Filed pursuant to Rule 424(b)(1)
Registration Number 333-90096
Registration Number 333-40305
PROSPECTUS
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[GRAPHIC OMITTED]
COMMON STOCK
This prospectus covers the offer and sale of up to 4,450,000 shares of
common stock, $.001 par value per share, of Wild Oats Markets, Inc., a
Delaware corporation (the "Company"), by the Company to investors at a
fixed price of $11.50 per share, which represents a discount of
approximately 6.1% from the prevailing market price identified below. This
offering price was established after consultation with J.P. Morgan
Securities Inc., the Company's exclusive placement agent for this offering,
following negotiations with prospective investors as part of a
book-building process and with reference to the prevailing market price of
the Company's common stock, recent trends in such price and other factors
considered material by such investors.
Our executive offices are located at 3375 Mitchell Lane, Boulder,
Colorado 80301, and our telephone number is (303) 440-5220.
The common stock is quoted on Nasdaq National Market under the symbol
"OATS." On August 27, 2002, the last reported sale price of our common
stock on the Nasdaq National Market was $12.25 per share.
Investing in the common stock involves a high degree of risk. See
"Risk Factors" beginning on page 3.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any representation
to the contrary is a criminal offense.
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The date of this prospectus is August 27, 2002.
TABLE OF CONTENTS
Page
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Wild Oats Markets....................................................... 1
Risk Factors............................................................ 3
Special Note Regarding Forward-Looking Information...................... 8
Recent Events and Other Material Information............................ 9
Use of Proceeds......................................................... 12
Plan of Distribution.................................................... 12
Legal Matters........................................................... 13
Experts................................................................. 13
Where You Can Find More Information..................................... 13
WILD OATS MARKETS
Wild Oats Markets, Inc. is one of the largest natural foods
supermarket chains in North America. As of August 19, 2002, we operated 101
natural foods stores, including two small vitamin stores, in 23 states and
British Columbia, Canada under several names, including:
o Wild Oats Natural Marketplace (nationwide);
o Henry's Marketplace (San Diego and Orange County,
California);
o Nature's - A Wild Oats Market (metropolitan Portland,
Oregon);
o Sun Harvest Farms (Texas); and
o 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. We provide our 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.
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, according to the Natural Foods Merchandiser.
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. 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.
Our 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
2001, and rolled out to 44 stores in phases during September, October and
November of 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:
o warehousing, distribution and administrative economies of
scale;
o improved volume purchasing discounts; and
o 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.
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:
TOTAL STORE COUNT
------------------------------------------
Fiscal Year Period
Ending Ending
-------------------------- ------------
August 19,
2000 2001 2002
----------- ----------- ------------
Store count at beginning of period 110 106 107
Stores opened 14 4 1
Stores acquired 2
Stores closed (17) (1) (4)
Stores sold (3) (2) (3)
----------- ----------- ------------
Store count at end of period 106 107 101
=========== =========== ============
As part of our strategic repositioning announced in the second and
fourth quarters of fiscal 2000, we 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 our 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. To date, we
have closed four of the identified stores, terminated our lease-related
obligations as to two of the identified locations and sold five of the
identified stores, four in related transactions. We 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
Ending Ending
-------------------------- ------------
August 19,
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
Stores identified in fiscal 2002 for closure or sale 1
Identified stores closed or abandoned (10) (3) (4)
Identified stores sold (3) (2) (3)
Reversal of stores identified for closure or sale (4)
----------- ----------- ------------
Identified stores remaining at period end 9 6 0
=========== =========== ============
RISK FACTORS
You should carefully consider the following risk factors, in addition
to the other information included or incorporated by reference in this
prospectus, before making an investment decision. Additional risks that we
do not yet know of or that we currently think are immaterial may also
impair our business operations. If any of the events or circumstances
described in the following risks actually occurs, our business may suffer,
the trading price of common stock could decline, and you may lose all or
part of your investment.
Our quarterly financial results and our stock price may fluctuate significantly
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.
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.
Our past comparable store sales may not be indicative of future comparable
store sales
A variety of factors affect our comparable store sales results,
including, among others:
o the opening of stores by us or by our competitors in markets
where we have existing stores;
o the relative proportion of new stores to mature stores;
o store remodels;
o the timing of promotional events;
o our ability to follow our operating plans effectively;
o changes in consumer preferences for natural foods products;
and
o general economic conditions.
Past increases in comparable store sales may not reflect future
performance. Comparable store sales for any particular period may decrease
in the future. Due to the factors listed above, we believe that
period-to-period comparisons of our operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future financial performance. Fluctuations in our comparable store sales
could cause the price of our common stock to fluctuate substantially.
Increased competition in the sale of natural foods products could reduce
our profitability
Our competitors currently include other independent and multi-unit
natural foods supermarkets, smaller traditional natural foods stores,
conventional supermarkets and specialty grocery stores. We believe that our
primary competitor is Whole Foods Market, Inc., a national natural foods
supermarket chain based in Texas, which, as of August 7, 2002, had 133
stores and had annual sales of approximately $2.3 billion in its 2001
fiscal year. A number of other natural foods supermarkets offer a range of
natural foods products similar to those we offer. While some competitors do
not offer as full a range of products as we do, they do compete with us in
some product categories.
Many of our competitors have been in business longer and have greater
financial or marketing resources than we do. Our competitors also may be
able to devote more funds and employees to securing suitable locations for
new stores and to the sourcing, promotion and sale of their products. In
addition, should any of our competitors reduce prices, we may be required
to reduce prices to remain competitive, which could result in lower sales
and profitability. As we open stores in new geographic markets, our success
will depend in part on our ability to gain market share from established
competitors. Traditional and specialty grocery stores are expanding the
amount of natural foods they carry and market, and therefore they now
compete directly with us for products, customers and locations. We expect
competition from both new and existing competitors to increase in our
markets and we may not be able to compete effectively in the future, which
could adversely affect our profitability.
Economic conditions may affect us to a greater degree than our competitors
Downturns in general economic conditions in communities, states,
regions or the nation as a whole can negatively 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 we continue to pay rent and other carrying
costs, substantially more difficult as the markets become saturated with
vacant space and market rents decrease.
Information picketing and other union activities may negatively affect our sales
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 by local trade unions, which can discourage
customer traffic and lower sales volumes.
Loss of key personnel could disrupt our operations
We believe that our continued success will depend to a significant
extent upon the leadership and performance of our key executive personnel,
including:
o Perry D. Odak, our Chief Executive Officer and President;
o Stephen P. Kaczynski, our Senior Vice President of
Merchandising; and
o Bruce Bowman, our Senior Vice President of Operations.
The loss of the services of these individuals or other of our key
personnel could harm our operations. We do not maintain key person
insurance on any of these personnel. Our continued success is also
dependent upon our ability to attract and retain qualified executives to
meet our future growth needs. We face intense competition for qualified
executives, many of whom are subject to offers from competing employers. We
may not be able to attract and retain key executive personnel as necessary
to operate our business.
Disruptions of product supply could reduce store sales and profitability and
disrupt our operations
Our business is dependent on our ability to buy products on a timely
basis and at competitive prices from a small number of distributors and
from a large number of relatively small vendors. We purchase 28.2% of our
total goods from one distributor under an agreement that expires in August
2002. On June 14, 2002, we entered into a new distribution agreement with
Tree of Life, Inc., as distributor, which commences in September 2002 (See
"Recent Events and Other Material Information" beginning on page 8). We may
experience short term disruptions in delivery of goods as the transition
from the prior distributor to Tree of Life is implemented, resulting in
reduced sales. Upon expiration of the existing distribution agreement with
our current primary distributor, other than the new distribution agreement
with Tree of Life, we will have no other 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, resulting in reduced sales. Any significant
disruption in the supply of goods could have a material impact on our
overall sales volume, cost of goods and our profitability. We may not be
able to negotiate future supply agreements with this or other distributors
on terms favorable to us, if at all.
Changes in government regulation could increase our costs and harm our
operating results
We are subject to many laws, regulations and ordinances at the local,
state and national level and problems or failures to comply with these laws
could negatively affect our store sales and operations, or could delay the
opening of a new store. Such laws regulate our operations, including:
o health and sanitation standards;
o food labeling and handling requirements;
o employment and wage levels; and
o food and alcoholic beverage sales regulations.
For example, in the fall of 2002, the U.S.D.A.'s National Organic
Standards, a comprehensive program of regulations governing the growing,
production, handling and sale of goods advertised as "organic", will be
fully implemented. We may experience a disruption in our product offerings
if our suppliers are unable to comply with these standards or our stores
require certification as organic handlers to handle certain organic foods.
Additionally, approximately 17% of our total sales come from the sale of
vitamins, supplements and herbal products and there have been many
proposals for new laws on a national level to restrict sales of certain
supplement products or to regulate information available to consumers
regarding these products.
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 could require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not able to be reformulated, additional
record keeping, expanded documentation of the properties of certain
products, expanded or different labeling and/or scientific substantiation.
Any of these requirements could harm our sales volume, costs of goods and
direct store expenses. 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.
Our Fresh Look program may not be successful, which would harm our
operating results
In 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. As of August 19, 2002, we have
implemented the Fresh Look program in 16 additional stores and as a result
as of that date have implemented the Fresh Look program in a total of 60 of
our natural foods supermarket stores. Our Fresh Look program may not be
successful, in which case we will experience an increase in costs and a
decrease in gross margins without a corresponding increase in gross sales.
For example, 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.
Successfully opening and operating new stores is a critical component of our
growth strategy
We have grown considerably in size and geographic scope since 1992.
Between 1997 and 2001, we added 72 new and acquired stores to our store
base. We plan to continue growing, primarily through the opening of new
stores. If we are unable to successfully open and operate new stores our
growth strategy will be restricted and our operating results will be
harmed. We are currently restricted by our bank covenants in the number of
new leases we can sign and the amount of aggregate new store capital
expenditures we can make; however, the bank covenants allow us to add
additional leases and make additional capital expenditures if we are
successful in raising $30.0 million or more in new equity financings. Our
ability to successfully open and operate new stores depends on many
factors, including our ability to:
o raise sufficient equity financing to allow us to execute new
leases and spend additional capital in accordance with the
terms of our current bank covenants;
o hire and train new personnel, including administrative and
accounting personnel, departmental, regional and store
managers, store employees and other personnel in our
corporate organization;
o expand into areas of the country where we have no operating
experience;
o identify areas of the country that meet our criteria for new
store sites;
o locate suitable store sites and negotiate acceptable lease
terms;
o obtain governmental and other third party consents, permits
and licenses needed to operate new stores;
o integrate new stores into our existing operations;
o expand our existing systems or acquire and implement new
systems, including information systems, hardware and
software, and distribution infrastructure, to include new,
relocated and acquired stores; and
o obtain adequate funding for operations.
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 stores we opened in 2001 and 2002 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.
Additionally, we incur significant pre-opening expenses and, as a result,
the opening of a significant number of new stores in a single period will
negatively affect our operating results.
We may grow our business through the acquisition of other stores, which we
may be unable to successfully accomplish
We will continue to consider acquisitions of natural foods retailers
where attractive opportunities exist. Acquisitions of operating stores
involve risks which could have a negative effect on our business and
financial results such as:
o short-term declines in our reported operating results;
o diversion of management's attention;
o unanticipated problems or legal liabilities;
o inclusion of incompatible operations, particularly management
information systems; and
o inexperience in operating different store formats.
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, difficulties in
integrating existing employees, turnover of regional and store management,
disruption of advertising, changes in product mix and delays in the
integration of purchasing programs.
Our remodeling efforts may cause an extended reduction in the sales volumes
of our remodeled stores
We completed the remodeling of 15 of our older stores in 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. We
plan to remodel and remerchandise a number of our older remaining stores,
subject to the limitations of our bank covenants and the availability of
capital. 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. Current and future remodeled or remerchandised
stores may experience sales disruptions and the related impact on earnings
to a greater degree than we have projected.
Our strategy of clustering stores may cause an extended decrease in sales of
clustered stores
As part of our growth strategy, we strive to locate stores in clusters
in select regional markets to increase overall sales, reduce operating
costs and increase customer awareness. 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.
Our growth strategy has placed, and will continue to place, a significant
strain on our management
Although we believe that we have the management, operational and
information systems, distribution infrastructure and other resources
required to implement our growth strategy, we may not be able to execute
our new store expansion plans within the expected time frame. Our continued
growth may place a significant strain on our management, our ability to
distribute products to our stores, working capital, and financial and
management control systems. In order for us to manage our expanding store
base successfully, our management will be required to anticipate the
changing demands of our growing operations and to adapt systems and
procedures accordingly. If we are not able to do so, our business, sales
and overall profitability will be materially and negatively affected.
We do not intend to pay cash dividends for the foreseeable future
We have never paid cash dividends on shares of our common stock. We do
not intend to pay cash dividends in the foreseeable future. Our credit
facilities contain various financial covenants which restrict, among other
things, our ability to pay cash dividends.
Legal proceedings could materially impact our results
From time to time we are party to legal proceedings including matters
involving personnel and employment issues, distribution relationships, real
estate leases, and other proceedings arising in the ordinary course of
business. Although not currently anticipated by management, our operating
results could be harmed by the decisions and expenses related to such
proceedings.
We may be subject to product liability claims if people are harmed by the
products we sell
There is increasing governmental scrutiny of and public awareness
regarding food safety. We believe that many customers choose to shop at our
stores because of their interest in health, nutrition and food safety. We
believe that our customers hold us to a higher standard than conventional
supermarkets. The real or perceived sale of contaminated food products by
us could result in decreased sales and product liability claims, which
would harm our operating results.
Information system upgrades or integrations may disrupt our operations or
financial reporting
We continually evaluate and upgrade our management information
systems. We have completed a number of acquisitions in recent years, and
the information systems of some of the acquired operations have not been
fully integrated with our information systems. Although we do not
anticipate any disruption in our operations or financial reporting as a
result of system upgrades or system integrations, there can be no assurance
that such disruption will not occur or that the desired benefits from the
system upgrades will be realized.
We May Be Unable to Refinance Our Bank Debt on Attractive Terms
Our $125,000,000 bank credit facility matures in August 2003 and
contains some covenants which are more restrictive on our operational and
financial flexibility than we believe could be achieved in a new facility.
Following the sale of the shares of common stock offered by this
prospectus, we hope to arrange and issue up to $100,000,000 in senior
and/or subordinated debt, the proceeds of which will be used, together with
operating cash and a portion of the proceeds from the sale of the shares of
common stock offered by this prospectus, to refinance our existing
facility. We have begun the process of investigating possible debt
refinancing opportunities, but there can be no assurance as to whether the
debt markets will be receptive to a refinancing on terms that would be
attractive to us or as to the timing of arranging any such refinancing.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. In some cases, you can identify these
forward-looking statements by words such as "may," "will," "expect,"
"intend," "anticipate," "believe," "estimate," "plan," "could," "should"
and "continue" and other similar words and expressions. Specifically, this
prospectus contains forward-looking statements regarding:
o our plans to open, acquire, relocate or close additional
stores;
o the anticipated performance of such stores;
o the impact of competition and current economic uncertainty;
o the sufficiency of funds to satisfy our cash requirements
through the remainder of fiscal 2002;
o our expectations for comparable store sales;
o our plans for redesigning our natural foods supermarket store
format;
o the impact of changes resulting from implementation of our
Fresh Look merchandising, advertising and pricing program;
o levels of cannibalization caused by clustering stores; and
o expected pre-opening expenses and capital expenditures;
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results,
performance or achievements to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Important factors that could cause such differences include,
among other things, the following:
o our ability to conclude a private placement of our stock;
o the timing and success of the implementation of the Fresh
Look program;
o the timing and execution of new store openings, relocations,
remodels, sales and closures;
o the impact of competition;
o changes in product supply or suppliers;
o changes in management information needs;
o changes in customer needs and expectations;
o governmental and regulatory actions;
o general industry or business trends or events;
o changes in economic or business conditions in general or
affecting the natural foods industry in particular;
o competition for and the availability of sites for new stores
and potential acquisition candidates; and
o other factors referenced in this prospectus.
You should also consider carefully the risk factors described on pages
3 through 7 of this prospectus, which address additional factors that could
cause our results to differ from those set forth in the forward-looking
statements. We undertake no obligation to update any of the forward-looking
statements after the date of this prospectus to conform such statements to
actual results, except to the extent required by law.
RECENT EVENTS AND OTHER MATERIAL INFORMATION
Perry D. Odak's Right to Receive Additional Options - Perry D. Odak,
the Company's Chief Executive Officer and President and a director of the
Company, is a party to an employment agreement under the terms of which he
will be entitled, by virtue of the sale of the common stock offered
pursuant to this prospectus, to receive options to purchase sufficient
additional shares of common stock (but not in excess of 294,144 shares) to
maintain his percentage interest at 5% of the outstanding common stock
(determined as if such options were issued). The options will be issued
under our stock option plan with a term of ten years vesting ratably on a
monthly basis over four years, subject to accelerated vesting in the case
of certain changes of control or in the event that the average closing sale
prices of the common stock over a 90 trading day period trades above
specified targets. The exercise price of the options will be issued at the
fair market value on the date of grant, which will be deemed to be the
closing sale price of the shares of common stock on the day before the date
of grant.
In August of 2002, the Company's Board of Directors approved a third
amendment to Mr. Odak's employment agreement, pursuant to which up to
70,000 of the stock options to which Mr. Odak would otherwise be entitled
under his employment agreement as a result of the closing of this offering
may be granted to other employees of the Company designated by Mr. Odak.
The options only would be granted upon the closing of this offering (or
another capital-raising transaction), have a 10-year term, vest over four
years and have an exercise price equal to the closing price of the
Company's stock on the date the offering (or other such capital-raising
transaction) is concluded. An equal number of options would be granted
simultaneously to Mr. Odak; provided that the options granted to Mr. Odak
only would be exercisable as the options granted to other employees
terminated (as opposed to expired) without exercise. At the time the
options are issued as proposed under the amendment to the employment
agreement, a simultaneous matching grant by the Company of up to 70,000
additional options from the Company's 1996 Equity Incentive Plan will be
made to the same employees. The Company may incur quarterly compensation
expense, based on any increase in the then-current stock price over the
exercise price, as a result of the issuance of the initial 70,000 options
to the designated employees and Mr. Odak.
John A. Shields Director Compensation - John A. Shields, who has been
Chairman of the Board of Directors of the Company since July 1996, was
recently granted by our Board of Directors a payment of $60,000 in
recognition of significant efforts made by him on our behalf over the past
year, including in connection with negotiating a settlement of certain
disputes with our founders and related transition issues, as well as
increase in his monthly compensation from us from $1,000 to $5,000
effective as of May 1, 2002. Mr. Shields has received, and expressed his
preference to continue to receive, all such payments in the form of options
to purchase common stock. The options, consistent with past practice, are
fully vested, have a term of ten years and are granted at an exercise price
equal to 85% of the fair market value on the date of grant (deemed to be
the closing sale price of the shares of common stock on the day before the
date of grant) such that the aggregate spread in the options on such date
will be equal to the amount of his monthly compensation.
Capitalization - As of August 19, 2002, we have 25,182,660 outstanding
shares of common stock and 3,016,091 options to purchase common stock at
exercise prices ranging from $3.13 per share to $26.50 per share. The
number of outstanding shares reflects the shares issued to our founders as
part of a settlement agreement with them and the number of options reflects
grants of director options for all meetings through the date of this
prospectus and grants of options to Mr. Shields in respect of his monthly
compensation through July 2002. Assuming that a total of 4,450,000 shares
of common stock are sold pursuant to this prospectus, Mr. Odak would be
granted options to purchase an additional 234,211 shares of common stock
and other employees of the Company would be granted options to purchase
140,000 shares of common stock, in each case with the terms described
above.
Possible New Severance Agreements - In recognition of their value in
retaining valuable employees, our Board of Directors has approved in
principle the granting of severance agreements to a group of key members of
our management, other than Mr. Odak, whose employment agreement already
provides for severance arrangements. The terms of the proposed severance
agreements are under review, but are expected to be finalized and
implemented within the next several months.
Refinancing of Credit Facility - Our $125,000,000 bank credit facility
matures in August 2003 and contains some covenants which are more
restrictive on our operational and financial flexibility than we believe
could be achieved in a new facility. Following the sale of the shares of
common stock offered by this prospectus, we hope to arrange and issue up to
$100,000,000 in senior and/or subordinated debt, the proceeds of which will
be used, together with operating cash and a portion of the proceeds from
the sale of the shares of common stock offered by this prospectus, to
refinance our existing facility. We have begun the process of investigating
possible debt refinancing opportunities, but there can be no assurance as
to whether the debt markets will be receptive to a refinancing on terms
that would be attractive to us or as to the timing of arranging any such
refinancing.
New Distribution Agreement - As disclosed in a Current Report on Form
8-K, filed with the SEC on July 1, 2002, on June 14, 2002, we entered into
an Agreement for Distribution of Products (the "Distribution Agreement")
with Tree of Life, Inc., as distributor. The distribution arrangement
commences effective September 1, 2002, which is the date upon which our
existing primary distribution contract with United Natural Foods, Inc.
expires. The Distribution Agreement has no specified term, although either
party can terminate the Agreement after three years upon 120 days' prior
written notice to the other party. Either party also may terminate the
Distribution Agreement for defaults, as defined in the Distribution
Agreement, by the other party of certain provisions of the Distribution
Agreement. Under the terms of the Distribution Agreement, we are obligated
to purchase 90% of the total cost of specified categories of goods for sale
in our U.S. stores from Tree of Life, except in certain defined
circumstances when such percentage purchasing obligation is excused We
currently are implementing a transition plan designed to switch the primary
distribution of goods from our existing distributor to Tree of Life with
minimal disruption to our store operations.
New Accounting Standard - Goodwill and Other Intangible Assets
Effective December 30, 2001, the Company implemented SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 was issued in July 2001,
supersedes Accounting Principles Bulletin No. 17, Intangible Assets, and is
effective for fiscal years beginning after December 15, 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.
In conjunction with its purchase acquisitions, the Company
historically had recorded goodwill at the store level; however, based on
the Company's recent consolidation of its brands to increase synergy and
awareness, the Company has changed its goodwill accounting policy and
accordingly has assigned the carrying value of its goodwill to one
reporting unit at the enterprise level to recognize goodwill for the brand,
as opposed to the past practice of recording goodwill at the store level.
During the second quarter of fiscal year 2002, the Company completed the
impairment test prescribed by SFAS No. 142 and concluded that no impairment
of goodwill existed as of December 30, 2001. The Company 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.
Also, upon implementation of SFAS No. 142, the Company identified
intangible assets related to leasehold interest resulting from store lease
agreements with a carrying value of approximately $7.9 million at December
30, 2001. The Company determined that there is no indication of impairment
of these assets and that the average 20-year life assigned to these assets
is appropriate. Going forward, the Company will test these intangibles for
impairment annually or more frequently if the occurrence of an event or
circumstance indicates impairment.
The amortization of intangibles expense (net of tax) and net income
(loss) available to common stockholders are as follows (in thousands):
SIX MONTHS ENDED FISCAL YEAR
June 29, 2002 June 30, 2001 2001 2000 1999
Goodwill amortization $-- $946 $1,883 $1,967 $1,783
Leasehold interest $149 $120 $270 $254 $82
amortization
Net income (loss) $2,166 $(38,238) $(43,912) $(15,021) $12,488
available to common
stockholders
The following table illustrates net income (loss) available to common
stockholders as if SFAS No. 142 had been implemented as of January 3, 1999
(in thousands):
SIX MONTHS
ENDED FISCAL YEAR
-------------------------------- ---------------------------------------
June June
29, 30,
2002 2001 2001 2000 1999
---------------------------------------------------------------------------
Reported net income (loss)
available to common stockholders $ 2,166 $ (38,238) $(43,912) $(15,021) $ 12,488
Goodwill amortization --- 946 1,883 1,967 1,783
-------------- ------------- ----------- ---------- ---------
Adjusted net income available
to common stockholders $ 2,166 $ (37,292) $(42,029) $(13,054) $ 14,271
============== ============= =========== ========== =========
EARNINGS PER SHARE -
BASIC AND DILUTED
Reported net income (loss)
available to common stockholders $ 0.09 $ (1.58) $ (1.80) $ (0.65) $ 0.53
Goodwill amortization --- 0.04 0.08 0.08 0.08
-------------- ------------- ----------- ---------- ---------
Adjusted net income available
to common stockholders $ 0.09 $ (1.54) $ (1.72) $ (0.57) $ 0.61
============== ============= =========== ========== =========
During the three months and six months ended June 29, 2002,
amortization of intangible assets expense was $119,000 and $237,000,
respectively. The estimated amortization of intangible assets for each of
the five fiscal years ending in fiscal 2006 is as follows (in thousands):
Fiscal Amortization
Year Expense
----------------------- --------------------
2002 $ 472,000
2003 472,000
2004 472,000
2005 472,000
2006 472,000
USE OF PROCEEDS
After payment of approximately $2.9 million in expenses, including
approximately $2.35 million payable to JPMorgan (as defined below) as
compensation for its services as the sole placement agent as further
described below, we expect to have net proceeds of approximately
$48,275,000 from the sale of the shares of the common stock offered by this
prospectus. The net proceeds from the sale of the common stock offered
pursuant to this prospectus will be used for general corporate purposes,
including capital expenditures, purchases of equipment and general
operations, with approximately 65% of such proceeds used for the funding of
new store expansion plans (as outlined in our annual report on Form 10-K
for the year ended December 29, 2001), approximately 30% of such proceeds
used for remodeling of certain of our 101 existing stores and maintenance
of store capital equipment and other leasehold improvements, and
approximately 5% of such proceeds used for the development of information
systems and infrastructure aimed at reducing costs and improving operating
margins. If necessary, a portion of the net proceeds also may be used in
connection with the refinancing of our existing bank credit facility as
described above.
PLAN OF DISTRIBUTION
All of the shares of the common stock offered pursuant to this
prospectus will be sold by us, with the assistance of our sole placement
agent as described below, directly to investors to be identified. All of
the shares of the common stock will be sold at a single closing and at the
same price. The price was established after consultation with JPMorgan, the
Company's exclusive placement agent for this offering, following
negotiations with prospective investors as part of a book-building process
and with reference to the prevailing market price of the Company's common
stock, recent trends in such price and other factors considered material by
such investors. Such price reflects a discount of 6.1% from the last
reported sale price of our common stock on the Nasdaq National Market on
the date hereof.
We have engaged J.P. Morgan Securities Inc. ("JPMorgan") to act as the
sole placement agent on a best efforts basis for this offering. In this
capacity, JPMorgan is an underwriter for purposes of the Securities Act,
but will not be obligated to purchase the shares from us. Instead, JPMorgan
will use its best efforts to facilitate the sale of all of the shares by us
to the investors. As a result, it is possible that not all of the shares
offered pursuant to this prospectus will be sold at the closing, in which
case we would issue only a portion of the shares offered hereby and our
expected net proceeds would be proportionally reduced. JPMorgan's
engagement expires on March 26, 2003 unless earlier terminated by either
JPMorgan or us at any time upon ten days' prior written notice. JPMorgan is
affiliated with J.P. Morgan Partners (SBIC), LLC, which holds approximately
9.4% of our outstanding common stock and has a representative on our Board
of Directors.
As compensation for its services as the sole placement agent, we have
agreed to pay JPMorgan a fee equal to 5.0% of the value of the common stock
sold under this prospectus, except in the case of common stock sold to
certain investors that we previously had identified to JPMorgan, in which
case the fee will be 3.25%. We also have agreed to reimburse JPMorgan up to
$50,000 (or such greater amount as we specifically may approve) for all of
its reasonable out-of-pocket costs and expenses in connection with its
engagement. JPMorgan's fee compensation may be deemed to be underwriter
commissions.
Prior to engaging JPMorgan to act as our sole placement agent, we had
explored the possibility of conducting a private placement of our common
stock, or securities convertible into common stock, with prospective
investors, including several of our current stockholders and other eligible
investors who expressed interest in such a private placement. This proposed
private placement sought to raise net proceeds in the same general range as
the net proceeds sought by this offering for the same use described under
the heading "Use of Proceeds" above. None of our common stock was sold in
the proposed private placement and this prospectus supersedes any selling
material used in the proposed private placement. By May 1, 2002, we had
determined to pursue this offering in lieu of a private placement and had
engaged JPMorgan to act as our sole placement agent and by May 15, 2002 we
had terminated all offering activity related to the private placement. In
negotiating JPMorgan's fees for this engagement, JPMorgan agreed to a
reduced fee to the extent that the previously identified prospective
investors participate in this offering. We anticipate that one or more of
these previously identified prospective investors will purchase a portion
of the shares offered hereby and, accordingly, JPMorgan's fee will be 3.25%
for that portion of the shares sold to the previously identified investors
and 5.0% for the balance of the shares sold in this offering.
In connection with JPMorgan's engagement, we also have agreed to
indemnify and hold harmless JPMorgan, its affiliates and their respective
officers, directors, employees, agents and controlling persons (each an
"Indemnified Person") from and against any and all losses, claims, damages,
liabilities and expenses, joint or several, to which any such Indemnified
Person may become subject arising out of or in connection with its
engagement, or any claim, litigation, investigation or proceedings relating
to the foregoing regardless of whether any of such Indemnified Persons is a
party thereto, and to reimburse such Indemnified Persons for any legal or
other out-of-pocket expenses as they are incurred in connection with
investigating, responding to or defending any of the foregoing, provided
that the foregoing indemnification will not, as to any Indemnified Person,
apply to losses, claims, damages, liabilities or expenses to the extent
that they are finally judicially determined to have resulted from the gross
negligence or willful misconduct of such Indemnified Person.
We anticipate that one or more investors purchasing shares of common
stock offered by this prospectus already will own shares of our common
stock. We do not anticipate that any of the investors purchasing shares of
common stock offered by this prospectus will have any other business
relationships with us or our subsidiaries or affiliates.
We are bearing all costs relating to the registration of the shares
offered by this prospectus (other than fees and expenses, if any, of
counsel or other advisors to the investors).
LEGAL MATTERS
The validity of the common stock being offered hereby will be passed
upon by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
EXPERTS
The financial statements incorporated in this prospectus by reference
to the Annual Report on Form 10-K for the year ended December 29, 2001 have
been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The report of Ernst & Young LLP, independent auditors, on the
financial statements of Sun Harvest Farms, Inc. as of September 28, 1999,
December 29, 1998, December 30, 1997, and for the nine-month period ended
September 28, 1999 and the fiscal years ended December 29, 1998, December
30, 1997, and December 31, 1996, which report appears in the Form 10-K of
Wild Oats Markets, Inc. for the year ended December 29, 2001 is
incorporated by reference in reliance on Ernst & Young LLP's report, given
on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
You should rely only on the information provided or incorporated by
reference in this prospectus. We have not authorized anyone to provide you
with any different information. This prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, these securities in
any state where the offer or sale is prohibited. You should not assume that
the information in this prospectus or any prospectus supplement is accurate
as of any date other than the date on the front of the document.
We are a reporting company and file annual, quarterly and current
reports, proxy statements and other information with the Securities and
Exchange Commission, or SEC. We have filed with the SEC a registration
statement on Form S-3 under the Securities Act with respect to the shares
of common stock we are offering under this prospectus. This prospectus does
not contain all of the information set forth in the registration statement
and the exhibits to the registration statement. For further information
regarding our company and the common stock being offered under this
prospectus, we refer you to the registration statement and the exhibits and
schedules filed as a part of the registration statement. You may read and
copy the registration statement, as well as our reports, proxy statements
and other information filed with the SEC, at the SEC's Public Reference
Room at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents by writing to the SEC and paying a fee
for the copying cost. Please call the SEC at 1-800-SEC-0330 for more
information about the operation of the public reference rooms. Our SEC
filings are also available at the SEC's web site at "http://www.sec.gov."
In addition, you can read and copy our SEC filings at the office of the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
The SEC allows us to "incorporate by reference" information that we
file with it, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by
reference is an important part of this prospectus. Information in this
prospectus supersedes information incorporated by reference that we filed
with the SEC prior to the date of this prospectus, while information that
we file later with the SEC will automatically update and supersede this
information. We incorporate by reference into this registration statement
and prospectus the documents listed below and any future filings we will
make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act after the date of the initial registration statement but prior to
effectiveness of the registration statement and after the date of this
prospectus but prior to the termination of the offering of the shares
covered by this prospectus.
The following documents filed with the SEC are incorporated by
reference in this prospectus:
1. Our annual report on Form 10-K for the year ended December 29,
2001;
2. Our quarterly reports on Form 10-Q for the quarters ended March
30, 2002 and June 29, 2002;
3. Our current report on Form 8-K, filed with the SEC on July 1,
2002;
4. The description of our common stock set forth in our registration
statement on Form S-1, filed with the SEC on August 30, 1996; and
5. The description of the rights to purchase our Series A junior
participating preferred stock set forth in our registration
statement on Form 8-A, filed with the SEC on May 21, 1998.
We will furnish without charge to you, on written or oral request, a
copy of any or all of the documents incorporated by reference, including
exhibits to these documents. You should direct any requests for documents
to Wild Oats Markets, Inc., Attention: Chief Financial Officer, 3375
Mitchell Lane, Boulder, Colorado 80301, telephone: (303) 440-5220.