-----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, D/k8qscSUUPFRx7GyTt52HYuXBpa0Pk29wl6rvKYXixX4AHE/J1cDjMs1AnsXk6C VpwozfTlGKLNm7PYREYx+A== 0000927356-97-000279.txt : 19970328 0000927356-97-000279.hdr.sgml : 19970328 ACCESSION NUMBER: 0000927356-97-000279 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970327 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21577 FILM NUMBER: 97565686 BUSINESS ADDRESS: STREET 1: 1645 BROADWAY CITY: BOULDER STATE: CO ZIP: 80302 BUSINESS PHONE: 3034405220 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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 Number) incorporation or organization) 1645 Broadway Boulder, Colorado 80302 (Address of principal executive offices, including zip code) (303) 440-5220 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class ------------------- Common Stock, $.001 par value 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 ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) As of March 17, 1997, the aggregate market value of the voting stock held by non-affiliates (as defined by the regulations of the Securities and Exchange Commission) of the Registrant was $37,278,000, based upon the closing sale price of such stock on such date as reported on the NASDAQ National Market. As of March 17, 1997, the total number of shares outstanding of the Registrant's common stock, $.001 par value, was 6,890,484 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 28, 1996 have been incorporated by reference into Parts II and IV of this report on Form 10-K. Portions of the definitive Proxy Statement for the Registrant's Annual Meeting of Stockholders to be held on May 1, 1997, have been incorporated by reference into Part III of this report.
TABLE OF CONTENTS Page PART I. Item 1. Business. 1 Item 2. Properties. 8 Item 3. Legal Proceedings. 9 Item 4. Submission of Matters to a Vote of Security Holders. 9 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 9 Item 6. Selected Financial Data. 9 Item 7. Management's Discussion and Analysis of 9 Financial Condition and Results of Operations. Item 8. Financial Statements and Supplementary Data. 10 Item 9. Changes in and Disagreements with Accountants 10 on Accounting and Financial Disclosure. PART III. Item 10. Directors and Executive Officers of the Registrant. 10 Item 11. Executive Compensation. 10 Item 12. Security Ownership of Certain Beneficial Owners and Management. 10 Item 13. Certain Relationships and Related Transactions. 10 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 10
PART I. Item 1. BUSINESS Introduction Wild Oats Markets, Inc. (the "Company" or "Wild Oats") is the second largest natural foods supermarket chain in North America with the largest natural foods store base in the western United States. References herein to "the Company" or "Wild Oats" are deemed to refer to Wild Oats Markets, Inc., its subsidiaries and predecessors. As of March 21, 1997, the Company currently operates 45 stores under the names "Wild Oats Community Markets", "Alfalfa's Markets" and "Oasis Fine Foods" in nine states: California, Colorado, Florida, Kansas, Missouri, Nevada, New Mexico, Oregon and Utah; and under the name "Capers Whole Foods Markets" in British Columbia, Canada. The Company is dedicated to providing a broad selection of high quality natural and gourmet foods and related products at "down to earth" competitive prices in an inviting and educational store environment emphasizing customer service. The Company's stores range in size from 5,000 to 35,000 square feet and feature natural alternatives in virtually every product category found in conventional supermarkets, providing consumers with a one-stop, full-service shopping alternative to both conventional supermarkets and traditional health food stores. The Company grew from nine natural foods stores located primarily in Colorado at the end of 1992, to 40 stores in eight states and Canada at the end of 1996, representing a compound annual growth rate of 45%. During this period, the Company's sales increased from $36.6 million to $192.5 million, representing a compound annual growth rate of 51%. This growth resulted from the acquisition of independent and small chain natural foods store operators, the opening of new stores and positive comparable store sales growth. As of the end of fiscal 1994, 1995 and 1996, the Company grew from 14 to 21 to 40 stores, with sales of $65.2 million, $98.5 million and $192.5 million, respectively, and income (loss) from operations of $2.6 million, $800,000 and $(4.6 million), respectively. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations" incorporated by reference from the Company's Annual Report to Stockholders. In 1996, the Company opened seven new stores and acquired 14 additional stores and sales increased 95% to $192.5 million from $98.5 million in 1995. In July 1996, Wild Oats completed the acquisition of Alfalfa's, Inc. ("Alfalfa's"), a leading natural foods supermarket chain that operated 11 stores in three states and Canada. From fiscal 1994 to fiscal 1996 Alfalfa's grew from six to 11 stores, representing a compound annual growth rate of 35.4%. During this same period sales increased from $45.9 million to $85.6 million, representing a compound annual growth rate of 36.6%. Through the acquisition of Alfalfa's, the Company combined two natural foods retailers with similar operating strategies and complementary store bases, increased the Company's penetration of existing markets and created a stronger platform for future growth. In the last half of 1996, the Company closed the Alfalfa's Market Seattle, Washington store and the Wild Oats Market Lawrence, Kansas store, and consolidated the Company's and Alfalfa's, Inc.'s corporate headquarters and information systems, for which the Company recorded a one-time nonrecurring charge of $7.0 million. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations," incorporated by reference from the Company's Annual Report to Stockholders. The Company was incorporated in Colorado in 1987 and reincorporated in Delaware in 1993. In July 1996, in connection with the acquisition of Alfalfa's, Inc., the Company effected a merger into WO Holdings, Inc., a Delaware corporation, which subsequently changed its name to Wild Oats Markets, Inc. In December 1996 and January 1997 the Company merged several wholly owned subsidiaries that held the operations of the Colorado and New Mexico Alfalfa's Market stores into the Company. Natural Foods Industry Natural foods are defined as foods which are minimally processed, free of artificial ingredients, preservatives and other non-naturally occurring chemicals and, in general, are as near to their whole, natural state as possible. Most natural products fall into the food category, but the natural foods industry also encompasses a number of other categories such as naturally- based cosmetics, toiletries and personal care items, vitamins and herbal supplements, naturally-based cleaning agents, and natural and homeopathic medicines. While sales growth in the traditional supermarket industry remained relatively flat, from 1991 to 1995 the natural foods industry grew at a 19% compound annual growth rate. According to The Natural Foods Merchandiser, a leading industry publication, growth in the natural foods industry has accelerated from a 10% increase in sales in 1991 to a 22% increase in 1995, when the market reached $9.1 billion, of which approximately $6.1 billion was generated by independent natural/health food stores. According to the results of a retailer survey of 1996 industry performance by Whole Foods, an industry publication, total independent natural/health food store sales reached $10.4 billion in 1996, which represents an approximate 58% increase in sales in this sector in 1996. The Company believes that this growth reflects a broadening of the natural foods consumer base which is being propelled by several factors, including healthier eating patterns, increasing concern regarding food purity and safety, and greater environmental awareness. While natural products generally have higher costs of production and correspondingly higher retail prices, the Company believes that a growing segment of the population now attributes added value to high quality natural products and is willing to pay a premium for such products. Indeed, while early growth in the industry was attributed to more educated, wealthier consumers, there is increasing evidence that the mainstream consumer is driving much of the recent growth. Further, according to industry data, the natural foods industry comprises less than 3% of the total supermarket industry, allowing for significant potential to continue to expand the customer base. 1 Traditional natural foods stores, offering only vitamins, dietary supplements, herbs and a limited selection of natural foods product lines, first emerged over 50 years ago. Over the years, as consumer demand for natural foods has increased, the number of natural foods stores has grown and the product mix has expanded. More distributors and vendors have entered the natural foods industry and many more natural products have become available. In response to increasing supply and demand, larger format natural foods stores have emerged, offering virtually every product category found in a conventional supermarket, including grocery, produce, meat, poultry, seafood, dairy, frozen, deli, bakery, health and body care and household items. Today, natural foods stores offer a one-stop, full-service grocery shopping alternative to conventional supermarkets and appeal to a broader, more mainstream customer base than the traditional natural foods store. The Company believes that the appeal of natural foods supermarkets is based on the quality of the total shopping experience. Many natural foods stores develop a personal relationship with their customers because there is typically more interaction between the customer and the store staff than in a conventional supermarket. The Company believes that conventional supermarkets historically have had only limited success in competing in the natural foods segment because they are largely dependent on national brands. As a result, while conventional supermarkets may carry a limited selection of natural food products, it is difficult for them to duplicate the inventory of natural foods stores which carry a more comprehensive selection of natural products sourced from a large number of independent vendors. The natural foods industry is highly fragmented. According to The Natural Foods Merchandiser, there were approximately 6,600 independent natural/health foods stores in 1995, which generated approximately $6.1 billion of the total $9.1 billion of natural food sales. In 1996, the total number of stores is estimated to have increased to over 7,000, and total natural food sales by these independents are estimated at $10.4 billion by a retailer survey conducted by Whole Foods, an industry publication. In 1995, only 13% of the 6,600 stores were full-service, natural foods stores (defined as stores having a minimum of 5,000 square feet and offering a full range of product categories, including fresh meat and seafood). The Company believes that the two largest natural foods retailers (Wild Oats and Whole Foods Market, Inc., including subsequent acquisitions) represented on a pro forma basis approximately 10% of the total natural foods dollars spent by consumers in 1996. There has been considerable consolidation in the industry as natural foods supermarket chains have acquired smaller independent competitors. The Company believes natural foods supermarkets, with their extensive product offerings and broad customer appeal, will continue to lead the overall growth and consolidation in the natural foods industry. Operating Strategy The Company's objective is to become the grocery store of choice both for natural foods shoppers and quality-conscious consumers in each of its markets by emphasizing the following key elements of its operating strategy: Destination Format. The Company's stores are one-stop, full-service supermarkets for customers seeking high quality natural and gourmet foods and related products. In most of its stores, the Company offers between 10,000 and 25,000 SKUs of natural products in virtually every product category found in a conventional supermarket. The Company's stores carry a much broader selection of natural and gourmet foods and related products than those offered by typical independent natural foods stores or conventional supermarkets. High Quality, Unique Products. The Company seeks to offer the highest quality products throughout its merchandise categories and emphasizes unique products and brands not typically found in conventional supermarkets. The Company's strict quality standards require products to be minimally processed, free of preservatives, artificial colors and chemical additives, and not tested on animals. Each store tailors its product mix to meet the preferences of the local market, in particular sourcing produce from local organic growers whenever possible. The Company also operates regional kitchens and bakeries that provide its stores with fresh bakery items and a unique assortment of prepared foods for the quality and health-conscious consumer. Educational and Entertaining Store Environment. At Wild Oats, shopping is "theater." Each store strives to create a fun, friendly and educational environment that makes grocery shopping enjoyable and encourages shoppers to spend more time in the store and to purchase new products. In order to enhance customers' understanding of natural foods and how to prepare them, the Company trains its store staff to educate customers as to the benefits and quality of its products and prominently features educational brochures and newsletters as well as an in-store consumer information department. In addition, many stores offer cafe seating areas, espresso and fresh juice bars, and in-store massage therapists, all of which emphasize the comfortable, relaxed nature of the shopping experience. The Company believes its knowledgeable store staff and high ratio of store staff to customers results in significantly higher levels of customer service than in a conventional supermarket. Extensive Community Involvement. The Company seeks to engender customer loyalty by demonstrating its high degree of commitment to the local community. Each store makes significant monetary and in-kind contributions to local not- for-profit organizations through programs such as "5% Days," where each store donates 5% of its gross sales one day each month to a local not-for-profit group, and "Charity Work Benefits" where the Company pays employees for time spent working for local charities. 2 Flexible Store Format. The Company's flexible store format enables it to customize its stores to specific site characteristics and to meet the unique needs of a variety of markets. The Company's supermarket format stores are adapted in size and product selection to suburban markets and its urban format stores are designed to appeal in size and product selection to more densely populated urban markets. The Company believes that this flexible store format strategy allows it to operate successfully in a diverse set of markets, enabling it to reach a broader customer base and increase market penetration. Competitive Pricing. The Company seeks to offer products at prices which are at or below those of other natural foods stores. The Company has implemented a "down to earth" competitive price program designed to ensure that high quality, all natural items in each product category are offered at prices that are competitive with those offered on similar items in conventional supermarkets. The Company believes these pricing programs broaden its consumer appeal and encourage its customers to fill more of their shopping needs at the Company's stores. Motivated Staff. The Company has developed a unique culture by encouraging active participation and communication among all staff members, advocating store-level participation in a variety of marketing, merchandising and operating decisions and rewarding staff based upon the achievement of targeted store-level sales and other financial performance criteria. In addition, the Company generally hires individuals dedicated to the concept of natural foods and a healthy lifestyle. The Company believes that these practices translate into a satisfied and motivated staff and a high level of customer service. Growth Strategy Wild Oats is the second largest natural foods supermarket chain in North America. To date, the Company has focused its growth in the western half of the U.S. and has built the largest store base in that region. The Company's growth strategy is to increase sales and income through: (i) new store expansion; (ii) acquisition of existing compatible stores; and (iii) increased sales at existing stores. New Store Expansion. The Company has grown from nine stores at the end of 1992 to 45 stores as of March 21, 1997, through a combination of both new store openings and acquisitions. Since its inception, the Company has opened 20 stores and acquired 27 stores (including 11 Alfalfa's Market stores). In 1996 the Company opened seven new stores and acquired 14 existing stores, and subsequently closed the Alfalfa's Market Seattle, Washington store and the Wild Oats Market Lawrence, Kansas store. The Company intends to continue to strengthen its position in the western United States and to expand to new regions, such as Florida and the Pacific Northwest, which it believes are currently underserved by natural foods retailers. The Company opened one store in 1996 in Florida, and signed leases for stores in Sacramento and Laguna Beach, California, which are planned to open in March and the second quarter of 1997, respectively. The Company also has purchased real property for the construction of a new store in Westminster, Colorado that is projected to open in September of 1997. While the Company believes that most of its new store expansion will result from store openings, it continues to evaluate acquisition opportunities in both existing and new markets. In the first quarter of 1997, the Company acquired four additional existing natural foods supermarkets: two located in Eugene, Oregon, and one located in Boca Raton and one located in West Palm Beach, Florida. There is no assurance that the Company will achieve its planned expansion in existing markets or enter new markets. The Company intends to operate new stores primarily under the "Wild Oats Community Market" name. Historically, the Company has pursued a strategy of clustering stores within each of its markets in order to more fully penetrate these markets, achieve operating efficiencies and enhance name recognition. The Company believes this strategy has resulted in increased overall sales in each of its markets. In the past when the Company has opened a store in a market in which it had an existing presence, the Company has experienced a decline in the revenue and operating results at certain of its existing stores in that market. However, over time, the Company believes the affected stores generally will achieve store contribution margins comparable to prior levels on the lower base of sales. The Company intends to continue to pursue its store clustering strategy and expects these trends to continue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," incorporated by reference from the Company's Annual Report to Stockholders. Increase Sales at Existing Stores. The Company believes that historical growth in sales at the Company's existing stores reflects continued strong growth in the natural foods industry as well as improved execution of the Company's operating strategy. The Company continually seeks to increase sales at its existing stores and has undertaken several initiatives designed to increase comparable store sales. The Company is seeking to attract new customers, generate repeat business and gradually increase the size of the average transaction by introducing, expanding and improving key merchandise categories such as perishables (produce, deli and prepared foods) and private label products, as well as implementing expanded marketing programs and expanding customer service. Site Selection and Store Format Prior to opening or acquiring a store, the Company analyzes the local market, including: (i) certain demographic data, such as education level, average income, population density and age distribution; (ii) certain lifestyle data, such as the levels of cultural awareness, physical exercise, health consciousness and environmental awareness in the community; and (iii) the existing competition. In addition to performing internal market analysis, the Company frequently engages an outside consultant to conduct additional market studies and validate 3 internal sales forecasts. The Company's flexible strategy allows it to open stores in a variety of locations and adapt its store layout and merchandise selection to accommodate specific site characteristics, regional themes and local cultural traditions. The Company seeks locations of approximately 15,000 to 35,000 square feet for its supermarket format stores and generally seeks to be either an anchor tenant in a regional neighborhood shopping center or a stand-alone store with high visibility, easy access and plenty of parking. The Company seeks locations of approximately 5,000 to 15,000 square feet for urban format stores and generally seeks to be in the commercial district of densely populated residential areas with convenient parking and a high level of foot traffic. When the Company acquires a store, it remodels the store in accordance with the Company's specifications. These acquired stores remain in operation while they are being remodeled and, if the stores are to be renamed "Wild Oats," they are not renamed until the remodeling is completed. The timing and cost of the remodel of each store varies depending on the location of the store and whether it is in a new or existing market for the Company, the size of the store and the required build-out. The Company typically requires eight to 16 weeks to remodel a store. Products The Company offers its customers a broad selection of unique, high-quality products that are natural alternatives to those found in conventional supermarkets. The Company typically does not offer well known national brands and focuses instead on a comprehensive selection of natural products within each category. Although the core merchandise assortment is similar at each of the Company's stores, individual stores adapt the product mix to reflect local and regional preferences. Stores source produce from local organic growers whenever possible and typically offer a variety of local products unique to the region. In addition, in certain markets, stores may offer more food service, gourmet and ethnic items as well as feature more value-added services such as gift baskets, catering and home delivery, and in other markets, a store may focus more on bulk foods, produce and staple grocery items. The Company and its stores regularly introduce new high-quality and locally grown products in its merchandise selection to minimize overlap with products carried by conventional supermarkets. In addition, the Company intends to continue to expand and enhance its prepared food and in-store cafe environment. The Company believes that consumers are increasingly seeking convenient, healthy, "ready-to-eat" meals and that by increasing its commitment to this category it can provide an added service to its customers, broaden its customer base, and further differentiate itself from conventional supermarkets and traditional natural foods stores. Quality Standards. The Company's objective is to offer products which meet the following standards: free of preservatives, artificial colors, chemical additives and added hormones; organically grown, whenever possible; minimally processed; and not tested on animals. The Company continually evaluates new products, quality issues and controversial ingredients and frequently counsels store managers on compliance with the Company's strict product standards. Product Categories. The Company's stores typically feature the following product categories:
Product Category Description - ---------------- ----------- Grocery Pastas, canned goods, cereals, cooking oils, juices, salad dressings, crackers, chips, pretzels, cookies, baking items, sodas, bottled waters, and beer and wine in selected stores. Many products are formulated for special diets and are identified as fat-free, low-sodium, wheat-free or dairy- free; Natural Living Vitamins, supplements, herbs and body care items such as shampoos, lotions, cosmetics, deodorants, dental care products, nutritional supplements, herbal tinctures, bulk herbs and homeopathic remedies as well as a selection of health-related books and magazines; Prepared Foods Hot entrees, salads, sushi, wraps, pizza and pasta which can be taken out or, in the larger stores, eaten in the store's cafe seating area. Most stores feature full-service delis as well as espresso and fresh juice bars; Produce Majority of produce is organically grown, although the availability varies, and is sourced seasonally from local organic farmers whenever possible. All produce is clearly labeled as to whether it was grown organically or commercially; Dairy/Frozen Dairy products, both organic and commercial, such as yogurt, milk, cheese, eggs, soy milk, soy foods, and fresh juices, and frozen products such as ice cream, frozen yogurt, entrees, vegetables, desserts, juices, meat and meat substitutes;
4 Meat/Poultry/ Fresh beef, lamb, pork, seafood and free-range poultry, Seafood as well as value-added meat products such as stuffed peppers, marinated meats and home-made sausages; Baked Goods Muffins, cakes, breads and pies, which are supplied by both the Company's bakeries and outside vendors, and signature items including a proprietary line of private label gourmet breads; Bulk Products Generally between 200 and 500 SKUs of bulk products, including beans, pastas, grains, rice, coffee, granolas, snacks, nuts, flours, seeds, dried fruits, soaps, detergents, shampoos and conditioners; and General Merchandise Environmentally-friendly cleaning compounds, housewares, kitchen tools, recycled paper products and other natural household items, as well as selected gift items, such as natural fiber clothing, greeting cards and decorative glassware.
Private Label. The natural foods industry is highly fragmented and characterized by many small independent vendors. As a result, the Company believes that its customers do not have strong loyalty to particular brands of natural foods products. In contrast to conventional supermarkets whose private label products are intended to be low cost alternatives to name-brand products, the Company has developed a private label program in order to build brand loyalty to specific products based on its relationship with its customers and its reputation as a natural foods authority. Through this program, Wild Oats has successfully introduced a number of high quality, unique private label products, such as chocolate bars, gourmet breads, salsa, salad dressings, vitamins, chips, pretzels, tortillas, fresh juices, pasta, pasta sauces, oils, and canned fruit. The Company intends to continue to expand its private label product offerings on a selected basis. Pricing. In general, natural and gourmet foods and related products have higher costs of production and correspondingly higher retail prices than conventional grocery items. The Company's pricing strategy has been to maintain prices that are at or below those of its natural foods competitors while educating its customers as to the higher quality and added value of its products so as to differentiate them from conventional products. Like most conventional supermarkets, the Company regularly features dozens of sale items, including "buy one-get one free" items, that are rotated periodically. In addition, the Company has an ongoing "down to earth" competitive pricing program that consistently features a natural foods item in each major product category at a price that is competitive with or lower than its conventional equivalent. The Company regularly monitors the prices at its natural foods and conventional supermarket competitors to ensure its prices remain competitive. Store Environment At Wild Oats, shopping is "theater." Each store strives to create a fun, friendly and educational environment that makes grocery shopping enjoyable and encourages shoppers to spend more time in the store and to purchase new products. In order to enhance customers' understanding of natural foods and how to prepare them, the Company trains its store staff to educate customers as to the benefits and quality of its products and prominently features educational brochures and newsletters as well as an in-store consumer information department. Product brochures, recipe card areas, food sampling stations, informational signage and, in certain stores, an educational computer kiosk, are used extensively throughout the store. Most stores offer cafe seating areas, espresso and fresh juice bars and in-store massage therapists, all of which emphasize the comfortable, relaxed nature of the Wild Oats shopping experience. In addition, each store features a monthly calendar of special events such as educational presentations, children's events, cooking classes, live music, prize drawings and dog washes. Certain departments are remerchandised several times a year according to seasonal themes or different marketing campaigns, such as Rain Forest Month or Organic Harvest Month. The stores also sponsor many community- related activities such as presentations on health and safety as well as fund- raising drives for local organizations. The Company encourages and receives feedback from its customers through its suggestion boxes and posts responses on the stores' community bulletin board. Company Culture and Store Operations Company Culture. The Company's culture is embodied in its "Four Areas of Responsibility": responsibility to its customers, its staff, its community and its bottom line. In particular, Wild Oats believes that knowledgeable, satisfied and motivated staff members have a direct impact on store performance and overall profitability. Wild Oats encourages active participation and open communication among all staff members and advocates store-level participation in a variety of marketing, merchandising and operating decisions. The Company has made a substantial commitment to staff education and has created an in-house training program which consists of an intensive orientation for new hires and mandatory monthly and quarterly education programs for the general staff. The Company generally hires individuals dedicated to the concept of natural foods and a healthy lifestyle and seeks to promote store-level employees to positions of increasing responsibility. 5 Management and Employees. The Company's stores are organized into ten geographic regions, each of which has a regional director who is responsible for the store operations within his or her region and who reports to the Company's senior management. The Company's regional directors are responsible for, and frequently visit, their cluster of stores to monitor financial performance and ensure adherence to the Company's operating standards. The typical staff of a Wild Oats store consists of one store manager, ten department managers and between 25 to 200 additional hourly staff members, most of whom work full time. Store and department managers are responsible for the operations of individual stores including recruiting and hiring store personnel, communicating financial results nightly, coordinating merchandise ordering, distribution and receiving, and to a limited extent, supplementing their stores' merchandise mix with regional and other products suited for their specific market. The accounting department provides a detailed monthly financial analysis of every department in each store which is reviewed by both the store and regional managers. The Company maintains a staff of corporate level department specialists including Natural Living, Prepared Foods, Produce, Meat/Poultry/Seafood and Grocery coordinators who manage centralized buying programs and assist in store-level merchandising, pricing and staff training to ensure Company-wide adherence to product standards and store concept. All regional directors and store managers and certain store-level staff participate in an incentive plan that ties compensation awards to the achievement of specified store-level sales, profitability and other financial performance criteria. The Company also seeks to foster enthusiasm and dedication in its staff members through comprehensive benefits packages including health insurance and wellness programs as well as an employer matching 401(k) plan and Equity Incentive Plans. Purchasing and Distribution The Company has a centralized purchasing function which sets product standards, approves products and negotiates volume purchase discount arrangements with distributors and vendors. Individual store purchases are handled through its department managers who make purchasing decisions within these established parameters. This approach enables each store to customize its product mix to meet the needs and preferences of its customers while adhering to the Company's established product standards and allowing each store to benefit from the Company's volume purchasing discounts. The wholesale segment of the natural foods industry provides a large and growing array of product choices across the full range of grocery product categories. Although the Company purchases products from more than 3,000 suppliers, the Company purchases approximately 30% of its products from a single wholesale distributor that operates warehouses in Colorado, Connecticut, Georgia and California. The Company believes that this distributor is able to service all of the Company's existing stores as well as any future sites. In 1996, as a result of the Alfalfa's acquisition, the Company was able to negotiate greater volume discounts with this distributor and certain other vendors. The Company has no supply contracts with these parties and any vendor or distributor could discontinue selling to the Company at any time. The Company believes that it could develop alternative sources of supply; however, any such termination may create a short-term disruption in store-level merchandise selection. The Company is a party to an interim buying agreement with a distributor in Vancouver, British Columbia, Canada under which the Company is obligated to purchase certain products from the distributor, provided the purchase price is the lowest price offered from the Company's various distributors in that region. Most products are delivered directly to the stores by vendors and distributors. The Company currently operates a consolidated warehouse facility in Denver which receives and distributes truck load purchases of produce and grocery items and distributes products that cannot be delivered directly to the stores by outside vendors. The Company maintains a small fleet of local delivery vans and over-the-road trucks. As the Company enters new markets it will review the need for additional warehouse and distribution facilities. The Company operates four off-site kitchens in Santa Fe, New Mexico, Denver, Colorado and Los Angeles and San Francisco, California as well as a bakery in Denver, Colorado. These facilities produce deli food, take out food, bakery products and certain private label items exclusively for sale in the Company's stores. Each kitchen can make daily deliveries to stores within a hundred mile radius of the facility. The Company intends to add new kitchens as it expands into new markets. Marketing The Company's marketing programs are primarily focused on in-store customer education and information. The Company believes that its customers are more responsive to the quality of the shopping experience, issue-based marketing and word-of-mouth advertising than to price-based marketing and traditional media advertising. As a result, the Company focuses on consumer education and emphasizes the benefits and quality of its products such as the fact that an item is organic or grown locally. The Company uses a variety of media, including in-store fliers, newspaper inserts and promotional brochures in which it promotes the depth of its merchandise selection, benefits of natural products, and "down to earth" competitive prices, including "buy one-get one free" and "two for one" pricing promotions. When the Company first enters a new market, the Company executes an intense marketing campaign to build awareness of its new store and its selection of natural products. After the initial campaign, this advertising is replaced by the marketing strategies described above. The Company's advertising costs historically have been less than 1.5% of sales. 6 Management Information Systems The Company's management information systems have been designed to provide detailed store-level financial data, including sales, gross margin, payroll and store contribution, to regional and store managers and to the Company's headquarters on a timely basis. Currently, certain store-level accounting and inventory management systems are processed manually. In 1996 the Company purchased a software system to convert the currently different Wild Oats and Alfalfa's point-of-sale and pricing systems to one system, and anticipates that such system will be in place by the end of the fourth quarter of 1997. Certain Wild Oats stores are not currently on an automated point-of-sale and pricing system, and the Company anticipates that such stores will not be included within the automated system for several years. Although the Company believes that a combined system can be implemented without significant disruptions in its operations or financial reporting, there can be no assurance that such disruption will not occur. Competition The Company's competitors currently include other independent and multi- unit natural foods supermarkets, smaller traditional natural foods stores, conventional supermarkets and specialty grocery stores. A number of other natural foods supermarkets offer a range of natural foods products similar to those offered in the Company's stores. The Company believes that the principal competitive factors in the natural foods industry include customer service, quality and variety of selection, store location and convenience, price and store atmosphere. The Company believes that its primary competitor is Whole Foods Market, Inc., a publicly-traded company based in Texas which, as of September 28, 1996, had 68 stores and gross sales of $892 million. The Company currently competes with Whole Foods Market in California and Florida. Whole Foods Market recently announced that it signed a lease for a 39,000 square foot store in Boulder, Colorado, where the Company's headquarters and three of its stores are currently located, and that it intends to pursue other markets in which the Company has stores. At this time the Company cannot evaluate what, if any, impact increased competition from Whole Foods Market will have on its overall sales. The Company's Boulder, Colorado stores account for approximately 10% of the Company's overall sales revenues. While certain conventional supermarkets, smaller traditional natural foods stores and small specialty stores do not offer as full a range of products as the Company, they do compete with Wild Oats in one or more product categories. Many of the Company's competitors have been in business longer and have greater financial or marketing resources than the Company and may be able to devote greater resources to securing suitable locations and to the sourcing, promotion and sale of their products. In addition, should any of the Company's competitors reduce prices, the Company may be required to implement price reductions in order to remain competitive, which could have an adverse impact on its business, financial condition and results of operations. As Wild Oats enters new geographic markets, its success will depend in part on its ability to gain market share from established competitors. In addition, traditional and specialty grocery stores may expand more aggressively in marketing a broader range of natural foods and related products and thereby compete directly with the Company for products, customers and locations. The Company expects competition from both new and existing competitors to increase in its markets and there can be no assurance that the Company will be able to compete effectively in the future. Government Regulation The Company is subject to numerous federal, state and local laws, regulations and ordinances regulating health and sanitation standards, food labeling and handling, equal employment, minimum wages and licensing for the sale of food and alcoholic beverages. Difficulties or failures in complying with these regulations could adversely affect the operations of an existing store or delay the opening of a new store. In addition, from time-to-time, various federal, state and local legislative and regulatory proposals are made to, among other things, increase the minimum wage payable to employees, establish minimum store security requirements and increase taxes on the retail sale of certain products. Changes to such laws, regulations or ordinances may adversely affect the Company's performance by increasing the Company's costs or affecting its sales of certain products. Although the Company currently pays all of its non-exempt employees hourly wages which are above the minimum wage level, federal legislation raising the minimum wage in the future may increase the Company's employee costs and adversely affect the Company's profitability. The Company also sells nutritional supplements, some of which are subject to regulation by several federal, state and local agencies. There can be no assurance that such agencies will not enact regulations that could have an adverse effect on the Company's business, results of operations and financial condition. In addition, recent legislation has required manufactures of nutritional supplements to label ingredients in their products. Such legislation could be enacted in the future which may adversely effect the Company's results of operations. Employees As of March 4, 1997, the Company employed 2,470 full-time individuals and 1,690 part-time individuals. Approximately 4,040 of the Company's employees are engaged at the store-level and 120 are devoted to regional administrative and corporate activities. 7 Item 2. PROPERTIES The Company currently leases an aggregate of approximately 14,500 square feet for its corporate offices in Boulder, Colorado. The lease for the corporate headquarters expires in October 2006 and has a renewal option for an additional six year term. The rental payment is a fixed base rate. The lease for the Company's 13,500 square foot warehouse in Denver expires in August 1999 and is subject to two renewal options of three years each. The rental payment is a fixed base rate. The Company leases all of its currently operating stores; however, the Company has purchased real property in Westminster, Colorado for the construction of a new store projected to be opened in September of 1997. The Company also has exercised an option to purchase the real property underlying its Fort Collins, Colorado, Alfalfa's Market store, with a proposed purchase date in the second quarter of 1997. The Company's leases typically provide for a ten-year base term and generally have several renewal periods. The rental payments are either fixed base rates or percentages of sales with minimum rentals. All of the leases are accounted for as operating leases. See "Note 11 of Notes to Consolidated Financial Statements" incorporated by reference from the Company's Annual Report to Stockholders. The following is a list of the Company's stores as of March 21, 1997:
Approximate Date Gross Square Territory/Store Location Opened/Acquired Footage - --------------- -------- --------------- ------------ Northern California Wild Oats Berkeley Berkeley, CA Acquired April 1995 7,500 Wild Oats Sacramento Sacramento, CA Opened March 1997 12,400 Wild Oats San Anselmo San Anselmo, CA Acquired April 1995 8,500 Wild Oats San Francisco San Francisco, CA Opened April 1996 9,000 Wild Oats Sunnyvale Sunnyvale, CA Opened November 1996 23,850 Southern California Wild Oats Mission Viejo Mission Viejo, CA Opened May 1996 23,500 Wild Oats Pasadena Pasadena, CA Opened January 1994 15,000 Wild Oats Santa Monica Santa Monica, CA Opened September 1995 8,200 Wild Oats West Hollywood West Hollywood, CA Opened February 1996 14,000 Wild Oats West Los Angeles Los Angeles, CA Opened September 1996 7,900 Colorado Wild Oats Aurora Aurora, CO Acquired February 1990 8,000 Wild Oats Vegetarian Boulder, CO Acquired October 1987 6,500 Wild Oats Boulder Boulder, CO Opened February 1988 12,900 Alfalfa's Boulder Boulder, CO Acquired July 1996 25,000 Wild Oats Colorado Springs Colorado Springs, CO Opened November 1992 16,700 Alfalfa's Cherry Creek Denver, CO Acquired July 1996 17,000 Wild Oats Denver Denver, CO Acquired February 1990 6,300 Wild Oats Washington Park Denver, CO Opened May 1995 18,600 Alfalfa's Capitol Hill Denver, CO Acquired July 1996 22,000 Wild Oats Fort Collins Fort Collins, CO Acquired September 1988 5,000 Alfalfa's Fort Collins Fort Collins, CO Acquired July 1996 14,000 Wild Oats Orchard Greenwood Village, CO Opened August 1995 35,000 Alfalfa's Littleton Littleton, CO Acquired July 1996 22,500 Alfalfa's Vail Vail, CO Acquired July 1996 6,200 Florida Wild Oats Fort Lauderdale Ft. Lauderdale, FL Opened November 1996 24,000 Wild Oats Boca Raton Boca Raton, FL Acquired February 1997 12,000 Wild Oats West Palm Beach West Palm Beach, FL Acquired February 1997 11,000 Midwest Wild Oats Mission Mission, KS Opened October 1995 22,000 Wild Oats Kansas City Kansas City, MO Acquired March 1993 5,000 Wild Oats St. Louis St. Louis, MO Opened August 1996 20,500 New Mexico Wild Oats Albuquerque Albuquerque, NM Opened May 1992 28,000 Wild Oats Juan Tabo Albuquerque, NM Opened November 1995 22,000 Wild Oats St. Francis Santa Fe, NM Opened January 1991 15,000 Wild Oats St. Michael Santa Fe, NM Opened January 1992 9,000 Alfalfa's Santa Fe Santa Fe, NM Acquired July 1996 20,000
8
Oregon Oasis Fine Foods North Eugene, OR Acquired March 1997 27,000 Oasis Fine Foods South Eugene, OR Acquired March 1997 13,000 Utah/Nevada Wild Oats Las Vegas East Las Vegas, NV Acquired July 1994 10,400 Wild Oats Las Vegas West Las Vegas, NV Acquired July 1994 16,400 Wild Oats Salt Lake East Salt Lake City, UT Acquired June 1996 10,000 Wild Oats Salt Lake Holladay Salt Lake City, UT Acquired June 1996 8,800 Wild Oats Salt Lake South Salt Lake City, UT Acquired June 1996 7,000 Canada Capers Vancouver, B.C. Acquired July 1996 17,500 Capers Vancouver, B.C. Acquired July 1996 8,100 Capers West Vancouver, B.C. Acquired July 1996 11,800
The Company has signed a lease for a store in Laguna Beach, CA, with a Wild Oats Markets store projected to be opened at that location in the second quarter of 1997. Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or its subsidiaries are a party. From time to time, the Company is involved in lawsuits that the Company considers to be in the normal course of its business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS In October 1996 the Company solicited written consents in lieu of a special meeting from stockholders for the following items: amendment to the Amended and Restated Certificate of Incorporation to provide, among other things, for automatic conversion of the Company's Series A, B, C, D and E preferred stock to common stock upon the initial public offering of the Company's common stock and to effect a 1.7735 for one stock split of the Company's common stock; adoption of the Company's 1996 Equity Incentive Plan; and adoption of the Company's 1996 Employee Stock Purchase Plan. Requests for consents were sent to stockholders holding a number of the shares of the Company's outstanding stock as would be necessary to approve such matters at a meeting of the stockholders. Notices of the taking of corporate action without a meeting by less than unanimous consent were given to the Company's stockholders of record pursuant to Section 228(d) of the Delaware General Corporation Law. On a post-split basis, 72% of the then-outstanding shares voted by consent in favor of the proposals, with the votes tallied as follows: 2,202,048 shares of common stock, 298,730 shares of Series A Preferred Stock, 732,984 shares of Series C Preferred Stock, 408,336 shares of Series D Preferred Stock and 926,992 shares of Series E Preferred Stock voted in favor of the proposal and of those stockholders from which consent was requested, no shares voted against such proposal. PART II. Items 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the NASDAQ National Market system under the symbol "OATS". The high per share sales price for the Company's common stock for the period from the Company's initial public offering on October 22, 1996 through December 28, 1996 was $27, and the low per share sales price was $18. As of March 4, 1997, the Company's common stock was held by 194 stockholders of record. No cash dividends have been declared previously on the Company's common stock, and the Company does not anticipate declaring a cash dividend in the near future. Item 6. SELECTED FINANCIAL DATA The information included under the caption "Selected Financial Data" from the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. 9 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information included in the financial statements and footnotes thereto in the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information included under the captions "Election of Directors" and "Executive Compensation-Management-Executive Officers" in the Company's definitive Proxy Statement in connection with the Annual Meeting of stockholders to be held May 1, 1997, to be filed with the Commission on or before April 29, 1997, is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION The information included under the caption "Executive Compensation" in the Company's definitive Proxy Statement in connection with the 1997 Annual Meeting of stockholders to be held May 1, 1997, to be filed with the Commission on or before April 29, 1997, is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information included under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement in connection with the 1997 Annual Meeting of stockholders to be held May 1, 1997, to be filed with the Commission on or before April 29, 1997, is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information included under the caption "Directors and Executive Officers - Certain Transactions" in the Company's definitive Proxy Statement in connection with the 1997 Annual Meeting of stockholders to be held May 1, 1997, to be filed with the Commission on or before April 29, 1997, is incorporated herein by reference. PART IV. Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following are filed as a part of this Report on Form 10-K: (1) Consolidated Statement of Operations Consolidated Balance Sheet Consolidated Statement of Changes in Stockholders' Equity (Deficit) Consolidated Statement of Cash Flows (2) Schedule II - Valuation and Qualifying Accounts (b) Reports on Form 8-K. There were no reports on Form 8-K for the three-month period ended December 28, 1996. (c) Exhibits The following exhibits to this Form 10-K are filed pursuant to the requirements of Item 601 of Regulation S-K: 10
Exhibit Number Description of Document ------ ----------------------- 3(i).1.(a) Amended and Restated Certificate of Incorporation of the Registrant. 3(i).1.(b) Certificate of Correction to Amended and Restated Certificate of Incorporation of the Registrant. 3(ii).1 Amended and Restated By-Laws of the Registrant. 4.1+ Reference is made to Exhibits 3(i).1 through 3(ii).1. 4.2+ Specimen stock certificate. 10.1+ Form of Indemnity Agreement between the Registrant and its directors and executive officers, with related schedule. 10.2+ Registrant's 1996 Equity Incentive Plan, including forms of Options granted to employees and non-employee directors thereunder. 10.3+ Registrant's 1996 Employee Stock Purchase Plan. 10.4+ Registrant's 1993 Stock Option Plan. 10.5+ Registrant's 1991 Stock Option Plan. 10.6+ Employee Stock Ownership Plan. 10.7+ Employment Agreement between Registrant and Michael C. Gilliland, dated July 12, 1996 as amended. 10.8+ Employment Agreement between Registrant and S.M. Hassan, dated July 12, 1996. 10.9+ Employment Agreement between Registrant and Elizabeth C. Cook, dated July 12, 1996 as amended. 10.10+ Warrant to purchase Series C Preferred Stock issued to Montgomery Securities dated November 14, 1994. 10.11+ Warrant to purchase Series B Preferred Stock issued to Weston Presidio Offshore Capital C.V. dated November 14, 1994. 10.12+ Warrant to purchase Series B Preferred Stock issued to Weston Presidio Offshore Capital C.V. dated November 14, 1994. 10.13+ Amended and Restated Stockholders Agreement among the Registrant and certain parties named therein dated August 1996. 10.14+ Registration Rights Agreement between the Registrant and certain parties named therein dated July 12, 1996. 10.15+ Credit Agreement between the Registrant and Bank One, Indianapolis, National Association dated March 15, 1995. 10.16+ First Amendment to Credit Agreement between the Registrant and Bank One, Indianapolis, National Association dated November 30, 1995. 10.17+ Lease Agreement between Registrant and Bway Property Limited Partnership for the property located at 1645 Broadway, Boulder, CO dated October 5, 1992. 10.18+ Lease Agreement between Registrant and Bway Property Limited Partnership for the property located at 1651 Broadway, Boulder, CO dated October 11, 1982. 10.19+ Amendment to Lease Agreements between Registrant and Bway Property Limited Partnership dated March 9, 1995 for the properties located at 1645 and 1651 Broadway, Boulder, CO. 10.20+ Lease Agreement between Registrant and Overland Outfitters, Inc. for the property located at 1655 Broadway, Boulder, CO dated April 10, 1989. 10.21+ Lease Agreement between Registrant and Marianna Partners Limited for the property located at the northwest corner of St. Francis Drive and Cordova Road, Santa Fe, NM dated August 27, 1990. 10.22+ First Amendment to Lease Agreement between Registrant and CAMPR Partners, Ltd., successor by merger to Marianna Partners Limited for the property located at the northwest corner of St. Francis Drive and Cordova Road, Santa Fe, NM dated August 1, 1992. 10.23+ Second Amendment to Lease Agreement between Registrant and CAMPR Partners, Ltd., for the property located at the northwest corner of St. Francis Drive and Cordova Road, Santa Fe, NM dated 10.24+ Lease Agreement between Registrant and First Interstate Bank of New Mexico, N.A., as Trustee of the Joseph M. Montoya Trust, the Patrick J. Montoya Trust, and the Lynda M. Haran Trust for the property located at the northwest corner of Don Diego Avenue and Cordova Road, Santa Fe, NM dated June 29, 1994. 10.25+ Shopping Center Lease between Registrant and Skunk Creek Investors dated August 8, 1995 for the store located at Baseline Road, Boulder, CO. 10.26+ Lease between Registrant and AGF Property Management Corp. for the property located at 1111-23 South Washington Street, Denver, CO dated October 12, 1994. 10.27+ Lease between Registrant and 306283 British Columbia Ltd. for the property located at 2211 West 4th Avenue, Vancouver, B.C. dated November 6, 1992. 10.28+ Lease Agreement between Registrant and Fireside Liquors, Inc. for the property located at 1425/1421/1411 Montana Avenue, Santa Monica, CA dated September 15, 1994. 10.29+ Employment Agreement between Registrant and James Lee, dated September 30, 1996. 10.30+ Agreement and Plan of Merger between the Registrant, Alfalfa's, Inc. and WO Holdings, Inc. dated June 4, 1996.
11
11.1 Statement regarding computation of pro forma net income (loss) per share. 13.1 Registrant's 1996 Annual Report to Stockholders. 21.1+ List of subsidiaries. 23.1 Consent of Price Waterhouse LLP. 27.1 Financial Data Schedule.
+ Previously filed. 12 ------------------- SELECTED FINANCIAL DATA ------------------- in thousands, except per-share data The following data for the five fiscal years ended December 28, 1996, are derived from the consolidated financial statements of the Company. The following data should be read in conjunction with the Company's consolidated financial statements, related notes thereto and other financial information included elsewhere in this Annual Report.
Fiscal year: 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Sales $192,493 $ 98,517 $ 65,219 $ 47,266 $ 36,638 Cost of goods sold and occupancy costs 130,957 67,164 44,637 32,344 25,056 --------- --------- --------- --------- --------- Gross profit 61,536 31,353 20,582 14,922 11,582 Direct store expenses 48,317 25,072 15,685 11,007 8,723 --------- --------- --------- --------- --------- Store contribution 13,219 6,281 4,897 3,915 2,859 Selling, general and administrative expenses 8,977 4,465 2,317 1,824 1,049 Pre-opening expenses 1,763 1,037 416 650 Nonrecurring expenses 7,035 --------- --------- --------- --------- --------- Income (loss) from operations (4,556) 779 2,580 1,675 1,160 Interest expense 904 363 373 350 151 --------- --------- --------- --------- --------- Income (loss) before income taxes (5,460) 416 2,207 1,325 1,009 Income tax expense (benefit)/(1)/ (977) 40 880 521 393 --------- --------- --------- --------- --------- Net income (loss)/(1)/ (4,483) $ 376 $ 1,327 $ 804 $ 616 ========= ========= ========= ========= ========= Unaudited pro forma net income (loss) per common share/(2)/ $ (0.92) $ 0.10 ========= ========= Unaudited pro forma weighted average number of common shares outstanding/(2)/ 4,890 3,864 ========= ========= BALANCE SHEET DATA (AT PERIOD END): Working capital (deficit) $ 9,932 $ 474 $ 3,278 $ (292) $ (1,400) Total assets 107,057 38,376 24,053 9,873 6,763 Long-term debt (including capitalized leases) 971 13,302 3,078 2,494 1,446 Redeemable convertible preferred stock 16,956 15,018 2,164 Stockholders' equity (deficit) 77,783 (4,209) (2,645) (358) 1,301
/(1)/On July 3, 1993, Wild Oats changed its corporate status from an S corporation to a C corporation. Income tax expense and net income for 1992 and 1993 are shown pro forma to reflect income taxes for Wild Oats as if it had been a C corporation for all periods presented. /(2)/Unaudited pro forma net income (loss) per common share was computed assuming conversion of all outstanding shares of preferred stock into common stock, which occurred upon the completion of the Company's initial public offering on October 22, 1996. See Note 1 of Notes to Consolidated Financial Statements. ----------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------------------------------- This Annual Report contains forward-looking statements within the context of Section 21E of the Securities Exchange Act of 1934, as amended. Each and every forward-looking statement involves a number of risks and uncertainties, including the Risk Factors specifically delineated and described in the Company's Registration Statement on Form S-1, No. 333-11261, effective October 22, 1996 ("Registration Statement"), and in the Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1996, including those Risk Factors that have been specifically expanded or modified below. The actual results that the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. Words such as "believes," "anticipates," "expects," "intends," and similar expressions are intended to identify forward- looking statements, but are not the exclusive means of identifying such statements. 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. Certain of the Risk Factors described above are hereby restated, modified and expanded in accordance with the following section references: UNCERTAIN ABILITY TO EXECUTE GROWTH STRATEGY (AMENDED) The Company's business has grown considerably in size and geographic scope, increasing from nine stores located primarily in Colorado in 1992, to its current size of forty-four stores (as of the date of this annual report) in nine U.S. states and British Columbia, Canada. The Company opened its first store outside of the western United States (in Florida) in November 1996. The Company closed the Alfalfa's Seattle, Washington, store and the Wild Oats Market Lawrence, Kansas, store in September 1996 and October 1996, respectively. The Company opened seven stores in 1996 (exclusive of the acquisition of 11 Alfalfa's stores), including one store originally scheduled to open in 1997, and anticipates opening or acquiring at least nine additional stores in 1997. The Company also acquired 14 existing stores in 1996. The Company currently has signed a lease for two stores and a purchase agreement for real property for the construction of a third store planned to open in 1997. As of the date of this report, in 1997 the Company has purchased four existing natural food grocery stores located in West Palm Beach and Boca Raton, Florida, and Eugene, Oregon, and is currently integrating those stores into its operations. The Company's ability to implement its growth strategy depends to a significant degree upon its ability to open or acquire stores in existing and new markets and to integrate and operate those stores profitably. While the Company plans to expand primarily through the opening of new stores, it will continue to pursue acquisitions of natural foods retailers where attractive opportunities exist. The Company's growth strategy is dependent upon a number of factors, including its ability to: (i) access adequate capital resources; (ii) expand into regions where it has no operating experience; (iii) identify markets that meet its site selection criteria; (iv) locate suitable store sites and negotiate acceptable lease terms; (v) locate acquisition targets and negotiate acceptable acquisition terms; (vi) hire, train and integrate management and store employees; and (vii) expand its distribution and other operating systems. In addition, the Company pursues a strategy of clustering stores in each of its markets to increase overall sales, achieve operating efficiencies and further penetrate markets. In the past, when the Company has opened a store in a market where it had an existing presence, the Company has experienced a decline in the sales and operating results at certain of its existing stores in these markets. The Company intends to continue to pursue its store clustering strategy and expects the sales and operating result trends for other stores in an expanded market to continue. Further, acquisitions involve a number of additional risks, such as short-term negative effects on the Company's reported operating results, diversion of management's attention, unanticipated problems or legal liabilities, and the integration of potentially dissimilar operations, some or all of which could have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that the Company will achieve its planned expansion in existing markets, enter new markets or operate or integrate its existing, newly opened or newly acquired stores profitably. If the Company fails to do so, the Company's business, results of operations and financial condition will be materially and adversely affected. In addition, the Company's ability to execute its growth strategy is partially dependent upon the demographic trends and market conditions in the natural foods industry, and any change in those trends and conditions could adversely affect the Company's future growth rate. COMPETITION (AMENDED) The Company believes its primary competitor in the natural foods grocery store market is Whole Foods Market, Inc. ("Whole Foods"), a publicly traded company based in Texas. Whole Foods Market recently announced that it has signed a lease for a 39,000-square-foot store in Boulder, Colorado, the location of the Company's headquarters and three of its stores. Whole Foods' management has also announced that Whole Foods intends to seek additional store sites in other cities in which the Company has stores. If Whole Foods is successful in opening stores in locations in which the Company has or intends to open stores, the Company's sales and operating results at such stores may be materially adversely affected. FLUCTUATIONS IN OPERATING RESULTS (AMENDED) The Company's results of operations may fluctuate significantly from period to period as the result of a variety of factors, including: (i) the number, timing and mix of store openings, acquisitions or closings; (ii) the ratio of stores opened to stores acquired; (iii) the opening of stores by the Company or its competitors in markets where the Company has existing stores; (iv) comparable store sales results; and (v) the ratio of urban format to supermarket format stores. The Company incurs significant pre-opening expenses, and new stores typically experience an initial period of operating losses resulting from lower initial gross margins and higher direct store expenses as a percentage of sales. As a result, the opening of a significant number of stores in a single period will have an adverse effect on the Company's results of operations. In addition, the Company's store base is geographically concentrated, and shifts in economic or demographic trends and consumer preferences in a particular market could have an adverse effect on the Company's results of operations. Further, a variety of factors affect the Company's comparable store sales results, including, among others, the relative proportion of new stores to mature stores, the opening of stores by the Company or its competitors in markets where the Company has existing stores, the timing of promotional events, the Company's ability to execute its operating strategy effectively, changes in consumer preferences for natural foods, and general economic conditions. Past increases in comparable store sales may not be indicative of future operating performance. Due to the foregoing factors, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and that such comparisons cannot be relied upon as indicators of future financial performance. ----------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------------------------------- continued RESULTS OF OPERATIONS The following table is derived from the Company's consolidated statement of operations for the periods indicated and presents, for the periods indicated, certain selected income statement data expressed as a percentage of sales:
Fiscal year: 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- Sales 100.0% 100.0% 100.0% Cost of goods sold and occupancy costs 68.0 68.2 68.4 --------- --------- --------- Gross profit 32.0 31.8 31.6 Direct store expenses 25.1 25.4 24.0 --------- --------- --------- Store contribution 6.9 6.4 7.6 Selling, general and administrative expenses 4.7 4.4 3.5 Pre-opening expenses 0.9 1.1 Nonrecurring expenses 3.7 --------- --------- --------- Income (loss) from operations (2.4) 0.9 4.1 Interest expense, net 0.4 0.4 0.6 --------- --------- --------- Income (loss) before income taxes (2.8) 0.5 3.5 Income tax expense (benefit) (0.5) 1.4 --------- --------- --------- Net income (loss) (2.3)% 0.5% 2.1% ========= ========= =========
STORE OPENINGS, CLOSINGS AND ACQUISITIONS In 1996, the Company opened seven new stores in St. Louis, Missouri, Ft. Lauderdale, Florida, and San Francisco, West Hollywood, West Los Angeles, Mission Viejo and Sunnyvale, California. The Sunnyvale store was originally scheduled to open in the first quarter of 1997. The Company also completed the acquisition of fourteen stores, including the acquisition of the stores owned by Alfalfa's, Inc., which operated eight Alfalfa's and three Capers stores. (See "Acquisition of Alfalfa's" below.) In addition, in the third quarter, the Company closed one Alfalfa's store in Seattle, Washington, and, in the fourth quarter, closed a Wild Oats Market store in Lawrence, Kansas. As of the date of this report, the Company has also completed the acquisition of four existing natural foods grocery stores in Boca Raton and West Palm Beach, Florida, and Eugene, Oregon. The Company's results of operations have been and will continue to be affected by, among other things, the number, timing and mix of store openings, acquisitions 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. While store openings and the acquisition of Alfalfa's, Inc. contributed to an increase in the Company's overall sales during these periods, from $98.5 million during 1995 to $192.5 million during 1996, net income decreased, largely as a result of a $7.0 million nonrecurring charge described below, pre-opening expenses (which aggregated approximately $1.8 million for 1996) and initial operating losses at the new stores. The Company anticipates that the new stores opened in the third and fourth quarters of 1996 will experience operating losses for the first six to twelve months of operation, in accordance with historic trends. The Company will continue to evaluate the profitability of all its stores on an ongoing basis and may, from time to time, make decisions regarding closures, relocations or remodels in accordance with such evaluations. ACQUISITION OF ALFALFA'S The Company completed the acquisition of Alfalfa's, Inc. in July 1996. Through this acquisition, the Company combined two natural foods retailers with similar operating strategies and complementary store bases, increased its penetration of existing markets and created a stronger platform for future growth. Wild Oats and Alfalfa's stores overlap in four markets: Santa Fe, New Mexico, and Denver, Boulder and Fort Collins, Colorado. The Company believes these markets are large enough to support these stores. In connection with the acquisition, the Company recorded goodwill in the third quarter of 1996 of approximately $27.8 million, which is being amortized on a straight-line basis over 40 years. The future operating and financial performance of the Company will depend in part on its ability to integrate and operate the Alfalfa's stores successfully and to enhance the profitability of the acquired business. NONRECURRING EXPENSES During late August 1996, the Company performed a thorough analysis of its operations subsequent to the acquisition of Alfalfa's, Inc. and made certain decisions relating to its operations which resulted in a $7.0 million nonrecurring charge being recorded, of which $5.7 million were noncash write- offs. The charge is attributable to (i) closing the Wild Oats Market Lawrence, Kansas, store, resulting in approximately $800,000 in lease-cancellation costs and asset write-offs, as well as closing a regional bakery and kitchen resulting in approximately $200,000 in asset write-offs and lease adjustment costs; (ii) moving out of the Company's existing corporate headquarters and relocating to the former Alfalfa's, Inc. corporate headquarters, resulting in approximately $700,000 in lease-cancellation costs, relocation costs and asset write-offs; and (iii) consolidating certain information systems resulting in approximately $300,000 in asset write-offs. In addition, after operating the combined companies, management closed the Alfalfa's Seattle, Washington store, resulting in approximately $4.5 million of severance costs, lease-cancellation costs and asset write-offs, and a restaurant in a Vancouver, British Columbia, Capers store, resulting in approximately $500,000 of severance costs, lease- cancellation costs and asset write-offs. At the time of the Alfalfa's acquisition, the Company had planned to retain the Seattle store and Vancouver restaurant operation. The Company does not believe that closing the two stores will have a material effect on the Company's future operating results. ----------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------------------------------- continued FISCAL 1996 COMPARED TO FISCAL 1995 SALES Sales for the fiscal year ended December 28, 1996, increased 95.4% to $192.5 million from $98.5 million in 1995. The increase was primarily due to the acquisition of the eight Alfalfa's and three Capers stores, the acquisition of three stores in Salt Lake City, Utah, the opening of seven new Wild Oats Markets stores, and the reporting of a full year of operations for the five new stores opened in 1995. Sales of a store are deemed to be comparable commencing in the thirteenth full month after the store was opened or acquired. Comparable store sales were 1.5% for 1996, as compared to 7.4% for 1995 and contributed $1.6 million to the increase in sales. Comparable store sales results for the fiscal year ended December 28, 1996, were negatively affected primarily by planned cannibalization (the loss of sales at an existing store when the Company opens a new store nearby) resulting from the implementation of the Company's store- clustering strategy as described in "Uncertain Ability to Execute Growth Strategy" and "Fluctuations in Operating Results." Management believes that the Company experienced the most significant negative effects of this cannibalization in the first three quarters of 1996, and expects that comparable store sales increases will improve in 1997. GROSS PROFIT Gross profit for the fiscal year ended December 28, 1996, increased 96.3% to $61.5 million from $31.3 million in 1995. The increase in gross profit on a dollar basis is primarily attributable to the acquisition of 11 Alfalfa's stores and the opening of new stores. There was no material change in gross profit as a percentage of sales during the fiscal year. DIRECT STORE EXPENSES Direct store expenses for the fiscal year ended December 28, 1996, increased 92.7% to $48.3 million from $25.1 million in 1995. The increase in direct store expenses is attributable to the increase in the number of stores operated by the Company. As a percentage of sales, direct store expenses decreased to 25.1% from 25.4% in the same period in 1995 due to the matured performance of the new stores opened in 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the fiscal year ended December 28, 1996, increased 101.1% to $9.0 million from $4.5 million in 1995. The increase is primarily attributable to the acquisition of Alfalfa's, Inc. and the opening of seven new stores during 1996. For the fiscal year, selling, general and administrative expenses as a percentage of sales increased to 4.7% from 4.4% in 1995 as a result of combining and then beginning the consolidation of the overhead structure of Alfalfa's, Inc. PRE-OPENING EXPENSES Pre-opening expenses for the fiscal year ended December 28, 1996 increased 70.0% to $1.8 million from $1.0 million in 1995. The increase in pre-opening expenses is attributable to an increase in the number of new stores opened (seven in 1996, as compared to five in 1995), as well as to increased costs for travel for pre-opening arrangements and staff training for those stores opened in new or less-developed geographic regions. NET INTEREST EXPENSE Net interest expense for the fiscal year ended December 28, 1996, increased 149.0% to $904,000 from $363,000 in 1995. The increase is attributable to the higher levels of indebtedness incurred to fund store openings and acquisitions. FISCAL 1995 COMPARED TO FISCAL 1994 SALES Sales in 1995 increased 51.1% to $98.5 million from $65.2 million in 1994. This increase was primarily due to the opening of five stores and the acquisition of two additional stores in 1995, and also to reporting a full year of operations for two stores which had been open for only part of 1994. Comparable store sales increased 7.4% in 1995 as compared to 12.5% for 1994 and accounted for $5.3 million of the increase in sales. Wild Oats believes comparable store sales results were negatively affected in the second half of 1995 by the entry of a competitor into the Santa Fe, New Mexico, market, as well as by planned cannibalization of existing stores sales in Albuquerque, New Mexico, Denver, Colorado, and Kansas City, Missouri. GROSS PROFIT Gross profit in 1995 increased 52.3% to $31.3 million from $20.6 million in 1994. As a percentage of sales, gross profit increased slightly to 31.8% in 1995 from 31.6% in 1994. Both merchandise gross profit and occupancy costs remained relatively flat as a percentage of sales in 1995, reflecting operating efficiencies at mature stores which were offset by lower merchandise margins and higher occupancy costs as a percentage of sales at the five stores opened in 1995 and the Company's Santa Fe, New Mexico, stores. DIRECT STORE EXPENSES Direct store expenses in 1995 increased 59.8% to $25.1 million from $15.7 million in 1994. This increase was primarily due to expenses of five stores opened and two stores acquired in 1995 and to reporting of a full year of operations for two stores which had been open for only part of 1994. As a percentage of sales, direct store expenses increased to 25.4% in 1995 from 24.0% in 1994, primarily due to higher expenses as a percentage of sales at the five stores opened in 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased 92.7% to $4.5 million in 1995 from $2.3 million in 1994. As a percentage of sales, selling, general and administrative expenses increased to 4.4% in 1995 from 3.5% in 1994 due to the addition of central and regional support staff to support store growth and ----------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------------------------------- continued expansion into new geographic markets. PRE-OPENING EXPENSES Wild Oats incurred $1.0 million in pre-opening expenses in 1995 related to the five stores that opened during the year. No pre-opening expenses were incurred in 1994 as pre-opening expenses for the one store opened in January 1994 were expensed in December 1993 since the store was ready to open at that time. NET INTEREST EXPENSE Net interest expense in 1995 decreased 2.7% to $363,000 from $373,000 in 1994 as a result of lower average levels of indebtedness. LIQUIDITY AND CAPITAL RESOURCES The Company's 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 store openings and acquisitions. Net cash provided by operating activities was $9.5 million during 1996 and $4.6 million during 1995. Net income decreased during 1996 as compared to 1995, but cash provided by operating activities increased during this period primarily as a result of non-cash asset write-offs, an increase in depreciation and amortization expense related to assets acquired during 1996, an increase in accrued liabilities related to the nonrecurring expenses during the period and an increase in trade payables related to new store openings for which the Company typically receives extended payment terms from vendors. The Company has not required significant external financing to support inventory requirements at its existing and new stores because it has been able to rely on vendor financing for most of the inventory costs. The Company anticipates that vendor financing will continue to be available for new store openings. Net cash used by investing activities was $27.3 million during 1996 as compared to $17.0 million during 1995 due to the Alfalfa's, Inc. acquisition, other minor acquisitions and the opening of seven new stores during 1996. Net cash provided by financing activities was $33.1 million during 1996 and $7.2 million during 1995. The increase is due to net proceeds of $31.4 million from the sale of 1.4 million shares of the Company's common stock during its initial public offering in October 1996 and net proceeds of $16.5 million from the July 1996 sale of Series E convertible preferred stock, the proceeds of which were used to fund a portion of the purchase price of Alfalfa's, Inc. The Company currently has a $20.0 million revolving line of credit with Bank One Indianapolis, National Association (the "Revolving Line"). The Revolving Line bears interest, at the Company's option, at the lender's prime rate or LIBOR plus 1.75% and has a final maturity of February 2002. At December 28, 1996, the Company had borrowings outstanding under the Revolving Line of approximately $750,000. The Company used a portion of the net proceeds from its initial public offering in October 1996 to repay all amounts outstanding on the Revolving Line. Further, in December 1996, the Company received a commitment from its lender to increase its borrowing capacity under the Revolving Line to $40.0 million. The Company's ability to borrow under the Revolving Line is contingent upon its compliance with certain material covenants, including covenants related to the Company's net worth, total funded debt to total capitalization ratio, interest coverage ratio, tangible capital base, and fixed charge coverage. The Company spent approximately $13.2 million in 1996 to complete the build-out and opening of seven stores, one of which was originally scheduled to open in 1997. In addition, in 1996, the Company spent $14.1 million (net of cash acquired) to acquire the capital stock or assets of fourteen natural foods stores. As of the date of this Annual Report, in 1997 the Company has used cash of approximately $7.4 million and will issue shares of the Company's common stock worth approximately $1.0 million to acquire four existing natural foods stores and fund the construction in progress of its sites in development or under remodel. The Company's average capital expenditures to open a store, including leasehold improvements, equipment and fixtures, have ranged from approximately $1.0 million to $2.0 million over the past 18 months, excluding inventory costs, pre-opening expenses and initial operating losses. The cost of initial inventory for a new store over such period was approximately $500,000; however, the Company relies on vendor financing for most of this cost. Pre- opening expenses are approximately $250,000 per store and are expensed when the new store opens. The amounts and timing of such expenditures 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 the Company, 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. Wild Oats Markets, Inc. ====================== CONSOLIDATED STATEMENT OF OPERATIONS ---------------------- in thousands, except per-share amounts
Dec. 28, Dec. 30, Dec. 31, Fiscal year ended: 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Sales $192,493 $98,517 $65,219 Cost of goods sold and occupancy costs 130,957 67,164 44,637 -------- ------- ------- Gross profit 61,536 31,353 20,582 Operating expenses: Direct store expenses 48,317 25,072 15,685 Selling, general and administrative expenses 8,977 4,465 2,317 Pre-opening expenses 1,763 1,037 Nonrecurring expenses 7,035 -------- ------- ------- Income (loss) from operations (4,556) 779 2,580 Interest expense, net 904 363 373 -------- ------- ------- Income (loss) before income taxes (5,460) 416 2,207 Income tax expense (benefit) (977) 40 880 -------- ------- ------- Net income (loss) (4,483) 376 1,327 Accretion of redeemable preferred stock 2,396 1,937 484 -------- ------- ------- Net income (loss) allocable to common stock $ (6,879) $(1,561) $ 843 ======== ======= ======= Unaudited pro forma net income (loss) per common share (Note 1) $ ( 0.92) $0.10 ======== ======= Unaudited pro forma weighted average number of common shares outstanding (Note 1) 4,890 3,864 ======== =======
The accompanying notes are an integral part of these Consolidated Financial Statements. Wild Oats Markets, Inc. ======================= CONSOLIDATED BALANCE SHEET -------------------------- in thousands, except share amounts
Dec. 28, Dec. 30, 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS: Current assets: Cash and cash equivalents $ 16,404 $ 1,150 Inventories 15,464 7,789 Accounts receivable (net of allowance for doubtful accounts of $299 and $47) 558 378 Income tax receivable 800 1,367 Prepaid expenses and other current assets 319 464 Deferred income taxes 2,056 343 -------- ------- Total current assets 35,601 11,491 Property and equipment, net 35,736 19,318 Intangible assets, net 35,150 7,309 Deposits and other assets 416 258 Deferred income taxes 154 -------- ------- $107,057 $38,376 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): Current liabilities: Accounts payable $ 16,845 $ 8,468 Accrued liabilities 8,664 2,467 Notes payable 50 Current portion of long-term debt 110 82 -------- ------- Total current liabilities 25,669 11,017 Long-term debt 971 13,302 Deferred income taxes 1,157 1,310 Other liabilities 1,477 -------- ------- 29,274 25,629 -------- ------- Commitments and contingencies (Notes 10 and 11) Redeemable convertible preferred stock; $.001 par value; 5,000,000 shares authorized; 298,730 designated as Series A, 298,730 issued and outstanding in 1995; 2,845 designated as Series B, no shares issued and outstanding; 743,240 designated as Series C, 739,727 issued and outstanding in 1995 16,956 ------- Stockholders' equity (deficit): Common stock; $.001 par value; 20,000,000 shares authorized; 6,875,514 and 2,723,307 issued; 6,875,514 and 2,321,716 outstanding 7 3 Additional paid-in capital 86,471 2,868 Accumulated deficit (8,610) (1,731) Treasury stock, at cost, 401,591 shares in 1995 (5,349) Foreign currency translation adjustment (85) -------- ------- Total stockholders' equity (deficit) 77,783 (4,209) -------- ------- $107,057 $38,376 ======== =======
The accompanying notes are an integral part of these Consolidated Financial Statements. Wild Oats Markets, Inc. ==================================== CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) ==================================== in thousands, except share and per-share amounts
Foreign Additional Currency Stockholders' Common Stock Treasury Stock Paid-in Accumulated Translation Equity Shares Amount Shares Amount Capital Deficit Adjustment (Deficit) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1994 2,489,423 $ 3 149,364 $(1,050) $ 1,654 $ (964) $ (357) Issuance of common stock ($9.84 per share) 12,700 125 125 Issuance of common stock ($14.06 per share) 4,139 58 58 Issuance of warrants to purchase preferred stock 27 27 Conversion of note payable into shares of common stock 216,472 1,000 1,000 Repurchase of common stock 251,654 (4,292) (4,292) Accretion of redeemable preferred stock (484) (484) Stockholder draws (49) (49) Net income 1,327 1,327 --------- -------- -------- --------- --------- --------- --------- Balance at December 31, 1994 2,722,734 3 401,018 (5,342) 2,864 (170) (2,645) Common stock options exercised ($7.05 to $17.10 per share) 573 4 4 Repurchase of common stock 573 (7) (7) Accretion of redeemable preferred stock (1,937) (1,937) Net income 376 376 --------- -------- -------- --------- --------- --------- --------- Balance at December 30, 1995 2,723,307 3 401,591 (5,349) 2,868 (1,731) (4,209) Issuance of common stock ($16.70 per share) 783,421 1 13,086 13,087 Issuance of stock options 1,109 1,109 Initial public offering of common stock ($25.00 per share), net of issuance costs 1,400,000 1 31,401 31,402 Accretion of redeemable preferred stock (2,396) (2,396) Conversion of redeemable convertible preferred stock into shares of common stock 2,322,809 2 43,100 43,102 Common stock options exercised ($7.05 to $17.10 per share) 50,920 298 298 Repurchase of common stock 3,352 (42) (42) Retirement of treasury stock (404,943) (404,943) 5,391 (5,391) Net loss (4,483) (4,483) Foreign currency translation adjustment $ (85) (85) --------- -------- -------- --------- --------- --------- --------- --------- Balance at December 28, 1996 6,875,514 $ 7 -- $ -- $ 86,471 $ (8,610) $ (85) $ 77,783 ========= ======== ======== ========= ========= ========= ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. Wild Oats Markets, Inc. ==================================== CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ in thousands
Dec. 28, Dec. 30, Dec. 31, Fiscal year ended: 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (4,483) $ 376 $ 1,327 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Write-off of assets in nonrecurring expenses 5,746 Depreciation and amortization 7,019 2,078 1,301 Loss on disposal of equipment 110 241 57 Deferred tax provision (benefit) (863) 834 51 Change in assets and liabilities: Inventories (4,239) (3,363) (570) Receivables and other assets (1,529) (1,385) (224) Accounts payable 3,001 5,098 (618) Accrued liabilities 4,737 747 205 --------- --------- --------- Net cash provided by operating activities 9,499 4,626 1,529 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (13,174) (14,213) (1,907) Payment for purchase of acquired entities, net of cash acquired (14,109) (2,829) (2,361) --------- --------- --------- Net cash used by investing activities (27,283) (17,042) (4,268) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 3,095 Payments on long-term debt (2,029) (5,938) (3,546) Net proceeds (payments) on line of credit (12,486) 13,236 Principal payments under capitalized leases (88) (142) (143) Proceeds from issuance of redeemable preferred stock, net 16,068 12,369 Proceeds from issuance of common stock, net 31,700 4 125 Purchase of treasury stock (42) (7) (4,292) Stockholder draws (49) --------- --------- --------- Net cash provided by financing activities 33,123 7,153 7,559 --------- --------- --------- Effect of exchange rate changes on cash (85) --------- Net increase (decrease) in cash and cash equivalents 15,254 (5,263) 4,820 Cash and cash equivalents at beginning of year 1,150 6,413 1,593 --------- --------- --------- Cash and cash equivalents at end of year $ 16,404 $ 1,150 $ 6,413 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest $ 1,099 $ 380 $ 426 --------- --------- --------- Cash paid for income taxes $ 809 $ 668 $ 991 --------- --------- ---------
The accompanying notes are an integral part of these Consolidated Financial Statements. Wild Oats Markets, Inc. ------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------ NOTE I: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Wild Oats Markets, Inc. (the "Company"), headquartered in Boulder, Colorado, owns and operates natural foods supermarkets in the western and central United States and Canada. The Company also operates bakeries, commissary kitchens and warehouses that supply the retail stores. The Company's operations are concentrated in one market segment -- grocery stores -- and are geographically concentrated in the western and central United States; management considers a downturn in this market segment and geographic location to be unlikely. Principles of Consolidation The Company's consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Fiscal Year The Company reports its financial results on a 52- or 53-week fiscal year ending on the Saturday closest to December 31. Each fiscal quarter consists of a 13- week period, with one 14-period in a 53-week year. All fiscal years presented were 52-week periods. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Such cash equivalents aggregated $12.3 million at December 28, 1996; there were no cash equivalents at December 30, 1995. Cash equivalents are carried at cost which approximates fair market value. Inventories Inventories consisting of products held for sale are stated at the lower of cost (first in, first out) or market, as determined by the retail inventory method. Depreciation and Amortization Property and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the respective assets (three to seven years). Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the asset or the lease term. Maintenance and repairs are expensed as incurred and improvements are capitalized. Intangible Assets Intangible assets consist primarily of goodwill, which is amortized using the straight-line method over 40 years and are shown net of accumulated amortization of $1.6 million and $942,000 at December 28, 1996, and December 30, 1995, respectively. The carrying value of goodwill is assessed for recoverability by management based on an analysis of undiscounted expected future cash flows from the related acquired entities. The Company believes that there has been no impairment thereof as of December 28, 1996. Pre-Opening Expenses Pre-opening expenses are included in other assets and consist primarily of labor costs, rent, utilities, supplies, and other expenses incurred in connection with the opening of a new store. Pre-opening expenses are deferred until the store's opening date, at which time such costs are expensed in full. Advertising Advertising is expensed as incurred. Advertising expense was $2.7 million, $1.3 million and $568,000 for 1996, 1995 and 1994, respectively. Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments, including cash and cash equivalents, short-term trade receivables and payables and long-term debt, approximate their fair values. Use of Estimates The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Foreign Currency Translation The functional currency for the Company's Canadian subsidiary is the Canadian dollar. Translation into U.S. dollars is performed for balance-sheet accounts at year-end rates for monetary items and historical rates for non-monetary items. Income and expense accounts are translated at average exchange rates. Adjustments resulting from the translation are reflected as a separate component of stockholders' equity. Unaudited Pro Forma Net Income (Loss) Per Share Pro forma net income (loss) per common share is computed based on the weighted average number of common shares outstanding during the respective period and gives effect to the acquisition of Alfalfa's as of January 1, 1995, and to certain adjustments described below. Common equivalent shares are not included in the per-share calculation where the effect of their inclusion would be antidilutive (i.e., in a loss period), except that, in conformity with SEC requirements, common shares and common share equivalents issued during the 12- month period prior to the effectiveness of the Company's initial public offering have been included in the calculation as if they were outstanding for all periods using the treasury stock method. Additionally, all outstanding shares of convertible preferred stock are assumed to have been converted to common stock at the time of their issuance. The Company's historical capital structure is not indicative of its structure following the closing of its initial public offering, due to the automatic conversion of convertible preferred stock into common stock. Accordingly, net income (loss) per common share has been presented on a pro forma basis only. Reclassifications Certain amounts in the prior years' Consolidated Financial Statements have been reclassified to conform to the 1996 presentation. NOTE 2: BUSINESS COMBINATIONS In July 1996, the Company acquired all of the outstanding common and preferred stock of Alfalfa's for $39.1 million, consisting of $16.2 million of cash, issuance of 783,421 shares of common stock and options to acquire 124,101 shares of common stock valued at $14.2 million, issuance of 408,336 shares of redeemable convertible Series D Preferred Stock valued at $7.7 million and $1.0 million of acquisition-related costs. The acquisition was accounted for using the purchase method, and the excess of cost over the fair value of the assets acquired of $27.8 million was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. In May 1996, the Company acquired substantially all of the combined assets of three related natural foods retail stores in Salt Lake City, Utah, in exchange for total consideration of $2.2 million consisting of $500,000 in cash and $1.7 million in promissory notes. The acquisition was accounted for using the purchase method, and the excess of cost over fair value of the assets acquired of $2.1 million was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. Wild Oats Markets, Inc. ====================================== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------- continued The fair values of the acquired assets and liabilities of these acquisitions are as follows (in thousands):
Current assets ($3,591 of cash).................................. $ 8,507 Equipment........................................................ 12,030 Other assets..................................................... 523 Liabilities...................................................... (9,738) Goodwill......................................................... 29,899 ------- $41,221 =======
On April 22, 1995, the Company acquired the assets of two independent California Limited Partnerships, each operating a natural foods supermarket in northern California, in exchange for $2.8 million in cash. The acquisitions were accounted for using the purchase method and the excess of cost over fair value of the assets acquired of $1.7 million was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. The fair values of the assets and liabilities are as follows (in thousands):
Current assets.................................................... $ 564 Equipment......................................................... 607 Current liabilities............................................... (24) Goodwill.......................................................... 1,682 ------ $2,829 ======
On July 14, 1994, the Company acquired all of the outstanding stock of two related Nevada corporations, each operating a natural foods store in Las Vegas, in exchange for $2.8 million in cash, $3.6 million in notes payable, and $85,000 in stock and warrants. The acquisition was accounted for using the purchase method and resulted in goodwill of $5.8 million, which is being amortized on a straight-line basis over 40 years. The fair values of the assets and liabilities are as follows (in thousands):
Current assets ($396 of cash)..................................... $ 1,423 Property and equipment............................................ 1,239 Other assets...................................................... 80 Goodwill.......................................................... 5,837 Current liabilities............................................... (1,168) Notes payable..................................................... (855) Other liabilities................................................. (90) ------- $ 6,466 =======
Total debt and liabilities incurred and assumed in acquisitions for 1996 and 1994 aggregated $30.5 million and $5.8 million, respectively, and were excluded from the Consolidated Statement of Cash Flows. The assets acquired in 1996 and 1994 aggregated $47.4 million and $8.6 million, respectively, and were excluded from the Consolidated Statement of Cash Flows. The following unaudited pro forma combined results of operations of the Company and the acquired businesses discussed above have been prepared as if the transactions occurred as of the beginning of the respective period (in thousands):
Dec. 28, Dec. 30, Dec. 31, Fiscal year ended: 1996 1995 1994 - --------------------------------------------------------------------------- Sales $242,318 $111,304 $83,577 Net income (loss) (3,677) 1,852 1,791 Earnings (loss) per share $ (0.75) $ 0.47
The unaudited pro forma results above are not necessarily representative of the actual results that would have occurred or may occur in the future, if the transactions had been in effect on the date indicated. The pre-merger historical results of the acquired businesses discussed above are not reflected in the Company's historical financial statements. NOTE 3: PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
Dec. 28, Dec. 30, 1996 1995 - --------------------------------------------------------------------------- Machinery and equipment $28,415 $14,634 Leasehold improvements 12,781 5,192 Land and building 44 338 Construction in progress 2,624 3,022 ------- ------- 43,864 23,186 Less accumulated depreciation and amortization (8,128) (3,868) ------- ------- $35,736 $19,318 ======= =======
The amounts shown above include $339,000 and $338,000 of machinery and equipment which are accounted for as capitalized leases and which have accumulated amortization of $280,000 and $228,000 at fiscal year-end 1996 and 1995, respectively. NOTE 4: ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
Dec. 28, Dec. 30, 1996 1995 - --------------------------------------------------------------------------- Accrued wages and employee costs $4,660 $1,230 Accrued sales and property taxes 1,640 793 Deferred charges and other accruals 2,364 444 ------ ------ $8,664 $2,467 ====== ======
NOTE 5: NOTES PAYABLE AND LONG-TERM DEBT At December 28, 1996, the Company had a short-term note payable of $50,000 which bears interest at an annual rate of 10%; the note was repaid in full in January 1997. Long-term debt outstanding consists of the following (in thousands):
Dec. 28, Dec. 30, 1996 1995 - --------------------------------------------------------------------------- Notes payable to banks: Due February 28, 2002, bearing interest, at the Company's option, at the prime rate or LIBOR plus 1.75% (8.25% at December 28, 1996, and $5,238 at 8.25% and $8,000 at 7.625%, respectively, at December 30, 1995), secured by inventory and fixed assets $ 750 $13,236 Notes payable to corporations and individuals: Due in monthly installments of $4,165 including interest through June 2005, bearing interest at 10%, unsecured 271 Capitalized leases 60 148 ------ ------- 1,081 13,384 Less current portion (110) (82) ------ ------- $ 971 $13,302 ====== =======
Wild Oats Markets, Inc. ====================================== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------- continued At December 28, 1996, the Company had a $20.0 million revolving line of credit. The facility has a three-year draw period, after which the commitment will reduce over a four-year period. The line bears interest, at the Company's option, at the prime rate or LIBOR plus 1.75%. As of December 28, 1996, the Company had $750,000 outstanding on the line of credit and had approximately $16.5 million available under the line of credit, although, in December 1996, the Company received a commitment from its lender to increase its line of credit to $40.0 million. The line of credit agreement includes certain financial and other covenants, as well as restrictions on payments of dividends. Scheduled maturities of long-term debt as of December 28, 1996, are as follows (in thousands): 1997 $ 117 1998 775 1999 27 2000 30 2001 33 Thereafter 106 ------ 1,088 Less interest on capitalized leases (7) ------ $1,081 ======
NOTE 6: INCOME TAXES Income tax expense (benefit) consists of the following (in thousands):
Dec. 28, Dec. 30, Dec. 31, Fiscal year ended: 1996 1995 1994 - ------------------------------------------------------------------------ Current: Federal $(114) $(791) $ 707 State 0 (3) 122 ----- ----- ----- (114) (794) 829 ----- ----- ----- Deferred: Federal (705) 825 40 State (158) 9 11 ----- ----- ----- (863) 834 51 ----- ----- ----- $(977) $ 40 $ 880 ===== ===== =====
Income taxes as reflected in the consolidated statement of operations differ from the amounts computed by applying the statutory federal corporate tax rate to income as follows:
Dec. 28, Dec. 30, Dec. 31, Fiscal year ended: 1996 1995 1994 - ------------------------------------------------------------------------- Statutory tax rate (34.0%) 34.0% 34.0% State income taxes, net of federal income tax benefit (3.8) 3.8 3.6 Tax effect of nondeductible goodwill 14.3 4.7 1.1 Disposal of assets (30.7) Other, net 5.6 (2.2) 1.2 ----- ----- ----- Effective tax rate (17.9%) 9.6% 39.9% ===== ===== =====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):
Dec. 28, Dec. 30, 1996 1995 - --------------------------------------------------------- Deferred tax assets Inventory related $ 386 $ 165 Accruals 1,209 168 Other 249 Net operating loss carryforward 904 102 ------- ------- Total deferred tax assets 2,748 435 ------- ------- Deferred tax liabilities Property related (1,695) (1,310) Pre-opening expenses (92) ------- ------- Total deferred tax liabilities (1,695) (1,402) ------- ------- Net deferred tax asset (liability) $ 1,053 $ (967) ======= =======
The ultimate realization of a significant portion of this asset is dependent upon the generation of future taxable income sufficient to offset the related deductions on future tax periods in which they reverse. Although realization is not assured, management believes that it is more likely than not that all of the deferred tax asset will be realized. As of December 28, 1996, the Company had U.S. net operating loss carryforwards of approximately $1.9 million which expire beginning in the year 2011. The Company also had state net operating loss carryforwards of approximately $4.2 million. NOTE 7: REDEEMABLE CONVERTIBLE PREFERRED STOCK On November 15, 1994, the Company issued 739,727 shares of Series C Preferred Stock at $17.05 per share and had previously issued 298,730 shares of Series A Preferred Stock at $7.03 per share. The preferred stock had a liquidation preference of $7.03 per share plus accrued dividends at 12% compounded annually for Series A and $17.05 per share plus accrued dividends at 12% compounded annually for Series C, participated in dividends declared on a pro rata basis with common stock, and converted, at the option of the holder, into common stock at a ratio of one to one. In July 1996, in connection with the acquisition of Alfalfa's, the Company amended and restated its Certificate of Incorporation to give effect to the following: (i) the Series A Preferred Stock and Series C Preferred Stock liquidation preferences were amended to reduce the dividend to 10% compounded annually, respectively; and (ii) the Series A Preferred Stock redemption election date was amended to be December 31, 1999. Also, in July 1996, immediately prior to the acquisition of Alfalfa's, the Company sold 876,016 shares of Series E Preferred Stock for $16.5 million. The proceeds were used primarily to purchase shares of common and preferred stock held by former Alfalfa's stockholders. In addition, as part of the consideration in the acquisition of Alfalfa's, the Company issued 408,336 shares of Series D Preferred Stock. Both the Series D and E have the same liquidation preference of $18.81 per share plus all of the same rights, preferences and privileges as the Series A and C Preferred Stock. Wild Oats Markets, Inc. ====================================== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------- continued Upon the closing of the Company's initial public offering on October 22, 1996, the Company's Series A, B, C, D and E Preferred Stock shares were converted into an aggregate of 2,322,809 shares of the Company's common stock. Non-cash transactions of $43.1 million and $2.4 million relating to the conversion of preferred stock into common stock and the accretion of preferred stock, respectively, were excluded from financing activities in the 1996 Consolidated Statement of Cash Flows. NOTE 8: COMMON STOCK The Company completed its initial public offering on October 22, 1996. The proceeds from the sale of 1.4 million shares of common stock at $25.00 per share were approximately $31.4 million, net of the underwriting discount of $2.5 million and stock offering costs of $1.1 million. NOTE 9: EMPLOYEE STOCK PLANS, OPTIONS AND WARRANTS Employee Stock Purchase Plan In August 1996, the Company's board of directors approved and adopted the Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 127,692 shares of common stock. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. Under the Purchase Plan, the board of directors may authorize participation by eligible employees, including officers, in periodic offerings. The offering period for any offering will be no more than 27 months. The board authorized an offering commencing on the initial public offering date of October 22, 1996, and ending June 30, 1997, and sequential six-month offerings thereafter. Employees are eligible to participate in the currently authorized offerings if they have been employed by the Company or an affiliate of the Company incorporated in the United States for at least six months preceding October 22, 1996. Employees can have up to 15% of their earnings withheld pursuant to the Purchase Plan (10% under the currently authorized offerings) and applied on specified purchase dates (currently the last day of each authorized offering) to the purchase of shares of common stock. The price of common stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the common stock on the commencement date of each offering ($25.00 per share on October 22, 1996) or the relevant purchase date. Employees may end their participation in the offering at any time during the offering, and participation ends automatically on termination of employment. In the event of certain changes in control, the Company and the Board of Directors have discretion to provide that each right to purchase common stock will be assumed or an equivalent right substituted by the successor corporation, or the board may shorten an offering and provide for all sums collected by payroll deductions be applied to purchase stock immediately prior to the change in control. The Purchase Plan will terminate at the board's direction. As of December 28, 1996, there were approximately $49,000 of payroll deductions to be applied to purchase stock on June 30, 1997. Employee Stock Ownership Plan In conjunction with the acquisition of Alfalfa's in July 1996, the Company assumed an employee stock ownership plan ("ESOP") for Alfalfa's employees who were participants at the time of the acquisition. Following the acquisition, the Company discontinued contributions to the ESOP. The 50,176 shares of the Company's common stock held in trust as of December 28, 1996, will be distributed to the ESOP participants, pursuant to the terms of the ESOP, in 1997. 1996 Equity Incentive Plan The Company's 1996 Equity Incentive Plan (the "Incentive Plan") was adopted by the Board of Directors in August 1996 as an amendment and restatement of the Company's 1993 Stock Option Plan (the "1993 Plan"). The board designated all shares formerly available for issuance under the 1993 Plan and the 1991 Option Plan (the "1991 Plan") of Alfalfa's following the July 1996 acquisition of Alfalfa's to be available for issuance under the Incentive Plan. The Incentive Plan provides for the grant of incentive stock options to employees (including officers and employee-directors) and nonstatutory stock options, restricted stock purchase awards and stock bonuses to employees, directors and consultants. The exercise price of options granted under the Incentive Plan is determined by the Board of Directors, provided that the exercise price for an incentive stock option cannot be less than 100% of the fair market value of the common stock on the grant date and the exercise price for a nonstatutory stock option cannot be less than 85% of the fair market value of the common stock on the grant date. Outstanding options vest ratably over a period of five years and expire 10 years from the grant date. Warrants During 1994, as consideration for providing certain bridge financing, the Company issued two warrants to an existing stockholder to purchase an aggregate of 2,678 shares of Series B Preferred Stock. The warrants have a five-year term and an exercise price of $9.84 and $10.59 per share. Also during 1994, as consideration for investment advisory services related to the placement of Series C Preferred Stock, the Company issued a five-year warrant to a Series C stockholder to purchase 3,513 shares of Series C Preferred Stock at an exercise price of $21.32 per share. The above warrants were valued at $27,000, which was recorded as additional paid in capital in 1994. Upon the closing of the Company's initial public offering on October 23, 1996, the above warrants were converted to warrants to purchase common stock with the same terms and exercise prices. Fair Values The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock plans. Accordingly, no compensation expense has been recognized for these plans. Had compensation costs for these plans been determined based on the fair value at the grant dates as prescribed by Financial Accounting Standards Board Statement No. 123 "Accounting for Stock- Based Compensation," the Company's net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
1996 1995 - -------------------------------------------------------- Net income (loss) As reported $(4,483) $ 376 Pro forma $(4,871) 73 Earnings (loss) per share As reported $ (0.92) $ 0.10 Pro forma $ (1.00) $ 0.02
Wild Oats Markets, Inc. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------- continued The fair value of the employees' purchase rights was estimated using the Black- Scholes model with the following assumptions for 1996: No dividend yield; an expected life of eight months; expected volatility of 51 percent; and risk-free interest rate of 5.6 percent. The weighted-average fair value of the purchase rights granted in 1996 was $4.92 per share. The fair value of each option grant under the Incentive Plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: no dividend yield for both years; expected volatility of 51 percent for both years, risk-free interest rates ranging from 5.6 to 7.1%and from 6.2 to 6.8% and expected lives of seven years for both years. A summary of the status of the Company's Incentive Plan as of the 1994, 1995 and 1996 fiscal year ends and changes during the years ending on those dates is presented below:
Weighted- Average Exercise Qualified Non-Qualified Price - -------------------------------------------------------------------------------- Outstanding as of January 1, 1994 181,473 $ 7.05 Granted 85,004 23,815 $ 13.12 Forfeited (45,224) (1,774) $ 7.03 Outstanding as of ---------- ---------- December 31, 1994 221,253 22,041 $ 9.19 Granted 115,100 $ 17.10 Forfeited (44,128) $ 10.08 Exercised (573) $ 7.70 Outstanding as of ---------- ---------- December 30, 1995 291,652 22,041 $ 11.95 Granted 439,825 29,528 $ 15.10 Forfeited (42,874) $ 14.68 Exercised (50,920) $ 5.85 ---------- ---------- Outstanding as of December 28, 1996 637,683 51,569 $ 14.13 ========== ==========
At December 28, 1996, options exercisable for 134,179 shares were available for future grant under the Plan. At December 30, 1995 and at December 31, 1994, options exercisable for 166,647 and 91,551 shares with weighted average exercise prices of $10.39 and $8.72, respectively, were exercisable. The weighted-average grant date per share fair values of options granted during 1996, 1995 and 1994 were $16.91, $17.10 and $13.12, respectively, per share. The following tables summarize information about options outstanding and exercisable at December 28, 1996:
Options Outstanding - -------------------------------------------------------------------------------- Weighted- Average Weighted- Range of Remaining Average Exercise Number Contractual Exercise Prices Outstanding Life Price - -------------------------------------------------------------------------------- $ 3.98-9.87 187,478 6.7 years $ 7.38 11.71-19.00 501,774 9.3 16.65 ------------- ---------- ---------- ----------- $ 3.98-19.00 689,252 8.6 14.13 ========== Options Exercisable - -------------------------------------------------------------------------------- Weighted- Range of Average Exercise Number Exercise Prices Exercisable Price - -------------------------------------------------------------------------------- $ 3.98-9.87 152,574 $ 7.23 11.71-19.00 121,605 15.89 -------------- ----------- -------- $ 3.98-19.00 274,179 11.07 ===========
NOTE 10: LITIGATION The Company is named as defendant in various actions and proceedings arising in the normal course of business. In all of these cases, the Company is denying the allegations and is vigorously defending against them and in some instances, has filed counterclaims. Although the eventual outcome of the various lawsuits cannot be predicted, it is management's opinion these suits will not result in liabilities that would materially affect the Company's financial position or results of operations. NOTE 11: COMMITMENTS The Company has several noncancelable operating leases related to facilities occupied and store equipment. These leases generally contain renewal provisions at the option of the Company. Total rental expense (consisting of minimum rent and contingent rent) under these leases was $7.6 million, $2.6 million and $1.8 million during 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancelable operating leases as of December 28, 1996, are summarized as follows (in thousands):
Operating Fiscal year ended: Leases - -------------------------------------------------------------------------------- 1997 $ 8,025 1998 7,422 1999 6,893 2000 6,105 2001 5,354 Thereafter 22,442 ------- Total minimum lease payments $56,241 =======
Minimum rentals for operating leases do not include contingent rentals which may become due under certain lease terms which provide that rentals may be increased based on a percentage of sales. During 1996, 1995 and 1994, the Company paid contingent rentals of $270,000, $158,000 and $165,000, respectively. NOTE 12: NONRECURRING EXPENSES During late August 1996, the Company's Board of Directors made the following decisions relating to the Company's operations, which resulted in an approximate $7.3 million nonrecurring charge being recorded in the third quarter of 1996. Specifically, as a direct result of the July 1996 acquisition of Alfalfa's, the Company incurred $2.0 million by: (i) closing the Wild Oats Lawrence, Kansas, store as well as a regional bakery and kitchen; (ii) moving out of its existing corporate headquarters and relocating to Alfalfa's; and (iii) consolidating certain Wild Oats Markets, Inc. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------- continued information systems, thereby abandoning certain Wild Oats hardware and software. In addition, after operating the combined businesses, management closed the Alfalfa's Seattle, Washington, store and a restaurant in a Capers Store which, at the time of the acquisition, it had planned to retain. These closures resulted in the remaining $5.3 million of the charge. Components of the nonrecurring charge consist primarily of lease-cancellation costs ($1.1 million), employee severance and relocation costs ($500,000) and losses on disposal or abandonment of certain assets ($5.7 million). During the fourth quarter of 1996, management revised its estimates and adjusted the nonrecurring charge from $7.3 million to $7.0 million to reflect a $200,000 reduction in employee severance and relocation costs and a $100,000 reduction in lease-cancellation costs. Cash paid for employee severance, relocation and lease-cancellation costs related to the nonrecurring charge totaled $1.1 million during 1996. At December 28, 1996, the remaining accrued liabilities related to the nonrecurring charge totaled approximately $1.4 million. NOTE 13: 401(K) PLAN As of July 1, 1994, the Company adopted a tax-qualified employee savings and retirement plan (the "401(k) Plan") covering the Company's employees who have attained the age of 21 and have completed one year of service. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 15% of their annual compensation or the statutorily prescribed annual limit ($9,500 in 1996) and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan provides for additional matching contributions to the 401(k) Plan by the Company in an amount determined by the Company prior to the end of each plan year. Total Company contributions to the 401(k) Plan during 1996, 1995 and 1994 were approximately $95,000, $83,000 and $23,000, respectively. The trustees under the 401(k) Plan, at the direction of each participant, invest the assets of the 401(k) Plan in designated investment options. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code. In conjunction with the acquisition of Alfalfa's in July 1996, the Company assumed a 401(k) Profit Sharing Plan and Trust (the "Profit Sharing Plan") for Alfalfa's employees who were participants in the Profit Sharing Plan at the time of the acquisition. The Profit Sharing Plan provides for discretionary matching contributions of 1% of participant compensation to the Profit Sharing Plan. The net assets of the Profit Sharing Plan will be transferred to the Company's 401(k) Plan during 1997. NOTE 14: QUARTERLY INFORMATION (UNAUDITED) The following interim financial information presents the 1996 and 1995 consolidated results of operations on a quarterly basis (in thousands, except per-share amounts):
Quarter Ended 1996 Dec. 28 Sept. 28 June 29 March 30 - ------------------------------------------------------------------------------- Sales $63,361 $60,203 $36,692 $32,237 Gross profit 20,439 19,124 11,913 10,060 Net income (loss) 421 (5,405) 255 246 Pro forma net income (loss) per common share $ 0.06 $ (1.05) $ 0.04 $ 0.03 Quarter Ended 1995 Dec. 30 Sept. 30 July 1 April 1 - ------------------------------------------------------------------------------- Sales $30,008 $25,724 $23,359 $19,426 Gross profit 9,175 8,191 7,618 6,369 Net income (loss) (415) (277) 469 599 Pro forma net income (loss) per common share $ (0.10) $ (0.07) $ 0.12 $ 0.15
------------------- REPORT OF INDEPENDENT ACCOUNTANTS ------------------- To the Board of Directors and Stockholders of Wild Oats Markets, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Wild Oats Markets, Inc. and its subsidiaries (the "Company") at December 28, 1996, and December 30, 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Boulder, Colorado January 31, 1997 Schedule II WILD OATS MARKETS, INC. Valuation and Qualifying Accounts (in thousands)
Balance at Charged Balance at Allowance for Doubtful Accounts Beginning to End for the Fiscal Year Ended: of Year Expenses Write-Offs of Year December 31, 1994 $ 37 $ $ $ 37 December 30, 1995 37 85 (75) 47 December 28, 1996 47 252 299
14 ======================================== MANAGEMENT'S STATEMENT OF RESPONSIBILITIES ---------------------------------------- The accompanying consolidated financial statements of Wild Oats Markets, Inc. and its subsidiaries (the "Company") are prepared by the Company's management in conformity with generally accepted accounting principles. Management is responsible for the fairness of the financial statements, which include estimates based on judgment. The Company maintains accounting and other control systems which management believes provide reasonable assurance that financial records are reliable for the purposes of preparing financial statements, and that assets are properly safeguarded and recorded. Underlying the concept of reasonable assurance is the premise that the cost of control should not be disproportionate to the benefits expected to be derived from control. The Audit Committee of the Board of Directors meets periodically with management and the independent accountants to discuss the annual audit, internal control and financial reporting matters. The independent accountants have direct access to the Audit Committee. /s/ Michael C. Gilliland Michael C. Gilliland Chief Executive Officer /s/ James W. Lee James W. Lee President and Chief Operating Officer /s/ Mary Beth Lewis Mary Beth Lewis Chief Financial Officer and Treasurer ===================== STOCKHOLDER INFORMATION --------------------- Wild Oats Markets, Inc. MARKET INFORMATION AND DIVIDEND POLICY: The Company's Common Stock is traded on the NASDAQ National Market System under the symbol "OATS." Since the Company's initial public offering on October 22, 1996, the high and low prices per share of the Common Stock as reported on the NASDAQ National Market System were $27 and $18, respectively. As of March 4, 1997, the Company's common stock was held by 194 holders of record. No cash dividends have been declared previously on the Company's common stock and the Company does not anticipate declaring a cash dividend in the near future. ANNUAL MEETING: The Company's Annual Meeting of Stockholders will be held at 2 pm (Mountain Daylight time), on Thursday, May 1, 1997, at: Boulder Public Library Auditorium 1000 Canyon Boulevard Boulder, CO 80302 FORM 10-K AND QUARTERLY STOCKHOLDER INFORMATION: The Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 may be obtained without charge by sending a written request to the address below. Quarterly information is available to all stockholders immediately upon its release, free of charge, via fax, by calling (303) 440-5220, extension 392, or through access on the Internet at www.wildoats.com. To receive a copy by mail, please send your written request to: INVESTOR RELATIONS Wild Oats Markets, Inc. 1645 Broadway Boulder, CO 80302 TRANSFER AGENT AND REGISTRAR Norwest Bank Minnesota, N.A. Shareowner Services 161 North Concord Exchange Post Office Box 738 South St. Paul, MN 55075 (612) 450-4062 EXECUTIVE OFFICERS Michael C. Gilliland Chief Executive Officer and Director James W. Lee President and Chief Operating Officer Mary Beth Lewis Chief Financial Officer and Treasurer Elizabeth C. Cook Vice President, Secretary and Director BOARD OF DIRECTORS John A. Shields Chairman of the Board Chairman and Chief Executive Officer, Del Ray Farms Markets, Inc. David M. Chamberlain Vice Chairman of the Board Chairman of the Board, Genesco, Inc. Peter D. Behrendt Chairman of the Board, Exabyte Corporation Barnet M. Feinblum Chief Executive Officer and President, Horizon Organic Dairy, Inc. David L. Ferguson General Partner, Chase Capital Partners S.M. Hassan Wild Oats Markets, Inc. M. Laird Koldyke General Partner, Frontenac Company James B. McElwee General Partner, Weston Presidio Capital SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By /s/ Mary Beth Lewis -------------------- Mary Beth Lewis Executive Officer, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ MICHAEL GILLILAND Chief Executive Officer - ------------------------- and Director /s/ JAMES W. LEE President - ------------------------- /s/ MARY BETH LEWIS Chief Financial Officer - ------------------------- /s/ JOHN A. SHIELDS Chairman - ------------------------- /s/ ELIZABETH C. COOK Vice President and Director - ------------------------- /s/ DAVID M. CHAMBERLAIN Vice Chairman - ------------------------- /s/ BARNET M. FEINBLUM Director - ------------------------- /s/ DAVID L. FERGUSON Director - ------------------------- /s/ S.M. HASSAN Director - ------------------------- /s/ M. LAIRD KOLDYKE Director - ------------------------- /s/ JAMES B. MCELWEE Director - -------------------------
13 EX-3.1 2 AMEND. AND RESTATED CERTIFICATE OF INCORP. 3(I).1.(A) Exhibit 3(i).1.(a) Amended and Restated Certificate of Incorporation AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF WILD OATS MARKETS, INC. a Delaware corporation I. The undersigned, Elizabeth C. Cook, hereby certifies that: ONE: She is the duly elected and acting Vice President of Wild Oats Markets, Inc. TWO: The corporation's original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on May 31, 1996 under the name WO Holdings, Inc. THREE: This Amended and Restated Certificate of Incorporation restates, integrates and amends the corporation's Certificate of Incorporation filed on May 31, 1996, as amended by the Amended and Restated Certificate of Incorporation filed July 12, 1996 and the Certificate of Amendment filed on October 15, 1996 and has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. FOUR: The text of the Amended and Restated Certificate of Incorporation of this corporation is hereby amended and restated to read in its entirety as follows: II. The name of this corporation is Wild Oats Markets, Inc. III. The address of the registered office of the corporation in the State of Delaware is The Prentice-Hall Corporation Systems, Inc., 1013 Centre Road, Wilmington, Delaware 19805. The name of its registered agent at such address is The Prentice-Hall Corporation Systems, Inc. IV. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. A. Classes Of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is nineteen million two hundred thousand (25,000,000), of which sixteen million two hundred thousand (20,000,000) shares shall be Common Stock and five million (5,000,000) shares shall be Preferred Stock. The Common Stock shall have a par value of $.001 per share and the Preferred Stock shall have a par value of $.001 per share. B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, and subject to the Stockholders Agreement dated as of July 12, 1996 between the corporation and certain stockholders, following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock to the public (the "Initial Public Offering"), the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the Closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease 2 in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3. Subject to the rights of the holders of any series of Preferred Stock, no director shall be removed without cause. Subject to any limitations imposed by law, the Board of Directors or any individual director may be removed from office at any time with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock"). 4. Subject to the rights of the holders of any series of Preferred Stock and the Stockholders Agreement, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. B. 1. Subject to paragraph (i) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. 2. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws and following the closing of the Initial Public Offering no action shall be taken by the stockholders by written consent. C. 1. Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) or (iv) by the holders of the shares entitled to cast not less that ten percent (10%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as they or he shall fix; provided, however, that the following registration of any classes of equity securities of the 3 corporation pursuant to the provisions of the Securities Exchange Act of 1934, as amended, special meetings of the stockholders may only be called by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized Directors. 2. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VI. A. To the fullest extent permitted by applicable law, this corporation is authorized to provide indemnification of (and advancement of expenses to) directors, officers, employees and agents (and any other persons to which Delaware law permits this corporation to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to the corporation, its stockholders, and others. B. No director of the corporation shall be personally liable to the corporation or any stockholder for monetary damages for breach of fiduciary duty as a director, except for any matter in respect of which such director shall be liable under Section 174 of the General Corporation Law of the State of Delaware or any amendment thereto or shall be liable by reason that, in addition to any and all other requirements for such liability, such director (1) shall have breached the director's duty of loyalty to the corporation or its stockholders, (2) shall not have acted in good faith, or, in failing to act, shall not have acted in good faith, (3) shall have acted in manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law, or (4) shall have derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. C. Each person who was or is made a party or is threatened to be made a party to or is in any way involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), including any appeal therefrom, by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation or of a direct or indirect subsidiary of the corporation, or is or was serving at the request of the corporation as a director of officer of another entity or enterprise, or was a director or officer of a foreign or domestic corporation which was predecessor corporation of the corporation or of another entity or enterprise at the request of such predecessor corporation, shall be indemnified and held harmless by the corporation, and the corporation shall advance all expenses incurred by any such person in defense of any such proceeding prior to its final determination, to the fullest extent authorized by the General Corporation Law of the State of Delaware. In any proceeding against the corporation to enforce these rights, such person shall be presumed to be entitled to indemnification and the 4 corporation shall have the burden of proving that such person has not met the standards of conduct for permissible indemnification set forth in the General Corporation Law of the State of Delaware. The rights to indemnification and advancement of expenses conferred by this Article VII shall be presumed to have been relied upon by the directors and officers of the corporation in serving or continuing to serve the corporation and shall be enforceable as contact rights. Said rights shall not be exclusive of any other rights to which those seeking indemnification may otherwise be entitled. The corporation may, upon written demand presented by a director or officer of the corporation or of a direct or indirect subsidiary of the corporation, or by a person serving at the request of the corporation as a director or officer of another entity or enterprise, enter into contracts to provide such persons with specified rights to indemnification, which contracts may confer rights and protections to the maximum extent permitted by the General Corporation Law of the State of Delaware, as amended and in effect from time to time. 1. If a claim under this Article VII is not paid in full by the corporation within sixty (60) days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce the right to be advanced expenses incurred in defending any proceeding prior to its final disposition where the required undertaking, if any, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware for the corporation to indemnify the claimant for the amount claimed, but the claimant shall be presumed to be entitled to indemnification and the corporation shall have the burden of proving that the claimant has not met the standards of conduct for permissible indemnification set forth in the General Corporation Law of the Sate of Delaware. 2. If the General Corporation Law of the State of Delaware is hereafter amended to permit the corporation to provide broader indemnification rights than said Law permitted the corporation to provide prior to such amendment, the indemnification rights conferred by this Article VII shall be broadened to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. D. Any repeal or modification of any of the foregoing provisions of this Article VII, including without limitation, any contractual rights arising under or authorized by it, shall not adversely affect any right or protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of the corporation with respect to any acts or omissions of such director, officer or agent occurring prior to such repeal or modification. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VIII, and all rights conferred upon the stockholders herein are granted subject to this reservation. 5 B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI, and VII. In Witness Whereof, the undersigned has executed this certificate on October 28, 1996. /s/ Elizabeth C. Cook ---------------------------------------- Elizabeth C. Cook Vice President 6 EX-3.1 3 CERT. OF CORRECTION TO AMEND. & RESTATED CERT.(3)(I).1.(B) Exhibit 3(i).1.(b) Certificate of Correction to Amended and Restated Certificate of Incorporation CERTIFICATE OF CORRECTION OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF WILD OATS MARKETS, INC. FILED WITH THE SECRETARY OF STATE OF DELAWARE ON OCTOBER 28, 1996 Wild Oats Markets, Inc., a Delaware corporation (the "Corporation"), hereby certifies as follows: 1. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on May 31, 1996 under the name "WO Holdings, Inc." 2. An Amended and Restated Certificate of Incorporation was filed with the Secretary of State of Delaware on October 28, 1996 under the name Wild Oats Markets, Inc. (the "Restated Certificate"). 3. The Restated Certificate requires correction as permitted by subsection (f) of Section 103 of the General Corporation Law of the State of Delaware. 4. The errors to be corrected in the Restated Certificate are as follows: (a) The number of shares of capital stock authorized to be issued by the Corporation in paragraph A of Article IV should be Twenty-five Million (25,000,000) shares of which Twenty Million (20,000,000) shares shall be Common Stock and Five Million (5,000,000) shares shall be Preferred Stock. The Common Stock shall have a par value of $.001 per share and the Preferred Stock shall have a par value of $.001 per share. 5. Accordingly, paragraph A of Article IV of the Restated Certificate are corrected to read as follows: "(a) CLASSES OF STOCK. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is Twenty-five Million (25,000,000) of which Twenty Million (20,000,000) shares shall be Common Stock and Five Million (5,000,000) shares shall be Preferred Stock. The Common Stock shall have a par value of $.001 per share and the Preferred Stock shall have a par value of $.001 per share." In Witness Whereof, the undersigned has executed this Certificate of Correction on the 9th day of January, 1997. Wild Oats Markets, Inc. By: /s/ Mary Beth Lewis ____________________________________________ Mary Beth Lewis, Chief Financial Officer EX-3.1 4 AMENDED AND RESTATED BYLAWS 3(II).1 Exhibit 3(ii).1 Amended and Restated By-laws AMENDED AND RESTATED BY-LAWS OF WILD OATS MARKETS, INC. (a Delaware corporation) As adopted by the Board of Directors August 19, 1996 Table Of Contents Page
ARTICLE I OFFICES.......................................................1 SECTION 1 REGISTERED OFFICE............................................1 SECTION 2 OTHER OFFICES................................................1 ARTICLE II CORPORATE SEAL................................................1 SECTION 3 CORPORATE SEAL...............................................1 ARTICLE III STOCKHOLDERS' MEETINGS........................................1 SECTION 4 OF MEETINGS..................................................1 SECTION 5 ANNUAL MEETING...............................................2 SECTION 6 SPECIAL MEETINGS.............................................3 SECTION 7 NOTICE OF MEETINGS...........................................4 SECTION 8 QUORUM.......................................................4 SECTION 9 ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS.................5 SECTION 10 VOTING RIGHTS...............................................5 SECTION 11 BENEFICIAL OWNERS OF STOCK..................................6 SECTION 12 LIST OF STOCKHOLDERS........................................6 SECTION 13 ACTION WITHOUT MEETING......................................6 SECTION 14 ORGANIZATION................................................7 ARTICLE IV DIRECTORS.....................................................8 SECTION 15 NUMBER AND TERM OF OFFICE...................................8 SECTION 16 POWERS......................................................8 SECTION 17 CLASSES OF DIRECTORS........................................8 SECTION 18 VACANCIES...................................................8 SECTION 19 RESIGNATION.................................................9 SECTION 20 REMOVAL.....................................................9 SECTION 21 MEETINGS....................................................9 (a) Annual Meetings................................................9 (b) Regular Meetings...............................................9 (c) Special Meetings...............................................9 (d) Telephone Meetings............................................10 (e) Notice of Meetings............................................10 (f) Waiver of Notice..............................................10 SECTION 22 QUORUM AND VOTING..........................................10 SECTION 23 ACTION WITHOUT MEETING.....................................10 SECTION 24 FEES AND COMPENSATION......................................11 SECTION 25 COMMITTEES.................................................11 (a) Executive Committee...........................................11
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(b) Other Committees..............................................11 (c) Term..........................................................11 (d) Meetings......................................................12 SECTION 26 ORGANIZATION...............................................12 ARTICLE V OFFICERS......................................................12 SECTION 27 OFFICERS DESIGNATED........................................12 SECTION 28 TENURE AND DUTIES OF OFFICERS..............................13 (a) General.......................................................13 (b) Duties of Chairman of the Board of Directors..................13 (c) Duties of President...........................................13 (d) Duties of Vice Presidents.....................................13 (e) Duties of Secretary...........................................13 (f) Duties of Chief Financial Officer or Treasurer................14 SECTION 29 DELEGATION OF AUTHORITY....................................14 SECTION 30 RESIGNATIONS...............................................14 SECTION 31 REMOVAL....................................................14 ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION ......................14 SECTION 32 EXECUTION OF CORPORATE INSTRUMENTS..........................14 SECTION 33 VOTING OF SECURITIES OWNED BY THE CORPORATION...............15 ARTICLE VII SHARES OF STOCK.............................................15 SECTION 34 FORM AND EXECUTION OF CERTIFICATES..........................15 SECTION 35 LOST CERTIFICATES...........................................16 SECTION 36 TRANSFERS...................................................16 SECTION 37 FIXING RECORD DATES.........................................16 SECTION 38 REGISTERED STOCKHOLDERS.....................................17 ARTICLE VIII OTHER SECURITIES OF THE CORPORATION.........................17 SECTION 39 EXECUTION OF OTHER SECURITIES...............................17 ARTICLE IX DIVIDENDS....................................................18 SECTION 40 DECLARATION OF DIVIDENDS....................................18 SECTION 41 DIVIDEND RESERVE............................................18 ARTICLE X FISCAL YEAR...................................................18 SECTION 42 FISCAL YEAR.................................................18 ARTICLE XI INDEMNIFICATION..............................................19
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SECTION 43 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS.................................................19 (a) Directors......................................................19 (b) Officers, Employees and Other Agents...........................19 (c) Good Faith.....................................................19 (d) Expenses.......................................................20 (e) Enforcement....................................................20 (f) Non Exclusivity of Rights......................................20 (g) Survival of Rights.............................................21 (h) Insurance......................................................21 (i) Amendments.....................................................21 (j) Saving Clause..................................................21 (k) Certain Definitions............................................21 ARTICLE XII NOTICES.....................................................22 SECTION 44 NOTICES....................................................22 ARTICLE XIII AMENDMENTS.................................................24 SECTION 45 AMENDMENTS.................................................24 ARTICLE XIV LOANS TO OFFICERS...........................................24 SECTION 46 LOANS TO OFFICERS..........................................24
iii. AMENDED AND RESTATED BY-LAWS OF WILD OATS MARKETS, INC. (a Delaware corporation) ARTICLE I OFFICES Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Dover, County of Kent. Section 2. Other Offices. The corporation shall also have and maintain an office or principal place of business in Boulder, Colorado, at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II CORPORATE SEAL Section 3. Corporate Seal. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE III STOCKHOLDERS' MEETINGS Section 4. Place of Meetings. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. Section 5. Annual Meeting. (a) The annual meeting of the stockholders of the corporation, for the purpose of election of Directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors 1 (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date of the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received not earlie than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the sixtieth (60th) day prior to such annual meeting or, in the event public announcement of the date of such annual meeting is first made by the corporation fewer than seventy (70) days prior to the date of such annual meeting, the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the corporation. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the Securities and Exchange Act of 1934, as amended. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) and the Stockholders Agreement between the corporation and certain stockholders shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of Directors at the meeting who complies with the notice procedures set forth in this 2 paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 5. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re election as a Director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a Director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 5. At the request of the Board of Directors, any person nominated by a stockholder for election as a Director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these By-laws, and if he should so determine, he shall so declare at the meeting and the defective nomination shall be disregarded. (d) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. Section 6. Special Meetings. (a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption)or (iv) by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as they or he shall fix; provided, however, that following registration of any of the classes of equity securities of the corporation pursuant to the provisions of the Securities Exchange Act of 1934, as amended, special meetings of the stockholders may only be called by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized Directors. (b) If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by 3 registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board, the President, any Vice President, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these By-Laws, that a meeting will be held not less than thirty five (35) nor more than one hundred twenty (120) days after the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. If the notice is not given within sixty (60) days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. Section 7. Notice of Meetings. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. Section 8. Quorum. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these By-Laws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. Any shares, the voting of which at said meeting has been enjoined, or which for any reason cannot be lawfully voted at such meeting, shall not be counted to determine a quorum at such meeting. In the absence of a quorum any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, all action taken by the holders of a majority of the voting power represented at any meeting at which a quorum is present shall be valid and binding upon the corporation; provided, however, that Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of Directors. Where a separate vote by a class or classes or series is required, a majority of the outstanding shares of such class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority (plurality, in the case of the election of Directors) of shares of such class or classes 4 or series present in person or represented by proxy at the meeting shall be the act of such class or classes or series. Section 9. Adjournment and Notice of Adjourned Meetings. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares represented thereat. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 10. Voting Rights. (a) For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these By-Laws, shall be entitled to vote at any meeting of stockholders. Except as may be otherwise provided in the Certificate of Incorporation or these By-Laws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. Every person entitled to vote shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent, which proxy shall be filed with the Secretary at or before the meeting at which it is to be used. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. All elections of Directors shall be by written ballot, unless otherwise provided in the Certificate of Incorporation. Section 11. Beneficial Owners of Stock. (a) If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the General Corporation Law of Delaware, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even split for the purpose of this subsection (c) shall be a majority or even split in interest. (b) Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by 5 the pledgor on the books of the corporation he has expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such stock and vote thereon. Section 12. List of Stockholders. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 13. Action without Meeting. (a) Any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. (b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the Corporation in the manner herein required, written consents signed by a sufficient number of stockholders to take action are delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. (c) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. (d) Notwithstanding the foregoing, no such action by written consent may be taken following the closing of the initial public offering pursuant to an effective registration 6 statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock of the corporation (the "Initial Public Offering"). Section 14. Organization. (a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, the most senior Vice President present, or in the absence of any such officer, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies, and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless, and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. ARTICLE IV DIRECTORS Section 15. Number and Term of Office. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the Directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these By-Laws. No reduction of the authorized number of Directors shall have the effect of removing any Director before the Director's term of office expires, unless such removal is made pursuant to the provisions of Section 20 hereof. Section 16. Powers. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. 7 Section 17. Classes of Directors. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the Initial Public Offering, the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the Closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 18. Vacancies. Unless otherwise provided in the Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, although less than a quorum, or by a sole remaining Director, and each Director so elected shall hold office for the unexpired portion of the term of the Director whose place shall be vacant and until his successor shall have been duly elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Section 18 in the case of the death, removal or resignation of any Director, or if the stockholders fail at any meeting of stockholders at which Directors are to be elected (including any meeting referred to in Section 20 below) to elect the number of Directors then constituting the whole Board of Directors. Section 19. Resignation. Any Director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more Directors shall resign from the Board of Directors, effective at a future date, a majority of the Directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. Section 20. Removal. Subject to the rights of the holders of any series of Preferred Stock and the Stockholders Agreement, no director shall be removed without cause. Subject to any limitations imposed by law, the Board of Directors or any individual director may be removed from office at any time with cause by the affirmative vote of the holders of a majority of 8 the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock"). Section 21. Meetings. (a) Annual Meetings. The annual meeting of the Board of Directors shall be held immediately after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) Regular Meetings. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 2 hereof. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been determined by the Board of Directors. (c) Special Meetings. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the President or a majority of the Directors. (d) Telephone Meetings. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (e) Notice of Meetings. Written notice of the time and place of all special meetings of the Board of Directors shall be given at least one (1) day before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any Director by attendance thereat, except when the Director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (f) Waiver of Notice. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the Directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in any written waiver of notice or consent unless so required by the Certificate of Incorporation or these By-Laws. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. 9 Section 22. Quorum and Voting. (a) Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 43 hereof, for which a quorum shall be one-third of the exact number of Directors fixed from time to time in accordance with the Certificate of Incorporation, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) At each meeting of the Board of Directors at which a quorum is present all questions and business shall be determined by a vote of a majority of the Directors present, unless a different vote be required by law, the Certificate of Incorporation or these By-Laws. Section 23. Action without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 24. Fees and Compensation. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. Section 25. Committees. (a) Executive Committee. The Board of Directors may by resolution passed by a majority of the whole Board of Directors, appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and specifically granted by the Board of Directors, shall have and may exercise when the Board of Directors is not in session all powers of the Board of Directors in the management of the business and affairs of the corporation, including, without limitation, the power and authority to declare a dividend or to authorize the issuance of stock, except such committee shall not have the power or authority to amend the Certificate of Incorporation, to adopt an agreement of merger or consolidation, to recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, to recommend to the stockholders of the corporation a dissolution of the corporation or a revocation of a dissolution or to amend these By-Laws. 10. (b) Other Committees. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors, and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall such committee have the powers denied to the Executive Committee in these By-Laws. (c) Term. The members of all committees of the Board of Directors shall serve a term coexistent with that of the Board of Directors which shall have appointed such committee. The Board of Directors, subject to the provisions of subsections (a) or (b) of this Section 25, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any Director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any Director by attendance thereat, except when the Director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. Section 26. Organization. At every meeting of the Directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or if the President is absent, the most senior Vice President, or, in the absence of any such officer, a chairman of the meeting chosen by a majority of the Directors present, shall preside over the 11. meeting. The Secretary, or in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. ARTICLE V OFFICERS Section 27. Officers Designated. The officers of the corporation shall be the Chairman of the Board of Directors, the President, one or more Vice Presidents, the Secretary and the Chief Financial Officer or Treasurer, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The order of the seniority of the Vice Presidents shall be in the order of their nomination, unless otherwise determined by the Board of Directors. The Board of Directors may also appoint such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. The President may appoint one or more Assistant Secretaries and Assistant Treasurers with such powers and duties as he or she deems necessary. Section 28. Tenure and Duties of Officers. (a) General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (b) Duties of Chairman of the Board of Directors. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. If there is no President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 28. (c) Duties of President. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. The President shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. 12. (d) Duties of Vice Presidents. The Vice Presidents, in the order of their seniority, may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (e) Duties of Secretary. The Secretary shall attend all meetings of the stockholders and of the Board of Directors, and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these By-Laws of all meetings of the stockholders, and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these By-Laws and other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (f) Duties of Chief Financial Officer or Treasurer. The Chief Financial Officer or Treasurer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner, and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer or Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer or Treasurer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct any Assistant Treasurer to assume and perform the duties of the Chief Financial Officer or Treasurer in the absence or disability of the Chief Financial Officer or Treasurer, and each Assistant Treasurer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. Section 29. Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. Section 30. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. Section 31. Removal. Any officer may be removed from office at any time, either with or without cause, by the vote or written consent of a majority of the Directors in office at the 13. time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION Section 32. Execution of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these By-Laws, and such execution or signature shall be binding upon the corporation. Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, or the President or any Vice President, and by the Secretary or Chief Financial Officer or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 33. Voting of Securities Owned by the Corporation. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the President, or any Vice President. 14. ARTICLE VII SHARES OF STOCK Section 34. Form and Execution of Certificates. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be by facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the designations, preferences, limitations, restrictions on transfer and relative rights of the shares authorized to be issued. Section 35. Lost Certificates. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. Section 36. Transfers. (a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. Section 37. Fixing Record Dates. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such 15. meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) Prior to the Initial Public Offering, in order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 38. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 16. ARTICLE VIII OTHER SECURITIES OF THE CORPORATION Section 39. Execution of Other Securities. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE IX DIVIDENDS Section 40. Declaration of Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 41. Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. 17. ARTICLE X FISCAL YEAR Section 42. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. ARTICLE XI INDEMNIFICATION Section 43. Indemnification of Directors, Officers, Employees and Other Agents. (a) Directors. The corporation shall indemnify its Directors to the fullest extent not prohibited by the Delaware General Corporation Law; provided, however, that the corporation shall not be required to indemnify any Director in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the corporation or its Directors, officers, employees or other agents unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation or (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law. (b) Officers, Employees and Other Agents. The corporation shall have power to indemnify its officers, employees and other agents as set forth in the Delaware General Corporation Law. (c) Good Faith. (i) For purposes of any determination under this Bylaw, a Director or executive officer shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, to have had no reasonable cause to believe that his conduct was unlawful, if his action is based on information, opinions, reports and statements, including financial statements and other financial data, in each case prepared or presented by: (1) one or more officers or employees of the corporation whom the Director or executive officer believed to be reliable and competent in the matters presented; (2) counsel, independent accountants or other persons as to matters which the Director or executive officer believed to be within such person's professional competence; and (3) with respect to a Director, a committee of the Board upon which such Director does not serve, as to matters within such Committee's designated authority, 18. which committee the Director believes to merit confidence; so long as, in each case, the Director or executive officer acts without knowledge that would cause such reliance to be unwarranted. (ii) The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, that he had reasonable cause to believe that his conduct was unlawful. (iii) The provisions of this paragraph (c) shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth by the Delaware General Corporation Law. (d) Expenses. The corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by any Director or executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise. (e) Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to Directors and executive officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the Director or executive officer. Any right to indemnification or advances granted by this Bylaw to a Director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. The corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. (f) Non Exclusivity of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its Directors, officers, employees or agents 19. respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law. (g) Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a Director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (h) Insurance. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw. (i) Amendments. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (j) Saving Clause. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Director and executive officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. (k) Certain Definitions. For the purposes of this Bylaw, the following definitions shall apply: (i) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (ii) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (iii) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. 20. (iv) References to a "director," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (v) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Bylaw. ARTICLE XII NOTICES Section 44. Notices. (a) Notice to Stockholders. Whenever, under any provisions of these By-Laws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. (b) Notice to Directors. Any notice required to be given to any Director may be given by the method stated in subsection (a), or by facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such Director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such Director. (c) Address Unknown. If no address of a stockholder or Director be known, notice may be sent to the office of the corporation required to be maintained pursuant to Section 2 hereof. (d) Affidavit of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or Director or Directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. (e) Time Notices Deemed Given. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by 21. facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission. (f) Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all Directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (g) Failure to Receive Notice. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any Director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such Director to receive such notice. (h) Notice to Person with Whom Communication Is Unlawful. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or By-Laws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. (i) Notice to Person with Undeliverable Address. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or By-Laws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve month period, have been mailed addressed to such person at his address as shown on the records of the Corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. 22. ARTICLE XIII AMENDMENTS Section 45. Amendments. Except as otherwise set forth in paragraph (i) of Section 43 of these By-Laws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend or repeal Bylaws. ARTICLE XIV LOANS TO OFFICERS Section 46. Loans to Officers. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this Section 46 shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 23. EX-11.1 5 STATEMENT OF PRO FORMA NET INCOME(LOSS) PER SHARE EXHIBIT 11.1 WILD OATS MARKETS, INC. Statement Regarding Computation of Pro Forma Net Income (Loss) Per Share (Unaudited) Year Ended December 28, 1996 -----------
Weighted average number of common shares outstanding 4,622,202 Common and common equivalent shares issued during the twelve-month period prior to the filing of the Company's initial public offering calculated using the treasury stock method 267,811 ----------- Pro forma weighted average number of common shares outstanding 4,890,013 Net income (loss) $(4,483,000) =========== Pro forma net income (loss) per share $ (0.92) ===========
EX-23 6 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-20539) of Wild Oats Markets, Inc. of our report dated January 31, 1997 appearing in this Form 10-K. PRICE WATERHOUSE LLP Boulder, Colorado March 25, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 28, 1996 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 12-MOS DEC-28-1996 DEC-28-1996 16,404 0 857 299 15,464 35,601 43,864 8,128 107,057 25,669 971 0 0 7 77,776 107,057 192,493 192,493 130,957 130,957 66,092 252 904 5,460 977 4,483 0 0 0 4,483 0.92 0.92
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