
increase in our interest rate and certain limitations on the execution of new
leases and capital expenditures, as well as other financial covenants and a
security interest in certain of our assets. If we are unsuccessful in
negotiating an amendment acceptable to our lenders, such lenders could
accelerate repayment of existing borrowings. The Company currently does not have
sufficient available funds to repay in the event of an acceleration of our debt.
The Company is also proposing to raise up to approximately $30.0 million or more
in equity financings to provide additional liquidity, though such equity
financing is not a requirement of amending the credit facility. As of March 31,
2001, there were $77.6 million in borrowings outstanding under the revolving
facility and $43.8 million in borrowings outstanding under the term loan. If we
are successful in negotiating an amendment to our existing credit facility, we
believe that cash generated from operations will be sufficient to meet our
capital expenditure requirements in fiscal 2001.
The Company maintains an interest rate risk-management strategy that
uses derivative instruments to minimize significant, unanticipated earnings
fluctuations that may arise from volatility in interest rates. The Company's
specific goals are to (1) manage interest rate sensitivity by modifying the
repricing or maturity characteristics of some of its debt and (2) lower (where
possible) the cost of its borrowed funds. In accordance with the Company's
interest rate risk-management strategy, the Company has entered into a swap
agreement to hedge the interest rate on $47.5 million of its borrowings. The
swap agreement locks in an average LIBOR rate of 6.7% and expires in August
2003.
We spent approximately $12.3 million during the first three months of
fiscal 2001 for new store construction, development, remodels and other capital
expenditures, exclusive of acquisitions, and anticipate that we will spend $10.0
million or more in the remainder of fiscal 2001 for new store construction,
equipment, leasehold improvements, remodels and other capital expenditures and
relocations of existing stores, exclusive of acquisitions. We expect that the
capital expenditures originally planned for stores rescheduled to open in 2002
will be incurred commencing in the fourth quarter of 2001. That amount was
originally estimated at $15.0 million to $20.0 million, but may be revised as
part of our comprehensive review of the business operations and strategic plan.
Our average capital expenditures to open a leased store, including leasehold
improvements, equipment and fixtures, have ranged from approximately $2.0
million to $5.0 million historically, excluding inventory costs and initial
operating losses. We anticipate that our average capital expenditures will be
$2.5 million to $6.0 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. Delays in opening new stores may result in increased
capital expenditures and increased pre-opening costs for the site, as well as
lower than planned sales for the Company. Although there can be no assurance
that actual capital expenditures will not exceed anticipated levels, we believe
that cash generated from operations will be sufficient to satisfy the Company's
budgeted capital expenditure requirements through the remainder of fiscal 2001.
The cost of initial inventory for a new store is approximately $300,000
to $800,000 depending on the store format; however, we obtain vendor financing
15
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 will be sufficient to satisfy our
budgeted cash requirements through fiscal 2001.
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 open, acquire or relocate additional
stores; the anticipated performance of such stores; the impact of competition;
the sufficiency of funds to satisfy the Company's cash requirements through the
remainder of fiscal 2001; our ability to negotiate an amendment to our credit
facilities acceptable to our lenders; our expectations for comparable store
sales; our plans for redesigning our natural foods store format; the impact of
changes resulting from our current comprehensive review of the Company's
business operations and strategic plan; levels of cannibalization; expected
pre-opening expenses and capital expenditures; 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 differences in
results of operations include, but are not limited to, the Company's ability to
negotiate a suitable amendment to its outstanding line of credit facility; the
timing and success of the current comprehensive review of the Company's business
operations and strategic plan; the successful transition of operating authority
to our new Chief Executive Officer, Perry Odak; 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 or suppliers; changes in management information needs; changes in
customer needs and expectations; governmental and regulatory actions; 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. 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.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the Company is exposed to
fluctuations in interest rates and the value of foreign currency. The Company
employs various financial instruments to manage certain exposures when
practical.
The Company is exposed to foreign currency exchange risk. The Company
owns and operates four natural foods supermarkets and a commissary kitchen in
British Columbia, Canada. The commissary supports the four Canadian stores and
does not independently generate sales revenue. Sales made from the four Canadian
stores are made in exchange for Canadian dollars. To the extent that those
revenues are repatriated to the United States, the amounts repatriated are
subject to the exchange rate fluctuations between the two currencies. The
Company does not hedge against this risk because of the small amounts of funds
at risk.
The Company's exposure to interest rate changes is primarily related to
its variable rate debt issued under its $157.5 million revolving credit
facility. The facility has two separate lines of credit, a revolving line in the
amount of $111.2 million and a term loan in the amount of $46.3 million, each
with a three-year term expiring August 1, 2003. As a result of violations by the
Company of certain financial covenants under the line of credit facility, the
Company's lenders issued a notice of default, although the lenders have not
accelerated repayment of outstanding borrowings at this time. All borrowings
outstanding under the credit facility at March 31, 2001 are considered to be due
on demand and accordingly are classified as a current liability at March 31,
2001. Borrowings under the credit facility have been limited to $125 million. As
of March 31, 2001, there were $77.6 million in borrowings outstanding under the
$111.2 million revolving line of this facility and $43.8 million in borrowings
outstanding under the $46.3 million term note. As a result of the Company's
default, the interest rate on the credit facility was adjusted to the prime
rate, effective December 30, 2000. The Company is currently negotiating an
amendment to the credit facility that would adjust interest rates to a variable
rate based on the prime rate or LIBOR, effective as of the date of amendment.
Because the interest rates on these facilities are variable, based upon the
prime rate or LIBOR, if the Company is successful in negotiating an amendment to
the facility, 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
March 31, 2001, would be an annual increase or decrease of approximately $1.2
million in interest expense and a corresponding decrease or increase of
approximately $771,000 in the Company's net income after taxes.
The Company maintains an interest rate risk-management strategy that
uses derivative instruments to minimize significant, unanticipated earnings
fluctuations that may arise from volatility in interest rates. The Company's
specific goals are to (1) manage interest rate sensitivity by modifying the
repricing or maturity characteristics of some of its debt and (2) lower (where
possible) the cost of its borrowed funds. In accordance with the Company's
interest rate risk-management strategy, the Company has entered into a swap
agreement to hedge the interest rate on $47.5 million of its borrowings. The
swap agreement locks in an average LIBOR rate of 6.7% and expires in August
2003.
17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In January 2001, we were named as defendant in Glades Plaza, LP v. Wild
Oats Markets, Inc., a suit filed in the 15th Judicial Circuit Court, Palm Beach
County, Florida, by a landlord alleging we breached our lease obligations when
we gave notice of termination of the lease for landlord's default in not timely
turning over the premises. The plaintiff seeks unspecified damages. The parties
are in discovery currently and have conducted one court-ordered mediation.
In April 2001, we were named as defendant in City Place Retail LLC v.
Wild Oats Markets, Inc., a suit filed in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida, by a landlord alleging we breached
our lease obligations by allegedly failing to timely complete the finish and
fixturing of a new store. We do not believe that we defaulted, and we served the
landlord with a default notice. The parties have agreed to settle the matter for
a cash payment by the landlord in exchange for a termination by us of our rights
under the lease.
Item 2. Changes in Securities and Use of Proceeds
On March 6, 2001 ("Purchase Date"), the Company issued 1,332,649 shares
of its common stock to Perry D. Odak in exchange for cash and a promissory note
in the amount of $9,273,978.31. The number of shares equaled five percent of the
number of shares of common stock outstanding (on a fully diluted basis), and Mr.
Odak paid a per share price equal to the closing market price on NASDAQ on the
Purchase Date. The transaction was completed pursuant to an exemption from
registration under Rule 506 of Regulation D, promulgated under the Securities
Act of 1933, as amended. The transaction qualified as exempt under Rule 506 as
no more than 35 purchasers received shares of the Company's stock and Mr. Odak
was an accredited investor under Rule 105(a)(4) of Regulation D.
Item 3. Defaults Upon Senior Securities
The second paragraph of Note 2 to the Company's Consolidated Financial
Statements included in this report is hereby incorporated by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description of Document
10.1+# Employment Agreement dated March 6, 2001 between Wild
Oats Markets, Inc. and Perry D. Odak
10.2+ Stock Purchase Agreement dated March 6, 2001 between Wild Oats
Markets, Inc. and Perry D. Odak
------------------
+ Filed herewith.
# Management compensation plan.
(b) Reports on Form 8-K.
None.
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 15th day of May, 2001.
Wild Oats Markets, Inc.
By /s/ Mary Beth Lewis
Mary Beth Lewis
Executive Officer, Secretary, Vice President
of Finance, and Chief Financial Officer
(Principal Financial and Accounting Officer)
19