SEVERANCE AGREEMENT

 

 

THIS AGREEMENT, dated November 7, 2002, is made by and between Wild Oats Markets, Inc.,a Delaware corporation (the "Company"), and Edward F. Dunlap (the"Executive").

WHEREAS, the Company considers it essential to the best interests of its stockholdersto foster the continued employment of key management personnel; and

WHEREAS, the Board recognizes that, as is the case with many publicly heldcorporations, the possibility of a Change in Control exists and that such possibility, andthe uncertainty and questions which it may raise among management, may result in thedeparture or distraction of management personnel to the detriment of the Company and itsstockholders; and

WHEREAS, the Board has determined that appropriate steps should be taken to reinforceand encourage the continued attention and dedication of members of the Company'smanagement, including the Executive, to their assigned duties without distraction in theface of potentially disturbing circumstances arising from the possibility of a Change inControl;

NOW, THEREFORE, in consideration of the premises and the mutual covenants hereincontained, the Company and the Executive hereby agree as follows: 

1.    Defined Terms. The definitionsof capitalized terms used in this Agreement are provided in the last Section hereof.

2.    Term of Agreement. The Term of this Agreement shallcommence on the date hereof and shall continue in effect through December 31, 2004; provided,however, that commencing on January 1, 2003 and each January 1 thereafter, the Termshall automatically be extended for one additional year unless, not later than September30 of the preceding year, the Company or the Executive shall have given notice not toextend the Term; and furtherprovided, however, that if a Change inControl shall have occurred during the Term, the Term shall expire no earlier thantwenty-four (24) months beyond the month in which such Change in Control occurred.

3.    Company's Covenants Summarized. In order to induce theExecutive to remain in the employ of the Company and in consideration of the Executive'scovenants set forth in Section 4 hereof, the Company agrees, under the conditionsdescribed herein, to pay the Executive the Severance Benefits and the other payments andbenefits described herein. Except as provided in Section 10.1 hereof, no SeveranceBenefits shall be payable under this Agreement unless there shall have been (or, under theterms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) atermination of the Executive's employment with the Company following a Change in Controland during the Term. This Agreement shall not be construed as creating an express orimplied contract of employment and, except as otherwise agreed in writing between theExecutive and the Company, the Executive shall not have any right to be retained in theemploy of the Company.

4.    The Executive's Covenants. The Executive agrees that,subject to the terms and conditions of this Agreement, in the event of a Potential Changein Control during the Term, the Executive will remain in the employ of the Company untilthe earliest of (i) a date which is six (6) months from the date of such Potential Changein Control, (ii) the date of a Change in Control, (iii) the date of termination by theExecutive of the Executive's employment for Good Reason or by reason of death, Disabilityor Retirement, or (iv) the termination by the Company of the Executive's employment forany reason.

5.    Compensation Other Than Severance Benefits.

5.1    Following a Change in Control and during the Term, during anyperiod that the Executive fails to perform the Executive's full-time duties with theCompany as a result of incapacity due to physical or mental illness, the Company shall paythe Executive's full salary to the Executive at the rate in effect at the commencement ofany such period, together with all compensation and benefits payable to the Executiveunder the terms of any compensation or benefit plan, program or arrangement maintained bythe Company during such period (other than any disability plan), until the Executive'semployment is terminated by the Company for Disability.

5.2    If the Executive's employment shall be terminated for any reasonfollowing a Change in Control and during the Term, the Company shall pay the Executive'sfull salary to the Executive through the Date of Termination at the rate in effectimmediately prior to the Date of Termination or, if higher, the rate in effect immediatelyprior to the first occurrence of an event or circumstance constituting Good Reason,together with all compensation and benefits payable to the Executive through the Date ofTermination under the terms of the Company's compensation and benefit plans, programs orarrangements as in effect immediately prior to the Date of Termination or, if morefavorable to the Executive, as in effect immediately prior to the first occurrence of anevent or circumstance constituting Good Reason.

5.3    If the Executive's employment shall be terminated for any reasonfollowing a Change in Control and during the Term, the Company shall pay to the Executivethe Executive's normal post-termination compensation and benefits as such payments becomedue. Such post-termination compensation and benefits shall be determined under, and paidin accordance with, the Company's retirement, insurance and other compensation or benefitplans, programs and arrangements as in effect immediately prior to the Date of Terminationor, if more favorable to the Executive, as in effect immediately prior to the occurrenceof the first event or circumstance constituting Good Reason.

6.    Severance Benefits.

6.1    Subject to Section 9 below, if the Executive's employment isterminated following a Change in Control and during the Term, other than (A) by theCompany for Cause, (B) by reason of death or Disability, or (C) by the Executive withoutGood Reason, then the Company shall pay the Executive the amounts, and provide theExecutive the benefits, described in this Section 6.1 ("Severance Benefits") andthe payment referred to in Section 6.2, in addition to any payments and benefits to whichthe Executive is entitled under Section 5 hereof. For purposes of this Agreement, theExecutive's employment shall be deemed to have been terminated following a Change inControl by the Company without Cause or by the Executive with Good Reason, if (i) theExecutive's employment is terminated by the Company without Cause prior to a Change inControl (whether or not a Change in Control ever occurs) and such termination was at therequest or direction of a Person who has entered into an agreement with the Company theconsummation of which would constitute a Change in Control, (ii) the Executive terminateshis employment for Good Reason prior to a Change in Control (whether or not a Change inControl ever occurs) and the circumstance or event which constitutes Good Reason occurs atthe request or direction of such Person, or (iii) the Executive's employment is terminatedby the Company without Cause or by the Executive for Good Reason and such termination orthe circumstance or event which constitutes Good Reason is otherwise in connection with orin anticipation of a Change in Control (whether or not a Change in Control ever occurs).For purposes of any determination regarding the applicability of the immediately precedingsentence, any position taken by the Executive shall be presumed to be correct unless theCompany establishes to the Committee by clear and convincing evidence that such positionis not correct. The Executive shall not be entitled to receive any Severance Benefitsunder this Agreement under any circumstances other than those set forth in this paragraph.

(A)    In lieu of any further salary payments to the Executive forperiods subsequent to the Date of Termination and in lieu of any severance benefitotherwise payable to the Executive, the Company shall pay to the Executive a lump sumseverance payment, in cash, equal to two times the sum of (i) the Executive's base salaryas in effect immediately prior to the Date of Termination or, if higher, in effectimmediately prior to the first occurrence of an event or circumstance constituting GoodReason, and (ii) the average annual bonus earned by the Executive pursuant to anydiscretionary annual bonus or incentive plan maintained by the Company in respect of thetwo fiscal years ending immediately prior to the fiscal year in which occurs the Date ofTermination or, if the Executive has not been eligible for at least two annual bonuses asof the Date of Termination, the bonus earned by the Executive in respect of the fiscalyear immediately prior to the fiscal year in which occurs the Date of Termination.

(B)    For the twenty-four (24) month period immediately following theDate of Termination, the Company shall arrange to provide the Executive and his dependentslife, disability, accident and health insurance benefits substantially similar to thoseprovided to the Executive and his dependents immediately prior to the Date of Terminationor, if more favorable to the Executive, those provided to the Executive and his dependentsimmediately prior to the first occurrence of an event or circumstance constituting GoodReason, at no greater cost to the Executive than the cost to the Executive immediatelyprior to such date or occurrence; provided, however, that, unless theExecutive consents to a different method (after taking into account the effect of suchmethod on the calculation of "parachute payments" pursuant to Section 6.2hereof), such health insurance benefits shall be provided through a third-party insurer.Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall bereduced to the extent benefits of the same type are received by or made available to theExecutive during the twenty-four (24) month period following the Executive's terminationof employment (and any such benefits received by or made available to the Executive shallbe reported to the Company by the Executive); provided, however, that theCompany shall reimburse the Executive for the excess, if any, of the cost of such benefitsto the Executive over such cost immediately prior to the Date of Termination or, if morefavorable to the Executive, the first occurrence of an event or circumstance constitutingGood Reason. 

(C)    Notwithstanding any provision of any annual or long-termincentive plan to the contrary, the Company shall pay to the Executive a lump sum amount,in cash, equal to the sum of (i) any unpaid incentive compensation which has beenallocated or awarded to the Executive for a completed fiscal year or other measuringperiod preceding the Date of Termination under any such plan and which, as of the Date ofTermination, is contingent only upon the continued employment of the Executive to asubsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregatevalue of all contingent incentive compensation awards to the Executive for all thenuncompleted periods under any such plan, calculated as to each such award by multiplyingthe award that the Executive would have earned on the last day of the performance awardperiod, assuming the achievement, at the target level of the individual and corporateperformance goals established with respect to such award, if the Company's incentivecompensation plan has such a concept, or, if not, at a level commensurate with theExecutive's position at the Company and the incentive compensation awards paid tosimilarly situated executives of the Company, by the fraction obtained by dividing thenumber of full months and any fractional portion of a month during such performance awardperiod through the Date of Termination by the total number of months contained in suchperformance award period. 

(D)    In addition to the benefits to which the Executive is entitledunder each DC Pension Plan, the Company shall pay the Executive a lump sum amount, incash, equal to the sum of (i) the amount that would have been contributed thereto by theCompany on the Executive's behalf during the two years immediately following the Date ofTermination, determined (x) as if the Executive made the maximum permissible contributionsthereto during such period, (y) as if the Executive earned compensation during such periodat a rate equal to the Executive's compensation (as defined in the DC Pension Plan) duringthe twelve (12) months immediately preceding the Date of Termination or, if higher, duringthe twelve months immediately prior to the first occurrence of an event or circumstanceconstituting Good Reason, and (z) without regard to any amendment to the DC Pension Planmade subsequent to a Change in Control and on or prior to the Date of Termination, whichamendment adversely affects in any manner the computation of benefits thereunder, and (ii)the excess, if any, of (x) the Executive's account balance under the DC Pension Plan as ofthe Date of Termination over (y) the portion of such account balance that isnonforfeitable under the terms of the DC Pension Plan.

(E)    Each option to acquire common stock of the Company granted undera Company incentive plan or other arrangement that is held by the Executive on the Date ofTermination shall, as of such date, vest and become immediately exercisable in full.

6.2    (A)    Subject to Section 9 below, whether or notthe Executive becomes entitled to the Severance Benefits, if any of the payments orbenefits received or to be received by the Executive in connection with a Change inControl or the Executive's termination of employment (whether pursuant to the terms ofthis Agreement or any other plan, arrangement or agreement with the Company, any Personwhose actions result in a Change in Control or any Person affiliated with the Company orsuch Person) (all such payments and benefits, excluding the Gross-Up Payment, beinghereinafter referred to as the "Total Payments") will be subject to the ExciseTax, the Company shall pay to the Executive an additional amount (the "Gross-UpPayment") such that the net amount retained by the Executive, after deduction of anyExcise Tax on the Total Payments and any federal, state and local income and employmenttaxes and Excise Tax upon the Gross-Up Payment, and after taking into account the phaseout of itemized deductions and personal exemptions attributable to the Gross-Up Payment,shall be equal to the Total Payments.

(B)    For purposes of determining whether any of the Total Paymentswill be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the TotalPayments shall be treated as "parachute payments" (within the meaning of section280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel")reasonably acceptable to the Executive and selected by the accounting firm which was,immediately prior to the Change in Control, the Company's independent auditor (the"Auditor"), such payments or benefits (in whole or in part) do not constituteparachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all"excess parachute payments" within the meaning of section 280G(b)(l) of the Codeshall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, suchexcess parachute payments (in whole or in part) represent reasonable compensation forservices actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) inexcess of the Base Amount allocable to such reasonable compensation, or are otherwise notsubject to the Excise Tax, and (iii) the value of any noncash benefits or any deferredpayment or benefit shall be determined by the Auditor in accordance with the principles ofsections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of theGross-Up Payment, the Executive shall be deemed to pay federal income tax at the highestmarginal rate of federal income taxation in the calendar year in which the Gross-UpPayment is to be made and state and local income taxes at the highest marginal rate oftaxation in the state and locality of the Executive's residence on the Date of Termination(or if there is no Date of Termination, then the date on which the Gross-Up Payment iscalculated for purposes of this Section 6.2), net of the maximum reduction in federalincome taxes which could be obtained from deduction of such state and local taxes.

(C)    In the event that the Excise Tax is finally determined to be lessthan the amount taken into account hereunder in calculating the Gross-Up Payment, theExecutive shall repay to the Company, within five (5) business days following the timethat the amount of such reduction in the Excise Tax is finally determined, the portion ofthe Gross-Up Payment attributable to such reduction (plus that portion of the Gross-UpPayment attributable to the Excise Tax and federal, state and local income and employmenttaxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent thatsuch repayment results in a reduction in the Excise Tax and a dollar-for-dollar reductionin the Executive's taxable income and wages for purposes of federal, state and localincome and employment taxes. In the event that the Excise Tax is determined to exceed theamount taken into account hereunder in calculating the Gross-Up Payment (including byreason of any payment the existence or amount of which cannot be determined at the time ofthe Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect ofsuch excess (plus any interest, penalties or additions payable by the Executive withrespect to such excess) within five (5) business days following the time that the amountof such excess is finally determined. The Executive and the Company shall each reasonablycooperate with the other in connection with any administrative or judicial proceedingsconcerning the existence or amount of liability for Excise Tax with respect to the TotalPayments.

6.3    The payments provided in subsections (A), (C) and (D) of Section6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day followingthe Date of Termination (or if there is no Date of Termination, then the date on which theGross-Up Payment is calculated for purposes of Section 6.2 hereof); provided, however,that if the amounts of such payments cannot be finally determined on or before such day,the Company shall pay to the Executive on such day an estimate, as determined in goodfaith by the Executive or, in the case of payments under Section 6.2 hereof, in accordancewith Section 6.2 hereof, of the minimum amount of such payments to which the Executive isclearly entitled and shall pay the remainder of such payments (together with interest onthe unpaid remainder (or on all such payments to the extent the Company fails to make suchpayments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) assoon as the amount thereof can be determined but in no event later than the thirtieth(30th) day after the Date of Termination. In the event that the amount of the estimatedpayments exceeds the amount subsequently determined to have been due, such amount shall berepaid by the Executive to the Company no later than the fifth (5th) business day afterdemand by the Company. At the time that payments are made under this Agreement, theCompany shall provide the Executive with a written statement setting forth the manner inwhich such payments were calculated and the basis for such calculations including, withoutlimitation, any opinions or other advice the Company has received from Tax Counsel, theAuditor or other advisors or consultants (and any such opinions or advice which are inwriting shall be attached to the statement).

6.4    The Company also shall pay to the Executive fifty percent (50%)all legal fees and expenses incurred by the Executive in disputing in good faith any issuehereunder relating to the termination of the Executive's employment, in seeking in goodfaith to obtain or enforce any benefit or right provided by this Agreement or inconnection with any tax audit or proceeding to the extent attributable to the applicationof section 4999 of the Code to any payment or benefit provided hereunder. Such paymentsshall be made within five (5) business days after delivery of the Executive's writtenrequests for payment accompanied with such evidence of fees and expenses incurred as theCompany reasonably may require. Within five (5) business days following the finalresolution and any such dispute, attempted enforcement or tax proceeding, either (i) theCompany shall pay to the Executive the remaining fifty percent (50%) of such fees andexpenses not previously paid to the Executive, if the Executive prevails on at least onematerial issue in such dispute, attempted enforcement or tax proceeding or (ii) theExecutive shall repay to the Company the fifty percent (50%) of such fees and expensespreviously paid to the Executive, if the Executive does not prevail on at least onematerial issue in such dispute, attempted enforcement or tax proceeding.

7.    Termination Procedures and Compensation During Dispute.

7.1    Notice of Termination. After a Change in Control andduring the Term, any purported termination of the Executive's employment (other than byreason of death) shall be communicated by written Notice of Termination from one partyhereto to the other party hereto in accordance with Section 11 hereof. For purposes ofthis Agreement, a "Notice of Termination" shall mean a notice which shallindicate the specific termination provision in this Agreement relied upon and shall setforth in reasonable detail the facts and circumstances claimed to provide a basis fortermination of the Executive's employment under the provision so indicated. Further, aNotice of Termination for Cause is required to include a copy of a resolution duly adoptedby the affirmative vote of not less than three-quarters (3/4) of the entire membership ofthe Board at a meeting of the Board which was called and held for the purpose ofconsidering such termination (after reasonable notice to the Executive and an opportunityfor the Executive, together with the Executive's counsel, to be heard before the Board)finding that, in the good faith opinion of the Board, the Executive was guilty of conductset forth in clause (i) or (ii) of the definition of Cause herein, and specifying theparticulars thereof in detail.

7.2    Date of Termination. "Date of Termination,"with respect to any purported termination of the Executive's employment after a Change inControl and during the Term, shall mean (i) if the Executive's employment is terminatedfor Disability, thirty (30) days after Notice of Termination is given (provided that theExecutive shall not have returned to the full-time performance of the Executive's dutiesduring such thirty (30) day period), and (ii) if the Executive's employment is terminatedfor any other reason, the date specified in the Notice of Termination (which, in the caseof a termination by the Company, shall not be less than thirty (30) days (except in thecase of a termination for Cause) and, in the case of a termination by the Executive, shallnot be less than fifteen (15) days nor more than sixty (60) days, respectively, from thedate such Notice of Termination is given).

7.3    Dispute Concerning Termination. If within fifteen (15)days after any Notice of Termination is given, or, if later, prior to the Date ofTermination (as determined without regard to this Section 7.3), the party receiving suchNotice of Termination notifies the other party that a dispute exists concerning thetermination, the Date of Termination shall be extended until the earlier of (i) the dateon which the Term ends or (ii) the date on which the dispute is finally resolved, eitherby mutual written agreement of the parties or by a final judgment, order or decree of anarbitrator or a court of competent jurisdiction (which is not appealable or with respectto which the time for appeal therefrom has expired and no appeal has been perfected); provided,however, that the Date of Termination shall be extended by a notice of disputegiven by the Executive only if such notice is given in good faith and the Executivepursues the resolution of such dispute with reasonable diligence.

7.4    Compensation During Dispute. If a purportedtermination occurs following a Change in Control and during the Term and the Date ofTermination is extended in accordance with Section 7.3 hereof, the Company shall continueto pay the Executive the full compensation in effect when the notice giving rise to thedispute was given (including, but not limited to, salary) and continue the Executive as aparticipant in all compensation, benefit and insurance plans in which the Executive wasparticipating when the notice giving rise to the dispute was given, until the Date ofTermination, as determined in accordance with Section 7.3 hereof. Amounts paid under thisSection 7.4 are in addition to all other amounts due under this Agreement (other thanthose due under Section 5.2 hereof) and shall not be offset against or reduce any otheramounts due under this Agreement.

8.    No Mitigation. The Company agrees that, if theExecutive's employment with the Company terminates during the Term, the Executive is notrequired to seek other employment or to attempt in any way to reduce any amounts payableto the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof.Further, except as specifically provided in Section 6.1(B) hereof, the amount of anypayment or benefit provided for in this Agreement shall not be reduced by any compensationearned by the Executive as the result of employment by another employer, by retirementbenefits, by offset against any amount claimed to be owed by the Executive to the Company,or otherwise.

9.    Restrictive Covenants
The Executive agrees that restrictions on his activities during and after hisemployment are necessary to protect the goodwill, Confidential Information and otherlegitimate interests of the Company and its Subsidiaries, and that the agreed restrictionsset forth below will not deprive the Executive of the ability to earn a livelihood:

(A)    While the Executive is in the employment of the Company and, ifthe Executive is entitled to benefits under Section 6.1 hereof upon termination ofemployment, for a period of twenty-four (24) months after such termination of employment(the "Non-Competition Period"), the Executive shall not, directly or indirectly,whether as owner, partner, investor, consultant, agent, employee, co-venturer orotherwise, compete with the business of the Company or any of its Subsidiaries within atwenty (20) mile radius of any location where the Company operates a retail store at thedate of termination of employment, or at which the Company has entered into a letter ofintent or similar commitment for or entered into obligations relating to the opening of aretail store to be opened within the period of this covenant. Specifically, but withoutlimiting the foregoing, the Executive agrees not to engage in any manner in any activitythat is directly or indirectly competitive with the business of the Company or any of itsSubsidiaries as conducted or which has been proposed by management within six months priorto termination of the Executive's employment. Restricted activity also includes withoutlimitation accepting employment or a consulting position with any person who is, or at anytime within twelve (12) months prior to termination of the Executive's employment hasbeen, a licensee of the Company or any of its Subsidiaries. For the purposes of thisSection 9, the business of the Company and its Subsidiaries shall mean retail operationsfor the sale of natural and organic foods, including groceries, meat, seafood, dairy andfrozen products and produce, as well as natural vitamins, supplements, homeopathicremedies and body care products. 

(B)    The Executive agrees that during the Non-Competition Period or inconnection with any termination of employment pursuant to which the Executive is entitledto benefits under Section 6.1, the Executive will not, either directly or through anyagent or employee, Solicit any employee of the Company or any of its Subsidiaries toterminate his or her relationship with the Company or any of its Subsidiaries or to applyfor or accept employment with any enterprise competitive with the business of the Company,or Solicit any customer, supplier, licensee or vendor of the Company or any of itsSubsidiaries to terminate or materially modify its relationship with them, or, in the caseof a customer, to conduct with any person any business or activity which such customerconducts or could conduct with the Company or any of its Subsidiaries. 

(C)    The Executive and the Company further agree that following anytermination of the Executive's employment pursuant to which the Executive is entitled tobenefits under Section 6.1, (i) the Executive shall not make statements orrepresentations, otherwise communicate, directly or indirectly, in writing, orally, orotherwise, or take any action which may, directly, or indirectly, disparage or be damagingto the Company or any if its Subsidiaries or affiliates or their respective former orcurrent officers, directors, employees, advisors, businesses or reputations, (ii) theCompany shall instruct its Board members and senior management to not make statements orrepresentations, otherwise communicate, directly, or indirectly, in writing, orally orotherwise, or take any action which may, directly, or indirectly, disparage or be damagingto the Executive or his reputation. The Executive and the Company further agree that, inthe event the Executive's employment with the Company is terminated other than by theCompany for Cause or as a result of the Executive's death, the Executive and the Companyshall refer to the Executive's departure as a "resignation" in any press releaseor other external announcement or communication concerning the Executive's departure fromthe Company. Nothing in this paragraph is intended to undermine any obligations theExecutive or the Company may have to comply with applicable law, or prohibit the Executiveor the Company from providing truthful testimony or information pursuant to subpoena,court order, discovery demand or similar legal process, or truthfully responding to lawfulinquiries by any governmental or regulatory entity.

(D)    The provisions of this Section 9 shall not be deemed to precludethe Executive from employment or engagement during the Non-Competition Period followingtermination of employment hereunder (i) in a business engaged in retail sales, providedsuch employment or engagement does not otherwise violate the provisions of this Section 9,or (ii) by a corporation, some of the activities of which are competitive with thebusiness of the Company, if the Executive's activities do not relate to such competitivebusiness, and nothing contained in this Section 9 shall be deemed to prohibit theExecutive, during the Non-Competition Period following termination of employmenthereunder, from acquiring or holding, solely as an investment, publicly traded securitiesof any competitor corporation so long as such securities do not, in the aggregate,constitute more than 3% of the outstanding voting securities of such corporation.

(E)    The Executive acknowledges that the Company and its Subsidiariescontinually develop Confidential Information, that the Executive may develop ConfidentialInformation for the Company or its Subsidiaries and that the Executive may learn ofConfidential Information during the course of his employment under this Agreement. TheExecutive will comply with the policies and procedures of the Company and its Subsidiariesfor protecting Confidential Information and shall never disclose to any person (except asrequired by applicable law or legal process or for the proper performance of his dutiesand responsibilities to the Company and its Subsidiaries, or in connection with anylitigation between the Company and the Executive (provided that the Company shall beafforded a reasonable opportunity in each case to obtain a protective order)), or use forhis own benefit or gain, any Confidential Information obtained by the Executive incidentto his employment or other association with the Company or any of its Subsidiaries. TheExecutive understands that this restriction shall continue to apply after his employmentterminates, regardless of the reason for such termination. All documents, records, tapesand other media of every kind and description relating to the business, present orotherwise, of the Company or its Subsidiaries and any copies, in whole or in part, thereof(the "Documents"), whether or not prepared by the Executive, shall be the soleand exclusive property of the Company and its Subsidiaries. The Executive shall safeguardall Documents and shall surrender to the Company at the time his employment terminates, orat such earlier time or times as the Board or its designee may specify, all Documents thenin the Executive's possession or control.

(F)    Without limiting the foregoing, it is understood that the Companyshall not be obligated to make any of the payments or to provide for any of the benefitsspecified in Sections 6.1 and 6.2 hereof, and shall be entitled to recoup the pro rataportion of any such payments and of the value of any such benefits previously provided tothe Executive in the event of a material breach by the Executive of the provisions of thisSection 9 (such pro ration to be determined as a fraction, the numerator of which is thenumber of days from such breach to the second anniversary of the date on which theExecutive terminates employment and the denominator of which is 730), which breachcontinues without having been cured within 15 days after written notice to the Executivespecifying the breach in reasonable detail. 

(G)    The Executive and the Company agree that in the event theExecutive seeks a reference from the Company in connection with any future or prospectiveemployment, the Company's response to any such reference inquiry shall be limited to andconsistent with the following: start and end dates of employment, position(s) held andlast salary.

For purposes of this Section 9, the following definitions shall apply:

(I)    "Confidential Information" means any and allinformation of the Company and its Subsidiaries that is not generally known by others withwhom they compete or do business, or with whom they plan to compete or do business and anyand all information not readily available to the public, which, if disclosed by theCompany or its Subsidiaries could reasonably be of benefit to such person or business incompeting with or doing business with the Company. Confidential Information includeswithout limitation such information relating to (1) the development, research, testing,manufacturing, store operational processes, marketing and financial activities, includingcosts, profits and sales, of the Company and its Subsidiaries, (2) the Products and allformulas therefor, (3) the costs, sources of supply, financial performance and strategicplans of the Company and its Subsidiaries, (4) the identity and special needs of thecustomers and suppliers of the Company and its Subsidiaries and (5) the people andorganizations with whom the Company and its Subsidiaries have business relationships andthose relationships. Confidential Information also includes comparable information thatthe Company or any of its Subsidiaries have received belonging to others or which wasreceived by the Company or any of its Subsidiaries with an agreement by the Company thatit would not be disclosed. Confidential Information does not include information which (i)is or becomes available to the public generally (other than as a result of a disclosure bythe Executive), (ii) was within the Executive's possession prior to the date hereof orprior to its being furnished to the Executive by or on behalf of the Company, providedthat the source of such information was not bound by a confidentiality agreement with orother contractual, legal or fiduciary obligation of confidentiality to the Company or anyother party with respect to such information, (iii) becomes available to the Executive ona non-confidential basis from a source other than the Company, provided that such sourceis not bound by a confidentiality agreement with or other contractual, legal or fiduciaryobligation of confidentiality to the Company or any other party with respect to suchinformation, or (iv) was independently developed the Executive without reference to theConfidential Information.

(II)    "Products" mean all products planned, researched,developed, tested, manufactured, sold, licensed, leased or otherwise distributed or putinto use by the Company or any of its Subsidiaries, together with all services provided tothird parties or planned by the Company or any of its Subsidiaries, during the Executive'sservice; as used herein, "planned" refers to a Product or service which theCompany has decided to introduce within six months from the date as of which such term isapplied.

(III)    "Subsidiary" means any corporation or other businessorganization of which the securities having a majority of the normal voting power inelecting the board of directors or similar governing body of such entity are, at the timeof determination, owned by the Company directly or indirectly through one or moreSubsidiaries.

(IV)    "Solicit" means any direct or indirect communicationof any kind whatsoever, regardless of by whom initiated, inviting, advising, encouragingor requesting any person or entity, in any manner, with respect to any action.

10.    Successors; Binding Agreement.

10.1    In addition to any obligations imposed by law upon any successorto the Company, the Company will require any successor (whether direct or indirect, bypurchase, merger, consolidation or otherwise) to all or substantially all of the businessand/or assets of the Company to expressly assume and agree to perform this Agreement inthe same manner and to the same extent that the Company would be required to perform it ifno such succession had taken place. Failure of the Company to obtain such assumption andagreement prior to the effectiveness of any such succession shall be a breach of thisAgreement and shall entitle the Executive to compensation from the Company in the sameamount and on the same terms as the Executive would be entitled to hereunder if theExecutive were to terminate the Executive's employment for Good Reason after a Change inControl, except that, for purposes of implementing the foregoing, the date on which anysuch succession becomes effective shall be deemed the Date of Termination.

10.2    This Agreement shall inure to the benefit of and be enforceableby the Executive's personal or legal representatives, executors, administrators,successors, heirs, distributees, devisees and legatees. If the Executive shall die whileany amount would still be payable to the Executive hereunder (other than amounts which, bytheir terms, terminate upon the death of the Executive) if the Executive had continued tolive, all such amounts, unless otherwise provided herein, shall be paid in accordance withthe terms of this Agreement to the executors, personal representatives or administratorsof the Executive's estate.

11.    Notices. For the purpose of this Agreement, noticesand all other communications provided for in the Agreement shall be in writing and shallbe deemed to have been duly given when delivered or mailed by United States registeredmail, return receipt requested, postage prepaid, addressed, if to the Executive, to theaddress inserted below the Executive's signature on the final page hereof and, if to theCompany, to the address set forth below, or to such other address as either party may havefurnished to the other in writing in accordance herewith, except that notice of change ofaddress shall be effective only upon actual receipt:To the Company:
Wild Oats Markets, Inc
3375 Mitchell Lane
Boulder, CO 80301
Attention: Chief Executive Officer
With a copy to: General Counsel

12.    Miscellaneous. No provision of this Agreement may bemodified, waived or discharged unless such waiver, modification or discharge is agreed toin writing and signed by the Executive and such officer as may be specifically designatedby the Board. No waiver by either party hereto at any time of any breach by the otherparty hereto of, or of any lack of compliance with, any condition or provision of thisAgreement to be performed by such other party shall be deemed a waiver of similar ordissimilar provisions or conditions at the same or at any prior or subsequent time. ThisAgreement supersedes any other agreements or representations, oral or otherwise, expressor implied, with respect to the subject matter hereof which have been made by eitherparty; provided, however, that this Agreement shall supersede the agreementdated as of December 17, 2001 between the Company and the Executive (as modified by theAssignment and Assumption of Employment Agreement effective June 29, 2002) only withrespect to provisions contained therein the subject matter of which is the termination ofthe Executive's employment with the Company on or following a Change in Control, either bythe Company other than for Cause or by the Executive for Good Reason. The validity,interpretation, construction and performance of this Agreement shall be governed by thelaws of the State of Colorado. All references to sections of the Exchange Act or the Codeshall be deemed also to refer to any successor provisions to such sections. Any paymentsprovided for hereunder shall be paid net of any applicable withholding required underfederal, state or local law and any additional withholding to which the Executive hasagreed. The obligations of the Company and the Executive under this Agreement which bytheir nature may require either partial or total performance after the expiration of theTerm (including, without limitation, those under Sections 6, 7 and 9 hereof) shall survivesuch expiration.

13.    Validity. The invalidity or unenforceability of anyprovision of this Agreement shall not affect the validity or enforceability of any otherprovision of this Agreement, which shall remain in full force and effect.

14.    Counterparts. This Agreement may be executed inseveral counterparts, each of which shall be deemed to be an original but all of whichtogether will constitute one and the same instrument.

15.    Settlement of Disputes; Arbitration. 15.1 All claimsby the Executive for benefits under this Agreement shall be directed to and determined bythe Committee and shall be in writing. Any denial by the Committee of a claim for benefitsunder this Agreement shall be delivered to the Executive in writing and shall set forththe specific reasons for the denial and the specific provisions of this Agreement reliedupon. The Committee shall afford a reasonable opportunity to the Executive for a review ofthe decision denying a claim and shall further allow the Executive to appeal to theCommittee a decision of the Committee within sixty (60) days after notification by theCommittee that the Executive's claim has been denied.

15.2 Any further dispute or controversy arising under or in connection with thisAgreement may, at the Executive's option, be settled by arbitration in Boulder, Coloradoin accordance with the rules of the American Arbitration Association then in effect; provided,however, that the evidentiary standards set forth in this Agreement shall apply. Ifthe Executive chooses to settle any dispute or controversy by arbitration, judgment may beentered on the arbitrator's award in any court having jurisdiction. Notwithstanding anyprovision of this Agreement to the contrary, the Executive shall be entitled to seekspecific performance of the Executive's right to be paid until the Date of Terminationduring the pendency of any dispute or controversy arising under or in connection with thisAgreement.

15.3 The Executive acknowledges that he has carefully read and considered all the termsand conditions of this Agreement, including the restraints imposed upon him pursuant toSection 9 hereof. The Executive agrees that said restraints are necessary for thereasonable and proper protection of the Company and its Subsidiaries and that each andevery one of the restraints is reasonable in respect to subject matter, length of time andgeographic area. The Executive further acknowledges that, were he to breach any of thecovenants contained in Section 9 hereof, the damage to the Company would be irreparable.The Executive therefore agrees that the Company, in addition to any other remediesavailable to it, and notwithstanding any provision of this Agreement to the contrary,shall be entitled to seek preliminary and permanent injunctive relief against any breachor threatened breach by the Executive of any of said covenants, without having to postbond. The parties further agree that, in the event that any provisions of Section 9 hereofshall be determined by any court of competent jurisdiction to be unenforceable by reasonof its being extended over too great a time, too large a geographic area or too great arange of activities, such provision shall be deemed to be modified to permit itsenforcement to the maximum extent permitted by law.

16.    Definitions. For purposes of this Agreement, thefollowing terms shall have the meanings indicated below:"Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under                Section 12 of the Exchange Act.
"Auditor" shall have the meaning set forth in Section 6.2 hereof.
"Base Amount" shall have the meaning set forth in section 280G(b)(3) of the                Code.
"Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the                Exchange Act.
"Board" shall mean the Board of Directors of the Company.
"Cause" for termination by the Company of the Executive's employment shall                mean (i) the willful and continued failure by the Executive to substantially perform the                Executive's duties with the Company (other than any such failure resulting from the                Executive's incapacity due to physical or mental illness or any such actual or anticipated                failure after the issuance of a Notice of Termination for Good Reason by the Executive                pursuant to Section 7.1 hereof) that has not been cured within 30 days after a written                demand for substantial performance is delivered to the Executive by the Board, which                demand specifically identifies the manner in which the Board believes that the Executive                has not substantially performed the Executive's duties, or (ii) the willful engaging by                the Executive in conduct which is demonstrably and materially injurious to the Company or                its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this                definition, (x) no act, or failure to act, on the Executive's part shall be deemed                "willful" unless done, or omitted to be done, by the Executive not in good faith                and without reasonable belief that the Executive's act, or failure to act, was in the best                interest of the Company and (y) in the event of a dispute concerning the application of                this provision, no claim by the Company that Cause exists shall be given effect unless the                Company establishes to the Committee by clear and convincing evidence that Cause exists.
A "Change in Control" shall be deemed to have occurred if the event set forth                in any one of the following paragraphs shall have occurred:
- any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of                  the Company (not including in the securities beneficially owned by such Person any                  securities acquired directly from the Company or its Affiliates) representing 31% or more                  of the combined voting power of the Company's then outstanding securities, excluding any                  Person who becomes such a Beneficial Owner in connection with a Non-Control Merger (as                  defined in paragraph (III) below); or 
- the following individuals cease for any reason to constitute a majority of the number of                  directors then serving: individuals who, on the date hereof, constitute the Board and any                  new director (other than a director whose initial assumption of office is in connection                  with an actual or threatened election contest, including but not limited to a consent                  solicitation, relating to the election of directors of the Company) whose appointment or                  election by the Board or nomination for election by the Company's stockholders was                  approved or recommended by a vote of at least two-thirds (2/3) of the directors then still                  in office who either were directors on the date hereof or whose appointment, election or                  nomination for election was previously so approved or recommended; or;
- there is consummated a merger or consolidation of the Company or any direct or indirect                  subsidiary of the Company with any other corporation, other than a merger or consolidation                  (a "Non-Control Merger") immediately following which the individuals who                  comprise the Board immediately prior thereto constitute at least a majority of the board                  of directors of the Company, the entity surviving such merger or consolidation or any                  parent thereof; or
- the stockholders of the Company approve a plan of complete liquidation or dissolution of                  the Company or there is consummated an agreement for the sale or disposition by the                  Company of all or substantially all of the Company's assets, other than a sale or                  disposition by the Company of all or substantially all of the Company's assets immediately                  following which the individuals who comprise the Board immediately prior thereto                  constitute at least a majority of the board of directors of the entity to which such                  assets are sold or disposed or any parent thereof.

Notwithstanding the foregoing, a "Change in Control" shall not be deemed to              have occurred by virtue of the consummation of any transaction or series of integrated              transactions immediately following which the record holders of the common stock of the              Company immediately prior to such transaction or series of transactions continue to have              substantially the same proportionate ownership in an entity which owns all or              substantially all of the assets of the Company immediately following such transaction or              series of transactions.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time to                time.
"Committee" shall mean (i) the individuals (not fewer than three in number)                who, on the date six months before a Change in Control, constitute the Compensation                Committee of the Board, plus (ii) in the event that fewer than three individuals are                available from the group specified in clause (i) above for any reason, such individuals as                may be appointed by the individual or individuals so available (including for this purpose                any individual or individuals previously so appointed under this clause (ii)).
"Company" shall mean Wild Oats Markets, Inc., a Delaware corporation and,                except in determining under Section 15(G) hereof whether or not any Change in Control of                the Company has occurred, shall include any successor to its business and/or assets which                assumes and agrees to perform this Agreement by operation of law, or otherwise.
"DC Pension Plan" shall mean any tax-qualified, supplemental or excess defined                contribution plan maintained by the Company and any other defined contribution plan or                agreement entered into between the Executive and the Company.
"Date of Termination" shall have the meaning set forth in Section 7.2 hereof.
"Disability" shall be deemed the reason for the termination by the Company of                the Executive's employment, if, as a result of the Executive's incapacity due to physical                or mental illness, the Executive shall have been absent from the full-time performance of                the Executive's duties with the Company for a period of six (6) consecutive months, the                Company shall have given the Executive a Notice of Termination for Disability, and, within                thirty (30) days after such Notice of Termination is given, the Executive shall not have                returned to the full-time performance of the Executive's duties.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from                time to time.
"Excise Tax" shall mean any excise tax imposed under section 4999 of the Code.
"Executive" shall mean the individual named in the first paragraph of this                Agreement.
"Good Reason" for termination by the Executive of the Executive's employment                shall mean the occurrence (without the Executive's express written consent) after any                Change in Control, or prior to a Change in Control under the circumstances described in                clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all                references in paragraphs (I) through (VII) below to a "Change in Control" as                references to a "Potential Change in Control"), of any one of the following acts                by the Company, or failures by the Company to act, unless, (x) in the case of any act or                failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure                to act is corrected prior to the Date of Termination specified in the Notice of                Termination given in respect thereof or (y) in the case of first act or failure to act                following a Change in Control and described in paragraph (IV) below, such act or failure                to act is corrected prior to the Date of Termination specified in the Notice of                Termination given in respect thereof:
- the assignment to the Executive of any duties materially and adversely inconsistent with                  the Executive's status as a senior executive officer of the Company or a substantial                  adverse alteration in the nature or status of the Executive's responsibilities from those                  in effect immediately prior to the Change in Control;
- a reduction by the Company in the Executive's annual base salary as in effect on the                  date hereof or as the same may be increased from time to time;
- the relocation of the Executive's principal place of employment to a location more than                  25 miles from the Executive's principal place of employment immediately prior to the                  Change in Control or the Company's requiring the Executive to be based anywhere other than                  such principal place of employment (or permitted relocation thereof) except for required                  travel on the Company's business to an extent substantially consistent with the                  Executive's present business travel obligations;
- the failure by the Company to pay to the Executive any portion of the Executive's                  current compensation or to pay to the Executive any portion of an installment of deferred                  compensation under any deferred compensation program of the Company, within seven (7) days                  of the date such compensation is due;
- the failure by the Company to continue in effect any compensation plan in which the                  Executive participates immediately prior to the Change in Control which is material to the                  Executive's total compensation, unless an equitable arrangement (embodied in an ongoing                  substitute or alternative plan) has been made with respect to such plan, or the failure by                  the Company to continue the Executive's participation therein (or in such substitute or                  alternative plan) on a basis not materially less favorable, both in terms of the amount or                  timing of payment of benefits provided and the level of the Executive's participation                  relative to other participants, as existed immediately prior to the Change in Control;
- the failure by the Company to continue to provide the Executive with benefits                  substantially similar to those enjoyed by the Executive under any of the Company's                  pension, savings, life insurance, medical, health and accident, or disability plans in                  which the Executive was participating immediately prior to the Change in Control, the                  taking of any other action by the Company which would directly or indirectly materially                  reduce any of such benefits or deprive the Executive of any material fringe benefit                  enjoyed by the Executive at the time of the Change in Control, or the failure by the                  Company to provide the Executive with the number of paid vacation days to which the                  Executive is entitled on the basis of years of service with the Company in accordance with                  the Company's normal vacation policy in effect at the time of the Change in Control; or
- any purported termination of the Executive's employment which is not effected pursuant                  to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes                  of this Agreement, no such purported termination shall be effective.

The Executive's right to terminate the Executive's employment for Good Reason shall not              be affected by the Executive's incapacity due to physical or mental illness. The              Executive's continued employment shall not constitute consent to, or a waiver of rights              with respect to, any act or failure to act constituting Good Reason hereunder.

For purposes of any determination regarding the existence of Good Reason, any claim by              the Executive that Good Reason exists shall be presumed to be correct unless the Company              establishes to the Committee by clear and convincing evidence that Good Reason does not              exist.

"Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof.
"Notice of Termination" shall have the meaning set forth in Section 7.1                hereof.
"Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act,                as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not                include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary                holding securities under an employee benefit plan of the Company or any of its Affiliates,                (iii) an underwriter temporarily holding securities pursuant to an offering of such                securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of                the Company in substantially the same proportions as their ownership of stock of the                Company.
"Potential Change in Control" shall be deemed to have occurred if the event                set forth in any one of the following paragraphs shall have occurred:
- the Company enters into an agreement, the consummation of which would result in the                  occurrence of a Change in Control;
- the Company or any Person publicly announces an intention to take or to consider taking                  actions which, if consummated, would constitute a Change in Control;
- any Person becomes the Beneficial Owner, directly or indirectly, of securities of the                  Company representing 15% or more of either the then outstanding shares of common stock of                  the Company or the combined voting power of the Company's then outstanding securities (not                  including in the securities beneficially owned by such Person any securities acquired                  directly from the Company or its affiliates); or
- the Board adopts a resolution to the effect that, for purposes of this Agreement, a                  Potential Change in Control has occurred. 
"Retirement" shall be deemed the reason for the termination by the Executive                of the Executive's employment if such employment is terminated in accordance with the                Company's retirement policy, including early retirement, generally applicable to its                salaried employees.
"Severance Benefits" shall have the meaning set forth in Section 6.1 hereof.
"Tax Counsel" shall have the meaning set forth in Section 6.2 hereof.
"Term" shall mean the period of time described in Section 2 hereof (including                any extension, continuation or termination described therein).
"Total Payments" shall mean those payments so described in Section 6.2 hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first abovewritten.

 

Wild Oats Markets, Inc.

By: /s/ Perry D. Odak

Name: Perry D. Odak

Title: President

 

 

 

/s/ Edward F. Dunlap

Edward F. Dunlap

Address:

3375 Mitchell Lane

Boulder, CO 80301