-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CjX0Ex72bwaWKnKB8G0bkEaCaf4/D9F3cm58kdllT89nQLV9SOp1o3s2KT0W5AtY P/QwuajDUDz6QAjm8EyF9A== 0000899733-01-500040.txt : 20010516 0000899733-01-500040.hdr.sgml : 20010516 ACCESSION NUMBER: 0000899733-01-500040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILD OATS MARKETS INC CENTRAL INDEX KEY: 0000909990 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CONVENIENCE STORES [5412] IRS NUMBER: 841100630 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21577 FILM NUMBER: 1638855 BUSINESS ADDRESS: STREET 1: 3375 MITCHELL LANE CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3034405220 MAIL ADDRESS: STREET 1: 1645 BROADWAY CITY: BOULDER STATE: CO ZIP: 80302 10-Q 1 firstq01.txt 03/31/01 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 EX-10.1 2 emplagt.txt PERRY D. ODAK EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT by and between Wild Oats Markets, Inc. (the "Company"), a Delaware corporation with its principal place of business at 3375 Mitchell Lane, Boulder, CO 80301, and Perry D. Odak of Brockie Mansion, 900 Brockie Lane, York, Pennsylvania 17403 (the "Executive"), dated March 6, 2001. WHEREAS, the Executive is possessed of certain experience and expertise that qualify him to provide the direction and leadership required by the Company; and WHEREAS, subject to the terms and conditions hereinafter set forth, the Company wishes to retain the Executive as its Chief Executive Officer and President and the Executive wishes to accept such retention; NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, terms, provisions and conditions set forth in this Agreement, the parties hereby agree: 1. Employment. Subject to the terms and conditions set forth in this Agreement, the Company hereby offers and the Executive hereby accepts employment as the Chief Executive Officer and President of the Company, commencing on March 19, 2001 (the "Effective Date"). 2. Term. Subject to earlier termination as hereinafter provided, the Executive's retention under this Agreement shall be for a term of five years commencing on the Effective Date. The term of this Agreement, as from time to time extended or renewed, is hereinafter referred to as "the Term of this Agreement" or "the Term hereof." This Agreement shall continue on a year-to-year basis beyond the end of the fifth year (or a later year if this Agreement has renewed), unless the Company notifies the Executive in writing not less than nine (9) months prior to the end of the fifth year (or applicable later year) that the Company does not wish to renew the Agreement. The Company's decision not to renew this Agreement shall not be treated as a termination of the Executive by the Company for purposes of this Agreement. 3. Capacity and Performance. (a) During the Term hereof, the Executive shall serve the Company as its Chief Executive Officer and President. (b) During the Term hereof, the Executive shall serve the Company on a full-time basis and shall have the leadership of and be responsible to the Board of Directors for all operations of the Company and shall have all powers and duties consistent with such position, in accordance with the Bylaws of the Company. It is understood that for the Term hereof, the Executive shall also have certain authorities and obligations designated by the Board of Directors and set forth in Exhibit A to this Agreement (the "Statement of Authority"). The Statement of Authority is incorporated herein by reference and shall remain in effect unless modified or terminated by mutual written agreement during the Term hereof. (c) During the Term hereof, the Executive shall devote his full business time (other than vacations) and his best efforts, business judgment, skill and knowledge exclusively (except as provided below) to the advancement of the business and interests of the Company and to the discharge of his duties and responsibilities hereunder. The Executive shall not engage in any other business activity or serve in any industry, trade, governmental position or as a director of any other business or organization during the Term of this Agreement, except as may be approved by a committee of the Board consisting of three outside directors. The Company encourages participation by the Executive in community and charitable activities, but said committee shall have the right to approve or disapprove the Executive's participation in such activities if, in the judgment of said committee, such participation may conflict with the Company's interests or with the Executive's duties or responsibilities or the time required for the discharge of those duties and responsibilities. The Executive has previously delivered a letter containing a true and correct list of all directorships or other participation in committees, consulting or other business activities which the Executive has or intends to maintain during the Term, which have been approved by said committee of the Board. (d) The Executive shall be appointed to the Board of Directors by the present Board of Directors as soon as practicable. The Company agrees to propose and recommend to the shareholders of the Company at each appropriate Annual Meeting of such shareholders during the Term hereof the election or re-election of the Executive as a member of the Board. The Executive shall also lead the effort on behalf of the Company to identify candidates to fill any vacancies on the Board of Directors. 4. Payments and Benefits. As payment for all services performed by the Executive under and during the Term hereof and subject to performance of the Executive's duties and the obligations pursuant to this Agreement: (a) Base Amount. During the Term hereof, the Company shall pay the Executive a base amount at the rate of Five Hundred Thousand Dollars ($500,000) per annum, payable in accordance with the Company's regular payroll practice, subject to increase from time to time by the Board, in its sole discretion. Such base amount, as from time to time in effect, is hereinafter referred to as the "Base Amount. The Base Amount shall be reviewed at least annually by the Company's Compensation Committee. (b) Incentive Compensation. In addition to the Base Amount, the Company shall pay the Executive as incentive compensation ("Incentive Compensation") in respect of each fiscal year (or portion thereof) of the Company during the Term hereof, an amount determined in accordance with any bonus or short term incentive compensation program (which may be based upon achieving certain specified performance criteria) which may be established by the Board either for Executive or for senior management. The determination as to the amounts of any awards available to the Executive under these programs shall be reviewed at least annually by the Company's Compensation Committee to ensure that such amounts are competitive with awards granted to similarly situated executives of publicly held companies comparable to the Company. The amount of Incentive Compensation to be paid by the Company to the Executive for the first twelve (12) months of service during the Term hereof shall not be less than Two Hundred Fifty Thousand Dollars ($250,000), which amount shall be paid only if the Executive remains in the continuous employment of the Company throughout such twelve (12) month period or is terminated by the Company other than for Cause (or he terminates for Good Reason) during such period. The Company shall consider whether to pay a pro rata portion of any Incentive Bonus otherwise payable to the Executive for a fiscal year if the Executive's employment is terminated by reason of death or disability or by the Company other than for Cause during such fiscal year. The Executive shall consider in good faith waiving all or a portion of the Incentive Compensation otherwise payable to him for the first twelve (12) months of service to the extent that the Company incurs a loss in connection with its obligation to arrange for the purchase of the Executive's house under Section 4(h) of this Agreement. (c) Restricted Stock. (1) The Executive shall be given the opportunity to purchase from the Company on the date hereof that number of shares of the Company's Common Stock, par value $0.001 per share ("Stock"), equal to five percent (5%) of the number of shares of Common Stock outstanding (on a fully diluted basis) upon the date of purchase (after taking into account the shares sold to the Executive), at a per share price equal to the closing market price on NASDAQ on the effective date of the purchase. The purchase by the Executive shall be financed by the Company and evidenced by a full recourse promissory note of the Executive in favor of the Company. The purchase of the shares, including the financing, shall be in accordance with and subject to the terms and conditions set forth in a Restricted Stock Purchase Agreement (the "Purchase Agreement") by and between the Executive and the Company, substantially in the form (including the exhibits thereto) attached to this Agreement as Exhibit B. (2) For purposes of this Agreement, the calculation of the number of shares of Stock outstanding on a "fully diluted basis" shall be made by assuming that shares of Stock subject to options having an exercise price of $12 or less are outstanding, and that shares of Stock subject to options having an exercise price of more than $12 are not outstanding. (3) The terms of the Purchase Agreement shall control in the event of any ambiguity between the Purchase Agreement and this Agreement. (d) Stock Options. If, by reason of the issuance by the Company of additional shares of Stock pursuant to a capital raising transaction at any time or times during the two hundred seventy (270) day period following the date of this Agreement, the number of Shares purchased by the Executive pursuant to the Purchase Agreement represents less than five percent (5%) of the sum of (i) the number of shares of Stock outstanding (on a fully diluted basis) upon the date of the Executive's purchase (after taking into account the shares sold to the Executive) plus (ii) the number of shares issued pursuant to such capital raising transaction, the Company shall automatically grant to the Executive, on the date of issuance of the Stock in the capital raising transaction (provided he has become an employee and remained in the continuous employment of the Company), options to acquire such additional number of shares of Stock sufficient to maintain the Executive's percentage interest as of such date (if such options were exercised) at five percent (5%) of the sum of (i) and (ii) plus the number of shares subject to such options; provided, however, that the Executive shall not be granted options to acquire more than 300,000 shares in the aggregate pursuant to this provision. For purposes of this Subsection (d), a capital raising transaction does not include issuances of Stock or options to acquire Stock to employees or other service providers in connection with the performance of services. Any options granted pursuant to this provision shall be subject to the terms of the Company's Equity Incentive Plan and an incentive stock option agreement to be entered into between the Company and the Executive pursuant thereto, the terms of which shall control, provided they are consistent with the following provisions of this Subsection (d). Such agreement shall provide that the options have an exercise price equal to their fair market value at the date of grant (as determined under the Equity Incentive Plan) and a term of ten years, and become vested and exercisable over four years at the rate of 2.0833% per month following the date of grant provided the Executive has remained in the continuous employment of the Company pursuant to this Agreement. The vesting and exercisability of the options shall be subject to acceleration under the same conditions that apply to the vesting of the Restricted Shares. Any unexercised options shall terminate upon the Executive's termination of employment for any reason; provided, however, that any options that are vested and exercisable upon the Executive's termination shall remain exercisable for ninety (90) days if termination is by the Company other than for Cause or by the Executive for Good Reason, or for twelve (12) months if the Employee's termination is by reason of death or disability (but not longer than the remaining term of the option). The other terms of the options shall be no less advantageous to the Executive than currently in place for executive employees generally. (e) Supplemental Bonus. Provided the Executive has remained in the continuous employment of the Company pursuant to this Agreement, the Executive shall become entitled to (and shall vest in the right to receive) a cash bonus if (i) the fair market value of the Stock, as measured by the closing stock price on NASDAQ for the preceding 120 consecutive trading days, shall equal at least $30 per share during the Term hereof, or (ii) a Change in Control of the Company occurs during the Term hereof and the fair market value of the Stock, as measured by the closing stock price on NASDAQ immediately prior to the Change in Control, shall equal at least $20 per share. The amount of the cash bonus shall equal $ 9,221,955.82, plus an amount equal to the interest that would accrue thereon from the date hereof to the date of payment, at 7.5% per annum, compounded semi-annually. The cash bonus shall be paid by the Company as soon as reasonably practicable following the occurrence of the event described in clause (i) or (ii) of this Subsection (e). The Company shall make appropriate adjustments to the per share prices referred to in this Subsection (e) and the number and exercise price of option shares referred to in Subsection (d) above to reflect any stock dividend, extraordinary dividend payable in a form other than stock, spin-off, stock split, reverse stock split, recapitalization, or similar transaction affecting the Company's outstanding securities that is effected without receipt of consideration. (f) Employee Benefit Plans. During the Term hereof, Executive (and his family) shall be entitled to participate in the Company's welfare and retirement plans, including the Company's group health, life, disability, and 401(k) plan, from time to time in effect for executives of the Company generally, except to the extent such plans are profit sharing or bonus plans or stock plans or are in a category of benefit otherwise provided to the Executive under this Agreement. The Executive shall also be entitled to defer up to $30,000 of salary and/or incentive compensation otherwise payable to the Executive for the calendar year 2001, in accordance with and subject to the terms of the Company's Deferred Compensation Plan. The Company may amend, terminate or add to its employee benefit plans at any time as it, in its sole judgment, determines to be appropriate. (g) Business Expenses. The Company shall pay or reimburse the Executive for all reasonable business expenses of the Executive incurred during the Term hereof in the performance of his duties and responsibilities hereunder, including reasonable expenses relating to his transportation between the Company's headquarters in Colorado and a temporary office to be maintained by the Executive in Pennsylvania, subject to such reasonable substantiation and documentation as may be specified by the Company from time to time. The Executive shall be entitled to the use of an automobile (and operating expenses) on terms to be mutually agreed upon between the Executive and the Compensation Committee of the Board of Directors. (h) Relocation. The Company shall reimburse the Executive for the reasonable costs incurred by him in relocating to a home in Colorado (not to exceed $25,000). The Company shall assist the Executive in arranging for the sale of his residence in York, Pennsylvania. The Executive agrees to provide the Company with all consents, disclosures, representations and authorizations reasonably required to enable the Company to arrange for the sale of the residence on the Executive's behalf, to list the residence for sale for an amount not in excess of 110% of its appraised value (determined as provided below), and to otherwise cooperate with the Company to facilitate the sale of the residence. In the event that a sale of the Executive's residence to a third party is not completed with four (4) months after the Effective Date, the Company (or a third party retained by the Company) shall offer to purchase the Executive's residence for an amount equal to the fair market value of the residence as of the Effective Date, or, if less, the fair market value of the house as of the date thirty days prior to the date upon which the Company is obligated to purchase the house pursuant to this provision. In each case, fair market value shall be determined on the basis of an independent appraisal obtained by the Company. However, if the Executive obtains an independent appraisal from a party reasonably acceptable to the Company that is within 5% of the appraised amount obtained by the Company, the fair market value shall be deemed to equal the average of the two amounts. If the Executive's appraised amount exceeds the Company's appraised amount by more than 5%, the Company shall obtain a third appraisal from a party reasonably acceptable to the Executive, and the fair market value shall be deemed the average of the three appraised amounts. (i) Legal Fees. The Company shall reimburse the Executive for reasonable legal fees incurred by the Executive in the negotiation and execution of this Agreement. (j) Signing Bonus. The Company shall pay the Executive a one-time signing bonus of $20,000 following the Effective Date of the Agreement. 5. Termination of Employment and Severance Benefits. Notwithstanding the provisions of Section 2 hereof, the Executive's employment hereunder shall terminate prior to the expiration of the Term hereof under the following circumstances: (a) Death. In the event of the Executive's death during the Term hereof, the Company shall pay to the Executive's designated beneficiary or, if no beneficiary has been designated by the Executive, to his estate, any earned and unpaid Base Amount that is earned but unpaid, and reimbursement of business expenses accrued prior to the date of death. (b) Disability. (1) The Company may terminate the Executive's employment hereunder, upon thirty (30) days written notice to the Executive, in the event that the Executive becomes disabled during his employment hereunder through any illness, injury, accident or condition of either a physical or psychological nature and, as a result, is unable to perform substantially all of his duties and responsibilities hereunder for ninety (90) consecutive days during any period of three hundred and sixty-five (365) consecutive calendar days. (2) The Board may designate another employee to act in the Executive's place during any period of the Executive's disability prior to termination as provided in Section 5(b)(1) above. Notwithstanding any such designation, the Executive shall continue to receive from the Company (or under the Company's disability plan) the Base Amount in accordance with Section 4(a) and benefits in accordance with the other provisions of Section 4, to the extent permitted by the then-current terms of the applicable benefit plans until the termination of his employment. (3) The Executive shall be entitled to participate in the Company's long-term disability plan during the Term hereof, to the same extent as other employees. No finding of disability under this Section 5(b) shall be made in respect of any cause or condition which has not been approved as a full disability under the applicable plan (or, prior to the Executive's participation, would not be approved as a full disability thereunder). (4) If any question shall arise as to whether during any period the Executive is disabled through any illness, injury, accident or condition of either a physical or psychological nature so as to be unable to perform substantially all of his duties and responsibilities hereunder, the Executive may, and at the request of the Company shall, submit to a medical examination by a physician selected by the Company, to whom the Executive or his duly appointed guardian has no reasonable objection, to determine whether the Executive is so disabled and such determination shall for the purposes of this Agreement be conclusive of the issue. If such question shall arise and the Executive shall fail to submit to such medical examination, the Company's determination of the issue shall be binding on the Executive. (c) By the Company for Cause. (1) The Company may terminate the Executive's employment hereunder for Cause ("Cause") any time upon written notice to the Executive setting forth in reasonable detail the nature of such Cause. The following, as determined by the Board in its reasonable judgment, shall each constitute Cause for termination: (i) a material breach of this Agreement by Executive (not otherwise listed in (ii) through (ix) below, for which no cure period shall be provided unless otherwise specified) which is not cured within thirty (30) days after written notice to Executive from the Compensation Committee; (ii) Executive's willful and repeated failure to comply with the lawful directives of the Board or the Company's Certificate of Incorporation or By-laws; (iii) gross negligence or willful misconduct by Executive in the performance of his duties hereunder; (iv) the commission by Executive of an act (including, but not limited to, a felony or a crime involving moral turpitude) causing material harm to the standing and reputation of the Company or its Subsidiaries, as determined in good faith by the Board; (v) misappropriation, breach of trust or fraudulent conduct by Executive with respect to the assets or operations of the Company or any of its Subsidiaries; (vi) the use by Executive of alcohol or drugs (not including the medicinal use of drugs in accordance with the prescription of a physician to treat disease, heal or relieve pain) to an extent that, in the good faith determination of the Board, materially interferes with the performance by Executive of his responsibilities under this Agreement and which continues after notice from the Board; (vii) the repeated threat of Executive to cause, or the actual occurrence of, damage to the relations of the Company or any of its Subsidiaries with customers, suppliers, lenders, advisors or employees which damage is materially adverse to the business or operations of the Company or any of its Subsidiaries, and which threat is not terminated or which damage is not cured following ten (10) days written notice from the Board (provided, however, that the utilization by the Executive of the dispute resolution procedures in this Agreement shall not, by itself, constitute a violation of this provision); (viii) unauthorized absence from work (unless resulting from Executive's disability) which continues after notice from the Board and materially interferes with the performance by Executive of his responsibilities under this Agreement; or (ix) deliberate or intentional violation of applicable laws, rules or regulations relating to the Company or its business, including violation of employment discrimination or harassment laws, rules or regulations. (2) For purposes of Section 5(c), no act, or failure to act, shall be "willful" unless done, or omitted to be done, without reasonable belief that the action or omission was in the best interests of the Company. (3) Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a notice of termination, and such termination shall have been approved by the vote of two-thirds of the members of the Board of Directors (not including the Executive) at a meeting of the Board (after reasonable notice to the Executive and an opportunity for him, together with counsel, to be heard before the Board of Directors) finding that, in the good faith opinion of the Board of Directors, the above standard of termination for Cause was met in such case. Effective upon a termination for Cause, the Executive shall be deemed to have resigned as a member of the Board of Directors. (4) Upon the giving of notice of termination of the Executive's employment hereunder for Cause following the determination of the Board under the preceding subsection (3), the Company shall have no further obligation or liability to the Executive, other than for any Base Amount earned and unpaid at the date of termination, and payments or reimbursement of business expenses accrued prior to the date of termination. (d) By the Company Other than for Cause. The Company may terminate the Executive's employment hereunder other than for Cause at any time upon notice to the Executive, provided that the Board of Directors determines, upon vote of two-thirds its members (not including the Executive) after consultation with the Executive and after setting forth the reasons for the Board's actions, that retention of the Executive as the Chief Executive Officer would no longer be in the best interests of the Company. In the event of such termination during the first nine (9) months of the Term hereof, the Company shall continue to pay the Executive the Base Amount at the rate in effect on the date of termination for twenty-four (24) months. In the event of such termination during the last fifty-one (51) months of the Term hereof, the Company shall continue to pay the Executive the Base Amount at the rate in effect on the date of termination for thirty-six (36) months. Subject to any employee contribution applicable to the Executive on the date of termination, the Company shall continue to contribute, for the period during which the Base Amount is continued hereunder, to the cost of the Executive's participation (including his family) in the Company's group medical and hospitalization insurance plans and group life insurance plan, provided that the Executive is entitled to continue such participation under applicable law and plan terms; and provided, further, that if the Executive is not so entitled to continue, the Company shall reimburse the Executive (subject to any employee contribution applicable to the Executive on the date of termination) for the cost of obtaining such coverage. Except as otherwise required under applicable law, continuation of such participation shall terminate on the date the Executive becomes eligible to receive comparable coverage under the plans of a subsequent employer. (e) By the Executive for Good Reason in the Absence of Cause. The Executive may terminate his employment hereunder for Good Reason ("Good Reason"), upon notice to the Company setting forth in reasonable detail the nature of such Good Reason, and the Company's failure to remedy such matter within thirty (30) days after receipt of such notice. The following shall constitute Good Reason for termination by the Executive: (1) Failure of the Company to continue the Executive in the position of Chief Executive Officer; (2) Failure of the Company to propose or recommend the Executive, or failure by the shareholders of the Company to elect the Executive, to the Board of Directors as contemplated by Section 3(d) above; (3) Material diminution in the nature or scope of the Executive's responsibilities, duties or authority (including those set forth in the Statement of Authority); (4) Failure of the Company to provide the Executive the Base Amounts and benefits in accordance with the terms of Section 4 or to observe any other material provision of this Agreement; or (5) A Change in Control of the Company. A termination by the Executive for Good Reason, and in the absence of circumstances that would entitle the Company to terminate the Executive for Cause, shall be treated as a termination of the Executive by the Company other than for Cause, and the Company shall continue to pay or provide the Base Amount and other benefits in the same manner and to the same extent as provided under Section 5(d) above for a termination other than for Cause. 6. Effect of Termination. (a) Except for benefits expressly continued pursuant to Section 5, benefits shall terminate pursuant to the terms of the applicable benefit plans based on the date of termination of the Executive's employment without regard to any continuation of Base Amounts to the Executive following such date of termination, and the Executive's entitlement to benefits accrued as of the date of termination of the Executive's employment for any reason shall be determined under the terms of the applicable benefit plan. (b) The provisions of this Agreement shall survive any termination if so provided herein or if necessary or desirable fully to accomplish the purposes of such provision, including without limitation the obligations of the Executive under Sections 7, 8 and 9 hereof and all indemnifications provided for in this Agreement (including Sections 12 and 15). The obligation of the Company to make payments to or on behalf of the Executive under Sections 5(d) and 5(e) hereof is expressly conditioned upon the Executive's continued full performance of obligations under Sections 7, 8 and 9 hereof, and the Executive's execution and delivery of a general release in such form as the Company shall require. The Executive agrees that, except as expressly provided in Section 5 with respect to continuation of the Base Amount as expressly provided, no compensation is earned after termination of employment of the Executive for any reason, including as a result of the non-renewal of this Agreement. 7. Confidential Information. (a) The Executive acknowledges that the Company and its Subsidiaries continually develop Confidential Information, as defined in Section 14 hereof, that the Executive may develop Confidential Information for the Company or its Subsidiaries and that the Executive may learn of Confidential Information during the course of his employment under this Agreement. The Executive will comply with the policies and procedures of the Company and its Subsidiaries for protecting Confidential Information and shall never disclose to any person (except as required by applicable law or legal process or for the proper performance of his duties and responsibilities to the Company and its Subsidiaries, or in connection with any litigation between the Company and the Executive (provided that the Company shall be afforded a reasonable opportunity in each case to obtain a protective order)), or use for his own benefit or gain, any Confidential Information obtained by the Executive incident to his employment or other association with the Company or any of its Subsidiaries. The Executive understands that this restriction shall continue to apply after his employment terminates, regardless of the reason for such termination. (b) All documents, records, tapes and other media of every kind and description relating to the business, present or otherwise, of the Company or its Subsidiaries and any copies, in whole or in part, thereof (the "Documents"), whether or not prepared by the Executive, shall be the sole and exclusive property of the Company and its Subsidiaries. The Executive shall safeguard all Documents and shall surrender to the Company at the time his employment terminates, or at such earlier time or times as the Board or its designee may specify, all Documents then in the Executive's possession or control. 8. Assignment of Rights to Intellectual Property. The Executive shall promptly and fully disclose all Intellectual Property (as defined in Section 14 hereof) to the Company. The Executive hereby assigns and agrees to assign to the Company (or as otherwise directed by the Company) the Executive's full right, title and interest in and to all Intellectual Property. The Executive agrees to execute any and all applications for domestic and foreign patents, copyrights or other proprietary rights and to do such other acts (including without limitation the execution and delivery of instruments of further assurance or confirmation) requested by the Company to assign such Intellectual Property to the Company and to permit the Company to enforce any patents, copyrights or other proprietary rights to such Intellectual Property. The Executive will not charge the Company for time spent in complying with these obligations. All copyrightable works that the Executive creates shall be considered "work made for hire". 9. Restricted Activities. The Executive agrees that restrictions on his activities during and after his employment are necessary to protect the goodwill, Confidential Information and other legitimate interests of the Company and its Subsidiaries, and that the agreed restrictions set forth below will not deprive the Executive of the ability to earn a livelihood: (a) While the Executive is in the employment of the Company and, after his employment terminates, for the greater of two years or the period during which severance payments of the Base Amount are being made (the "Non-Competition Period"), the Executive shall not, directly or indirectly, whether as owner, partner, investor, consultant, agent, employee, co-venturer or otherwise, compete with the business of the Company or any of its Subsidiaries within any state within the United States, or within any province or other geographic division within any foreign country in which the Company operates retail stores or wholesale distribution outlets or warehouses at the date of termination of employment, or in which the Company has commenced negotiations for or entered into obligations relating to the opening of a retail store or wholesale distribution outlet or warehouse to be opened within the period of this covenant, or undertake any planning for any business competitive with the Company or any of its Subsidiaries. Specifically, but without limiting the foregoing, the Executive agrees not to engage in any manner in any activity that is directly or indirectly competitive with the business of the Company or any of its Subsidiaries as conducted or which has been proposed by management within six months prior to termination of the Executive's employment. Restricted activity also includes without limitation accepting employment or a consulting position with any person who is, or at any time within twelve (12) months prior to termination of the Executive's employment has been, a supplier, licensee or vendor of the Company or any of its Subsidiaries. For the purposes of this Section 9, the business of the Company and its Subsidiaries shall mean retail or wholesale operations for the sale of groceries and ancillary Products, such as health and beauty aids, vitamins and supplements. (b) The Executive further agrees that during the Non-Competition Period or in connection with the Executive's termination of employment, the Executive will not, either directly or through any agent or employee, Solicit any employee of the Company or any of its Subsidiaries to terminate his or her relationship with the Company or any of its Subsidiaries or to apply for or accept employment with any enterprise competitive with the business of the Company, or Solicit any customer, supplier, licensee or vendor of the Company or any of its Subsidiaries to terminate or materially modify its relationship with them, or, in the case of a customer, to conduct with any person any business or activity which such customer conducts or could conduct with the Company or any of its Subsidiaries. (c) The provisions of this Section 9 shall not be deemed to preclude the Executive from employment or engagement during the Non-Competition Period following termination of employment hereunder (i) in a business engaged in retail sales, provided such employment or engagement does not otherwise violate the provisions of this Section 9, or (ii) by a corporation, some of the activities of which are competitive with the business of the Company, if the Executive's activities do not relate to such competitive business, and nothing contained in this Section 9 shall be deemed to prohibit the Executive, during the Non-Competition Period following termination of employment hereunder, from acquiring or holding, solely as an investment, publicly traded securities of any competitor corporation so long as such securities do not, in the aggregate, constitute more than 3% of the outstanding voting securities of such corporation. (d) Without limiting the foregoing, it is understood that the Company shall not be obligated to continue to make the payments specified in Sections 5(d) and 5(e) in the event of a material breach by the Executive of the provisions of Sections 7, 8 or 9 of this Agreement, which breach continues without having been cured within 15 days after written notice to the Executive specifying the breach in reasonable detail. 10. Enforcement of Covenants. The Executive acknowledges that he has carefully read and considered all the terms and conditions of this Agreement, including the restraints imposed upon him pursuant to Sections 7, 8 and 9 hereof. The Executive agrees that said restraints are necessary for the reasonable and proper protection of the Company and its Subsidiaries and that each and every one of the restraints is reasonable in respect to subject matter, length of time and geographic area. The Executive further acknowledges that, were he to breach any of the covenants contained in Sections 7, 8 or 9 hereof, the damage to the Company would be irreparable. The Executive therefore agrees that the Company, in addition to any other remedies available to it, shall be entitled to seek preliminary and permanent injunctive relief against any breach or threatened breach by the Executive of any of said covenants, without having to post bond. The parties further agree that, in the event that any provision of Section 7, 8 or 9 hereof shall be determined by any court of competent jurisdiction to be unenforceable by reason of its being extended over too great a time, too large a geographic area or too great a range of activities, such provision shall be deemed to be modified to permit its enforcement to the maximum extent permitted by law. 11. Conflicting Agreements. The Executive hereby represents and warrants that the execution of this Agreement and the performance of his obligations hereunder will not breach or be in conflict with any other agreement to which the Executive is a party or is bound and that the Executive is not now subject to any covenants against competition or similar covenants that would affect the performance of his obligations hereunder. The Executive will not disclose to or use on behalf of the Company any proprietary information of a third party without such party's consent. 12. Indemnification. The Company shall indemnify, defend and hold harmless the Executive to the extent provided for Company executive officers in its then current Certificate of Incorporation or By-Laws, and in any event shall indemnify the Executive to the fullest extent permitted under the Delaware Corporation Law, including an undertaking to advance litigation expenses. The Executive agrees promptly to notify the Company of any actual or threatened claim arising out of or as a result of his employment with the Company. The Company agrees to maintain Directors and Officers Liability Insurance for the benefit of Executive, together with all other officers and directors, covering claims made with respect to occurrences during the Term of this Agreement and having coverage and policy limits no less favorable to directors and officers than those in effect at the Effective Date. 13. No Duty to Mitigate. Following a termination of employment, the Executive shall not be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. 14. Definitions. Words or phrases which are initially capitalized or are within quotation marks shall have the meanings provided in Section 14 and as provided elsewhere herein. For purposes of this Agreement, the following definitions apply: (a) A "Change in Control" shall be deemed to have occurred if during the Term hereof (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities in the election of directors; (b) the Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter, or (c) during any period of twelve consecutive months, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. Notwithstanding the foregoing provisions of this Section 14(a), a "Change in Control" will not be deemed to have occurred solely because of (i) the acquisition of securities of the Company (or any reporting requirement under the Act relating thereto) by an employee benefit plan maintained by the Company for the benefit of employees or an acquisition by J.P. Morgan Partners LLC (formerly known as Chase Capital), an investor group that the Executive brings in as part of the proposed capital raising transaction, Michael C. Gilliland, Elizabeth C. Cook or the Executive or their affiliates" or "associates" (as such terms are defined in Rule 12b-2 under the Act) or members of their families (or trusts for their benefit) or charitable trusts established by any of them or other related management group. (b) "Confidential Information" means any and all information of the Company and its Subsidiaries that is not generally known by others with whom they compete or do business, or with whom they plan to compete or do business and any and all information not readily available to the public, which, if disclosed by the Company or its Subsidiaries could reasonably be of benefit to such person or business in competing with or doing business with the Company. Confidential Information includes without limitation such information relating to (1) the development, research, testing, manufacturing, store operational processes, marketing and financial activities, including costs, profits and sales, of the Company and its Subsidiaries, (2) the Products and all formulas therefor, (3) the costs, sources of supply, financial performance and strategic plans of the Company and its Subsidiaries, (4) the identity and special needs of the customers and suppliers of the Company and its Subsidiaries and (5) the people and organizations with whom the Company and its Subsidiaries have business relationships and those relationships. Confidential Information also includes comparable information that the Company or any of its Subsidiaries have received belonging to others or which was received by the Company or any of its Subsidiaries with an agreement by the Company that it would not be disclosed. Confidential Information does not include information which (i) is or becomes available to the public generally (other than as a result of a disclosure by the Executive), (ii) was within the Executive's possession prior to the date hereof or prior to its being furnished to the Executive by or on behalf of the Company, provided that the source of such information was not bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Company or any other party with respect to such information, (iii) becomes available to the Executive on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Company or any other party with respect to such information, or (iv) was independently developed the Executive without reference to the Confidential Information. (d) "Intellectual Property" means inventions, discoveries, developments, methods, processes, formulas, compositions, works, concepts and ideas (whether or not patentable or copyrightable or constituting trade secrets) conceived, made, created, developed or reduced to practice by the Executive (whether alone or with others, whether or not during normal business hours or on or off Company premises) during the Executive's service that relate to the Products of the Company or any of its Subsidiaries. (e) "Products" mean all products planned, researched, developed, tested, manufactured, sold, licensed, leased or otherwise distributed or put into use by the Company or any of its Subsidiaries, together with all services provided to third parties or planned by the Company or any of its Subsidiaries, during the Executive's service; as used herein, "planned" refers to a Product or service which the Company has decided to introduce within six months from the date as of which such term is applied. (f) "Subsidiary" of an entity means any corporation or other business organization of which the securities having a majority of the normal voting power in electing the board of directors or similar governing body of such entity are, at the time of determination, owned by such entity directly or indirectly through one or more subsidiaries. (g) "Solicit" means any direct or indirect communication of any kind whatsoever, regardless of by whom initiated, inviting, advising, encouraging or requesting any person or entity, in any manner, with respect to any action. 15. Withholding. The Executive agrees that all payments made by the Company under this Agreement shall be reduced by any tax or other amounts required to be withheld by the Company under applicable law. 16. Assignment. Neither the Company nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other; provided, however, that, in the event that the Company shall hereafter effect a reorganization, consolidate with, or merge into, any other person or transfer all or substantially all of its properties or assets to any other person, the Company shall require such person or the resulting entity to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it. This Agreement shall inure to the benefit of and be binding upon the Company and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. 17. Severability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 18. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 19. Notices. Any and all notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be effective when delivered in person or deposited in the United States mail, postage prepaid, registered or certified; provided that, if the receiving party consents in advance, a notice may be given by telecopy or by such other electronic transmission mechanism as may be available to the parties. Notice shall be addressed to the Executive at his last known address on the books of the Company or, in the case of the Company, at its principal executive office, attention, Board of Directors, with a copy to General Counsel, or to such other address as either party may specify by notice to the other. 20. Entire Agreement. This Agreement (including any letters or agreements referred to herein or attached as exhibits hereto) constitutes the entire agreement between the parties and supersedes all prior communications, representations and understandings, whether written or oral and whether express or implied, with respect to the terms and conditions of the Executive's employment. 21. Amendment. This Agreement may be amended or rescinded only by a written instrument signed by the Executive and by a expressly authorized officer of the Company making specific reference to this Agreement. 22. Governing Law, Arbitration and Consent to Jurisdiction. (a) This Agreement shall be construed and enforced under and be governed in all respects by the laws of the State of Colorado, without regard to the conflict of laws principles thereof. (b) The parties hereby agree that, in order to obtain prompt and expeditious resolution of any disputes under this Agreement, each claim, dispute or controversy of whatever nature, arising out of, in connection with, or in relation to the interpretation, performance or breach of this Agreement (or any other agreement contemplated by or related to this Agreement or any other agreement between the Company and Executive), including without limitation, any claim based on contract, tort or statute, or the arbitrability of any claim hereunder (a "Claim"), shall be settled, at the request of any party to this Agreement, by final and binding arbitration conducted in Denver, Colorado. All such Claims shall be settled by one arbitrator in accordance with the Commercial Arbitration Rules then in effect of the American Arbitration Association. Such arbitrator shall be provided through the CFR Institute for Dispute Resolution ("CFR") by mutual agreement of the parties, provided that, absent such agreement, the arbitrator shall be appointed by CFR. In either event, such arbitrator may not have any pre-existing, direct or indirect relationship with any party to the dispute. Each party hereto expressly consents to, and waives any future objection to, such forum and arbitration rules. Judgment upon any award may be entered by any state or federal court having jurisdiction thereof. Except as required by law (including, without limitation, the rules and regulations of the Securities and Exchange Commission and the NASDAQ Stock Market, if applicable), neither party nor the arbitrator shall disclose the existence, content, or results of any arbitration hereunder without the prior written consent of all parties. Except as provided herein, the Federal Arbitration Act shall govern the interpretation, enforcement and all proceedings pursuant to this Section. (c) Adherence to this dispute resolution process shall not limit the right of the Company or Executive to obtain any provisional remedy, including without limitation, injunctive or similar relief set forth in Section 10 from any court of competent jurisdiction as may be necessary to protect their respective rights and interests pending arbitration. Notwithstanding the foregoing sentence, this dispute resolution procedure is intended to be the exclusive method of resolving any Claims arising out of or relating to this Agreement. (d) The arbitration procedures shall follow the substantive law of the State of Colorado, including the provisions of statutory law dealing with arbitration, as it may exist at the time of the demand for arbitration, insofar as said provisions are not in conflict with this Agreement and specifically excepting therefrom sections of any such statute dealing with discovery and sections requiring notice of the hearing date by registered or certified mail. (e) To the extent a dispute is not to be arbitrated in accordance with the foregoing, each of the Company and the Executive (1) irrevocably submits to the jurisdiction of the United States District Court for the District of Colorado and to the jurisdiction of the state courts of the State of Colorado for the purpose of any suit or other proceeding arising out of or based upon this Agreement or the subject matter hereof and agrees that any such proceeding shall be brought or maintained only in such court, and (2) waives, to the extent not prohibited by applicable law and agrees not to assert in any such proceedings, any claim that it is not subject personally to the jurisdiction of the above-named courts, that he or it is immune from extraterritorial injunctive relief or other injunctive relief, that any such proceeding brought or maintained in a court provided for above may not be properly brought or maintained in such court, should be transferred to some other court or should be stayed or dismissed by reason of the pendency of some other proceeding in some other court, or that this Agreement or the subject matter hereof may not be enforced in or by such court. IN WITNESS WHEREOF, this Agreement has been executed by the Company, by its duly authorized officer, and by the Executive, as of the date first above written. THE EXECUTIVE: WILD OATS MARKETS, INC. - ---------------------- By: Perry D. Odak --------------------------- Name: Title: Exhibit A Statement of Authority The Board of Directors of the Company acknowledges that, in connection with the Company's engagement of the Chief Executive Officer to accomplish certain objectives on behalf of the Company and its shareholders, the Chief Executive Officer will require certain authorities to conduct business on behalf of the Company. The purpose of this Statement of Authority is to specify the authorities of the Chief Executive Officer, subject to the Board's reservation of authority to limit or revoke such authority to the extent necessary to comply with the Board's responsibilities under applicable law, including the Company's Certificate of Incorporation and By-Laws ("Applicable Law"). A. The Chief Executive Officer shall have authority with respect to the following matters with the required written concurrence of the Chief Financial Officer: 1. Capital expenditures within the capital budget up to $1,000,000 per project (or up to $3,000,000 per new store if approved by the Real Estate Committee); provided, that the total value of capital expenditures does not exceed the amount authorized in the budget. 2. Capital expenditures not in the capital budget up to $350,000 per project, but not over $750,000 in the aggregate. In no event will total capital expenditures exceed the total value of capital expenditures authorized in the capital budget. 3. Disposal or encumbrance of assets with a book or fair market value of no more than $150,000 per transaction. 4. Operating leases (within any operating lease budget, if applicable) up to a total commitment of $500,000 per transaction. 5. Operating leases not in operating lease budget, with a total commitment of $150,000 per year in total commitment per lease with a term not to exceed five years, but not over $450,000 annually in the aggregate. 6. Administration of the details of the Company's compensation program (applying its general compensation philosophy as previously developed) for all employees (other than those at or above the level of officer or any other employees with annual compensation in excess of $200,000). 7. Administration of the employee benefits program, including approval of changes with an aggregate annual cost up to $300,000. 8. a. Execution of contracts within the ordinary course with an individual value of up to $500,000 that do not require special approval under Section B.1 below. b. Other non-ordinary payments in an amount up to $150,000 that also do not require special approval under Section B.1 below. 9. Primary responsibility for negotiation of financing transaction involving investment of approximately $35-$50 million of new equity in the Company. Notwithstanding the foregoing, the authorities described in this Section A will be subject to Board approval (i) to the extent specifically covered in Section B below, (ii) to the extent that the exercise of the authority directly affects the Chief Executive Officer personally (other than where the Chief Executive Officer is affected only incidentally by a decision affecting all employees generally), or (iii) to the extent that Board approval is required under Applicable Law. B. The Board of Directors of the Company retains authority with regard to the following matters: 1. Any transaction involving: a. The sale or encumbrance of assets with a book value over $150,000. b. The sale of stock or assets of a subsidiary. c. The acquisition of stock or assets of another company. d. Loans in excess of $30,000 made outside the ordinary course of business not to exceed $150,000 outstanding at any time. e. A single purchase of inventory in excess of $5 million or any opening of letters of credit in excess of $2 million (individually or in the aggregate). f. Transactions with any parties related to any officer of the Company. g. The sale or purchase of the Company's capital stock. h. The declaration and payment of dividends. i. The approval of any other contract (including all real property leases, joint venture, partnership or similar contracts with vendors) with a value in excess of $250,000 per year or any other non-ordinary course payment or purchase orders (including the settlement of litigation claims involving payments by the Company) in excess of $150,000. 2. All matters not specified in Section A above which require approval of the Board of Directors under Applicable Law, including the approval of the above specification of authorities. C. The Chief Executive Officer will cause to be provided to the Board a comprehensive review of the following matters on a regular basis, or more often if issues create the need: 1. As soon as practical: a. Status of material tax matters as they arise. b. Status of material legal matters as they arise. c. Any material change in vendor relations. d. Any material change in the operating or financial performance of the Company. e. Any contact made by potential buyers who may be interested in purchasing the Company and/or its assets. f. Notices of default or acceleration under loan agreements, notes or significant contract. 2. Monthly: a. Financial and operating results, including management's analysis in writing. b. Update/reconciliation of actual vs. budgeted capital expenditures. 3. Quarterly: a. Status of legal matters. b. Competition update. c. Information systems d. Report on all banking relationships. 4. Annually: a. Independent accountant management letters. b. Other tax matters. c. Officers salary, bonus and wages adjustment and/or recommendations. d. Property/casualty and employee benefit insurance programs. e. Advertising and public relations programs. f. Officer performance appraisals. g. Union relationships. EX-10.2 3 stkpurch.txt PERRY D. ODAK STOCK PURCHASE AGREEMENT RESTRICTED STOCK PURCHASE AGREEMENT THIS RESTRICTED STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of March 6, 2000, by Wild Oats Markets, Inc., a Delaware corporation (the "Company"), and Perry D. Odak (the "Purchaser"). SECTION A -- Acquisition Of Shares 1. Transfer. Pursuant to the employment agreement between the parties dated as of March 6, 2001 ("Employment Agreement"), and subject to the terms and conditions set forth in this Agreement, the Company agrees to transfer 1,332,649 shares ("Purchased Shares") of Common Stock, $0.001 par value per share, of the Company ("Stock") to the Purchaser. The transfer shall occur at the offices of the Company on the date set forth above or at such other place and time as the parties may agree. 2. Consideration. The Purchaser agrees to pay $6.969 for each Purchased Share ("Purchase Price"), or an aggregate of $9,287,230.15. The Purchase Price is agreed to be at 100% of the per share closing price of the Stock on NASDAQ as of the date of purchase. Payment of $0.01 per share shall be made on the purchase date in cash or cash equivalents and the balance shall be paid by delivery of a full recourse, five-year promissory note in an original principal amount equal to the amount of the Purchase Price for the Purchased Shares not otherwise paid in cash or cash equivalents (the "Note") (the form of which is attached hereto as Exhibit A and made a part hereof), with interest on the Note at the rate set forth in the Note. Payments of principal and interest due under the Note shall be subject to acceleration under the terms set forth therein and in the Pledge Agreement. The Note shall provide for a balloon payment of principal and accrued, unpaid interest on the fifth anniversary of the date the Note is made. 3. Tax Election and Withholding. Purchaser hereby acknowledges that he has been advised by the Company to seek independent tax advice regarding the availability and advisability of making an election under Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and that any such election (an "83(b) Election"), if made, must be made within 30 days of the date the Purchased Shares are transferred to the Purchaser. At the time of making a timely 83(b) Election, or, in the event the Purchaser fails to make a timely 83(b) Election, on each date on which a Right of Repurchase (defined below) lapses, the Company shall have the right to deduct from any compensation or any other payment of any kind (including withholding the release of Purchased Shares) due the Purchaser the amount of any federal, state or local taxes required by law to be withheld as a result of the purchase of the Purchased Shares or the lapse of the Right of Repurchase in whole or in part; provided, however, that the value of Purchased Shares withheld may not exceed the statutory minimum withholding amount required by law. In lieu of such deduction, the Company may require the Purchaser to make a cash payment to the Company equal to the amount required to be withheld. If the Purchaser does not make such payment when requested, the Company may refuse to release any certificate representing Purchased Shares under this Agreement until arrangements satisfactory to the Board of Directors of the Company for such payment have been made. SECTION B -- Right Of Repurchase 1. Scope of Repurchase Right. All Purchased Shares initially shall be "Restricted Shares" and shall be subject to a right, but not an obligation, of repurchase by the Company ("Right of Repurchase"). The Purchaser shall not transfer, assign, encumber, sell, hypothecate, exchange or otherwise dispose of any Restricted Shares, except by will or the laws of descent and distribution, subject to the terms of this Agreement. 2. Condition Precedent to Exercise of Repurchase Right. Subject to Paragraph 3 below, the Right of Repurchase shall be exercisable with respect to any or all of the Restricted Shares at any time (i) following the date when the Purchaser's employment pursuant to the Employment Agreement terminates for any reason, with or without cause, including death or disability, or (ii) if the Purchaser does not commence employment on the effective date of the Employment Agreement. 3. Lapse of Repurchase Right. Provided that the Purchaser has remained in the continuous employment of the Company pursuant to the Employment Agreement from the effective date of that agreement, the Right of Repurchase shall lapse and the Purchased Shares shall no longer be Restricted Shares (i.e., they shall become "vested") as follows: (i) Unless vesting is accelerated pursuant to clauses (ii) or (iii) below, on each of the dates specified in the following table with respect to the aggregate percentage of Purchased Shares indicated:
AGGREGATE AGGREGATE AGGREGATE PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF VESTING DATE TOTAL PURCHASED VESTING TOTAL PURCHASED VESTING TOTAL PURCHASED SHARES VESTED DATE SHARES VESTED DATE SHARES VESTED - -------------- ------------------ -------------- ----------------- ------------- ------------------ 4/19/01 2.08% 8/19/02 35.42% 12/19/03 68.75% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 5/19/01 4.17% 9/19/02 37.50% 1/19/04 70.83% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 6/19/01 6.25% 10/19/02 39.58% 2/19/04 72.92% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 7/19/01 8.33% 11/19/02 41.67% 3/19/04 75.00% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 8/19/01 10.42% 12/19/02 43.75% 4/19/04 77.08% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 9/19/01 12.50% 1/19/03 45.83% 5/19/04 79.17% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 10/19/01 14.58% 2/19/03 47.92% 6/19/04 81.25% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 11/19/01 16.67% 3/19/03 50.00% 7/19/04 83.33% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 12/19/01 18.75% 4/19/03 52.08% 8/19/04 85.42% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 1/19/02 20.83% 5/19/03 54.17% 9/19/04 87.50% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 2/19/02 22.92% 6/19/03 56.25% 10/19/04 89.58% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 3/19/02 25.00% 7/19/03 58.33% 11/19/04 91.67% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 4/19/02 27.08% 8/19/03 60.42% 12/19/04 93.75% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 5/19/02 29.17% 9/19/03 62.50% 1/19/05 95.83% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 6/19/02 31.25% 10/19/03 64.58% 2/19/05 97.92% - -------------- ------------------ -------------- ----------------- ------------- ------------------ 7/19/02 33.33% 11/19/03 66.67% 3/19/05 100% - -------------- ------------------ -------------- ----------------- ------------- ------------------
The extent to which the Purchased Shares are vested as of a particular vesting date specified above, determined based on the total number of Purchased Shares, is rounded down to the nearest whole share. However, vesting is rounded up to the nearest whole share with respect to the last vesting date reflected on this vesting schedule. (ii) The aggregate percentage of Purchased Shares specified below shall become vested when the fair market value of the Stock, as measured by the average of the daily closing stock prices on NASDAQ for the preceding 90 consecutive trading days, shall equal at least the corresponding Per Share Fair Market Value Threshold indicated (such shares being the Restricted Shares that would regularly vest the latest under clause (i) above following the date when such acceleration under this clause (ii) has become effective): ------------------------------------- ------------------------------------- Per Share Fair Market Value AGGREGATE PERCENTAGE OF TOTAL Threshold PURCHASED shares vested ------------------------------------- ------------------------------------- $12 50% ------------------------------------- ------------------------------------- $18 75% ------------------------------------- ------------------------------------- $24 100% ------------------------------------- ------------------------------------- For example, if 25% of the Purchased Shares are already vested pursuant to clause (i) above, and 50% of the Purchased Shares become vested pursuant to this clause (ii), then the Purchaser shall be vested in 75% of the Purchased Shares. (iii) One hundred percent (100%) of the Restricted Shares shall become vested upon a Change in Control of the Company (as defined in the Employment Agreement), within the first twelve months after the effective date of the Employment Agreement, or upon a Change of Control of the Company thereafter if the fair market value of the Stock, as measured by the closing stock price on NASDAQ immediately prior to the Change in Control, shall equal at least Twenty Dollars ($20). 4. Repurchase Cost. If the Company exercises the Right of Repurchase, it shall pay the Purchaser an amount equal to the Purchase Price for each of the Restricted Shares being repurchased. 5. Exercise of Repurchase Right. The Right of Repurchase shall be exercisable only by written notice delivered to the Purchaser. The notice shall set forth the date on which the repurchase is to be effected. Such date shall not be more than 30 days after the date of the notice. To the extent not held in escrow by the Company, the certificate(s) representing the Restricted Shares to be repurchased shall, prior to the close of business on the date specified for the repurchase, be delivered to the Company properly endorsed for transfer, together with any other documents needed to effectuate the transfer. The Company shall, concurrently with the receipt of such certificate(s), pay to the Purchaser the purchase price determined according to Paragraph B.4 above. Payment shall be made (a) in cash or cash equivalents, (b) by canceling indebtedness to the Company, including indebtedness incurred by the Purchaser in the purchase of the Restricted Shares (whether or not then due), or (c) by a combination of the foregoing. 6. Additional Shares or Substituted Securities. In the event of a stock dividend, extraordinary dividend payable in a form other than stock, spin-off, stock split, reverse stock split, recapitalization, or similar transaction affecting the Company's outstanding securities that is effected without receipt of consideration, any new, substituted or additional securities or other property (including money paid other than as an ordinary cash dividend) that are by reason of such transaction distributed with respect to any Restricted Shares shall immediately be subject to this Agreement (including the Right of Repurchase). Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number and/or class of the Restricted Shares. Appropriate adjustments shall also be made, after each such transaction, to the per share fair market value prices referred to in Paragraph B.3(ii) above, and the price per share to be paid upon the exercise of the Right of Repurchase, in order to reflect any change in the Company's outstanding securities effected without receipt of consideration therefor; provided, however, that the aggregate purchase price payable for the Restricted Shares shall remain the same. 7. Termination of Rights as Stockholder. If the Company makes available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Restricted Shares to be repurchased in accordance with this Section B, then after such time the person from whom such Restricted Shares are to be repurchased shall no longer have any rights as a holder of such Restricted Shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such Restricted Shares shall be deemed to have been repurchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement. 8. Escrow Upon issuance, the certificates for Restricted Shares shall be deposited in escrow with the Company, together with a stock power, endorsed in blank by the Purchaser, with respect to the Restricted Shares, to be held in accordance with the provisions of this Agreement. Any new, substituted or additional securities or other property described in Paragraph B.6 above shall immediately be delivered to the Company to be held in escrow, but only to the extent the Purchased Shares with respect to which such securities or other property are issued are, at the time, Restricted Shares. All regular cash dividends on Restricted Shares (or other securities at the time held in escrow) shall be paid directly to the Purchaser and shall not be held in escrow. The Purchaser shall have no right to vote the Restricted Shares while held in escrow. Restricted Shares, together with any other assets or securities held in escrow hereunder, shall be (i) surrendered to the Company for repurchase and cancellation upon the Company's exercise of its Right of Repurchase (provided that the Purchaser hereby appoints the Company as attorney-in-fact to execute any repurchase agreement and related certificates and documents for the repurchase of the Restricted Shares by the Company and to endorse and transfer such shares to the Company) or (ii) released to the Purchaser upon the Purchaser's request to the extent the Purchased Shares are no longer Restricted Shares. In any event, all Purchased Shares which have vested (and any other vested assets and securities attributable thereto) shall be released within 60 days after the Purchaser's cessation of employment pursuant to the Employment Agreement. SECTION C -- Restrictions On Transfer 1. Purchaser Representations. In connection with the issuance and acquisition of Purchased Shares under this Agreement, the Purchaser hereby represents and warrants to the Company as follows: The Purchaser understands and is familiar with the requirements of Regulation D (17 C.F.R. ss.230.501-08), and is an accredited investor within the meaning of the Securities Act of 1933 (the "Securities Act"). The Purchaser is acquiring and will hold the Purchased Shares for investment for his account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. The Purchaser understands that the Purchased Shares have not been registered under the Securities Act by reason of a specific exemption therefrom and that the Purchased Shares must be held indefinitely, unless they are subsequently registered under the Securities Act or the Purchaser obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required. The Purchaser further acknowledges and understands that the Company is under no obligation to register the Purchased Shares. The Purchaser is aware of the adoption of Rule 144 by the Securities and Exchange Commission under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions, including without limitation the availability of certain current public information about the issuer, the resale occurring only after the holding period required by Rule 144 has been satisfied, the sale occurring through an unsolicited "broker's transaction," and the amount of securities being sold during any three-month period not exceeding specified limitations. The Purchaser will not sell, transfer or otherwise dispose of the Purchased Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the Securities Act. The Purchaser agrees that he will not dispose of the Purchased Shares unless and until he has complied with all requirements of this Agreement applicable to the disposition of Purchased Shares and he has provided the Company with written assurances, in substance and form satisfactory to the Company, that (a) the proposed disposition does not require registration of the Purchased Shares under the Securities Act or all appropriate action necessary for compliance with the registration requirements of the Securities Act or with any exemption from registration available under the Securities Act (including Rule 144) has been taken and (b) the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Purchased Shares under state securities law. The Purchaser has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the Purchased Shares, and the Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Purchased Shares. The Purchaser is aware that his investment in the Company is a speculative investment which has limited liquidity and is subject to the risk of complete loss. The Purchaser is able, without impairing his financial condition, to hold the Purchased Shares for an indefinite period and to suffer a complete loss of his investment in the Purchased Shares. 2. Securities Law Restrictions. Regardless of whether the offering and sale of Shares under this Agreement have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of the Purchased Shares (including the placement of appropriate legends on stock certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law. 3. Rights of the Company. The Company shall not be required to (i) transfer on its books any Purchased Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Purchased Shares have been transferred in contravention of this Agreement. 4. Piggyback Registration Rights. If the Company proposes to register any of its equity securities under the Securities Act (other than a registration effected solely to implement an employee benefit plan or transaction to which Rule 145 of the Securities Act is applicable, or a registration using any form that does not permit secondary sales of securities), on a form and in a manner that would permit registration of the Purchased Shares for sale to the public under the Securities Act, it will give written notice to the Purchaser of its intention to do so, describing such securities and specifying the form and manner and other relevant facts involved in such proposed registration, if such disclosure is acceptable to the managing underwriter. Upon the written request of the Purchaser delivered to the Company within ten (10) days after the receipt of any such notice (which request shall specify the Purchased Shares intended to be disposed of by the Purchaser and the intended method of disposition thereof), the Company will use reasonable commercial efforts (at the Company's expense, other than underwriting commissions, stock transfer taxes and opinions of counsel accruing to or required by the Purchased Shares being registered) to effect the registration under the Securities Act of all the Purchased Shares that the Company has been so requested to register; provided, however, that: (i) The Company shall only be obligated to register those Purchased Shares which are fully paid and nonassessable, which have fully vested under any vesting schedule applicable to Purchased Shares, and with respect to which any indebtedness incurred by the Purchaser in the purchase of the Purchased Shares has been paid. (ii) If, at any time after giving such written notice of its intention to register its securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company may, at its election, give notice of such determination to the Purchaser and thereupon the Company shall be relieved of its obligation to register any Purchased Shares in connection with such registration. (iii) If such registration involves an underwritten offering, the Purchaser must sell the Purchased Shares requested to be registered to the underwriter selected by the Company on the same terms and conditions as apply to the Company or the other selling stockholders participating therein, and Purchaser shall bear all costs of such sale. The Company shall not be obligated to effect any registration of Purchased Shares incidental to the registration of any of its securities in connection with mergers, acquisitions, exchange offers, dividend reinvestment plans or stock option or other employee benefit plans. If a registration pursuant to this Agreement involves an underwritten offering and the sole or managing underwriter advises the Company that, in its opinion, the number of securities proposed to be included in such registration should be limited due to market conditions or the necessity of including shares being sold by the Company, or being sold by third parties pursuant to the Registration Rights Agreement dated July 12, 1996, then the Company will notify the Purchaser, if he has requested registration, and the Purchased Shares shall be excluded until such limitation has been met. The Company shall have the right to select the managing underwriter with respect to any offering. The Company shall have no obligation to pro rate the amount of Purchased Shares that the Purchaser may register in any such offering, in the event the number of shares includable is limited. Notwithstanding the foregoing, the Company shall not be required to included any Purchased Shares in any registration in the event that the Company shall obtain an opinion of its counsel that the Purchased Shares requested to be registered may then be sold without registration under Rule 144 or other provisions of the Securities Act. The Purchaser agrees that in the event Purchased Shares are registered as provided for above, the Purchaser shall cooperate with the Company to provide any information required for the registration. SECTION D -- Successors And Assigns Except as otherwise expressly provided to the contrary, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and be binding upon the Purchaser and the Purchaser's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person has become a party to this Agreement or has agreed in writing to join herein and to be bound by the terms, conditions and restrictions hereof. SECTION E -- No Retention Rights Nothing in this Agreement shall confer upon the Purchaser any right to continue in the employment of the Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any parent or subsidiary employing or retaining the Purchaser) or of the Purchaser, which rights are hereby expressly reserved by each, to terminate his employment at any time and for any reason, with or without cause or notice. SECTION F -- Legends All certificates evidencing Purchased Shares shall bear legends referencing, to the extent applicable, this Agreement, and restricting transferability of such Shares. If required by the authorities of any state in connection with the issuance of the Purchased Shares, the legend or legends required by such state authorities shall also be endorsed on all such certificates. Legends will be removed by the Company when such Shares are registered or an exemption from registration is available under applicable federal and state law and the Purchased Shares are no longer subject to such agreements. SECTION G -- NOTICE Any notice required by the terms of this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid; provided that, if the receiving party consents in advance, a notice may be given by telecopy or by such other electronic transmission mechanism as may be available to the parties. Notice shall be addressed to the Company at its principal executive office, attention Board of Directors, with a copy to General Counsel, and to the Purchaser at the address that he most recently provided to the Company, or to such other address as either party may specify by notice to the other. SECTION H -- Entire Agreement This Agreement, together with the Employment Agreement and Note, constitute the entire agreement between the parties hereto with regard to the subject matter hereof. It supersedes all prior communications, representations and understandings, whether oral or written and whether express or implied, which relate to the subject matter hereof. SECTION I - AMENDMENT AND RESCISSION This Agreement may be amended or rescinded only by a writing signed by the parties making specific reference to this Agreement. SECTION J-- Choice Of Law, ARBITRATION AND CONSENT TO JURISDICTION This Agreement shall be governed by, and construed in accordance with, the laws of the State of Colorado, as such laws are applied to contracts entered into and performed in such State, without regard to the conflicts of law principles thereof. This Agreement and the Note shall also be subject to the arbitration and consent to jurisdiction provisions in Section 22 of the Employment Agreement, which are incorporated herein by reference as though fully set forth herein. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. PURCHASER: WILD OATS MARKETS, INC. By: - ----------------------------------------- --------------------------- Title: ------------------------ EXHIBIT A PROMISSORY NOTE $ 9,273,978.31 March 6, 2001 Boulder, Colorado FOR VALUE RECEIVED, Perry D. Odak ("Borrower") promises to pay to the order of Wild Oats Markets, Inc., a Delaware corporation ("Holder"), the principal sum of Nine Million Two Hundred Seventy Three Thousand Nine Hundred Seventy Eight and 31/100 Dollars ($9,273,978.31) ("Principal Sum"), together with interest computed on the unpaid balance of the Principal Sum calculated from the date hereof until paid in full in accordance with the provisions of this Note (the "Loan"). Borrower has delivered to Holder on the date hereof an executed Restricted Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to which Borrower purchased 1,332,649 shares of Common Stock, par value of $0.001 per share, of Wild Oats Markets, Inc. (the "Shares"). Borrower has paid $13,251.84 in cash and has requested that Holder make the Loan to Borrower to pay the balance of the purchase price of the Shares, and Holder is willing to make the Loan to Borrower upon the terms and subject to the conditions contained in this Note. 1. Interest. Interest shall accrue on the outstanding principal amount of this Note at a rate equal to 5.5% per annum, and shall be compounded semi-annually. All interest shall accrue based on a 360-day year for the actual number of days outstanding. In the event Borrower shall fail to make any payment under this Note within 10 days after its due date, Borrower shall pay a late charge, without written notice or additional demand therefor, that is equal to the lesser of (i) 5% of the amount not paid in a timely manner or (ii) the maximum amount permitted by applicable law. Any such late charge shall be payable with the interest payment on which it is imposed. All payments made pursuant to this Note shall be applied, first, to any late fees and penalties hereunder, next, to all accrued and outstanding interest on the Loan, and lastly to the principal amount outstanding. 2. Payment. (a) Method of Payment. All payments hereunder shall be made in lawful currency of the United States and in immediately available funds at the principal office of Holder at 3375 Mitchell Lane, Boulder, CO 80301, or at such other place as Holder may from time to time designate. Any payments by check shall be accepted subject to collection in immediately available funds. (b) Scheduled Payment. The entire outstanding Principal Sum of this Note, together with all accrued and unpaid interest, late charges, expenses, and fees, shall be due and payable in full on the last business day preceding the fifth anniversary of the date this Note is made. (c) Mandatory Prepayment. Accrued and unpaid interest, together with the Principal Sum, if not sooner paid, shall be immediately due and payable on the earliest of: (i) the date Borrower is no longer the beneficial owner of the Shares; (ii) the date of termination of Borrower's employment with Holder pursuant to the Employment Agreement between Borrower and Holder dated March 6, 2001 (the "Employment Agreement"); (iii) thirty days after the achievement of the "Performance Targets" (defined below); and (iv) the acceleration of the maturity of the Loan as provided in Section 3. For purposes of this Note, the Performance Targets are achieved (i) when the fair market value of the Shares, as measured by the closing stock price on NASDAQ for the preceding 120 consecutive trading days shall equal at least $30 per share, or (ii) upon a Change in Control of the Company (as defined in the Employment Agreement) if the fair market value of the Shares as measured by the closing stock price on NASDAQ immediately prior to the Change in Control shall equal at least $20 per share (as such per share prices may be adjusted by Holder to reflect any stock dividend, extraordinary dividend payable in a form other than stock, spin-off, stock split, reverse stock split, recapitalization, or similar transaction affecting the Holder's outstanding securities that is effected without receipt of consideration). (d) Optional Prepayment. Borrower may, at any time and from time to time, without premium or penalty, prepay the outstanding Principal Sum in whole or in part. (e) Event of Default. Any of the following shall constitute an "Event of Default" hereunder: (i) failure to pay the Loan when due and payable; (ii) any breach by Borrower of the terms of the Stock Purchase Agreement or this Note; or (iii) death of Borrower. 3. Acceleration. In the event that Borrower commences an action under any law relating to bankruptcy, insolvency or relief of debtors, there is commenced against Borrower an action under any such law which results in the entry of an order for relief or such action remains undismissed for a period of 60 days or Borrower otherwise becomes insolvent, or upon the occurrence of an Event of Default, Holder may accelerate this Loan and may, by written notice to Borrower, declare the entire outstanding Principal Sum and all accrued and unpaid interest thereon to be immediately due and payable and, thereupon, the outstanding Principal Sum and all such accrued and unpaid interest shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are expressly waived by Borrower. If an Event of Default shall occur, Borrower shall pay Holder all costs and expenses which Holder may incur in connection with the collection of any monies due under this Note or in connection with the enforcement of any rights under this Note or under any other agreement related to the loan evidenced hereby, including reasonable attorneys' fees and costs not to exceed Fifteen Percent (15%) of the then outstanding principal balance hereunder. The failure of Holder to accelerate this Loan shall not constitute a waiver of any of Holder's rights under this Loan as long as any of the events described in this Section continue. 4. Recourse. The Loan shall be a full recourse obligation of Borrower, and Holder may enforce this Note by any suit, claim, action or proceeding wherein a money judgment, deficiency judgment or other judgment for personal liability shall be sought against Borrower. Without limiting Holder's right to exercise any or all of its rights, powers and remedies upon an Event of Default, Holder agrees to accept Shares if offered in payment of Borrower's obligation under the Note, which Shares shall be valued based on their then fair market value as determined by the closing price on NASDAQ; provided, however, that any Shares that are "unvested" and subject to the Company's "right of repurchase" under the Stock Purchase Agreement will not be valued at more than the purchase price paid by the Borrower for such Shares. 5. Miscellaneous. (a) Each right, power and remedy of Holder under this Note or under applicable laws shall be cumulative and concurrent, and the exercise of any one or more of them shall not preclude the simultaneous or later exercise by Holder of any or all such other rights, powers or remedies. No failure or delay by Holder to insist upon the strict performance of any one or more provisions of this Note or to exercise any right, power or remedy consequent upon a breach thereof or default hereunder shall constitute a waiver thereof, or preclude Holder from exercising any such right, power or remedy. By accepting full or partial payment after the due date of any amount of principal of this Note, Holder shall not be deemed to have waived the right either to require payment when due and payable of all other amounts of principal of this Note or to exercise any rights and remedies available to it in order to collect all such other amounts due and payable under this Note. (b) No modification, change, waiver or amendment of this Note shall be deemed to be made by Holder unless in writing signed by Holder, and each such waiver, if any, shall apply only with respect to the specific instance involved. (c) To the extent permitted by law, Borrower waives diligence, presentment, demand, demand for payment, notice of nonpayment, notice of dishonor, protest and notice of protest and all other notices or demands in connection with the delivery, acceptance, performance, default or enforcement of this Note. (d) Borrower hereby agrees that at any time and from time to time and with or without consideration, Holder may, without notice to or further consent of Borrower and without in any manner releasing, lessening or affecting the obligations of Borrower hereunder: (a) release, surrender, waive, add, substitute, settle, exchange, compromise, modify, extend or grant indulgences with respect to, (i) this Note, (ii) all or any part of the collateral or security for this Note, if any, and (iii) Borrower; and (b) grant any extension or other postponements of time of payment hereof. (e) The terms of any documents referred to herein are incorporated herein by reference as though fully set forth herein. (f) Borrower hereby acknowledges, consents and agrees that the provisions of this Note and the rights of all parties mentioned herein shall be governed by and construed and enforced in accordance with the internal laws of the State of Colorado, without regard to the conflict of laws and principles thereof. (g) This Note shall not be assignable by Borrower and shall be binding upon Borrower's personal representative, heirs and legatees. (h) All notices, demands, requests for modification, consents or approvals under this Note must be in writing and shall be deemed to have been properly given when received by Holder at its address as above stated, and when hand-delivered or mailed by first class mail, postage prepaid, to Borrower at the address as it appears below, or at such other place as either party may designate in writing. (i) Time is of the essence with respect to all matters hereunder. IN WITNESS WHEREOF, Borrower has executed this Note, under seal, on the day and year first above written. WITNESS: BORROWER - ------------------------------ ------------------------------- Perry D. Odak ------------------------------- ------------------------------- (address) -----END PRIVACY-ENHANCED MESSAGE-----