Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2007. |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM __________ TO _________. |
Commission file number 0-21577
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
Incorporation or organization)
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84-1100630
(I.R.S. Employer Identification Number) |
1821 30th Street
Boulder, Colorado 80301
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of
the Exchange Act).
Yes o No þ
As of April 27, 2007, there were 29,882,910 shares outstanding of the registrants common stock
(par value $0.001 per share).
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WILD OATS MARKETS, INC.
Consolidated Balance Sheets
(in thousands, except share data)
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March 31, 2007 |
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December 30, 2006 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
34,567 |
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$ |
40,420 |
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Short-term investments |
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8,250 |
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13,675 |
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Inventories (net of reserves of $1,062 and $1,032,
respectively) |
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69,717 |
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67,753 |
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Accounts receivable (net of allowance for doubtful accounts
of $179 and $288, respectively) |
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4,740 |
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7,581 |
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Prepaid expenses and other current assets |
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9,883 |
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10,204 |
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Total current assets |
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127,157 |
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139,633 |
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Property and equipment, net |
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199,274 |
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192,061 |
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Goodwill, net |
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105,124 |
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105,124 |
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Other intangible assets, net |
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4,776 |
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4,810 |
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Deposits and other assets |
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4,980 |
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4,831 |
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Deferred tax asset, net |
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181 |
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179 |
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$ |
441,492 |
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$ |
446,638 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
57,622 |
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$ |
57,147 |
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Book overdraft |
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24,133 |
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29,888 |
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Accrued liabilities |
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60,930 |
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64,470 |
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Current portion of debt, capital leases and financing
obligations |
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500 |
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573 |
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Total current liabilities |
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143,185 |
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152,078 |
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Long-term debt, capital leases and financing obligations |
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147,596 |
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147,662 |
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Other long-term obligations |
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39,147 |
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38,302 |
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329,928 |
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338,042 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding |
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Common stock, $0.001 par value; 60,000,000 shares authorized, 32,540,392 and 32,454,554 shares issued; and 29,881,129 and
29,795,291 shares outstanding, respectively |
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32 |
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32 |
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Treasury stock, at cost: 2,659,263 shares, respectively |
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(37,181 |
) |
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(37,181 |
) |
Additional paid-in capital |
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243,568 |
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242,322 |
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Accumulated deficit |
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(96,288 |
) |
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(97,912 |
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Accumulated other comprehensive income |
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1,433 |
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1,335 |
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Total stockholders equity |
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111,564 |
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108,596 |
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$ |
441,492 |
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$ |
446,638 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
WILD OATS MARKETS, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts) (unaudited)
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THREE MONTHS ENDED |
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March 31, |
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April 1, |
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2007 |
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2006 |
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Sales |
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$ |
309,942 |
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$ |
298,357 |
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Cost of goods sold and occupancy costs |
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210,776 |
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201,297 |
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Gross profit |
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99,166 |
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97,060 |
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Operating expenses: |
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Direct store expenses |
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73,078 |
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69,821 |
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Depreciation and amortization |
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6,716 |
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6,687 |
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Selling, general and administrative expenses |
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14,022 |
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12,978 |
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Loss on disposal of assets |
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19 |
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90 |
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Pre-opening expenses |
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697 |
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1,459 |
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Restructuring and asset impairment charges, net |
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1,457 |
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1,670 |
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Income from operations |
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3,177 |
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4,355 |
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Interest income |
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551 |
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589 |
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Interest expense |
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(1,840 |
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(1,854 |
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Income before income taxes |
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1,888 |
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3,090 |
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Income tax expense |
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264 |
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205 |
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Net income |
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$ |
1,624 |
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$ |
2,885 |
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Net earnings per common share: |
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Basic |
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$ |
0.05 |
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$ |
0.10 |
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Diluted |
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$ |
0.05 |
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$ |
0.10 |
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Weighted-average common shares outstanding, basic |
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30,005 |
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28,970 |
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Dilutive effect of stock options and restricted stock units |
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337 |
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572 |
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Weighted-average common shares outstanding, assuming dilution |
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30,342 |
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29,542 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
WILD OATS MARKETS, INC.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands) (unaudited)
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THREE MONTHS ENDED |
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March 31, |
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April 1, |
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2007 |
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2006 |
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Net income |
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$ |
1,624 |
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$ |
2,885 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments |
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98 |
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(44 |
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Unrealized gain (loss) on
available-for-sale securities |
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(4 |
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Other comprehensive income (loss) |
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98 |
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(48 |
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Comprehensive income |
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$ |
1,722 |
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$ |
2,837 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
WILD OATS MARKETS, INC.
Consolidated Statements of Cash Flows
(in thousands) (unaudited)
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THREE MONTHS ENDED |
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March 31, |
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April 1, |
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2007 |
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2006 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
1,624 |
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$ |
2,885 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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6,716 |
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6,687 |
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Loss on disposal of property and equipment |
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19 |
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90 |
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Restructuring and asset impairment charges, net |
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1,457 |
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1,670 |
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Interest on related party receivable |
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(88 |
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Stock-based compensation |
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564 |
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778 |
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Accretion of debt issuance costs |
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156 |
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156 |
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Change in assets and liabilities: |
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Inventories, net |
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(1,944 |
) |
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(2,651 |
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Receivables, net, and other assets |
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2,849 |
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15 |
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Accounts payable |
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(1,827 |
) |
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3,506 |
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Accrued liabilities and other liabilities |
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(3,771 |
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133 |
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Net cash provided by operating activities |
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5,843 |
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13,181 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures |
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(11,967 |
) |
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(5,759 |
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Purchase of short-term investments |
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(37,925 |
) |
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(21,410 |
) |
Proceeds from sale of short-term investments |
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43,350 |
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14,522 |
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Proceeds from sale of property and equipment |
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2 |
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24 |
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Net cash used in investing activities |
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(6,540 |
) |
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(12,623 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net decrease in book overdraft |
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(5,755 |
) |
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(760 |
) |
Repayments on notes payable, long-term debt and capital leases |
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(139 |
) |
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(125 |
) |
Proceeds from issuance of common stock, net |
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682 |
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4,227 |
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Net cash (used in) provided by financing activities |
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(5,212 |
) |
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3,342 |
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Effect of exchange rate changes on cash |
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56 |
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(40 |
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Net (decrease) increase in cash and cash equivalents |
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(5,853 |
) |
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3,860 |
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Cash and cash equivalents at beginning of period |
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40,420 |
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35,250 |
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Cash and cash equivalents at end of period |
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$ |
34,567 |
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$ |
39,110 |
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SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: |
Equipment acquired through capital lease |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
6
WILD OATS MARKETS, INC.
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared by the Company
in accordance with United States generally accepted accounting principles for interim financial
information and pursuant to instructions to Form 10-Q and Article 10 of Regulation S-X. Certain
information and footnote disclosures normally included in consolidated financial statements
prepared in accordance with United States generally accepted accounting principles have been
condensed or omitted pursuant to Securities and Exchange Commissions (SEC) rules and
regulations. In the opinion of the Company, all adjustments necessary to present fairly the
financial position at March 31, 2007 and results of operations and cash flows for all periods
presented have been made. The consolidated balance sheet at December 30, 2006 has been derived
from the audited financial statements at that date.
These consolidated financial statements should be read in conjunction with the Companys
audited financial statements and notes thereto included in the Companys 2006 Annual Report on Form
10-K as filed with the SEC. The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenue,
expenses and related disclosures of contingent assets and liabilities. Examples include accounting
for self-insurance reserves, stock-based compensation, restructuring charges and store closing
costs, asset impairment charges, goodwill, inventory valuation, and contingencies. Actual results
may differ from these estimates. The results of operations for the three months ended March 31,
2007 are not necessarily indicative of the operating results to be expected for any subsequent
quarter or for the entire fiscal year ending December 29, 2007.
The unaudited information included in the consolidated financial statements for the three
months ended March 31, 2007 and April 1, 2006 includes the results of operations of the Company for
the 13 weeks then ended.
Pending Tender Offer. On February 21, 2007, the Company entered into an Agreement and Plan of
Merger (the Merger Agreement) with Whole Foods Market, Inc. (Parent or WFM) and WFMI Merger
Co., a wholly-owned subsidiary of Parent (Purchaser).
Subject to the terms and conditions of the Merger Agreement, on February 27, 2007, Purchaser
commenced a tender offer (the Offer) to purchase all of the Companys outstanding shares of
common stock, par value $0.001 per share (the Common Stock), including the associated preferred
stock purchase rights (the Rights), issued pursuant to the Rights Agreement, dated as of May 22,
1998, as amended (the Rights Agreement), between the Company and Wells Fargo Bank, N.A., as
successor in interest to Norwest Bank Minneapolis, N.A., as rights agent (such Common Stock,
together with the associated Rights, the Shares), at a purchase price of $18.50 per Share in cash
(the Offer Price). Upon successful completion of the Offer, Purchaser will be merged (the
Merger) with and into the Company, with each outstanding Share being converted into the right to
receive the Offer Price in cash, and the Company will survive the Merger as a wholly-owned
subsidiary of Parent.
Consummation of the Offer and the Merger are subject to customary closing conditions,
including the expiration or termination of any waiting period (and any extension thereof) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The consummation of the Offer is
also subject to the tender of a majority of the Shares. On March 13, 2007, the Company and WFM
received a request for additional information (commonly known as a second request) from the
Federal Trade Commission (FTC) in connection with the Offer. The Company intends to continue to
cooperate fully with the FTC and to respond promptly to this request. The effect of the second
request is to extend the waiting period imposed by the HSR Act until 10 days after WFM has
substantially complied with the request, unless that period is extended voluntarily by the parties
or terminated sooner by the FTC.
Under a Tender and Support Agreement, dated as of February 21, 2007 (the Tender Agreement),
among the Company, Parent, Purchaser, Yucaipa American Alliance Fund I, L.P. (YAAF), and Yucaipa
American Alliance (Parallel) Fund I, L.P. (YAAF Parallel and together with YAAF, Yucaipa),
Yucaipa has committed to accept the Offer and to tender all Shares beneficially owned by it, which
represent approximately 18% of the Companys total outstanding Shares.
7
Principles of consolidation. The Companys consolidated financial statements include the
amounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Inventories. Store inventories are valued principally at the lower of cost or market, with
cost primarily determined under the retail method on a first in first out (FIFO) basis. FIFO
cost is determined using the retail inventory method for approximately 80% of inventories and using
the item cost method for highly perishable products representing approximately 20% of inventories.
Under the retail inventory method, the valuation of inventories at cost and the resulting gross
margins are determined by applying a cost-to-retail ratio for various categories of similar items
to the retail value of inventories. Inherent in the retail inventory method calculations are
certain management judgments and estimates, including shrinkage, which could impact the ending
inventory valuation at cost as well as the resulting gross margins. Certain other highly
perishable inventories are valued primarily at the lower of cost or market on a specific item
basis, with cost determined on a FIFO basis.
Reclassifications. Certain prior period information has been reclassified to conform to the
current year presentation. This includes a reclassification of the Companys 2006 results of
operations to classify depreciation and amortization separately as its own line item. For the
three months ended April 1, 2006, approximately $6.7 million was reclassified to Depreciation and
Amortization; $5.7 million was reclassified from Cost of Goods Sold and Occupancy Costs, $12,000
was reclassified from Direct Store Expenses, and $987,000 was reclassified from Selling, General
and Administrative expenses.
2. New Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards, The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159
permits entities to choose to measure many financial instruments and certain other items at fair
value. This statement is effective for fiscal years beginning after November 15, 2007. The
Company is currently assessing the impact SFAS No. 159 may have on its financial position.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurement (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 does not require any new fair value measurements. This
statement is effective for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. The Company is currently assessing the impact SFAS No. 157 may have on
its financial position.
3. Short-Term Investments
The amortized cost of debt securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity computed under the effective interest method. Such
amortization and accretion is included in interest income. Realized gains and losses and declines
in value judged to be other than temporary on available-for-sale securities are included in
interest income. The cost of securities sold is based on the specific identification method.
Realized income and dividends on securities classified as available-for-sale are included in
interest income. Investments classified as available-for-sale are marked to market each reporting
period with the unrealized gain or loss reflected as a component of other comprehensive income
(loss).
8
4. Stock-Based Compensation
The following summary presents the impact of recording stock-based compensation on the
Companys consolidated results of operations of for the three months ended fiscal 2007 and fiscal
2006 (in thousands):
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THREE MONTHS ENDED |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
Cost of goods sold and occupancy costs |
|
$ |
1 |
|
|
$ |
4 |
|
Direct Store expenses |
|
|
26 |
|
|
|
94 |
|
Selling, general and administrative expenses |
|
|
537 |
|
|
|
680 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
564 |
|
|
$ |
778 |
|
|
|
|
|
|
|
|
At March 31, 2007, the Company had four stock-based compensation plans: the 2001
Non-Officer/Non-Director Equity Incentive Plan (2001 Plan), the 2006 Equity Incentive Plan (2006
Plan), and two individual nonqualified stock option plans. In addition, the 1996 Equity Incentive
Plan (1996 Plan), which expired in June of 2006, provided for the grant of incentive stock
options to employees (including officers and employee-directors) and nonqualified stock options,
restricted stock and restricted stock units (RSUs) and stock bonuses to employees, directors and
consultants. Under the 1996 Plan, there are still outstanding nonvested options that will continue
to affect the Companys stock-based compensation expense. The 2001 Plan provides for the grant of
nonqualified stock options to employees of the Company who are not officers or directors. The 2006
Plan provides for the grant of stock options, restricted stock, RSUs, stock appreciation rights
(SARs), stock-based and cash-based performance awards and stock bonuses to employees, directors
and consultants. The individual stock option plans were created during 2006 as inducements to
certain executives to accept offers of employment with the Company. For all stock-based
compensation plans except the 2006 Plan, the exercise price of the options is determined by the
Board of Directors, provided that the exercise price for an incentive stock option cannot be less
than 100% of the fair market value of the common stock on the grant date and the exercise price for
a nonqualified stock option cannot be less than 85% of the fair market value of the common stock on
the grant date. For the 2006 Plan, the exercise price of the options is the price per share of
common stock as of the close of market on the day prior to date the option is granted. The
outstanding options for all four plans generally vest over a period of four years and generally
expire 10 years from the grant date. The estimated fair value of the Companys
stock-based awards, less estimated forfeitures, is amortized over the awards expected life on a
straight-line basis.
For all of the Companys stock-based compensation plans, the fair value of each grant was
estimated at the date of grant using the Black-Scholes option pricing model. Black-Scholes
utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield and
expected life. Expected volatilities utilized in the model are based on the historical volatility
of the Companys stock price. The risk-free interest rate is derived from the U.S. Treasury yield
curve in effect at the time of grant. The model incorporates exercise and post-vesting forfeiture
assumptions based on an analysis of historical data. The expected life of the fiscal 2007 grants
is derived from historical information and other factors. The following summary presents the
weighted-average assumptions used for grants issued in the three months ended fiscal 2007 and
fiscal 2006:
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
Estimated dividends |
|
None |
|
None |
Expected volatility |
|
|
47 |
% |
|
|
56 |
% |
Risk-free interest rate |
|
|
4.76 |
% |
|
|
4.34% - 4.63 |
% |
Expected life (years) |
|
|
4.0 |
|
|
|
4.0 |
|
Weighted-average fair value per share |
|
$ |
6.49 |
|
|
$ |
5.31 |
|
9
The following summary presents information regarding outstanding stock options as of March 31,
2007 and changes during the three months then ended with regard to options under the Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Number of |
|
|
Average |
|
|
|
Options |
|
|
Exercise Price |
|
Outstanding as of December 30, 2006 |
|
|
1,597,960 |
|
|
$ |
12.35 |
|
Granted |
|
|
37,500 |
|
|
$ |
15.40 |
|
Forfeited |
|
|
(158,847 |
) |
|
$ |
13.53 |
|
Exercised |
|
|
(56,071 |
) |
|
$ |
9.86 |
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2007 |
|
|
1,420,542 |
|
|
$ |
12.40 |
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2007 |
|
|
984,953 |
|
|
$ |
11.62 |
|
|
|
|
|
|
|
|
As of March 31, 2007, the total unrecorded deferred stock-based compensation balance for
nonvested shares, net of expected forfeitures, was $2.8 million which is expected to be amortized
over a weighted-average period of 1.4 years.
5. Property and Equipment
Property, plant and equipment are recorded at cost and consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
December 30, 2006 |
|
Machinery and equipment |
|
$ |
158,435 |
|
|
$ |
150,005 |
|
Buildings and leasehold improvements |
|
|
182,771 |
|
|
|
167,276 |
|
Construction in progress |
|
|
21,142 |
|
|
|
31,740 |
|
|
|
|
|
|
|
|
|
|
|
362,348 |
|
|
|
349,021 |
|
Less: accumulated depreciation |
|
|
(163,074 |
) |
|
|
(156,960 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
199,274 |
|
|
$ |
192,061 |
|
|
|
|
|
|
|
|
Depreciation expense was $6.6 million and $6.6 million for the three months ended March 31,
2007 and April 1, 2006, respectively.
6. Debt
Contingent convertible senior debentures. In June 2004, the Company issued $115.0 million
aggregate principal amount of its 3.25% Convertible Senior Debentures due May 15, 2034 in a private
placement for total proceeds of $115.2 million. The debentures bear regular interest at the annual
rate of 3.25%, payable semiannually on May 15 and November 15 of each year until May 15, 2011,
after which date, no regular interest will be due. Commencing May 20, 2011 and ending November 14,
2011, and for any six-month period thereafter, contingent interest will be due and payable in the
amount of 0.25% of the average trading price of the debentures during a specified period, if the
average trading price of the debentures equals or exceeds 125% of the principal amount of the
debentures. Refer to Note 8 Earnings per Share for the potentially dilutive impact of the
convertible debentures on future periods.
During the second quarter of 2005, the Company made an irrevocable election to pay the
principal amount of debentures in cash upon conversion, however, the Company retains the ability to
satisfy the remainder of any conversion payment, exceeding the debenture defined principal, in cash
or any combination of cash and common stock. According to their terms, the debentures are callable
and convertible into the Companys common stock prior to maturity at the option of the holders
under the following circumstances: (1) during any calendar quarter commencing after June 30, 2004
and before March 31, 2029, if the last reported sale price of the Companys common stock is greater
than or equal to 130% of the conversion price of $17.70 per share for at least 20 trading days in
the period of 30 consecutive trading days ending on the last trading day of the proceeding calendar
quarter; (2) at any time on or after April 1, 2029 if the last reported sale price of the Companys
common stock on any date on or after March 31, 2029 is greater than or equal to 130% of the
conversion price; (3) subject to certain limitations,
10
during the five business-day period after any five consecutive trading-day period in which the
trading price per debenture for each day of that period was less than 98% of the product of the
conversion rate and the last reported sale price of the Companys common stock; (4) if the Company
calls the debentures for redemption; (5) upon the occurrence of certain corporate transactions; or
(6) if the Company requests a credit rating for the debentures, at any time when the credit ratings
assigned to the debentures are below specified levels. While a credit rating has been issued for
the debentures, the rating was not requested by the Company, but initiated by the rating agency.
Therefore, a change in the current rating will not trigger a call provision. The debentures are
initially convertible into 56.5099 shares of the Companys common stock per $1,000 principal
amount, which is equivalent to approximately $17.70 per share, for total initial underlying shares
of 6,498,639. The conversion rate will be subject to adjustment upon the occurrence of specified
events. Pursuant to the underwriting agreement and within 90 days of issuance, the Company filed a
shelf registration statement covering resales of the debentures and the common stock issuable upon
conversion thereof. The registration statement was declared effective August 26, 2005.
On or after May 20, 2011, the Company may redeem for cash some or all of the debentures at any
time and from time to time, for a price equal to 100% of the principal amount of the debentures
plus accrued and unpaid contingent interest, if any. Holders have the right to require the Company
to repurchase any or all debentures for cash, at a repurchase price equal to 100% of the principal
amount of the debentures, plus accrued and unpaid interest on: (1) May 15, 2011, May 15, 2014, and
May 15, 2024; and (2) upon the occurrence of a fundamental change (as defined in the debenture
indenture). In the case of a fundamental change in which all of the consideration for the common
stock in the transaction or transactions constituting the fundamental change consists of cash, the
Company also will pay to the holders a make-whole premium (as defined in the debenture indenture),
the amount of which could be significant but would not be determinable unless and until there were
to be a public announcement of such a fundamental change. Any make-whole premium would be payable
to all holders regardless of whether the holder elects to require the Company to repurchase the
debentures or elects to surrender the debentures for conversion. The purchase of Shares pursuant
to the Merger Agreement will enable the holders of outstanding convertible debentures to cause the
Company to repurchase their debentures. Purchaser expects to fund all such amounts which may
become due and payable by the Company as a result of the purchase of the Shares.
The debentures are unsecured and unsubordinated obligations, and rank equal in priority with
all of the Companys existing and future unsecured and unsubordinated indebtedness and senior in
right of payment to all of its subordinated indebtedness. The debentures effectively rank junior
to any of the Companys secured indebtedness and any of its indebtedness that is guaranteed by its
subsidiaries. Payment of principal and interest on the debentures will be structurally
subordinated to the liabilities of the Companys subsidiaries.
There are no financial covenants within the debenture indenture, however, the Company paid
penalty interest of 0.25% for the first 90 days of 2005 and paid 0.50% thereafter until the
debentures were publicly registered on August 26, 2005. As of December 31, 2005, all $305,102 in
accrued additional interest to debenture holders due to not having an effective registration
statement within the specified timeframe had been paid.
Credit facility. On March 31, 2005, the Company entered into a five-year revolving secured
credit facility with Bank of America, N.A. (the B of A Facility). Concurrent with the execution
of the B of A Facility, the Company terminated its existing $95.0 million credit facility (the
Wells Facility) with Wells Fargo Bank N.A. as administrative agent. The B of A Facility allows
borrowings and letters of credit up to a maximum of $40.0 million, with an option to increase
borrowings up to $100.0 million, subject to a borrowing base determined by the value of certain
inventory, credit card receivables, invested cash and, at the Companys discretion, mortgaged
leaseholds. The B of A Facility is secured by certain assets including, but not limited to, cash,
inventory and fixed assets. Borrowings under the B of A Facility bear interest, at the Companys
election, at the prime rate or at London Interbank Offering Rate (LIBOR) plus a margin ranging
from 1.00% to 1.50%, depending on the excess borrowing availability over amounts borrowed.
Interest rates are determined quarterly. The Company is charged a commitment fee on the unused
portion of the B of A Facility. There are no financial covenants, other than the obligation to
maintain a certain percentage of minimum excess availability (as defined in the agreement) at all
times. The B of A Facility requires compliance on a monthly basis with certain non-financial
covenants, including limitations on incurring additional indebtedness and making investments, the
use and disposition of collateral, changes of control, as well as cash management provisions. In
conjunction with the debt refinancing, the Company wrote off approximately $559,000 related to the
remaining unamortized debt issuance cost from the Wells Facility. As of March 31, 2007, the
Company has approximately $200,000 of capitalized debt issuance costs remaining to be amortized
over the life of the agreement using the effective interest method. As of March 31, 2007, the
Company had letters of credit outstanding totaling $15.6 million which reduce our borrowing
availability to approximately $24.4 million.
11
7. Derivatives and Hedging Activities
The Company does not have any derivative financial instruments as of March 31, 2007 that meets
the criteria of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
8. Earnings Per Share
Earnings per share are calculated in accordance with the provisions of SFAS No. 128, Earnings
Per Share (SFAS No. 128). SFAS No. 128 requires the Company to report both basic earnings per
share, which is based on the weighted-average number of common shares outstanding, and diluted
earnings per share, which is based on the weighted-average number of common shares outstanding and
all dilutive potential common shares outstanding, except where the effect of their inclusion would
be anti-dilutive. Anti-dilutive stock options of 347,492 and 423,806 for the three months ended
March 31, 2007 and April 1, 2006, respectively, were not included in the diluted earnings per share
calculations.
The Emerging Issues Task Force of the FASB concluded in Issue No. 04-8, The Effect of
Contingently Convertible Debt on Diluted Earnings per Share that contingently convertible debt
should be included in diluted earnings per share computations using the if-converted method
regardless of whether any of the conversion contingencies have been met. During the second quarter
of 2005, the Company irrevocably elected to satisfy 100% of the principal amount of the debentures
in cash to be converted on or after July 1, 2005. The Company maintains the right to satisfy the
remainder of the conversion obligation to the extent it exceeds the principal amount in cash or
common stock or any combination of cash and common stock. In calculating diluted earnings per
share for the three months ending March 31, 2007, no shares related to the debentures conversion
have been included as the effect would have been anti-dilutive.
9. Goodwill and Intangible Assets
During the first three months of fiscal 2007, and all of fiscal 2006, no goodwill was recorded
as a result of acquisitions, the Company concluded goodwill was not impaired, and no other changes
in the carrying amount of goodwill occurred.
Other intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 30, |
|
|
|
2007 |
|
|
2006 |
|
Leasehold interests |
|
$ |
6,598 |
|
|
$ |
6,598 |
|
Less accumulated amortization |
|
|
(2,166 |
) |
|
|
(2,093 |
) |
|
|
|
|
|
|
|
Leasehold interests, net |
|
|
4,432 |
|
|
|
4,505 |
|
Liquor licenses (indefinite lived) |
|
|
344 |
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
$ |
4,776 |
|
|
$ |
4,810 |
|
|
|
|
|
|
|
|
Amortization expense related to finite lived intangible assets was $74,000 and $90,000 for the
three months ended March 31, 2007 and April 1, 2006, respectively. The estimated amortization of
finite lived intangible assets for the remainder of 2007 and each of the fiscal years through 2012
is as follows (in thousands):
|
|
|
|
|
FISCAL |
|
AMORTIZATION |
|
YEAR |
|
EXPENSE |
|
Remainder of 2007 |
|
$ |
221 |
|
2008 |
|
$ |
295 |
|
2009 |
|
$ |
295 |
|
2010 |
|
$ |
295 |
|
2011 |
|
$ |
290 |
|
2012 |
|
$ |
290 |
|
12
10. Restructuring and Asset Impairment Charges
During the first quarter of fiscal 2007, the Company recorded restructuring and asset
impairment charges of $1.5 million consisting of the following components (in thousands):
|
|
|
|
|
Change in estimate related to lease-related liabilities for sites previously
closed |
|
$ |
(92 |
) |
Lease-related liability for a site identified for a future store |
|
|
304 |
|
Accretion expense on lease-related liabilities |
|
|
462 |
|
Severance for employees terminated during the first quarter of fiscal 2007 |
|
|
377 |
|
Asset impairment charges |
|
|
406 |
|
|
|
|
|
Total restructuring and asset impairment charges |
|
$ |
1,457 |
|
|
|
|
|
Details of the significant components are as follows:
|
|
|
Changes in estimate related to lease-related liabilities for sites previously closed
($92,000 of restructuring income) - During the first quarter of fiscal 2007, due to changes
in facts and circumstances, the Company adjusted an estimate for a location in Florida that
was closed during a previous period. |
|
|
|
|
Lease-related liability for a site identified for a future store ($304,000 of
restructuring expense) During the first quarter of fiscal 2007, the Company determined
that a future store location was no longer suitable and recorded an accrual for the net
present value of the future expected minimum lease payments. |
|
|
|
|
Accretion expense on lease-related liabilties ($462,000 of restructuring expense) -
During the first quarter, the Company accrued accretion expense on reserves for
lease-related liabilities that were calculated using the net present value of the minimum
lease payments (net of sublease income). |
|
|
|
|
Severance for employees notified of termination in the first quarter of fiscal 2007
($377,000 of restructuring expense) - During the first quarter of 2007, 28 employees were
notified of their involuntary termination in connection with a reorganization of the
Companys Home Office and regional functions. During the three months ended March 31,
2007, $723,000 in benefits were paid to employees that were terminated during the fourth
quarter of 2006 and the first quarter of 2007. |
|
|
|
|
Asset impairment charges ($406,000 of restructuring expense) During the first
quarter, management wrote off $406,000 for the net book value of assets related to sites
identified for future store locations that were subsequently determined unsuitable. |
During the first quarter of 2007, there were no asset impairment charges in accordance with
the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In
determining whether an impairment exists, the Company estimates the stores future cash flows on an
undiscounted basis, and if the cash flows are not sufficient to recover the carrying value, then
the Company uses a discounted cash flow based on a risk-adjusted discount rate, to adjust its
carrying value of the assets, and records a provision for impairment as appropriate. The Company
continually re-evaluates its stores performance to monitor the carrying value of its long-lived
assets in comparison to projected cash flows.
The Company incurred charges for accelerated depreciation related to planned store closures of
$68,000 and $52,000 for the three months ended March 31, 2007 and April 1, 2006, respectively.
These costs are included in the Depreciation and amortization line of the Consolidated Statements
of Operations.
13
The following table summarizes accruals related to the Companys restructuring charges (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Qtr |
|
|
|
|
EXIT PLANS |
|
Prior |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
Total |
|
Balance at
December 31, 2005: |
|
$ |
5,949 |
|
|
$ |
287 |
|
|
$ |
1,183 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
809 |
|
|
|
|
|
|
|
809 |
|
Lease-related expense |
|
|
54 |
|
|
|
|
|
|
|
724 |
|
|
|
11,811 |
|
|
|
|
|
|
|
12,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(449 |
) |
|
|
|
|
|
|
(449 |
) |
Lease-related liabilities |
|
|
(1,147 |
) |
|
|
|
|
|
|
(824 |
) |
|
|
(1,195 |
) |
|
|
|
|
|
|
(3,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision adjustments |
|
|
20 |
|
|
|
(7 |
) |
|
|
|
|
|
|
936 |
|
|
|
|
|
|
|
949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 30, 2006: |
|
$ |
4,876 |
|
|
$ |
280 |
|
|
$ |
1,083 |
|
|
$ |
11,912 |
|
|
$ |
|
|
|
$ |
18,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317 |
|
|
|
60 |
|
|
|
377 |
|
Lease-related expense |
|
|
99 |
|
|
|
|
|
|
|
20 |
|
|
|
251 |
|
|
|
304 |
|
|
|
674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(666 |
) |
|
|
(58 |
) |
|
|
(724 |
) |
Lease-related liabilities |
|
|
(207 |
) |
|
|
|
|
|
|
(178 |
) |
|
|
(1,030 |
) |
|
|
|
|
|
|
(1,415 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530 |
|
|
|
(2 |
) |
|
|
528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
March 31, 2007: |
|
$ |
4,768 |
(1) |
|
$ |
280 |
(1) |
|
$ |
925 |
(1) |
|
$ |
11,314 |
(2) |
|
$ |
304 |
(1) |
|
$ |
17,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The restructuring accrual balance consists of lease-related liabilities. |
|
(2) |
|
The restructuring accrual balance consists of lease-related liabilities
and $267 for employee termination benefits. |
As of March 31, 2007, the Companys restructuring balances consist of $6.2 million in accrued
liabilities and other long-term obligations of $11.4 million.
11. Income Taxes
On December 31, 2006, the first day of the first quarter of fiscal 2007, the Company adopted
the provisions of Financial Standards Accounting Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109 (FIN No. 48). As a
result of the implementation of FIN No. 48, the Company recorded a $4.0 million decrease in the
gross deferred tax assets. The Company did not record any cumulative adjustment to the opening
balance of retained earnings and paid-in-capital on December 31, 2006, as no additional net
liability for unrecognized tax positions were identified as of that date. The total amount of
unrecognized tax benefits as of March 31, 2007, was $4.0 million. The Company is in discussions
with certain state taxing authorities on several open tax positions, and it is possible that the
amount of the liability for unrecognized tax benefits could change during the next fiscal year. An
estimate of the range of the possible change cannot be made.
In accordance with the Companys accounting policy, accrued interest and penalties related to
unrecognized tax benefits are recognized as a component of tax expense. This policy did not change
as a result of the adoption of FIN No. 48. The Companys financial statements do not currently
include any accrued interest or penalties with regard to uncertain tax positions.
The Company files income tax returns, including returns for its subsidiaries, with federal,
state, local, and foreign jurisdictions. The Company is no longer subject to IRS examination for
periods prior to 2003, although
carryforward attributes that were generated prior to 2003 may still be adjusted upon
examination by the IRS if they either have been or will be used in a future period. Various state,
local, and foreign income tax returns are also under examination by taxing authorities. The
Company does not believe that the outcome of any examination will have a material impact on its
financial statements.
14
12. Related Party Transactions
Perry D. Odak. The Company and Perry D. Odak, the Companys former Chief Executive Officer
and President entered into an employment agreement, dated March 6, 2001 (the Odak Agreement).
The Odak Agreement, as amended May 10, 2005, provided for the payment of the existing $9.2 million
supplemental bonus in the event of Mr. Odaks death or disability, as defined in the Odak
Employment Agreement, while employed by the Company, and for payment of a bonus of approximately
$1.6 million: (i) in the event Mr. Odak terminated his employment for good reason, as defined in
the Odak Employment Agreement, or (ii) in the event Mr. Odak was terminated without Cause, as
defined in the Odak Employment Agreement. The Company acquired an insurance policy for the benefit
of the Company to cover Mr. Odaks death or disability in the approximate amount of the
supplemental bonus.
In March 2001, Mr. Odak purchased 1,332,649 shares of Common Stock for $6.969 per share for an
aggregate purchase price of $9.3 million. Mr. Odak paid $13,326 in cash and executed a full
recourse, five-year promissory note for the balance of $9,273,905 to the Company, with interest
accruing at 5.5% per annum, compounding semiannually. On February 19, 2006, pursuant to the
termination of the five-year promissory note, Mr. Odak sold 678,530 shares of Common Stock for
$17.89 per share to the Company. The Company repurchased the shares for $12,138,902, effectively
relieving all debt owed by Mr. Odak and reducing the number of shares outstanding by 678,530. The
repurchased shares are reflected as treasury shares in the Companys consolidated balance sheet.
On June 16, 2006, and again on August 14, 2006, the Company and Mr. Odak entered into two
consecutive amendments to the Employment Agreement, the Fifth Amendment and the Sixth Amendment, to
extend the period during which a notice of non-renewal could be given under the Odak Employment
Agreement, which continued on a year-to-year basis after expiration of the initial five year term
in March 2006. With respect to the existing one-year term, the amendments changed the dates within
which the Company must provide to Mr. Odak notice of non-renewal of the Employment Agreement to not
later than, with reference to the Fifth Amendment, August 15, 2006, and with reference to the Sixth
Amendment, October 16, 2006 (such extension periods being referred to as the Extended Notice
Period). The deadline for notice of non-renewal of the Employment Agreement for all years after
March 19, 2007 remained unchanged by the amendments. The amendments also provided that Mr. Odak
may terminate his employment with the Company for Good Reason (as defined in the Employment
Agreement) if (a) the Company, in bad faith, fails to engage in negotiations regarding a new
employment agreement or modifications to the Employment Agreement during the Extended Notice Period
or (b) during the Extended Notice Period, the Company provides Mr. Odak with a notice of
non-renewal of the Employment Agreement prior to, with reference to the Fifth Amendment, August 14,
2006, or with reference to the Sixth Amendment, October 13, 2006. Refer to Note 14 Subsequent
Events for further details on the status of this Employment Agreement.
As a result of the inability of the Company and Mr. Odak to agree upon a new or modified
employment agreement, Perry D. Odak resigned effective October 19, 2006. Consequently, the
Employment Agreement dated March 6, 2001, as amended, between Mr. Odak and the Company was
terminated as of October 19, 2006, except to the extent incorporated into a severance agreement
dated October 19, 2006 between the Company and Mr. Odak (the Severance Agreement).
Pursuant to the Severance Agreement, in exchange for mutual general releases of any claims by
the Company or Mr. Odak against each other and a non-competition covenant from Mr. Odak through
October 2009, Mr. Odak will receive continuation of his current base salary for a period of
thirty-six months, valued at approximately $1,534,000, in addition to a payment valued at
approximately $1,978,000 in recognition of the increased profitability of the Company and in light
of the termination of the Companys obligations under the Employment Agreement. Mr. Odak will also
continue to receive both medical and group life insurance benefits for thirty-six months. He will
also maintain the use of the automobile currently provided by the Company for the balance of the
term remaining on its lease ending June 16, 2009. The Company has valued the medical and group
life insurance benefits at approximately $33,000, and the use of the automobile through the
remainder of the lease has been valued at approximately $48,000. Approximately $3.6 million
related to the above amounts payable to Mr.
Odak were accrued by the Company in 2006. The Company also accelerated the vesting of 4,167
shares of restricted stock granted to Mr. Odak for his performance in 2006 that were scheduled to
vest in February of 2007. The Company expensed an additional $45,000 related to the accelerated
vesting of the restricted stock.
15
Other. Mark A. Retzloff was a member of the Companys Board of Directors and sat on its Real
Estate Committee until the expiration of his term as director at the Companys Annual Meeting of
Shareholders on May 3, 2006. As a result of Mr. Retzloffs position as Chief Organic Officer of
Aurora Organic Dairy, a vendor that derives 6% of its total revenues from sales of organic milk to
the Company under the Companys private label brand, the Company considered the organic milk
transactions to include a related party relationship until Mr. Retzloffs term as a director
expired on May 3, 2006. Stacey J. Bell, a current member of the Companys Board of Directors, is
an employee of Ideasphere, Inc., which sold vitamins and supplements to the Company through the
first two quarters of fiscal 2006. Total purchases from these vendors for the three months ended
March 31, 2007 and April 1, 2006 were $0 and $1.0 million, respectively. A majority of these
purchases are made primarily through the Companys primary distributor, UNFI and are therefore
indirect in nature. These costs are all for inventory and the related cost of goods sold. As of
March 31, 2007 and April 1, 2006, amounts owed to these vendors were $0 and $53,000, respectively.
Gregory Mays, the Chairman of the Board of Directors and interim CEO, is also on the Board of
Directors for Pathmark Stores, Inc. which began carrying the Wild Oats corporate branded products
during the fourth quarter of 2006. Total sales to Pathmark Stores during the three months ended
March 31, 2007 and April 1, 2006 were $1.3 million and $0, respectively.
13. Contingencies
Tim Auchterlonie, individually and on behalf of all others similarly situated and the
general public, and Roes 1 to 1000 vs. Wild Oats Markets, Inc. and Does 1 through 100, is a
suit brought in August 2004 on behalf of six plaintiffs in the Superior Court, County of Los
Angeles, for payment of overtime and damages relating to alleged violations of the California
Business and Professions Code by a former store director claiming that he should have been
classified as an employee paid on an hourly basis, together with other related claims. The Company
believes that all of the named plaintiffs were correctly classified as exempt employees based upon
their job duties. The Company settled with four of the plaintiffs for an immaterial amount in the
aggregate and one plaintiff withdrew his claims. The claims of one plaintiff went to trial, and
after a bench trial, the Court found in favor of the remaining plaintiff on the claim for unlawful
nonpayment of overtime compensation, and ordered that judgment on damages should enter in the
amount of approximately $43,700, plus attorneys fees in the amount of approximately $87,000. The
Company has appealed the judgment.
Four cases related to the Auchterlonie suit have been filed. The Company believes
that it will prevail in each case, but if liability were to be assessed, the aggregate potential
liability in all of these related cases could be material. Ana Marie Hoeppner et al. v. Wild
Oats Markets, Inc. and Does 1 through 100, Superior Court, County of Los Angeles, is filed by
six California plaintiffs arising from claimed misclassification as exempt employees. Jason
Puerto, et al. v. Wild Oats Markets, Inc. and Does 1 through 100, is a suit brought by eight
plaintiffs in October 2006 in the Superior Court, County of Los Angeles, with substantively similar
claims as Hoeppner. A bench trial of each of the Hoeppner and Puerto cases
is set to commence on January 28, 2008 before the judge who presided at the Auchterlonie
trial. John Montagne, et al., v. Wild Oats Markets, Inc. and Does 1 through 100, is a suit
filed in March 2007 in the Superior Court, County of Los Angeles, on behalf of 14 individuals, with
substantively similar claims as Hoeppner. Kelvin Massie, Anne Ress-Lemay and Gary
Liss, individually and on behalf of all other similarly situated and the California general public
v. Wild Oats Markets, Inc. and Does 1 through 100, is a purported class action lawsuit filed in
April 2007 in the Superior Court, County of Los Angeles, arising from claimed misclassification of
certain exempt employees while such employees were in a training program. The purported class is
small and any potential liability immaterial.
In October 2000, the Company was named as defendant in 3601 Group Inc. v. Wild Oats
Northwest, Inc., Wild Oats, Inc. and Wild Oats Markets, Inc., a suit filed in Superior Court
for King County, Washington, by a property owner who claims that Alfalfas Inc., the Companys
predecessor in interest, breached a lease in 1995 related to certain property in Seattle,
Washington. After trial in fiscal 2002, a jury awarded $0 in damages to the plaintiffs, and the
Company was subsequently awarded $190,000 in attorneys fees. The judgment was reversed on the
plaintiffs appeal and the matter was remanded to the trial court. After a jury trial in August
2006, judgment was entered against the Company in the amount of $823,000, inclusive of attorneys
fees, costs and interest. The Company has posted a bond and filed a notice of appeal.
16
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 managements opinion that these
lawsuits will not result in liabilities that would materially affect the Companys consolidated
results of operations, financial position, or cash flows.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This report on Form 10-Q contains certain forward-looking statements regarding our future
results of operations and performance. Important factors that could cause differences in results
of operations include, but are not limited to, risks and uncertainties related to the proposed
Merger, the timing, execution and performance of new store openings, relocations and remodels; the
timing and liability resulting from store closures; the amount of time before new stores become
profitable; the timing and impact of promotional and advertising campaigns; the impact of
competition; changes in merchandising strategies, product supply or suppliers; changes in
management information needs; changes in customer needs and expectations; governmental and
regulatory actions; general industry or business trends or events; changes in economic or business
conditions in general or affecting the natural foods industry in particular; and competition for
and the availability of sites for new stores and potential acquisition candidates. See
Managements Discussion and Analysis of Financial Condition and Results of Operations Cautionary
Statement Regarding Forward-Looking Statements.
Executive Summary
This Executive Summary section of Managements Discussion and Analysis of Financial Condition
and Results of Operations provides a broad summary of the more specific and detailed information
disclosed in other sections of this report. The context that it provides should be viewed as a
supplement to, and read in conjunction with, the details contained elsewhere in this report.
Wild Oats Markets, Inc. is one of the largest natural foods supermarket chains in North
America. As of the date of this report, we operated 110 natural foods stores in 24 states and
British Columbia, Canada. We operate in the retail grocery industry with two store formats: the
natural foods supermarket format, under the Wild Oats Marketplace® name nationwide and the Capers
Community Market® name in Canada; and the farmers market format, under the Henrys Farmers Market®
name in southern California; and the Sun Harvest name in Texas. Both formats emphasize natural
and organic products with a wide selection of products in a full-service environment. The formats
share a core demographic customer profile and similar economic characteristics. We manage support
services provided to the stores centrally from our Boulder, Colorado headquarters. All of our
stores in the United States, regardless of format, purchase from the same primary distributor based
on centralized negotiations, merchandising and marketing strategies. Our Riverside, California
distribution center (DC) primarily supplies produce, private label groceries, bulk foods, natural
living vitamins, minerals, and supplements, and selected other items for the majority of our stores
west of the Mississippi River. We continue to identify additional procurement opportunities to
maximize efficiencies of the DC.
In 2007, we are focusing our efforts on increasing comparable store sales growth and improving
overall merchandising and the store conditions of operating stores. As of the end of the first
quarter of fiscal 2007, we had 110 stores located in 24 states and Canada, as compared to 112
stores located in 24 states and Canada at the end of the first quarter of fiscal 2006.
On February 21, 2007, we entered into an Agreement and Plan of Merger (the Merger Agreement)
with Whole Foods Market, Inc. (Parent or WFM) and WFMI Merger Co., a wholly-owned subsidiary of
Parent (Purchaser).
Subject to the terms and conditions of the Merger Agreement, on February 27, 2007, Purchaser
commenced a tender offer (the Offer) to purchase all of our outstanding shares of common stock,
par value $0.001 per share (the Common Stock), including the associated preferred stock purchase
rights (the Rights), issued pursuant to the Rights Agreement, dated as of May 22, 1998, as
amended (the Rights Agreement), between the us and Wells Fargo Bank, N.A., as successor in
interest to Norwest Bank Minneapolis, N.A., as rights agent (such Common Stock, together with the
associated Rights, the Shares), at a purchase price of $18.50 per Share in cash (the Offer
Price). Upon successful completion of the Offer, Purchaser will be merged (the Merger) with and
into us, with
each outstanding Share being converted into the right to receive the Offer Price in cash, and
we will survive the Merger as a wholly-owned subsidiary of Parent.
17
Consummation of the Offer and the Merger are subject to customary closing conditions,
including the expiration or termination of any waiting period (and any extension thereof) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The consummation of the Offer is
also subject to the tender of a majority of the Shares. On March 13, 2007, the Company and WFM
received a request for additional information (commonly known as a second request) from the
Federal Trade Commission (FTC) in connection with the Offer. We intend to continue to cooperate
fully with the FTC and to respond promptly to this request. The effect of the second request is to
extend the waiting period imposed by the HSR Act until 10 days after WFM has substantially complied
with the request, unless that period is extended voluntarily by the parties or terminated sooner by
the FTC.
Under a Tender and Support Agreement, dated as of February 21, 2007 (the Tender Agreement),
among the Company, Parent, Purchaser, Yucaipa American Alliance Fund I, L.P. (YAAF), and Yucaipa
American Alliance (Parallel) Fund I, L.P. (YAAF Parallel and together with YAAF, Yucaipa),
Yucaipa has committed to accept the Offer and to tender all Shares beneficially owned by it, which
represent approximately 18% of the Companys total outstanding Shares.
Results of Operations
Our net income for the three months ended March 31, 2007 was $1.6 million or $0.05 per diluted
share compared with net income of $2.9 million or $0.10 per diluted share in the same period in
fiscal 2006. The following tables set forth, for the periods indicated, certain selected income
statement data expressed as a percentage of sales and in dollars (in thousands percentages may
not add due to rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
Sales |
|
$ |
309,942 |
|
|
|
100.0 |
% |
|
$ |
298,357 |
|
|
|
100.0 |
% |
Cost of goods sold and occupancy costs |
|
|
210,776 |
|
|
|
68.0 |
% |
|
|
201,297 |
|
|
|
67.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
99,166 |
|
|
|
32.0 |
% |
|
|
97,060 |
|
|
|
32.5 |
% |
Direct store expenses |
|
|
73,078 |
|
|
|
23.6 |
% |
|
|
69,821 |
|
|
|
23.4 |
% |
Depreciation and amortization |
|
|
6,716 |
|
|
|
2.2 |
% |
|
|
6,687 |
|
|
|
2.2 |
% |
Selling, general and administrative expenses |
|
|
14,022 |
|
|
|
4.5 |
% |
|
|
12,978 |
|
|
|
4.3 |
% |
Loss on disposal of assets |
|
|
19 |
|
|
|
0.0 |
% |
|
|
90 |
|
|
|
0.0 |
% |
Pre-opening expenses |
|
|
697 |
|
|
|
0.2 |
% |
|
|
1,459 |
|
|
|
0.5 |
% |
Restructuring and asset impairment charges,
net |
|
|
1,457 |
|
|
|
0.5 |
% |
|
|
1,670 |
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
3,177 |
|
|
|
1.0 |
% |
|
|
4,355 |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
551 |
|
|
|
0.2 |
% |
|
|
589 |
|
|
|
0.2 |
% |
Interest expense |
|
|
(1,840 |
) |
|
|
(0.6 |
)% |
|
|
(1,854 |
) |
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1,888 |
|
|
|
0.6 |
% |
|
|
3,090 |
|
|
|
1.0 |
% |
Income tax expense |
|
|
264 |
|
|
|
0.1 |
% |
|
|
205 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,624 |
|
|
|
0.5 |
% |
|
$ |
2,885 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Analysis
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
March 31, |
|
|
April 1, |
|
|
2006 to |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
For the three months ended (in thousands): |
|
$ |
309,942 |
|
|
$ |
298,357 |
|
|
|
3.9 |
% |
18
Sales for the three months ended March 31, 2007 increased 3.9%, as compared to the same period
in fiscal 2006. The contribution of seven new stores opened since the end of last years first
quarter drove the overall increase in net sales and more than offset the sales impact of nine store
closures in 2006. In addition, sales of the
Companys corporate branded products to third parties have increased by approximately $2.0
million in the first quarter of 2007 over the same period in fiscal 2006. Total square feet of
open stores decreased 1.2% over the first quarter of 2006, as the first fiscal quarter 2007 ended
with 2.53 million total square feet as compared to 2.56 million total square feet in the first
fiscal quarter of 2006. Comparable store sales increased 0.3% for the year to date period ended
March 31, 2007 as compared to an increase of 4.1% in the same period last year. Reduced comparable
store sales in the first quarter of 2007 relative to last year is attributable to the continued
impact of new competition and the year over year comparison of all stores participating in certain
promotional activities.
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
March 31, |
|
|
April 1, |
|
|
2006 to |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
For the three months ended (in thousands): |
|
$ |
99,166 |
|
|
$ |
97,060 |
|
|
|
2.2 |
% |
As a percent of sales for the three
months ended: |
|
|
32.0 |
% |
|
|
32.5 |
% |
|
|
(0.5 |
)% |
Gross profit consists of sales less cost of goods sold and store occupancy costs. Occupancy
costs include rent and utilities. As a percentage of sales, gross profit decreased to 32.0% for
the three months ended March 31, 2007 from 32.5% for the same period in fiscal 2006. The decrease
in gross margin relative to last year can be attributed to increased occupancy costs related to the
new store locations, more aggressive promotional activities, and a mix shift to higher sales in
lower margin product categories.
Direct store expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
March 31, |
|
|
April 1, |
|
|
2006 to |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
For the three months ended (in thousands): |
|
$ |
73,078 |
|
|
$ |
69,821 |
|
|
|
4.7 |
% |
As a percent of sales for the three
months ended: |
|
|
23.6 |
% |
|
|
23.4 |
% |
|
|
0.2 |
% |
Direct store expenses include payroll, payroll taxes and benefits, marketing and advertising,
regional store support services, store supplies and maintenance, and other store-specific costs.
As a percentage of sales, direct store expenses increased to 23.6% from 23.4% in the three months
ended March 31, 2007 and April 1, 2006, respectively. Direct store expenses as a percent of sales
increased as a result of higher inventory service costs and an upgrade in stores information
technology systems. Further, in the first quarter of 2007, in order to better support our stores,
we have increased the regional presence of management.
Depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
March 31, |
|
|
April 1, |
|
|
2006 to |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
For the three months ended (in thousands): |
|
$ |
6,716 |
|
|
$ |
6,687 |
|
|
|
0.4 |
% |
As a percent of sales for the three
months ended: |
|
|
2.2 |
% |
|
|
2.2 |
% |
|
|
0.0 |
% |
Depreciation and amortization expense for the quarter ended March 31, 2007 remained constant
at 2.2% of sales, compared to the same period in the prior year.
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
March 31, |
|
|
April 1, |
|
|
2006 to |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
For the three months ended (in thousands): |
|
$ |
14,022 |
|
|
$ |
12,978 |
|
|
|
8.0 |
% |
As a percent of sales for the three
months ended: |
|
|
4.5 |
% |
|
|
4.3 |
% |
|
|
0.2 |
% |
Selling, general and administrative (SG&A) expenses include corporate administrative support
services and purchasing. SG&A expenses for the quarter ended March 31, 2007 were 4.5% of sales,
which is a slight increase over prior year. SG&A expenses in the first quarter were higher as a
percentage of sales due to transaction
costs related to the pending Merger. These expenses totaled $3.5 million during the first
quarter of 2007. Excluding the transaction costs, SG&A expenses were 3.4% of sales, a decrease of
0.9%, due to improved operating efficiency and expense management.
19
Pre-opening expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
March 31, |
|
|
April 1, |
|
|
2006 to |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
For the three months ended (in thousands): |
|
$ |
697 |
|
|
$ |
1,459 |
|
|
|
(52.2 |
)% |
As a percent of sales for the three months ended: |
|
|
0.2 |
% |
|
|
0.5 |
% |
|
|
(0.3 |
)% |
Pre-opening expenses include labor, rent, advertising, utilities, training, supplies and
certain other costs incurred prior to a stores opening. Pre-opening expenses for the first
quarter of fiscal 2007 decreased from $1.5 million in the first quarter of 2006 to $697,000 during
the same period in fiscal 2007, due to the timing of the opening of new stores, in addition to the
costs related to future planned store openings.
The number of stores opened is as follows:
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
New stores |
|
|
1 |
|
|
|
1 |
|
In the first quarter of fiscal 2007, we opened a new Wild Oats Marketplace in Naples, Florida.
Restructuring and asset impairment charges, net
Restructuring and asset impairment charges consist of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
Change in estimate related to lease-related
liabilities for sites previously closed |
|
$ |
(92 |
) |
|
$ |
66 |
|
Lease-related liabilities during the current period |
|
|
304 |
|
|
|
1,362 |
|
Accretion expense on lease-related liabilities |
|
|
462 |
|
|
|
128 |
|
Severance for employees terminated during the period |
|
|
377 |
|
|
|
114 |
|
Asset impairment charges |
|
|
406 |
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and asset impairment charges |
|
$ |
1,457 |
|
|
$ |
1,670 |
|
Restructuring and asset impairment charges include lease termination costs, severance for
employees notified of termination, accretion expense on reserves for lease-related liabilities that
were calculated using the net present value of minimum lease payments (net of sublease income), and
non-cash charges for asset impairments. Restructuring and asset impairment charges of $1.5 million
for the first quarter of 2007 decreased from $1.7 million in the same period ended April 1, 2006
due mainly to a decline in the number of stores closed during the first quarter of 2007, offset by
an increase in accretion in the first quarter of 2007 as a result of the closure of eight stores
during the fourth quarter of 2006. In addition, both severance and asset impairment charges
increased in the first quarter of 2007 over the first quarter of 2006 due to the reorganization of
our Home Office and regional staff functions and the write off of the net book value of assets
related to sites identified for future store locations that were subsequently determined
unsuitable. Refer to Note 10 Restructuring and Asset Impairment Charges for more details.
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
March 31, |
|
|
April 1, |
|
|
2006 to |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
For the three months ended (in thousands): |
|
$ |
551 |
|
|
$ |
589 |
|
|
|
(6.5 |
)% |
As a percent of sales for the three months ended: |
|
|
0.2 |
% |
|
|
0.2 |
% |
|
|
0.0 |
% |
20
Interest income was $551,000 for the three ended March 31, 2007 compared to $589,000 for the
same period in fiscal 2006. The decrease of 6.5% is due to a decline in the average balance of
cash invested year over year.
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
March 31, |
|
|
April 1, |
|
|
2006 to |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
For the three months ended (in thousands): |
|
$ |
1,840 |
|
|
$ |
1,854 |
|
|
|
(0.8 |
)% |
As a percent of sales for the three
months ended: |
|
|
0.6 |
% |
|
|
0.6 |
% |
|
|
0.0 |
% |
Interest expense during the first quarter ended March 31, 2007 remained relatively consistent
compared to the same period in 2006.
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
March 31, |
|
|
April 1, |
|
|
2006 to |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
For the three months ended (in thousands): |
|
$ |
264 |
|
|
$ |
205 |
|
|
|
28.8 |
% |
As a percent of sales for the three months ended: |
|
|
0.1 |
% |
|
|
0.0 |
% |
|
|
0.1 |
% |
Effective tax rate for the three months ended: |
|
|
14.0 |
% |
|
|
6.6 |
% |
|
|
7.4 |
% |
For the quarter ended March 31, 2007, we recorded $264,000 of income tax expense, as a result
of taxable foreign income during the period. The tax benefit resulting from the loss in previous
years on domestic operations has been fully offset by a tax valuation allowance that was
established at fiscal 2004 year end. We have determined that any expected federal or state income
tax expense for the current quarter and fiscal year will be expected to be fully offset by deferred
tax assets that are currently subject to a 100% valuation allowance.
Earnings before interest, taxes, depreciation and amortization, loss on early extinguishment of
debt, loss (gain) on asset disposals, net, restructuring and asset impairment charges (income),
net, and stock-based compensation expense, as adjusted (EBITDA, as adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
March 31, |
|
|
April 1, |
|
|
2006 to |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
For the three months ended (in thousands): |
|
$ |
11,933 |
|
|
$ |
13,580 |
|
|
|
(12.1 |
)% |
As a percent of sales for the three
months ended: |
|
|
3.9 |
% |
|
|
4.6 |
% |
|
|
(0.7) |
% |
We believe that the reconciliation of earnings before interest, taxes, depreciation and
amortization (EBITDA) and EBITDA, as adjusted, provides meaningful non generally accepted
accounting principles (GAAP) financial measures to help management and investors understand and
compare business trends among different reporting periods on a consistent basis, independently of
regularly reported non-cash charges and infrequent or unusual events as determined by management.
Readers are cautioned not to view EBITDA or EBITDA, as adjusted, as an alternative to GAAP results
or as being comparable to results reported or forecasted by other companies, and should refer to
the reconciliation of GAAP net income (loss) results to EBITDA and EBITDA, as adjusted, for the
three months ending March 31, 2007 and April 1, 2006, respectively. For an explanation and
reconciliation of EBITDA, and EBITDA, as adjusted, see Non GAAP Financial Information.
Liquidity and Capital Resources
Our primary sources of capital have been cash flow from operations (which includes trade
payables), bank indebtedness, and the sale of equity securities. Primary uses of cash have been
the financing of new store development, new store openings, relocations, remodels and acquisitions,
repurchase of common stock and repayment of debt.
21
Net cash generated by operating activities decreased by $7.3 million to $5.8 million during
the first three months of fiscal 2007, as compared to $13.2 million during the same period in
fiscal 2006. This decline is primarily due to lower net income of $1.3 million, in addition to a
decrease of $5.7 million in the change of assets and liabilities.
Net cash used in investing activities was $6.5 million during the first three months of fiscal
2007 as compared to $12.6 million of cash used in investing activities during the same period in
fiscal 2006. The $6.1 million decline in cash utilized is due to an increase of $12.3 million in
the net sale of short-term investments, offset by a $6.2 million increase in capital expenditures
during the first three months of 2007 compared to the same period in 2006.
Net cash used in financing activities was $5.2 million during the first three months of 2007
compared to $3.3 million of cash provided by financing activities during the same period in fiscal
2006. The change in cash flows from financing activities is the result of a decrease of $3.5
million in proceeds from the issuances of common stock due primarily to option exercises and a $5.0
million decrease in book overdraft.
EBITDA. EBITDA was $9.9 million for the three month period ended March 31, 2007, as compared
to $11.0 million for the three months ended April 1, 2006. The decrease in EBITDA is primarily
attributable to the decrease in gross margin as well as lower pre-tax income of $1.2 million. For
an explanation and reconciliation of EBITDA, see Non GAAP Financial Information.
As of March 31, 2007, we had no off-balance sheet arrangements, unconsolidated subsidiaries,
commitments or guarantees, except as disclosed in the notes to the consolidated financial
statements. As of March 31, 2007, we have a working capital deficit of $16.0 million, a decrease
of $14.9 million over the three months ended April 1, 2006.
Capital expenditures. We spent approximately $12.0 million during the three months ended
March 31, 2007 for new store construction, remodels and other capital expenditures. During 2007,
we continue to experience higher construction and related costs due to increased construction
material and labor costs, and partially due to an increase in the size of our store prototype. Our
average capital expenditures to open a leased store, including leasehold improvements and equipment
and fixtures, has ranged from approximately $2.0 million to $5.0 million historically, excluding
inventory costs. We anticipate that the average capital expenditures to open a natural foods
supermarket format store will be $3.0 million to $4.0 million in the future, on a turnkey lease
basis. Under turnkey leases, the landlord constructs the building to our specifications, and
installs equipment we purchase. Average capital expenditures for non turnkey leases are expected
to be between $5.0 million and $7.0 million. Our average capital expenditures to open a farmers
market format store are estimated at $2.5 million to $3.0 million in the future. Delays in opening
new stores may result in increased capital expenditures and pre-opening costs, as well as lower
than planned sales for the Company.
Based upon the current level of operations, we believe that cash flows from operations and
other sources available such as cash from our available line of credit will be adequate to meet
anticipated requirements for working capital, capital expenditures, interest payments and future
debenture payments in the foreseeable future. However, there can be no assurance that the business
will continue to generate cash flows from operations at current levels or that we will be able to
maintain our ability to borrow under the line of credit.
New Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159
permits entities to choose to measure many financial instruments and certain other items at fair
value. This statement is effective for fiscal years beginning after November 15, 2007. We are
currently assessing the impact SFAS No. 159 may have on our financial position.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurement (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 does not require any new fair value measurements. This
statement is effective for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. We are currently
assessing the impact SFAS No. 157 may have on our financial position.
22
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect reported amounts and related disclosures. We have discussed
those estimates that we believe are critical and require the use of complex judgment in their
application in our 2006 Form 10-K. Due to the implementation of Financial Standards Accounting
Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes An Interpretation of
FASB Statement No. 109 (FIN No. 48) in the first quarter of 2007, we identified a new critical
accounting policy related to income taxes, which is listed below. There have been no changes in
the application of the Companys other critical accounting policies and estimates in 2007.
Income taxes. On December 31, 2006, the first day of the first quarter of fiscal 2007, we
adopted FIN No. 48. FIN No. 48 is an interpretation of FASB Statement No. 109, Accounting for
Income Taxes (SFAS No. 109), which requires management to implement a recognition
threshold and measurement attribute for financial statement recognition of a tax position that
requires significant emphasis on management estimates and judgment. Under the provisions of this
interpretation, the financial statement impact of a particular income tax position must be analyzed
from the perspective of whether the taxpayer would be more likely than not to prevail if such
position were to be challenged by the relevant tax authority. Furthermore, management is required
to estimate the likelihood of various outcomes (ranging from resolution 100% in favor of the
taxpayer to 100% in favor of the tax authority) and the resulting range of potential impacts on the
financial statements.
Cautionary Statement Regarding Forward-Looking Statements
This Report on Form 10-Q contains forward-looking statements, within the meaning of the
Private Securities Litigation Reform Act of 1995, which involve known and unknown risks. Such
forward-looking statements include statements that are not historical facts, such as to the number
of stores we plan to open or relocate in future periods and the anticipated performance of such
stores; the impact of competition; the sufficiency of funds to satisfy our cash requirements
through the remainder of fiscal 2007; the impact of changes resulting from our merchandising and
marketing programs; our ability to benefit from past supply chain modifications; expected
pre-opening expenses and capital expenditures; and other statements containing words such as
believes, anticipates, estimates, expects, may, intends and words of similar import or
statements of managements opinion. These forward-looking statements and assumptions involve known
and unknown risks, uncertainties and other factors that may cause our actual results, market
performance or achievements to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Important factors that could
cause differences in results of operations include, but are not limited to, risks and uncertainties
related to the pending Merger, the timing and execution of new store openings, relocations,
remodels and closures; new competitive impacts; changes in product supply or suppliers and supplier
performance levels; changes in management information needs; changes in customer needs and
expectations; changes in government regulations applicable to our business; changes in economic or
business conditions in general or affecting the natural foods industry in particular; cost and
stability of fuel and power sources; and competition for and the availability of sites for new
stores. We undertake no obligation to update any forward-looking statements in order to reflect
events or circumstances that may arise after the date of this Report.
23
Non GAAP Financial Information
The following is a reconciliation of EBITDA and EBITDA, as adjusted, to net income (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
Net income |
|
$ |
1,624 |
|
|
$ |
2,885 |
|
Interest expense, net of interest income |
|
|
1,289 |
|
|
|
1,265 |
|
Income tax expense |
|
|
264 |
|
|
|
205 |
|
Depreciation and amortization |
|
|
6,716 |
|
|
|
6,687 |
|
|
|
|
|
|
|
|
EBITDA |
|
|
9,893 |
|
|
|
11,042 |
|
Loss on asset disposals, net |
|
|
19 |
|
|
|
90 |
|
Stock-based compensation expense |
|
|
564 |
|
|
|
778 |
|
Restructuring and asset impairment charges, net |
|
|
1,457 |
|
|
|
1,670 |
|
|
|
|
|
|
|
|
EBITDA, as adjusted |
|
$ |
11,933 |
|
|
$ |
13,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, as a percentage of sales |
|
|
3.2 |
% |
|
|
3.7 |
% |
EBITDA, as adjusted, as a percentage of sales |
|
|
3.9 |
% |
|
|
4.6 |
% |
EBITDA and EBITDA, as adjusted, are measures used by management to measure operating
performance. EBITDA is defined as net income plus interest, taxes, depreciation, and amortization.
EBITDA, as adjusted, excludes certain non-cash charges and other items that management does not
utilize in assessing operating performance or for purposes of corporate and regional level bonuses.
The items included in the reconciliation from EBITDA to EBITDA, as adjusted, are either (a)
non-cash items (e.g. asset impairments and stock-based compensation expense) or (b) items that
management does not consider to be relevant to assessing operating performance (e.g. restructuring,
gain/loss on sale of assets, net). Regarding the non-cash items, management believes that
investors can better assess operating performance if the measures are presented without such items.
In the case of the items that management does not consider relevant to assessing operating
performance, management believes that investors can better assess ongoing operating performance if
the measures are presented without these items because their financial impact has no continuing
relevance to our ongoing business. The above table reconciles net income to EBITDA and EBITDA, as
adjusted. Management believes that EBITDA and EBITDA, as adjusted, are useful to investors because
securities analysts, lenders and other interested parties frequently utilize them to evaluate our
peer companies and us. Neither EBITDA nor EBITDA, as adjusted, are recognized terms under GAAP and
do not purport to be an alternative to net income as an indicator of operating performance or any
other GAAP measure. Not all companies utilize identical calculations; therefore, the presentation
of EBITDA and EBITDA, as adjusted, may not be comparable to other identically titled measures of
other companies. In addition, EBITDA and EBITDA, as adjusted, are not intended to be measures of
free cash flow for managements discretionary use since they do not consider certain cash
requirements, such as interest payments, tax payments and capital expenditures.
Comparable stores sales. We deem sales of new or acquired stores comparable commencing in the
thirteenth full month of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, the Company is exposed to fluctuations in fossil fuel
commodity prices, interest rates and the value of foreign currency. Fossil fuels commodity prices
directly impact the costs the Company pays for utilities and distribution, and are subject to
fluctuation due to availability and other natural causes. The Company attempts to balance retail
price increases against lost profits without losing customer loyalty. The Company will employ
various financial instruments to manage certain exposures to foreign currency and interest rate
risk when considered practical.
The Company is exposed to foreign currency exchange risk. As of the date of this report, the
Company owns and operates four natural foods supermarkets and a commissary kitchen in British
Columbia, Canada. The commissary supports the four Canadian stores and does not independently
generate sales revenue. Sales made from the Canadian stores are made in exchange for Canadian
dollars. To the extent that those revenues are repatriated to
the United States, the amounts repatriated are subject to the exchange rate fluctuations
between the two currencies. The Company does not hedge against this risk because of the small
amounts of funds at risk.
24
Should we begin drawing on the B of A Facility for additional capital, our exposure to
interest rate changes would be primarily related to our variable rate debt issued under the B of A
Facility. The total commitment available is $40.0 million under a revolving line of credit, with a
five-year term expiring March 31, 2010. The interest rate on the credit facility is prime or LIBOR
plus 1.25%, at our election, and the rates modify depending on the excess borrowings availability
over amounts borrowed. Because the interest rate on the facility is variable, based upon the prime
rate or LIBOR, the Companys interest expense and net income would be affected by interest rate
fluctuations.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Companys management, with the participation of the
Companys interim Chief Executive Officer and interim Chief Financial Officer, has evaluated the
effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act))
as of March 31, 2007. Based on such evaluation, the Companys interim Chief Executive Officer /
interim Chief Financial Officer has concluded that, as of March 31, 2007, the Companys disclosure
controls and procedures are effective in recording, processing, summarizing and reporting, on a
timely basis, information required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act and are effective in ensuring that information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Companys management, including the Companys interim Chief
Executive Officer / interim Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Internal Control Over Financial Reporting. There have not been any changes in the Companys
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter ended March 31, 2007 that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Tim Auchterlonie, individually and on behalf of all others similarly situated and the
general public, and Roes 1 to 1000 vs. Wild Oats Markets, Inc. and Does 1 through 100, is a
suit brought in August 2004 on behalf of six plaintiffs in the Superior Court, County of Los
Angeles, for payment of overtime and damages relating to alleged violations of the California
Business and Professions Code by a former store director claiming that he should have been
classified as an employee paid on an hourly basis, together with other related claims. We believe
that all of the named plaintiffs were correctly classified as exempt employees based upon their job
duties. We settled with four of the plaintiffs for an immaterial amount in the aggregate and one
plaintiff withdrew his claims. The claims of one plaintiff went to trial, and after a bench trial,
the Court found in favor of the remaining plaintiff on the claim for unlawful nonpayment of
overtime compensation, and ordered that judgment on damages should enter in the amount of
approximately $43,700, plus attorneys fees in the amount of approximately $87,000. We have
appealed the judgment.
Four cases related to the Auchterlonie suit have been filed. We believe that we will
prevail in each case, but if liability were to be assessed, the aggregate potential liability in
all of these related cases could be material. Ana Marie Hoeppner et al. v. Wild Oats Markets,
Inc. and Does 1 through 100, Superior Court, County of Los Angeles, is filed by six California
plaintiffs arising from claimed misclassification as exempt employees. Jason Puerto, et al. v.
Wild Oats Markets, Inc. and Does 1 through 100, is a suit brought by eight plaintiffs in
October 2006 in the Superior Court, County of Los Angeles, with substantively similar claims as
Hoeppner. A bench trial of each of the Hoeppner and Puerto cases is set to
commence on January 28, 2008 before the judge who presided at the Auchterlonie trial.
John Montagne, et al., v. Wild Oats Markets, Inc. and Does 1 through 100, is a suit filed
in March 2007 in the Superior Court, County of Los Angeles, on behalf of 14 individuals, with
substantively similar claims as Hoeppner. Kelvin Massie, Anne Ress-Lemay and Gary
Liss, individually and on behalf of all other similarly situated and the California general public v. Wild Oats Markets, Inc. and Does 1
through 100, is a purported class action lawsuit filed in April 2007 in the Superior Court,
County of Los Angeles, arising from claimed misclassification of certain exempt employees while
such employees were in a training program. The purported class is small and any potential
liability immaterial.
25
In October 2000, we were named as defendant in 3601 Group Inc. v. Wild Oats Northwest,
Inc., Wild Oats, Inc. and Wild Oats Markets, Inc., a suit filed in Superior Court for King
County, Washington, by a property owner who claims that Alfalfas Inc., our predecessor in
interest, breached a lease in 1995 related to certain property in Seattle, Washington. After trial
in fiscal 2002, a jury awarded $0 in damages to the plaintiffs, and we were subsequently awarded
$190,000 in attorneys fees. The judgment was reversed on the plaintiffs appeal and the matter
was remanded to the trial court. After a jury trial in August 2006, judgment was entered against
us in the amount of $823,000, inclusive of attorneys fees, costs and interest. We have posted a
bond and filed a notice of appeal.
We also are named as defendant in various actions and proceedings arising in the normal course
of business. In all of these cases, we are denying the allegations and are vigorously defending
against them and, in some cases, have filed counterclaims. Although the eventual outcome of the
various lawsuits cannot be predicted, it is managements opinion that these lawsuits will not
result in liabilities that would materially affect our consolidated results of operations,
financial position, or cash flows.
Item 1A. Risk Factors
This Item 1A should be read in conjunction with Item 1A. Risk Factors in our Form 10-K for
the fiscal year ended December 30, 2006.
Failure to complete the proposed Merger could negatively affect us. Consummation of the Offer
and the transactions contemplated in the Merger Agreement are subject to customary closing
conditions, including the expiration or termination of any waiting period (and any extension
thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The
consummation of the Offer is subject to certain conditions, including the tender of a majority of
the Shares, and the approval of a majority of the shareholders if less than 90% of the Shares are
tendered. There is no assurance that the Federal Trade Commission will approve the Merger, when or
if the Merger Agreement and the Merger will be approved by our stockholders, and there is no
assurance that the other conditions to the completion of the Merger will be satisfied. In
connection with the Merger, we may be impacted by the following risks:
|
|
|
the current market price may reflect a market assumption that the Merger will
occur, and a failure to complete the Merger could result in a decline in the market
price of our common stock; |
|
|
|
|
the occurrence of any event, change or other circumstances that could give rise
to a termination of the Merger Agreement; |
|
|
|
|
the outcome of any legal proceedings that may be instituted against us, members
of our Board of Directors and others relating to the Merger including any
settlement of such proceedings that may be subject to court approval; |
|
|
|
|
the inability to complete the Merger due to the failure to obtain stockholder
approval or the failure to satisfy other conditions to consummation of the Merger; |
|
|
|
|
the failure of the Merger to close for any other reason; |
|
|
|
|
our remedies against Whole Foods Market, Inc., the Purchaser and other
affiliates with respect to certain breaches of the Merger Agreement may not be
adequate to cover our damages; |
|
|
|
|
the proposed transactions disrupt current business plans and operations; |
|
|
|
|
the proposed Merger may create difficulties in attracting employees; |
|
|
|
|
the number of days during which the Merger transaction is pending may create
difficulties in retaining key employees; |
|
|
|
|
the effect of the announcement of the Merger on our business relationships,
operating results and business generally; and |
|
|
|
|
the costs, fees, expenses and charges we have and may incur related to the
Merger. |
Except for the additional risks described above, there have been no other material changes in
the risk factors provided in Item 1A. Risk Factors in our Form 10-K for the fiscal year ended
December 30, 2006.
26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The Company previously disclosed an amendment of the compensation arrangement with Samuel
Martin, Senior Vice President, under Part II, Item 9(B) Other Information of its Annual Report on
Form 10-K for fiscal year ended December 30, 2006. A portion of the compensation amendment related
to relocation expenses was reduced to writing and is filed herewith as a material contract due to
Mr. Martins position as senior executive officer of the Company. The disclosure made in the
Annual Report on Form 10-K for the fiscal year ended December 30, 2006, is reprinted below.
Effective January 7, 2007, the Company modified the compensation of Samuel Martin, Senior Vice
President of Operations to provide for: (1) an increase in annual salary to $350,000, and (2)
subject to certain conditions of sale, the Companys payment of an amount equal to the remaining
balance due, if any, on a loan secured by a mortgage on Mr. Martins prior residence, after
application of the net proceeds from sale of the residence to the amount due under the loan, plus
an amount approximately equal to the income taxes arising as a result of such payment; and (b) the
Companys payment of $25,000, together with closing costs of sale of Mr. Martins prior residence,
plus an amount approximately equal to the income taxes arising as a result of such payment.
27
Item 6. Exhibits
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Exhibit Number |
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Description |
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2.1**
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Agreement and Plan of Merger, dated as of February 21, 2007, by
and among Whole Foods Market, Inc., WFMI Merger Co., and Wild
Oats Markets, Inc. (1) |
4.1**
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|
Amendment No. 3 to Rights Agreement, dated as of February 21,
2007, between Wild Oats Markets, Inc. and Wells Fargo, N.A., as
successor in interest to Norwest Bank Minneapolis, N.A., as
rights agent. (1) |
10.1**
|
|
Tender and Support Agreement, dated as of February 21, 2007, by
and among Whole Foods Market, Inc., WFMI Merger Co., Wild Oats
Markets, Inc., Yucaipa American Alliance Fund I, L.P., and
Yucaipa American Alliance (Parallel) Fund I, L.P. (1) |
10.2#**
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|
Incentive Bonus Agreement between Wild Oats Markets, Inc.
and Gregory Mays, dated February 20, 2007. (2) |
10.3#+
|
|
Memorandum dated March 7, 2007, confirming amendment to the
relocation expenses portion of the Employment Agreement between
Samuel M. Martin and Registrant. |
31.1+
|
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CEO Certification under Section 302 of Sarbanes-Oxley Act of 2002 |
31.2+
|
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CFO Certification under Section 302 of Sarbanes-Oxley Act of 2002 |
32.1+
|
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CEO Certification under Section 906 of Sarbanes-Oxley Act of 2002 |
32.2+
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CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002 |
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|
|
# |
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Management Compensation Plan. |
|
** |
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Previously filed. |
|
+ |
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Included herewith. |
|
(1) |
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Incorporated by reference from the Registrants Form 8-K dated February 22, 2007 (File No. 0-21577). |
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(2) |
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Incorporated by reference from the Registrants Form 8-K dated February 26, 2007 (File No. 0-21577). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Boulder, County of Boulder, State of Colorado, on the 9th day of May, 2007.
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|
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|
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Wild Oats Markets, Inc.
(Registrant)
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By: |
/s/ Gregory Mays
|
|
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|
Gregory Mays |
|
|
|
Interim Chief Financial Officer
(Principal Financial and Accounting Officer) |
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29