-----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, UXiCMnaCCtjKUZuwsD5M2iDOuswFs6aezJVSu1pTaUcYJHywKeK9sBjOSgJw5En2 FqtEnuWIjeCd/zthpmsoaQ== 0000899733-00-000020.txt : 20000420 0000899733-00-000020.hdr.sgml : 20000420 ACCESSION NUMBER: 0000899733-00-000020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILD OATS MARKETS INC CENTRAL INDEX KEY: 0000909990 STANDARD INDUSTRIAL CLASSIFICATION: 5412 IRS NUMBER: 841100630 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21577 FILM NUMBER: 590969 BUSINESS ADDRESS: STREET 1: 3375 MITCHELL LANE CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3034405220 MAIL ADDRESS: STREET 1: 1645 BROADWAY CITY: BOULDER STATE: CO ZIP: 80302 10-K 1 1999 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 JANUARY 1, 2000 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) 3375 Mitchell Lane Boulder, Colorado 80301 (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 1, 2000, 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 $319,098,538, based upon the closing sale price of such stock on such date as reported on the NASDAQ National Market. As of March 1, 2000, the total number of shares outstanding of the Registrant's common stock, $.001 par value, was 23,022,059 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Registrant's Annual Meeting of Stockholders to be held on May 5, 2000, 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. 10 Item 4. Submission of Matters to a Vote of Security Holders. 10 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 10 Item 6. Selected Financial Data. 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 19 Item 8. Financial Statements and Supplementary Data. 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 41 PART III. Item 10. Directors and Executive Officers of the Registrant. 41 Item 11. Executive Compensation. 41 Item 12. Security Ownership of Certain Beneficial Owners and Management. 41 Item 13. Certain Relationships and Related Transactions. 41 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 41
2 PART I. Item 1. BUSINESS Introduction Wild Oats Markets, Inc. ("Wild Oats") is the largest natural foods supermarket chain in North America (based on number of stores). As of March 1, 2000, we operated 111 stores in 22 states and British Columbia, Canada under several names, including: o Wild Oats Community Market (Nationwide) o Alfalfa's Market (CO and NM) o Henry's Marketplace (San Diego, CA) o Nature's Fresh and Nature's Northwest (metropolitan Portland, OR) o Sun Harvest Market (TX) o Capers Community Market (British Columbia, Canada) We are dedicated to providing a broad selection of high quality natural and gourmet foods and related products at competitive prices in an inviting and educational store environment emphasizing customer service. Our stores range in size from 2,700 to 45,000 gross square feet and feature natural alternatives for virtually every product category found in conventional supermarkets. Wild Oats provides its customers with a one-stop, full-service shopping alternative to both conventional supermarkets and traditional health food stores. We believe we have developed a differentiated concept that provides the expanding natural foods consumer base with an attractive one-stop, full-service shopping alternative to both the conventional supermarket and the traditional natural health foods store and one which appeals to a broader, more mainstream customer base than the traditional natural foods store. Our thorough selection of natural health foods products appeals to health conscious shoppers while we also offer virtually every product category found in a conventional supermarket, including grocery, produce, meat, poultry, seafood, dairy, frozen, food service, bakery, vitamins and supplements, health and body care and household items. Our positioning, coupled with industry data that states that the natural products industry comprises less than 2.5% of the total grocery industry, offers significant potential for us to continue to expand our customer base. Since acquiring our first natural foods store in 1987, we have pursued an aggressive growth strategy. In 1999, we acquired 17 stores through cash acquisitions and completed two stock-for-stock transactions with Henry's Marketplace, Inc. ("Henry's") and Sun Harvest Farms, Inc. and an affiliate ("Sun Harvest") in the third and fourth quarters, respectively, that added another 24 stores to our historic store base. The transactions were accounted for as poolings-of-interests, and so our historic financial information and the numbers of stores operated for all periods described have been restated throughout this Report on Form 10-K to include the operations of Henry's and Sun Harvest. We have grown from 82 natural foods stores located in 18 states and Canada at the end of 1998 to 106 natural foods stores and four vitamin stores in 22 states and Canada as of the end of 1999, an increase of 34%. Wild Oats' sales grew from $530.7 million during 1998 to $721.1 million during fiscal 1999, an increase of 36%, due largely to the opening of eight new stores (including one opened by Henry's), the relocation of five stores and the acquisition of 17 stores in 1999. Our growth has been driven by the acquisition of independent and small chain natural foods store operators, the opening of new stores and positive comparable store sales growth. In 1999, we opened eight new stores (including one opened by Henrys in 1999) and acquired 17 operating natural foods stores, including: o Nature's Fresh Northwest, which owned seven operating stores and one site in development in metropolitan Portland, Oregon o Four stores operated under the name "Wild Harvest" in metropolitan Boston, Massachusetts o Three operating stores located in Tucson, Arizona 1 We also completed stock-for-stock transactions, accounted for as poolings-of-interests, with the following entities in 1999: o Henry's Marketplace, which owned 11 stores and one site in development in metropolitan San Diego, California o Sun Harvest Farms and an affiliate, which owned nine natural food grocery stores and four vitamin stores in San Antonio, Austin and other communities in Texas As a result of our aggressive growth, we have increased our penetration of existing markets, entered new geographic markets and created a stronger platform for future growth. We believe our growth has resulted in operating efficiencies created by: o warehousing, distribution and administrative economies of scale o improved volume purchasing discounts o coordinated merchandising and marketing strategies Natural products industry Retail sales of natural products have grown from $7.6 billion in 1994 to sales of $19.0 billion in 1998, a 26% compound annual growth rate, and total sales of natural products (including over the internet, by practitioners, by multi-level marketers and through mail order) reached $25.4 billion in 1998. Sales growth in the traditional grocery industry has remained relatively flat over the same period. We believe that this growth reflects a broadening of the natural products 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, we believe that more of the population now attributes added value to high quality natural products and is willing to pay a premium for such products. The increase in the availability of natural products in conventional supermarkets, whose sales of natural foods products increased by 18% in 1998, demonstrates the increase in consumer acceptance of natural products. Despite the increase in natural foods sales within conventional supermarkets, we believe that conventional supermarkets still lack the total shopping experience that natural foods stores offer. Many natural foods stores develop a more personal relationship with increased interaction between store staff and customers than that of conventional supermarkets. Conventional supermarkets may also have less appeal for natural foods shoppers because they are largely dependent on commercial brand names, resulting in a more limited selection of natural products from which to choose. In addition, conventional supermarkets may not be able to match our pricing in many categories because of the greater volume purchase discounts we receive on natural products. As a result, while conventional supermarkets may carry a limited selection of natural foods products, they do not duplicate the inventory of natural foods stores, which carry a more comprehensive selection of natural products sourced from a large number of independent vendors. Operating strategy Our objective is to become the grocery store of choice both for natural foods shoppers and quality-conscious consumers in each of our markets by emphasizing the following key elements of our operating strategy: Destination format. Our stores are one-stop, full-service supermarkets for customers seeking high quality natural and gourmet foods and related products. In most of our stores, we offer between 10,000 and 25,000 stock-keeping units of natural foods products in virtually every product category found in a conventional supermarket. Our 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. We seek to offer the highest quality products throughout our merchandise categories and emphasize unique products and brands not typically found in conventional supermarkets. Our strict quality standards require products to be minimally processed, free of preservatives, artificial colors and chemical additives and not tested on animals. Each of our stores tailors its product mix to meet the preference of its local market, in particular sourcing produce from local organic growers whenever possible. We also operate regional commissary kitchens and bakeries that provide our stores with fresh bakery items and a unique assortment of prepared foods for the quality and health-conscious consumer. 2 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, encouraging shoppers to spend more time in the store and to purchase new products. In order to enhance our customers' understanding of natural foods and how to prepare them, we train our store staff to educate customers as to the benefits and quality of our products and prominently feature educational brochures and newsletters, as well as an in-store consumer information department. We also are installing "Healthnotes On Line(R)", an on-line health information database, in most of our stores in 2000 to provide our customers with up-to-date access to health and health product information. 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. We believe our 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. We seek to engender customer loyalty by demonstrating our 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 a store may, once each calendar quarter, donate 5% of its gross sales from one day to a local not-for-profit group, and a "Charity Work Benefit" where we pay employees for time spent working for local charities. Flexible store format. Our flexible store format enables us to customize our stores to specific site characteristics and to meet the unique needs of a variety of markets. Our supermarket format stores are adapted in size and product selection to suburban markets and our urban format stores are designed to appeal in size and product selection to more densely populated urban markets. We believe that this flexible store format strategy allows us to operate successfully in a diverse set of markets, enabling us to reach a broader customer base and to increase our market penetration. Competitive pricing. We seek to offer products at prices which are at or below those of other natural foods stores. We have implemented a 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. We have also expanded our private label programs to include a large selection of high quality private label products under our "Wild Oats" and "A Wild Oats Down to Earth Value" lines at competitive prices. We believe these pricing programs broaden our consumer appeal and encourage our customers to fill more of their shopping needs at our stores. Motivated staff. We have 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, profitability and other financial performance criteria. In 1998, we introduced a new compensation program that includes the award of incentive stock options to all our full-time employees who have been with us for one year or more. In addition, we generally hire individuals dedicated to the concept of natural foods and a healthy lifestyle. We believe that these practices translate into a satisfied and motivated staff and a high level of customer service. Growth strategy Our growth strategy is to increase sales and income through: o acquisitions of independent and small chain natural foods store operators o opening of new stores o year over year comparable store sales growth We plan to open, acquire or relocate as many as 21 stores in 2000. We intend to continue our expansion strategy by increasing penetration in existing markets and expanding into new regions which we believe are currently underserved by natural foods retailers. While we believe that most of our store expansion will result from new store openings, we continue to evaluate acquisition opportunities in both existing and new markets. We have identified and are negotiating with several potential acquisition candidates. As of March 1, 2000, we have opened three new stores and relocated one store. We currently have leases or letters of intent signed for 18 additional new stores to be opened or relocated in the remainder of 2000 and in 2001, including six relocations of existing stores, as follows: 3 Projected Site Name Opening Date St. Louis, Missouri Opened January 2000 West Hartford, Connecticut* Opened February 2000 San Diego, California Opened February 2000 Reno, Nevada Opened February 2000 Kansas City, Kansas* Opened March 2000 Bend, Oregon 2000 Cincinnati, Ohio 2000 Cleveland, Ohio (two sites) 2000 Las Vegas, Nevada* 2000 Northern California 2000 Omaha, Nebraska 2000 Portland, Oregon 2000 Salt Lake City, Utah* 2000 San Diego, California 2000 South Florida (two sites)* 2000 Southern California (two sites) 2000 Texas 2000 Westport, Connecticut* 2000 Kansas City, Missouri 2001 Long Beach, California 2001 * Relocation Acquisition of assets of independent and small chain natural foods store operators. During 1999, we acquired 17 natural foods stores: seven in metropolitan Portland, Oregon; four in metropolitan Boston, Massachusetts; three in Tucson, Arizona; one each in Hartford (subsequently relocated in the first quarter of 2000) and Norwalk, Connecticut; and one in Melbourne, Florida. In 1998, we acquired seven natural foods stores in Nashville, Tennessee; Columbus, Ohio; New York, New York; Victoria, British Columbia; Santa Barbara, California; Little Rock, Arkansas and Boulder, Colorado. Stock-for-stock transactions with operators of natural foods stores. During 1999, we completed two stock-for-stock transactions, accounted for as poolings of interest, with the shareholders of the following natural foods store operators: Henry's Marketplace, which operated 11 natural foods stores, a bakery depot and a produce warehouse in metropolitan San Diego, California; and Sun Harvest Farms, which operated nine natural foods stores, a distribution warehouse, and through an affiliate, four small vitamin stores in San Antonio, Austin and other communities in Texas. In 1998, we completed two stock-for-stock transactions accounted for as poolings of interests with natural foods store operators who operated single stores in Columbus, Ohio, and in Little Rock, Arkansas. Opening of new stores. In 1999, we opened eight new stores in Phoenix, Arizona; San Diego, California (opened by Henry's); Hinsdale and Evanston, Illinois; Madison, New Jersey; Albuquerque, New Mexico; Tulsa, Oklahoma and Nashville, Tennessee, and relocated five stores in Phoenix, Arizona; Ft. Collins, Colorado; Portland, Oregon; Salt Lake City, Utah and Memphis, Tennessee. We also closed two Farm to Market stores in Tempe, Arizona and Buffalo Grove, Illinois. To date in 2000, we opened three new stores, relocated one store and closed two smaller stores. In 1998, we opened nine new stores in Santa Monica, California; Westminster, Colorado; Pinecrest and South Beach, Florida; Indianapolis, Indiana; Las Vegas, Nevada; Princeton, New Jersey and Dallas and San Antonio, Texas (opened by Sun Harvest), and relocated two stores, one each in Denver, Colorado and Columbus, Ohio. Year over year comparable store sales growth. We believe that historical growth in sales at our existing stores reflects continued strong growth in the natural foods industry as well as improved execution of our operating strategy. We continually seek to increase sales at our existing stores and have undertaken several initiatives designed to increase comparable store sales. We seek to attract new customers, generate repeat business and gradually increase the size of the average transaction by introducing, expanding and improving key merchandise 4 categories such as perishables (produce, deli and prepared foods) and private label products, as well as implementing expanded marketing programs and expanding customer service. Our comparable store sales results have been negatively affected in the past by planned cannibalization, which is the loss of sales at an existing store when we open a new store nearby, resulting from the implementation of our store clustering strategy. We expect that comparable sales increases will continue to be negatively affected in 2000 by planned cannibalization due to the opening of new or relocated stores in several of our existing markets, including, among others, Phoenix, Arizona; San Diego, California; Kansas City and St. Louis, Missouri; Las Vegas, Nevada; Albuquerque, New Mexico and Salt Lake City, Utah. There can be no assurance that comparable store sales for any particular period will not decrease in the future. Products We offer our customers a broad selection of unique, high-quality products that are natural alternatives to those found in conventional supermarkets. We typically do not offer well-known national conventional brands and focus instead on a comprehensive selection of lesser-known natural branded products within each category. Although the core merchandise assortment is similar at each of our stores, individual stores adapt the product mix to reflect local and regional preferences. Our 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, our 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, while in other markets, a store may focus more on bulk foods, produce and staple grocery items. We regularly introduce new high-quality and locally grown products in our merchandise selection to minimize overlap with products carried by conventional supermarkets. In addition, we intend to continue to expand and enhance our prepared food and in-store cafe environment. We believe that consumers are increasingly seeking convenient, healthy, "ready-to-eat" meals and that by increasing our commitment to this category we can provide an added service to our customers, broaden our customer base and further differentiate us from conventional supermarkets and traditional natural foods stores. Quality standards. Our objective is to offer products which meet the following standards: o free of preservatives, artificial colors, chemical additives and added hormones o organically grown, whenever possible o minimally processed o not tested on animals We continually evaluate new products, quality issues and controversial ingredients and frequently counsel store managers on compliance with our strict product standards. Private label. The natural foods industry is highly fragmented and characterized by many small independent vendors. As a result, we believe that our 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, we have developed a private label program in order to build brand loyalty to specific products based on our relationship with our customers and our reputation as a natural foods authority. Through this program, we have successfully introduced a number of high quality, unique private label products, such as cereals, breads, salad dressings, vitamins, chips, salsa, pretzels, cookies, juices, pasta, pasta sauces, oils and chocolate bars. We intend to continue to expand our private label product offerings on a selected basis, and anticipate doubling the number of private label stock-keeping units in the next twelve to eighteen months. In 1999, we introduced our "A Wild Oats Down to Earth Value" label of "staple" products, such as peanut butter, coffee, bottled water and paper products, to offer our customers quality natural products at competitive prices. Pricing. In general, natural and gourmet foods and related products have higher costs of production and correspondingly higher retail prices than conventional grocery items. Our pricing strategy has been to maintain prices that are at or below those of our natural foods competitors while educating our customers as to the higher quality and added value of our products so as to differentiate them from conventional products. Like most conventional supermarkets, we regularly feature dozens of sale items. Sale items are promoted through a variety of media, including direct mail, newspapers and in-store flyers. We regularly monitor the prices at natural foods and conventional supermarket competitors to ensure our prices remain competitive. 5 Company culture and store operations Company culture. Our culture is embodied in our "Five Areas of Responsibility": responsibility to our customers, our staff, our community, the environment and our bottom line. In particular, we believe that knowledgeable, satisfied and motivated staff members have a positive impact on store performance and overall profitability. We have made a substantial commitment to staff training, including the creation of "Wild Oats University," an in-house training program. We generally hire individuals dedicated to the concept of natural foods and a healthy lifestyle and seek to promote store-level employees to positions of increasing responsibility. Management and employees. Our stores are organized into 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 our senior management. The regional directors are responsible for, and frequently visit, their cluster of stores to monitor financial performance and ensure adherence to our operating standards. We maintain a staff of corporate level department specialists including Natural Living, Food Service, Produce, Meat/Poultry/Seafood and Grocery purchasing directors who manage centralized buying programs and assist with store-level merchandising, pricing and staff training to ensure company-wide adherence to product standards and store concept. Staff members at the store and home-office level participate in an incentive plan that ties compensation awards to the achievement of specified store-level or company-wide sales, profitability and other performance criteria. We also seek to foster enthusiasm and dedication in our staff members through comprehensive benefits packages including health and disability insurance, employer matching 401(k) plan and equity incentive plans that include the award of incentive stock options to all our full-time employees who have been with us for one year or more. Purchasing and distribution We have 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 their 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 our established product standards and allowing each store to benefit from our 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 we purchase products from approximately 8,000 suppliers, we purchase approximately 25% of the dollar value of the products sold in our stores from United Natural Foods Inc. ("UNFI"), a wholesale distributor that operates multiple warehouses nationwide and with whom we are in the second of a four-year buying agreement. We believe that UNFI has the capacity to service all of our existing stores as well as most of our future sites, although in 1999 UNFI experienced some problems with the consolidation of its eastern U.S. warehouse operations that resulted in its inability to supply us with sufficient product in certain categories so that some of our stores were out of stock on certain items. Recent changes in the upper management of UNFI have improved distribution operations and reduced the number of unfilled or partially filled orders. As a result of our rapid growth, we have been able to negotiate greater volume discounts with this distributor and certain other vendors. In 1999, we entered into a supply agreement with General Nutrition Products, Inc. ("GNP") under which GNP supplies us with certain private label vitamins and supplements. The agreement runs for three years, but is terminable by either party with advanced notice. We have no supply contracts with the majority of our smaller vendors, who could discontinue selling to us at any time. Although we believe that we could develop alternative sources of supply, any such termination may create a short-term disruption in store-level merchandise selection. We are a party to an interim buying agreement with a distributor in Vancouver, British Columbia, Canada under which we are obligated to purchase certain products from the distributor for certain of our Canadian stores, provided the purchase price is the lowest price offered by our various distributors in that region. Most products are delivered directly to our stores by vendors and distributors. We currently operate three warehouse facilities, one in Denver, Colorado, one in Los Angeles, California, and one in San Antonio, Texas, which receive and distribute truckload purchases of produce and grocery items and distribute products that cannot be delivered directly to the stores by outside vendors. We maintain a small fleet of local delivery vans and over-the-road trucks. As we enter new markets, we will review the need for additional warehouse and distribution facilities. 6 We operate seven commissary kitchens in Phoenix, Arizona; Los Angeles, California; Denver, Colorado; Las Vegas, Nevada; Santa Fe, New Mexico; Portland, Oregon and Vancouver, British Columbia, Canada, as well as a bakeries in Phoenix and Tucson, Arizona; San Diego, California and Denver, Colorado. These facilities produce deli food, take-out food, bakery products and certain private label items for sale in our stores. Each kitchen can make daily deliveries to stores within a hundred mile radius of the facility. We intend to add new kitchens as we expand into new markets. Marketing Our marketing programs have been primarily focused on in-store customer education and promoting product specials. We believe that our customers are more responsive to the quality of the shopping experience, issue-based marketing and word-of-mouth advertising than to price-based campaigns. As a result, we focus on consumer education and emphasize the benefits and quality of our products. We use a variety of media, including in-store flyers, informational brochures and signage that promote the depth of our merchandise selection, benefits of natural products and "down to earth" competitive prices. We also recognize the importance of building brand awareness within our trade area and advertise in traditional media outlets such as radio, newspapers, outdoor and direct mail to gain new customer trial and repeat business. When we first enter a new market, we execute an intense marketing campaign to build awareness of our new store and its selection of natural products. After the initial campaign, this advertising is supplemented by the marketing strategies described above. In 1999, we entered into a strategic alliance with eNutrition, Inc. under which eNutrition will have an exclusive right to market vitamins, supplements, sports nutrition products and certain personal care items through links from www.eNutrition.com to our website, www.wildoats.com. Wild Oats and eNutrition will also co-market each other's products, with the goal to boost the number of customers and sales from our website. Wild Oats may receive equity interests in eNutrition for our participation in co-marketing plans, and for achieving target levels of new customers who purchase from eNutrition's site by the link through our website. Our advertising costs historically have been less than 1.5% of sales. We operate a multifaceted annual promotional program to our vendors which allows for different degrees of promotional participation and commits vendors to full year marketing expenditures in advance. In exchange for participation in our promotional program, vendors receive access to national advertising programs, detailed feedback on volume movement and the ability for longer term production planning. Management information systems Our management information systems have been designed to provide detailed store-level financial data, including sales, gross margin, payroll and store contribution, to regional directors and store directors and to our headquarters on a timely basis. Currently, certain store-level accounting and inventory management systems are processed manually. We purchased a software system to convert the store level point-of-sale and pricing systems to one system and to track product movement, and have installed new hardware to run such software and implemented such systems in more than 95% of our stores, other than a majority of the stores acquired in 1999, to date. The Henry's stores in the metropolitan San Diego area use a different point-of-sale system that will be maintained independently. All newly opened stores will be using the new hardware and software systems going forward. We have implemented new, faster credit card processing systems company-wide to reduce transaction time at the cash register and the cost to us of individual credit card transactions. We have also implemented a wide-area network to allow faster data transmissions between our headquarters and stores, and between our stores and our credit card processor. The credit card processing system is fully operational in 80% of our stores, and the remaining stores currently using IBM cash register systems are targeted for conversion, with the exception of the stores in Canada and several of our smallest stores, by the end of the first quarter of 2000. In 1999, we standardized our timekeeping systems throughout our stores, and installed new software that now allows us to process payroll in-house instead of through a third-party processor. We believe that by handling payroll in house, we have greater accuracy in payroll processing, greater control over payroll and, in the future, we expect to realize a cost savings by not paying outside processing fees. 7 Competition Our competitors currently include other independent and multi-unit natural foods supermarkets, smaller traditional natural foods stores, conventional supermarkets and specialty grocery stores. While certain conventional supermarkets, smaller traditional natural foods stores and small specialty stores do not offer as complete a range of products as we do, they compete with us in one or more product categories. A number of other natural foods supermarkets offer a range of natural foods products similar to those offered in our stores. We believe 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. We believe that our primary competitor is Whole Foods Market, Inc., a publicly-traded company based in Texas. We currently compete directly with Whole Foods in California, Colorado, Florida, Illinois, Massachusetts, New Mexico and Texas. Employees As of March 1, 2000, we employed approximately 6,600 full-time individuals and 2,000 part-time individuals. Approximately 8,000 of our employees are engaged at the store-level and 600 are devoted to regional administrative and corporate activities. We believe that we maintain a good relationship with our employees. One small group of employees at one of our acquired stores was unionized at the time of the store's acquisition and continues to be unionized. We anticipate that in the future one or more of our stores may be the subject of attempted organizational campaigns by labor unions representing grocery industry workers, and that from time to time certain of our stores may be picketed by local labor unions relating to area wage and benefit standards. Three of our stores (including two Henry's stores in metropolitan San Diego, California) are currently being picketed relating to area standards. Item 2. PROPERTIES We currently lease approximately 29,500 square feet for our corporate office in Boulder, Colorado. The lease for the corporate headquarters expires in September 2003 and has two renewal options for an additional three years each. The rental payment is a fixed base rate. We lease all of our currently operating stores. We currently have letters of intent or leases signed for 18 sites projected to be opened in the remainder of 2000 and in 2001, including six relocations. In 1999, we acquired certain real property in Oregon in conjunction with the acquisition of an operating store, and an office building in San Antonio, Texas as part of the stock-for-stock transaction with Sun Harvest Farms, Inc. We have already sold the property under the store in Oregon in a sale-leaseback transaction. We anticipate that we will sell substantially all of the real property we currently own. Our leases typically provide for a 10- to 25-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. 8 Store locations The following map and store list show, as of December 31, 1999, the number of natural food grocery stores (excluding four small vitamin stores in Texas) that Wild Oats operates in each state and Canadian province and the cities in which Wild Oats stores are located: [MAP]
------------------------ ----------------------------- -------------------------- ------------------------------ Arizona Colorado Kansas Oklahoma Phoenix (2) Aurora Mission Tulsa Scottsdale Boulder (3) Tucson (3) Colorado Springs Massachusetts Oregon Denver (3) Andover Beaverton Arkansas Fort Collins Framingham Eugene (2) Little Rock Glendale Medford Lake Oswego Greenwood Village Saugus Portland (4) California Lakewood Berkeley Littleton Missouri Tennessee Encinitas Westminster Kansas City Memphis (2) Mission Viejo St. Louis Nashville (2) Laguna Beach Connecticut La Mesa Hartford Nevada Texas Los Angeles Norwalk Las Vegas (3) Austin (2) Pasadena Corpus Christie Poway Florida New Jersey Dallas Sacramento Boca Raton Princeton El Paso San Anselmo Fort Lauderdale Madison McAllen San Diego (6) Melbourne San Antonio (4) Santa Barbara Miami Beach New Mexico Santa Monica (2) Pinecrest Albuquerque (3) Utah Santee West Palm Beach Santa Fe (3) Salt Lake City (3) Solana Beach Sunnyvale Illinois New York Washington West Hollywood Evanston New York City Vancouver Hinsdale Ohio British Columbia, Canada Indiana Upper Arlington Vancouver (2) Indianapolis Victoria West Vancouver
9 Item 3. LEGAL PROCEEDINGS In August 1998, we filed Wild Oats Markets, Inc. v. Plaza Acquisition, Inc. in United States District Court for the Northern District of Illinois, Eastern Division, seeking recovery of $300,000 in tenant improvement allowances owed to us by our landlord for the build-out of our Buffalo Grove, Illinois store. The landlord counterclaimed for $1 million in damages, alleging that we breached covenants requiring construction to be completed by a certain date and other operating covenants. After we closed the Buffalo Grove store in May 1999, the landlord increased its counterclaim to $3 million, including accelerated rent resulting from an alleged breach of a continuous operations clause in the lease. However, because the lease requires us to pay percentage rent only until a certain level of gross sales is achieved, and because that level was never achieved, the actual amount of rent due, even if accelerated, cannot be determined at this time. We asserted several defenses to the counterclaim. Motions for summary judgment were filed by each party. Our motion was denied and the landlord's motion to accelerate rent was granted; however, at this time an assessment of damages, if any, to which the landlord may become entitled cannot be made for the reasons stated above. Alfalfa's Canada, Inc., our Canadian subsidiary, is a defendant in a suit brought in the Supreme Court of British Columbia, by one of its distributors, Waysafer Wholefoods Limited and one of its principals, seeking monetary damages for breach of contract and injunctive relief to enforce a buying agreement for three Canadian stores entered into by a predecessor of Alfalfa's Canada, Inc. The suit was filed in September 1996. In June 1998, we filed a Motion for Dismissal on the grounds that the contract in dispute constituted a restraint of trade. The Motion was subsequently denied. We do not believe our potential exposure in connection with the suit to be material. On February 17, 2000, we were named as defendant in Cornerstone III, LLC v. Wild Oats Markets, Inc., a suit filed in U.S. District Court for the Eastern District of Missouri by a former landlord who alleges that we breached our obligations under a lease agreement when we notified the landlord that we were exercising our rights under the lease to terminate after the landlord failed to turn over possession of the leased property within the time period provided for in the lease. The plaintiff seeks actual and punitive damages. We believe that we acted within our rights under the lease and intend to vigorously defend the suit. There are no other material pending legal proceedings to which we or our subsidiaries are a party. From time to time, we are involved in lawsuits that we consider to be in the normal course of our business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On October 22, 1999, Wild Oats held a special meeting of stockholders to vote on an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock to 60,000,000. The proposal was adopted, with 9,259,379 votes cast for and 2,743,008 votes cast against the matter. 18,393 votes abstained and there were no broker non-votes. PART II. Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the NASDAQ National Market under the symbol "OATS". The following are the quarterly high and low sales prices (adjusted for the 3-for-2 splits described below) for each quarter of the past two years: High Low First Quarter 1998 25.50 14.00 Second Quarter 1998 24.33 17.04 Third Quarter 1998 21.83 11.67 Fourth Quarter 1998 22.00 14.67 First Quarter 1999 21.33 14.67 Second Quarter 1999 20.50 16.50 Third Quarter 1999 27.42 20.04 Fourth Quarter 1999 28.50 17.44 10 As of March 1, 2000, Wild Oats' common stock was held by 681 stockholders of record. No cash dividends have been declared previously on our common stock, and we do not anticipate declaring a cash dividend in the near future. Our revolving line of credit facility contains restrictions on the payment of cash dividends without lender consent for so long as amounts remain unpaid under the facility. On January 7, 1998, and on December 1, 1999, Wild Oats effected 3-for-2 stock splits of its common stock for securities held of record as of December 22, 1997 and November 17, 1999, respectively. On December 15, 1999, we issued 888,903 shares of Wild Oats common stock to the stockholders of Sun Harvest Farms, Inc. and an affiliate in exchange for 100% of the outstanding stock of Sun Harvest and all of the partnership interests in the affiliate, in a transaction accounted for as a pooling-of-interests. The transaction was completed pursuant to an exemption from registration under Rule 506 of Regulation D, promulgated under the Securities Act of 1933, as amended. In accordance with Rule 506, no more than 35 purchasers received shares of the Company's stock, each purchaser who was not an accredited investor had sufficient knowledge and experience, alone or with a purchaser representative, to evaluate the investment, and all information required to be provided by the Company was provided. There were no cash proceeds from the transaction. 11 Item 6. SELECTED FINANCIAL DATA (In thousands, except per-share amounts and number of stores) The following data for the five fiscal years ended January 1, 2000, 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 report on Form 10-K.
Fiscal Year 1999 1998 1997 1996 1995 - - ---------------------------------------------------------------------------------------------------------------------- Statement of operations data: (unaudited) Sales $721,091 $530,726 $431,974 $299,567 $180,037 Cost of goods sold and occupancy costs 499,627 369,475 301,644 208,454 124,890 ---------- ---------- -------- --------- -------- Gross profit 221,464 161,251 130,330 91,113 55,147 Direct store expenses 155,869 113,094 96,448 69,485 42,486 ---------- ---------- --------- --------- -------- Store contribution 65,595 48,157 33,882 21,628 12,661 Selling, general and administrative expenses 27,939 20,026 16,314 12,361 8,657 Pre-opening expenses 2,767 3,449 1,149 1,863 1,037 Non-recurring expenses 12,642 393 7,035 ---------- ---------- --------- ------- Income from operations 22,247 24,289 16,419 369 2,967 Interest income (expense), net (4,280) (28) (622) (1,471) (867) ---------- ---------- --------- --------- -------- Income (loss) before income taxes 17,967 24,261 15,797 (1,102) 2,100 Income tax expense (benefit) 5,198 7,822 5,501 (120) 424 ---------- ---------- --------- --------- -------- Net income (loss) before cumulative effect of change in accounting principle 12,769 16,439 10,296 (982) 1,676 Cumulative effect of change in accounting principle, net of tax (1) 281 --------- Net income (loss) 12,488 16,439 10,296 (982) 1,676 Accretion of redeemable preferred stock 2,396 1,937 ---------- ---------- --------- --------- -------- Net income (loss) allocable to common stock $12,488 $16,439 $10,296 $(3,378) $(261) ========== ========== ========= ========= ======== Basic net income (loss) per common share $0.55 $0.73 $0.55 $(0.32) $(0.03) ========== ========== ========= ========= ======== Weighted average number of common shares outstanding 22,806 22,440 18,841 10,606 8,214 ========== ========== ========= ========= ======== Diluted net income (loss) per common share $0.53 $0.71 $0.53 $(0.32) $(0.03) ========== ========== ========= ========= ======== Weighted average number of common shares outstanding 23,467 23,079 19,425 10,606 8,214 ========== ========== ========= ========= ======== Number of stores at end of period 110 82 70 57 36 Balance sheet data: Working capital (deficit) $(20,971) $(5,281) $32,566 $5,998 $(3,035) Total assets 350,629 217,320 190,752 123,045 49,275 Long-term debt (including capitalized leases) 80,328 2,675 4,157 4,678 14,984 Redeemable convertible preferred stock 16,956 Stockholders' equity (deficit) 165,387 152,608 136,697 77,809 (4,376)
(1) In 1999 the Company recorded $281,000 in expenses associated with cumulative effect of change in accounting principle. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Preopening Expenses". 12 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report on Form 10-K contains certain forward-looking statements regarding our future results of operations and performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement Regarding Forward-Looking Statements." All information stated herein has been revised to reflect the stock-for-stock transactions, accounted for as poolings of interests, with Henry's and Sun Harvest, which were consummated on September 27, 1999 and December 15, 1999, respectively. The Company declared a 3-for-2 stock split for all stockholders of record on November 17, 1999, effective December 1, 1999. All shares and per-share information presented herein have been retroactively restated to reflect this stock split. Overview Store openings, closings, remodels, relocations and acquisitions. In 1999, we opened eight new stores in Phoenix, Arizona; San Diego, California (opened by Henry's); Evanston and Hinsdale, Illinois; Madison, New Jersey; Albuquerque, New Mexico; Tulsa, Oklahoma and Nashville, Tennessee, and relocated five stores in Phoenix, Arizona; Ft. Collins, Colorado; Portland, Oregon; Salt Lake City, Utah and Memphis, Tennessee. As of March 1, 2000, we have opened three new stores and relocated one new store. Also during 1999, we acquired 17 operating natural foods stores, including seven Nature's Fresh Northwest stores in metropolitan Portland, Oregon (of which one was subsequently relocated during the second quarter), four in Metropolitan Boston, Massachusetts, three in Tucson, Arizona, two in Norwalk and Hartford, Connecticut, and one in Melbourne, Florida. We also consummated two stock-for-stock transactions, accounted for as poolings of interest, which added 24 stores to our historic store base, including 11 Henry's Marketplace stores in metropolitan San Diego, California (one of which was opened in 1999 and is included in the number of new stores opened discussed herein) and nine Sun Harvest and four vitamin stores in San Antonio, Austin and other Texas communities. We plan to open, acquire or relocate as many as 16 stores in the remainder of 2000. We are actively looking for other acquisition opportunities and may complete additional acquisitions in 2000. We will continue to evaluate the profitability of all of our stores on an ongoing basis and may, from time to time, make decisions regarding closures, disposals, relocations or remodels in accordance with such evaluations. As a result of such evaluations, we closed two Farm to Market stores in Tempe, Arizona and Buffalo Grove, Illinois in 1999. In the first quarter of 2000, we closed our Dallas store for remodeling and reopening under the "Sun Harvest" tradename, and closed two of our smaller stores. During the first half of 2000, we plan to remodel as many as 25 of our existing, older stores to remerchandise and incorporate new features. Acquisitions. In 1999, we opened eight new stores (including one opened by Henry's) and acquired 17 stores, including: o Nature's Fresh Northwest, located in metropolitan Portland, Oregon, which owned seven operating natural foods stores and one site in development. Nature's had sales of approximately $58.3 million in 1998. The purchase price was approximately $40.0 million in cash and assumption by us of a $17.0 million promissory note payable to the seller. This acquisition was accounted for using the purchase method and the excess of cost over the fair value of the assets acquired and liabilities assumed of $29.5 million was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. o Four stores operated under the name "Wild Harvest" in metropolitan Boston, Massachusetts. The purchase price aggregated $12.5 million in cash. The acquisition was accounted for using the purchase method, and the excess of cost over the fair value of the assets acquired of $787,000 was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. We also consummated two stock-for-stock transactions, accounted for as poolings of interest, which added 20 natural food grocery stores and four small vitamin stores to our historic store base, with the following entities: o Henry's Marketplace, located in metropolitan San Diego, California, which owned 11 operating natural foods stores and one site in development. Henry's had sales of approximately $81.0 million in 1998. The merger consideration was 2,100,290 shares of Wild Oats' common stock. This transaction was accounted for as a pooling of interests. o Sun Harvest Farms and an affiliate, located in San Antonio, Austin and other Texas communities, which owned nine operating natural food stores and four vitamin stores. Sun Harvest Farms had sales of 13 approximately $50.8 million in sales in 1998. The merger consideration was 888,903 shares of Wild Oats' common stock. The transaction was accounted for as a pooling of interests. Our results of operations have been and will continue to be affected by, among other things, the number, timing and mix of store openings, acquisitions, relocations or closings. New stores build their sales volumes and refine their merchandise selection gradually and, as a result, generally have lower gross margins and higher operating expenses as a percentage of sales than more mature stores. We anticipate that the new stores opened in 1999 will experience operating losses for the first six to 12 months of operation, in accordance with historical trends. Further, acquired stores, while generally profitable as of the acquisition date, generate lower gross margins and store contribution margins than our company average due to their substantially lower volume purchasing discounts. Over time, typically six months, as we sell through the acquired inventories and are able to realize our volume purchase discounts, we expect that the gross margin and store contribution margin of the acquired stores will approach our company average. We anticipate that our current high concentration of acquired stores, including the Nature's, Henry's and Sun Harvest stores, will have a temporary negative impact on our consolidated results of operations. We are actively upgrading, remodeling or relocating some of our older stores. We plan to remodel or remerchandise as many as 25 of our older stores in the first half of 2000. Remodels and relocations typically cause short-term disruption in sales volume and related increases in certain expenses as a percentage of sales, such as payroll. Remodels on average take between 90 and 120 days to complete. We cannot predict whether sales disruptions and the related impact on earnings may be greater in time or volume than projected in certain remodeled or relocated stores. Store format and clustering strategy. We operate two store formats: supermarket and urban. The supermarket format is generally 15,000 to 35,000 gross square feet, and typically generates higher sales and store contribution than the urban format stores, which are generally 8,000 to 15,000 gross square feet. Our profitability has been and will continue to be affected by the mix of supermarket and urban format stores opened, acquired or relocated and whether stores are being opened in markets where we have an existing presence. We expect to focus primarily on opening, acquiring or relocating supermarket format stores in the future but will consider additional urban stores when appropriate opportunities arise. In addition, we pursue a strategy of clustering stores in each of our markets to increase overall sales, reduce operating costs and increase customer awareness. In the past, when we have opened a store in a market where we have an existing presence, our sales and operating results have declined at certain of our existing stores in that market. However, over time, we believe the affected stores generally will achieve store contribution margins comparable to prior levels on the lower base of sales. We intend to continue to pursue our store clustering strategy and expect the sales and operating results trends for other stores in an expanded market to continue to experience temporary declines related to the clustering of stores. Comparable store sales results. Sales of a store are deemed to be comparable commencing in the thirteenth full month of operations for new, relocated and acquired stores. A variety of factors affect our comparable store sales results, including, among others: o the opening of stores by us or by our competitors in markets where we have existing stores o the relative proportion of new or relocated stores to mature stores o the timing of promotional events o store remodels o our ability to execute our operating plans effectively o changes in consumer preferences for natural foods products o general economic conditions. Past increases in comparable store sales may not be indicative of future performance. Our comparable store sales results have been negatively affected in the past by planned cannibalization, which is the loss of sales at an existing store when we open a new store nearby, resulting from the implementation of our store clustering strategy. We expect that comparable sales increases will continue to be negatively affected in 2000 by planned cannibalization due to the opening of new or relocated stores in several of our existing markets, including, among others, Phoenix, Arizona; San Diego, California; Kansas City and St. Louis, Missouri; Las Vegas, Nevada; Albuquerque, New Mexico and Salt Lake City, Utah. As a result, we expect comparable store sales percentage increases to be flat to slightly negative for the first quarter of 2000, and to average in the low to mid- 14 single digits for the remainder of 2000. There can be no assurance that comparable store sales for any particular period will not decrease in the future. Pre-opening expenses. Pre-opening expenses include labor, rent, utilities, supplies and certain other costs incurred prior to a store's opening. Pre-opening expenses have averaged approximately $250,000 to $350,000 per store historically, although the amount per store may vary depending on the store format and whether the store is the first to be opened in a market, or is part of a cluster of stores in that market. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Accounting for Costs of Start-Up Activities. Statement of Position 98-5 requires that pre-opening costs be expensed as incurred. Statement of Position 98-5 is effective for fiscal years beginning after December 15, 1998, and the initial application should be reported as a cumulative effect of a change in accounting principle. We adopted Statement of Position 98-5 in fiscal 1999 and recorded approximately $281,000 as a cumulative effect of a change in accounting principle, net of taxes, during 1999. Results of Operations The following table sets forth for the periods indicated, certain selected income statement data expressed as a percentage of sales:
Fiscal Year Ended 1999 1998 1997 - - ----------------- --------- -------- ------- Sales 100.0% 100.0% 100.0% Cost of goods sold and occupancy costs 69.3 69.6 69.8 --------- -------- ------- Gross profit 30.7 30.4 30.2 Direct store expenses 21.6 21.3 22.4 --------- -------- ------- Store contribution 9.1 9.1 7.8 Selling, general and administrative expenses 3.9 3.8 3.7 Pre-opening expenses 0.4 0.6 0.3 Non-recurring expenses 1.8 0.1 --------- ------ Income from operations 3.0 4.6 3.8 Interest (expense), net (0.6) (0.1) --------- -------- -------- Income before income taxes 2.4 4.6 3.7 Income tax expense 0.7 1.5 1.3 --------- -------- ------- Net income before cumulative effect of change in accounting principle 1.7 3.1 2.4 Cumulative effect of change in accounting principle, net of taxes 0.1 ------ Net income 1.6% 3.1% 2.4% ========= ======== ========
Fiscal 1999 Compared to Fiscal 1998 Fiscal 1999 contained 52 weeks of operations as compared to 53 weeks in fiscal 1998. Sales Sales for the fiscal year ended January 1, 2000, increased 35.9% to $721.1 million from $530.7 million in 1998. The increase was primarily due to the acquisition of seventeen stores, the opening of eight new stores, and the relocation of five stores, as well as the inclusion of a full year of sales for the nine new stores opened and seven stores acquired in 1998. Comparable store sales increased 6% for 1999, as compared to 4% for 1998. Gross Profit Gross profit for the fiscal year ended January 1, 2000, increased 37.3% to $221.5 million from $161.3 million in 1998. The increase in gross profit is primarily attributable to the acquisition of seventeen stores and the opening of eight new stores. As a percentage of sales, gross profit increased to 30.7% in 1999 from 30.4% in 1998 due to the maturation of the Company's store base and the Company's increasing volume purchase discounts. 15 Direct Store Expenses Direct store expenses for the fiscal year ended January 1, 2000, increased 37.8% to $155.9 million from $113.1 million in 1998. The increase in direct store expenses is attributable to the increase in the number of stores operated by the Company. As a percentage of sales, direct store expenses increased to 21.6% in 1999 from 21.3% in 1998 due to the increased number of acquired and newly-opened stores in 1999 over 1998. Selling, General and Administrative Expenses Selling, general and administrative expenses for the fiscal year ended January 1, 2000, increased 39.5% to $27.9 million from $20.0 million in 1998. As a percentage of sales, selling, general and administrative expenses increased to 3.9% from 3.8% in 1998. The increases are primarily attributable to additions in the corporate and regional staff necessary to support the Company's growth. In addition, the Company moved its corporate office during the fourth quarter of 1998 to a larger facility to accommodate an increased support staff for its larger base of stores. There is a full year of additional selling, general and administrative expenses for rent and utilities on the new facility in 1999, as compared to one quarter in 1998. Pre-Opening Expenses As previously discussed herein, in April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of Start-Up Activities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Pre-Opening Expenses." Pre-opening expenses for the fiscal year ended January 1, 2000, decreased 19.8% to $2.8 million from $3.4 million in 1998. The decrease in pre-opening expenses is attributable to the decrease in the number of stores opened. As a percentage of sales, pre-opening expenses decreased to 0.4% from 0.6% due to the opening of eight new stores in 1999 as compared to nine new stores in 1998. Non-Recurring Expenses Non-recurring expenses for the fiscal year ended January 1, 2000, were $12.6 million, as compared to $393,000 in 1998. Non-recurring expenses of approximately $10.9 million were recorded in the first quarter of 1999 as the result of certain decisions by our management regarding our operations and selected store closures. The first decision was a change in our strategic direction with respect to our two Farm to Market stores located in Buffalo Grove, Illinois, and Tempe, Arizona which resulted in a non-recurring expense of $4.5 million. The second decision involved the reallocation of corporate resources to service new and existing stores, rather than closed sites which resulted in a non-recurring expense of $6.4 million. Components of the non-recurring charge consist primarily of non-cancelable lease obligations through the year 2000 in the amount of $1.2 million and abandonment of fixed and intangible assets in the amount of $9.7 million. There were also non-recurring expenses of $645,000 during the third quarter of 1999, and $1.1 million during the fourth quarter 1999, as a result of the poolings with Henry's and Sun Harvest. The components were primarily non-cancelable lease obligations and professional fees. The 1998 charge is attributed to employee severance costs, inventory and fixed asset write-downs, and lease cancellation costs associated with two poolings-of-interests transactions during 1998. Interest Expense, Net Net interest expense for the fiscal year ended January 1, 2000, increased to $4.3 million, from $28,000 in 1998. As a percentage of sales, net interest expense increased to 0.6% from less than 0.1% in 1998. The increase is primarily attributable to interest on borrowings on our line of credit to fund acquisitions and new stores. Fiscal 1998 Compared to Fiscal 1997 Fiscal 1998 contained 53 weeks of operations as compared to 52 weeks in fiscal 1997. Sales Sales for the fiscal year ended January 2, 1999, increased 22.8% to $530.7 million from $432.0 million in 1997. The increase was primarily due to the acquisition of seven stores, the opening of nine new stores, and the relocation of two stores, as well as the inclusion of a full year of sales for the five new stores opened and nine stores acquired in 1997. Comparable store sales increased 4% for 1998, as compared to 5% for 1997. Gross Profit Gross profit for the fiscal year ended January 2, 1999, increased 23.7% to $161.3 million from $130.3 million in 1997. The increase in gross profit is primarily attributable to the acquisition of seven stores and the opening of nine new stores. As a percentage of sales, gross profit increased to 30.4% in 1998 from 30.2% in 1997 due to the maturation of the Company's store base and the Company's increasing volume purchase discounts. Direct Store Expenses Direct store expenses for the fiscal year ended January 2, 1999, increased 17.3% to $113.1 million from $96.4 million in 1997. 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 21.3% from 22.4% in 1997 due to the matured performance of the new stores opened in 1997, as well as improved control of direct store expenses, particularly payroll and benefits costs. 16 Selling, General and Administrative Expenses Selling, general and administrative expenses for the fiscal year ended January 2, 1999, increased 22.7% to $20.0 million from $16.3 million in 1997. As a percentage of sales, selling, general and administrative expenses increased to 3.8% from 3.7% in 1997. The increases are the result of additional personnel costs in the information technology, marketing and purchasing departments needed to support our growth plans, as well as additional costs to distribute marketing materials to our customers. In addition, we moved our corporate office during the fourth quarter of 1998 to a larger facility to accommodate an increased support staff for our larger base of stores. There were additional selling, general and administrative expenses for rent and utilities on the new facility, as well as costs of relocating the information systems that we use. Pre-Opening Expenses Pre-opening expenses for the fiscal year ended January 2, 1999, increased 200.1% to $3.4 million from $1.1 million in 1997. The increase in pre-opening expenses is attributable to the increase in the number of stores opened or relocated. As a percentage of sales, pre-opening expenses increased to 0.6% from 0.3% due to the delayed opening of two stores resulting in additional pre-opening costs primarily in the form of rental payments, as well as the opening of nine new stores in 1998 as compared to five new stores in 1997. Non-Recurring Expenses Non-recurring expenses for the fiscal year ended January 2, 1999, were $393,000, as compared to no non-recurring expenses in 1997. The change is attributed to employee severance costs, inventory and fixed asset write-downs, and lease cancellation costs associated with two poolings-of-interests transactions during 1998. Interest Expense, Net Net interest expense for the fiscal year ended January 2, 1999, decreased 95.4% to $28,000, from $622,000 in 1997. As a percentage of sales, net interest expense decreased to less than 0.1% from 0.1% in 1997. The decrease is attributable to the investment of the net proceeds from the Company's public equity offering in December 1997 and to lower levels of indebtedness incurred to fund new store openings and acquisitions. Liquidity and Capital Resources Our primary sources of capital have been cash flow from operations, trade payables, bank indebtedness, and the sale of equity securities. Primary uses of cash have been the financing of new store development, new store openings, relocations, remodels, acquisitions and purchases of real property. Net cash provided by operating activities was $53.9 million during 1999 as compared to $32.1 million during 1998. Cash provided by operating activities increased during this period primarily due to increases in net income before depreciation and amortization expense and non-recurring expenses. Net cash provided by operating activities was $32.1 million during 1998 and $23.6 million during 1997. Cash provided by operating activities increased during this period primarily as a result of an increase in net income before depreciation and amortization expense and increases in accounts payable and accrued liabilities. We have not required significant external financing to support inventory requirements at our existing and new stores because we have been able to rely on vendor financing for most of the inventory costs, and we anticipate that vendor financing will continue to be available for new store openings. Net cash used by investing activities was $120.0 million during 1999 as compared to $63.5 million during the same period in 1998. The increase is due to the opening of eight new stores, the acquisition of 17 stores, the relocation of five stores and several store remodels in 1999, as compared to nine new stores, one relocated store and seven acquired stores in 1998 and the construction costs incurred for new stores in development which opened during 1999. Net cash used by investing activities was $40.9 million during 1997 due to the acquisition of nine stores and the opening of five new stores during 1997, the purchase of real property and the construction costs incurred for six new stores in development which opened during the first nine months of 1998. Net cash provided by financing activities was $76.0 million during 1999 as compared to $4.0 million net cash used during 1998. The increase reflects increased borrowing under our revolving line of credit, as well as repayment of a $17.5 million debt. Net cash used by financing activities was $4.0 million during 1998 and net cash provided by financing activities was $46.4 million during 1997. The fluctuation was primarily due to net proceeds of $46.5 million from the sale of 3.2 million shares of our common stock pursuant to a public equity offering in December 1997. 17 We have a $120.0 million revolving credit facility. The facility has two separate lines of credit, one in the amount of $90.0 million with a three-year term expiring in 2002 and the other in the amount of $30.0 million with a one-year term, expiring in May 2000. Both bear interest, at our option, at the prime rate or LIBOR plus 1.15%. The line of credit agreement includes certain financial and other covenants, as well as restrictions on payments of dividends. As of December 31, 1999, there were $79.7 million in borrowings outstanding under the $90.0 million line of this facility and $15.5 million in borrowings outstanding under the $30.0 million line. We are currently negotiating with our bank group to increase the commitment under the revolving credit facility to $180.0 million. We spent approximately $63 million during 1999 for new store construction, purchases of real property and leasehold interests, development, remodels and maintenance capital expenditures, exclusive of acquisitions, and anticipate that we will spend $60 to $65 million in 2000 for new store construction, equipment, leasehold improvements, remodels and maintenance capital expenditures, relocations of existing stores and purchases of leasehold interests, exclusive of acquisitions. Our average capital expenditures to open a leased store, including leasehold improvements, equipment and fixtures, have ranged from approximately $2.0 million to $3.0 million historically, excluding inventory costs and initial operating losses. Delays in opening new stores may result in increased capital expenditures, increased pre-opening costs and lower sales. We opened two stores on owned property in the second quarter of 1999, acquired a third operating store and the underlying property in the second quarter of 1999 as part of the acquisition of the outstanding stock of Nature's Fresh Northwest and acquired an office building in the fourth quarter of 1999 as part of the pooling of interests transaction with Sun Harvest Farms, Inc. Acquisition of real property and construction of stores requires substantially greater cash outlays than the remodeling of existing leased buildings (i.e., $3.5 to $9.0 million as compared to $2.0 to $3.0 million). We sold three parcels in sale-leaseback transactions and plan to sell the office building and a remaining vacant parcel in sale transactions. The cost of initial inventory for a new store has historically been approximately $500,000 to $600,000; however, we obtain vendor financing for most of this cost. Pre-opening costs currently are approximately $250,000 to $350,000 per store and are expensed as incurred. The amounts and timing of such pre-opening costs will depend upon the availability of new store sites and other factors, including the location of the store and whether it is in a new or existing market for us, the size of the store, and the required build-out at the site. Costs to acquire future stores, if any, are impossible to predict and could vary materially from the cost to open new stores. There can be no assurance that actual capital expenditures will not exceed anticipated levels. We believe that cash generated from operations and funds available under our revolving line of credit will be sufficient to satisfy our cash requirements, exclusive of additional acquisitions, through 2000. New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. FAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 1999, the FASB issued FAS No. 137 which defers the effective date of FAS No. 133 to fiscal years beginning after June 15, 2000. The Company will adopt FAS No. 137 in the first quarter of fiscal 2001, but does not expect such adoption to materially affect financial statement presentation. Year 2000 readiness statement Information technologies. We recognize the need to ensure that our operations will not be adversely affected by Year 2000 software or hardware failures that may occur through the first half of the Year 2000. We have determined that all components of our major software and hardware systems at our corporate headquarters are Year 2000 compliant, and as of the date of this Report, we have experienced no material disruptions in operations of such systems. All but two of our stores contain point-of-sale systems, such as cash registers and scanners, that are also Year 2000 compliant, including those recently acquired or added through stock-for-stock transactions in 1999. Total replacement and installation cost to date has been approximately $5.25 million. The financial impact to us of further investments is not anticipated to be material. 18 Vendors, suppliers and service providers. We have received confirmation from a majority of our major suppliers, service providers, and financial institutions that they are Year 2000 compliant. We experienced no material disruptions as of January 1, 2000 in product supplies. Many of our product vendors are smaller businesses that have not considered the impact of Year 2000 noncompliance and therefore have not taken steps to ensure compliance. To the extent that product vendors' manufacturing or distribution systems fail as a result of Year 2000 noncompliance, certain products carried by our stores could become unavailable, resulting in decreases in operating revenues, although in many circumstances alternative local vendors' products may be available. One of our largest distributors has upgraded or replaced the majority of its technology infrastructure and devices that had embedded computer chips with compliant systems and devices. At this time, we cannot evaluate the magnitude of the impact that a failure by that distributor to successfully install compliant systems could have on our operations. A failure in the distributor's warehouse facilities could affect our ability to stock product in certain of our stores, resulting in lower sales revenues in those stores. There were no major failures in the operating systems of our financial institutions as of January 1, 2000. If our financial institutions are not Year 2000 compliant, a failure in their operating system could result in our temporary inability to access necessary cash resources required for operations; we expect that normal store operations, however, will generate sufficient revenues to cover daily operating needs. Our credit card processor has confirmed to us that it has adapted its systems to accept credit cards issued with expiration dates of 2000 and beyond and has also completed implementation of all phases of its compliance program in accordance with guidelines of the Federal Financial Institutions Examination Council and to date there have been no disruptions in credit card processing. Mechanical systems. There was little impact on store operations due to Year 2000 noncompliance in mechanical systems as of January 1, 2000. We do not anticipate that any major store mechanical systems will require replacement because of Year 2000 compliance concerns or that noncompliance of any mechanical systems will have any material effect on store operations. The dollar value of perishable goods that could be affected by a failure in refrigerated systems is small in comparison to the total inventory of any one store. The estimates and conclusions regarding Year 2000 impact contained above are forward-looking statements based on our best estimates of future events. Actual results may differ due to certain risks and uncertainties that we cannot, at this time, predict. Cautionary Statement Regarding Forward-Looking Statements This Report on Form 10-K contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, that involve known and unknown risks. Such forward-looking statements include statements as to the Company's plans to acquire, open or relocate additional stores, the anticipated performance of such stores, the impact of competition and other statements containing words such as "believes," "anticipates," "estimates," "expects," "may," "intends" and words of similar import or statements of management's opinion. These forward-looking statements and assumptions involve known and unknown risks, uncertainties and other factors that may cause the actual results, market performance or achievements of the Company to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause such differences include, but are not limited to, changes in economic or business conditions in general or affecting the natural foods industry in particular, changes in product supply, changes in the competitive environment in which the Company operates, competition for and the availability of sites for new stores and potential acquisition candidates, changes in the Company's management information needs, changes in customer needs and expectations and governmental actions. The Company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this Report. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 19 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per-share amounts) January 1, January 2, December 27, Fiscal Year Ended 2000 1999 1997 - - --------------------------------------------------------------------------------------------------------------------- Sales $721,091 $530,726 $431,974 Cost of goods sold and occupancy costs 499,627 369,475 301,644 ---------- --------- --------- Gross profit 221,464 161,251 130,330 Operating expenses Direct store expenses 155,869 113,094 96,448 Selling, general and administrative expenses 27,939 20,026 16,314 Pre-opening expenses 2,767 3,449 1,149 Non-recurring expenses 12,642 393 ---------- -------- Income from operations 22,247 24,289 16,419 Interest income 304 975 309 Interest expense (4,584) (1,003) (931) --------- --------- --------- Income before income taxes 17,967 24,261 15,797 Income tax expense 5,198 7,822 5,501 ---------- --------- --------- Net income before cumulative effect of change in accounting principle 12,769 16,439 10,296 Cumulative effect of change in accounting principle, net of tax 281 --------- Net income 12,488 16,439 10,296 Other comprehensive income Foreign currency translation adjustment, net 510 22 (46) ---------- --------- --------- Comprehensive income $12,998 $16,461 $10,250 ========== ========= ========= Basic net income per common share: Net income before cumulative effect of change in accounting principle $0.56 $ 0.73 $ 0.55 Cumulative effect of change in accounting principle, net of tax (0.01) ---------- Net income $0.55 $0.73 $0.55 ========== ========= ========= Diluted net income per common share: Net income before cumulative effect of change in accounting principle $0.54 $0.71 $0.53 Cumulative effect of change in accounting principle, net of tax (0.01) ---------- Net income $0.53 $0.71 $0.53 ========== ========= ========= Weighted average number of common shares outstanding 22,806 22,440 18,841 ========== ========= ========= Weighted average number of common shares outstanding assuming dilution 23,467 23,079 19,425 ========== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 20
CONSOLIDATED BALANCE SHEET (In thousands, except share amounts) January 1, January 2, 2000 1999 - - ---------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $21,877 $11,389 Inventories 51,412 36,206 Accounts receivable (net of allowance for doubtful accounts of $259 and $159) 2,159 2,257 Income tax receivable 520 Prepaid expenses and other current assets 2,424 2,552 Deferred income taxes 1,775 812 ---------- --------- Total current assets 80,167 53,216 Property and equipment, net 156,156 106,804 Long-term equity investment 1,500 Intangible assets, net 108,734 56,018 Deposits and other assets 4,072 1,282 ---------- --------- $350,629 $217,320 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $48,048 $35,991 Accrued liabilities 30,381 14,386 Current portion of debt and capital leases 22,709 8,120 ---------- --------- Total current liabilities 101,138 58,497 Long-term debt and capital leases 80,328 2,675 Deferred income taxes 1,185 1,958 Other long-term obligations 2,591 1,582 ---------- --------- 185,242 64,712 ---------- --------- Commitments and contingencies Stockholders' equity: Common stock; $.001 par value; 60,000,000 shares authorized; 22,992,437 and 22,606,019 issued and outstanding 23 23 Additional paid-in capital 148,307 142,774 Retained earnings 16,656 9,920 Accumulated other comprehensive income (loss) 401 (109) ---------- ---------- Total stockholders' equity 165,387 152,608 ---------- --------- $350,629 $217,320 ========== =========
The accompanying notes are an integral part of these consolidated financial statements. 21
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except share and per-share amounts) ---------------------------------------------------------------------------------------------------- Retained Accumulated Additional Earnings Other Total Common Stock Paid In (Accumulated Comprehensive Stockholders' ----------------- Capital Deficit) Income (Loss) Equity Shares Amount ---------------------------------------------------------------------------------------------------- Balance at December 28, 1996 18,459,099 $18 $88,467 $(10,083) $(85) $78,317 Equity transactions of pooled companies (2,219) (2,219) Issuance of common stock ($7.11 to $9.45 per 152,346 1,117 1,117 share) Public offering of common stock ($14.99 per share), net of 3,125,313 3 46,535 46,538 issuance costs Common stock options and warrants exercised ($1.77 to $8.45 per share) 371,391 1 2,693 2,694 Net income 10,296 10,296 Foreign currency translation adjustment (46) (46) __________ ___ _______ _________ _____ _______ Balance at December 27, 1997 22,108,149 22 138,812 (2,006) (131) 136,697 Pooling-of-interests 200,045 60 188 248 transactions Equity transactions of pooled companies (4,701) (4,701) Issuance of common stock ($9.63 to $20.33 per 69,846 1,096 1,096 share) Common stock options exercised ($3.13 to $16.00 227,979 1 2,806 2,807 per share) Net income 16,439 16,439 Foreign currency translation adjustment 22 22 __________ ___ _______ _________ _____ _______ Balance at January 2, 1999 22,606,019 23 142,774 9,920 (109) 152,608 Equity transactions of pooled companies 104 (5,752) (5,648) Issuance of common stock ($16.72 to $18.92 per 131,239 2,104 2,104 share), net of issuance costs Common stock options exercised ($3.13 to $19.79 255,179 3,325 3,325 per share) Net income 12,488 12,488 Foreign currency translation adjustment 510 510 __________ ___ _______ _________ _____ _______ Balance at January 1, 2000 22,992,437 $23 $148,307 $ 16,656 $ 401 $ 165,387 ========== ===== ======== ========= ======== ==========
The accompanying notes are an integral part of these consolidated financial statements. 22
CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands, except share amounts) January 1, January 2, December 27, Fiscal Year Ended 2000 1999 1997 - - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 12,488 $ 16,439 $ 10,296 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,613 15,525 11,118 Loss (gain) on disposal of property and equipment and settlement of property-related obligations 14 (829) (1,060) Deferred tax provision (benefit) (1,409) 406 1,737 Deferred severance Non-recurring expenses 1,868 476 Change in assets and liabilities, net of acquisitions: Inventories, net (7,569) (6,504) (4,024) Receivables, net and other assets (2,417) (2,215) (533) Accounts payable 12,057 7,202 4,499 ------- ------- ------- Accrued liabilities 7,261 2,046 1,045 Net cash provided by operating activities 53,906 32,070 23,554 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (62,592) (56,448) (27,459) Acquisitions, net of cash acquired (77,779) (10,481) (14,003) Proceeds from sale of property and equipment 21,902 3,408 566 Long-term equity investment (1,500) Net cash used by investing activities (119,969) (63,521) (40,896) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds on line of credit, net 95,200 Proceeds from notes payable and long-term debt 1,538 1,720 2,497 Payments on notes payable, long-term debt and capitalized (18,810) (3,041) (3,570) leases 3,865 2,003 49,705 Proceeds from issuance of common stock, net Distributions to stockholders, net (5,752) (4,726) (2,244) --------- -------- -------- Net cash provided (used) by financing activities 76,041 (4,044) 46,388 --------- -------- -------- Effect of exchange rates on cash 510 62 (46) --------- -------- -------- Net increase (decrease) in cash and cash equivalents 10,488 (35,433) 29,000 Cash and cash equivalents at beginning of year 11,389 46,822 17,822 --------- -------- -------- Cash and cash equivalents at end of year $ 21,877 $ 11,389 $ 46,822 ========== ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 3,570 $ 897 $ 891 ========== ========== ========== Cash paid for income taxes $ 2,097 $ 6,370 $ 2,505 ========== ========== ========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Short-term note payable issued for acquisition $ 3,150 ========= Common stock issued and total debt and liabilities assumed in acquisitions $ 1,668 $ 488 $ 3,400 ======== ========== =========
In addition, the Company issued 2,989,193 and 200,045 shares as consideration for poolings of interests transactions in 1999 and 1998, respectively. The accompanying notes are an integral part of these consolidated financial statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies Organization Wild Oats Markets, Inc. ("Wild Oats" or the "Company"), headquartered in Boulder, Colorado, owns and operates natural foods supermarkets in the United States and Canada. The Company also operates bakeries, commissary kitchens, and warehouses that supply the retail stores. The Company's operations are concentrated in one market segment, grocery stores, and are geographically concentrated in the western and central United States. Management considers a downturn in this market segment and geographic location to be unlikely. Basis of Presentation Certain amounts in the prior years' financial statements have been reclassified to conform to the current year presentation. Principles of Consolidation The Company's 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-week period in a 53-week year. Fiscal year 1998 was a 53-week period, and fiscal years 1997 and 1999 were 52-week periods. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Such cash equivalents aggregated $2.1 million at January 1, 2000 and January 2, 1999. 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. Property and Equipment 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. Upon sale or retirement of assets, the cost and related accumulated depreciation or amortization are eliminated from the respective accounts and any resulting gains or losses are reflected in operations. 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 $7.1 million and $4.4 million at January 1, 2000 and January 2, 1999, respectively. Management periodically evaluates the recoverability of intangibles, which would be adjusted for a permanent decline in value, if any, by comparing anticipated undiscounted future cash flows from operations to net book value. Pre-Opening Expenses Beginning in fiscal year 1999, the Company adopted SOP 98-5, Accounting for the Costs of Start-Up Activities, which requires that pre-opening costs be expensed as incurred and was effective for fiscal years beginning after December 15, 1998. The Company recorded $281,000 as a cumulative effect of change in accounting principle, net of taxes, during the first quarter of 1999. Through fiscal 1998, pre-opening expenses were deferred until the store's opening date, at which time such costs were expensed in full. Pre-opening expenses are included in other current assets and consist primarily of labor costs, marketing, rent, utilities, supplies, and other expenses incurred in connection with the opening of a new store. Beginning in fiscal 1999, pre-opening expenses were recognized as incurred. 24 Concentration of Risk The Company purchases approximately one-quarter of its cost of goods sold from one vendor. The Company's reliance on this supplier can be shifted, over a period of time, to alternative sources of supply, should such changes be necessary. However, if the Company could not obtain products from this supplier for factors beyond its control, the Company's operations would be disrupted in the short term while alternative sources of product were secured. Advertising Advertising is expensed as incurred. Advertising expense was $7.3 million, $6.8 million, and $7.0 million for 1999, 1998 and 1997, 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 assets and liabilities at the exchange rate as of the balance sheet date. Income and expense accounts are translated at average exchange rates for the year. Adjustments resulting from the translation are reflected as a separate component of other comprehensive income. Earnings Per Share Basic earnings per share is based on the weighted-average number of common shares outstanding, and diluted earnings per share is based on the weighted-average number of common shares outstanding and all dilutive potential common shares outstanding, except where the effect of their inclusion would be antidilutive. A reconciliation of the basic and diluted per-share computations is as follows (in thousands, except per-share data):
Jan. 1, Jan. 2, Dec. 27, Fiscal Year Ended 2000 1999 1997 - - ------------------------------------ ---------- --------- -------- Basic earnings per common share computation: Net income $12,488 $16,439 $10,296 Basic net income per common share: Net income before cumulative effect of change in accounting principle $0.56 $0.73 $0.55 Cumulative effect of change in accounting principle, net of tax (0.01) --------- Net income 0.55 $0.73 $0.55 ========== ========= ========= Diluted net income per common share: Net income before cumulative effect of change in accounting principle $0.54 $0.71 $0.53 Cumulative effect of change in accounting principle, net of tax (0.01) --------- Net income $0.53 $0.71 $0.53 ========== ========= ========= Weighted average number of common shares outstanding 22,806 22,440 18,841 Incremental shares from assumed conversions: Stock options 661 639 584 ---------- --------- --------- Weighted average number of common shares outstanding assuming dilution 23,467 23,079 19,425 ========== ========= =========
25 New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. FAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 1999, the FASB issued FAS No. 137 which defers the effective date of FAS No. 133 to fiscal years beginning after June 15, 2000. The Company will adopt FAS No. 137 in the first quarter of fiscal 2001, but does not expect such adoption to materially affect financial statement presentation. 2. Business Combinations 1999 Poolings of Interests On December 15, 1999, the Company issued approximately 890,000 shares of common stock in exchange for all of the outstanding stock of Sun Harvest Farms, Inc. and an affiliate in a transaction accounted for as a pooling of interests. Accordingly, the financial position, results of operations and cash flows of Sun Harvest have been combined with those of the Company in these financial statements. Certain reclassifications have been made to the prior financial statements of Sun Harvest to conform with the Company's financial presentations and policies. There were no intercompany transactions between the Company and Sun Harvest for all periods presented. On September 27, 1999, the Company issued approximately 2.1 million shares of common stock in exchange for all of the outstanding stock of Henry's Marketplace, Inc. in a transaction accounted for as a pooling of interests. Accordingly, the financial position, results of operations and cash flows of Henry's have been combined with those of the Company in these financial statements. Certain reclassifications have been made to the prior financial statements of Henry's to conform with the Company's financial presentation and policies. There were no intercompany transactions between the Company and Henry's for all periods presented. Results of Pooled Company Prior to Transaction Separate results of operations for the Company's, Henrys', and Sun Harvest's (including the affiliated entity) operations for the periods prior to the transaction are as follows (in thousands): Jan. 1, Jan. 2, Dec. 27, Fiscal Year Ended 2000 1999 1997 - - ----------------- ------- ------- ------- Sales: Wild Oats $593,109 $398,857 $311,077 Henry's 74,979 81,026 72,776 Sun Harvest 53,003 50,843 48,121 ------- ------- ------- Combined $721,091 $530,726 $431,974 ======= ======= ======= Net Income: Wild Oats $7,355 $ 11,648 $ 7,036 Henry's 3,542 3,859 2,411 Sun Harvest 1,591 932 849 ------- ------- ------- Combined $ 12,488 $ 16,439 $ 10,296 ======= ======= ======= Other Changes in Stockholders' Equity: Wild Oats $5,939 $4,173 $ 50,304 Henry's (4,450) (3,565) (1,653) Sun Harvest (1,198) (1,136) (567) ------- ------- ------- Combined $ 291 $ (528) $ 48,084 ======= ======= ======= Purchase Transactions On November 15, 1999, the Company acquired the assets and operations of four operating natural food supermarkets located in metropolitan Boston, Massachusetts, for a purchase price of $12.5 million in cash. The 26 acquisition was accounted for using the purchase method and the excess of cost over the fair value of the assets acquired of $787,000 was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. On May 29, 1999, the Company acquired all of the outstanding stock of Nature's Fresh Northwest, Inc., a Delaware corporation that owned seven operating natural food stores, one new site and one relocation in development in metropolitan Portland, Oregon. The purchase price for this acquisition aggregated $40.0 million in cash, including the assumption by the Company of a $17.0 million promissory note owed by Nature's to the seller. The acquisition was accounted for using the purchase method and the excess of cost over the fair value of the assets acquired and liabilities assumed of $33.5 million was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. Since the acquisition, goodwill has been adjusted to $29.5 million to reflect reductions in the promissory note and differences in the book and tax basis of assets. On April 30, 1999, the Company acquired the operations of three existing natural foods supermarkets in Norwalk and Hartford, Connecticut and Melbourne, Florida. The purchase price for this acquisition aggregated $6.6 million in cash. The acquisition was accounted for using the purchase method, and the excess of cost over the fair value of the assets acquired and liabilities assumed of $6.1 million was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. On February 1, 1999, the Company acquired the operations of three existing natural foods supermarkets in Tucson, Arizona. The purchase price for this acquisition aggregated $18.4 million in cash. The acquisition was accounted for using the purchase method, and the excess of cost over the fair value of the assets acquired of $17.0 million was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. The fair values of the purchased assets and liabilities of these purchased acquisitions are as follows (in thousands): Current assets ($697 of cash) $8,912 Equipment 26,604 Building and land 9,153 Other assets 89 Liabilities (24,730) Goodwill 57,352 ------ $77,380 ====== 1998 In January, May, June and December 1998, in four separate transactions, the Company acquired the assets and assumed certain liabilities of five operating natural foods supermarkets in Nashville, Tennessee; New York, New York; Santa Barbara, California; Victoria, British Columbia, Canada and Boulder, Colorado. The purchase price for these acquisitions aggregated $10.6 million in cash and a note payable of $3.1 million that was repaid in full in January 1999 (see Note 5). The acquisitions were accounted for using the purchase method, and the excess of cost over the fair value of the assets acquired of $12.0 million was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. The fair values of the acquired assets and liabilities of these acquisitions are as follows (in thousands): Current assets ($127 of cash) $1,304 Equipment 1,397 Other assets 25 Liabilities (1,022) Goodwill 12,014 ------ $13,718 ====== Also during 1998, the Company issued 200,045 shares of the Company's common stock in exchange for all of the common stock of two companies operating natural foods grocery stores in Columbus, Ohio and Little Rock, Arkansas. These acquisitions were accounted for as poolings of interests, and accordingly, the Company's consolidated financial statements for 1998 include the operations of the stores for the entire year, adjusted to conform with the Company's accounting policies and presentation. The Company's financial statements prior to 1998 were not restated to include the results of these pooling transactions as the effect is immaterial. Non-recurring, acquisition-related expenses of $393,000 were recorded in conjunction with the poolings. 1997 In February, March and June 1997, in four separate transactions, the Company acquired the assets and assumed certain liabilities of nine operating natural foods supermarkets: two in south Florida, two in Eugene, Oregon, two in 27 Memphis, Tennessee, and three in Phoenix and Scottsdale, Arizona. The purchase price for these acquisitions aggregated $15.0 million and consisted of $14.0 million in cash and 137,690 shares of the Company's common stock. The acquisitions were accounted for using the purchase method, and the excess of cost over the fair value of the assets acquired of $10.3 million was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. The fair values of the acquired assets and liabilities of these acquisitions are as follows (in thousands): Current assets ($27 of cash) $3,304 Equipment 3,782 Other assets 23 Liabilities (2,460) Goodwill 10,338 ------ $14,987 ====== The following unaudited pro forma combined results of operations of the Company and the acquired businesses discussed above have been prepared as if the transactions occurred as of the beginning of the respective periods presented (in thousands): Jan. 1, Jan. 2, Dec. 27, Fiscal Year Ended 2000 1999 1997 - - ----------------- -------- --------- ------ Sales $794,848 $693,083 $482,121 Net income 17,613 16,671 9,889 Basic earnings per share $0.77 $0.75 $0.52 Diluted earnings per share $0.75 $0.73 $0.51 The unaudited pro forma results above are not necessarily representative of the actual results that would have occurred or may occur in the future, if the transactions had been in effect on the dates indicated. The pre-acquisition historical results of the acquired businesses discussed above are not reflected in the Company's historical financial statements. 3. Property and Equipment Property and equipment consist of the following (in thousands): Jan. 1, Jan. 2, 2000 1999 ---------- -------- Machinery and equipment $101,585 $70,309 Leasehold improvements 60,977 45,369 Land and building 13,322 11,492 Construction in progress 35,157 17,609 ---------- --------- Less accumulated depreciation 211,041 144,779 and amortization (54,885) (37,975) ---------- ---------- $156,156 $106,804 ========== ========= Depreciation and amortization expense related to property and equipment totaled approximately $20.0 million, $14.3 million and $8.0 million in 1999, 1998 and 1997, respectively. Property and equipment includes approximately $776,000 of interest capitalized during fiscal year 1999. No interest was capitalized during fiscal years 1998 and 1997. The amounts shown above include $969,000 of machinery and equipment which are accounted for as capitalized leases and which have accumulated amortization of $275,000 at January 1, 2000. There were no fixed assets accounted for as capitalized leases as of January 2, 1999. 4. Accrued Liabilities Accrued liabilities consist of the following (in thousands): Jan. 1, Jan. 2, 2000 1999 ---------- ------- Wages and employee costs $14,370 $6,563 Sales and personal property taxes 3,565 2,283 Real estate costs 4,984 1,750 Deferred charges and other accruals 7,462 3,790 ------ ------ $30,381 $14,386 ====== ====== 28 5. Notes Payable and Long-Term Debt Long-term debt outstanding consists of the following (in thousands):
Jan. 1, Jan. 2, 2000 1999 ----------- ----------- Notes payable to corporations and individuals: Due January 5, 1999, bearing no interest, secured by inventory and fixed assets $ 3,150 Notes payable to bank and lending institutions payable in monthly installments ranging from $632 to $10,992, including interest ranging from 8.0% to 14.55% per annum at January 2, 1999, due dates ranging from June 1, 1998 through January 3,668 29, 2003, secured by equipment Unsecured notes payable in monthly installments ranging from $3,805 to $14,311, including interest ranging from 6.0% to 14.75% per annum at January 2, 1999, due dates ranging from December 18,1999 through July 18, 2001 311 Note payable to a related party, unsecured, interest of 10.0% at January 2, 1999, payable in monthly installments of $1,366, including interest through October 1, 2005 80 Note payable to bank ($2,675,000) in monthly principal and interest installments of $40,000 at a financial institution's prime (8.25% at September 28, 1999) beginning February 5, 1995 through January 5, 2000; all remaining unpaid principal and interest is due and payable on January 5, 2000; payable on demand at the bank's discretion; collateralized by inventory, equipment, and furniture and fixtures, and personally guaranteed by the shareholders 1,538 Note payable to bank ($500,000) in monthly principal installments of $10,440 plus interest at a financial institution's prime (8.25% at September 28, 1999) floating, beginning February 5, 1997 through January 28, 2002 with the outstanding principal and interest balance due on January 28, 2002; payable on demand at the bank's discretion; collateralized by property, assignment of life insurance proceeds, and assignments of common stock 388 Note payable to bank ($200,000) in monthly principal installments of $4,200 plus interest at a financial institution's prime (8.25% at September 28, 1999) floating, beginning June 16, 1997 through January 28, 2002 with the outstanding principal and interest balance due on January 28, 2002; payable on demand at the bank's discretion; collateralized by property, assignment of life insurance proceeds, and assignments of common stock 37 Note payable to bank ($1,000,000) in monthly principal installments of $16,344 plus interest at prime (8.25% at September 28, 1999) + .5% floating, beginning May 15, 1998 through April 15, 2003 with the outstanding principal and interest balance due on April 15, 2003; payable on demand at the bank's discretion; collateralized by real property 952 Note payable to bank ($200,000) in monthly interest-only installments at prime (8.52% at September 28, 1999) + 1% floating, beginning December 20, 1998 through May 20, 1999 with the entire principal balance due on May 20, 1999; payable on demand at the bank's discretion; collateralized by property, assignment of life insurance proceeds, and assignments of common stock 200 Note payable ($144,198) in twelve monthly principal installments of $12,017; collateralized by inventory due on November 8, 1999 120 Mortgage payable to lending institution payable in monthly installments of $3,899, including interest, secured by real estate 176 226 Unsecured note payable to a related party on demand 125 Note payable to corporation ($190,800) due and payable March 23, 2000; 0% interest; unsecured 95 Note payable to corporation ($17,000,000); variable interest rate per annum based on lender's external borrowing rate; principle and interest due November 28, 2000 6,629 Capitalized leases 937 Bank line of credit due March 1, 2000; bearing interest, at the Company's option, at the prime rate or LIBOR plus 1.15% (7.3375 on January 1, 2000); unsecured 15,500 Bank line of credit due March 2, 2002; bearing interest, at the Company's option, at the prime rate or LIBOR plus 1.15% ($63,0000,000 at 7.3375%; $15,000,000 at 7.275%; $1,700,000 at 8.5% on January 1, 2000); unsecured 79,700 ------- ------ 103,037 10,795 Less current portion (22,709) (8,120) ------- ------ $ 80,328 $ 2,675 ======= ======
29 The maturities of notes payable and long-term debt are as follows (in thousands): Fiscal year ending 2000 $ 22,709 2001 162 2002 79,888 2003 270 2004 8 ------- $103,037 ------- The Company has a $120.0 million revolving line of credit. The facility has two separate lines of credit, one in the amount of $90.0 million with a three-year term expiring in 2002 and the other in the amount of $30.0 million with a one-year term expiring in May 2000. Both bear interest, at the Company's option, at the prime rate or LIBOR plus 1.15%. The line of credit agreement includes certain financial and other covenants, as well as restrictions on the payment of dividends. As of January 1, 2000, there were $79.7 million in borrowings outstanding under the $90.0 million line of this facility and $15.5 million outstanding under the $30.0 million line of this facility. 6. Income Taxes Income before income taxes consists of the following (in thousands): Jan. 1, Jan. 2, Dec. 27, Fiscal Year Ended 2000 1999 1997 - - ----------------- ---------- ---------- -------- Domestic $17,519 $23,405 $14,895 Foreign 448 856 902 ---------- ---------- --------- $17,967 $24,261 $15,797 ========== ========== ========= Income tax expense (benefit) consists of the following (in thousands): Jan. 1, Jan. 2, Dec. 27, Fiscal Year Ended 2000 1999 1997 - - ----------------- --------- -------- ------- Current: Federal $4,624 $5,685 $3,009 State and foreign 1,983 1,731 755 --------- -------- -------- 6,607 7,416 3,764 --------- -------- -------- Deferred: Federal (1,019) 430 1,728 State and foreign (390) (24) 9 --------- -------- -------- (1,409) 406 1,737 --------- -------- -------- $5,198 $7,822 $5,501 ========= ======== ======== The differences between the U.S. federal statutory income tax rate and the Company's effective tax rate are as follows:
Jan. 1, Jan. 2, Dec. 27, Fiscal Year Ended 2000 1999 1997 - - ----------------- -------- --------- ------ Statutory tax rate 35.0% 35.0% 34.0% State income taxes, net of federal income tax benefit 2.1 3.6 1.5 Tax effect of non-deductible goodwill 2.6 1.2 1.7 Untaxed earnings related to pooled companies (10.2) (7.0) (4.8) Change in tax status of pooled companies (4.7) Other permanent items related to acquisitions 2.9 Other, net 1.2 (0.6) 2.4 ------- -------- ----- Effective tax rate 28.9% 32.2% 34.8% ======= ======== ======
30 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands): Jan. 1, Jan. 2, Fiscal Year Ended 2000 1999 - - ----------------- --------- ------- Deferred tax assets Inventory related $ 536 $ 237 Vacation accrual 1,284 724 Other accruals 2,531 352 Other 131 3 ------- ------ Total deferred tax assets 4,482 1,316 ------- ----- Deferred tax liabilities Property related (3,892) (2,462) ------- ------ Total deferred tax liabilities (3,892) (2,462) ------- ------ Net deferred tax asset (liability) $ 590 $(1,146) ======= ====== 7. Capital Stock The Company declared 3-for-2 stock splits for all stockholders of record as of December 22, 1997, and November 17, 1999, effective January 7, 1998 and December 1, 1999, respectively. All shares and per-share prices presented herein have been retroactively restated to reflect the stock splits. In October 1999, the Company's shareholders approved an increase in the authorized common stock of the Company to 60,000,000 shares. In December 1997, the Company completed a public offering of its common stock. The proceeds from the sale of 3,125,313 shares of common stock at $14.99 per share were approximately $46.5 million, net of the underwriting discount of $2.5 million and stock offering costs of $300,000. 8. Stock Plans, Options and Warrants Employee Stock Purchase Plan In August 1996, the Company's board of directors approved and adopted an Employee Stock Purchase Plan ("Purchase Plan") covering an aggregate of 287,307 shares of common stock. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. Under the Purchase Plan, the board of directors may authorize participation by eligible employees, including officers, in periodic offerings. The offering period for any offering will be no more than 27 months. The board authorized an offering commencing on the initial public offering date of October 22, 1996 and ending June 30, 1997, and sequential six-month offerings thereafter. Employees are eligible to participate in the currently authorized offerings if they have been employed by the Company or an affiliate of the Company incorporated in the United States for at least six months preceding October 22, 1996. Employees can have up to 15% of their earnings withheld pursuant to the Purchase Plan (10% under the currently authorized offerings) and applied on specified purchase dates (currently the last day of each authorized offering) to the purchase of shares of common stock. The price of common stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the common stock on the commencement date of each offering or the relevant purchase date. As of January 1, 2000, there were approximately $21,000 of payroll deductions to be applied to purchase stock on June 30, 2000; on December 31, 1999, $338,000 of payroll deductions were used to purchase 19,820 shares of common stock. Equity Incentive Plan The Company's Equity Incentive Plan (the "Incentive Plan") was adopted by the board of directors in August 1996. As of January 1, 2000, 3,090,221 shares of common stock were reserved 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 nonqualified stock options, restricted stock purchase awards and stock bonuses to employees and directors. The exercise price of options granted under the Incentive Plan is determined by the board of directors, provided that the exercise price for an incentive stock option cannot be less than 100% of the fair market value of the common stock on the grant date and the exercise price for a nonqualified stock option cannot be less than 85% of 31 the fair market value of the common stock on the grant date. Outstanding options generally vest over a period of five years and generally expire ten years from the grant date. Warrants A five-year warrant to purchase 7,904 shares of the Company's common stock at an exercise price of $9.47 per share was outstanding at January 2, 1999. The warrant was exercised in full in 1999. Fair Values The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock plans. Accordingly, no compensation expense has been recognized for these plans. Had compensation cost for these plans been determined based on the fair value at the grant dates as prescribed by FAS No. 123, Accounting for Stock-Based Compensation, the Company's net income allocable to common stock and basic and diluted earnings per share would have been reduced to the pro forma amounts indicated below: 1999 1998 1997 ------------- -------------- --------- Net income As reported $12,488 $16,439 $10,296 Pro forma 8,855 6,825 3,809 Basic earnings per share As reported $ 0.55 $0.73 $0.55 Pro forma $ 0.39 $0.30 $0.20 Diluted earnings per share As reported $ 0.53 $0.71 $0.53 Pro forma $ 0.38 $0.30 $0.20 The fair value of the employees' purchase rights was estimated using the Black-Scholes model with the following weighted-average assumptions: 1999 1998 1997 -------- --------- ------ Estimated dividends None None None Expected volatility 46% 46% 51% Risk-free interest rate 5.6% 4.5% 5.5% Expected life (years) 0.5 0.5 0.5 Weighted-average fair value per share $4.96 $4.66 $3.69 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: 1999 1998 1997 ----------- ----------- ------- Estimated dividends None None None Expected volatility 46% 46% 49% Risk-free interest rate 5.6% 4.5%-4.7% 5.8% Expected life (years) 7 7 7 32 A summary of the status of the Company's Incentive Plan as of the 1999, 1998 and 1997 fiscal year ends and changes during the years ending on those dates is presented below: Weighted Number Average of Exercise Shares Price Outstanding as of December 28, 1996 1,550,816 $ 6.28 Granted 443,219 $10.91 Forfeited (226,401) $ 7.12 Exercised (365,366) $ 4.71 --------- Outstanding as of December 27, 1997 1,402,268 $ 7.95 Granted 346,611 $17.91 Forfeited (101,546) $11.11 Exercised (227,979) $ 6.03 --------- Outstanding as of January 2, 1999 1,419,354 $10.49 Granted 809,665 $20.18 Forfeited (165,632) $16.80 Exercised (255,179) $ 7.26 --------- Outstanding as of January 1, 2000 1,808,208 $14.68 ========= The following table summarizes information about incentive and nonqualified stock options outstanding and exercisable at January 1, 2000:
Options Outstanding Options Exercisable - - --------------------------------------------------------------- ------------------------------- Weighted- Range of Remaining Average Weighted- Exercise Number Contractual Exercise Number Average Prices Outstanding Life Price Exercisable Exercise Price - - ------------- -------------- ------------ --------- ----------- -------------- $2.65-5.30 73,928 3.5 years $3.62 73,928 $3.62 $5.30-7.95 526,127 5.8 $7.37 351,257 $7.37 $7.95-10.60 14,050 6.7 $8.33 6,228 $8.43 $10.60-13.25 94,191 7.4 $11.65 64,848 $11.43 $13.25-15.90 55,781 8.3 $14.77 41,300 $14.85 $15.90-18.55 576,154 8.6 $17.02 87,110 $16.48 $18.55-21.20 159,425 9.0 $19.86 27,772 $19.48 $21.20-23.85 187,377 9.9 $22.25 9,145 $22.40 $23.85-26.50 121,175 9.3 $26.50 0 $0 ---------- ----------- 1,808,208 7.7 $14.68 661,588 $9.74 ========== ===========
At January 1, 2000, options exercisable for 416,044 shares were available for future grant under the Incentive Plan. At January 2, 1999 and December 27, 1997, options for 620,448 and 524,871 shares with weighted average exercise prices of $7.67 and $6.25, respectively, were exercisable. The weighted-average grant-date per-share fair values of options granted during 1999, 1998 and 1997 were $20.18, $17.91 and $10.91, respectively. 9. Litigation In August 1998, the Company filed Wild Oats Markets, Inc. v. Plaza Acquisition, Inc. in United States District Court for the Northern District of Illinois, Eastern Division, seeking recovery of $300,000 in tenant improvement allowances owed to it by its landlord for the build-out of the Company's Buffalo Grove, Illinois store. The landlord counterclaimed for $1 million in damages, alleging that the Company breached covenants requiring construction to be completed by a certain date and other operating covenants. After the Company closed the Buffalo Grove store in May 1999, the landlord increased its counterclaim to $3 million, including accelerated rent resulting from an alleged 33 breach of a continuous operations clause in the lease. However, because the lease requires the Company to pay percentage rent only until a certain level of gross sales is achieved, and because that level was never achieved, the actual amount of rent due, even if accelerated, cannot be determined at this time. The Company asserted several defenses to the counterclaim. Motions for summary judgment were filed by each party. The Company's motion was denied and the landlord's motion to accelerate rent was granted; however, at this time an assessment of damages, if any, to which the landlord may become entitled cannot be made for the reasons stated above. Alfalfa's Canada, Inc., a Canadian subsidiary of the Company, is a defendant in a suit brought in the Supreme Court of British Columbia, by one of its distributors, Waysafer Wholefoods Limited and one of its principals, seeking monetary damages for breach of contract and injunctive relief to enforce a buying agreement for the three Canadian stores entered into by a predecessor of Alfalfa's Canada. Under the buying agreement, the stores must buy products carried by the plaintiff if such are offered at the current advertised price of its competitors. The suit was filed in September 1996. In June 1998, the Company filed a Motion for Dismissal on the grounds that the contract in dispute constituted a restraint of trade. The Motion was subsequently denied. The Company does not believe its potential exposure in connection with the suit to be material. On February 17, 2000, the Company was named as defendant in Cornerstone III, LLC v. Wild Oats Markets, Inc., a suit filed in U.S. District Court for the Eastern District of Missouri by a former landlord who alleges that the Company breached its obligations under a lease agreement when Wild Oats notified the landlord that it was exercising its rights under the lease to terminate after the landlord failed to turn over possession of the leased property within the time period provided for in the lease. The plaintiff seeks actual and punitive damages. The Company also is named as defendant in various actions and proceedings arising in the normal course of business. In all of these cases, the Company is denying the allegations and is vigorously defending against them and, in some cases, has filed counterclaims. Although the eventual outcome of the various lawsuits cannot be predicted, it is management's opinion that these lawsuits will not result in liabilities that would materially affect the Company's financial position or results of operations. 10. Commitments The Company has numerous operating leases related to facilities occupied and store equipment. These leases generally contain renewal provisions at the option of the Company. Total rental expense (consisting of minimum rent and contingent rent) under these leases was $25.5 million, $17.1 million and $13.7 million during 1999, 1998 and 1997, respectively. Future minimum lease payments under noncancelable operating leases as of January 1, 2000 are summarized as follows (in thousands): Fiscal year ending 2000 $33,339 2001 33,301 2002 32,981 2003 32,018 2004 29,929 Thereafter 276,333 ---------- Total minimum lease payments $437,901 ========== 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 1999, 1998 and 1997, the Company paid contingent rentals of $938,000, $755,000 and $598,000, respectively. 11. Non-Recurring Expenses During the first quarter of 1999, the Company's management made certain decisions relating to the Company's operations and selected store closures, which resulted in approximately $10.9 million of non-recurring expenses being recorded. These decisions included (1) a change in the Company's strategic direction, resulting in the closure in the second quarter of 1999 of its two "Farm to Market" stores located in Buffalo Grove, Illinois, and Tempe, 34 Arizona ($4.5 million), and (2) a decision by the Company's management to allocate corporate resources to servicing new and existing stores, rather than closed sites ($6.4 million). Components of the non-recurring charge consist primarily of non-cancelable lease obligations through the year 2000 ($1.2 million) and abandonment of fixed and intangible assets ($9.7 million). At January 1, 2000, the remaining accrued liabilities related to the non-recurring charge totaled approximately $516,000 of non-cancelable lease obligations. During the third quarter of 1999, the Company recognized non-recurring expenses related to the pooling transaction with Henry's that totaled $645,000. Components of the non-recurring charge consist primarily of non-cancelable lease obligations ($287,000) and professional fees associated with the pooling ($323,000). At January 1, 2000, the remaining accrued liabilities related to the non-recurring charge totaled approximately $252,000 of non-cancelable lease obligations. During the fourth quarter of 1999, the Company recognized non-recurring expenses related to the pooling transaction with Sun Harvest that totaled $1.1 million. Components of the non-recurring charge consist primarily of professional fees associated with the pooling ($869,000) and employee-related costs ($128,000). At January 1, 2000, the remaining accrued liabilities related to the non-recurring charge totaled $1.1 million. During 1998, a $393,000 non-recurring charge was recorded in conjunction with two pooling-of-interests transactions (see Note 2). The non-recurring charge consists of $201,000 of employee severance costs, $162,000 of inventory and fixed asset write-downs, and $30,000 of lease cancellation costs. As of January 1, 2000, there were no remaining accrued liabilities related to the non-recurring charge. Cash paid for employee severance, relocation and lease cancellation costs related to the non-recurring charge totaled approximately $900,000 in 1997. During 1997, management adjusted certain accruals related to the non-recurring charge, including a $500,000 reduction following the settlement of a property-related obligation. At December 27, 1997, there were no remaining accrued liabilities related to the non-recurring charge. 12. 401(k) Plan The Company maintains a tax-qualified employee savings and retirement plan (the "401(k) Plan") covering the Company's employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 15% of their annual compensation or the statutorily prescribed annual limit ($10,000 in 1999) and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan provides for additional matching contributions to the 401(k) Plan by the Company in an amount determined by the Company prior to the end of each plan year. Total Company contributions during 1999, 1998 and 1997 were approximately $557,000, $408,000 and $256,000, respectively. The trustees of the 401(k) Plan, at the direction of each participant, invest the assets of the 401(k) Plan in designated investment options. The 401(k) Plan is intend to qualify under Section 401 of the Internal Revenue Code. The Company, through Henry's, also sponsored a 401(k) plan in 1999 covering Henry's employees with at least 12 months of service. Contributions are discretionary. Henry's contributed $90,000, $106,000 and $72,000 to this 401(k) plan for fiscal 1999, 1998 and 1997, respectively. The Company, through Sun Harvest, also sponsored a 401(k) plan in 1999 covering Sun Harvest employees with at least 12 months of service. Contributions are discretionary. Sun Harvest contributed $36,000, $36,000, and $33,000 to this 401(k) plan for fiscal 1999, 1998, and 1997, respectively. 13. Stockholder Rights Plan The Company has a stockholder rights plan having both "flip-in" and "flip-over" provisions. Stockholders of record as of May 22, 1998 received the right ("Right") to purchase a fractional share of preferred stock at a purchase price of $145 for each share of common stock held. In addition, until the Rights become exercisable as described below and in certain limited circumstances thereafter, the Company will issue one Right for each share of common stock issued after May 22, 1998. For the "flip-in provision," the Rights would become exercisable only if a person or group acquires beneficial ownership of 15% (the "Threshold Percentage") or more of the outstanding common stock. Holdings of certain existing affiliates of the Company are excluded from the Threshold Percentage. In that event, all holders of Rights other than the person or group who acquired the Threshold Percentage would be entitled to purchase shares of common stock at a substantial discount to the then-current market price. This right to purchase 35 common stock at a discount would be triggered as of a specified number of days following the passing of the Threshold Percentage. For the "flip-over" provision, if the Company was acquired in a merger or other business combination or transaction, the holders of such Rights would be entitled to purchase shares of the acquiror's common stock at a substantial discount. 14. Deferred Compensation Plan The Company maintains a nonqualified Deferred Compensation Plan (the "DCP") for certain members of management. Eligible employees may contribute a portion of base salary or bonuses to the plan annually. The DCP provides for additional matching contributions by the Company in an amount determined by the Company prior to the end of each plan year. Total Company matching contributions to the DCP during 1999 were approximately $21,000. 15. Quarterly Information (Unaudited) The following interim financial information presents the 1999 and 1998 consolidated results of operations on a quarterly basis (in thousands, except per-share amounts):
Quarter Ended ---------------------------------------------- Jan. 1, Oct. 2, July 3, April 3, 2000 1999 1999 1999 ------ ------ ------- ------- Statement of Operations Data: Sales $201,719 $186,522 $173,207 $159,643 Gross profit 62,342 57,965 52,805 48,352 Net income before cumulative effect of change (1,157) Cumulative effect of change in accounting principle, net of tax 281 --------- Net income (loss) $ 4,448 $4,882 $4,596 $ (1,438) ====== ====== ====== ======== Basic net income per common share: Net income before cumulative effect of change in accounting principle $(0.05) Cumulative effect of change in accounting principle, net of tax (0.01) ------- Basic earnings (loss) per common share $0.19 $0.22 $0.20 $(0.06) ===== ===== ===== ======= Diluted net income per common share: Net income before cumulative effect of change in accounting principle $(0.05) Cumulative effect of change in accounting principle, net of tax (0.01) ------- Diluted earnings (loss) per common share $0.19 $0.21 $0.19 $(0.06) ===== ===== ===== ======= Quarter Ended ---------------------------------------------- Jan. 2, Sept. 26, June 27, March 28, 1999 1998 1998 1998 ------ ------ ------- ------- Statement of Operations Data: Sales $144,809 $130,235 $131,794 $123,888 Gross profit 43,670 39,571 40,036 37,974 Net income 4,041 3,891 3,812 4,695 ===== ===== ===== ===== Basic earnings per common share $0.18 $0.17 $0.17 $0.21 ===== ===== ===== ===== Diluted earnings per common share $0.17 $0.17 $0.17 $0.20 ===== ===== ===== =====
36 16. Related Party Transaction Elizabeth C. Cook and Michael C. Gilliland, executive officers and directors of the Company, are trustees of Wild Oats Community Foundation ("Foundation"), a non-profit organization. In 1998, the Foundation opened Wild Oats Wellness Centers in Boulder, Colorado and Albuquerque, New Mexico in space subleased from the Company. In 1999, the Foundation opened a Wellness Center in Denver, Colorado and closed the center in Albuquerque, New Mexico. The Foundation pays to the Company the same rent as paid by the Company for the space. There are no material transactions between the Company and the Foundation. Subsequent to January 1, 2000, the Company recorded a note receivable in the amount of $75,000 from a related party that is also a subtenant at one of the Company's stores. The note has a five-year term and bears interest at 7%. 37 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Wild Oats Markets, Inc. In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 41 present fairly, in all material respects, the financial position of Wild Oats Markets, Inc. and its subsidiaries (the "Company") at January 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2000, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, based on our audits and the reports of other auditors, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 41 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. The consolidated financial statements give retroactive effect to the mergers of Henry's Marketplace, Inc. and Sun Harvest Farms, Inc. and its affiliate on September 17, 1999 and December 15, 1999, respectively, in transactions accounted for as poolings of interests, as described in Note 2 to the consolidated financial statements. We did not audit the financial statements of Henry's Marketplace, Inc., which statements reflect total assets of $10,930,032 at December 27, 1998, and total revenues of $81,025,852 for the fifty-two weeks ended December 27, 1998. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it related to the amounts included for Henry' Marketplace, Inc. as of and for the fifty-two weeks ended December 27, 1998, is based solely on the report of the other auditors. Additionally, we did not audit the financial statements of Sun Harvest Farms, Inc., which statements reflect total assets of $6,850,288 and $5,189,373 at December 29, 1998 and December 30, 1997, respectively, and total revenues of $41,155,576, $50,841,400 and $48,120,937 for the thirty-nine weeks ended September 28, 1999, and the fifty-two weeks ended December 29, 1998, and December 30, 1997, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Sun Harvest Farms, Inc. for the thirty-nine weeks ended September 28, 1999 and as of and for the fifty-two weeks ended December 29, 1998, and December 30, 1997, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for the opinion expressed above. In 1999, the Company changed its method of accounting for pre-opening expenses as discussed in Note 1 to the consolidated financial statements. PricewaterhouseCoopers LLP Denver, Colorado March 3, 2000 38 Independent Auditors' Report The Board of Directors Henry's Marketplace, Inc. We have audited the balance sheet of Henry's Marketplace, Inc. as of December 27, 1998, and the related statements of earnings, stockholders' equity and cash flows for the fifty-two weeks ended December 27, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Henry's Marketplace, Inc. as of December 27, 1998, and the results of its operations and its cash flows for the fifty-two weeks ended December 27, 1998, in conformity with generally accepted accounting principles. KPMG LLP San Diego, California February 5, 1999 39 Report of Independent Auditors The Board of Directors Sun Harvest Farms, Inc. We have audited the accompanying balance sheets of Sun Harvest Farms, Inc. (the Company) as of September 28, 1999, December 29, 1998, and December 30, 1997, and the related statements of income, shareholder's equity (deficit), and cash flows for the nine-month period ended September 28, 1999 and the fiscal years ended December 29, 1998, December 30, 1997, and December 31, 1996, not separately presented herein. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sun Harvest Farms, Inc. as of September 28, 1999, December 29, 1998, and December 30, 1997, and the results of its operations and its cash flows for the nine-month period ended September 28, 1999 and the fiscal years ended December 29, 1998, December 30, 1997, and December 31, 1996, in conformity with generally accepted accounting principles. Ernst & Young LLP November 17, 1999 40 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None reported. 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 our definitive Proxy Statement in connection with the Annual Meeting of stockholders to be held May 5, 2000, to be filed with the Commission on or before May 2, 2000, is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION The information included under the caption "Executive Compensation" in our definitive Proxy Statement in connection with the Annual Meeting of stockholders to be held May 5, 2000, to be filed with the Commission on or before May 2, 2000, 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 our definitive Proxy Statement in connection with the Annual Meeting of stockholders to be held May 5, 2000, to be filed with the Commission on or before May 2, 2000, 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 our definitive Proxy Statement in connection with the Annual Meeting of stockholders to be held May 5, 2000, to be filed with the Commission on or before May 2, 2000, is incorporated herein by reference. PART IV. Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statement Schedules. 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 Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements (2) Schedule II - Valuation and Qualifying Accounts (b) Reports on Form 8-K. The Company filed the following reports on Form 8-K during fiscal 1999: (1) Report dated May 29, 1999, which reported under Item 5, Other Items, the acquisition of all of the outstanding stock of Nature's Fresh Northwest, Inc. This report was amended by the following amendments on Form 8-KA: (A) By an amendment dated August 12, 1999, reported under Item 7, Financial Statements and Exhibits, the Company amended the report on Form 8-K dated May 29, 1999 to append to such report audited and unaudited, interim financial statements of Nature's Fresh Northwest, Inc., and pro forma combined condensed financial statements of Nature's and the Company; 41 (B) By an amendment dated August 16, 1999, reported under Item 7, Financial Statements and Exhibits, the Company corrected a clerical error in the financials previously filed as an amendment to the report on Form 8-K dated May 29, 1999. (2) Report dated July 27, 1999, reported under Item 5, Other Events, the Company's issuance of a press release containing the Company's second quarter 1999 earnings announcement. (3) Report dated September 29, 1999, reported under Item 5, Other Events, the merger with Henry's Marketplace, Inc., a California corporation that owned eleven operating natural food stores located in metropolitan San Diego, California. The following audited financial statements were filed with this report: Supplemental Combined Statement of Operations, Statement of Changes in Stockholders Equity (Deficit) and Statement of Cash Flows for the Three Years Ended January 2, 1999, and Supplemental Combined Balance Sheet as of January 2, 1999 and December 27, 1997. This report was subsequently amended on February 28, 2000 by a report on Form 8-KA to restate the financial information included in the report as the historic financial statements of the Company. (4) Report dated October 29, 1999, reported under Item 5, Other Events, the Company's issuance of a press release containing the Company's third quarter 1999 earnings announcement. (5) Report dated November 17, 1999, reported under Item 5, Other Events and Item 7, Financial Statements, certain selected financial data of the Company restated for the pooling of interests transaction with Henry's Marketplace, Inc. (c) Exhibits. The following exhibits to this Form 10-K are filed pursuant to the requirements of Item 601 of Regulation S-K: Exhibit Number Description of Document 3(i).1.(a)** Amended and Restated Certificate of Incorporation of the Registrant. (1) 3(i).1.(b)** Certificate of Correction to Amended and Restated Certificate of Incorporation of the Registrant. (1) 3(i).1.(c)** Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant. (2 3(ii).1** Amended and Restated By-Laws of the Registrant. (1) 4.1** Reference is made to Exhibits 3(i).1 through 3(ii).1. 4.2** Specimen stock certificate. (3) 4.3** Rights Agreement dated May 22, 1998 between Registrant and Norwest Bank Minnesota. (4) 10.1** Form of Indemnity Agreement between the Registrant and its directors and executive officers, with related schedule. (3) 10.2#** 1996 Equity Incentive Plan, including forms of Options granted to employees and non-employee directors thereunder. (3) 10.3#** 1996 Employee Stock Purchase Plan. (3) 10.4#** 1993 Stock Option Plan. (3) 10.5#** 1991 Stock Option Plan. (3) 10.6#** Employee Stock Ownership Plan. (3) 10.7#** Employment Agreement between Registrant and Michael C. Gilliland, dated July 12, 1996, as amended. (3) 10.8** Amended and Restated Stockholders Agreement among the Registrant and certain parties named therein dated August 1996. (3) 10.9** Registration Rights Agreement between the Registrant and certain parties named therein dated July 12, 1996. (3) 10.10** Revolving Loan Agreement dated as of March 2, 1999 among Wild Oats Markets, Inc., the Lenders Named Herein and Wells Fargo Bank, National Association, as Administrative Agent. (5) 10.11+ Amendment No. 1 to Revolving Loan Agreement dated July 29, 1999. 10.12#** Employment Agreement dated June 1, 1999, between Registrant and James Lee. (6) 10.13#** Employment Agreement dated June 14, 1999, between Registrant and Mary Beth Lewis. (6) 10.14** Stock Purchase Agreement between Nature's Fresh Northwest, Inc., General Nutrition Incorporated and Registrant dated April 22, 1999. (7) 42 10.15** Stock Purchase Agreement among Henry's Marketplace, Inc., the selling stockholders and the Registrant dated July 27, 1999. (8) 10.16** Letter Agreement dated September 1, 1999, amending the Stock Purchase Agreement referenced in 10.15 above. (8) 10.17** Agreement and Plan of Merger between the Registrant, Alfalfa's, Inc. and WO Holdings, Inc. dated June 4, 1996. (3) 10.18#+ Wild Oats Markets, Inc. Deferred Compensation Plan 10.19#** 1996 Equity Incentive Plan, including forms of Options granted to employees and non-employee directors thereunder. (9) 21.1+ List of subsidiaries. 23.1+ Consent of PricewaterhouseCoopers LLP 23.2+ Consent of KPMG LLP 23.3+ Consent of Ernst & Young LLP 27.1+ Financial Data Schedule - Year Ended January 1, 2000. - - -------------------------------- # Management Compensation Plan. ** Previously filed. + Included herewith. (1) Incorporated by reference from the Registrant's Form 10-K for the year ended December 28, 1996. (File No. 0-21577) (2) Incorporated by reference from the Registrant's Amendment No. 2 to the Registration Statement on Form S-3 filed with the Commission on November 10, 1999 (File No. 333-88011) (3) Incorporated by reference from the Registrant's Registration Statement on Form S-1 (File No. 333-11261) filed on August 30, 1996 (4) Incorporated by reference from the Registrant's Form 8-K filed on May 5, 1998 (File No. 0-21577) (5) Incorporated by reference from the Registrant's Report on Form 10-K for th year ended January 2, 1999 (File No. 0-21577). (6) Incorporated by reference from Registrant's Report on Form 10-Q filed on August 17, 1999 (File No. 0-21577). (7) Incorporated by reference from Registrant's Report on Form 8-K filed on June 14, 1999 (File No. 0-21577). (8) Incorporated by reference from the Registrant's Report on Form 8-K filed September 29, 1999 (File No. 0-21577). (9) Incorporated by reference from the Registrant's Registration Statement on Form S-8 (File No. 333-66347) filed on October 30, 1998 43 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. Wild Oats Markets, Inc. (Registrant) Date: March 14, 2000 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 C. Gilliland Chief Executive Officer March 14, 2000 - - -------------------------------------------- and Director /s/ James W. Lee President and Chief Operating March 14, 2000 - - -------------------------------------------- Officer /s/ Mary Beth Lewis Chief Financial Officer March 14, 2000 - - -------------------------------------------- /s/ John A. Shields Chairman March 14, 2000 - - -------------------------------------------- /s/ Elizabeth C. Cook Executive Vice President March 14, 2000 - - -------------------------------------------- and Director /s/ David M. Chamberlain Vice Chairman March 14, 2000 - - -------------------------------------------- /s/ Brian K. Devine Director March 14, 2000 - - -------------------------------------------- /s/ David L. Ferguson Director March 14, 2000 - - ------------------------------------ /s/ James B. McElwee Director March 14, 2000 - - ------------------------------------ /s/ Morris J. Siegel Director March 14, 2000 - - --------------------------------------------
44 `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 27, 1997 299 273 (358) 214 January 2, 1999 214 55 (110) 159 January 1, 2000 159 155 (55) 259
45 EX-10.11 2 AMENDMENT TO LOAN AGREEMENT AMENDMENT NO. 1 TO REVOLVING LOAN AGREEMENT This Amendment No. 1 to Revolving Loan Agreement (this "Amendment") is entered into with reference to the Revolving Loan Agreement dated as of March 2, 1999 (the "Loan Agreement") among Wild Oats Markets, Inc. ("Borrower"), the Lenders party thereto, and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used but not defined herein are used with the meanings set forth for those terms in the Loan Agreement. Borrower and the Administrative Agent, acting with the consent of all of the Lenders pursuant to Section 11.2 of the Loan Agreement, agree as follows: 1. Section 1.1. Section 1.1 of the Loan Agreement is amended by revising the definitions of "Line A Commitment" and "Line B Commitment" to read as follows: "Line A Commitment" means, subject to Sections 2.5 and 2.6, $90,000,000. The respective Pro Rata Shares of the Lenders with respect to the Line A Commitment are set forth in Schedule 1.1. "Line B Commitment" means, subject to Sections 2.5 and 2.6, $30,000,000. The respective Pro Rata Shares of the Lenders with respect to the Line B Commitment are set forth in Schedule 1.1. 2. Section 1.1. Section 1.1 of the Loan Agreement is further amended by adding the following new definition at the appropriate alphabetical place: "Reserve Amount" means, as of any date of determination, the amount (if any) by which Indebtedness permitted by Section 6.9(d)(iii) on that date exceeds $5,000,000. 3. Schedule 1.1. Schedule 1.1 to the Loan Agreement is amended as set forth in Schedule 1.1 attached to this Amendment. 4. Section 2.1. Section 2.1(a) of the Loan Agreement is amended by striking the first sentence thereof and substituting therefor the following: Subject to the terms and conditions set forth in this Agreement, at any time and from time to time from the Closing Date through the Line A Maturity Date, each Lender shall, pro rata according to that Lender's Pro Rata Share of the then applicable Line A Commitment, make Advances to Borrower under the Line A Commitment in such amounts as Borrower may request that do not result in the sum of (i) the aggregate principal amount outstanding under the Line A Notes plus (ii) the Aggregate Effective Amount of all outstanding Letters of Credit plus (iii) the Swing Line Outstandings plus (iv) the Reserve Amount to exceed the Line A Commitment. 5. Section 3.1. Section 3.1(d) of the Loan Agreement is amended by striking clause (i) thereof and substituting therefor the following: (i) The amount, if any, by which the sum of (A) the principal Indebtedness evidenced by the Line A Notes plus (B) the Aggregate Effective Amount of all outstanding Letters of Credit plus (C) the Swing Line Outstandings plus (D) the Reserve Amount at any time exceeds the then applicable Line A Commitment (including the Line A Commitment as reduced pursuant to Section 2.5) shall be payable immediately. 6. Section 6.9. Section 6.9 of the Loan Agreement is amended by striking Subsection (d) thereof and substituting therefor the following: (d) Indebtedness of an Acquired Company (i) that is the subject of an Acquisition made on or before July 1, 1999 which is secured solely by a Lien permitted by Section 6.8(e), (ii) that is the subject of an Acquisition made after July 1, 1999 which is owed to a Person that is not the seller of the Acquired Company, or an Affiliate of such seller, that is secured solely by a Lien permitted by Section 6.8(e) and (iii) that is the subject of an Acquisition made after July 1, 1999 which is owed to the seller of the Acquired Company, or an Affiliate of such seller, that is secured solely by a Lien permitted by Section 6.8(e); provided that the aggregate principal Indebtedness permitted by this clause (iii) shall not at any time exceed $10,000,000. 7. Section 8.2. Section 8.2 of the Loan Agreement is amended by striking the same in its entirety any substituting therefor the following: "[Intentionally Deleted"] 8. Conditions Precedent. The effectiveness of this Amendment shall be conditioned upon: (a) The receipt by the Administrative Agent of an amendment fee of $40,000 for the account of the Lenders according to their Pro Rata Share, which the Administrative Agent shall promptly disburse to the Lenders; and (b) The receipt by the Administrative Agent of all of the fol-lowing, each properly executed by an authorized officer of each party thereto and dated as of the date hereof: (i) Counterparts of this Amendment executed by all parties hereto; (ii)Written consent of all of the Lenders as required under Section 11.2 of the Loan Agreement in the form of Exhibit A to this Amendment; (iii)Written consent of the Subsidiary Guarantors in the form of Exhibit B to this Amendment; (iv)Replacement Line A Notes and Line B Notes for each Lender in the new amount of its Pro Rata Share of the Line A Commitment and Line B Commitment, respectively, (against delivery by such Lenders of the existing Line A Notes and Line B Notes); (v)A copy of the resolution of the Board of Directors of Borrower authorizing the increases in the Line A Commitment and Line B Commitment, certified by a Senior Officer; and (vi)the written opinion of Freya R. Brier, Esq. with respect to the due corporate authorization by Borrower of the increase in the Line A Commitment and Line B Commitment and confirming such aspects of the Opinion of Counsel as the Administrative Agent reasonably requests, in form and substance acceptable to the Administrative Agent. 9. Representation and Warranty. Borrower represents and warrants that no Default or Event of Default has occurred and remains continuing. 10. Confirmation. In all other respects, the terms of the Loan Agreement and the other Loan Documents are hereby confirmed. IN WITNESS WHEREOF, Borrower and the Administrative Agent have executed this Amendment as of July ___, 1999 by their duly authorized representatives. WILD OATS MARKETS, INC. By:By _________________________________ Mary Beth Lewis Chief Financial Officer WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent By _________________________________ Tracey Hanson Vice President Exhibit A to Amendment CONSENT OF LENDER Reference is hereby made to that certain Revolving Loan Agreement dated as of March 2, 1999 (the "Loan Agreement") among Wild Oats Markets, Inc. ("Borrower"), the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used but not defined herein are used with the meanings set forth for those terms in the Loan Agreement. The undersigned Lender hereby consents to the execution and delivery of Amendment No. 1 to Revolving Loan Agreement by the Administrative Agent on its behalf, substantially in the form of the most recent draft presented to the undersigned Lender. Date: July ___, 1999 - - ------------------------------------- [Name of Institution] By ___________________________________ - - -------------------------------------- [Printed Name and Title] Exhibit B to Amendment CONSENT OF SUBSIDIARY GUARANTORS Reference is hereby made to that certain Revolving Loan Agreement dated as of March 2, 1999 among Wild Oats Markets, Inc. ("Borrower"), the Lenders party thereto, and Wells Fargo Bank, National Association, as Administrative Agent (the "Loan Agreement"). Each of the undersigned Subsidiary Guarantors hereby consents to Amendment No. 1 to the Loan Agreement in the form executed by Borrower and confirms that the Subsidiary Guaranty to which it is a party remain in full force and effect. Dated: July ___, 1999 "Guarantors" WILD OATS MARKETS CANADA, INC. By:___________________________ - - -------------------------------- [Printed name and title] ALFALFA'S CANADA, INC. By:_____________________________ - - -------------------------------- [Printed name and title] EX-10.18 3 DEFERRED COMPENSATION PLAN Wild Oats Markets, Inc. Deferred Compensation Plan Master Plan Document - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Effective November 1, 1999 Wild Oats Markets, Inc. Deferred Compensation Plan Master Plan Document - - -------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------
TABLE OF CONTENTS Page Purpose ...............................................................................................1 ARTICLE 1 Definitions....................................................................................1 ARTICLE 2 Selection, Enrollment, Eligibility.............................................................6 2.1 Selection by Committee.........................................................................6 2.2 Enrollment Requirements........................................................................6 2.3 Eligibility; Commencement of Participation.....................................................6 2.4 Termination of Participation and/or Deferrals..................................................6 ARTICLE 3 Deferral Commitments/Company Matching/Crediting Taxes..........................................7 3.1 Minimum Deferrals..............................................................................7 3.2 Maximum Deferral...............................................................................7 3.3 Election to Defer; Effect of Election Form.....................................................7 3.4 Withholding of Annual Deferral Amounts.........................................................8 3.5 Company Contribution Amount....................................................................8 3.6 Annual Company Matching Amount.................................................................8 3.7 Investment of Trust Assets.....................................................................8 3.8 Vesting........................................................................................8 3.9 Crediting/Debiting of Account Balances.........................................................9 3.10 FICA and Other Taxes..........................................................................11 ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election...................11 4.1 Short-Term Payout.............................................................................11 4.2 Other Benefits Take Precedence Over Short-Term................................................11 4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies.........................11 4.4 Withdrawal Election...........................................................................12 ARTICLE 5 Retirement Benefit............................................................................12 5.1 Retirement Benefit............................................................................12 5.2 Payment of Retirement Benefit.................................................................12 5.3 Death Prior to Completion of Retirement Benefit...............................................13 ARTICLE 6 Pre-Retirement Survivor Benefit...............................................................13 6.1 Pre-Retirement Survivor Benefit...............................................................13 6.2 Payment of Pre-Retirement Survivor Benefit....................................................13 ARTICLE 7 Termination Benefit...........................................................................13 7.1 Termination Benefit...........................................................................13 7.2 Payment of Termination Benefit................................................................13 ARTICLE 8 Disability Waiver and Benefit.................................................................14 8.1 Disability Waiver.............................................................................14 8.2 Continued Eligibility; Disability Benefit.....................................................14 ARTICLE 9 Beneficiary Designation.......................................................................14 9.1 Beneficiary...................................................................................14 9.2 Beneficiary Designation; Change; Spousal Consent..............................................15 9.3 Acknowledgement...............................................................................15 9.4 No Beneficiary Designation....................................................................15 9.5 Doubt as to Beneficiary.......................................................................15 9.6 Discharge of Obligations......................................................................15 ARTICLE 10 Leave of Absence..............................................................................15 10.1 Paid Leave of Absence.........................................................................15 10.2 Unpaid Leave of Absence.......................................................................15 ARTICLE 11 Termination, Amendment or Modification........................................................16 11.1 Termination...................................................................................16 11.2 Amendment.....................................................................................16 11.3 Plan Agreement................................................................................17 11.4 Effect of Payment.............................................................................17 ARTICLE 12 Administration................................................................................17 12.1 Committee Duties..............................................................................17 12.2 Administration Upon Change In Control.........................................................17 12.3 Agents........................................................................................18 12.4 Binding Effect of Decisions...................................................................18 12.5 Indemnity of Committee........................................................................18 12.6 Employer Information..........................................................................18 ARTICLE 13 Other Benefits and Agreements.................................................................18 13.1 Coordination with Other Benefits..............................................................18 ARTICLE 14 Claims Procedures.............................................................................18 14.1 Presentation of Claim.........................................................................18 14.2 Notification of Decision......................................................................19 14.3 Review of a Denied Claim......................................................................19 14.4 Decision on Review............................................................................19 14.5 Legal Action..................................................................................19 ARTICLE 15 Trust.........................................................................................20 15.1 Establishment of the Trust....................................................................20 15.2 Interrelationship of the Plan and the Trust...................................................20 15.3 Distributions From the Trust..................................................................20 ARTICLE 16 Miscellaneous.................................................................................20 16.1 Status of Plan................................................................................20 16.2 Unsecured General Creditor....................................................................20 16.3 Employer's Liability..........................................................................20 16.4 Nonassignability..............................................................................20 16.5 Not a Contract of Employment..................................................................21 16.6 Furnishing Information........................................................................21 16.7 Terms.........................................................................................21 16.8 Captions......................................................................................21 16.9 Governing Law.................................................................................21 16.10 Notice........................................................................................21 16.11 Successors....................................................................................22 16.12 Spouse's Interest.............................................................................22 16.13 Validity......................................................................................22 16.14 Incompetent...................................................................................22 16.15 Court Order...................................................................................22 16.16 Distribution in the Event of Taxation.........................................................22 16.17 Insurance.....................................................................................23 16.18 Legal Fees To Enforce Rights After Change in Control..........................................23
Wild Oats Markets, Inc. Deferred Compensation Plan Master Plan Document - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- WILD OATS MARKETS, INC. DEFERRED COMPENSATION PLAN Effective November 1, 1999 Purpose The purpose of this Plan is to provide specified benefits to a select group of management and highly compensated Employees and Directors who contribute materially to the continued growth, development and future business success of Wild Oats Markets, Inc., a Delaware corporation, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. ARTICLE 1 Definitions For purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Account Balance" shall mean, with respect to a Participant, a credit on the records of the Employer equal to the sum of (i) the Deferral Account balance, (ii) the vested Company Contribution Account balance and (iii) the vested Company Matching Account balance. The Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan. 1.2 "Annual Company Matching Amount" for any one Plan Year shall be the amount determined in accordance with Section 3.6. 1.3 "Annual Deferral Amount" shall mean that portion of a Participant's Base Annual Salary, Bonus and Directors Fees that a Participant elects to have, and is deferred, in accordance with Article 3, for any one Plan Year. In the event of a Participant's Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event. 1.4 "Annual Installment Method" shall be an annual installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: The Account Balance of the Participant shall be calculated as of the close of business on the last business day of the year. The annual installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one, and the denominator of which is the remaining number of annual payments due the Participant. By way of example, if the Participant elects a 10 year Annual Installment Method, the first payment shall be 1/10 of the Account Balance, calculated as described in this definition. The following year, the payment shall be 1/9 of the Account Balance, calculated as described in this definition. Each annual installment shall be paid on or as soon as practicable after the last business day of the applicable year. 1.5 "Base Annual Salary" shall mean the annual cash compensation relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, excluding bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee's gross income). Base Annual Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans of any Employer and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee. 1.6 "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.7 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.8 "Board" shall mean the board of directors of the Company. 1.9 "Bonus" shall mean any compensation, in addition to Base Annual Salary relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, payable to a Participant as an Employee under any Employer's bonus and cash incentive plans, excluding stock options, stock dividends, stock warrants, and any other stock-based compensation. 1.10 "Change in Control" shall mean the first to occur of any of the following events: (a) Any person (as defined below) becomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing a majority or more of the combined voting power of the Company's then outstanding securities. For purposes of this Agreement, (1) the term "Person" is used as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided, however, that the term shall not include Elizabeth C. Cook, Michael C. Gilliland, Chase Venture Capital Associates or their affiliates, the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, and (2) the term "Beneficial Owner" shall have the meaning given to such term in Rule 13d-3 under the Exchange Act; (b) During any period of two consecutive years following the effective date of this Plan, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Sections 1.11(a) or (c)) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at least a majority thereof; (c) The stockholders of the Company consummate a plan of complete liquidation of the Company or any agreement for the sale or disposition by the Company to an unrelated third party or parties of all or substantially all of the Company's assets. 1.11 "Claimant" shall have the meaning set forth in Section 14.1. 1.12 "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. 1.13 "Committee" shall mean the committee described in Article 12. 1.14 "Company" shall mean Wild Oats Markets, Inc., a Delaware corporation, and any successor to all or substantially all of the Company's assets or business. 1.15 "Company Contribution Account" shall mean (i) the sum of the Participant's Company Contribution Amounts, plus (ii) amounts credited in accordance with all the applicable crediting provisions of this Plan that relate to the Participant's Company Contribution Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Company Contribution Account. 1.16 "Company Contribution Amount" shall mean, for any one Plan Year, the amount determined in accordance with Section 3.5. 1.17 "Company Matching Account" shall mean (i) the sum of all of a Participant's Annual Company Matching Amounts, plus (ii) amounts credited in accordance with all the applicable crediting provisions of this Plan that relate to the Participant's Company Matching Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Company Matching Account. 1.18 "Deduction Limitation" shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are "subject to the Deduction Limitation" under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible for federal income tax purposes, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall continue to be credited/debited with additional amounts in accordance with Section 3.9 below, even if such amount is being paid out in installments. The amounts so deferred and amounts credited thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control. 1.19 "Deferral Account" shall mean (i) the sum of all of a Participant's Annual Deferral Amounts, plus (ii) amounts credited in accordance with all the applicable crediting provisions of this Plan that relate to the Participant's Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to his or her Deferral Account. 1.20 "Director" shall mean any member of the board of directors of any Employer. 1.21 "Directors Fees" shall mean the total fees paid by any Employer in cash during a Plan Year, including retainer fees and meetings fees, as compensation for serving on the board of directors. 1.22 "Disability" shall mean a period during which a Participant is "permanently and totally disabled" within the meaning of Code Section 22(e), as determined in the sole discretion of the Committee. 1.23 "Disability Benefit" shall mean the benefit set forth in Article 8. 1.24 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.25 "Employee" shall mean a person who is an employee of any Employer. 1.26 "Employer(s)" shall mean the Company and/or any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor. 1.27 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.28 "First Plan Year" shall mean the period beginning November 1, 1999 and ending December 31, 1999. 1.29 "Participant" shall mean any Employee or Director (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant's benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce. 1.30 "Plan" shall mean the Company's Deferred Compensation Plan, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time. 1.31 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant's Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant. 1.32 "Plan Year" shall, except for the First Plan Year, mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year. 1.33 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 6. 1.34 "Retirement", "Retire(s)" or "Retired" shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability when the sum of the Participant's age and Years of Service is equal to or greater than fifty five (55). 1.35 "Retirement Benefit" shall mean the benefit set forth in Article 5. 1.36 "Short-Term Payout" shall mean the payout set forth in Section 4.1. 1.37 "Termination Benefit" shall mean the benefit set forth in Article 7. 1.38 "Termination of Employment" shall mean the severing of employment with all Employers, or service as a Director of all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, death or an authorized leave of absence. If a Participant is both an Employee and a Director, a Termination of Employment shall occur only upon the termination of the last of these positions held; provided, however, that such a Participant may elect, at least one year before Termination of Employment and in accordance with the policies and procedures established by the Committee, to be treated for purposes of this Plan as having experienced a Termination of Employment at the time he or she ceases employment with an Employer as an Employee. 1.39 "Trust" shall mean one or more trusts established pursuant to that certain Master Trust Agreement, dated as of November 1, 1999 between the Company and the trustee named therein, as amended from time to time. 1.40 "Trustee" shall mean the trustee named under the Trust. 1.41 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant, the Participant's spouse, or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all of the above as determined in the sole discretion of the Committee. 1.42 "Years of Plan Participation" shall mean the total number of full Plan Years a Participant has been a Participant in the Plan prior to his or her Termination of Employment (determined without regard to whether deferral elections have been made by the Participant for any Plan Year). Any partial year shall not be counted. Notwithstanding the previous sentence, a Participant's first Plan Year of participation shall be treated as a full Plan Year for purposes of this definition, even if it is only a partial Plan Year of participation. 1.43 "Years of Service" shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. Any partial year of employment shall not be counted. ARTICLE 2 Selection, Enrollment, Eligibility 2.1 Selection by Committee. Participation in the Plan shall be limited to a select group of management and highly compensated Employees and Directors of the Employers, as determined by the Committee in its sole discretion. From that group, the Committee shall select, in its sole discretion, Employees and Directors to participate in the Plan. 2.2 Enrollment Requirements. As a condition to participation, each selected Employee and Director shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, all within 30 days after he or she is selected to participate in the Plan. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary. 2.3 Eligibility; Commencement of Participation. Provided an Employee or Director selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period, that Employee or Director shall commence participation in the Plan on the first day of the month following the month in which the Employee or Director completes all such enrollment requirements. If an Employee or a Director fails to meet all such requirements within the period required, in accordance with Section 2.2, that Employee or Director shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents. 2.4 Termination of Participation and/or Deferrals. If the Committee determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to do one or more of the following: (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant's membership status changes, (ii) prevent the Participant from making future deferral elections, and (iii) immediately distribute the Participant's then Account Balance as a Termination Benefit and terminate the Participant's participation in the Plan. ARTICLE 3 Deferral Commitments/Company Matching/Crediting/Taxes 3.1 Minimum Deferrals. (a) Base Annual Salary, Bonus and Director's Fees. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, one or more of the following forms of compensation: (i) Base Annual Salary; (ii) Bonus; and (iii) Director's Fees. The Annual Deferral Amount for each Participant shall not in total be less than $2,000 in any Plan Year. (b) Short Plan Year. Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, or in the case of the First Plan Year, the minimum Annual Deferral Amount for such Participant shall be an amount equal to the product obtained by multiplying $2,000 by a fraction, the numerator of which is the number of full months remaining in that Plan Year and the denominator of which is 12. 3.2 Maximum Deferral. (a) Base Annual Salary, Bonus and Directors Fees. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, up to the following maximum percentages for each of the following forms of compensation: Deferral Maximum Amount Base Annual Salary 50% Bonus 100% Directors Fees 100% Notwithstanding the foregoing, a Participant's total maximum Annual Deferral Amount for the First Plan Year shall be limited to the amount of compensation not yet earned by such Participant for the First Plan Year determined as of the date the Participant submits a Plan Agreement and Election Form to the Committee for acceptance. If a Participant commences participation in the Plan after the first day of a Plan Year (other than the First Plan Year), such Participant's Maximum Annual Deferral Amount shall be limited in the same manner as the First Plan Year limitation. 3.3 Election to Defer; Effect of Election Form. (a) Initial Plan Year. In connection with a Participant's commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee. (b) Subsequent Plan Years. For each succeeding Plan Year, an irrevocable deferral election and such other elections as the Committee shall require must be made by each Participant prior to the end of the preceding Plan Year. The irrevocable deferral election shall be made by timely delivering an Election Form to the Committee in accordance with its rules and procedures. Failure to do so shall preclude a Participant from participating in the Plan for that Plan Year. 3.4 Withholding of Annual Deferral Amounts. For each Plan Year, the total Base Annual Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Annual Salary paycheck in equal amounts, as adjusted from time to time for increases and decreases in Base Annual Salary. The Bonus and Directors Fees portion of the Annual Deferral Amount shall be withheld at the time the Bonus and Directors Fees are to be paid to the Participant, whether or not this occurs during the Plan Year. 3.5 Company Contribution Amount. For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to a Participant's Company Contribution Account. The amount so credited to a Participant may be greater or less than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive a Company Contribution Amount for that Plan Year. The Company Contribution Amount, if any, shall be credited as of the last day of the Plan Year. If a Participant is not employed by an Employer as of the last day of a Plan Year other than by reason of his or her Retirement or death while employed, the Company Contribution Amount for that Plan Year shall be zero. 3.6 Annual Company Matching Amount. A Participant's Annual Company Matching Amount for any Plan Year shall be equal to (i) 50 % of the Participant's Annual Deferral Amount for such Plan Year, up to an amount that does not exceed 4 % of the Participant's Base Annual Salary plus (ii) 25 % of the Participant's Annual Deferral Amount for such Plan Year that exceeds 4 % of the Participant's Base Annual Salary, up to an amount that does not exceed 6 % of the Participant's Base Annual Salary. If a Participant is not employed by an Employer, or is no longer providing services as a Director, as of the last day of a Plan Year other than by reason of his or her Retirement or death, the Annual Company Matching Amount for such Plan Year shall be zero. In the event of Retirement or death, a Participant shall be credited with the Annual Company Matching Amount for the Plan Year in which he or she Retires or dies. 3.7 Investment of Trust Assets. The Trustee shall be authorized, upon written instructions received from the Committee or investment manager appointed by the Committee, to invest and reinvest the assets of the Trust in accordance with the applicable Trust Agreement, including the disposition of stock and reinvestment of the proceeds in one or more investment vehicles designated by the Committee. 3.8 Vesting. (a) A Participant shall at all times be 100% vested in his or her Deferral Account and Company Matching Account. (b) A Participant shall be vested in his or her Company Contribution Account in accordance with the schedule set forth in his or her Plan Agreement. (c) Notwithstanding anything to the contrary contained in Section 3.8(b), in the event of a Change in Control, a Participant's Company Contribution Account shall immediately become 100% vested (if it is not already vested in accordance with the above vesting schedule). (d) Notwithstanding subsection (c), the vesting schedule for a Participant's Company Contribution Account shall not be accelerated to the extent that the Committee determines that such acceleration would cause the deduction limitations of Section 280G of the Code to become effective. In the event that all of a Participant's Company Contribution Account is not vested pursuant to such a determination, the Participant may request independent verification of the Committee's calculations with respect to the application of Section 280G. In such case, the Committee must provide to the Participant within 30 business days of such a request an opinion from an independent public accounting firm selected by the Company (the "Accounting Firm") concluding that a limitation in the vested percentage hereunder is necessary to avoid the limits of Code Section 280G. The opinion shall include supporting calculations. The cost of such opinion shall be paid for by the Company. 3.9 Crediting/Debiting of Account Balances. In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant's Account Balance in accordance with the following rules: (a) Election of Measurement Funds. A Participant, in connection with his or her initial deferral election in accordance with Section 3.3(a) above, shall elect, on the Election Form, one or more Measurement Fund(s) (as described in Section 3.9(c) below) to be used to determine the additional amounts to be credited to his or her Account Balance for the first business day in which the Participant commences participation in the Plan and continuing thereafter for each subsequent business day in which the Participant participates in the Plan, unless changed in accordance with the next sentence. Commencing with the first business day that follows the Participant's commencement of participation in the Plan and continuing thereafter for each subsequent business day in which the Participant participates in the Plan, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the additional amounts to be credited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply to the next business day and continue thereafter for each subsequent business day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence. (b) Proportionate Allocation. In making any election described in Section 3.9(a) above, the Participant shall specify on the Election Form, in increments of five percentage points (5%), the percentage of his or her Account Balance to be allocated to a Measurement Fund (as if the Participant was making an investment in that Measurement Fund with that portion of his or her Account Balance). (c Measurement Funds. The Participant may elect one or more of the following measurement funds, based on certain mutual funds (the "Measurement Funds"), for the purpose of crediting additional amounts to his or her Account Balance. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund. Each such action will take effect as of the first day of the calendar quarter that follows by thirty (30) days the day on which the Committee gives Participants advance written notice of such change. (d) Crediting or Debiting Method. The performance of each elected Measurement Fund (either positive or negative) will be determined by the Committee, in its reasonable discretion, based on the performance of the Measurement Funds themselves. A Participant's Account Balance shall be credited or debited on a daily basis based on the performance of each Measurement Fund selected by the Participant, as determined by the Committee in its sole discretion, as though (i) a Participant's Account Balance were invested in the Measurement Fund(s) selected by the Participant, in the percentages applicable to such calendar quarter, as of the close of business on the first business day of such calendar quarter, at the closing price on such date; (ii) the portion of the Annual Deferral Amount that was actually deferred during any calendar quarter was invested in the Measurement Fund(s) selected by the Participant, in the percentages applicable to such calendar quarter, no later than the close of business on the first business day after the day on which such amounts are actually deferred from the Participant's Base Annual Salary through reductions in his or her payroll, at the closing price on such date; and (iii) any distribution made to a Participant that decreases such Participant's Account Balance ceased being invested in the Measurement Fund(s), in the percentages applicable to such calendar quarter, no earlier than one business day prior to the distribution, at the closing price on such date. The Participant's Annual Company Matching Amount shall be credited to his or her Company Matching Account for purposes of this Section 3.9(d) as of the close of business on the first business day in February of the Plan Year following the Plan Year to which it relates. (e) No Actual Investment. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant's election of any such Measurement Fund, the allocation to his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the Measurement Funds, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust. The Participant shall at all times remain an unsecured creditor of the Company. 3.10 FICA and Other Taxes. (a) Annual Deferral Amounts. For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant's compensation, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary and Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.10. (b) Company Matching Amounts. When a participant becomes vested in a portion of his or her Company Matching Account, the Participant's Employer(s) shall withhold from the Participant's Base Annual Salary and/or Bonus that is not deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes. If necessary, the Committee may reduce the vested portion of the Participant's Company Matching Account in order to comply with this Section 3.10. (c) Distributions. The Participant's Employer(s) or the Trustee, as the case may be, shall withhold from any payments made to a Participant under this Plan all applicable federal, state and local income, employment and other taxes required to be withheld in a manner to be determined in the sole discretion of the Employer(s) or the Trustee. ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election 4.1 Short-Term Payout. In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a future "Short-Term Payout" from the Plan with respect to such Annual Deferral Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the Annual Deferral Amount and the Annual Company Matching Amount, plus amounts credited or debited in the manner provided in Section 3.9 above on those amounts, determined at the time that the Short-Term Payout becomes payable (rather than the date of a Termination of Employment). Subject to the Deduction Limitation and the other terms and conditions of this Plan, each Short-Term Payout elected shall be paid out during a 60 day period commencing immediately on the first day of any Plan Year designated by the Participant that is at least three Plan Years after the Plan Year in which the Annual Deferral Amount is actually deferred. By way of example, if a one year Short-Term Payout is elected for Annual Deferral Amounts that are deferred in the Plan Year commencing November 1, 1999, the three year Short-Term Payout would become payable during a 60 day period commencing January 1, 2002. 4.2 Other Benefits Take Precedence Over Short-Term. Should an event occur that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral Amount, plus amounts credited or debited thereon, that is subject to a Short-Term Payout election under Section 4.1 shall not be paid in accordance with Section 4.1 but shall be paid in accordance with the other applicable Article. 4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within 60 days of the date of approval. The payment of any amount under this Section 4.3 shall not be subject to the Deduction Limitation. 4.4 Withdrawal Election. A Participant (or, after a Participant's death, his or her Beneficiary) may elect, at any time, to withdraw all but not less than all of his or her Account Balance, calculated as if there had occurred a Termination of Employment as of the day of the election, less a withdrawal penalty equal to 10% of such amount (the net amount shall be referred to as the "Withdrawal Amount"). This election can be made at any time, before or after Retirement, Disability, death or Termination of Employment, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. If made before Retirement, Disability or death, a Participant's Withdrawal Amount shall be his or her Account Balance calculated as if there had occurred a Termination of Employment as of the day of the election. No partial withdrawals of the Withdrawal Amount shall be allowed. The Participant (or his or her Beneficiary) shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant (or his or her Beneficiary) shall be paid the Withdrawal Amount within 60 days of his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan for the remainder of the Plan Year of such election and the next Plan Year. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation. ARTICLE 5 Retirement Benefit 5.1 Retirement Benefit. Subject to the Deduction Limitation, a Participant who Retires shall receive, as a Retirement Benefit, his or her Account Balance in accordance with the provisions contained herein. 5.2 Payment of Retirement Benefit. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or pursuant to an Annual Installment Method of 2, 5, 10 or 15 years. The Participant may annually change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted at least 1 year prior to the Participant's Retirement and is accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the Retirement Benefit. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. If elected, the lump sum payment shall be made no later than 60 days after the day on which the Participant Retires. If elected, installment payments shall commence no later than 60 days after the last day of the Plan Year in which the Participant Retires. Any payment made shall be subject to the Deduction Limitation. 5.3 Death Prior to Completion of Retirement Benefit. If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and shall be paid to the Participant's Beneficiary (a) over the remaining number of years and in the same amounts as that benefit would have been paid to the Participant had the Participant survived, or (b) in a lump sum, if requested by the Beneficiary and allowed in the sole discretion of the Committee, that is equal to the Participant's unpaid remaining Account Balance. ARTICLE 6 Pre-Retirement Survivor Benefit 6.1 Pre-Retirement Survivor Benefit. Subject to the Deduction Limitation, the Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant's Account Balance if the Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability. 6.2 Payment of Pre-Retirement Survivor Benefit. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form whether the Pre-Retirement Survivor Benefit shall be received by his or her Beneficiary in a lump sum or pursuant to an Annual Installment Method of 2, 5, 10 or 15 years. The Participant may annually change this election to an allowable alternative payout period by submitting a new Election Form to the Committee, which form must be accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee prior to the Participant's death shall govern the payout of the Participant's Pre-Retirement Survivor Benefit. If a Participant does not make any election with respect to the payment of the Pre-Retirement Survivor Benefit, then such benefit shall be paid in a lump sum. Despite the foregoing, if the Participant's Account Balance at the time of his or her death is less than $25,000, payment of the Pre-Retirement Survivor Benefit may be made, in the sole discretion of the Committee, in a lump sum or pursuant to an Annual Installment Method of not more than 5 years. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the last day of the Plan Year in which the Committee is provided with proof that is satisfactory to the Committee of the Participant's death. Any payment made shall be subject to the Deduction Limitation. ARTICLE 7 Termination Benefit 7.1 Termination Benefit. Subject to the Deduction Limitation, the Participant shall receive a Termination Benefit, which shall be equal to the Participant's Account Balance if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability. 7.2 Payment of Termination Benefit. If the Participant's Account Balance at the time of his or her Termination of Employment is less than $25,000, payment of his or her Termination Benefit shall be paid in a lump sum. If his or her Account Balance at such time is equal to or greater than that amount, the Committee, in its sole discretion, may cause the Termination Benefit to be paid in a lump sum or pursuant to an Annual Installment Method of 5 years. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the last day of the Plan Year in which the Participant experiences the Termination of Employment. Any payment made shall be subject to the Deduction Limitation. ARTICLE 8 Disability Waiver and Benefit 8.1 Disability Waiver. (a) Waiver of Deferral. A Participant who is determined by the Committee to be suffering from a Disability shall be excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Base Annual Salary, Bonus and/or Directors Fees for the remainder of the Plan Year during which the Participant first suffers a Disability. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan. (b) Return to Work. If a Participant returns to employment, or service as a Director, with an Employer, after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above. 8.2 Continued Eligibility; Disability Benefit. A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed, or in the service of an Employer as a Director, and shall be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee may, in its sole and absolute discretion and for purposes of this Plan only, and shall in the case of a Participant who is otherwise eligible to Retire, deem the Participant to have experienced a Termination of Employment, or in the case of a Participant who is eligible to Retire, to have Retired, at any time (or in the case of a Participant who is eligible to Retire, as soon as practicable) after such Participant is determined to be suffering a Disability, in which case the Participant shall receive a Disability Benefit equal to his or her Account Balance at the time of the Committee's determination; provided, however, that should the Participant otherwise have been eligible to Retire, he or she shall be paid in accordance with Article 5. The Disability Benefit shall be paid in a lump sum within 60 days of the Committee's exercise of such right. Any payment made shall be subject to the Deduction Limitation. ARTICLE 9 Beneficiary Designation 9.1 Beneficiary. Each Participant shall have the right, at any time, to designate one or more Beneficiaries to receive benefits payable under the Plan upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. 9.2 Beneficiary Designation; Change; Spousal Consent. A Participant shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary designation by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death. 9.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent. 9.4 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate. 9.5 Doubt as to Beneficiary. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction. 9.6 Discharge of Obligations. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits. ARTICLE 10 Leave of Absence 10.1 Paid Leave of Absence. If a Participant is authorized by the Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3. 10.2 Unpaid Leave of Absence. If a Participant is authorized by the Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld. ARTICLE 11 Termination, Amendment or Modification 11.1 Termination. Each Employer reserves the right to discontinue its sponsorship of the Plan and/or to terminate the Plan at any time with respect to one or more or all of its participating Employees and Directors, by action of its board of directors. Upon the termination of the Plan with respect to any Employer, the Plan Agreements of the affected Participants who are employed by that Employer, or in the service of that Employer as Directors, shall terminate and their Account Balances, determined as if they had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which a Participant was eligible to Retire, then with respect to that Participant as if he or she had Retired on the date of Plan termination, shall be paid to the Participants as follows: Prior to a Change in Control, if the Plan is terminated with respect to all of its Participants, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or pursuant to an Annual Installment Method of up to 15 years, with amounts credited and debited during the installment period as provided herein. If the Plan is terminated with respect to less than all of its Participants, an Employer shall be required to pay such benefits in a lump sum. After a Change in Control, the Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Employer shall have the right to accelerate installment payments without a premium or prepayment penalty by paying the Account Balance in a lump sum or pursuant to an Annual Installment Method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). 11.2 Amendment. Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer by the action of its board of directors; provided, however, that: (i) no amendment or modification shall decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification, and (ii) no amendment or modification of this Section 11.2 or Section 12.2 of the Plan shall be effective. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the Account Balance in a lump sum or pursuant to an Annual Installment Method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). 11.3 Plan Agreement. Despite the provisions of Sections 11.1 and 11.2 above, if a Participant's Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the consent of the Participant. 11.4 Effect of Payment. The full payment of the applicable benefit under Articles 4, 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate. ARTICLE 12 Administration 12.1 Committee Duties. Except as otherwise provided in this Article 12, this Plan shall be administered by a Committee which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company. 12.2 Administration Upon Change In Control. For purposes of this Plan, the Company shall be the "Administrator" at all times prior to the occurrence of a Change in Control. Upon and after the occurrence of a Change in Control, the "Administrator" shall be an independent third party selected by the Trustee and approved by the individual who, immediately prior to such event, was the Company's Chief Executive Officer or, if not so identified, the Company's highest ranking officer (the "Ex-CEO"). The Administrator shall have the discretionary power to determine all questions arising in connection with the administration of the Plan and the interpretation of the Plan and Trust including, but not limited to benefit entitlement determinations; provided, however, upon and after the occurrence of a Change in Control, the Administrator shall have no power to direct the investment of Plan or Trust assets or select any investment manager or custodial firm for the Plan or Trust. Upon and after the occurrence of a Change in Control, the Company must: (1) pay all reasonable administrative expenses and fees of the Administrator; (2) indemnify the Administrator against any costs, expenses and liabilities including, without limitation, attorney's fees and expenses arising in connection with the performance of the Administrator hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the Administrator or its employees or agents; and (3) supply full and timely information to the Administrator or all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the date of circumstances of the Retirement, Disability, death or Termination of Employment of the Participants, and such other pertinent information as the Administrator may reasonably require. Upon and after a Change in Control, the Administrator may be terminated (and a replacement appointed) by the Trustee only with the approval of the Ex-CEO. Upon and after a Change in Control, the Administrator may not be terminated by the Company. 12.3 Agents. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. 12.4 Binding Effect of Decisions. The decision or action of the Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 12.5 Indemnity of Committee. All Employers shall indemnify and hold harmless the members of the Committee, any Employee to whom the duties of the Committee may be delegated, and the Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of gross negligence or willful misconduct by the Committee, any of its members, any such Employee or the Administrator. 12.6 Employer Information. To enable the Committee and/or Administrator to perform its functions, the Company and each Employer shall supply full and timely information to the Committee and/or Administrator, as the case may be, on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee or Administrator may reasonably require. ARTICLE 13 Other Benefits and Agreements 13.1 Coordination with Other Benefits. The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. ARTICLE 14 Claims Procedures 14.1 Presentation of Claim. Any Participant or Beneficiary (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 14.2 Notification of Decision. The Committee shall consider a Claimant's claim within a reasonable time, not to exceed 60 days from the date the Committee received written notice of the claim, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice shall include the following: (i the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; (iii)a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 14.3 below. 14.3 Review of a Denied Claim. Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; (b) may submit written comments or other documents; and/or (c) may request a hearing, which the Committee, in its sole discretion, may grant. 14.4 Decision on Review. The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must contain the following: (a) the specific reasons for the decision; (b) the specific reference(s) to the pertinent Plan provisions upon which the decision was based; and (c) such other matters as the Committee deems relevant. 14.5 Legal Action. A Claimant's compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. ARTICLE 15 Trust 15.1 Establishment of the Trust. The Company shall establish the Trust, and each Employer shall at least annually transfer to the Trust such assets as the Employer determines, in its sole discretion, are necessary to provide, on a present value basis, for its respective future liabilities created with respect to the Annual Deferral Amounts, Company Contribution Amounts, and Company Matching Amounts for such Employer's Participants for all periods prior to the transfer, as well as any debits and credits to the Participants' Account Balances for all periods prior to the transfer, taking into consideration the value of the assets in the trust at the time of the transfer. 15.2 Interrelationship of the Plan and the Trust. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. 15.3 Distributions From the Trust. Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Plan. ARTICLE 16 Miscellaneous 16.1 Status of Plan. The Plan is intended to be a nonqualified plan within the meaning of Code Section 401(a) and is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted to the extent possible in a manner consistent with this intent. 16.2 Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. 16.3 Employer's Liability. An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement. 16.4 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, any amounts payable hereunder. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise. 16.5 Not a Contract of Employment. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and a Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, either as an Employee or a Director, or to interfere with the right of any Employer to discipline or discharge the Participant at any time. 16.6 Furnishing Information. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 16.7 Terms. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 16.8 Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 16.9 Governing Law. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Colorado without regard to its conflicts of laws principles. 16.10 Notice. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: Chief Financial Officer Wild Oats Markets, Inc. 3376 Mitchell Lane Boulder, Colorado 80301 Such notice shall be deemed given as of the date of delivery, or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the last known address of the Participant. Such notice shall be deemed given as of the date of delivery, or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 16.11 Successors. This Plan shall be binding upon and inure to the benefit of all the parties hereto, and, to the extent permitted by this Plan, to their respective heirs, legal representatives, successors, and assigns. 16.12 Spouse's Interest. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. 16.13 Validity. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 16.14 Incompetent. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 16.15 Court Order. The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant's benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouse's or former spouse's interest in the Participant's benefits under the Plan to that spouse or former spouse. 16.16 Distribution in the Event of Taxation. (a) In General. If, for any reason, all or any portion of a Participant's benefits under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the Trustee after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan. (b) Trust. If the Trust terminates in accordance with its terms, and benefits are distributed from the Trust to a Participant in accordance therewith, the Participant's benefits under this Plan shall be reduced to the extent of such distributions. 16.17 Insurance. The Employers, on their own behalf or on behalf of the Trustee, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trustee may choose. The Employers or the Trustee, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance. 16.18 Legal Fees To Enforce Rights After Change in Control. The Company and each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of a Participant's Employer (which might then be composed of new members) or a shareholder of the Company or the Participant's Employer, or of any successor corporation might then cause or attempt to cause the Company, the Participant's Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Participant's Employer to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, the Participant's Employer or any successor corporation has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company and the Participant's Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Participant's Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Participant's Employer or any director, officer, shareholder or other person affiliated with the Company, the Participant's Employer or any successor thereto in any jurisdiction. IN WITNESS WHEREOF, the Company has signed this Plan document as of __________, 1999. "Company" Wild Oats Markets, Inc., a Delaware corporation By: /s/ Title: _________________________________ EX-21.1 4 SUBSIDIARIES Exhibit 21.1 WILD OATS MARKETS, INC. LIST OF SUBSIDIARIES Alfalfa's Canada, Inc. Wild Oats Markets Canada, Inc. Wild Oats of Texas, Inc. Sun Harvest Farms, Inc. EX-23.1 5 PRICEWATERHOUSECOOPERS CONSENT CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 333-66347 and File No. 333-20539) of Wild Oats Markets, Inc. of our report dated March 3, 2000 relating to the financial statements, which appears on page 38 of this Annual Report to Shareholders. We also consent to the incorporation by reference of our report dated March 3, 2000 relating to the financial statement schedules, which appears on page 45 of this Form 10-K. PricewaterhouseCoopers LLP Denver, Colorado March 27, 2000 EX-23.2 6 KPMG CONSENT Consent of Independent Accountants The Board of Directors Henry's Marketplace, Inc.: We consent to incorporation by reference in the registration statements on Form S-3 (No. 333-31292, No. 333-88011, No. 333-62175, and No. 333-52747) and in the registration statements on Form S-8 (No. 333-66347 and No. 333-20539) of Wild Oats Markets, Inc. of our report dated February 5, 1999 with respect to the balance sheet of Henry's Marketplace, Inc. as of December 27, 1998, and the related statements of earnings, stockholders' equity, and cash flows for the fifty-two weeks then ended, which report appears in the January 1, 2000, annual report on Form 10-K of Wild Oats Markets, Inc. KPMG LLP San Diego, California March 27, 2000 EX-23.3 7 ERNST & YOUNG CONSENT CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-3, No. 333-88011, No. 333-62175, No. 333-52747, and No. 333-31292 of Wild Oats Markets, Inc. and the Registration Statements on Form S-8, No. 333-66347 and No. 333-20539 pertaining to certain benefit plans of Wild Oats Markets, Inc. of our report dated November 17, 1999, with respect to the financial statements of Sun Harvest Farms, Inc. as of September 28, 1999, December 29, 1998, and December 30, 1997, and for the nine-month period ended September 28, 1999 and the fiscal years ended December 29, 1998, December 30, 1997, and December 31, 1996, included in the Annual Report (Form 10-K) dated March 27, 2000. Ernst & Young LLP San Antonio, Texas March 27, 2000 EX-27.1 8 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JANUARY 1, 2000 AND THE CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 12-mos Jan-1-2000 Jan-2-1999 Jan-1-2000 21,877 0 2,418 259 51,412 80,167 211,041 54,885 350,629 101,138 103,037 0 0 23 165,364 350,629 721,091 721,091 499,627 499,627 199,217 155 4,584 17,967 5,198 12,769 0 0 281 12,488 0.55 0.53
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