UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21577
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
|
Delaware |
84-1100630 |
3375 Mitchell Lane
Boulder, Colorado 80301
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ( X ) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.( )
As of March 1, 2002, the aggregate market value of the voting stock held by
non-affiliates (as defined by the regulations of the Securities and Exchange
Commission) of the Registrant was $200,212,124, based upon the closing sale
price of such stock on such date as reported on the NASDAQ National Market. As
of March 1, 2002, the total number of shares outstanding of the Registrant's
common stock, $.001 par value, was 24,809,433 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's Annual Meeting
of Stockholders to be held on May 7, 2002, have been incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
PART I.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceeding
Item 4. Submission of Matters to a Vote of Security Holders
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
PART III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV.
Item 14. Exhibits, Financial Statements, Financial Statements Schedules and
Reports on Form 8-K
PART I.
Item 1.
BUSINESS
Introduction
Wild Oats Markets, Inc. ("Wild Oats") is one of the largest natural
foods supermarket chains in North America. As of March 1, 2002, we operated 102
natural foods stores, including two small vitamin stores, in 23 states and
British Columbia, Canada under several names, including:
- Wild Oats Natural Marketplace (nationwide)
- Henry's Marketplace (San Diego and Orange County,
CA)
- Nature's - A Wild Oats Market (metropolitan
Portland, OR)
- Sun Harvest Farms (TX)
- Capers Community Market (British Columbia, Canada)
We are dedicated to providing a broad selection of high-quality natural, organic
and gourmet foods and related products at competitive prices in an inviting and
educational store environment emphasizing customer service. Our stores range in
size from 2,700 to 45,000 gross square feet and feature natural alternatives for
virtually every product category found in conventional supermarkets. Wild Oats
provides its customers with a one-stop, full-service shopping alternative to
both conventional supermarkets and traditional health food stores. We believe we
have developed a differentiated concept that appeals to a broader, more
mainstream customer base than the traditional natural foods store. Our
comprehensive selection of natural health foods products appeals to
health-conscious shoppers while we also offer virtually every product category
found in a conventional supermarket, including grocery, produce, meat, poultry,
seafood, dairy, frozen, food service, bakery, vitamins and supplements, health
and body care and household items. Our unique positioning, coupled with industry
data that states that the natural products industry comprises less than 5% of
the total grocery industry, offers significant potential for us to continue to
expand our customer base.
Wild Oats' sales grew from $838.1 million during fiscal 2000 to $893.2 million
during fiscal 2001, an increase of 6.6%, due largely to improvements in
merchandising, marketing and operations in our stores and the opening of four
new stores. We also believe that sales increases, in the face of a number of
store closures and sales, resulted from the implementation in 44 of our natural
foods supermarket format stores of certain new strategic initiatives. These
include strategic banner consolidation to build brand equity, and marketing,
merchandising and pricing initiatives as part of our Fresh Look program. The
Fresh Look program was tested in our Colorado stores on a modified format in
July of fiscal 2001, and rolled out to 44 stores in phases during September,
October and November of fiscal 2001. The Fresh Look program includes price
reductions on up to 2,500 items per store, increased marketing through the
introduction of a weekly, eight-page flyer that is distributed to a broader
range of potential customers, and operational modifications in the stores,
including product reorganization, department reorganization within the store,
modification of product mix and increased labor staffing.
We added 4, 13, 25, 16 and 14 new and acquired stores to our store base in
fiscal years 2001, 2000, 1999, 1998 and 1997, respectively. As a result of our
aggressive growth over the last five years, we have increased our penetration of
existing markets, entered new geographic markets and created a stronger platform
for future growth. We believe our growth has resulted in operating efficiencies
created by:
- warehousing, distribution and administrative economies
of scale
- improved volume purchasing discounts
- coordinated merchandising and marketing strategies
Our aggressive growth has also resulted in operations and acquisition
integration difficulties that had a negative impact on our overall operating
results in fiscal 2001. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Comparable Store Sales
Results."
At the end of fiscal 2001, we had 107 stores located in 23 states and Canada, as
compared to 106 stores in 22 states and Canada as of the end of fiscal 2000. A
summary of store openings, acquisitions, closures and sales is as follows:
|
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TOTAL STORE COUNT |
||||
|
|
|
Fiscal Year |
|
Period |
||
|
|
|
March 1, |
||||
|
|
|
2000 |
|
2001 |
|
2002 |
|
|
|
|
|
|
|
|
|
Store count at beginning of period |
|
110 |
|
106 |
|
107 |
|
Stores opened |
|
14 |
|
4 |
|
|
|
Stores acquired |
|
2 |
|
|
|
|
|
Stores closed |
|
(17) |
|
(1) |
|
(2) |
|
Stores sold |
|
(3) |
|
(2) |
|
(3) |
|
|
|
|
|
|
|
|
|
Store count at end of period |
|
106 |
|
107 |
|
102 |
As part of the strategic repositioning announced by the Company in the second
and fourth quarters of fiscal 2000, the Company identified 22 natural foods
stores for closure or sale due to weak performance. In fiscal 2000, we closed 10
and sold three of those identified stores. In the second quarter of fiscal 2001,
as part of additional evaluation of the Company's operations by new
management, we identified an additional three stores for closure in fiscal 2001;
in the fourth quarter of fiscal 2001, we extended our evaluation and identified
an additional three stores for closure in fiscal 2001 and 2002. In fiscal 2001
and through the date of this report, the Company closed three of the identified
stores, terminated its lease-related obligations as to two of the identified
locations and sold five of the identified stores, four in related transactions.
One store remains to be closed or sold in fiscal 2002. The Company also closed
two small vitamin stores in the second and third quarters of fiscal 2000. Due to
a change in estimates related to changes in facts and circumstances during the
fourth quarter of fiscal 2001, we decided to continue to operate four stores
previously identified for closure or sale. A summary of restructuring activity
by store count is as follows:
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RESTRUCTURING STORE COUNT |
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|
|
Fiscal Year |
|
Period |
||
| March 1, | ||||||
|
|
|
2000 |
|
2001 |
|
2002 |
|
|
|
|
|
|
|
|
|
Stores remaining at commencement of period |
|
|
|
9 |
|
6 |
|
Stores identified in fiscal 2000 for closure or sale |
|
22 |
|
|
|
|
|
Stores identified in fiscal 2001 for closure or sale |
|
|
|
6 |
|
|
|
Identified stores closed or abandoned |
|
(10) |
|
(3) |
|
(2) |
|
Identified stores sold |
|
(3) |
|
(2) |
|
(3) |
| Reversal of stores identified for closure or sale |
|
(4) |
|
|||
|
Identified stores remaining at period end |
|
9 |
|
6 |
|
1 |
Natural products industry
Retail sales of natural products have grown from $7.6 billion in 1994 to $24.6
billion in fiscal 2000, a 21.6% compound annual growth rate, and total sales of
natural products (including over the internet, by practitioners, by multi-level
marketers and through mail order) reached $32.1 billion in fiscal 2000 (Natural
Foods Merchandiser, June 2001). Sales growth in the traditional grocery industry
has remained relatively flat over the same period. We believe that this growth
reflects a broadening of the natural products consumer base, which is being
propelled by several factors, including healthier eating patterns, increasing
concern regarding food purity and safety and greater environmental awareness.
While natural products generally have higher costs of production and
correspondingly higher retail prices, we believe that more of the population now
attributes added value to high-quality natural products and is willing to pay a
premium for such products. The increase in the availability of natural products
in conventional supermarkets, whose sales of natural products increased by 6.1%
in fiscal 2000, demonstrates the increase in consumer acceptance of natural
products. Despite the increase in natural foods sales within conventional
supermarkets, we believe that conventional supermarkets still lack the total
shopping experience that natural foods stores offer. Many natural foods stores
develop a more personal relationship with increased interaction between store
staff and customers than that of conventional supermarkets. Conventional
supermarkets may also have less appeal for natural foods shoppers because they
are largely dependent on commercial brand names, resulting in a more limited
selection of natural products from which to choose. In addition, conventional
supermarkets may not be able to match our pricing in many categories because of
the greater volume purchase discounts we receive on natural products. As a
result, while conventional supermarkets may carry a limited selection of natural
foods products, they do not duplicate the inventory of natural foods stores,
which carry a more comprehensive selection of natural products sourced from a
large number of independent vendors.
Operating strategy
Our objective is to become the grocery store of choice both for natural foods
shoppers and quality-conscious consumers in each of our markets by emphasizing
the following key elements of our operating strategy:
Destination format. Our stores are one-stop, full-service supermarkets for
customers seeking high-quality natural and gourmet foods and related products.
In most of our stores, we offer between 10,000 and 30,000 stock-keeping units of
natural foods products in virtually every product category found in a
conventional supermarket. Our stores carry a much broader selection of natural
and gourmet foods and related products than those offered by typical independent
natural foods stores or conventional supermarkets.
High-quality, unique products. We seek to offer the highest quality products
throughout our merchandise categories and emphasize unique products and brands
not typically found in conventional supermarkets. Each of our stores tailors its
product mix to meet the preference of its local market, and where cost of goods
and distribution logistics allow, sourcing produce from local organic growers.
In fiscal 2001, we expanded our value-added offerings in our meat and seafood
departments to provide our customers with delicious, pre-prepared entrees. We
also operate regional commissary kitchens and bakeries that provide our stores
with fresh bakery items and a unique assortment of prepared foods for the
quality- and health-conscious consumer.
Educational and entertaining store environment. Each store strives to create a
fun, friendly and educational environment that makes grocery shopping enjoyable,
encouraging shoppers to spend more time in the store and to purchase new
products. In order to enhance our customers' understanding of natural foods
and how to prepare them, we train our store staff to educate customers as to the
benefits and quality of our products and prominently feature educational
brochures, newsletters and in-store demonstrations, as well as an in-store
consumer information department. In addition, many stores offer cafe seating
areas, espresso and fresh juice bars and in-store massage therapists, all of
which emphasize the comfortable, relaxed nature of the shopping experience. We
believe our knowledgeable store staff and high ratio of store staff to customers
results in significantly higher levels of customer service than in a
conventional supermarket. In fiscal 2001, we increased staffing levels at many
of our stores to address our guests' requests for higher service levels.
Extensive community involvement. We seek to engender customer loyalty by
demonstrating our high degree of commitment to the local communities in which we
operate. Each store makes significant monetary and in-kind contributions to
local not-for-profit organizations through programs such as "5% Days,"
where a store may, once each calendar quarter, donate 5% of its net sales from
one day to a local not-for-profit group, and a "Charity Work Benefit"
where we pay employees for time spent working for local charities.
Multiple store formats. We operate two store formats: natural foods
supermarkets, which emphasize natural and organic products and high-quality
service; and farmers market stores, which emphasize fresh produce, natural
living products and price value. Our two store formats enable us to customize
our stores to specific site characteristics and to meet the unique needs of a
variety of markets. We believe that this multiple store format strategy allows
us to operate successfully in a diverse set of markets, enabling us to reach a
broader customer base and to increase our market penetration.
Competitive pricing. We seek to offer products at prices that are at or below
those of other natural foods stores and conventional markets. In fiscal 2001, we
introduced our Fresh Look program in 44 of our natural supermarket stores, and
as part of such program reduced everyday prices on up to 2,500 items per store
and implemented a weekly flyer program, with an expanded selection of sale items
and emphasis on our perishable departments (meat/seafood, produce, prepared
foods and dairy). We have also expanded our private label programs to include a
large selection of high-quality private label products under our "Wild Oats(R)"
and "A Wild Oats Down to Earth Value" lines at competitive prices. We
believe these pricing programs broaden our consumer appeal and encourage our
customers to fill more of their shopping needs at our stores.
Motivated staff. We have developed a unique culture by encouraging active
participation and communication among all staff members, advocating store-level
participation in a variety of marketing, merchandising and operating decisions
and rewarding staff based upon the achievement of targeted store-level sales,
profitability and other financial performance criteria. In addition, we seek to
hire individuals dedicated to the concept of natural foods and a healthy
lifestyle. We believe that these practices translate into a satisfied and
motivated staff and a high level of customer service.
As mentioned previously, our operating strategy during fiscal 2001 also included
the development and implementation of the Fresh Look program, which involved
modifications in customer service, marketing, advertising, merchandising and
pricing strategies. This program occurred in conjunction with certain changes in
senior management in the second and third quarters of fiscal 2001, and was based
on extensive research regarding our target customer base, customer satisfaction,
store design elements, current marketing and advertising, and current
merchandising. We introduced the Fresh Look program in our Colorado stores on a
modified basis in July 2001, and added additional stores in the Midwest, New
England, Oregon and Florida throughout the third and fourth quarters of fiscal
2001. The Company currently is evaluating the results from the Fresh Look
campaign to determine its efficacy and whether modifications are necessary in
any of its components. If modifications are necessary, we will make the
necessary modifications based on such evaluation prior to implementing the Fresh
Look campaign in the first half of fiscal 2002 in additional natural foods
supermarket format stores. One modification already identified is the
reevaluation of the depth of pricing cuts in certain item pricing. We also
implemented merchandising, marketing and customer service changes in the
majority of our natural foods supermarket stores. These operational changes were
aimed at reorganizing the stores' merchandise to shelf locations according to
product movement, similar to conventional grocers, eliminating or reducing
slower-moving inventory, simplifying and clarifying our in-store signage,
reorganizing the content and look of our monthly flyers to emphasize specials
and give greater impact, and boosting store staff customer service skills
through intensive training.
Growth strategy
Our growth strategy is to increase total year-over-year comparable store sales
growth, sales and income through:
- improved guest service and store execution
- opening of new stores
- increased consumer awareness of Wild Oats
We intend to continue our expansion strategy by increasing penetration in
existing markets and expanding into new regions that we believe are currently
underserved by natural foods retailers. While we believe that most of our store
expansion will result from new store openings, we may continue to evaluate
acquisition opportunities in both existing and new markets.
We currently have leases signed for four new stores to be opened or relocated in
the remainder of fiscal 2002 or early fiscal 2003. The proposed sites are in
southern California (two sites), Kentucky and Maine.
Our growth strategy will be affected in fiscal 2002 and beyond by our ability to
raise additional operating capital. We provided private placement memoranda,
summarizing current business conditions and operational results as well as
projected results based on our beliefs as to the efficacy of the Fresh Look
program, to potential investors who executed confidentiality agreements with
standstill provisions. We have received several offers for investments in the
Company; however, we are currently reviewing other options for raising
additional equity funds on a less dilutive basis, as a result of improvements in
the Nasdaq market and the Company's operational results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
Opening of new stores. In fiscal 2001, we opened four new stores in Irvine,
California; Westport, Connecticut; Omaha, Nebraska; and Cleveland, Ohio. We
closed one underperforming natural foods store in Denver, Colorado and sold two
stores in San Anselmo and Sacramento, California in related transactions. To
date in fiscal 2002, we have sold three stores: two in Berkeley and Sunnyvale,
California to the purchaser of the other two northern California stores, and one
in Victoria, British Columbia, Canada. We have also closed two stores in Boca
Raton, Florida and Chesterfield, Missouri. In fiscal 2000, we opened 11 new
stores, acquired two stores, relocated three stores and closed 15
underperforming natural foods stores and two small vitamin stores, as well as
sold three stores in related transactions.
Year-over-year comparable store sales growth. Comparable store sales increased
4.0% in fiscal 2001, as compared to a 2.6% decrease for fiscal 2000, primarily due to
operational improvements implemented by our new executive team and the roll-out
of the Fresh Look program in certain key markets. We have also remerchandised a
significant number of our natural foods supermarket format stores to emphasize
perishables and reset certain product categories according to item movement. We
made a commitment in fiscal 2001 to improve customer service through aggressive
training programs for new and existing employees, and will continue this
commitment in fiscal 2002 and beyond. We are currently evaluating the results of
our Fresh Look program, which was implemented in 44 natural foods supermarket
stores in the third and fourth quarters of fiscal 2001, and will implement the
program in additional stores in the first half of fiscal 2002. Analysis of the
results from existing Fresh Look program stores on the program 30 weeks or more
shows that we are increasing comparable store sales results and customer counts,
although average transaction size remains relatively flat.
Our comparable store sales results have been negatively affected in the past by
planned cannibalization, which is the loss of sales at an existing store when we
open a new store nearby. The greater-than-expected cannibalization we
experienced in fiscal 2000 as a result of the opening of stores in existing
markets continues to impact certain of our stores in total gross sales, although
the comparable store sales growth impact has been eliminated as the new stores
celebrated their one-year anniversary. There can be no assurance that comparable
store sales for any particular period will not decline in the future.
Products
We offer our customers a broad selection of unique, high-quality products that
are natural alternatives to those found in conventional supermarkets. We
generally do not offer well-known national conventional brands and focus instead
on a comprehensive selection of lesser-known natural branded products within
each category. Although the core merchandise assortment is similar at each of
our stores, individual stores adapt the product mix to reflect local and
regional preferences. Our stores source produce from local organic growers
whenever possible and typically offer a variety of local products unique to the
region. In addition, in certain markets, our stores may offer more food service,
gourmet and ethnic items, as well as feature more value-added services such as
gift baskets, catering and home delivery, while in other markets, a store may
focus more on bulk foods, produce and staple grocery items. We regularly
introduce new high-quality and locally-grown products in our merchandise
selection to minimize overlap with products carried by conventional
supermarkets.
In addition, we intend to continue to expand and enhance our prepared foods,
value-added items (such as marinated or stuffed meats and seafood) and in-store
cafe environment. We believe that consumers are increasingly seeking
convenient, healthy, "ready-to-eat" meals and that by increasing our
commitment to this category we can provide an added service to our customers,
broaden our customer base and further differentiate us from conventional
supermarkets and traditional natural foods stores.
Quality standards. Our objective is to offer products that generally meet the
following standards:
- free of preservatives, artificial colors, chemical
additives and added hormones
- organically grown, whenever possible
- minimally processed
- not tested on animals
We continually evaluate new products, quality issues and controversial
ingredients and frequently counsel store managers on compliance with our product
standards.
Private label. The natural foods industry is highly fragmented and characterized
by many small independent vendors. As a result, we believe that our customers do
not have strong loyalty to particular brands of natural foods products. In
contrast to conventional supermarkets whose private label products are intended
to be low-cost alternatives to name-brand products, we have developed our
"Wild Oats(R)" private label program in order to build brand loyalty
to specific products based on our relationship with our customers and our
reputation as a natural foods authority. Through this program, we have
successfully introduced a number of high-quality, unique private label products,
such as cereals, breads, salad dressings, vitamins, chips, salsa, pretzels,
cookies, juices, pasta, pasta sauces, oils, frozen products such as pizza and
veggie burgers, and pet foods. In fiscal 2000, we introduced a new line of
"Wild Oats(R)" imported and organic goods. In fiscal 2001, we expanded
this private label line with the introduction of baking mixes, imported peppers,
capers, pickles and cherries, canned tomatoes, preserves, tuna, cookies and
teas. In fiscal 1999, we introduced our "A Wild Oats Down to Earth
Value" label of "staple" products, such as peanut butter,
cookies, coffee, canned tomatoes, bottled water and paper products, to offer our
customers quality natural products at competitive prices, and expanded the line
in fiscal 2001 with potato chips. We are currently evaluating a new private
label strategy that would include a new brand name and look for our private
label products. We intend to continue to expand our private label product
offerings on a selected basis.
Pricing. In general, natural and gourmet foods and related products have higher
costs of production and correspondingly higher retail prices than conventional
grocery items. Our pricing strategy has been to maintain prices that are at or
below those of our natural foods competitors while educating our customers about
the higher quality and added value of our products to differentiate them from
conventional products. As part of the Fresh Look program, we reduced prices on a
large number of products throughout participating stores. After analysis of
results from the Fresh Look stores and additional customer research, we
determined that some pricing reductions on certain items were overly aggressive,
resulting in greater margin erosion without corresponding customer recognition
and item movement, and we are evaluating a modest price increase on selected
products. Like most conventional supermarkets, we regularly feature dozens of
sale items, and for those stores on the Fresh Look program, we have implemented
a weekly flyer program featuring a broad selection of sale items from all
departments. Sale items are promoted through a variety of media, including
direct mail, newspapers and in-store flyers. We regularly monitor the prices at
natural foods and conventional supermarket competitors to ensure our prices
remain competitive.
Company culture and store operations
Company culture. Our culture is embodied in our mission statement:
"Wild Oats was founded on the vision of enhancing the lives of our
customers and
our people with products and education that support health and well-being.
Wild Oats is committed to providing the highest quality, fresh and natural
food,
and health and wellness products in vibrant stores with people who are
friendly, eager and ready to educate.
At Wild Oats, we sell food that remembers its roots." (TM)
Our values of service, integrity, quality, giving back to our communities,
increasing value for our stakeholders (which include our shareholders, our
employees and our communities) and accountability were adopted to support our
mission statement. As part of our values, we believe that knowledgeable,
satisfied and motivated staff members have a positive impact on store
performance and overall profitability. In fiscal 2001, we implemented aggressive
new training programs, with an emphasis on customer service, for all new
employees. We are also implementing product knowledge training programs for
certain departments to ensure that staff receive consistent training on issues
affecting the products they sell. We will continue to focus on customer service
in the coming years, with training for existing staff as well as new employees.
Management and employees. Our stores are organized into geographic regions, each
of which has a regional director who is responsible for the store operations
within his or her region and who reports to our senior management. The regional
directors are responsible for, and frequently visit, their cluster of stores to
monitor financial performance and ensure adherence to our operating standards.
In fiscal 2001, as part of new management's restructuring of our operations,
we reduced the number of regions from 11 to five. We maintain a staff of
corporate level department specialists including natural living, food service,
produce and floral, meat/poultry/seafood and grocery merchandising directors who
manage centralized buying programs and formulate store-level merchandising,
pricing and staff training to ensure company-wide adherence to product standards
and store concept.
Staff members at the store and home-office levels participate in incentive plans
that tie compensation awards to the achievement of specified store-level or
company-wide sales, profitability and other performance criteria. We also seek
to foster enthusiasm and dedication in our staff members through comprehensive
benefits packages, including health and disability insurance, an employee stock
purchase plan and an employer-matching 401(k) plan.
Purchasing and distribution
We have centralized merchandising departments for each major product category.
These departments set product standards, approve products and negotiate volume
purchase discount arrangements with distributors and vendors. The wholesale
segment of the natural foods industry provides a large and growing array of
product choices across the full range of grocery product categories. Although we
purchase products from approximately 8,000 suppliers, in fiscal 2001
approximately 28.2% of the Company's inventory purchases were from United
Natural Foods Inc. ("UNFI"), a wholesale distributor that operates
multiple warehouses nationwide under a four-year buying agreement that expires
in August 2002. We believe that UNFI has the capacity to service all of our
existing stores as well as most of our future sites. As a result of our rapid
growth, we have been able to negotiate greater volume discounts with this
distributor and certain other vendors. The Company currently is negotiating with
several parties for a new primary distributor arrangement.
In fiscal 1999, we entered into a supply agreement with Nutricia (formerly GNP),
under which Nutricia manufactures for us certain private label vitamins and
supplements. The agreement has a three-year term, but is terminable by either
party with advance notice. We have certain minimum per-product purchase
requirements that have led, in the past, to the Company being obligated for past
dated products where the minimum product purchased could not be sold prior to
expiration. We have no supply contracts with the majority of our smaller
vendors, who could discontinue selling to us at any time. Although we believe
that we could develop alternative sources of supply, any such termination may
create a short-term disruption in store-level merchandise selection.
Most products are delivered directly to our stores by vendors and distributors.
We currently operate three warehouse facilities in Los Angeles and San Diego,
California and San Antonio, Texas, which receive and distribute purchases of
produce and grocery items that cannot currently be delivered cost effectively
directly to the stores by outside vendors. We maintain a small fleet of local
delivery vans. As we enter new markets, we will evaluate the need for additional
warehouse and distribution facilities.
We operate commissary kitchens in Phoenix, Arizona; Denver, Colorado; Portland,
Oregon and Vancouver, British Columbia, Canada, as well as bakeries in Phoenix,
Arizona; San Diego, California and Denver, Colorado. These facilities produce
deli food, take-out food, bakery products and certain private label items for
sale in our stores. Each kitchen can make deliveries to stores within a
hundred-mile radius of the facility. We will evaluate the need for new
commissary kitchens as we expand into new markets. In fiscal 2001, after
extensive review of their profitability, operational efficiency and long-term
capital improvement requirements, we closed two commissary kitchens in Los
Angeles, California and Santa Fe, New Mexico, one bakery in Tucson, Arizona and
one distribution warehouse in Denver, Colorado. The goods and services
previously provided by these facilities have been absorbed by other, existing
commissaries and warehouses or have been replaced with goods and services from
third-party suppliers.
Marketing
We recognize the importance of building brand awareness within our trade area
and advertise in traditional media outlets such as radio, newspapers, outdoor
and direct mail to gain new customer trial and repeat business. As part of our
marketing strategy, we have increased our use of direct mail and newspaper
inserts to increase our market exposure to a broader base of customers. Our
farmers market format stores primarily use flyers and "weekly
specials" advertising to generate consumer interest and increase customer
traffic. As part of the implementation of the Fresh Look program in 44 of our
natural foods supermarket stores, we introduced eight-page weekly flyers, with a
significant number of weekly specials and an expanded flyer distribution. We are
currently evaluating the efficacy of the eight-page flyer and, based on the
results of the data currently being gathered, may modify the flyer program
before further implementation of the Fresh Look program in additional natural
foods supermarket format stores.
We also focus on in-store consumer education through the use of a variety of
media, including in-store flyers, informational brochures and signage that
promote the depth of our merchandise selection, benefits of natural products and
competitive prices. In fiscal 2001, with the hiring of a new Chief Marketing
Officer, we reviewed and made modifications to our store signage and educational
pieces, to increase consumer awareness of who we are and what we offer. When we
first enter a new market, we execute an intense marketing and public relations
campaign to build awareness of our new store and its selection of natural
products. After the initial campaign, this advertising is supplemented by the
marketing strategies described above. In fiscal 2001 we also created a public
relations department to promote the Company and its achievements, to manage a
consistent flow of internal and external communications and to assist in
educating consumers about our position on issues of importance, such as
genetically modified foods and the use of antibiotics in livestock production.
Our advertising costs prior to the implementation of the Fresh Look program
historically were 1.5% of sales. Advertising costs for stores on the Fresh Look
program on average have increased to 2.0% of sales. We offset a certain amount
of such costs through a promotional program with our vendors, which allows for
different degrees of promotional participation in our weekly flyers.
Management information systems
Our management information systems have been designed to provide detailed
store-level financial data, including sales, gross margin, payroll and store
contribution, to regional directors and store directors and to our headquarters
on a timely basis. Currently, certain inventory management systems are processed
manually. We purchased a software system that allows us to establish centralized
pricing on certain merchandise and to track product movement, and have
implemented such system in all of our Wild Oats and Henry's Marketplace stores
(for item movement). The Henry's stores host their own pricing structure,
although the Company currently is examining hosting all pricing for all stores
centrally.
We are currently testing, and plan to implement a "data warehouse" in
the first half of 2002 that will allow us to perform rapid analyses of disparate
data relating to financial performance, item movement, margin result, comparable
store sales results, payroll and other data generated by our operations. We also
are installing, in the first half of 2002, a promotion management system that
will link our item information database to our marketing and merchandising
systems to facilitate the approval and creation of marketing and merchandising
flyers. This will enable us to create our flyers more quickly by minimizing
printing modifications from flyer to flyer, and will increase the accuracy of
graphic and text descriptions of items. We are completing the testing of and
will implement a plan-o-gram computerized shelf management program in our newest
store in Long Beach, California, which is due to open in April 2002. This
program will allow us to map and manage shelf space from store to store to
ensure consistency of item placement and track item movement to allow us to
determine appropriate shelf inventory of various SKUs of product. In 2002 we
will be implementing a front end auditing program that will track cashier
activity and identify anomalies in cash handling, to enable us to identify
cashier training issues and improper cash handling procedures. We also are
evaluating, for possible future implementation the following: in-store signage
and shelf tag printing controlled by our home office departments; scale hosting
to standardize pricing by weight, product descriptions, cooking instructions and
other printed material on weighed items; and direct store delivery receiving,
which will verify the accuracy of deliveries and increase the efficiency of
in-store receiving departments.
We have implemented new, faster credit card processing systems company-wide to
reduce transaction time at the cash register and the cost to us of individual
credit card transactions. In 2000, we also implemented a wide-area network to
allow faster data transmissions between our headquarters and stores, and between
our stores and our credit card processor. The credit card processing system is
fully operational in our stores, with the exception of the stores in Canada and
a few of our smaller stores.
In fiscal 1999, we standardized our timekeeping systems throughout our stores,
and installed new software that now allows us to process payroll in-house
instead of through a third-party processor. In the first quarter of fiscal 2001,
we began processing our Canadian payroll in-house. We believe that by handling
payroll in-house, we have greater accuracy in payroll processing and greater
control over payroll and, in the future, we expect to realize a cost savings by
not paying outside processing fees.
Competition
Our competitors currently include other independent and multi-unit natural foods
supermarkets, smaller traditional natural foods stores, conventional
supermarkets and specialty grocery stores. While certain conventional
supermarkets, smaller traditional natural foods stores and small specialty
stores do not offer as complete a range of products as we do, they compete with
us in one or more product categories. In recent years, several of the larger
conventional grocers have added or expanded specialty sections in their stores
devoted specifically to natural and organic foods and body care products, and
have expanded their offerings of vitamins and supplements. Some feature a
"store-within-a-store" concept where the fixtures, lighting and
flooring in the natural foods and products section are modified to provide a
different, more upscale ambiance, such as that provided in our stores. We
believe that these specialty sections do not offer the customer service, product
selection and depth of product knowledge that we offer in our stores.
A number of other natural foods supermarkets offer a range of natural foods
products similar to those offered in our stores. We believe that the principal
competitive factors in the natural foods industry include customer service,
quality and variety of selection, store location and convenience, price and
store atmosphere. We believe that our primary natural foods competitor is Whole
Foods Market, Inc., a company based in Texas, with whom we currently compete
directly in California, Colorado, Florida, Illinois, Massachusetts, New Mexico
and Texas.
Employees
As of March 1, 2002, we employed approximately 6,334 full-time individuals and
2,053 part-time individuals. Approximately 8,015 of our employees are engaged at
the store-level and 372 are devoted to regional administrative and corporate
activities. We believe that we maintain a good relationship with our employees.
In fiscal 2001, we won by a substantial margin the one election for union
representation brought at any of our stores. We anticipate that in the future
one or more of our stores may be the subject of attempted organizational
campaigns by labor unions representing grocery industry workers, and that from
time to time certain of our stores may be picketed by local labor unions
relating to area wage and benefit standards. Four of our stores (including two
Henry's stores in metropolitan San Diego, California) are currently being
picketed relating to area standards.
Factors Impacting Results of Operations
Our results of operations have been and will continue to be affected by, among
other things:
- the number, timing and mix of store openings, acquisitions,
relocations, remodels or closings
- availability of capital
- fluctuations in quarterly results of operations
- impact of the Fresh Look program roll-out to additional
stores
- economic conditions
- competition
- labor issues
- loss of key management
- government regulations
- changes in suppliers, distributors and manufacturers
- volatility in our stock price
New stores build their sales volumes and refine their merchandise selection
gradually and, as a result, generally have lower gross margins and higher
operating expenses as a percentage of sales than more mature stores. We
anticipate that the new stores opened in fiscal 2001 will experience operating
losses for the first six to 12 months of operation, in accordance with
historical trends; however, given the continued weakening of the U.S. economy in
the wake of the events of September 11, 2001, operating losses may be extended
for additional periods of time. Further, acquired stores, while generally
profitable as of the acquisition date, generate lower gross margins and store
contribution margins than our company average due to their substantially lower
volume purchasing discounts and the integration of the acquired stores into our
operating systems. Over time, we expect the gross margin and store contribution
margin of acquired stores to approach our company average. Other factors that
could cause acquired stores to perform at lower-than-expected levels include,
among other things, turnover of regional and store management, disruption of
advertising, changes in product mix and delays in the integration of purchasing
programs.
We completed the remodeling of 15 of our older stores in the fiscal 2001, and
remerchandised a number of our stores in the second, third and fourth quarters
of 2001, with the goal of eliminating slower-selling products, reducing excess
SKU counts in certain categories of products, and giving greater emphasis to
produce, meat and seafood and grocery departments. Remodels and remerchandising
typically cause short-term disruption in sales volume and related increases in
certain expenses as a percentage of sales, such as payroll. We cannot predict
whether sales disruptions and the related impact on earnings may be greater in
time or volume than projected in future remodeled or remerchandised
stores.
The construction or acquisition of new stores, remodeling of existing stores, as
well as completion of capital purchases of new technology systems required for
efficient operation of our business require substantial capital expenditures. In
the past, our capital expenditures have been funded by cash generated from
operations, bank debt and equity financing proceeds. These sources of capital
may not be available to us in the future; in addition, our existing credit
agreement contains limitations on our ability to make capital expenditures that
may constrain future growth without additional equity financings. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
Our quarterly results of operations may differ materially from quarter to
quarter for a variety of reasons, including the timing and success of new store
openings, overall store performance, changes in the economy, seasonality and the
timing of holidays, significant increases or decreases in prices for or
availability of goods and services, competitive pressure and labor disturbances,
as well as other factors mentioned in this section.
As discussed above, we propose to implement the Fresh Look program in additional
natural foods supermarket stores in fiscal 2002. There can be no assurances that
the program will be successful in those stores, nor that the cost of the program
roll-out will be at or below the costs incurred in fiscal 2001.
Downturns in general economic conditions in communities, states, regions or the
nation as a whole can affect our results of operations. While purchases of food
generally do not decrease in a slower economy, consumers may choose less
expensive alternative sources for food purchases. In addition, downturns in the
economy make the disposition of excess properties, for which the Company
continues to pay rent and other carrying costs, substantially more difficult as
the markets become saturated with vacant space and market rents decrease.
As mentioned previously, we compete with both natural foods and conventional
grocers. As competition in certain markets intensifies, our results of
operations may be negatively impacted through loss of sales, reduction in margin
from competitive price modifications, and disruptions in our employee base.
From time to time, unions will attempt to organize employees or portions of the
employee base at stores or our distribution or manufacturing facilities.
Responses to organization attempts require substantial management and employee
time and are disruptive to operations. In addition, from time to time certain of
our stores may be subject to informational picketing, which can discourage
customer traffic and lower sales volumes. Our ability to attract, hire and
retain qualified employees at store and home-office levels is critical to our
continued success.
Our future direction and success is dependent in large part on the continued
services of certain key executive officers. Loss of any key officer may have an
adverse affect on current operations and future growth programs.
We are subject to a myriad of local, state and federal regulations governing the
operation of our stores and support facilities, including licensing laws
governing the sale of particular categories of products, health and sanitation
laws, laws governing the manufacture, labeling and importation of private label
products, labor laws controlling wages, benefits and employment conditions of
our employees and advertising regulations governing the manner in which we may
advertise products we sell. In addition, in the fall of 2002, the National
Organic Standards, a comprehensive program of regulations governing the growing,
production, handling and sale of goods advertised as "organic", will
be fully implemented. Modifications in existing laws and the implementation of
new laws governing components of our business operations may be triggered by
consumer and regulatory concerns regarding food safety issues, new technology or
competitive pressures. Such modifications can have a material impact on our
sales volume, costs of goods and direct store expenses. Modification of such
laws may also impact the vendors and manufacturers who provide goods and
services to us, raising the cost of such items or decreasing their availability.
In addition, from time to time we are audited by various governmental agencies
for compliance with existing laws, and we could be subject to fines or
operational modifications as a result of noncompliance.
We purchase 28.2% of our total goods from one distributor under an agreement
that expires in August 2002. We are currently negotiating with that distributor
and others for a new distribution agreement. There is no assurance that we may
not experience significant disruption in our operations through shortages of
goods and services if we change our distribution relationship. Any significant
disruption in the supply of goods could have a material impact on our overall
sales volume and cost of goods.
Our stock price has been and continues to be fairly volatile. Our stock price is
affected by our quarterly and year-end results, results of our major competitors
and suppliers, general market and economic conditions and publicity about us,
our competitors, our vendors or our industry. Volatility in our stock price may
affect our future ability to raise proceeds from equity financings, renegotiate
our existing credit agreement or enter into a new borrowing relationship, or
affect our ability to obtain new store sites on favorable economic terms.
Item 2.
PROPERTIES
We currently lease approximately 54,000 square feet for our corporate
headquarters in Boulder, Colorado. The lease has four and one-half years
remaining on the term, with one three-year renewal option.
We lease all of our currently operating stores. We currently have leases signed
for four sites projected to be opened in the remainder of fiscal 2002 and fiscal
2003. Our leases typically provide for a 10- to 25-year base term and generally
have several renewal periods. The rental payments are either fixed base rates or
minimum base rent with additional rent calculated on a percentages of sales over
a certain break point. All of the leases are accounted for as operating
leases.
Store locations
The following map and store list show, as of March 1, 2002, the natural foods
grocery stores and vitamin stores that Wild Oats operates in each state and
Canadian province and the cities in which Wild Oats stores are located:
|
Arizona Arkansas California Colorado |
Connecticut Florida Illinois Indiana Kansas Massachusetts Missouri |
Nebraska Nevada New Jersey New Mexico New York Ohio Oklahoma Oregon |
Tennessee Texas Utah Washington British Columbia, Canada |
** Includes two small vitamin stores
Item 3.
LEGAL PROCEEDINGS
Alfalfa's Canada, Inc., a Canadian subsidiary of the Company, is a defendant
in a suit brought in the Supreme Court of British Columbia, by one of its
distributors, Waysafer Wholefoods Limited and one of its principals, seeking
monetary damages for breach of contract and injunctive relief to enforce a
buying agreement for the three Canadian stores entered into by a predecessor of
Alfalfa's Canada. Under the buying agreement, the stores must buy products
carried by the plaintiff if such are offered at the current advertised price of
its competitors. The suit was filed in September 1996. In June 1998, Alfalfa's
Canada filed a Motion for Dismissal on the grounds that the contract in dispute
constituted a restraint of trade. The Motion was subsequently denied. We do not
believe its potential exposure in connection with the suit will have a material
adverse effect on the Company's consolidated results of operations, financial
position, or cash flows.
In April 2000, the Company was named as defendant in S/H -Ahwatukee, LLC and
YP- Ahwatukee LLC v. Wild Oats Markets, Inc., Superior Court of Arizona,
Maricopa County, by a landlord alleging Wild Oats breached a continuous
operations clause arising from the closure of a Phoenix, Arizona store. The
landlord dismissed the same suit, filed in 1999, without prejudice in 1999,
after the Company presented a possible acceptable subtenant, but subsequently
rejected the subtenant. Plaintiff claimed $1.5 million for diminution of value
of the shopping center plus accelerated rent, fees and $360,000 in attorneys'
fees and costs. After trial in November 2001, the judge awarded the plaintiff
$326,000 in damages and $210,000 in attorneys' fees.
In January 2001, the Company was named as defendant in Glades Plaza, LP v. Wild
Oats Markets, Inc., a suit filed in the 15th Judicial Circuit Court, Palm Beach
County, Florida, by a landlord alleging we breached our lease obligations when
we gave notice of termination of the lease for landlord's default in not
timely turning over the premises. The parties negotiated a settlement pursuant
to which the Company terminated its lease obligations and paid $220,000 to the
plaintiff in return for a full release from all lease liability and termination
of the lawsuit.
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
Alfalfa's Inc., our predecessor on interest, breached a lease in 1995 related
to certain property in Seattle, Washington. We believe that Alfalfa's properly
terminated the lease pursuant to certain conditions precedent to its obligations
thereunder. Since filing its claim, Plaintiff has increased its damages claim
from $377,000 to $2.4 million. The parties are currently in discovery. We have
filed a motion for summary judgment, which is currently scheduled for a hearing
in May 2002. A trial date has been set in June 2002.
We also are named as defendant in various actions and proceedings arising in the
normal course of business. In all of these cases, the Company is denying the
allegations and is vigorously defending against them and, in some cases, has
filed counterclaims. Although the eventual outcome of the various lawsuits
cannot be predicted, it is management's opinion that these lawsuits will not
result in liabilities that would materially affect the Company's consolidated
results of operations, financial position, or cash flows
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol "OATS".
The following are the quarterly high and low sales prices for each quarter of
the past two years:
|
HIGH |
LOW |
|||
|
$ 22.750 |
$ 15.313 |
||
|
23.500 |
8.000 |
||
|
14.250 |
9.313 |
||
|
13.000 |
3.875 |
||
|
9.563 |
4.125 |
||
|
11.800 |
6.125 |
||
|
11.970 |
7.120 |
||
|
11.330 |
6.900 |
As of March 1, 2002, Wild Oats' common stock was held by 650 stockholders of
record. No cash dividends have been declared previously on our common stock, and
we do not anticipate declaring a cash dividend in the near future. Our Amended
and Restated Credit Agreement for our $125.0 million credit facility contains
restrictions on the payment of cash dividends without lender consent for so long
as amounts remain unpaid under the facility.
Item 6.
SELECTED FINANCIAL DATA
(in thousands, except per-share amounts and number of stores)
The following data for the fiscal years ended December 29, 2001; December 30,
2000; January 1, 2000; January 2, 1999; and December 27, 1997 are derived from
the consolidated financial statements of the Company. The following data should
be read in conjunction with the Company's consolidated financial statements,
related notes thereto and other financial information included elsewhere in this
report on Form 10-K.
|
FISCAL YEAR |
2001 |
2000 |
1999 |
1998 |
1997 |
|||||
|
STATEMENT OF OPERATIONS DATA: |
||||||||||
|
Sales |
$ 893,179 |
$ 838,131 |
$ 721,091 |
$ 530,726 |
$ 431,974 |
|||||
|
Cost of goods sold and occupancy costs |
634,631 |
581,980 |
499,627 |
369,475 |
301,644 |
|||||
|
Gross profit |
258,548 |
256,151 |
221,464 |
161,251 |
130,330 |
|||||
|
Direct store expenses |
212,642 |
190,986 |
155,869 |
113,094 |
96,448 |
|||||
|
Store contribution |
45,906 |
65,165 |
65,595 |
48,157 |
33,882 |
|||||
|
Selling, general and administrative expenses |
48,864 |
32,480 |
27,939 |
20,026 |
16,314 |
|||||
|
Pre-opening expenses |
1,562 |
3,289 |
2,767 |
3,449 |
1,149 |
|||||
| Restructuring and asset impairment charges |
54,906 |
42,066 |
12,642 |
393 |
|
|||||
|
Income (loss) from operations |
(59,426) |
(12,670) |
22,247 |
24,289 |
16,419 |
|||||
|
Loss on investment |
228 |
2,060 |
||||||||
|
Interest expense, net |
9,447 |
8,850 |
4,280 |
28 |
622 |
|||||
|
Income (loss) before income taxes |
(69,101) |
(23,580) |
17,967 |
24,261 |
15,797 |
|||||
|
Income tax expense (benefit) |
(25,189) |
(8,559) |
5,198 |
7,822 |
5,501 |
|||||
|
Net income (loss) before cumulative effect of change in |
|
|
|
|
|
|||||
|
Cumulative effect of change in accounting |
|
|
|
|
|
|||||
|
Net income (loss) |
$ (43,912) |
$ (15,021) |
$ 12,488 |
$ 16,439 |
$ 10,296 |
|||||
|
Basic net income (loss) per common share |
$ (1.80) |
$ (0.65) |
$ 0.55 |
$ 0.73 |
$ 0.55 |
|||||
|
Weighted average number of |
|
|
|
|
|
|||||
|
Diluted net income (loss) per common share |
$ (1.80) |
$ (0.65) |
$ 0.53 |
$ 0.71 |
$ 0.53 |
|||||
|
Weighted average number of |
|
|
|
|
|
|||||
|
Number of stores at end of period |
107 |
106 |
110 |
82 |
70 |
|||||
|
BALANCE SHEET DATA: |
||||||||||
|
Working capital (deficit) |
$ (26,489) |
$ (16,102) |
$ (20,971) |
$ (5,281) |
$ 32,566 |
|||||
|
Total assets |
$ 353,426 |
$ 372,632 |
$ 350,629 |
$ 217,320 |
$ 190,752 |
|||||
|
Long-term debt (including capitalized leases) |
$ 112,291 |
$ 116,839 |
$ 80,328 |
$ 2,675 |
$ 4,157 |
|||||
|
Stockholders' equity |
$ 107,015 |
$ 151,564 |
$ 165,387 |
$ 152,608 |
$ 136,697 |
|
(1) |
In fiscal 1999 the Company recorded $281,000 in expenses associated with a cumulative effect of a change in accounting principle. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Pre-Opening Expenses." |
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report on Form 10-K contains certain forward-looking statements regarding
our future results of operations and performance. Important factors that could
cause differences in results of operations include, but are not limited to, the
timing and success of the Fresh Look program; the Company's continued
compliance with its credit facility covenants; the successful transition of
responsibility to our new Chief Financial Officer; the timing and execution of
new store openings, relocations, remodels, sales and closures; the timing and
impact of promotional and advertising campaigns; the impact of competition;
changes in product supply or suppliers; changes in management information needs;
changes in customer needs and expectations; governmental and regulatory actions;
general industry or business trends or events; changes in economic or business
conditions in general or affecting the natural foods industry in particular; and
competition for and the availability of sites for new stores and potential
acquisition candidates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Cautionary Statement Regarding
Forward-Looking Statements." All information stated herein has been revised
to reflect the stock-for-stock transactions, accounted for as poolings of
interests, with Henry's Marketplace, Inc. and Sun Harvest Farms, Inc., which
were consummated on September 27, 1999 and December 15, 1999,
respectively.
Overview
Fresh Look Program. During the second and third quarters of fiscal 2001, we
conducted extensive consumer research to determine how to broaden our customer
base and increase per-customer sales. Based on the results of the research, we
formulated our Fresh Look program - a comprehensive advertising, pricing and
merchandising program. In the beginning of the third quarter of fiscal 2001, the
Company commenced the test of a modified Fresh Look program in our 12 Colorado
stores. The results of such program were encouraging, and we initiated a phased
roll-out of the complete Fresh Look program to the Colorado stores and an
additional 32 stores in Connecticut, Florida, Kansas, Massachusetts, Missouri,
Nebraska, New Jersey, Ohio, Oklahoma, Oregon and Washington over the third and
fourth quarters of fiscal 2001. The program includes weekly, as opposed to
monthly, flyer advertising through direct mail, in-store distribution and
newspaper insertion, remerchandising to emphasize produce, grocery and meat and
seafood offerings, and lowered pricing on selected merchandise throughout the
stores. As part of the program, we are also consolidating our banner names in
selected areas across the country to convert stores bearing individually
different names to the "Wild Oats Market" name, to increase
advertising synergy and brand awareness. In the short period in which the
program has been in place, we have seen encouraging increases in customer counts
and comparable store sales results although average transaction size has
remained relatively flat. We will continue to evaluate the data being produced
from the Fresh Look program stores to determine whether to proceed on a
long-term basis with the program in its current format or in a modified format.
We currently have 42 stores operating on the program. We have seen increases in
comparable store sales results in most of the stores on the program; for those
on the program 30 weeks or more (the stores in Colorado), the results have been
most pronounced. For stores in the Fresh Look program for 30 weeks or more,
through the end of February 2002, comparable store sales results have increased
5%, from a -1% comparable store sales from January 2001 through mid July,
2001, to 4% through February 2002. These stores have also shown a 9% increase in
comparable customer counts, from -4% prior to the commencement of the program
to 5% for the period thereafter. In comparison, for those Wild Oats Market
stores not on the Fresh Look program (excluding the farmers market format stores
and our Capers Community Market(TM) stores), for similar periods, overall
comparable store sales increased 2% while comparable customer counts increased
5%.
Store format and clustering strategy. We operate two store formats: the natural
foods supermarket and farmers market formats. The natural foods supermarket
format store, operated under the Wild Oats(R) Natural Marketplace and Nature's(R)
- A Wild Oats Market tradenames, is generally 20,000 to 35,000 gross square
feet, and the farmers market store, operated under the Henry's Marketplace(R)
and Sun Harvest(TM) tradenames, is generally 15,000 to 25,000 gross square feet.
Our profitability has been and will continue to be affected by the mix of
natural foods supermarkets and farmers market stores opened, acquired or
relocated and whether stores are being opened in markets where we have an
existing presence. As part of the ongoing comprehensive review of the Company's
business operations and strategic plan, we are evaluating our current natural
foods store format and design, and may make significant changes in the future.
We also plan to expand the Henry's Marketplace farmers market store format as
our second, parallel store format. We believe this format, which is primarily
located in metropolitan San Diego, California and Texas, appeals to a more
value-conscious customer. The format has historically produced higher comparable
store sales results than the natural foods supermarket format stores, although
margins are lower. The format also appears to perform better in the face of new
competition, whether from conventional or natural foods supermarket competitors.
In the past, we have pursued a strategy of clustering stores in each of our
markets to increase overall sales, reduce operating costs and increase customer
awareness. In prior years, when we opened a store in a market where we had an
existing presence, our sales and operating results declined at certain of our
existing stores in that market. However, over time, the affected stores
generally achieved store contribution margins comparable to prior levels on the
lower base of sales. Certain new stores opened in the past two years have caused
a greater degree of cannibalization than previously expected, and at this time
it does not appear that the store contribution margins at the older, affected
stores in these regions will rebound to their prior levels. In certain existing
markets, the sales and operating results trends for other stores may continue to
experience temporary declines related to the clustering of stores. We are
currently reevaluating our clustering strategy in response to
greater-than-expected sales cannibalization in certain existing markets where we
opened new stores.
Comparable store sales results. Sales of a store are deemed to be comparable
commencing in the thirteenth full month of operations for new, relocated and
acquired stores. A variety of factors affect our comparable store sales results,
including, among others:
- general economic conditions
- the opening of stores by us or by our competitors in markets
where we have existing stores
- the relative proportion of new or relocated stores to mature
stores
- the timing of advertising and promotional events
- store remodels
- store closures
- our ability to effectively execute our operating plans
- changes in consumer preferences for natural foods products
- availability of produce and other seasonal merchandise.
Past increases in comparable store sales may not be indicative of future
performance. Substantial uncertainty in the current U.S. economy in the wake of
the events of September 11, 2001 make it more difficult to determine future
performance of certain of our stores, although generally, food sales are not
dramatically impacted by economic recessions.
Our comparable store sales results have been negatively affected in the past by,
among other factors, planned cannibalization, which is the loss of sales at an
existing store when we open a new store nearby, resulting from the
implementation of our store clustering strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Store
format and clustering strategy." Comparable store sales results in previous
years were negatively affected by higher-than-expected cannibalization due to
the openings of new or relocated stores in several of our existing markets. The
farmers market format stores, which depend heavily on produce sales, are more
susceptible to sales fluctuations resulting from the availability and price of
certain produce items. As a result of operational improvements in some recently
acquired stores, the Fresh Look marketing program in selected regions and store
closures of certain weaker stores, comparable store sales increased by 5.7% in
the fourth quarter of fiscal 2001, 5.5% in the third quarter of fiscal 2001,
3.9% in the second quarter of fiscal 2001 and 1.0% in the first quarter of
fiscal 2001. We expect comparable store sales to increase, although as the
Company expands the implementation of its Fresh Look program to additional
natural foods supermarket stores, the Company projects that comparable store
sales in those regions in which the initiatives are implemented may increase
slightly more as such initiatives increase total store sales. There can be no
assurance that comparable store sales for any particular period will not
decrease in the future.
Store openings, closings, sales, remodels, relocations and acquisitions. In the
first quarter of fiscal 2001, we opened four new stores in Cleveland, Ohio;
Irvine, California; Westport, Connecticut; and Omaha, Nebraska. We postponed the
opening of five additional stores originally planned to be opened in fiscal
2001, to allow for the redesign of the interiors of such stores to incorporate
feedback received during extensive customer interviews and focus groups
conducted in the second quarter of fiscal 2001, to improve the operating
efficiency of certain departments and to shift the guests' focus to the meat
and seafood, produce and grocery departments. One of the postponed stores is
currently planned to open in Long Beach, California in the first half of fiscal
2002. We negotiated a termination of one lease in Kansas City, Missouri; the
opening dates for the remainder have been rescheduled during fiscal 2002 or
early fiscal 2003.
In fiscal 2001 we closed one natural foods store in Denver, Colorado and
terminated our lease obligation in one location in West Palm Beach, Florida. We
also sold two underperforming stores in San Anselmo and Sacramento, California,
in related transactions. As of the date of this report, in fiscal 2002 we have
closed two underperforming stores in Boca Raton, Florida and Chesterfield,
Missouri, sold two additional stores in Berkeley and Sunnyvale, California to
the same purchaser of the other stores in northern California, and sold a store
in Victoria, British Columbia, Canada. We also terminated a lease obligation for
one location never opened in Kansas City, Missouri. In fiscal 2000, we opened 11
new stores in Laguna Niguel, San Diego (two) and Yorba Linda, California; Kansas
City, Kansas; St. Louis, Missouri; Reno, Nevada; Cleveland and Cincinnati, Ohio;
Bend and Portland, Oregon; and relocated three stores in West Hartford,
Connecticut; Las Vegas, Nevada; and Salt Lake City, Utah. We also acquired two
operating natural foods stores in Escondido and Hemet, California.
The Company currently has an inventory of 20 vacant sites, comprising both
closed store, kitchen and warehouse locations and excess unoccupied space
acquired during acquisitions or other leasing transactions, for which we have
rent obligations; appropriate accruals have been made for such obligations. We
are actively seeking subtenants or assignees for the spaces, although many of
the sites are difficult to sublease or assign because of unusual site
characteristics, surpluses of vacant retail space in the markets in which the
sites are located, or because the remaining lease terms are relatively short. In
fiscal 2001, we disposed of 12 of our vacant sites, including closed store sites
in Scottsdale and Tempe, Arizona; Mission Viejo and Santa Barbara, California;
Denver, Colorado; Framingham, Massachusetts; Madison, New Jersey; Las Vegas,
Nevada; Dallas, Texas and two smaller sites in Salt Lake City, Utah. In fiscal
2002, through the date of this report, we have disposed of two additional
locations, in Santa Fe, New Mexico and West Hartford, Connecticut, both in
transactions where the landlord took a reassignment of the space in exchange for
payment to the Company of cash or rent abatements. In some cases we have
negotiated lease terminations with the landlords in exchange for a cash payment
by us. Where appropriate, we have made vacant space available for use by
charitable organizations which cover the utilities costs for the space while we
continue to pay the rent obligation.
Our ability to increase the number of stores opened in fiscal 2002 and beyond
may depend upon our ability to raise additional equity financings. During the
first three quarters of fiscal 2001, we were in default under our $157.5 million
credit facility as a result of our violation of certain financial covenants in
our loan agreement. In October 2001, we executed an amendment to our credit
facility, pursuant to which all previous defaults under the credit facility were
waived. As part of such amendment, our borrowings have been limited to $125.0
million, and we agreed to restrictive covenants, including covenants regarding
our ability to enter into new leases and to make certain capital expenditures.
Absent additional equity funding, the limitations on capital expenditures will
not allow us to complete and open in fiscal 2002 all of the stores for which we
currently have signed leases; therefore, some openings have been rescheduled
into early fiscal 2003. We have proposed to raise $30.0 million or more in
equity financings, and have executed confidentiality agreements with and
provided due diligence to a number of interested parties. To date, we have
received several offers for investment in the Company. The Company is currently
investigating other, less dilutive equity alternatives. If the Company is
successful in raising additional equity financing of $30.0 million or more,
under the terms of the amended credit agreement we will be allowed to increase
the number of new leases we may execute and new stores we may open, based on the
amount of equity financings raised and the format of the stores proposed to be
opened. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
As has been our practice in the past, we will continue to evaluate the
profitability, strategic positioning, impact of potential competition, and sales
growth potential of all of our stores on an ongoing basis. We may, from time to
time, make decisions regarding closures, disposals, relocations or remodels in
accordance with such evaluations. In fiscal 2000, as part of restructuring and
asset impairment charges taken in the second and fourth quarters, we identified
22 stores for closure or sale, of which 20 have been closed or sold. Changing
facts and circumstances during the fourth quarter of fiscal 2001 have led us to
remove the remaining two stores from our list of closures or sales. One of these
stores was expected to be closed or sold by the end of fiscal 2001 in
conjunction with the Company's opening of a new store in the same city;
however, in the fourth quarter of fiscal 2001, the Company abandoned the new
store site due to parking issues created during construction of the site. Due to
this change in facts and circumstances, management decided to continue to
operate the existing store in its existing location; therefore, the
restructuring charges of $864,000 previously recorded for the existing store
were reversed during the fourth quarter of fiscal 2001. With regard to the other
store, during the fourth quarter of fiscal 2001 the Company completed a
competitive analysis of the market area and a re-evaluation of the operations of
the store, which showed that the store was achieving acceptable performance
levels and demonstrating positive performance trends following the
implementation of the Fresh Look program late in the third quarter of fiscal
2001. Due to this change in facts and circumstances during the fourth quarter of
fiscal 2001, management decided to continue to operate the store in its existing
location; therefore, the restructuring charges of $1.6 million previously
recorded for the store were reversed during the fourth quarter of fiscal 2001.
In the second quarter of fiscal 2001, we identified an additional three stores
slated for closure or sale, including one location in West Palm Beach, Florida
where we terminated our leasehold interest in the second quarter of fiscal 2001.
The other two stores were removed from our list of closures or sales due to
changes in estimates related to changes in facts and circumstances during the
fourth quarter of fiscal 2001. The Company had planned to close or sell both
stores in conjunction with the Company's opening of new stores in the
respective trade areas; however, during the fourth quarter of fiscal 2001, the
Company abandoned its plans for the new store sites and decided to continue to
operate the existing stores in their existing locations and reversed $274,000 of
restructuring charges previously recorded for the existing stores.
Pre-opening expenses. Pre-opening expenses include labor, rent, advertising,
utilities, supplies and certain other costs incurred prior to a store's
opening. Historically, pre-opening expenses for natural foods supermarket format
stores have averaged approximately $250,000 to $350,000 per store, and farmers
market format stores have averaged approximately $75,000 per store, although the
amount per store may vary depending on whether the store is the first to be
opened in a market or is part of a cluster of stores in that market. As part of
the Fresh Look advertising initiatives implemented by the Company, we expect
that pre-opening expenses will increase to $400,000 per natural foods
supermarket store, and $150,000 per farmers market store, as we boost grand
opening and weekly advertising. Consolidation of store banners, which was
implemented in the last half of fiscal 2001, should improve advertising
synergies in many regions of the country.
Restructuring and Asset Impairment Charges. As a result of the March 2001
transition to our new Chief Executive Officer and a new management philosophy,
the Company has been and continues to conduct an extensive review of all
components of our business, including our previously announced strategic
repositioning initiatives, as well as current marketing, purchasing,
merchandising and new store programs. This comprehensive review is intended to
aggressively reexamine all aspects of our business for opportunities to improve,
strengthen, streamline and reposition our business operations. As a result of
this review, the Company has and continues to make significant changes to our
current business strategy and methods of operations with the goal of increasing
comparable store sales, average transaction size and customer count. Initiatives
implemented at 44 of our natural foods supermarket stores as part of our Fresh
Look program include reductions in many items' everyday pricing, increases in
frequency and distribution of advertising, modifications of staffing and
remerchandising of selected stores.
During the second quarter of fiscal 2001, the Company's management made certain decisions relating to the Company's operations which identified three stores to be closed or abandoned by the end of fiscal 2001, reduced the Company's regional offices and certain staff, changed estimates of prior restructuring and asset impairment charges, and resulted in a restructuring and asset impairment charge of $54.8 million. See "Notes to Consolidated Financials Statements - Note 12 - Restructuring and Asset Impairment Charges."
After a comprehensive review of the Company's support facilities was
completed by management during the third quarter of fiscal 2001, management
determined that the operations of certain support facilities should be
eliminated. As a result, in the third quarter of fiscal 2001, the Company
recorded a restructuring and asset impairment charge of $776,000 resulting
primarily from the closure of three support facilities: a bakery in Tucson,
Arizona, and two commissary kitchens in Los Angeles, California and Santa Fe,
New Mexico.
During the fourth quarter of fiscal 2001, the Company's management made
certain decisions relating to the Company's operations which identified three
stores to be closed or abandoned by the second quarter of fiscal 2002, changed
estimates of prior restructuring and asset impairment charges, and resulted in
restructuring and asset impairment income of $704,000. See "Notes to
Consolidated Financials Statements - Note 12 - Restructuring and Asset
Impairment Charges."
Critical Accounting Policies and Estimates. Our discussion and analysis of the
Company's financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
On an ongoing basis, we evaluate the continued appropriateness of our accounting
policies and resulting estimates, including those related to:
- asset impairment charges
- restructuring charges and store closing costs
- allowance for bad debt
- inventory valuation and reserves
- self-insurance reserves
- reserves for contingencies and litigation
- goodwill valuation
We believe the following critical accounting policies affect our most
significant judgments and estimates used in the preparation of our consolidated
financial statements. We monitor the carrying value of our long-lived assets,
including goodwill and other intangible assets, for potential impairment at the
store level. The triggering events for such evaluations include a significant
decrease in the market value of an asset, acquisition and construction costs in
excess of budget, or current period losses combined with a history of losses or
a projection of continuing losses. The Company records an asset impairment
charge when an impairment is identified. Future adverse changes in asset market
values or store operating results could result in an inability to recover the
carrying value of the assets, thereby requiring an asset impairment charge in
the future. See "Notes to Consolidated Financial Statements - Note 12 - Restructuring and Asset Impairment Charges", for an additional discussion
of our policies regarding the calculation of asset impairments.
The Company plans to complete store closures or sales within a one-year period
following the commitment date. Costs related to store closures and sales are
reflected in the income statement as "Restructuring and Asset Impairment
Charges." For stores the Company intends to sell, the Company actively
markets the stores to potential buyers. Stores held for disposal are reduced to
their estimated net realizable value. For stores the Company intends to close, a
lease-related liability is recorded for the present value of the estimated
remaining noncancelable lease payments after the anticipated closing date, net
of estimated subtenant income, or for estimated lease settlement costs. In
addition, the Company records a liability for costs to be incurred after the
store closing which are required under leases or local ordinances for site
preservation during the period before lease termination. The value of equipment
and leasehold improvements related to a closed store is reduced to reflect
recoverable values based on the Company's previous efforts to dispose of
similar assets and current economic conditions. Severance costs incurred in
connection with store closings are recorded when the employees have been
identified and notified of the termination benefits to be made to the employees.
Lease-related liabilities and the recoverability of assets to be disposed of are
reviewed quarterly, and changes in previous estimates are reflected in
operations. Significant cash payments associated with closed stores relate to
ongoing payments of rent, common area maintenance, insurance charges, and real
property taxes as required under continuing lease obligations.
The Company maintains allowances for bad debt for estimated losses resulting
from the inability of third parties to make required payments. If the financial
condition of such third parties were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
The Company maintains allowances for excess or unsaleable inventory as a
percentage of its gross inventory balance based on historical experience and
assumptions about market conditions. If actual market conditions are less
favorable than those projected by management, or if the Company expands its
forward buying of inventory which will increase its inventory levels, then
additional inventory write-downs may be required.
The Company is self-insured for certain losses relating to workers'
compensation claims and employee medical and dental benefits. The Company has
purchased stop-loss coverage to limit its exposure to any significant levels of
claims. Self-insured losses are accrued based upon the Company's estimates of
the aggregate insured claims incurred using certain actuarial assumptions
followed in the insurance industry and the Company's historical experiences.
If the Company experiences an increase in claims, if actuarial assumptions are
inaccurate, or if insurance industry costs increase beyond current expectations,
then additional reserves may be required.
The Company maintains reserves for contingencies and litigation based on
management's best estimates of potential liability in the event of a judgment
against the Company, and possible settlement costs, as well as existing facts
and circumstances. Future adverse changes related to current contingencies and
litigation could necessitate additional reserves in the future.
Results of Operations
The net loss for fiscal 2001 was $43.9 million, or $1.80 per diluted share,
compared with a net loss of $15.0 million, or $0.65 per diluted share, in fiscal
2000. In addition to the restructuring income of $700,000 recorded during the
fourth quarter of fiscal 2001, as part of the Company's strategic
repositioning activities during fiscal 2001, the Company recorded restructuring
and asset impairment charges of approximately $55.0 million in the second and
third quarters of fiscal 2001. Excluding these charges, the Company reported a
pro forma net loss of $9.5 million, or $0.39 per diluted share, in fiscal 2001,
compared with pro forma net income of $12.6 million, or $0.54 per diluted share,
excluding $44.1 million in restructuring and asset impairment charges related to
the sale and closure of underperforming stores and the discontinuation of
e-commerce activities in fiscal 2000.
The following table sets forth for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
|
FISCAL YEAR ENDED |
|
2001 |
|
2000 |
|
1999 |
|
Sales |
|
100.0% |
|
100.0% |
|
100.0% |
|
Cost of goods sold and occupancy costs |
|
71.1 |
|
69.4 |
|
69.3 |
|
Gross profit |
|
28.9 |
|
30.6 |
|
30.7 |
|
Direct store expenses |
|
23.8 |
|
22.8 |
|
21.6 |
|
Store contribution |
|
5.1 |
|
7.8 |
|
9.1 |
|
Selling, general and administrative expenses |
|
5.4 |
|
3.9 |
|
3.9 |
|
Pre-opening expenses |
|
0.2 |
|
0.4 |
|
0.4 |
|
Restructuring and asset impairment charges |
|
6.1 |
|
5.0 |
|
1.8 |
|
Income (loss) from operations |
|
(6.6) |
|
(1.5) |
|
3.0 |
|
Loss on investment |
|
0.0 |
|
0.3 |
|
|
|
Interest expense, net |
|
1.1 |
|
1.0 |
|
0.6 |
|
Income (loss) before income taxes |
|
(7.7) |
|
(2.8) |
|
2.4 |
|
Income tax expense (benefit) |
|
(2.8) |
|
(1.0) |
|
0.7 |
|
Net income (loss) before cumulative |
|
|
|
|
|
|
|
Cumulative effect of change in |
|
|
|
0.1 |
||
|
Net income (loss) |
|
(4.9)% |
|
(1.8)% |
|
1.6 % |
Fiscal 2001 Compared to Fiscal 2000
Sales. Sales for the fiscal year ended December 29, 2001, increased 6.6% to
$893.2 million from $838.1 million in fiscal 2000. The increase was primarily
due to the opening of four new stores in the first quarter of fiscal 2001, as
well as the inclusion of the 16 stores opened or acquired in fiscal 2000, offset
by three stores closed or sold in fiscal 2001 and 20 stores closed or sold in
fiscal 2000. Higher comparable store sales from existing stores contributed
slightly more than half of the fiscal 2001 sales increase, with new stores
contributing the balance. Comparable store sales increased 4.0% for fiscal 2001,
as compared to a 2.6% decrease for fiscal 2000. Some of the comparable store
sales increases are attributable to the phased roll-out of a number of strategic
initiatives as part of the Fresh Look program, which are projected to increase
overall sales gradually in those regions in which the initiatives are
implemented, through increased advertising, more frequent advertised specials
and modified pricing.
Gross Profit. Gross profit for the fiscal year ended December 29, 2001,
increased 0.9% to $258.5 million from $256.2 million in fiscal 2000. The smaller
percentage increase in gross profit is due primarily to lower merchandise
margins resulting from the implementation of pricing reductions as part of the
Fresh Look program as well as a shift in the sales mix between store formats. As
a percentage of sales, gross profit decreased to 28.9% in fiscal 2001 from 30.6%
in fiscal 2000 due primarily to lower merchandise margins resulting from the
implementation of the Fresh Look program, as well as a shift in the sales mix
between store formats, increases in inventory reserves for slow-moving goods,
lower margins on certain categories of products sold in the stores, higher
utilities expenses and higher-than-expected coupon activity during the fourth
quarter of fiscal 2001. As the Company expands the Fresh Look program to
additional stores in fiscal 2002, gross profit in fiscal 2002 may be negatively
affected by lower margins on certain items.
Direct Store Expenses. Direct store expenses for the fiscal year ended December
29, 2001, increased 11.3% to $212.6 million from $191.0 million in fiscal 2000.
As a percentage of sales, direct store expenses increased to 23.8% in fiscal
2001 from 22.8% in fiscal 2000. The increases are primarily due to increased
payroll associated with an increase in the number of stores in operation,
enhanced customer service efforts as part of the Fresh Look program, additional
benefit days due to a change in vacation policy in fiscal 2001, increased health
and dental, workers' compensation, and general liability insurance costs
related to general market conditions, and an increase in repairs and maintenance
costs. We anticipate that we will see increases in fiscal 2002 and beyond in the
area of employee-related insurance and general liability insurance costs. On an
absolute basis, we expect direct store expenses to increase with the addition of
new stores, but on a percentage-of-sales basis to be consistent with fiscal
2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the fiscal year ended December 29, 2001, increased
50.4% to $48.9 million from $32.5 million in fiscal 2000. The increases are
attributable to consulting and professional fees resulting from the
comprehensive review of our business and strategic position ($1.7 million),
severance costs for former senior executives ($1.3 million), recruiting and
relocation costs ($500,000), and expenses associated with the October 2001
amendment to our $125.0 million credit facility ($300,000), as well as increases
in advertising and merchandising expenses related to the implementation of the
Fresh Look program and expenses for expanded infrastructure at the Company's
headquarters to support the new advertising, merchandising and pricing
initiatives. As a percentage of sales, selling, general and administrative
expenses increased to 5.4% in fiscal 2001 from 3.9% in fiscal 2000. As part of
the Company's expanded strategic repositioning, we expect to spend additional
funds on marketing at the national level, as well as increased corporate and
regional support staffs. As a result of these increased expenditures, we expect
that selling, general and administrative expenses will increase in fiscal 2002
over fiscal 2001 levels in both absolute and percentage terms. The increase is
primarily due to increased marketing expense in conjunction with the continuing
Fresh Look implementation, annualization of payroll expenses for staff additions
in fiscal 2001, and increased employee-related insurance costs.
Pre-Opening Expenses. Pre-opening expenses for the fiscal year ended December
29, 2001, decreased 52.5% to $1.6 million from $3.3 million in fiscal 2000. As a
percentage of sales, pre-opening expenses decreased to 0.2% in fiscal 2001 from
0.4% in fiscal 2000, due to the opening of four new stores in fiscal 2001 as
compared to the opening of 14 new and relocated stores in fiscal 2000. As part
of the Company's increase in marketing efforts relating to the Fresh Look
program, we anticipate that pre-opening expenses for new natural foods
supermarket stores will increase from an estimated $250,000 historically to an
estimated $400,000 per new store, and those of the farmers market format will
increase from $75,000 historically to an estimated $150,000 in the future.
Interest Expense, Net. Net interest expense for the fiscal year ended December
29, 2001, increased 6.7% to $9.4 million from $8.9 million in fiscal 2000, due
to higher average borrowings in fiscal 2001 and higher swap-related interest
rates on the term portion of the credit facility in fiscal 2001. As part of the
amendment to the credit facility, the interest rate on the facility was amended
to either prime plus 2.25% or one-month LIBOR plus 3.75%, at our election, and
the rates increase by 0.5% starting January 1, 2002 and each six months
thereafter through January 1, 2003 when the rate will remain constant through
the end of the agreement in August 2003. Due to the current state of the U.S.
economy, management believes that the variable interest rates will remain
constant during the next six to 12 months. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" below.
Restructuring and Asset Impairment Charges - Fiscal 2001. As a result of
hiring a new chief executive officer just prior to the beginning of the second
quarter of fiscal 2001, and a comprehensive review conducted by the new chief
executive officer of our business and strategic repositioning efforts during the
second quarter of fiscal 2001, we identified and committed to a restructuring
plan during the second quarter of fiscal 2001 and recorded a restructuring and
asset impairment charge of $54.8 million (such asset impairments were recorded
in accordance with SFAS 121, Accounting for the Impairment of Long-lived Assets
and for Assets to be Disposed of). Details of the significant components of the
charge are as follows:
- Change in estimate related to fixed asset impairments for
previously identified sites held for disposal ($1.5 million) - During the second
quarter of fiscal 2001, we determined that certain fixed assets were not
compatible with a new store design. Due to the new store design, such assets
could not be relocated as contemplated under the original restructuring plan. As
a result, we determined we could not recover the previously estimated carrying
value of these assets, and therefore recognized an impairment charge and
disposed of the assets during the second quarter of fiscal 2001.
- Change in estimate related to lease-related liabilities for
previously identified sites for closure ($15.9 million) - During the second
quarter of fiscal 2001, we determined that additional periods of time were
necessary to dispose of certain lease obligations. This determination was driven
by our results of current disposition efforts, and is attributable to
deteriorating real estate markets in certain regions, existing lease obligations
at above-market rates, and unattractive site characteristics. The charge for
exit costs assumes, based on our current results of disposition efforts, that we
will be successful in disposing of these long-term lease obligations within the
next five years. Facts and circumstances can change in the future with respect
to the above attributes, affecting the ultimate resolution of these exit costs.
We will make appropriate adjustments to the restructuring liabilities
contemporaneous with any change in facts and circumstances.
- Fixed asset impairments for three additional stores
identified in the second quarter of fiscal 2001 to be abandoned, closed, or sold
by the end of fiscal 2001 ($1.8 million) - During the second quarter of fiscal
2001, we became involved in litigation filed by the landlord of a site under
construction. We decided not to proceed with the opening of the store and
consequently abandoned the site and the related fixed assets (leasehold
improvements) totaling $1.5 million during the second quarter of fiscal 2001.
Additionally, the fixed assets of two other stores that were scheduled to be
closed by the end of fiscal 2001 comprised the remaining $300,000 of the
charge.
- Fixed asset impairments for subleased properties identified
during the second quarter of fiscal 2001 ($1.7 million) - These asset
impairments relate to leasehold improvements made by the Company in subleased
properties for specific subtenants. During the second quarter of fiscal 2001,
certain subtenants either vacated the improved properties without prior notice
or gave notice to us that they planned to vacate the properties shortly, and
certain other subtenants were in financial distress and in one case, had filed
for bankruptcy protection. We determined that we could not recover the carrying
value of these build-to-suit leasehold improvements and therefore recognized an
impairment charge. Certain of these assets were disposed of during the second
quarter of fiscal 2001 and the remainder were disposed of by the end of fiscal
2001.
- Lease-related liabilities for subleased properties identified
during the second quarter of fiscal 2001 ($10.0 million) - During the second
quarter of fiscal 2001, certain subtenants either vacated the improved
properties without prior notice or gave notice to us that they planned to vacate
the properties shortly. We also were informed in the second quarter that certain
other subtenants were in financial distress and in one case, had filed for
bankruptcy protection. The lease-related liabilities represent our estimate to
dispose of these lease obligations based on current disposition efforts, and is
attributable to deteriorating real estate markets in certain regions, existing
lease obligations at above-market rates, and unattractive site characteristics.
The charge for exit costs assumes, based on our current results of disposition
efforts, that the Company will be successful in disposing of these long-term
lease obligations within the next five years. Facts and circumstances can change
in the future with respect to the above attributes affecting the ultimate
resolution of these exit costs. We will make appropriate adjustments to the
restructuring liabilities contemporaneous with the change in facts and
circumstances.
- Fixed asset impairments for regional and departmental office
closures and consolidations during the second quarter of fiscal 2001 ($3.0
million) - As part of our reorganization during the second quarter of fiscal
2001, we reduced our regional offices from 11 to five offices, and eliminated
much of our construction department. In conjunction with these modifications to
regional and departmental structures, we determined that we could not recover
the carrying value of the fixed assets used by certain regional and departmental
offices and our construction department, and therefore recognized an impairment
charge and disposed of the assets during the second quarter of fiscal
2001.
- Fixed asset impairments for store construction project
discontinuation ($2.3 million) - During the second quarter of fiscal 2001, we
determined that a new store design was required, and construction of new stores
and expansion and remodel activities at existing stores based on the previously
developed designs would be abandoned to incorporate the new store design
changes. Assets in this charge included abandoned construction in progress
(primarily leasehold improvements). We determined that we could not recover the
carrying value of these fixed assets, and therefore recognized an impairment
charge and disposed of the assets during the second quarter of fiscal
2001.
- Severance for employees terminated during the second quarter
of fiscal 2001 ($2.5 million) - During the second quarter of fiscal 2001, 104 of
our 9,000 employees were terminated as part of the Company's restructuring
plan. The terminated employee groups were regional store support, construction
and new store development, and corporate office personnel. As of December 29,
2001, $2.4 million of involuntary termination benefits had been paid to
terminated employees; the remaining benefits of $136,000 will be paid during the
first half of fiscal 2002.
In addition to the restructuring charges described above, in the second quarter
of fiscal 2001 management also identified asset impairment charges of $15.9
million in accordance with the provisions of SFAS 121 related to five stores
held for use. These assets became impaired in the second quarter of fiscal 2001
because the projected future cash flows of each store at that time were not
sufficient to fully recover the carrying value of the stores' long-lived
assets. In determining whether an impairment exists, we estimate the store's
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. We believe
the weak performance from the stores included in the asset impairment charge
were caused by significant budget overruns in construction (one store), poor
site location (two stores) or insufficient advertising in new regional markets
(two stores). We continually reevaluate our stores' performance to monitor the
carrying value of long-lived assets in comparison to projected cash flows.
Elements that could contribute to impairment of long-lived assets include new
competition, overruns in construction costs, or poor operating results caused by
a variety of factors, including improper site selection, insufficient
advertising, or changes in local, regional or national economies. We are
currently reevaluating the store format and construction procedures to reduce
the likelihood of construction cost overruns, and have increased our projected
pre-opening costs per new store to increase the level of new store advertising.
Site selection criteria are also being reevaluated in light of the results of
the Company's comprehensive review of all operations and ideal customer
demographics. There is no assurance that in the future, additional long-lived
assets will not be impaired.
After a comprehensive review of our support facilities was completed by
management during the third quarter of fiscal 2001, we determined that the
operations of certain support facilities should be eliminated. As a result, in
the third quarter of fiscal 2001, we recorded a restructuring and asset
impairment charge of $776,000 resulting primarily from the closure of three
support facilities: a bakery in Tucson, Arizona, and two commissary kitchens in
Los Angeles, California and Santa Fe, New Mexico.
During the fourth quarter of fiscal 2001, we recorded restructuring income of
$5.7 million consisting of the following components:
- Change in estimate related to lease-related liabilities for
sites previously identified for closure or sale that were closed, sold or
disposed of during the fourth quarter of fiscal 2001 and the first quarter of
fiscal 2002 ($10.1 million of restructuring income) - During the fourth
quarter of fiscal 2001, we sold two stores in San Anselmo and Sacramento,
California, in related transactions; we subsequently sold two additional stores
in Berkeley and Sunnyvale, California, to the same purchaser of the other
northern California stores. In conjunction with these transactions, the
purchaser assumed the lease-related obligations associated with these stores.
Based on this change in facts and circumstances, we reversed the remaining
lease-related liabilities previously recorded for these stores and therefore
recognized restructuring income of $3.7 million during the fourth quarter of
fiscal 2001. During the fourth quarter of fiscal 2001 and the first quarter of
fiscal 2002, we also assigned to a third party or terminated lease obligations
for sites in Madison, New Jersey and Boca Raton, Florida, respectively; based on
this change in facts and circumstances, we reversed the remaining lease-related
liabilities previously recorded for these stores and therefore recognized
restructuring income of $6.4 million during the fourth quarter of fiscal 2001.
- Change in estimate related to fixed asset impairments for
four stores previously identified for closure or sale ($1.6 million of
restructuring income) - Due to changes in facts and circumstances during the
fourth quarter of fiscal 2001, we determined that four stores previously
identified as sites held for disposal would continue to operate in their
existing locations. Three of the stores were expected to be closed in
conjunction with the Company's opening of new stores in the respective trade
areas; however, during the fourth quarter of fiscal 2001, the Company decided to
abandon the new store sites and continue to operate the existing stores. With
regard to the fourth store, management decided in the fourth quarter of fiscal
2001 to continue to operate the store in its existing location after completing
a competitive analysis of the market area and a reevaluation of the operations
of the store in the fourth quarter of fiscal 2001, which showed that the store
was achieving acceptable performance levels and demonstrating positive
performance trends following the implementation of the Fresh Look program late
in the third quarter of fiscal 2001. As a result, we reversed the restructuring
charge previously recorded for the fixed asset impairments related to these four
stores and therefore recognized restructuring income of $1.6 million during the
fourth quarter of fiscal 2001.
- Change in estimate related to lease-related liabilities for
four stores previously identified for closure or sale ($1.1 million of
restructuring income) - Due to changes in facts and circumstances during the
fourth quarter of fiscal 2001, we determined that four stores previously
identified as sites held for disposal would continue to operate in their
existing locations. Three of the stores were expected to be closed in
conjunction with the Company's opening of new stores in the respective trade
areas; however, during the fourth quarter of fiscal 2001, the Company decided to
abandon the new store sites and continue to operate the existing stores. With
regard to the fourth store, management decided in the fourth quarter of fiscal
2001 to continue to operate the store in its existing location after completing
a competitive analysis of the market area and a reevaluation of the operations
of the store in the fourth quarter of fiscal 2001, which showed that the store
was achieving acceptable performance levels and demonstrating positive
performance trends following the implementation of the Fresh Look program late
in the third quarter of fiscal 2001. As a result, we reversed the restructuring
charge previously recorded for the long-term lease obligations related to these
four stores and therefore recognized restructuring income of $1.1 million during
the fourth quarter of fiscal 2001.
- Fixed asset impairments for three additional stores and one
support facility identified in the fourth quarter of fiscal 2001 to be closed or
sold by the second quarter of fiscal 2002 ($3.3 million of restructuring
expense) - During the fourth quarter of fiscal 2001, we decided to close two
stores in fiscal 2002 following the negotiation of a lease obligation settlement
for one store in the fourth quarter of fiscal 2001 and the completion of an
operations analysis for the other store, which showed that the intensive Fresh
Look marketing and merchandising efforts initiated at the store early in the
fourth quarter of 2001 were not improving the store's sales and profit trends.
We also decided to close one support facility in the second quarter of fiscal
2002 after deciding in the fourth quarter of fiscal 2001 to outsource the
operations of the support facility to an identified external food service
supplier. We determined that we could not recover the carrying value of the
fixed assets at these locations and therefore recognized an impairment charge.
Certain of these assets were disposed of during the first quarter of fiscal
2002, and the remainder will be disposed of by the end of the second quarter of
fiscal 2002.
During the fourth quarter of fiscal 2001, we also decided to abandon
construction of a new store in Kansas City, Missouri, due to location and
parking-related issues. Assets in this charge included abandoned construction in
progress (primarily leasehold improvements). We determined that we could not
recover the carrying value of these fixed assets and therefore recognized an
impairment charge and disposed of the assets during the fourth quarter of fiscal
2001.
- Lease-related liabilities for three additional stores and one
support facility identified during the fourth quarter of fiscal 2001 to be
closed or sold by the second quarter of fiscal 2002 ($3.6 million of
restructuring expense) - During the fourth quarter of fiscal 2001, we decided
to close two stores in fiscal 2002 following the negotiation of a lease
obligation settlement for one store in the fourth quarter of fiscal 2001 and the
completion of an operations analysis for the other store, which showed that the
intensive Fresh Look marketing and merchandising efforts initiated at the store
early in the fourth quarter of 2001 were not improving the store's sales and
profit trends. We also decided to close one support facility in the second
quarter of fiscal 2002 after determining in the fourth quarter of fiscal 2001 to
outsource the operations of the support facility to an identified external food
service supplier. The lease-related liabilities for these locations represent
our estimate to dispose of these lease obligations based on current disposition
efforts, and is attributable to deteriorating real estate markets in certain
regions, existing lease obligations at above-market rates, and unattractive site
characteristics. The charge for exit costs assumes, based on our current results
of disposition efforts, that the Company will be successful in disposing of
these long-term lease obligations within the next five years. Facts and
circumstances can change in the future with respect to the above attributes
affecting the ultimate resolution of these exit costs. We will make appropriate
adjustments to the restructuring liabilities contemporaneous with the change in
facts and circumstances.
During the fourth quarter of fiscal 2001, we also decided to abandon
construction of a new store in Kansas City, Missouri due to location and
parking-related issues. We subsequently terminated the lease obligation for a
commitment to pay up to $155,000.
- Severance for employees terminated during the fourth quarter
of fiscal 2001 ($0.2 million) - During the fourth quarter of fiscal 2001, 33
employees were terminated in conjunction with the closure of four support
facilities. The employees were notified of their involuntary termination during
the fourth quarter of fiscal 2001. As of December 29, 2001, $98,000 of
involuntary termination benefits had been paid to terminated employees; the
remaining benefits of $57,000 will be paid during the first half of fiscal 2002.
In addition to the restructuring charges described above, in the fourth quarter
of fiscal 2001 management also identified asset impairment charges of $5.0
million in accordance with the provisions of SFAS 121 related to four stores
held for use. These assets became impaired in the fourth quarter of fiscal 2001
because the projected future cash flows of each store at that time were not
sufficient to fully recover the carrying value of the stores' long-lived
assets. In determining whether an impairment exists, we estimate the store's
future cash flows on an undiscounted basis, and if the cash flows are not
sufficient to recover 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. We believe the
weak performance from the stores included in the asset impairment charge were
caused by poor site location (two stores) or insufficient advertising in new
regional markets (two stores). We continually reevaluate our stores'
performance to monitor the carrying value of long-lived assets in comparison to
projected cash flows. Elements that could contribute to impairment of long-lived
assets include new competition, overruns in construction costs, or poor
operating results caused by a variety of factors, including improper site
selection, insufficient advertising, or changes in local, regional or national
economies. We are currently reevaluating the store format and construction
procedures to reduce the likelihood of construction cost overruns, and have
increased our projected pre-opening costs per new store to increase the level of
new store advertising. Site selection criteria are also being reevaluated in
light of the results of the Company's comprehensive review of all operations
and ideal customer demographics. There is no assurance that in the future,
additional long-lived assets will not be impaired.
During fiscal 2001 and through the date of this report, the Company terminated
lease obligations for store sites in West Palm Beach, Florida and Kansas City,
Missouri and closed a store in Boca Raton, Florida as part of the fiscal 2001
restructuring plans. With regard to the current status of the six stores
identified for closure or sale as part of the Company's fiscal 2001
restructuring plans, as of March 1, 2002, three of the stores have been closed
or sold; one remains to be closed or sold in the second quarter of fiscal 2002.
The remaining two stores have been removed from the list of closures or sales
due to changes in estimates based on changes in facts and circumstances during
the fourth quarter of fiscal 2001.
Restructuring and Asset Impairment Charges - Fiscal 2000. During the second
quarter of fiscal 2000, we made certain decisions relating to the strategic
repositioning of the Company's operations which resulted in a restructuring
and asset impairment charge of $20.6 million. These decisions included the
closure of three natural foods stores during the second quarter of fiscal 2000
($4.7 million); the planned sale or closure of seven stores during the remainder
of fiscal 2000 ($9.9 million); exit costs of previously closed or abandoned
sites ($5.6 million); and the discontinuance of e-commerce activities
($400,000). The $5.6 million charge related to changes in estimates for
previously closed or abandoned sites. The significant components of the $5.6
million charge were (a) $3.6 million of additional lease-related liabilities,
and (b) $2.0 million of fixed asset impairments for 15 previously closed stores.
Components of the restructuring and asset impairment charge consist of
impairment of fixed ($8.9 million) and intangible assets ($6.4 million); and
non-cancelable lease obligations and liabilities ($5.3 million). Substantially
all of the restructuring charges are non-cash expenses.
During the fourth quarter of fiscal 2000, we expanded the strategic
repositioning and, as a part of such expansion, decided to close or sell 12
underperforming stores. This decision resulted in an additional restructuring
and asset impairment charge of $21.4 million. This restructuring charge consists
primarily of costs associated with the abandonment of fixed ($13.6 million) and
intangible assets ($1.7 million) and non-cancelable lease obligations and
lease-related liabilities ($6.1 million). Substantially all of the restructuring
charges are non-cash expenses. See "Notes to Consolidated Financial
Statements - Note 12 - Restructuring and Asset Impairment Charges."
During fiscal 2001 and through the date of this report, two of the identified natural foods stores were closed in Denver, Colorado and Chesterfield, Missouri as part of the fiscal 2000 restructuring plans and five of the identified stores were sold. With regard to the current status of the 22 stores identified for closure or sale as part of the Company's fiscal 2000 restructuring plans, as of March 1, 2002, 20 of the stores have been closed or sold. The remaining two stores have been removed from the list of closures or sales due to changes in estimates based on changes in facts and circumstances during the fourth quarter of fiscal 2001.
As part of the strategic repositioning announced by the Company in the second
and fourth quarters of fiscal 2000, the Company identified 22 natural foods
stores for closure or sale due to weak performance. In fiscal 2000, we closed 10
and sold three of those identified stores. In the second quarter of fiscal 2001,
as part of additional evaluation of the Company's operations by new
management, we identified an additional three stores for closure in fiscal 2001;
in the fourth quarter of fiscal 2001, we extended our evaluation and identified
an additional three stores for closure in fiscal 2001 and 2002. In fiscal 2001
and through the date of this report, the Company closed three of the identified
stores, terminated its lease-related obligations as to two of the identified
locations and sold five of the identified stores, four in related transactions.
One store remains to be closed or sold in fiscal 2002. The Company also closed
two small vitamin stores in the second and third quarters of fiscal 2000. Due to
a change in estimates related to changes in facts and circumstances during the
fourth quarter of fiscal 2001, we decided to continue to operate four stores
previously identified for closure or sale.
A summary of restructuring activity by store count is as follows:
|
|
|
RESTRUCTURING STORE COUNT |
||||
|
|
|
Fiscal Year |
|
Period |
||
|
|
|
|
|
|
|
March 1, |
|
|
|
2000 |
|
2001 |
|
2002 |
|
|
|
|
|
|
|
|
| Stores remaining at commencement of period | 9 | 6 | ||||
|
Stores identified in fiscal 2000 for closure or sale |
|
22 |
|
|
||
|
Stores identified in fiscal 2001 for closure or sale |
|
|
6 |
|
||
|
Identified stores closed or abandoned |
|
(10) |
|
(3) |
|
(2) |
|
Identified stores sold |
|
(3) |
|
(2) |
|
(3) |
| Reversal of stores identified for closure or sale |
|
(4) | ||||
|
|
|
|
|
|
||
|
Identified stores remaining at period end |
|
9 |
|
6 |
|
1 |
Restructuring Accruals. The material changes in the liability balances of each
significant type of exit cost included in the restructuring charges in the
second and fourth quarters of fiscal 2000 were related to changes in estimates
for lease defeasance costs and for the net realizable value of fixed assets. The
changes in estimates during the second quarter of fiscal 2001 for lease
defeasance costs in the restructuring charges during the second and fourth
quarters of fiscal 2000 resulted from the economic downturn during fiscal 2001,
which has made it more difficult to find sublease tenants and settle lease
terminations with landlords (particularly in the case of leases with
above-market rents). In the second quarter of fiscal 2001, we received updated
estimates from various external sources (i.e., landlords and real estate
brokers) of the costs to exit certain lease obligations. Due to the economic
downturn that worsened during the second quarter of fiscal 2001, we revised our
estimates of the costs associated with subleasing properties or settling lease
terminations with landlords. Due to changes in facts and circumstances during
the fourth quarter of fiscal 2001, we determined that four stores previously
identified as sites held for disposal would continue to operate in their
existing locations. Three of the stores were expected to be closed in
conjunction with the Company's opening of new stores in the respective trade
areas; however, during the fourth quarter of fiscal 2001, the Company decided to
abandon the new store sites and continue to operate the existing stores. With
regard to the fourth store, management decided in the fourth quarter of fiscal
2001 to continue to operate the store in its existing location after completing
a competitive analysis of the market area and a reevaluation of the operations
of the store in the fourth quarter of fiscal 2001, which showed that the store
was achieving acceptable performance levels and demonstrating positive
performance trends following the implementation of the Fresh Look program late
in the third quarter of fiscal 2001. As a result, we reversed the restructuring
accruals previously recorded for the long-term lease obligations related to
these four stores.
The material cash outlays associated with the Company's exit plans are
primarily for lease-related obligations. As of December 29, 2001, the components
of the accruals related to the Company's restructuring activities are accrued
liabilities ($6.6 million) and other long-term obligations ($16.4 million).
Employee severance benefits are another cash outlay that will be paid out during
the next five months. As of December 29, 2001, $2.4 million of the $2.5 million
of involuntary termination benefits accrued during the second quarter of fiscal
2001 had been paid to terminated employees. The employee severance benefits
relate to the termination of employment of 104 of our 9,000 employees.
Income Tax Benefit. For the fiscal year ended December 29, 2001, we recorded a
$25.2 million income tax benefit, primarily as a result of the loss before taxes
of $69.1 million during the period. The recoverability of the net deferred tax
asset is primarily dependent upon the Company generating sufficient taxable
income in the future. Although realization of the net deferred tax asset is not
assured, we believe it is more likely than not that the Company will generate
sufficient taxable income in the future to realize the full amount of the
deferred tax asset. Our assessment is based on projections that assume that the
Company can maintain its current store contribution margin. Furthermore, we
expect to maintain the sales growth experienced over the past five years that
would generate additional taxable income. The primary uncertainty related to the
realization of the deferred tax asset is the Company's ability to achieve its
four-year business plan and generate future taxable income to realize the full
amount of the deferred tax asset. We believe that the sales, gross margin, store
contribution margin, and selling, general and administrative expenses
assumptions in our four-year business plan are reasonable and, more likely than
not, attainable. We will continue to assess the recoverability of the net
deferred tax asset and to the extent it is determined in the future that a
valuation allowance is required, it will be recognized as a charge to earnings
at that time.
Fiscal 2000 Compared to Fiscal 1999
Fiscal 2000 and fiscal 1999 each contained 52 weeks of operations.
Sales. Sales for the fiscal year ended December 30, 2000, increased 16.2% to
$838.1 million from $721.1 million in fiscal 1999. The increase was primarily
due to the acquisition of two stores, the opening of 11 new stores, and the
relocation of three stores, as well as the inclusion of a full year of sales for
the eight new stores opened, five stores relocated, and 17 stores acquired in
fiscal 1999. Comparable store sales decreased 2.6% for fiscal 2000, as compared
to a 6% increase for fiscal 1999.
Gross Profit. Gross profit for the fiscal year ended December 30, 2000,
increased 15.7% to $256.2 million from $221.5 million in fiscal 1999. The
increase in gross profit is primarily attributable to the acquisition of two
stores, the opening of 11 new stores and the relocation of three stores. As a
percentage of sales, gross profit decreased to 30.6% in fiscal 2000 from 30.7%
in fiscal 1999 due primarily to acquisition integration difficulties in Oregon,
Massachusetts and Texas.
Direct Store Expenses. Direct store expenses for the fiscal year ended December
30, 2000, increased 22.5% to $191.0 million from $155.9 million in fiscal 1999.
The increase in direct store expenses is attributable to the increase in the
number of stores operated by the Company. As a percentage of sales, direct store
expenses increased to 22.8% in fiscal 2000 from 21.6% in fiscal 1999 due to the
increased number of acquired and newly-opened stores in late fiscal 1999,
acquisition integration difficulties and significant investments that the
Company has made in employee benefit programs, particularly expanded health
insurance offerings.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the fiscal year ended December 30, 2000, increased
16.3% to $32.5 million from $27.9 million in fiscal 1999. The increase is
primarily attributable to additions in the corporate and regional staff
necessary to support the Company's accelerated growth in fiscal 1999. As a
percentage of sales, selling, general and administrative expenses remained
constant at 3.9% in fiscal 2000 from fiscal 1999. As part of the Company's
expanded strategic repositioning, we expect to spend additional funds on
marketing at the national level, as well as increased corporate and regional
support staffs. As a result of these increased expenditures, we expect that
selling, general and administrative expenses will increase in fiscal 2001.
Pre-Opening Expenses. In April 1998, the AICPA issued Statement of Position
98-5, Accounting for the Costs of Start-Up Activities, which required that
preopening expenses be expensed as incurred. We adopted the policy in fiscal
1999. Pre-opening expenses for the fiscal year ended December 30, 2000,
increased 18.9% to $3.3 million from $2.8 million in fiscal 1999. The increase
in pre-opening expenses is attributable to the increase in the number of stores
opened. As a percentage of sales, pre-opening expenses remained constant at 0.4%
due to the opening of 14 new stores (including three relocations) in fiscal 2000
as compared to 13 new stores (including five relocations) in fiscal 1999.
Restructuring and Asset Impairment Charges. Restructuring and asset impairment
charges for fiscal 2000 were $42.0 million as compared to $12.6 million in
fiscal 1999. The expenses for fiscal 2000 consisted of two separate strategic
repositioning efforts. During the second quarter of fiscal 2000, the Company's
management made certain decisions relating to the strategic repositioning of the
Company's operations which resulted in a restructuring and asset impairment
charge of $20.6 million. These decisions included the closure of three natural
food stores during the second quarter of fiscal 2000 ($4.7 million); the planned
sale or closure of seven stores during the remainder of fiscal 2000 ($9.9
million); exit costs of previously closed or abandoned sites ($5.6 million); and
the discontinuation of e-commerce activities ($400,000). The $5.6 million charge
related to changes in estimates for previously closed or abandoned sites. The
significant components of the $5.6 million charge were (a) $3.6 million of
additional lease-related liabilities, and (b) $2.0 million of fixed asset
impairments for 15 previously closed stores. Components of the restructuring and
asset impairment charge consist primarily of abandonment of fixed ($8.9 million)
and intangible assets ($6.4 million); and noncancelable lease obligations and
lease-related liabilities ($5.3 million). Substantially all of the restructuring
charges are non-cash expenses.
During the fourth quarter of fiscal 2000, the Company expanded its strategic
repositioning and, as a part of such expansion, decided to close or sell 12
under-performing stores. This decision resulted in an additional restructuring
charge of $21.4 million. This restructuring charge consists primarily of costs
associated with the abandonment of fixed ($13.6 million) and intangible assets
($1.7 million) and noncancelable lease obligations and lease-related liabilities
($6.1 million). Substantially all of the restructuring charges are non-cash
expenses. See "Notes to Consolidated Financial Statements - Note 12 - Restructuring and Asset Impairment Charges".
Loss on Investment. In the second quarter of fiscal 2000, the Company recorded a
loss on investment of $2.1 million related to the reduction in value of the
Company's investment in an e-commerce nutritional company.
Interest Expense, Net. Net interest expense for the fiscal year ended December
30, 2000, increased to $8.9 million, from $4.3 million in fiscal 1999. As a
percentage of sales, net interest expense increased to 1.0% from 0.6% in fiscal
1999. The increase is primarily attributable to increased borrowings on our line
of credit to fund acquisitions, new stores, relocations and remodels. Interest
expense may increase in the future as a result of increased borrowing and/or an
expected increase in the interest rate under our credit facility. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" below.
Liquidity and Capital Resources
Our primary sources of capital have been cash flow from operations (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 and repayment of debt.
Net cash provided by operating activities was $25.7 million during fiscal 2001
as compared to $41.0 million during fiscal 2000. Cash from operating activities
decreased during this period primarily due to a pre-tax loss, offset by changes
in working capital items and restructuring and asset impairment charges. We have
not required significant external financing to support inventory requirements at
our existing and new stores because we have been able to rely on vendor
financing for most of the inventory costs, and we anticipate that vendor
financing will continue to be available for new store openings.
Net cash used in investing activities was $19.9 million during fiscal 2001 as
compared to $72.8 million during fiscal 2000. The decrease is due to a reduction
in capital expenditures and acquisitions.
Net cash provided by financing activities was $1.0 million during fiscal 2001 as
compared to $22.3 million during fiscal 2000. The decrease reflects lower
incremental borrowings under our revolving line of credit.
We have a net deferred tax asset of $24.4 million on our balance sheet,
primarily as a result of the $54.9 million of restructuring and asset impairment
charges recorded during fiscal 2001. The net deferred tax asset will reduce cash
required for payment of federal and state income taxes, as we believe we will
generate sufficient taxable income for realization of the asset in the future.
The following is a summary of our lease and debt obligations, construction
commitments and outstanding letters of credit as of December 29, 2001:
SUMMARY OF OBLIGATIONS AND COMMERCIAL COMMITMENTS
(in thousands)
|
PAYMENTS DUE BY PERIOD |
||||||||||
|
Less than |
After |
|||||||||
|
Total |
1 Year |
2-3 Years |
4-5 Years |
5 Years |
||||||
|
Contractual Obligations: |
||||||||||
|
Long-term debt |
$ 124,259 |
$ 12,000 |
$ 112,259 |
$ --- |
$ --- |
|||||
|
Capital lease obligations |
370 |
|
338 |
18 |
14 |
--- |
||||
|
Operating leases |
401,006 |
31,855 |
60,560 |
54,080 |
254,511 |
|||||
|
Construction commitments |
1,341 |
1,341 |
--- |
--- |
--- |
|||||
|
Total contractual cash obligations |
$ 526,976 |
$ 45,534 |
$ 172,837 |
$ 54,094 |
$ 254,511 |
|||||
|
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD |
||||||||||
|
Less than |
After |
|||||||||
|
Total |
1 Year |
2-3 Years |
4-5 Years |
5 Years |
||||||
|
Other Commercial Commitments: |
||||||||||
|
Letters of credit |
$ 1,307 |
$ 1,307 |
$ --- |
$ --- |
$ --- |
|||||
|
Total commercial commitments |
$ 1,307 |
$ 1,307 |
$ --- |
$ --- |
$ --- |
|||||
Amendment to Credit Facility. Our current credit facility has two separate lines
of credit, a revolving line and a term loan facility, each with a three-year
term expiring August 1, 2003. As of December 29, 2001, there were $83.5 million
in borrowings outstanding under the revolving line and $38.8 million in
borrowings outstanding under the term loan. The credit agreement includes
certain financial and other covenants, as well as restrictions on payments of
dividends. As of December 30, 2000, we were in violation of two financial
covenants, and the lending group issued a notice of default, although it did not
accelerate our repayment obligations. The defaults were waived as part of the
execution of an amendment to the credit facility on October 17, 2001. The
amendment entered into with our lenders includes an initial increase in our
interest rate, with additional increases each six months through January 2003,
increases in agency fees, and quarterly and yearly aggregate limits on the
execution of new leases, opening of new stores and new store capital
expenditures, as well as modification of other previously existing financial
covenants. Our borrowings under the amended credit facility have been limited to
$125.0 million. As part of the amendment, we have granted a security interest to
our lenders in all of our cash, equipment and fixtures, inventory and other
assets, other than the proceeds of any equity offering that may be concluded by
us. We also have an obligation to obtain leasehold mortgages on all new leases
executed after the date of the amendment, and to maintain, from February 1, 2002
through the maturity date of the credit facility, leasehold mortgages on
existing leases for stores generating at least 44% of the total sales revenues
of the Company. Following the execution of the amendment, we requested and
received a waiver of performance under the September 2001 stockholders' equity
covenant, and a modification of the performance requirements under the
stockholders' equity covenants for October and November 2001, and executed
amendments to the credit agreement reflecting such modifications in November and
December 2001. We believe that cash generated from operations and available
under our credit facility will be sufficient to meet our capital expenditure
requirements in fiscal 2002. If we are successful in concluding an equity
offering of at least $30.0 million in net proceeds, the number of new leases
that we will be permitted to sign and the number of new stores we will be
permitted to open under our credit facility will be proportionately increased,
based upon the format of the stores proposed to be opened (natural foods
supermarket stores are more expensive to build and open and therefore, under the
credit agreement, fewer may be opened from equity proceeds). As a result, the
Company's sales growth rate could accelerate as a portion of any equity
financing proceeds are used to fund the construction of additional stores not
currently planned.
The Company's credit agreement contains certain monthly and quarterly
financial covenants, which become more restrictive during fiscal 2002 and 2003.
The Company anticipates that it will continue to comply in fiscal 2002 and 2003
with the monthly and quarterly financial covenants in the credit agreement.
Management's current business plans for the Company anticipate significant
improvement in financial position attributable to increases in revenues due to
comparable store sales increases, improved working capital management, reduced
capital spending, successful implementation of ongoing cost savings initiatives,
and improved operating efficiencies. In the event that business conditions
worsen, management has identified contingency actions to enable the Company to
remain in compliance with the financial covenants. Such actions, including
reductions in operating expenses together with lower capital spending, may
result in fewer new store openings in fiscal 2003, which may negatively impact
revenues. The Company currently expects to meet the amended credit agreement
covenants throughout fiscal 2002 and 2003; however, if business conditions are
other than as anticipated or other unseen events occur and the Company's
planned contingency actions are unsuccessful in countering such events, these
may impact the Company's ability to remain in compliance. Even if the Company
remains in compliance with its monetary covenants, a technical default could
result due to a breach of the financial covenants. In the absence of a waiver or
amendment to such financial covenants, such non-compliance would constitute a
default under the credit agreement, and the lenders would be entitled to
accelerate the maturity of the indebtedness outstanding thereunder. In the event
that such non-compliance appears likely, or occurs, the Company will seek
approval, as it has in the past, from the lenders to renegotiate financial
covenants and/or obtain waivers, as required. However, there can be no assurance
that future amendments or waivers will be obtained.
The Company is proposing to raise approximately $30.0 million to $50.0 million
in a private placement of the Company's equity to provide additional
liquidity, although such equity financing is not a requirement of the amended
credit facility. A number of parties have conducted, and several parties are
currently conducting, due diligence on the Company related to the proposed
private placement. We have received several offers for investment in the
Company. Based on the Company's overall improvement in operational results,
and indications that other financing vehicles with a greater return and lower
dilutive effects to the Company may be available, the Company is currently
evaluating other financing alternatives.
The Company provided projections through fiscal 2005 of the Company's
operational results to the potential investors conducting due diligence in
connection with the private placement. The projections were based on an assumed
infusion of $50.0 million in net common equity financing proceeds received in
the first half of 2002, combined with internally generated cash to accelerate
new store openings. Based on such assumptions, the Company projected the
following:
| - | New store openings in 2002 would number four or five with most of the openings occurring in the second half of the year. In fiscal 2003, additional new stores would number 10. The number of new stores added would double to 20 in fiscal 2004 and would approximate 25 in fiscal 2005. |
| - | The compound annual growth rate in comparable store sales results were projected, based on 2001 actual comparable store sales results, to increase 6% to 7.5% company-wide. Company-wide net sales were projected to increase on a compound annual rate of 14% to 17%, based on 2001 actual net sales. |
| - | Net earnings were projected to turn positive in fiscal 2002 and achieve at least a 2% after-tax return on sales by 2005. Earnings before interest, taxes and depreciation/amortization (EBITDA) were projected to average a compound annual growth rate of 45% to 55% from fiscal 2001 to 2005 with growth in any one year not falling below 25%. |
The projections provided to potential investors, including but not limited to
the net income and EBITDA projections, are subject to uncertainties, including
but not limited to the following: whether the Company will complete an equity
financing and, if completed, the timing of net proceeds and terms of such equity
financing; the ability to locate suitable sites for new stores and successfully
negotiate acceptable lease terms; the ability to open the projected number of
stores; the success of the Fresh Look program in existing stores and our ability
to successfully implement the Fresh Look program in additional Wild Oats stores;
the ability to control and increase gross margins on products sold in our
stores; the ability to successfully negotiate a new distribution agreement with
a primary distributor on terms more favorable to the Company; continued sales
growth in excess of the increases in sales realized in fiscal 2001; increases in
the average transaction size per customer in all stores; receipt of vendor
financial support for certain advertising initiatives; and our ability to
leverage direct store and selling, general and administrative expenses as well
as renegotiate our current credit facility, or enter into a new credit agreement
with a new lending group at more favorable terms than those in our current
agreement. There is no assurance that any of the foregoing can be achieved or
that the projections will be met.
We maintain an interest rate risk-management strategy, which is required by our
amended credit facility terms, that uses derivative instruments to minimize
significant, unanticipated earnings fluctuations that may arise from volatility
in interest rates. The Company's specific goals are to (1) manage interest
rate sensitivity by modifying the repricing or maturity characteristics of some
of its debt and (2) lower (where possible) the cost of its borrowed funds. In
accordance with the Company's interest rate risk-management strategy, and in
accordance with the requirements of our credit facility, the Company has entered
into a swap agreement to hedge the interest rate on $42.5 million of its
borrowings. The swap agreement locks in a one-month LIBOR rate of 6.6% and
expires in August 2003.
Capital Expenditures. We spent approximately $20.1 million during fiscal 2001
for new store construction, development, remodels and other capital
expenditures, exclusive of acquisitions. Capital expenditures originally planned
for certain of the stores rescheduled to open in fiscal 2002 were incurred
commencing in the fourth quarter of fiscal 2001. The aggregate amount to
construct all five originally scheduled stores was originally estimated at $15.0
million to $20.0 million, but may be revised downward as part of our
comprehensive review of the business operations and strategic plan. Our average
capital expenditures to open a leased store, including leasehold improvements,
equipment and fixtures, have ranged from approximately $2.0 million to $5.0
million historically, excluding inventory costs and initial operating losses. As
part of our reexamination of our operating strategies, we anticipate that the
average capital expenditures to open a natural foods supermarket format store
will be $2.5 million to $4.0 million in the future, partly because of our
decision to reduce the size or simplify the format of our food service
department in new stores, as well as our decision not to increase store size in
the majority of geographic areas. Our average capital expenditures to open a
farmers market format store are estimated at $1.5 million to $2.0 million in the
future. Delays in opening new stores may result in increased capital
expenditures and increased pre-opening costs for the site, as well as lower than
planned sales for the Company. Under our amended credit facility, we are limited
in our capital expenditures to $3.6 million in the first quarter of fiscal 2002,
increasing to an aggregate $4.7 million in the second quarter and an aggregate
$5.0 million in the third quarter. Proceeds from any equity offering in excess
of $30.0 million may be used to increase our total allowable level of capital
expenditures by $4.0 million per natural foods supermarket format store and
$2.25 million per farmers market format store. If we are successful in raising
the additional equity financing, we plan to use the equity proceeds to complete
the early construction of two stores in fiscal 2002 and execute leases for and
commence capital expenditures on up to 15 new stores through fiscal 2003.
Although there can be no assurance that actual capital expenditures will not
exceed anticipated levels, we believe that cash generated from operations and
available under our existing credit facility will be sufficient to satisfy our
budgeted capital expenditure requirements through the remainder of fiscal 2001.
The cost of initial inventory for a new store is approximately $300,000 to
$800,000 depending on the store format; however, we obtain vendor financing for
most of this cost. Pre-opening costs currently are approximately $250,000 to
$350,000 per store and are expensed as incurred. Pre-opening costs for natural
foods supermarket format stores in the future are projected to increase from
$250,000 to $400,000 per store, and pre-opening costs for farmers market format
stores are projected to increase from $75,000 to $150,000, as a result of
increased advertising for new stores. The amounts and timing of such pre-opening
costs will depend upon the availability of new store sites and other factors,
including the location of the store and whether it is in a new or existing
market for us, the size of the store, and the required build-out at the site.
Costs to acquire future stores, if any, are impossible to predict and could vary
materially from the cost to open new stores. There can be no assurance that
actual capital expenditures will not exceed anticipated levels, although our
amended credit facility contains aggregate limits on the amounts of capital
expenditures we may make. We believe that cash generated from operations and
available under our existing credit facility will be sufficient to satisfy our
budgeted cash requirements through fiscal 2002.
Cautionary Statement Regarding Forward-Looking Statements
This Report on Form 10-K contains "forward-looking statements," within
the meaning of the Private Securities Litigation Reform Act of 1995, which
involve known and unknown risks. Such forward-looking statements include
statements as to the Company's plans to open, acquire or relocate additional
stores; the anticipated performance of such stores; the impact of competition
and current economic uncertainty; the sufficiency of funds to satisfy the
Company's cash requirements through the remainder of fiscal 2002, our
expectations for comparable store sales; our plans for redesigning our natural
foods supermarket store format; the impact of changes resulting from
implementation of our Fresh Look merchandising, advertising and pricing program;
levels of cannibalization; expected pre-opening expenses and capital
expenditures; and other statements containing words such as
"believes," "anticipates," "estimates,"
"expects," "may," "intends" and words of similar
import or statements of management's opinion. These forward-looking statements
and assumptions involve known and unknown risks, uncertainties and other factors
that may cause the actual results, market performance or achievements of the
Company to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Important
factors that could cause differences in results of operations include, but are
not limited to, the Company's ability to conclude a private placement of the
Company's stock; the timing and success of the implementation of the Fresh
Look program; the successful integration of our new Chief Financial Officer; the
timing and execution of new store openings, relocations, remodels, sales and
closures; the impact of competition; changes in product supply or suppliers;
changes in management information needs; changes in customer needs and
expectations; governmental and regulatory actions; general industry or business
trends or events; changes in economic or business conditions in general or
affecting the natural foods industry in particular; and competition for and the
availability of sites for new stores and potential acquisition candidates. The
Company undertakes no obligation to update any forward-looking statements in
order to reflect events or circumstances that may arise after the date of this
Report.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
In the normal course of business, the Company is exposed to fluctuations in
interest rates and the value of foreign currency. The Company employs various
financial instruments to manage certain exposures when practical.
The Company is exposed to foreign currency exchange risk. The Company owns and
operates three natural foods supermarkets and a commissary kitchen in British
Columbia, Canada. The commissary supports the three 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.
The Company's exposure to interest rate changes is primarily related to its
variable rate debt issued under its $125.0 million revolving credit facility.
The facility has two separate lines of credit, a revolving line of up to $86.2
million and a term loan of up to $38.8 million, each with a three-year term
expiring August 1, 2003. As part of the October 2001 amendment of the credit
facility, which had an original credit capacity of $157.5 million, borrowings
under the credit facility have been limited to $125.0 million. As of December
29, 2001, there were $83.5 million in borrowings outstanding under the $86.2
million revolving line of this facility and $38.8 million in borrowings
outstanding under the $38.8 million term note. As part of the amendment to the
credit facility, the interest rate on the facility was amended to either prime
plus 2.25% or one-month LIBOR plus 3.75%, at our election, and the rates
increase by 0.5% starting January 1, 2002 and each six months thereafter through
January 2003. Because the interest rates on these facilities are variable, based
upon the prime rate or LIBOR, the Company's interest expense and net income are
affected by interest rate fluctuations. If interest rates were to increase or
decrease by 100 basis points, the result, based upon the existing outstanding
debt as of December 29, 2001, would be an annual increase or decrease of
approximately $1.2 million in interest expense and a corresponding decrease or
increase of approximately $777,000 in the Company's net income after
taxes.
In September 2000, as required by the Company's credit facility, the Company
entered into an interest rate swap to hedge its exposure on variable rate debt
positions. Variable rates are predominantly linked to LIBOR as determined by
one-month intervals. The interest rate provided by the swap on variable rate
debt is 6.6%. At December 29, 2001, the notional principal amount of the
interest rate swap agreement was $42.5 million, expiring in August 2003. The
notional amount is the amount used for the calculation of interest payments
which are exchanged over the life of the swap transaction on the amortized
principal balance. In fiscal 2001, the loss, net of taxes, included in other
comprehensive loss for this cash flow hedge was approximately $1.2 million.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management
Reports of Independent Accountants
Consolidated Statements of Operations
for the Fiscal Years 2001, 2000 and 1999
Consolidated Statements of Comprehensive Income
for the Fiscal Years 2001, 2000 and 1999
Consolidated Balance Sheets for the Fiscal Years Ended 2001 and 2000
Consolidated Statements of Stockholders' Equity
for the Fiscal Years Ended 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Fiscal Years
Ended 2001, 2000 and 1999
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts and Reserves
for the Fiscal Years Ended 2001, 2000 and 1999
REPORT OF MANAGEMENT
We are responsible for the preparation and integrity of the consolidated
financial statements and all related information appearing in our Annual Report.
The consolidated financial statements and notes were prepared in conformity with
generally accepted accounting principles appropriate in the circumstances and,
accordingly, include certain amounts based on our best judgments and estimates
of current conditions and circumstances.
Management maintains a system of accounting and other controls to provide
reasonable assurance that assets are safeguarded against loss from unauthorized
use or disposition and that accounting records are reliable for preparing
financial statements. Even an effective internal control system, no matter how
well designed, has inherent limitations, including the possibility of
circumvention or overriding of controls, and therefore can provide only
reasonable assurance with respect to financial statement presentation. The
system of accounting and other controls is modified in response to changes in
business conditions and operations and recommendations made by the independent
accountants.
The Audit Committee of the Board of Directors, which is composed of directors
who are not employees, meets periodically with management and the independent
accountants to review the manner in which these groups are performing their
responsibilities and to carry out the Audit Committee's oversight role with
respect to auditing, internal controls and financial reporting matters. The
Audit Committee reviews with the independent accountants the scope and results
of the audit. The independent accountants periodically meet privately with the
Audit Committee and have access to its individual members.
We engaged PricewaterhouseCoopers LLP, independent accountants, to audit the
consolidated financial statements in accordance with generally accepted auditing
standards, which include consideration of the internal control structure. The
opinion of the independent accountants, based upon their audits of the
consolidated financial statements, is contained in this Annual Report.
/s/ Perry D. Odak
Chief Executive Officer and President
March 26, 2002
/s/ Edward F. Dunlap
Chief Financial Officer
March 26, 2002
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Wild Oats Markets, Inc.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Wild Oats Markets,
Inc and its subsidiaries (the "Company") at December 29, 2001 and
December 30, 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 29, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, based on our audits and the report of other auditors,
the financial statement schedule listed in the accompanying index present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. The
consolidated financial statements give retroactive effect to the merger of Sun
Harvest Farms, Inc. and its affiliate on December 15, 1999, in a transaction
accounted for as a pooling of interests, as described in Note 3 to the
consolidated financial statements. We did not audit the financial statements of
Sun Harvest Farms, Inc., which statements reflect total revenues of $41,155,576
for the thirty-nine weeks ended September 28, 1999. Those statements were
audited by other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for Sun
Harvest Farms, Inc. for the thirty-nine weeks ended September 28, 1999 is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.
In 1999, the Company changes its method of accounting for pre-opening expenses
as discussed in Note 1 to the consolidated financial statements.
PricewaterhouseCoopers LLP
Denver, Colorado
March 25, 2002
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sun Harvest Farms, Inc.
We have audited the accompanying balance sheets of Sun Harvest Farms, Inc. (the
Company) as of September 28, 1999, December 29, 1998, and December 30, 1997, and
the related statements of income, shareholder's equity (deficit) and cash
flows for the nine-month period ended September 28, 1999 and the fiscal years
ended December 29, 1998, December 30, 1997, and December 31, 1996, not
separately presented herein. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sun Harvest Farms, Inc. as of
September 28, 1999, December 29, 1998, and December 30, 1997, and the results of
its operations and its cash flows for the nine-month period ended September 28,
1999 and the fiscal years ended December 29, 1998, December 30, 1997, and
December 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Antonio, Texas
November 17, 1999
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
|
FISCAL YEAR |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
Sales |
|
$ 893,179 |
|
$ 838,131 |
|
$ 721,091 |
|
Cost of goods sold and occupancy costs |
|
634,631 |
|
581,980 |
|
499,627 |
|
Gross profit |
|
258,548 |
|
256,151 |
|
221,464 |
|
Operating expenses: |
|
|
|
|
||
|
Direct store expenses |
|
212,642 |
|
190,986 |
|
155,869 |
|
Selling, general and administrative expenses |
|
48,864 |
|
32,480 |
|
27,939 |
|
Pre-opening expenses |
|
1,562 |
|
3,289 |
|
2,767 |
|
Restructuring and asset impairment charges |
|
54,906 |
|
42,066 |
|
12,642 |
|
Income (loss) from operations |
|
(59,426) |
|
(12,670) |
|
22,247 |
|
Loss on investment |
|
(228) |
|
(2,060) |
|
|
|
Interest income |
|
990 |
|
117 |
|
304 |
|
Interest expense |
|
(10,437) |
|
(8,967) |
|
(4,584) |
|
Income (loss) before income taxes |
|
(69,101) |
|
(23,580) |
|
17,967 |
|
Income tax expense (benefit) |
|
(25,189) |
|
(8,559) |
|
5,198 |
|
Net income (loss) before cumulative effect |
|
|
|
|
|
|
|
Cumulative effect of change in accounting |
|
|
|
|
|
|
|
Net income (loss) |
|
$ (43,912) |
|
$ (15,021) |
|
$ 12,488 |
|
|
|
|
|
|
||
|
Basic net income (loss) per common share: |
|
|
|
|
||
|
Net income (loss) before cumulative effect |
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle, net of tax |
(0.01) |
|||||
|
Net income (loss) |
|
$ (1.80) |
|
$(0.65) |
|
$0.55 |
|
|
|
|
|
|
||
|
Diluted net income (loss) per common share: |
|
|
|
|
||
|
Net income (loss) before cumulative effect of |
|
|
|
|
|
|
|
Cumulative effect of change in accounting |
|
|
|
|
|
|
|
Net income (loss) |
|
$ (1.80) |
|
$(0.65) |
|
$0.53 |
|
|
|
|
|
|
||
|
Weighted average number of |
|
|
|
23,090 ====== |
|
22,806 ====== |
|
Weighted average number of common shares |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial
statements.
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
FISCAL YEAR |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ (43,912) |
|
$ (15,021) |
|
$ 12,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting |
|
(586) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of hedge results to interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in market value of cash flow hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
(1,951) |
|
(259) |
|
510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ (45,863) |
|
$ (15,280) |
|
$ 12,998 |
The accompanying notes are an integral part of the consolidated financial
statements
WILD OATS MARKETS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
|
FISCAL YEAR ENDED |
2001 |
|
2000 |
|
|
|
|
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
$ 18,840 |
|
$ 12,457 |
|
Inventories (net of reserves of $2,667 and $1,483, |
|
|
|
|
Accounts receivable (net of allowance for doubtful |
|
|
|
|
Income tax receivable |
4,186 |
|
9,973 |
|
Prepaid expenses and other current assets |
3,123 |
|
2,004 |
|
Deferred tax asset |
5,378 |
|
1,989 |
|
Total current assets |
88,782 |
|
85,617 |
|
|
|
|
|
|
Property, plant and equipment, net |
128,922 |
|
160,614 |
|
Intangible assets, net |
114,296 |
|
122,382 |
|
Deposits and other assets |
2,436 |
|
3,791 |
|
Long-term investment |
|
|
228 |
|
Deferred tax asset |
18,990 |
|
|
|
|
$ 353,426 |
|
$ 372,632 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|||
|
Accounts payable |
$ 39,796 |
|
$ 39,969 |
|
Book overdraft |
23,056 |
|
16,587 |
|
Accrued liabilities |
40,081 |
|
37,434 |
|
Current portion of debt and capital leases |
12,338 |
|
7,729 |
|
Total current liabilities |
115,271 |
|
101,719 |
|
|
|
|
|
|
Long-term debt and capital leases |
112,291 |
|
116,839 |
|
Deferred tax liability |
|
|
989 |
|
Other long-term obligations |
18,849 |
|
1,521 |
|
|
246,411 |
|
221,068 |
|
Commitments and contingencies (Notes 10 and 11) |
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 |
|
|
|
|
Common stock; $0.001 par value; 60,000,000 shares |
|
|
|
|
Additional paid-in capital |
160,736 |
|
149,764 |
|
Note receivable, related party |
(9,660) |
|
|
|
Retained earnings (accumulated deficit) |
(42,277) |
|
1,635 |
|
Accumulated other comprehensive income (loss) |
(1,809) |
|
142 |
|
Total stockholders' equity |
107,015 |
|
151,564 |
|
|
$ 353,426 |
|
$ 372,632 |
The accompanying notes are an integral part of these consolidated financial
statements.
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per-share amounts)
|
|
Common Stock |
|
|
|
|
|||
|
|
Shares |
|
Amount |
Add'l Paid-In Capital |
Note Receivable, Related Party |
Retained Earnings (Accumulated Deficit) |
Accumulated Other Comprehensive Income (Loss) |
Total Stockholders' Equity |
|
BALANCE AT JANUARY 2, 1999 |
22,606,019 |
$ 23 |
$ 142,774 |
$ 9,920 |
$ (109) |
$ 152,608 |
||
|
Equity transactions of pooled companies |
|
|
|
|||||
|
Issuance of common stock ($16.72 to $18.92 per share), net of issuance costs |
|
|
|
|||||
|
Common stock options exercised |
|
|
|
|||||
|
Net income |
12,488 |
12,488 |
||||||
| Foreign currency translation adjustment |
|
510 |
510 |
|||||
|
BALANCE AT JANUARY 1, 2000 |
22,992,437 |
23 |
148,307 |
16,656 |
401 |
165,387 |
||
|
Issuance of common stock ($10.68 per share), net of issuance costs |
|
|
|
|||||
|
Common stock options exercised ($3.13 to $18.00 per share) |
|
|
|
|||||
|
Net loss |
(15,021) |
(15,021) |
||||||
| Foreign currency translation adjustment |
|
(259) |
(259) |
|||||
|
BALANCE AT DECEMBER 30, 2000 |
|
|
|
|
|
|
||
|
Stock issued in exchange for note receivable |
|
|
|
|
|
|||
|
Accrued interest on note receivable |
|
|
||||||
|
Issuance of common stock ($3.61 to $3.66 per share), net of issuance costs |
|
|
|
|||||
|
Common stock options exercised ($3.13 to $9.06 per share) |
|
|
|
|
||||
|
Net loss |
(43,912) |
(43,912) |
||||||
|
Foreign currency translation adjustment |
|
|
||||||
|
Cumulative effect of change in accounting principle, net of tax |
|
|
||||||
|
Recognition of hedge results to interest expense during the period, net of tax |
|
|
||||||
|
Change in market value of cash flow hedge during the period, net of tax |
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 29, 2001 |
|
|
|
|
|
|
|
|
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share amounts)
|
FISCAL YEAR |
2001 |
|
2000 |
|
1999 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
||
|
|
|
|
|
||
|
Net income (loss) |
$ (43,912) |
|
$ (15,021) |
|
$ 12,488 |
|
|
|
|
|
||
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|||
|
Depreciation and amortization |
26,082 |
|
25,574 |
|
22,072 |
|
Loss (gain) on disposal of property and equipment |
477 |
|
(306) |
|
14 |
|
Deferred tax benefit |
(22,509) |
|
(410) |
|
(1,409) |
|
Restructuring and asset impairment charges |
54,907 |
|
42,066 |
|
12,642 |
|
Loss on investment |
228 |
|
2,060 |
|
|
| Other | (280) | 104 | |||
|
|
|
|
|
||
|
Change in assets and liabilities, net of acquisitions: |
|
|
|
||
|
Inventories, net |
1,120 |
|
(5,048) |
|
(7,569) |
|
Receivables, net and other assets |
5,240 |
|
(11,551) |
|
(2,417) |
|
Accounts payable |
6,330 |
|
8,542 |
|
12,057 |
|
Accrued liabilities |
(1,972) |
|
(5,001) |
|
6,028 |
|
|
|
|
|
||
|
Net cash provided by operating activities |
25,711 |
|
41,009 |
|
53,906 |
|
|
|
|
|
||
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
||
|
|
|
|
|
||
|
Capital expenditures |
(20,082) |
|
(60,584) |
|
(62,592) |
|
Acquisitions, net of cash acquired |
|
|
(16,791) |
|
(77,779) |
|
Proceeds from sale of property and equipment |
146 |
|
4,585 |
|
21,902 |
|
Long-term investment |
|
|
(38) |
|
(1,500) |
|
|
|
|
|
||
|
Net cash used in investing activities |
(19,936) |
|
(72,828) |
|
(119,969) |
|
|
|
|
|
||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||
|
|
|
|
|
||
|
Proceeds (repayments) on line of credit, net |
(1,685) |
|
28,751 |
|
95,200 |
|
Proceeds from notes payable and long-term debt |
2,000 |
|
|
1,538 |
|
|
Payments on notes payable, long-term debt and capitalized leases |
(254) |
|
(7,489) |
|
(18,810) |
|
Proceeds from issuance of common stock, net |
895 |
|
1,069 |
|
3,865 |
| Distributions to stockholders, net | (5,752) | ||||
|
|
|
|
|
||
|
Net cash provided by financing activities |
956 |
|
22,331 |
|
76,041 |
|
|
|
|
|
|
|
|
Effect of exchange rates on cash |
(348) |
|
68 |
|
510 |
|
Net (decrease) increase in cash and cash equivalents |
6,383 |
|
(9,420) |
|
10,488 |
|
Cash and cash equivalents at beginning of year |
12,457 |
|
21,877 |
|
11,389 |
|
Cash and cash equivalents at end of year |
$ 18,840 |
|
$ 12,457 |
|
$ 21,877 |
|
|
|
|
|
||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
||
|
Cash paid for interest |
$ 10,203 |
|
$ 9,715 |
|
$ 3,570 |
|
Cash paid (received) for income taxes |
$ (7,241) |
|
$ 4,503 |
|
$ 2,097 |
|
|
|
|
|
||
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|||
|
Common stock issued and total debt and liabilities |
|
|
|
|
|
|
Stock received in exchange for services |
|
|
$ 750 |
|
|
|
Stock issued in exchange for note receivable |
$ 9,274 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization. Wild Oats Markets, Inc. ("Wild Oats" or the
"Company"), headquartered in Boulder, Colorado, owns and operates
natural foods supermarkets in the United States and Canada. The Company also
operates bakeries, commissary kitchens, and warehouses that supply the retail
stores. The Company's operations are concentrated in one market segment,
grocery stores, and are geographically concentrated in the western and central
parts of the United States.
Basis of Presentation. Certain amounts in the prior years' financial
statements have been reclassified to conform to the current year presentation.
Principles of Consolidation. The Company's consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Fiscal Year. The Company reports its financial results on a 52- or 53-week
fiscal year ending on the Saturday closest to December 31. Fiscal years for the
consolidated financial statements included herein ended on December 29, 2001,
December 30, 2000 and January 1, 2000. Fiscal 2001, fiscal 2000 and fiscal 1999
were 52-week years.
Cash and Cash Equivalents. The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash and temporary cash investments. At
times, cash balances held at financial institutions were in excess of Federal
Deposit Insurance Corporation insurance limits. The Company places its temporary
cash investments with high-credit quality financial institutions. The Company
believes no significant concentration of credit risk exists with respect to
these cash investments.
Inventories. Inventories consisting of products held for sale are stated at the
lower of cost (first-in, first-out) or market, as determined by the retail
inventory method. Perishable inventories are valued at the lower of cost (first
in, first out) or market.
Property, Plant and Equipment. Property, plant and equipment are recorded at
cost. Depreciation is computed on a straight-line basis over the estimated
useful lives of machinery and equipment (three to ten years). Depreciation is
computed on a straight-line basis over the estimated useful lives of buildings
(30 years). Leasehold improvements are amortized on a straight-line basis over
the shorter of the useful life of the asset or the lease term. Major renewals
and improvements are capitalized, while maintenance and repairs are expensed as
incurred. Upon sale or retirement of assets, the cost and related accumulated
depreciation or amortization are eliminated from the respective accounts and any
resulting gains or losses are reflected in operations. Applicable interest
charges incurred during the construction of assets are capitalized as one of the
elements of cost and are amortized over the assets' estimated useful lives.
All construction-related overhead and a portion of direct administrative
expenses are capitalized and allocated to assets based on the relative asset
costs.
Intangible Assets. Intangible assets consist primarily of goodwill, which is
amortized using the straight-line method over 40 years, and are shown net of
accumulated amortization of $11.4 million, $8.8 million and $7.1 million at
December 29, 2001, December 30, 2000 and January 1, 2000, respectively.
Amortization expense related to intangible assets totaled approximately $3.0
million, $3.1 million and $2.6 million in fiscal 2001, fiscal 2000 and fiscal
1999, respectively. See "New Accounting Pronouncements: Goodwill and
Intangible Assets" below in this footnote.
Debt Issuance Costs. Costs related to the issuance of debt are capitalized and
amortized to interest expense using the effective interest method over the
period the debt is outstanding.
Impairment of Long-Lived Assets. The Company monitors the carrying value of its
long-lived assets, including intangible assets, for potential impairment at the
store level. The triggering events for such evaluations include a significant
decrease in the market value of an asset, acquisition and construction costs in
excess of budget, or current period losses combined with a history of losses or
a projection of continuing losses. If an impairment is identified, based on
undiscounted future cash flows, the Company compares the asset's future cash
flows, discounted to present value using a risk-adjusted discount rate, to its
current carrying value and records a provision for impairment as appropriate.
With respect to equipment and leasehold improvements associated with closed
stores, the value of these assets is adjusted to reflect recoverable values
estimated based on the Company's previous efforts to dispose of similar
assets, with consideration for current economic conditions.
Store Closing Costs. The Company plans to complete store closures or sales
within a one-year period following the commitment date. Costs related to store
closures and sales are reflected in the income statement as "Restructuring
and Asset Impairment Charges." For stores the Company intends to sell, the
Company actively markets the stores to potential buyers. Stores held for
disposal are reduced to their estimated net realizable value. For stores the
Company intends to close, a lease-related liability is recorded for the present
value of the estimated remaining noncancelable lease payments after the
anticipated closing date, net of estimated subtenant income, or for estimated
lease settlement costs. In addition, the Company records a liability for costs
to be incurred after the store closing which are required under leases or local
ordinances for site preservation during the period before lease termination. The
value of equipment and leasehold improvements related to a closed store is
reduced to reflect recoverable values based on the Company's previous efforts
to dispose of similar assets and current economic conditions.
Severance costs incurred in connection with store closings are recorded when the
employees have been identified and notified of the termination benefits to be
made to the employees.
Lease-related liabilities and the recoverability of assets to be disposed of are
reviewed quarterly, and changes in previous estimates are reflected in
operations. Significant cash payments associated with closed stores relate to
ongoing payments of rent, common area maintenance, insurance charges, and real
property taxes as required under continuing lease obligations.
Pre-Opening Expenses. Beginning in fiscal 1999, the Company adopted Statement of
Position 98-5, Accounting for the Costs of Start-Up Activities, which requires
that pre-opening costs be expensed as incurred and was effective for fiscal
years beginning after December 15, 1998. The Company recorded $281,000 as a
cumulative effect of change in accounting principle, net of taxes, during the
first quarter of fiscal 1999. Through fiscal 1998, pre-opening expenses were
deferred until the store's opening date, at which time such costs were
expensed in full. Beginning in fiscal 1999, pre-opening expenses are recognized
as incurred.
Concentration of Risk. The Company purchases approximately 28.2% of its cost of
goods sold from one vendor. The Company's reliance on this supplier can be
shifted, over a period of time, to alternative sources of supply, should such
changes be necessary. However, if the Company could not obtain products from
this supplier for factors beyond its control, the Company's operations would
be disrupted in the short term while alternative sources of product were
secured.
Revenue Recognition. Revenue for sales of the Company's products is recognized
at the point of sale to the retail customer.
Advertising. Advertising is expensed as incurred. Advertising expense was $9.3
million, $6.8 million and $7.3 million for fiscal 2001, fiscal 2000 and fiscal
1999, respectively.
Fair Value of Financial Instruments. The carrying amounts of the Company's
financial instruments, including cash and cash equivalents, short-term trade
receivables and payables, approximate their fair values due to the short-term
nature of the instruments. The fair value of the Company's long-term debt
approximates its carrying value due to the variable interest rate feature of the
instrument.
Derivative Financial Instruments. The Company uses an interest rate swap to
manage interest costs and the risk associated with changing interest rates. As
interest rates change, the differential paid or received is recognized in
interest expense of the related period.
Long-Term Investment. The Company's long-term investment in an e-commerce
nutrition company of $228,000 at December 30, 2000 was recorded under the cost
method as the Company is unable to exercise effective control. In the second
quarter of fiscal 2001, the Company recorded a loss on investment of $228,000
related to the reduction in value of the Company's investment in the
e-commerce nutrition company. In the second quarter of fiscal 2000, the Company
recorded a loss on investment of $2.1 million related to the reduction in value
of the Company's investment in the e-commerce nutrition company. In the
Company's previous fiscal 2000 financial statements, this $2.1 million loss on
investment was reflected in loss from operations as part of the restructuring
charge. This loss on investment is now presented separately after loss from
operations in these financial statements.
Use of Estimates. The preparation of these financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Foreign Currency Translation. The functional currency for the Company's
Canadian subsidiary is the Canadian dollar. Translation into U.S. dollars is
performed for assets and liabilities at the exchange rate as of the balance
sheet date. Income and expense accounts are translated at average exchange rates
for the year. Adjustments resulting from the translation are reflected as a
separate component of other comprehensive income. Translation adjustments are
not tax-effected as they relate to investments that are permanent in nature.
Self-Insurance. The Company is self-insured for certain losses relating to
worker's compensation claims, general liability and employee medical and
dental benefits. The Company has purchased stop-loss coverage in order to limit
its exposure to any significant levels of claims. Self-insured losses are
accrued based upon the Company's estimates of the aggregate uninsured claims
incurred using certain actuarial assumptions followed in the insurance industry
and the Company's historical experiences.
Earnings Per Share. Earnings per share are calculated in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share. 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
antidilutive (i.e., in a loss period). Antidilutive stock options of 2,006,215,
1,480,827, and 750,181 for the fiscal years ended December 29, 2001, December
30, 2000 and January 1, 2000, respectively, were not included in the earnings
per share calculations. A reconciliation of the basic and diluted per-share
computations is as follows (in thousands, except per-share data):
|
FISCAL YEAR |
2001 |
|
2000 |
|
1999 |
|
Basic and diluted earnings per |
|
|
|
||
|
Net income (loss) |
$ (43,912) |
|
$ (15,021) |
|
$ 12,488 |
|
Basic net income (loss) per common share: |
|
|
|
||
|
Net income (loss) before cumulative effect of |
|
|
|
|
|
|
Cumulative effect of change in accounting principle, net of tax |
|
(0.01) |
|||
|
Net income (loss) |
$ (1.80) |
|
$ (0.65) |
|
$ 0.55 |
|
|
|
|
|
||
|
Diluted net income (loss) per common share: |
|
|
|
||
|
Net income (loss) before cumulative |
|
|
|
|
|
|
Cumulative effect of change in |
|
(0.01) |
|||
|
Net income (loss) |
$ (1.80) |
|
$ (0.65) |
|
$ 0.53 |
|
|
|
|
|
||
|
Weighted average number of common |
|
|
|
|
|
|
Incremental shares from assumed |
|
|
|
||
|
Stock options |
661 | ||||
|
Weighted average number of common |
|
|
|
|
|
New Accounting Pronouncements: Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, was issued in October 2001. This statement addresses
significant issues relating to the implementation of SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of, and establishes a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS No. 144 is effective
for the Company's financial statements for the year beginning December 30,
2001. The adoption of this statement is not currently anticipated to have a
material impact on the Company's financial position or results of operations.
Goodwill and Other Intangible Assets. SFAS No. 142, Goodwill and Other
Intangible Assets, was issued in July 2001. SFAS No. 142 supersedes Accounting
Principles Bulletin No. 17, Intangible Assets, and is effective for the Company's
financial statements for the fiscal year beginning December 30, 2001. SFAS No.
142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. SFAS No. 142 (1) prohibits the
amortization of goodwill and indefinite-lived intangible assets, (2) requires
testing of goodwill and indefinite-lived intangible assets on an annual basis
for impairment (and more frequently if the occurrence of an event or
circumstance indicates an impairment), (3) requires that reporting units be
identified for the purpose of assessing potential future impairments of goodwill
and (4) removes the 40-year limitation on the amortization period of intangible
assets that have finite lives. The provisions of SFAS No. 142 also apply to
equity-method investments made both before and after June 30, 2001.
The Company records goodwill at the store level; no goodwill is recorded at the
enterprise level. During the second quarter of fiscal 2002, the Company plans to
complete the two-step process prescribed by SFAS No. 142 for (1) testing for
impairment and (2) determining the amount of impairment loss related to goodwill
associated with its store-level reporting units. The Company cannot reliably
estimate the full impact of this new accounting standard at this time, but
anticipates an annual decrease in amortization of goodwill of approximately $3.0
million and a corresponding annual increase to net income of $1.8 million. The
Company intends to test goodwill for impairment annually or more frequently if
the occurrence of an event or circumstance indicates potential impairment.
Business Combinations. SFAS No. 141, Business Combinations, was issued in July
2001. This statement establishes new accounting and reporting standards that
will, among other things, eliminate the pooling-of-interests method of
accounting for business combinations and require that the purchase method be
used. Its provisions will be effective for the Company for all future business
combinations.
Derivatives and Hedging Activities. In accordance with the Company's interest
rate risk-management strategy and as required by the terms of the Company's
credit facility, the Company has entered into a swap agreement to hedge the
interest rate on $42.5 million of its borrowings. The swap agreement locks in a
one-month LIBOR rate of 6.6% and expires in August 2003. The fair value of the
swap at December 29, 2001 was ($2.3 million), which has been recorded, net of
tax, in the accompanying balance sheet in accrued liabilities.
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, on December 31, 2000. In accordance with the transition
provisions of SFAS 133, as of December 31, 2000, the Company recorded a
net-of-tax cumulative loss adjustment to other comprehensive income totaling
$586,000 that relates to the fair value of the previously described cash flow
hedging relationship. Based upon current interest rates, approximately $2.1
million of the interest rate hedging loss currently in other comprehensive
income is expected to flow through interest expense during the next 12 months.
On the date that the Company entered into the derivative contract, it designated
the derivative as a hedge of the variability of cash flows that are to be
received or paid in connection with a recognized asset or liability (a
"cash flow" hedge). The Company does not enter into derivative
contracts for trading or non-hedging purposes. Currently, the Company's swap
agreement is designated as a cash flow hedge and is recognized in the balance
sheet at its fair value. Changes in the fair value of the Company's cash flow
hedge, to the extent that the hedge is highly effective, are recorded in other
comprehensive income, until earnings are affected by the variability of cash
flows of the hedged transaction through interest expense. Any hedge
ineffectiveness (which represents the amount by which the changes in the fair
value of the derivative exceed the variability in the cash flows being hedged)
is recorded in current period earnings.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair value, cash flow, or foreign currency
hedges to (1) specific assets and liabilities on the balance sheet or (2)
specific firm commitments or forecasted transactions. The Company also formally
assesses (both at the hedge's inception and on an ongoing basis) whether the
derivatives that are used in hedging transactions have been highly effective in
offsetting changes in the cash flows of hedged items and whether those
derivatives may be expected to remain highly effective in future periods. When
it is determined that a derivative is not (or has ceased to be) highly effective
as a hedge, the Company discontinues hedge accounting prospectively, as
discussed below.
The Company discontinues hedge accounting prospectively when (1) it determines
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of a hedged item (including hedged items such as firm
commitments or forecasted transactions); (2) the derivative expires or is sold,
terminated, or exercised; (3) it is no longer probable that the forecasted
transaction will occur; (4) a hedged firm commitment no longer meets the
definition of a firm commitment; or (5) management determines that designating
the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued due to the Company's determination that
the derivative no longer qualifies as an effective cash flow hedge, the Company
will continue to carry the derivative on the balance sheet at its fair value but
cease to adjust the hedged asset or liability for changes in fair value. When
hedge accounting is discontinued because the hedged item no longer meets the
definition of a firm commitment, the Company will continue to carry the
derivative on the balance sheet at its fair value, removing from the balance
sheet any asset or liability that was recorded to recognize the firm commitment
and recording it as a gain or loss in current period earnings. When the Company
discontinues hedge accounting because it is no longer probable that the
forecasted transaction will occur in the originally expected period, the gain or
loss on the derivative remains in accumulated other comprehensive income and is
reclassified into earnings when the forecasted transaction affects earnings.
However, if it is probable that a forecasted transaction will not occur by the
end of the originally specified time period or within an additional two-month
period of time thereafter, the gains and losses that were accumulated in other
comprehensive income will be recognized immediately in earnings. In all
situations in which hedge accounting is discontinued and the derivative remains
outstanding, the Company will carry the derivative at its fair value on the
balance sheet, recognizing changes in the fair value in current-period earnings.
2. Debt Covenant Compliance and Liquidity
The Company was not in compliance with certain financial covenants of its $157.0
million credit agreement as of December 30, 2000. On October 17, 2001, we
entered into an amendment to the credit agreement which waived the default in
exchange for certain restrictive covenants, a security interest in our assets
and a limitation on borrowing of $125.0 million. Following the execution of the
amendment, we requested and received a waiver of performance under the September
2001 stockholders' equity covenant, and a modification of the performance
requirements under the stockholders' equity covenants for October and November
2001, and executed amendments to the credit agreement reflecting such
modifications in November and December 2001. As of December 29, 2001, the
Company was in compliance with the revised covenants.
The Company's credit agreement contains certain monthly and quarterly
financial covenants, which become more restrictive during fiscal 2002 and 2003.
The Company anticipates that it will continue to comply in fiscal 2002 and 2003
with the monthly and quarterly financial covenants in the credit agreement.
Management's current business plans for the Company anticipate significant
improvement in financial position attributable to increases in revenues due to
comparable store sales increases, improved working capital management, reduced
capital spending, successful implementation of ongoing cost savings initiatives,
and improved operating efficiencies. In the event that business conditions
worsen, management has identified contingency actions to enable the Company to
remain in compliance with the financial covenants. Such actions, including
reductions in operating expenses together with lower capital spending, may
result in fewer new store openings in fiscal 2003, which may negatively impact
revenues.
The Company currently expects to meet the amended credit agreement covenants
throughout fiscal 2002 and fiscal 2003; however, if business conditions are
other than as anticipated or other unseen events occur and the Company's
planned contingency actions are unsuccessful in countering such events, these
may impact the Company's ability to remain in compliance. Even if the Company
remains in compliance with its monetary covenants, a technical default could
result due to a breach of the financial covenants. In the absence of a waiver or
amendment to such financial covenants, such non-compliance would constitute a
default under the credit agreement, and the lenders would be entitled to
accelerate the maturity of the indebtedness outstanding thereunder. In the event
that such non-compliance appears likely, or occurs, the Company will seek
approval, as it has in the past, from the lenders to renegotiate financial
covenants and/or obtain waivers, as required. However, there can be no assurance
that future amendments or waivers will be obtained. See "Notes to
Consolidated Financial Statements - Note 6."
3. Business Combinations
Fiscal 2000
In May 2000, the Company acquired the assets and operations of two operating
natural foods supermarkets located in southern California, for a purchase price
of $13.7 million in cash. The acquisition was accounted for using the purchase
method and the excess of cost over the fair value of the assets acquired of
$12.9 million was allocated to goodwill, which is being amortized on a
straight-line basis over 40 years.
Fiscal 1999
Poolings of Interests. On December 15, 1999, the Company issued approximately
890,000 shares of common stock in exchange for all of the outstanding stock of
Sun Harvest Farms, Inc. and an affiliate in a transaction accounted for as a
pooling of interests. Accordingly, the financial position, results of operations
and cash flows of Sun Harvest have been combined with those of the Company in
these financial statements. Certain reclassifications have been made to the
prior financial statements of Sun Harvest to conform with the Company's
financial presentations and policies. There were no intercompany transactions
between the Company and Sun Harvest for all periods presented.
On September 27, 1999, the Company issued approximately 2.1 million shares of
common stock in exchange for all of the outstanding stock of Henry's
Marketplace, Inc. in a transaction accounted for as a pooling of interests.
Accordingly, the financial position, results of operations and cash flows of
Henry's have been combined with those of the Company in these financial
statements. Certain reclassifications have been made to the prior financial
statements of Henry's to conform with the Company's financial presentation
and policies. There were no intercompany transactions between the Company and
Henry's for all periods presented.
Results of Pooled Company Prior to Transaction. Separate results of operations
for the Company's, Henrys', and Sun Harvest's (including the affiliated
entity) operations for the period prior to the transaction are as follows (in
thousands):
|
|
FISCAL YEAR |
|
1999 |
|
|
|
|
|
|
|
|
|
Sales: |
|
|
|
|
|
Wild Oats |
|
$ 593,109 |
|
|
|
Henry's |
|
74,979 |
|
|
|
Sun Harvest |
|
53,003 |
|
|
|
Combined |
|
$ 721,091 |
|
|
|
|
|
||
|
|
Net Income: |
|
|
|
|
|
Wild Oats |
|
$ 7,355 |
|
|
|
Henry's |
|
3,542 |
|
|
|
Sun Harvest |
|
1,591 |
|
|
|
Combined |
|
$ 12,488 |
|
|
|
|
|
|
|
|
|
Other Changes in Stockholders' Equity: |
|
|
|
|
|
Wild Oats |
|
$ 5,939 |
|
|
|
Henry's |
|
(4,450) |
|
|
|
Sun Harvest |
|
(1,198) |
|
|
|
Combined |
|
$ 291 |
|
Purchase Transactions. On November 15, 1999, the Company acquired the assets and
operations of four natural foods supermarkets located in metropolitan Boston,
Massachusetts, for a purchase price of $12.5 million in cash. The acquisition
was accounted for using the purchase method and the excess of cost over the fair
value of the assets acquired of $787,000 was allocated to goodwill, which is
being amortized on a straight-line basis over 40 years.
On May 29, 1999, the Company acquired all of the outstanding stock of Nature's
Fresh Northwest, Inc., a Delaware corporation that owned seven operating natural
food stores, one new site and one relocation in development in metropolitan
Portland, Oregon. The purchase price for this acquisition aggregated $40.0
million in cash, including the assumption by the Company of a $17.0 million
promissory note owed by Nature's to the seller. The acquisition was accounted
for using the purchase method and the excess of cost over the fair value of the
assets acquired and liabilities assumed of $32.6 million was allocated to
goodwill, which is being amortized on a straight-line basis over 40 years.
On April 30, 1999, the Company acquired the operations of three existing natural
foods supermarkets in Norwalk and Hartford, Connecticut and Melbourne, Florida.
The purchase price for this acquisition aggregated $6.6 million in cash. The
acquisition was accounted for using the purchase method, and the excess of cost
over the fair value of the assets acquired and liabilities assumed of $6.1
million was allocated to goodwill, which is being amortized on a straight-line
basis over 40 years.
On February 1, 1999, the Company acquired the operations of three existing
natural foods supermarkets in Tucson, Arizona. The purchase price for this
acquisition aggregated $18.4 million in cash. The acquisition was accounted for
using the purchase method, and the excess of cost over the fair value of the
assets acquired of $17.0 million was allocated to goodwill, which is being
amortized on a straight-line basis over 40 years.
The fair values of the purchased assets and liabilities of these purchased
acquisitions are as follows (in thousands):
|
|
Current assets ($697 of cash) |
|
$ 8,912 |
|
|
|
Equipment |
|
26,604 |
|
|
|
Building and land |
|
9,153 |
|
|
|
Other assets |
|
89 |
|
|
|
Liabilities |
|
(24,730) |
|
|
|
Goodwill |
|
57,352 |
|
|
|
|
|
$ 77,380 |
|
The following unaudited pro forma combined results of operations of the Company
and the acquired businesses discussed above have been prepared as if the
transactions occurred as of the beginning of the respective periods presented
(in thousands) (unaudited):
|
FISCAL YEAR |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ 846,017 |
|
$ 815,180 |
|
|
|
Net income (loss) |
|
(14,469) |
|
18,802 |
|
|
|
Basic income (loss) per share |
|
(0.63) |
|
0.82 |
|
|
|
Diluted income (loss) per share |
|
(0.63) |
|
0.80 |
|
|
The unaudited pro forma results above are not necessarily representative of the
actual results that would have occurred or may occur in the future, if the
transactions had been in effect on the dates indicated. The pre-acquisition
historical results of the acquired businesses discussed above are not reflected
in the Company's historical financial statements.
4. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
|
FISCAL YEAR |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
$ 122,169 |
|
$ 117,777 |
|
|
|
Leasehold improvements |
|
87,185 |
|
81,880 |
|
|
|
Land and building |
|
127 |
|
255 |
|
|
|
Construction in progress |
|
1,253 |
|
27,521 |
|
|
|
|
210,734 |
|
227,433 |
|
|
|
|
Less accumulated depreciation |
|
|
|
|
|
|
|
|
|
$ 128,922 |
|
$ 160,614 |
|
|
Depreciation and amortization expense related to property, plant and equipment
totaled approximately $22.7 million, $22.5 million and $19.6 million in fiscal
2001, fiscal 2000 and fiscal 1999, respectively. Property, plant and equipment
includes approximately $291,000 of interest capitalized during fiscal 2001,
$890,000 during fiscal 2000, and $776,000 during fiscal 1999. The amounts shown
above include $994,000 of machinery and equipment which are accounted for as
capitalized leases and which have accumulated amortization of $412,000 at
December 29, 2001. There were $1,086,000 of machinery and equipment accounted
for as capitalized leases as of December 30, 2000, with accumulated amortization
of $291,000.
5. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
FISCAL YEAR |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
Wages and employee costs |
|
$ 20,087 |
|
$ 16,510 |
|
|
|
Sales and personal property taxes |
|
2,822 |
|
3,034 |
|
|
|
Real estate costs |
|
9,688 |
|
14,328 |
|
|
|
Deferred charges and other accruals |
|
7,484 |
|
3,562 |
|
|
|
|
|
$ 40,081 |
|
$ 37,434 |
|
|
6. Notes Payable and Long-Term Debt
Notes payable and long-term debt outstanding consists of the following (in
thousands):
|
FISCAL YEAR ENDED |
2001 |
|
2000 |
|
|
|
|
|
|
Capitalized leases |
$ 370 |
|
$ 624 |
|
Note payable to related party; 9% interest rate per annum; unsecured |
2,000 |
|
|
|
Bank line of credit due August 1, 2003; bearing interest at one-month
LIBOR |
|
|
|
|
Bank term debt due August 1, 2003; bearing interest at one-month
LIBOR plus |
|
|
|
|
|
124,629 |
|
124,568 |
|
Less current portion |
(12,338) |
|
(7,729) |
|
|
$ 112,291 |
|
$ 116,839 |
The maturities of notes payable and long-term debt are as follows (in
thousands):
|
|
FISCAL YEAR ENDING |
|
|
|
|
|
2002 |
|
$ 12,338 |
|
|
|
2003 |
|
112,277 |
|
|
|
2004 |
|
14 |
|
|
|
|
|
$ 124,629 |
|
The Company has a $125.0 million revolving line of credit. The facility has two
separate lines of credit, a revolving line of up to $86.2 million and a term
loan of up to $38.8 million, each with a three-year term expiring on August 1,
2003. The interest rate on the facility is either prime plus 2.25% or one-month
LIBOR plus 3.75% at our election, and the rates increase by 0.5% starting
January 1, 2002 and each six months thereafter through January 2003. The line of
credit agreement includes certain financial and other covenants, as well as
restrictions on the payment of dividends. In addition, the Company has three
letters of credit outstanding as of December 29, 2001 that total $1.3 million
and expire in January 2002 ($30,000) and November 2002 ($1.3 million).
As a result of restructuring and asset impairment charges incurred during fiscal
2000, we were not in compliance with the fixed charge coverage ratio and minimum
net income covenants under our credit facility as of and for the quarter ended
December 30, 2000, and as a result, our lenders issued a notice of default,
although no acceleration of outstanding debt was requested. The Company entered
into an amendment to its existing credit facility on October 17, 2001, pursuant
to which all outstanding defaults were waived in exchange for the modification
of certain covenants, a security interest in the Company's assets and a cap on
borrowings of $125.0 million. Additional amendments were executed in November
and December 2001 to modify the performance requirements under the stockholders'
equity covenant for October and November 2001. See "Notes to Consolidated
Financial Statements - Note 2."
In September 2000, the Company entered into an interest rate swap to hedge its
exposure on variable rate debt positions. Variable rates are predominantly
linked to LIBOR as determined by one-month intervals. The interest rate provided
by the swap on variable rate debt is 6.6%. At December 29, 2001, the notional
principal amount at the interest rate swap agreement was $42.5 million, expiring
in August 2003. The notional amount is the amount used for the calculation of
interest payments that are exchanged over the life of the swap transaction on
the amortized principal balance. In fiscal 2000, the loss included in other
comprehensive loss for this cash flow hedge was approximately $12,000. In fiscal
2001, the loss included in other comprehensive loss for this cash flow hedge was
approximately $1.2 million.
7. Income Taxes
Income (loss) before income taxes consists of the following (in thousands):
|
FISCAL YEAR |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
Domestic |
|
$ (69,370) |
|
$ (24,358) |
|
$ 17,519 |
|
Foreign |
|
269 |
|
778 |
|
448 |
|
|
|
$ (69,101) |
|
$ (23,580) |
|
$ 17,967 |
Income tax expense (benefit) consists of the following (in thousands):
|
FISCAL YEAR |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
Federal |
|
$ (2,604) |
|
$ (7,690) |
|
$ 4,624 |
|
State and foreign |
|
(69) |
|
(454) |
|
1,983 |
|
|
|
(2,673) |
|
(8,144) |
|
6,607 |
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|||
|
Federal |
|
(21,025) |
|
(373) |
|
(1,019) |
|
State and foreign |
|
(1,491) |
|
(42) |
|
(390) |
|
|
|
(22,516) |
|
(415) |
|
(1,409) |
|
|
|
$ (25,189) |
|
$ (8,559) |
|
$ 5,198 |
The differences between the U.S. federal statutory income tax rate and the Company's effective tax rate are as follows:
|
FISCAL YEAR |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
Statutory tax rate |
|
(35.0)% |
|
(35.0)% |
|
35.0% |
|
|
|
|
|
|
|
|
|
State income taxes (benefit), net of |
|
|
|
|
|
|
|
Tax effect of non-deductible goodwill |
|
0.8 |
|
2.5 |
|
2.6 |
|
Untaxed earnings related to pooled companies |
|
|
|
|
|
(10.2) |
|
Change in tax status of pooled companies |
|
|
|
|
|
(4.7) |
|
Other permanent items related to acquisitions |
|
|
|
|
|
2.9 |
|
Other, net |
|
(0.0) |
|
(1.4) |
|
1.2 |
|
Effective tax rate |
|
(36.5)% |
|
(36.3)% |
|
28.9% |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):
|
FISCAL YEAR |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
||
|
Inventory-related |
|
911 |
|
533 |
|
|
|
Vacation accrual |
|
2,335 |
|
1,727 |
|
|
|
Real estate accruals |
|
13,023 |
|
3,008 |
|
|
|
Net operating loss carryforward |
|
9,267 |
|
|
|
|
|
Credit carryforward |
|
802 |
|
|
|
|
|
Mark-to-market swap accrual |
|
852 |
|
|
|
|
|
Other |
|
(693) |
|
220 |
|
|
|
Total deferred tax assets |
|
26,497 |
5,488 |
|
|
|
|
Deferred tax liabilities: |
|
|
||||
|
Property-related |
|
(2,129) |
(4,488) |
|
|
|
|
Total deferred tax liabilities |
|
(2,129) |
(4,488) |
|
|
|
|
Net deferred tax asset |
|
24,368 |
|
1,000 |
|
|
|
|
|
|
|
|
||
|
Financial statements: |
|
|
|
|
||
|
Current deferred tax asset |
|
5,378 |
|
1,989 |
|
|
|
Non-current deferred tax asset |
|
18,990 |
|
(989) |
|
|
|
Net deferred tax asset |
|
24,368 |
|
1,000 |
|
|
During fiscal 2001, fiscal 2000 and fiscal 1999, the Company recognized
$102,000, $293,000 and $1.4 million, respectively, as a tax benefit directly to
additional paid-in-capital related to noncompensatory stock plans.
At December 29, 2001, the Company had a net operating loss carryforward of $24.7
million, which expires in 2021, and is available to offset future taxable
income. Management has concluded that a valuation allowance is not required as
it is more likely than not that the Company will be able to realize the benefit
of the net operating loss carryforward through the generation of future taxable
income.
8. Capital Stock
The Company declared 3-for-2 stock splits for all stockholders of record as of
December 22, 1997, and November 17, 1999, effective January 7, 1998 and December
1, 1999, respectively. All shares and per-share prices presented herein have
been retroactively restated to reflect the stock splits.
In October 1999, the Company's shareholders approved an increase in the
authorized common stock of the Company to 60,000,000 shares.
9. Stock Plans, Options and Warrants
Employee Stock Purchase Plan. In August 1996, the Company's board of directors
approved and adopted an Employee Stock Purchase Plan ("Purchase Plan")
covering an aggregate of 287,307 shares of common stock. The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code. Under the Purchase Plan, the board of
directors may authorize participation by eligible employees, including officers,
in periodic offerings. The offering period for any offering will be no more than
27 months. The board authorized an offering commencing on the initial public
offering date of October 22, 1996 and ending June 30, 1997, and sequential
six-month offerings thereafter.
Employees are eligible to participate in the currently authorized offerings if
they have been employed by the Company or an affiliate of the Company
incorporated in the United States for at least six months preceding October 22,
1996. Employees can have up to 15% of their earnings withheld pursuant to the
Purchase Plan and applied on specified purchase dates (currently the last day of
each authorized offering) to the purchase of shares of common stock. The price
of common stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the common stock on the commencement date of
each offering or the relevant purchase date. As of December 29, 2001, there were
approximately $340,000 of payroll deductions of which $339,000 were used to
purchase 40,089 shares of common stock on December 31, 2001.
The Board suspended participation in the Purchase Plan effective January 29,
2001, when the available pool of shares was substantially exhausted. The Company
obtained shareholder approval in May 2001 to increase the pool of stock by
500,000 shares, and participation was resumed in June 2001.
Equity Incentive Plan. The Company's Wild Oats Markets, Inc. 1996 Equity
Incentive Plan (the "Incentive Plan") was adopted by the board of
directors in August 1996. The Incentive Plan provides for the grant of incentive
stock options to employees (including officers and employee-directors) and
nonqualified stock options, restricted stock purchase awards and stock bonuses
to employees and directors. The exercise price of options granted under the
Incentive Plan is determined by the board of directors, provided that the
exercise price for an incentive stock option cannot be less than 100% of the
fair market value of the common stock on the grant date and the exercise price
for a nonqualified stock option cannot be less than 85% of the fair market value
of the common stock on the grant date. Outstanding options generally vest over a
period of five years and generally expire ten years from the grant date.
Non-qualified Stock Option Plan. In 2001 the Company created the Wild Oats
Markets, Inc. 2001 Nonofficer/Nondirector Equity Incentive Plan (the
"Non-qualified Plan"). As of December 29, 2001, 486,000 shares of
common stock were reserved for issuance under the Non-qualified Plan. The
Non-qualified Plan provides for the grant of nonqualified stock options to
employees of the Company who are not officers or directors. The exercise price
of options granted under the Non-qualified Plan is determined by the board of
directors, provided that 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. Outstanding options generally vest over a period of five years and
generally expire ten years from the grant date.
Individual Stock Option Plans. The Company also created four nonqualified stock
option plans, two in May and one in each of September and December of 2001, as
inducements to certain executives to accept offers of employment with the
Company. The total amount of options available for grant and granted under the
four plans is 410,000 shares. Under each plan, the exercise price of the stock
options is determined by the board of directors, provided that the exercise
price cannot be less than 85% of fair market value of the common stock on the
grant date. Outstanding options vest over a four-year period with an expiration
date 10 years from the date of grant.
Fair Values. The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock plans. Accordingly, no
compensation expense has been recognized for these plans. Had compensation cost
for these plans been determined based on the fair value at the grant dates as
prescribed by FAS No. 123, Accounting for Stock-Based Compensation, the Company's
net income (loss) allocable to common stock and basic and diluted income (loss)
per share would have been reduced to the pro forma amounts indicated
below:
|
FISCAL YEAR |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|||
|
As reported |
|
$ (43,912) |
|
$ (15,021) |
|
$ 12,488 |
|
Pro forma |
|
$ (46,407) |
|
$ (19,269) |
|
$ 8,855 |
|
|
|
|
|
|||
|
Basic income (loss) per share |
|
|
|
|||
|
As reported |
|
$ (1.80) |
|
$ (0.65) |
|
$ 0.55 |
|
Pro forma |
|
$ (1.90) |
|
$ (0.83) |
|
$ 0.39 |
|
|
|
|
|
|||
|
Diluted income (loss) per share |
|
|
|
|||
|
As reported |
|
$ (1.80) |
|
$ (0.65) |
|
$ 0.53 |
|
Pro forma |
|
$ (1.90) |
|
$ (0.83) |
|
$ 0.38 |
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following weighted-average assumptions:
|
FISCAL YEAR |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
Estimated dividends |
|
None |
|
None |
|
None |
|
Expected volatility |
|
52% |
|
68% |
|
46% |
|
Risk-free interest rate |
|
1.8% |
|
4.8% |
|
5.6% |
|
Expected life (years) |
|
0.5 |
|
0.5 |
|
0.5 |
|
Weighted-average fair value per share |
|
$2.40 |
|
$1.16 |
|
$4.96 |
The fair value of each option grant under the Company's aggregated incentive and nonqualified stock option plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
FISCAL YEAR |
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
Estimated dividends |
|
None |
|
None |
|
None |
|
Expected volatility |
|
52% |
|
68% |
|
46% |
|
Risk-free interest rate |
|
4.55% |
|
5.75% |
|
5.6% |
|
Expected life (years) |
|
4.8 |
|
7.0 |
|
7.0 |
A summary of the status of the Company's aggregated incentive and nonqualified stock options plans as of the 2001, 2000 and 1999 fiscal year ends and changes during the years ending on those dates is presented below:
|
|
|
Number of |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 2, 1999 |
|
1,419,354 |
|
$ 10.49 |
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
809,665 |
|
$ 20.18 |
|
|
|
Forfeited |
|
(165,632) |
|
$ 16.80 |
|
|
|
Exercised |
|
(255,179) |
|
$ 7.26 |
|
|
|
Outstanding as of January 1, 2000 |
|
1,808,208 |
|
$ 14.68 |
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
881,832 |
|
$ 10.13 |
|
|
|
Forfeited |
|
(203,434) |
|
$ 18.53 |
|
|
|
Exercised |
|
(86,777) |
|
$ 7.55 |
|
|
|
Outstanding as of December 30, 2000 |
|
2,399,829 |
|
$ 12.94 |
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
2,226,465 |
|
$ 8.04 |
|
|
|
Forfeited |
|
(1,136,109) |
|
$ 11.36 |
|
|
|
Exercised |
|
(134,252) |
|
$ 6.57 |
|
|
|
Outstanding as of December 29, 2001 |
|
3,355,933 |
|
$ 10.36 |
|
|
The following table summarizes information about incentive and nonqualified stock options outstanding and exercisable at December 29, 2001:
|
OPTIONS OUTSTANDING |
|
OPTIONS EXERCISABLE |
||||||||
|
|
|
|
|
|
|
Weighted- |
|
|
|
Weighted- |
|
Range Of |
|
|
|
Remaining |
|
Average |
|
|
|
Average |
|
Exercise |
|
Number |
|
Contractual |
|
Exercise |
|
Number |
|
Exercise |
|
Prices |
|
Outstanding |
|
Life |
|
Price |
|
Exercisable |
|
Price |
|
$2.65 - 5.30 |
|
78,568 |
|
6.1 years |
|
4.19 |
|
45,628 |
|
4.14 |
|
$5.30 - 7.95 |
|
1,265,149 |
|
8.6 |
|
7.22 |
|
267,063 |
|
7.04 |
|
$7.95 - 10.60 |
|
1,236,589 |
|
9.2 |
|
9.20 |
|
218,951 |
|
8.99 |
|
$10.60 - 13.25 |
|
177,590 |
|
7.0 |
|
11.82 |
|
103,842 |
|
11.60 |
|
$13.25 - 15.90 |
|
43,406 |
|
6.5 |
|
15.01 |
|
43,406 |
|
15.01 |
|
$15.90 - 18.55 |
|
262,434 |
|
5.4 |
|
17.04 |
|
190,168 |
|
16.96 |
|
$18.55 - 21.20 |
|
123,406 |
|
7.3 |
|
19.86 |
|
73,395 |
|
19.61 |
|
$21.20 - 23.85 |
|
99,183 |
|
7.6 |
|
22.24 |
|
40,699 |
|
22.26 |
|
$23.85 - 26.50 |
|
69,608 |
|
7.5 |
|
26.50 |
|
27,856 |
|
26.50 |
|
|
|
3,355,933 |
|
8.3 |
|
10.36 |
|
1,011,008 |
|
12.07 |
At December 29, 2001, 1,147,945 shares were available
for future grant under the Incentive Plan, and 53,200
shares were available for future grant under the Non-qualified Plan. At December
29, 2001 and December 30, 2000, options for 1,011,008 and 975,708 shares with
weighted average exercise prices of $12.07 and $12.07, respectively, were
exercisable. The weighted-average grant-date per-share fair values of options
granted during fiscal 2001, fiscal 2000 and fiscal 1999 were $8.04, $10.13 and
$20.18, respectively.
10. Litigation
Alfalfa's Canada, Inc., a Canadian subsidiary of the Company, is a defendant
in a suit brought in the Supreme Court of British Columbia, by one of its
distributors, Waysafer Wholefoods Limited and one of its principals, seeking
monetary damages for breach of contract and injunctive relief to enforce a
buying agreement for the three Canadian stores entered into by a predecessor of
Alfalfa's Canada. Under the buying agreement, the stores must buy products
carried by the plaintiff if such are offered at the current advertised price of
its competitors. The suit was filed in September 1996. In June 1998, Alfalfa's
Canada filed a Motion for Dismissal on the grounds that the contract in dispute
constituted a restraint of trade. The Motion was subsequently denied. We do not
believe its potential exposure in connection with the suit will have a material
adverse effect on the Company's consolidated results of operations, financial
position, or cash flows.
In April 2000, the Company was named as defendant in S/H -Ahwatukee, LLC and
YP- Ahwatukee LLC v. Wild Oats Markets, Inc., Superior Court of Arizona,
Maricopa County, by a landlord alleging Wild Oats breached a continuous
operations clause arising from the closure of a Phoenix, Arizona store. The
landlord dismissed the same suit, filed in 1999, without prejudice in 1999,
after the Company presented a possible acceptable subtenant, but subsequently
rejected the subtenant. Plaintiff claimed $1.5 million for diminution of value
of the shopping center plus accelerated rent, fees and $360,000 in attorneys'
fees and costs. After trial in November 2001, the judge awarded the plaintiff
$326,000 in damages and $210,000 in attorneys' fees.
In January 2001, the Company was named as defendant in Glades Plaza, LP v. Wild
Oats Markets, Inc., a suit filed in the 15th Judicial Circuit Court, Palm Beach
County, Florida, by a landlord alleging we breached our lease obligations when
we gave notice of termination of the lease for landlord's default in not
timely turning over the premises. The parties negotiated a settlement pursuant
to which the Company terminated its lease obligations and paid $220,000 to the
plaintiff in return for a full release from all lease liability and termination
of the lawsuit.
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
Alfalfa's Inc., our predecessor on interest, breached a lease in 1995 related
to certain property in Seattle, Washington. We believe that Alfalfa's properly
terminated the lease pursuant to certain conditions precedent to its obligations
thereunder. Since filing its claim, Plaintiff has increased its damages claim
from $377,000 to $2.4 million. The parties are currently in discovery. We have
filed a motion for summary judgment, which is currently scheduled for a hearing
in May 2002. A trial date has been set in June 2002.
In January 2002, we were named as defendant in Michael C. Gilliland and
Elizabeth C. Cook v. Wild Oats Markets, Inc., a suit filed in Boulder District
Court, Boulder County, Colorado by former officers and directors, and holders of
more than 5% of the Company's outstanding stock, for $2.0 million in principal
on a promissory note, together with interest at a 15% default rate and attorneys'
fees. The plaintiffs loaned the Company $2.0 million in January 2001. The
Company executed a demand note for the loan. The plaintiffs demanded payment
under the note in January 2002 and filed suit when they did not receive payment
within the period specified. In March 2002, the parties entered into a
settlement agreement dismissing the suit, pursuant to which the Company has
agreed to a repayment schedule for the loan, together with interest at 9% per
annum, from cash and equity proceeds over a five-month period, and the
plaintiffs have agreed to a $200,000 offset against the principal balance of the
loan for outstanding receivables alleged to be due to the Company.
We also are named as defendant in various actions and proceedings arising in the
normal course of business. In all of these cases, the Company is denying the
allegations and is vigorously defending against them and, in some cases, has
filed counterclaims. Although the eventual outcome of the various lawsuits
cannot be predicted, it is management's opinion that these lawsuits will not
result in liabilities that would materially affect the Company's consolidated
results of operations, financial position, or cash flows.
11. Commitments
The Company has numerous operating leases related to facilities occupied and
store equipment. These leases generally contain renewal provisions at the option
of the Company. Total rental expense (consisting of minimum rent and contingent
rent) under these leases was $37.6 million, $34.5 million and $25.5 million
during fiscal 2001, fiscal 2000 and fiscal 1999, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 29, 2001 are summarized as follows (in thousands):
|
|
FISCAL YEAR |
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
$ 31,855 |
|
|
|
2003 |
|
31,323 |
|
|
|
2004 |
|
29,237 |
|
|
|
2005 |
|
27,941 |
|
|
|
2006 |
|
26,139 |
|
|
|
Thereafter |
|
254,511 |
|
|
|
Total minimum lease payments |
|
$ 401,006
|
|
Minimum rentals for operating leases do not include contingent rentals which may
become due under certain lease terms which provide that rentals may be increased
based on a percentage of sales. During fiscal 2001, fiscal 2000 and fiscal 1999,
the Company paid contingent rentals of $734,000, $445,000 and $938,000,
respectively.
Included in the $401.0 million of minimum lease payments is $29.1 million, which
is related to lease costs for closed stores. The Company is actively working to
defease these payments through assignments, subleases or terminations of the
lease obligations.
As of December 29, 2001, the Company had commitments under construction
contracts totaling $1.3 million.
In fiscal 1999, we entered into a supply agreement with Nutricia (formerly GNP),
under which Nutricia manufactures for us certain private label vitamins and
supplements. The agreement has a three-year term, but is terminable by either
party with advance notice. We have certain minimum per-product purchase
requirements that have led, in the past, to the Company being obligated for past
dated products where the minimum product purchased could not be sold prior to
expiration. We have no supply contracts with the majority of our smaller
vendors, who could discontinue selling to us at any time. Although we believe
that we could develop alternative sources of supply, any such termination may
create a short-term disruption in store-level merchandise selection.
12. Restructuring and Asset Impairment Charges
Fiscal 2001
As a result of hiring a new chief executive officer just prior to the beginning
of the second quarter of fiscal 2001 and a comprehensive review conducted by the
new chief executive officer of the business and strategic repositioning efforts
of the Company during the second quarter of fiscal 2001, management identified
and committed to a restructuring plan during the second quarter of fiscal 2001
and has recorded a restructuring and asset impairment charge of $54.8 million
(such asset impairments were recorded in accordance with SFAS 121, Accounting
for the Impairment of Long-lived Assets and for Assets to be Disposed of). The
significant components of the charge are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 38.9 million |
Details of the significant components of the charge are as follows:
- Change in estimate related to fixed asset impairments for
previously identified sites held for disposal ($1.5 million) - During the
second quarter of fiscal 2001, the Company determined that these fixed assets
were not compatible with a new store design. Due to the new store design, such
assets could not be relocated as contemplated under the original restructuring
plan. As a result, the Company determined it could not recover the previously
estimated carrying value of these assets, and therefore recognized an impairment
charge and disposed of the assets during the second quarter of fiscal 2001.
- Change in estimate related to lease-related liabilities for
previously identified sites for closure ($15.9 million) - During the second
quarter of fiscal 2001, the Company determined that additional periods of time
are necessary to dispose of certain lease obligations. This determination was
driven by results of current disposition efforts by the Company, and is
attributable to deteriorating real estate markets in certain regions, existing
lease obligation at above-market rates, and unattractive site characteristics.
The charge for exit costs assumes, based on the Company's current results of
disposition efforts, that the Company will be successful in disposing of these
long-term lease obligations within the next five years. Facts and circumstances
can change in the future with respect to the above attributes affecting the
ultimate resolution of these exit costs. The Company will make appropriate
adjustments to the restructuring liabilities contemporaneous with the change in
facts and circumstances.
- Fixed asset impairments for three additional stores
identified in the second quarter of fiscal 2001 to be abandoned, closed, or sold
by the end of fiscal 2001 ($1.8 million) - During the second quarter of fiscal
2001, the Company became involved in litigation filed by the landlord of a site
under construction. The Company decided not to proceed with the opening of the
store and consequently abandoned the site and the related fixed assets
(leasehold improvements) totaling $1.5 million during the second quarter of
fiscal 2001. Additionally, the fixed assets of two other stores that were
scheduled to be closed by the end of fiscal 2001 comprised the remaining
$300,000 of the charge.
- Fixed asset impairments for subleased properties identified
during the second quarter of fiscal 2001 ($1.7 million) - These asset
impairments relate to leasehold improvements made by the Company in subleased
properties for specific subtenants. During the second quarter of fiscal 2001,
certain subtenants either vacated the improved properties without prior notice
or gave notice to the Company that they planned to vacate the properties
shortly, and certain other subtenants were in financial distress and in one
case, had filed for bankruptcy protection. The Company determined that it could
not recover the carrying value of these build-to-suit leasehold improvements and
therefore recognized an impairment charge. Certain of these assets were disposed
of during the second quarter of fiscal 2001 and the remainder of which are to be
disposed of by the end of fiscal 2001.
- Lease-related liabilities for subleased properties identified
during the second quarter of fiscal 2001 ($10.0 million) - During the second
quarter of fiscal 2001, certain subtenants either vacated the improved
properties without prior notice or gave notice to the Company that they planned
to vacate the properties shortly. The Company also was informed in the second
quarter that certain other subtenants were in financial distress and in one
case, had filed for bankruptcy protection. The lease-related liabilities
represent the Company's estimate to dispose of these lease obligations based
on current disposition efforts by the Company, and is attributable to
deteriorating real estate markets in certain regions, existing lease obligations
at above-market rates, and unattractive site characteristics. The charge for
exit costs assumes, based on the Company's current results of disposition
efforts, that the Company will be successful in disposing of these long-term
lease obligations within the next five years. Facts and circumstances can change
in the future with respect to the above attributes affecting the ultimate
resolution of these exit costs. The Company will make appropriate adjustments to
the restructuring liabilities contemporaneous with the change in facts and
circumstances.
- Fixed asset impairments for regional and departmental office
closures and consolidations during the second quarter of fiscal 2001 ($3.0
million) - As part of the Company's reorganization during the second quarter
of fiscal 2001, the Company reduced its regional offices from 11 to five
offices, and eliminated much of its construction department. In conjunction with
these modifications to regional and departmental structures, the Company
determined that it could not recover the carrying value of the fixed assets used
by certain regional and departmental offices and the construction department and
therefore recognized an impairment charge and disposed of the assets during the
second quarter of fiscal 2001.
- Fixed asset impairments for store construction project
discontinuation ($2.3 million) - During the second quarter of fiscal 2001, the
Company determined that a new store design was required and construction of new
stores and expansion and remodel activities at existing stores based on the
previously developed designs would be abandoned to incorporate the new store
design changes. Assets in this charge included abandoned construction in
progress (primarily leasehold improvements). The Company determined that it
could not recover the carrying value of these fixed assets, and therefore
recognized an impairment charge and disposed of the assets during the second
quarter of fiscal 2001.
- Severance for employees terminated during the second quarter
of fiscal 2001 ($2.5 million) - During the second quarter of fiscal 2001, 104 of
the Company's 9,000 employees were terminated as part of the Company's
restructuring plan. The terminated employee groups were regional store support,
construction and new store development, and corporate office personnel. As of
December 29, 2001, $2.4 million of involuntary termination benefits had been
paid to terminated employees; the remaining benefits of $136,000 will be paid
during the first half of fiscal 2002.
In addition to the $38.9 million of restructuring charges described above,
management has also identified asset impairment charges of $15.9 million in
accordance with the provisions of SFAS 121 related to five stores held for use.
The assets became impaired in the second quarter of fiscal 2001 because the
projected future cash flows of each store at that time were not sufficient to
fully recover the carrying value of the stores' long-lived assets. In
determining whether an impairment exists, the Company estimates the store's
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
believes the weak performance from the stores included in the asset impairment
charge were caused by significant budget overruns in construction (one store),
poor site location (two stores) or insufficient advertising in new regional
markets (two stores). The Company continually reevaluates its stores'
performance to monitor the carrying value of its long-lived assets in comparison
to projected cash flows. Elements that could contribute to impairment of
long-lived assets include new competition, overruns in construction costs, or
poor operating results caused by a variety of factors, including improper site
selection, insufficient advertising, or changes in local, regional or national
economies. The Company is currently reevaluating its store format and
construction procedures to reduce the likelihood of construction cost overruns,
and has increased its projected preopening costs per new store to increase the
level of new store advertising. Site selection criteria are also being
reevaluated in light of the results of the Company's comprehensive review of
its operations and ideal customer demographics. There is no assurance that in
the future, additional long-lived assets will not be deemed impaired.
After a comprehensive review of our support facilities was completed by
management during the third quarter of fiscal 2001, we determined that the
operations of certain support facilities should be eliminated. As a result, in
the third quarter of fiscal 2001, we recorded a restructuring and asset
impairment charge of $776,000 resulting primarily from the closure of three
support facilities: a bakery in Tucson, Arizona, and two commissary kitchens in
Los Angeles, California and Santa Fe, New Mexico.
During the fourth quarter of fiscal 2001, we recorded restructuring income of
$5.7 million consisting of the following components:
Change in estimate related to lease-related liabilities for sites previously
identified for closure or sale that were closed, sold or disposed of during the
fourth quarter of fiscal 2001 and the first quarter of fiscal 2002
|
|
|
|
$ (10.1 million) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3 million |
|
|
|
|
3.6 million |
|
|
|
|
|
|
|
|
|
$ (5.7 million) |
- Change in estimate related to lease-related liabilities for
sites previously identified for closure or sale that were closed, sold or
disposed of during the fourth quarter of fiscal 2001 and the first quarter of
fiscal 2002 ($10.1 million of restructuring income) - During the fourth
quarter of fiscal 2001, we sold two stores in San Anselmo and Sacramento,
California, in related transactions; we subsequently sold two additional stores
in Berkeley and Sunnyvale, California, to the same purchaser of the other
northern California stores. In conjunction with these transactions, the
purchaser assumed the lease-related obligations associated with these stores.
Based on this change in facts and circumstances, we reversed the remaining
lease-related liabilities previously recorded for these stores and therefore
recognized restructuring income of $3.7 million during the fourth quarter of
fiscal 2001. During the fourth quarter of fiscal 2001 and the first quarter of
fiscal 2002, we also terminated lease obligations for sites in Madison, New
Jersey and Boca Raton, Florida, respectively; based on this change in facts and
circumstances, we reversed the remaining lease-related liabilities previously
recorded for these stores and therefore recognized restructuring income of $6.4
million during the fourth quarter of fiscal 2001.
- Change in estimate related to fixed asset impairments for
four stores previously identified for closure or sale ($1.6 million of
restructuring income) - Due to changes in facts and circumstances during the
fourth quarter of fiscal 2001, we determined that four stores previously
identified as sites held for disposal would continue to operate in their
existing locations. Three of the stores were expected to be closed in
conjunction with the Company's opening of new stores in the respective trade
areas; however, during the fourth quarter of fiscal 2001, the Company decided to
abandon the new store sites and continue to operate the existing stores. With
regard to the fourth store, management decided in the fourth quarter of fiscal
2001 to continue to operate the store in its existing location after completing
a competitive analysis of the market area and a reevaluation of the operations
of the store in the fourth quarter of fiscal 2001, which showed that the store
was achieving acceptable performance levels and demonstrating positive
performance trends following the implementation of the Fresh Look program late
in the third quarter of fiscal 2001. As a result, we reversed the restructuring
charge previously recorded for the fixed asset impairments related to these four
stores and therefore recognized restructuring income of $1.6 million during the
fourth quarter of fiscal 2001.
- Change in estimate related to lease-related liabilities for
four stores previously identified for closure or sale ($1.1 million of
restructuring income) - Due to changes in facts and circumstances during the
fourth quarter of fiscal 2001, we determined that four stores previously
identified as sites held for disposal would continue to operate in their
existing locations. Three of the stores were expected to be closed in
conjunction with the Company's opening of new stores in the respective trade
areas; however, during the fourth quarter of fiscal 2001, the Company decided to
abandon the new store sites and continue to operate the existing stores. With
regard to the fourth store, management decided in the fourth quarter of fiscal
2001 to continue to operate the store in its existing location after completing
a competitive analysis of the market area and a reevaluation of the operations
of the store in the fourth quarter of fiscal 2001, which showed that the store
was achieving acceptable performance levels and demonstrating positive
performance trends following the implementation of the Fresh Look program late
in the third quarter of fiscal 2001. As a result, we reversed the restructuring
charge previously recorded for the long-term lease obligations related to these
four stores and therefore recognized restructuring income of $1.1 million during
the fourth quarter of fiscal 2001.
- Fixed asset impairments for three additional stores and one
support facility identified in the fourth quarter of fiscal 2001 to be closed or
sold by the second quarter of fiscal 2002 ($3.3 million of restructuring
expense) - During the fourth quarter of fiscal 2001, we decided to close two
stores in fiscal 2002 following the negotiation of a lease obligation settlement
for one store in the fourth quarter of fiscal 2001 and the completion of an
operations analysis for the other store, which showed that the intensive Fresh
Look marketing and merchandising efforts initiated at the store early in the
fourth quarter of 2001 were not improving the store's sales and profit trends.
We also decided to close one support facility in the second quarter of fiscal
2002 after determining in the fourth quarter of fiscal 2001 to outsource the
operations of the support facility to an identified external food service
supplier. We determined that we could not recover the carrying value of the
fixed assets at these locations and therefore recognized an impairment charge.
Certain of these assets were disposed of during the first quarter of fiscal
2002, and the remainder will be disposed of by the end of the second quarter of
fiscal 2002.
During the fourth quarter of fiscal 2001, we also decided to abandon
construction of a new store in Kansas City, Missouri, due to location and
parking-related issues. Assets in this charge included abandoned construction in
progress (primarily leasehold improvements). We determined that we could not
recover the carrying value of these fixed assets and therefore recognized an
impairment charge and disposed of the assets during the fourth quarter of fiscal
2001.
- Lease-related liabilities for three additional stores and one
support facility identified during the fourth quarter of fiscal 2001 to be
closed or sold by the second quarter of fiscal 2002 ($3.6 million of
restructuring expense) - During the fourth quarter of fiscal 2001, we decided
to close two stores in fiscal 2002 following the negotiation of a lease
obligation settlement for one store in the fourth quarter of fiscal 2001 and the
completion of an operations analysis for the other store, which showed that the
intensive Fresh Look marketing and merchandising efforts initiated at the store
early in the fourth quarter of 2001 were not improving the store's sales and
profit trends. We also decided to close one support facility in the second
quarter of fiscal 2002 after determining in the fourth quarter of fiscal 2001 to
outsource the operations of the support facility to an identified external food
service supplier. The lease-related liabilities for these locations represent
our estimate to dispose of these lease obligations based on current disposition
efforts, and is attributable to deteriorating real estate markets in certain
regions, existing lease obligations at above-market rates, and unattractive site
characteristics. The charge for exit costs assumes, based on our current results
of disposition efforts, that the Company will be successful in disposing of
these long-term lease obligations within the next five years. Facts and
circumstances can change in the future with respect to the above attributes
affecting the ultimate resolution of these exit costs. We will make appropriate
adjustments to the restructuring liabilities contemporaneous with the change in
facts and circumstances.
During the fourth quarter of fiscal 2001, we also decided to abandon
construction of a new store in Kansas City, Missouri due to location and
parking-related issues. We terminated the lease obligation for $155,000 during
the fourth quarter of fiscal 2001.
- Severance for employees terminated during the fourth quarter
of fiscal 2001 ($0.2 million) - During the fourth quarter of fiscal 2001, 33
employees were terminated in conjunction with the closure of four support
facilities during the fourth quarter of fiscal 2001. The employees were notified
of their involuntary termination during the fourth quarter of fsical 2001. As of
December 29, 2001, $98,000 of involuntary termination benefits had been paid to
terminated employees; the remaining benefits of $57,000 will be paid during the
first half of fiscal 2002.
Sales and store contribution to profit (sales less cost of goods sold, occupancy
costs, and direct store expenses) for the fiscal year ended December 29, 2001,
December 30, 2000 and January 1, 2000 for stores that were held for disposal are
as follows (unaudited, in thousands):
|
|
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
Sales |
|
$ 35,171 |
|
$ 95,242 |
|
$ 138,506 |
|
|
|
|
|
|||
|
Store contribution to profit |
|
$ (1,979) |
|
$ 146 |
|
$ 9,452 |
|
|
|
|
|
|
|
The effect of suspending depreciation for assets held for disposal was
approximately $913,000, $1.7 million and $416,000 for the fiscal years ended
December 29, 2001, December 30, 2000 and January 1, 2000, respectively.
The carrying value of those assets held for disposal as of December 29, 2001 and
December 30, 2000 was approximately $125,000 and $509,000, respectively.
In addition to the restructuring charges described above, management also
identified asset impairment charges of $5.0 million in accordance with the
provisions of SFAS 121 related to four stores held for use. These assets became
impaired in the fourth quarter of fiscal 2001 because the projected future cash
flows of each store at that time were not sufficient to fully recover the
carrying value of the stores' long-lived assets. In determining whether an
impairment exists, we estimate the store's future cash flows on an
undiscounted basis, and if the cash flows are not sufficient to recover 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. We believe the weak performance from
the stores included in the asset impairment charge were caused by poor site
location (two stores) or insufficient advertising in new regional markets (two
stores). We continually reevaluate our stores' performance to monitor the
carrying value of long-lived assets in comparison to projected cash flows.
Elements that could contribute to impairment of long-lived assets include new
competition, overruns in construction costs, or poor operating results caused by
a variety of factors, including improper site selection, insufficient
advertising, or changes in local, regional or national economies. We are
currently reevaluating the store format and construction procedures to reduce
the likelihood of construction cost overruns, and have increased our projected
pre-opening costs per new store to increase the level of new store advertising.
Site selection criteria are also being reevaluated in light of the results of
the Company's comprehensive review of all operations and ideal customer
demographics. There is no assurance that in the future, additional long-lived
assets will not be impaired.
Fiscal 2000
During the second quarter of fiscal 2000, the Company's management made
certain decisions relating to the strategic repositioning of the Company's
operations which resulted in a restructuring and asset impairment charge of
$20.6 million. These decisions included the closure of three natural foods
stores during the second quarter of fiscal 2000 ($4.7 million); the planned sale
or closure of seven stores during the remainder of fiscal 2000 ($9.9 million);
exit costs of previously closed or abandoned sites ($5.6 million); and the
discontinuance of e-commerce activities ($400,000). The $5.6 million charge
related to changes in estimates for previously closed or abandoned sites. The
significant components of the $5.6 million charge were (a) $3.6 million of
additional lease-related liabilities, and (b) $2.0 million of fixed asset
impairments for 15 previously closed stores. Components of the restructuring and
asset impairment charge consist of impairment of fixed ($8.9 million) and
intangible assets ($6.4 million); and noncancelable lease obligations and
liabilities ($5.3 million). Substantially all of the restructuring charges are
non-cash expenses.
During the fourth quarter of fiscal 2000, the Company expanded its strategic
repositioning and, as a part of such expansion, decided to close or sell twelve
under performing stores. This decision resulted in an additional restructuring
and asset impairment charge of $21.4 million. This restructuring charge consists
primarily of costs associated with the abandonment of fixed ($13.6 million) and
intangible assets ($1.7 million) and noncancelable lease obligations and
lease-related liabilities ($6.1 million). Substantially all of the restructuring
charges are non-cash expenses.
The assets written off as part of the second and fourth quarter fiscal 2000
charges consist of the following:
|
|
Goodwill impairment |
|
$ 8,041,000 |
|
|
|
Leasehold interest impairment |
|
2,537,000 |
|
|
|
Fixed asset impairment |
|
20,030,000 |
|
|
|
Total |
|
$ 30,608,000
|
|
During the first quarter of fiscal 2001, one natural foods store was closed in Denver, Colorado as part of the fiscal 2000 restructuring plans. An additional store was closed in the first quarter of fiscal 2002. Five of the identified stores were sold in the fourth quarter of fiscal 2001 and the first quarter of fiscal 2002. With regard to the current status of the Company's fiscal 2000 restructuring plans, as of March 1, 2002, 20 of the 22 stores identified in fiscal 2000 for closure or sale have been closed or sold. The remaining two stores have been removed from the Company's closure or sale list due to changes in facts and circumstances. A summary of restructuring activity by store count is as follows:
|
|
|
RESTRUCTURING STORE COUNT |
||||
|
|
|
Fiscal Year |
|
Period |
||
|
|
|
|
|
|
|
March 1, |
|
|
|
2000 |
|
2001 |
|
2002 |
|
Stores remaining at commencement of period |
|
|
|
9 |
|
6 |
|
Stores identified in fiscal 2000 for closure or sale |
|
22 |
|
|
||
|
Stores identified in fiscal 2001 for closure or sale |
|
|
6 |
|
||
|
Identified stores closed or abandoned |
|
(10) |
|
(3) |
|
(2) |
|
Identified stores sold |
|
(3) |
|
(2) |
|
(3) |
|
Reversal of stores identified for closure or sale |
|
|
|
(4) |
|
|
|
Identified stores remaining at period end |
9 |
6 |
1 |
|||
The following table summarizes accruals related to all of the Company's restructuring plans during fiscal 2000 and 2001 (in thousands):
|
EXIT PLANS |
|
1999 |
|
Q2 |
|
Q4 |
|
Q2 |
|
Q3 |
|
Q4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Jan 1, 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New accruals: |
|
|
|
|
|
|
|
|
|
|
||||
|
Lease-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Dec 30, 2000 |
|
2,111 |
|
2,175 |
|
5,593 |
|
|
|
|
|
|
9,879 |
|
|
New accruals: |
|
|
|
|
|
|
|
|||||||
|
Severance |
|
|
|
|
$ 2,511 |
|
|
$ 155 |
|
2,666 |
||||
|
Lease-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid - |
|
|
|
|
|
|
|
|
|
|
||||
|
Cash paid - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|||||
|
Cash received -lease-related |
|
|
|
|
|
800 |
|
|
|
|
|
|
|
800 |
|
Balance, Dec 29, 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The restructuring accrual balance consists of lease-related liabilities.
** The restructuring accrual balance consists of $10.0 million for lease-related
liabilities and $0.1 million for employee termination benefits.
*** The restructuring accrual balance consists of $3.8 million for lease-related
liabilities and $57,000 for employee termination benefits.
As of December 29, 2001, the components of the accruals related to the Company's
restructuring activities are accrued liabilities ($6.6 million) and other
long-term obligations ($16.4 million).
13. 401(k) Plan
The Company maintains a tax-qualified employee savings and retirement plan (the
"401(k) Plan") covering the Company's employees. Pursuant to the
401(k) Plan, eligible employees may elect to reduce their current compensation
by up to the lesser of 15% of their annual compensation or the statutorily
prescribed annual limit ($10,500 in fiscal 2001) and have the amount of such
reduction contributed to the 401(k) Plan. The 401(k) Plan provides for
additional matching contributions to the 401(k) Plan by the Company in an amount
determined by the Company prior to the end of each plan year. Total Company
contributions during fiscal 2001, fiscal 2000 and fiscal 1999 were approximately
$1.1 million, $1.0 million and $557,000, respectively. The trustees of the
401(k) Plan, at the direction of each participant, invest the assets of the
401(k) Plan in designated investment options. The 401(k) Plan is intended to
qualify under Section 401 of the Internal Revenue Code.
In January 2002, the Company was notified by its 401(k) trustee, Advisors Trust
Company, that effective April 1, 2002, the trustee would no longer provide
trustee services for 401(k) plans. The Company selected a new plan administrator
and a new trustee after extensive research and interviews. The Company is
currently in the process of transferring the existing plan accounts to the new
trustee. Company employees have been notified that they will be unable to make
withdrawals from or change the investment designations of their accounts until
the transfer, which is estimated to take six to eight weeks, has been completed.
The Company, through Henry's, also sponsored a 401(k) plan in fiscal 1999
covering Henry's employees with at least 12 months of service. Contributions
are discretionary. Henry's contributed $90,000 to this 401(k) plan for fiscal
1999.
The Company, through Sun Harvest, also sponsored a 401(k) plan in fiscal 1999
covering Sun Harvest employees with at least 12 months of service. Contributions
are discretionary. Sun Harvest contributed $36,000 to this 401(k) plan for
fiscal 1999.
14. Stockholder Rights Plan
The Company has a stockholder rights plan having both "flip-in" and
"flip-over" provisions. Stockholders of record as of May 22, 1998
received the right ("Right") to purchase a fractional share of
preferred stock at a purchase price of $145 for each share of common stock held.
In addition, until the Rights become exercisable as described below and in
certain limited circumstances thereafter, the Company will issue one Right for
each share of common stock issued after May 22, 1998. For the "flip-in
provision," the Rights would become exercisable only if a person or group
acquires beneficial ownership of 15% (the "Threshold Percentage") or
more of the outstanding common stock. Holdings of certain existing affiliates of
the Company are excluded from the Threshold Percentage. In that event, all
holders of Rights other than the person or group who acquired the Threshold
Percentage would be entitled to purchase shares of common stock at a substantial
discount to the then-current market price. This right to purchase common stock
at a discount would be triggered as of a specified number of days following the
passing of the Threshold Percentage. For the "flip-over" provision, if
the Company was acquired in a merger or other business combination or
transaction, the holders of such Rights would be entitled to purchase shares of
the acquiror's common stock at a substantial discount. In February 2002, the
rights plan was amended to remove certain provisions related to continuing
control of modification and operation of the rights plan by certain directors.
15. Deferred Compensation Plan
Effective fiscal 1999, the Company maintains a nonqualified Deferred
Compensation Plan (the "DCP") for certain members of management.
Eligible employees may contribute a portion of base salary or bonuses to the
plan annually. The DCP provides for additional matching contributions by the
Company in an amount determined by the Company prior to the end of each plan
year. Total Company matching contributions to the DCP during fiscal 2001, fiscal
2000 and fiscal 1999 were approximately $26,000, $75,000 and $21,000,
respectively.
16. Quarterly Information (Unaudited)
The following interim financial information presents the fiscal 2001 and fiscal
2000 consolidated results of operations on a quarterly basis (in thousands,
except per-share amounts):
|
|
|
QUARTER ENDED |
||||||
|
|
|
March 31, |
|
June 30, |
|
September 29, |
|
December 29, |
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
Sales |
|
$ 219,499 |
|
$ 229,383 |
|
$ 222,168 |
|
$ 222,129 |
|
Gross profit |
|
66,409 |
|
66,378 |
|
63,543 |
|
62,218 |
|
Net loss |
|
$ (118) |
|
$ (38,120) |
|
$ (2,898) |
|
$ (2,776) |
|
|
|
|
|
|
||||
|
Basic net loss per common share: |
|
|
|
|
||||
|
Basic loss per common share |
|
$ (0.00) |
|
$ (1.55) |
|
$ (0.12) |
|
$ (0.13) |
|
|
|
|
|
|
||||
|
Diluted net loss per common share: |
|
|
|
|
||||
|
Diluted loss per common share |
|
$ (0.00) |
|
$ (1.55) |
|
$ (0.12) |
|
$ (0.13) |
|
|
|
QUARTER ENDED |
||||||
|
|
|
April 1, |
|
July 1, |
|
September 30, |
|
December 30, |
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
Sales |
|
$ 211,241 |
|
$ 212,772 |
|
$ 207,201 |
|
$ 206,917 |
|
Gross profit |
|
66,524 |
|
66,339 |
|
62,254 |
|
61,034 |
|
Net income (loss) |
|
$ 5,334 |
|
$ (8,780) |
|
$ 1,075 |
|
$ (12,650) |
|
|
|
|
|
|
|
|||
|
Basic net income (loss) |
|
|
|
|
|
|||
|
Basic income (loss) per common share |
|
$ 0.23 |
|
$ (0.38) |
|
$ 0.05 |
|
$ (0.55) |
|
|
|
|
|
|
|
|||
|
Diluted net income (loss) |
|
|
|
|
|
|||
|
Diluted income (loss) per common |
|
$ 0.23 |
|
$ (0.38) |
|
$ 0.05 |
|
$ (0.55) |
17. Related Party Transactions
Elizabeth C. Cook and Michael C. Gilliland, former executive
officers and directors of the Company, each own a one-third interest in Pretty
Good Groceries, Inc. ("PGG"), which in the past operated two grocery
stores, and currently operates one store in Boulder, Colorado. Through January
2002, PGG purchased certain items through the Company's volume purchase
discount programs with its distributors, and also purchased items from the
Company's commissaries and warehouses at cost. The Company had a receivable of
approximately $80,000 at December 29, 2001 related to the purchases by PGG of
goods from the Company or its suppliers. The receivable was paid as part of the
settlement of litigation described below. At December 29, 2001, the Company also
had a receivable for certain personal expenses of Mr. Gilliland and Ms. Cook,
the amount of which was in dispute.
Ms. Cook and Mr. Gilliland are trustees of Wild Oats Community Foundation ("Foundation"), a non-profit organization formed by Ms. Cook and Mr. Gilliland to provide health-related services. During fiscal 1998 and fiscal 1999, the Foundation entered into sublease arrangements with the Company for space adjacent to three of the Company's stores leased by the Company. In fiscal 2001, the sublease obligations between the Foundation and the Company were terminated, and other subtenants were placed in two of the three wellness center locations. The third primary lease for space sublet by the Foundation expired by its own terms. The Company had a small receivable related to subtenant rent due from the Foundation, which was paid as part of the settlement of the litigation described below.
In May 1998, PGG II, a limited liability company two-thirds owned by Mr. Gilliland and Ms. Cook purchased a small underperforming store in Boulder, Colorado from the Company. PGG II paid the wholesale cost of the inventory in the store at time of transfer. PGG II disputed whether there was consideration due for equipment transferred to PGG II as part of the original purchase transaction, and the parties reached a settlement on the value of the equipment as part of the settlement of the litigation described below.
In January 2001, the Company borrowed $2.0 million from Ms. Cook and Mr. Gilliland. The loan was evidenced by a demand note that bears interest at 9.0% per annum and default rate interest at 15% per annum. Mr. Gilliland and Ms. Cook filed suit against the Company in January 2002 for payment of the note after demand was made but payment was not received. See "Notes to Consolidated Financial Statements - Note 10 - Litigation." In March 2002 the parties settled the litigation through execution of a settlement agreement under which the plaintiffs agreed to a $200,000 offset against the principal balance of the loan in settlement of certain identified receivables alleged to be due to the Company, and the Company agreed to repayment of the balance of the loan, together with interest at 9% per annum, over a five-month period from cash and proceeds of equity securities.
In fiscal 2000, the Company recorded a note receivable in the amount of approximately $75,000 from Bacchus Beverage Corporation, an entity owned by Patrick Gilliland, Mr. Gilliland's brother, which was a subtenant in excess space located adjacent to one of the Company's stores. In March 2002, the Company agreed to extinguish the remaining balance on the note in exchange for a $35,000 cash payment.
In March 2001, Perry D. Odak, the Company's Chief Executive Officer and President, and a director of the Board, purchased 1,332,649 shares of Common Stock for $6.969 per share for an aggregate purchase price of $9.28 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% percent per annum, compounding semiannually.
If the Company issues additional shares of Common Stock such that Mr. Odak's share of Common Stock represents less than 5%, Mr. Odak has the right to purchase such additional shares of Common Stock sufficient to maintain his interest at 5% of the outstanding Common Stock, provided that Mr. Odak will not acquire more than 300,000 shares in the aggregate.
Schedule II
WILD OATS MARKETS, INC.
Valuation and Qualifying Accounts and Reserves
(in thousands)
|
Allowance For Doubtful Accounts for the Fiscal |
|
Balance At Beginning |
|
|
|
Write-Offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2000 |
|
$159 |
|
155 |
|
(55) |
|
$259 |
|
|
|
|
|
|
|
|
|
|
|
December 30, 2000 |
|
$259 |
|
293 |
|
(197) |
|
$355 |
|
|
|
|
|
|
|
|
|
|
|
December 29, 2001 |
|
$355 |
|
1,575 |
|
(860) |
|
$1,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance At Beginning |
|
|
|
Write-Offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2000 |
|
$586 |
|
1,713 |
|
(969) |
|
$1,330 |
|
|
|
|
|
|
|
|
|
|
|
December 30, 2000 |
|
$1,330 |
|
1,786 |
|
(1,633) |
|
$1,483 |
|
|
|
|
|
|
|
|
|
|
|
December 29, 2001 |
|
$1,483 |
|
1,784 |
|
(600) |
|
$2,667 |
|
|
|
|
|
|
|
|
|
|
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None reported.
PART III.
Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the captions "Election of Directors"
and "Executive Compensation-Management-Executive Officers" in our
definitive Proxy Statement in connection with the Annual Meeting of stockholders
to be held May 7, 2002, to be filed with the Commission on or before April 5,
2002, is incorporated herein by reference.
Item 11.
EXECUTIVE COMPENSATION
The information included under the caption "Executive Compensation" in
our definitive Proxy Statement in connection with the Annual Meeting of
stockholders to be held May 7, 2002, to be filed with the Commission on or
before April 5, 2002, is incorporated herein by reference.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information included under the caption "Security Ownership of Certain
Beneficial Owners and Management" in our definitive Proxy Statement in
connection with the Annual Meeting of stockholders to be held May 7, 2002, to be
filed with the Commission on or before April 5, 2002, is incorporated herein by
reference.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the caption "Directors and Executive
Officers - Certain Transactions" in our definitive Proxy Statement in
connection with the Annual Meeting of stockholders to be held May 7, 2002, to be
filed with the Commission on or before April 5, 2002, is incorporated herein by
reference.
PART IV.
Item 14.
EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULE AND REPORTS ON FORM 8-K
|
(a) |
Financial Statements and Financial Statement Schedule. The following are filed as a part of this Report on Form 10-K: |
|
(1) |
Report of Management |
|
|
Reports of Independent Accountants |
|
(2) |
Schedule II - Valuation and Qualifying Accounts and Reserves |
|
(b) |
Reports on Form 8-K. The Company filed the following reports on Form 8-K during fiscal 2001: |
|
(1) |
Report January 4, 2001 on Form 8-K, reported under Item 9, Regulation FD Disclosure, regarding earnings per share projections. |
|
(2) |
Report dated August 31, 2001 on Form 8-K, reported under Item 5, Other Events, announcing operations restructuring. |
|
|
|
|
(3) |
Report dated October 19, 2001, reported under Item 5, Other Events, announcing an amendment to credit facility. |
|
(4) |
Report dated December 7, 2001, reported under Item 5, Other Events, announcing the resignation of two board members. |
|
(5) |
Report dated December 17, 2001, reported under Item 5, Other Events, announcing the naming of Edward Dunlap as Chief Financial Officer. |
|
(c) |
Exhibits. The following exhibits to this Form 10-K are filed pursuant to the requirements of Item 601 of Regulation S-K: |
|
EXHIBIT |
DESCRIPTION OF DOCUMENT |
|
3(i).1.(a)** |
Amended and Restated Certificate of Incorporation of the Registrant. (1) |
|
3(i).1.(b)** |
Certificate of Correction to Amended and Restated Certificate of Incorporation of the Registrant. (1) |
|
3(i).1.(c)** |
Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant. (2) |
|
3(ii).1** |
Amended and Restated By-Laws of the Registrant. (1) |
|
4.1** |
Reference is made to Exhibits 3(i).1 through 3(ii).1. |
|
4.2** |
Specimen stock certificate. (3) |
|
4.3** |
Rights Agreement dated May 22, 1998 between Registrant and Norwest Bank Minnesota. (4) |
|
4.4+ |
Amendment No. 1 to Rights Agreement dated February 26, 2002 between Registrant and Wells Fargo Bank, N.A. |
|
10.1** |
Form of Indemnity Agreement between the Registrant and its directors and executive officers, with related schedule. (3) |
|
10.2#** |
1996 Equity Incentive Plan, including forms of Options granted to employees and non-employee directors thereunder. (3) |
|
10.3#** |
Amendment to 1996 Equity Incentive Plan. (4) |
|
10.4#+ |
Second Amendment to 1996 Equity Incentive Plan. |
|
10.5#** |
1996 Employee Stock Purchase Plan. (3) |
|
10.6#+ |
Amendment to 1996 Employee Stock Purchase Plan |
|
10.7#** |
1993 Stock Option Plan. (3) |
|
10.8#** |
1991 Stock Option Plan. (3) |
|
10.9#** |
Employee Stock Ownership Plan. (3) |
|
10.10#** |
Wild Oats Markets, Inc. Deferred Compensation Plan (6) |
|
10.11#** |
Employment Agreement dated March 6, 2001 between Perry D. Odak and the Registrant .(7) |
|
10.12#+ |
Amendment to Employment Agreement dated March 6, 2001 between Perry D. Odak and the Registrant. |
|
10.13#** |
Stock Purchase Agreement dated March 6, 2001 between Perry D. Odak and the Registrant .(7) |
|
10.14#** |
Stephen Kaczynski Equity Incentive Plan. (8) |
|
10.15#** |
Employment Agreement dated April 24, 2001 between Stephen A. Kaczynski and the Registrant. (8) |
|
10.16#** |
Employment Agreement dated May 21, 2001 between Bruce Bowman and the Registrant. (8) |
|
10.17#+ |
Amendment to Employment Agreement dated May 21, 2001 between Bruce Bowman and Registrant. |
|
10.18#** |
Bruce Bowman Equity Incentive Plan. (8) |
|
10.19#+ |
Terry Maloy Equity Incentive Plan. |
|
10.20#+ |
Edward F. Dunlap Equity Incentive Plan. |
|
10.21#+ |
Employment Agreement dated December 17, 2001 between Edward F. Dunlap and the Registrant. |
|
10.22#+ |
Severance Agreement and Release of Claims dated August 4, 2001, between Mary Beth Lewis and the Registrant. |
|
10.23#+ |
Amendment to Severance Agreement between Mary Beth Lewis and the Registrant |
|
10.24#+ |
Severance Agreement and Release of Claims dated November 14, 2001, between James Lee and the Registrant |
|
10.25+ |
Wild Oats Markets, Inc. 2001 Nonofficer/Nondirector Equity Incentive Plan. |
|
10.26** |
Amended and Restated Stockholders Agreement among the Registrant and certain parties named therein dated August 1996. (3) |
|
10.27** |
Registration Rights Agreement between the Registrant and certain parties named therein dated July 12, 1996. (3) |
|
10.28** |
Amended and Restated Credit Agreement dated as of August 1, 2000, among Registrant, the lenders named therein and Wells Fargo Bank National Association, as Administrative Agent. (5) |
|
10.29** |
Amendment No. 1 to Amended and Restated Credit Agreement, dated October 17, 2001. (9) |
|
10.30+ |
Amendment No. 2 to Amended and Restated Credit Agreement, dated November 12, 2001. |
|
10.31+ |
Amendment No. 3 to Amended and Restated Credit Agreement, dated December 14, 2001. |
|
21.1+ |
List of subsidiaries. |
|
23.1+ |
Consent of PricewaterhouseCoopers LLP. |
|
23.2+ |
Consent of Ernst & Young LLP. |
________________________________
|
# |
Management Compensation Plan. |
|
** |
Previously filed. |
|
+ |
Included herewith. |
|
(1) |
Incorporated by reference from the Registrant's Form 10-K for the year ended December 28, 1996. (File No. 0-21577) |
|
(2) |
Incorporated by reference from the Registrant's Amendment No. 2 to the Registration Statement on Form S-3 filed with the Commission on November 10, 1999 (File No. 333-88011) |
|
(3) |
Incorporated by reference from the Registrant's Registration Statement on Form S-1 (File No. 333-11261) filed on August 30, 1996 |
|
(4) |
Incorporated by reference from the Registrant's Registration Statement on Form S-8 (File No. 333-66347) filed on October 30, 1998 |
|
(5) |
Incorporated by reference from the Registrant's Form 10-Q for the period ended September 30, 2000 (File No. 0-21577), filed on November 14, 2000. |
|
(6) |
Incorporated by reference from the Registrant's Form 10-K for the year ended December 29, 2001 (File No. 0-21577) |
|
(7) |
Incorporated by reference from the Registrant's Form 10-Q for the period ended March 31, 2001 (File No. 0-21577 |
|
(8) |
Incorporated by reference from the Registrant's Form 10-Q for the period ended June 30, 2001 (File No. 0-1577) |
|
(9) |
Incorporated by reference from the Registrant's Form 10-Q for the period ended September 29, 2001 (File No. 0-21577) |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Wild Oats Markets, Inc.
(Registrant)
By: /s/ Edward F. Dunlap
Edward F. Dunlap
Executive Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 26, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
|
Signature |
Title |
Date |
|
/s/ Perry D. Odak |
Chief Executive Officer, President and Director |
March 26, 2002 |
|
/s/ Edward F. Dunlap |
Chief Financial Officer |
March 26, 2002 |
|
/s/ John A. Shields |
Chairman |
March 26, 2002 |
|
/s/ David M. Chamberlain |
Vice Chairman |
March 26, 2002 |
|
/s/ Brian K. Devine |
Director |
March 26, 2002 |
|
/s/ David L. Ferguson |
Director |
March 26, 2002 |
|
/s/ James B. McElwee |
Director |
March 26, 2002 |
|
/s/ Mo J. Siegel |
Director |
March 26, 2002 |