##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM  TO .
 Commission file number 0-21577
 WILD OATS MARKETS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
Incorporation or organization)
    
    84-1100630(I.R.S. Employer Identification Number)
 3375 Mitchell Lane
Boulder, Colorado 80301  (Address of principal executive offices, including zip code)
 (303) 440-5220  (Registrants telephone number, including area code)
  þ o
  o þ o
  o þ




---



##### 



TABLE OF CONTENTS
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets, September 30, 2006 (unaudited) and December 31, 2005
    
    
    3Consolidated Statements of Operations (unaudited), Three and Nine Months Ended September 30, 2006 and October 1, 2005
    
    
    4Consolidated Statements of Comprehensive Income (Loss) (unaudited), Three and Nine Months Ended September 30, 2006 and October 1, 2005
    
    
    5Consolidated Statements of Cash Flows (unaudited), Nine Months Ended September 30, 2006 and October 1, 2005
    
    
    6Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    32PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    33Item 1A.
    
    Risk Factors
    
    
    33Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3.
    
    Defaults Upon Senior Securities
    
    
    33Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    34Item 5.
    
    Other Information
    
    
    34Item 6.
    
    Exhibits
    
    
    34SIGNATURE AND EXHIBITSSignatures
    
    
    35Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 WILD OATS MARKETS, INC.
Consolidated Balance Sheets  (in thousands, except share data)
 September 30, 2006
    
    
    December 31, 2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,088
    
    
    $
    35,250Short-term investments
    
    
    33,000
    
    
    
    14,522Inventories (net of reserves of $1,065 and $960,
respectively)
    
    
    68,664
    
    
    
    63,056Accounts receivable (net of allowance for doubtful
accounts of $287 and $190, respectively)
    
    
    5,940
    
    
    
    4,006Prepaid expenses and other current assets
    
    
    6,923
    
    
    
    5,962Total current assets
    
    
    146,615
    
    
    
    122,796Property and equipment, net
    
    
    188,948
    
    
    
    178,867Goodwill, net
    
    
    105,124
    
    
    
    105,124Other intangible assets, net
    
    
    5,836
    
    
    
    6,122Deposits and other assets
    
    
    5,512
    
    
    
    5,897Deferred tax asset, net
    
    
    21
    
    
    
    64$
    452,056
    
    
    $
    418,870LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    60,038
    
    
    $
    56,078Book overdraft
    
    
    23,000
    
    
    
    23,351Accrued liabilities
    
    
    56,936
    
    
    
    53,354Current portion of debt, capital leases and
financing obligations
    
    
    529
    
    
    
    614Total current liabilities
    
    
    140,503
    
    
    
    133,397Long-term debt, capital leases and financing obligations
    
    
    147,875
    
    
    
    148,181Other long-term obligations
    
    
    31,291
    
    
    
    27,750319,669
    
    
    
    309,328Commitments and contingenciesStockholders equity:Preferred stock, $0.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 60,000,000 shares
authorized, 32,151,377 and 31,036,834 shares issued;
and 29,492,114 and 29,059,034 shares outstanding,
respectively
    
    
    32
    
    
    
    31Treasury stock, at cost: 2,659,263 and 1,977,800
shares, respectively
    
    
    (37,181
    )
    
    
    (24,999
    )Additional paid-in capital
    
    
    238,301
    
    
    
    226,645Note receivable, related party
    
    
    
    
    
    
    (12,051
    )Accumulated deficit
    
    
    (70,461
    )
    
    
    (81,324
    )Accumulated other comprehensive income
    
    
    1,696
    
    
    
    1,240Total stockholders equity
    
    
    132,387
    
    
    
    109,542$
    452,056
    
    
    $
    418,870
 The accompanying notes are an integral part of these consolidated financial statements.
  3




---



##### Table of Contents



WILD OATS MARKETS, INC.
Consolidated Statements of Operations  (in thousands, except per share amounts) (unaudited)
 THREE MONTHS ENDED
    
    
    NINE MONTHS ENDEDSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    $
    291,804
    
    
    $
    278,522
    
    
    $
    886,722
    
    
    $
    841,209Cost of goods sold and occupancy costs
    
    
    206,131
    
    
    
    197,785
    
    
    
    619,992
    
    
    
    597,657Gross profit
    
    
    85,673
    
    
    
    80,737
    
    
    
    266,730
    
    
    
    243,552Operating expenses:Direct store expenses
    
    
    68,709
    
    
    
    67,495
    
    
    
    208,481
    
    
    
    199,375Selling, general and administrative
expenses
    
    
    10,870
    
    
    
    11,235
    
    
    
    37,163
    
    
    
    32,691Loss on disposal of assets
    
    
    19
    
    
    
    43
    
    
    
    186
    
    
    
    87Pre-opening expenses
    
    
    1,441
    
    
    
    325
    
    
    
    3,692
    
    
    
    3,022Restructuring and asset impairment
charges, net
    
    
    260
    
    
    
    51
    
    
    
    2,225
    
    
    
    2,511Income from operations
    
    
    4,374
    
    
    
    1,588
    
    
    
    14,983
    
    
    
    5,866Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (559
    )Interest income
    
    
    667
    
    
    
    451
    
    
    
    1,955
    
    
    
    1,136Interest expense
    
    
    (1,865
    )
    
    
    (1,784
    )
    
    
    (5,555
    )
    
    
    (6,095
    )Income before income taxes
    
    
    3,176
    
    
    
    255
    
    
    
    11,383
    
    
    
    348Income tax expense
    
    
    68
    
    
    
    173
    
    
    
    520
    
    
    
    496Net income (loss)
    
    $
    3,108
    
    
    $
    82
    
    
    $
    10,863
    
    
    $
    (148
    )Net earnings (loss) per common share:Basic
    
    $
    0.11
    
    
    $
    0.00
    
    
    $
    0.37
    
    
    $
    (0.01
    )Diluted
    
    $
    0.10
    
    
    $
    0.00
    
    
    $
    0.36
    
    
    $
    (0.01
    )Weighted-average common shares outstanding, basic
    
    
    29,521
    
    
    
    28,928
    
    
    
    29,250
    
    
    
    28,717Dilutive effect of stock options and restricted stock
units
    
    
    634
    
    
    
    766
    
    
    
    771
    
    
    
    Weighted-average common shares outstanding, assuming
dilution
    
    
    30,155
    
    
    
    29,694
    
    
    
    30,021
    
    
    
    28,717
 The accompanying notes are an integral part of these consolidated financial statements.
  4




---



##### Table of Contents



WILD OATS MARKETS, INC.
Consolidated Statements of Comprehensive Income (Loss)  (in thousands) (unaudited)
 THREE MONTHS ENDED
    
    
    NINE MONTHS ENDEDSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005,Net income (loss)
    
    $
    3,108
    
    
    $
    82
    
    
    $
    10,863
    
    
    $
    (148
    )Other comprehensive income (loss):Foreign currency
translation
adjustments
    
    
    (23
    )
    
    
    571
    
    
    
    459
    
    
    
    316Unrealized gain
(loss) on
available-for-sale
securities
    
    
    1
    
    
    
    6
    
    
    
    (3
    )
    
    
    (22
    )Other comprehensive income (loss)
    
    
    (22
    )
    
    
    577
    
    
    
    456
    
    
    
    294Comprehensive income
    
    $
    3,086
    
    
    $
    659
    
    
    $
    11,319
    
    
    $
    146
 The accompanying notes are an integral part of these consolidated financial statements.
  5




---



##### Table of Contents



WILD OATS MARKETS, INC.
Consolidated Statements of Cash Flows  (in thousands) (unaudited)
 NINE MONTHS ENDEDSeptember 30,
    
    
    October 1,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    10,863
    
    
    $
    (148
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    19,525
    
    
    
    19,635Loss on disposal of property and equipment
    
    
    206
    
    
    
    87Deferred tax expense
    
    
    46
    
    
    
    223Restructuring and asset impairment expense, net
    
    
    2,225
    
    
    
    2,511Interest on related party receivable
    
    
    (88
    )
    
    
    (473
    )Stock-based compensation
    
    
    2,049
    
    
    
    383Accretion of debt issuance costs
    
    
    466
    
    
    
    96Loss on early extinguishment of debt
    
    
    
    
    
    
    559Change in assets and liabilities:Inventories, net
    
    
    (5,540
    )
    
    
    (4,817
    )Receivables, net, and other assets
    
    
    (2,970
    )
    
    
    1,941Accounts payable
    
    
    3,857
    
    
    
    1,950Accrued liabilities and other liabilities
    
    
    4,932
    
    
    
    3,387Net cash provided by operating activities
    
    
    35,571
    
    
    
    25,334CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (29,438
    )
    
    
    (19,182
    )Purchase of short-term investments
    
    
    (167,905
    )
    
    
    Proceeds from sale of short-term investments
    
    
    149,424
    
    
    
    11,122Proceeds from sale of property and equipment
    
    
    16
    
    
    
    58Net cash used in investing activities
    
    
    (47,903
    )
    
    
    (8,002
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net decrease in book overdraft
    
    
    (351
    )
    
    
    (1,597
    )Repayments on notes payable, long-term debt and capital leases
    
    
    (391
    )
    
    
    (156
    )Proceeds from issuance of common stock, net
    
    
    9,608
    
    
    
    4,863Purchase of treasury stock
    
    
    (43
    )
    
    
    Net cash provided by financing activities
    
    
    8,823
    
    
    
    3,110Effect of exchange rate changes on cash
    
    
    347
    
    
    
    260Net (decrease) increase in cash and cash equivalents
    
    
    (3,162
    )
    
    
    20,702Cash and cash equivalents at beginning of period
    
    
    35,250
    
    
    
    30,671Cash and cash equivalents at end of period
    
    $
    32,088
    
    
    $
    51,373SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:Equipment acquired through capital lease
    
    $
    
    
    
    $
    278
 The accompanying notes are an integral part of these consolidated financial statements.
  6




---



##### Table of Contents



WILD OATS MARKETS, INC.
Notes to Consolidated Financial Statements  (unaudited)
 1. Basis of Presentation and Summary of Significant Accounting Policies
    Principles of consolidation.
 Inventories.
 Reclassifications.
 2. New Accounting Pronouncements
 Considering the Effect of
Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements
  7




---



##### Table of Contents



Fair Value Measurement
 Accounting for Uncertainty in Income
Taxes  An Interpretation of FASB Statement No. 109
 How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation)
 3. Short-Term Investments
  4. Stock-Based Compensation
 Share-Based Payment
 Accounting for Stock Issued to Employees ,
  8




---



##### Table of Contents



THREE
    
    
    NINEMONTHS
    
    
    MONTHSENDED
    
    
    ENDEDOctober 1,
    
    
    October 1,2005
    
    
    2005Net income (loss), as reported
    
    $
    82
    
    
    $
    (148
    )Add: Stock-based employee compensation expense
included in reported net income (loss), net of tax*
    
    
    86
    
    
    
    232Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of tax*
    
    
    (46
    )
    
    
    (1,156
    )Pro forma net income (loss):
    
    $
    122
    
    
    $
    (1,072
    )Basic earnings (loss) per share:As reported
    
    $
    0.00
    
    
    $
    (0.01
    )Pro forma fair value expense, net of income taxes
    
    $
    0.00
    
    
    $
    (0.03
    )Pro forma basic earnings (loss) per share
    
    $
    0.00
    
    
    $
    (0.04
    )Diluted earnings (loss) per share:As reported
    
    $
    0.00
    
    
    $
    (0.01
    )Pro forma fair value expense, net of income taxes
    
    $
    0.00
    
    
    $
    (0.03
    )Pro forma diluted earnings (loss) per share
    
    $
    0.00
    
    
    $
    (0.04
    )
 *
   9




---



##### Table of Contents



NINE MONTHS ENDEDSeptember 30, 2006
    
    
    October 1, 2005Estimated dividends
    
    None
    
    NoneExpected volatility
    
    
    53% - 56
    %
    
    
    71
    %Risk-free interest rate
    
    
    4.34% - 5.08
    %
    
    
    3.97
    %Expected life (years)
    
    
    4.0
    
    
    
    4.2Weighted-average fair value per share
    
    $
    7.08
    
    
    $
    4.72
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Life
    
    
    Value(in years)
    
    
    (in thousands)Outstanding as of December 31, 2005
    
    
    2,570,199
    
    
    $
    10.19Granted
    
    
    261,666
    
    
    $
    15.31Cancellations and expirations
    
    
    (108,121
    )
    
    $
    11.02Exercised
    
    
    (989,929
    )
    
    $
    8.94Outstanding as of September 30, 2006
    
    
    1,733,815
    
    
    $
    11.63
    
    
    
    6.41
    
    
    $
    8,701Exercisable as of September 30, 2006
    
    
    1,248,385
    
    
    $
    11.33
    
    
    
    5.38
    
    
    $
    6,705
    10




---



##### Table of Contents



Weighted-Number of
    
    
    Average Grant-shares
    
    
    Date Fair ValueNonvested at December 31, 2006
    
    
    406,086
    
    
    $
    4.30Granted
    
    
    261,666
    
    
    $
    7.08Vested
    
    
    (111,859
    )
    
    $
    4.85Forfeited
    
    
    (70,463
    )
    
    $
    3.41Nonvested at September 30, 2006
    
    
    485,430
    
    
    $
    5.91
   5. Property and Equipment
 in
thousands
 September 30, 2006
    
    
    December 31, 2005Machinery and equipment
    
    $
    148,482
    
    
    $
    140,171Buildings and leasehold improvements
    
    
    176,613
    
    
    
    167,265Construction in progress
    
    
    20,880
    
    
    
    10,784345,975
    
    
    
    318,220Less: accumulated depreciation
    
    
    (157,027
    )
    
    
    (139,353
    )Property and equipment, net
    
    $
    188,948
    
    
    $
    178,867
  6. Debt
 Contingent convertible senior debentures Note 8 
Earnings per Share
  11




---



##### Table of Contents



Credit facility.
  12




---



##### Table of Contents



7. Derivatives and Hedging Activities
 , Accounting for Derivative Instruments and Hedging Activities.
 8. Earnings Per Share
 Earnings
Per Share .
 The Effect of
Contingently Convertible Debt on Diluted Earnings per Share
 9. Goodwill and Intangible Assets
 Goodwill and Other
Intangible Assets
  13




---



##### Table of Contents



in thousands
 September 30,
    
    
    December 31,2006
    
    
    2005Leasehold interests
    
    $
    8,337
    
    
    $
    8,374Less accumulated amortization
    
    
    (2,807
    )
    
    
    (2,576
    )Leasehold interests, net
    
    
    5,530
    
    
    
    5,798Liquor licenses (indefinite lived)
    
    
    306
    
    
    
    324$
    5,836
    
    
    $
    6,122
 in thousands
 FISCAL
    
    AMORTIZATIONYEAR
    
    EXPENSERemainder of 2006
    
    $
    892007
    
    
    3582008
    
    
    3582009
    
    
    3582010
    
    
    3582011
    
    
    352
 10. Restructuring and Asset Impairment Charges
 in thousands
 Change in estimate related to lease-related liabilities for sites previously
closed
    
    $
    83Accretion expense on lease-related liabilities
    
    
    170Severance for employees terminated during the third quarter of fiscal 2006
    
    
    (2
    )Asset impairment charges
    
    
    9Total restructuring and asset impairment expense
    
    $
    260
  
    
    Changes in estimate related to lease-related liabilities for sites previously closed
($83,000 of restructuring expense)  During the third quarter of fiscal 2006, the Company
accrued additional amounts for its closed stores located in Tennessee and Oregon. In
addition, the Company released the remainder of its lease-related liability when it entered
into an agreement to terminate the lease of a property in Portland, Oregon, which closed
during first quarter of fiscal 2006. In consideration of the lease termination, the
Company will make a payment of $606,000 to the landlord during the fourth quarter, which
includes a lease termination payment of $575,000. Based on changes in facts and
circumstances and the related change in estimate, the Company adjusted remaining
lease-related liabilities previously recorded for these locations and recognized the
additional restructuring expense during the third quarter of fiscal 2006.
    
    Accretion expense on lease-related liabilties ($170,000 of restructuring expense) 
During the third quarter, the Company accrued accretion expense on reserves for
lease-related liabilities that were calculated using the net present value of the minimum
lease payments (net of sublease income).
    
    Severance for employees notified of termination in the third quarter
of fiscal 2006 ($2,000 of restructuring income)  During the third quarter of 2006, four employees were
notified of their involuntary termination in connection with one commissary designated to
be closed. In addition, the Company reversed an existing accrual for severance not taken
from a previous store closure. As of September 30, 2006, $8,000 in benefits had been paid
to terminated employees.
  14




---



##### Table of Contents




    
    Asset impairment charges ($9,000 of restructuring expense) During the third quarter,
management wrote off $9,000 for the net book value of assets related to sites identified
for future store locations that were subsequently determined unsuitable.
 Accounting for the Impairment or Disposal of Long-Lived Assets
 in thousands
 Change in estimate related to lease-related liabilities for sites previously
closed
    
    $
    219Lease-related liability for sites closed during the year
    
    
    1,362Accretion expense on lease-related liabilities
    
    
    482Severance for employees terminated during the nine months ended 2006
    
    
    117Asset impairment charges
    
    
    45Total restructuring and asset impairment expense
    
    $
    2,225
  
    
    Changes in estimate related to lease-related liabilities for sites previously closed
($219,000 of restructuring expense) For the nine months ended September 30, 2006, the
Company accrued additional amounts for closed locations in Florida, Tennessee, Oregon and
California. In addition, the Company released the remainder of its lease-related liability
when it entered into an agreement to terminate the lease of a property in Portland, Oregon,
which closed during first quarter of fiscal 2006. Based on changes in facts and
circumstances and the related change in estimate, the Company adjusted remaining
lease-related liabilities previously recorded for these locations and recognized the
additional restructuring expense during the first nine months of fiscal 2006.
    
    Lease-related liability for sites closed year to date through September 30, 2006 ($1.4
million of restructuring expense) For the nine months ended September 30, 2006, the
Company closed stores in Portland, Oregon, Fort Lauderdale, Florida, and Aurora, Colorado.
    
    Accretion expense on lease-related liabilties ($482,000 of restructuring expense)
During the nine months of 2006, the Company accrued accretion expense on reserves for
lease-related liabilities that were calculated using the net present value of the minimum
lease payments (net of sublease income).
    
    Severance for employees notified of termination ($117,000 of restructuring expense)
For the nine months ended September 30, 2006, 79 employees were notified of their
involuntary termination in connection with the closure of a commissary and three stores
located in Portland, Oregon, Fort Lauderdale, Florida, and Aurora, Colorado. As of
September 30, 2006, $113,000 in benefits had been paid to terminated employees.
    
    Asset impairment charges ($45,000 of restructuring expense) During the nine months
ended September 30, 2006, management identified asset impairment charges of $36,000 for the
net book value of assets to be disposed of from one store location designated to be closed
and $9,000 for the net book value of assets related to sites identified for future store
locations that were subsequently determined unsuitable.
  15




---



##### Table of Contents



in
thousands
 2002 and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1st Qtr
    
    
    2nd Qtr
    
    
    3rd QtrEXIT PLANS
    
    Prior
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    TotalBalance atJanuary 1, 2005:
    
    $
    6,665
    
    
    $
    
    
    
    $
    762
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,427Severance expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134Lease-related expense
    
    
    (315
    )
    
    
    539
    
    
    
    (76
    )
    
    
    1,355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,503Cash paid:Severance
    
    
    
    
    
    
    
    
    
    
    (167
    )
    
    
    (159
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (326
    )Lease-related liabilities
    
    
    (1,539
    )
    
    
    (132
    )
    
    
    (324
    )
    
    
    (720
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,715
    )Provision adjustments
    
    
    731
    
    
    
    
    
    
    
    92
    
    
    
    573
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,396Balance atDecember 31, 2005:
    
    $
    5,542
    
    
    $
    407
    
    
    $
    287
    
    
    $
    1,183
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,419Severance expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    114Lease-related expense
    
    
    164
    
    
    
    21
    
    
    
    
    
    
    
    9
    
    
    
    1,362
    
    
    
    
    
    
    
    
    
    
    
    1,556Cash paid:Severance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105
    )
    
    
    
    
    
    
    
    
    
    
    (105
    )Lease-related liabilities
    
    
    (347
    )
    
    
    (31
    )
    
    
    
    
    
    
    (177
    )
    
    
    (47
    )
    
    
    
    
    
    
    
    
    
    
    (602
    )Provision adjustments
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    28Balance atApril 1, 2006:
    
    $
    5,379
    
    
    $
    397
    
    
    $
    287
    
    
    $
    1,015
    
    
    $
    1,332
    
    
    $
    
    
    
    $
    
    
    
    $
    8,410Severance expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Lease-related expense
    
    
    176
    
    
    
    10
    
    
    
    
    
    
    
    21
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    254Cash paid:Severance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lease-related liabilities
    
    
    (318
    )
    
    
    (20
    )
    
    
    
    
    
    
    (197
    )
    
    
    (81
    )
    
    
    
    
    
    
    
    
    
    
    (616
    )Provision adjustments
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (15
    )Balance atJuly 1, 2006:
    
    $
    5,237
    
    
    $
    387
    
    
    $
    280
    
    
    $
    839
    
    
    $
    1,290
    
    
    $
    5
    
    
    $
    
    
    
    $
    8,038Severance expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    1
    
    
    
    8
    
    
    
    (2
    )Lease-related expense
    
    
    (122
    )
    
    
    9
    
    
    
    
    
    
    
    684
    
    
    
    (318
    )
    
    
    
    
    
    
    
    
    
    
    253Cash paid:Severance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (2
    )
    
    
    (8
    )Lease-related liabilities
    
    
    (217
    )
    
    
    (20
    )
    
    
    
    
    
    
    (176
    )
    
    
    (177
    )
    
    
    
    
    
    
    
    
    
    
    (590
    )Provision adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atSeptember 30, 2006:
    
    $
    4,898
    (1)
    
    $
    376
    (1)
    
    $
    280
    (1)
    
    $
    1,347
    (1)
    
    $
    784
    (1)
    
    $
    
    
    
    $
    6
    (2)
    
    $
    7,691
 Note:
    
    1. The restructuring accrual balance consists of lease-related liabilities.2. The restructuring accrual balance consists of severance for employee termination.
   16




---



##### Table of Contents



11. Income Taxes
 Accounting
for Income Taxes
 12. Related Party Transactions
 Perry D. Odak.
     17




---



##### Table of Contents



Note 14  Subsequent Event
 Other.
 13. Contingencies
 Tim Auchterlonie, individually and on behalf of all others similarly situated and the
general public, and Roes 1 to 1000 vs. Wild Oats Markets, Inc. and Does 1 through 100
 Ana Marie Hoeppner et al. v. Wild Oats Markets, Inc Auchterlonie
 Jason Puerto, et al. v. Wild Oats Markets, Inc
  18




---



##### Table of Contents



3601 Group Inc. v. Wild Oats
Northwest, Inc., Wild Oats, Inc. and Wild Oats Markets, Inc.
 Wild Oats
Markets, Inc. and Local 371, United Food & Commercial Workers
  14. Subsequent Events
 Lease Termination.
 Perry D. Odak Resignation.
   19




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Managements Discussion and Analysis of Financial Condition
and Results of Operations  Cautionary Statement Regarding Forward-Looking Statements.
 Executive Summary
 Managements Discussion and Analysis of Financial Condition
and Results of Operations
 ® ® ®
    20




---



##### Table of Contents



Results of Operations
 in thousands  percentages may not add due to
rounding):
 THREE MONTHS ENDEDSeptember 30, 2006
    
    
    October 1, 2005Sales
    
    $
    291,804
    
    
    
    100.0
    %
    
    $
    278,522
    
    
    
    100.0
    %Cost of goods sold and occupancy costs
    
    
    206,131
    
    
    
    70.6
    %
    
    
    197,785
    
    
    
    71.0
    %Gross profit
    
    
    85,673
    
    
    
    29.4
    %
    
    
    80,737
    
    
    
    29.0
    %Direct store expenses
    
    
    68,709
    
    
    
    23.5
    %
    
    
    67,495
    
    
    
    24.2
    %Selling, general and administrative
expenses
    
    
    10,870
    
    
    
    3.7
    %
    
    
    11,235
    
    
    
    4.0
    %Loss on disposal of assets
    
    
    19
    
    
    
    0.0
    %
    
    
    43
    
    
    
    0.0
    %Pre-opening expenses
    
    
    1,441
    
    
    
    0.5
    %
    
    
    325
    
    
    
    0.1
    %Restructuring and asset impairment
charges, net
    
    
    260
    
    
    
    0.1
    %
    
    
    51
    
    
    
    0.0
    %Income from operations
    
    
    4,374
    
    
    
    1.5
    %
    
    
    1,588
    
    
    
    0.6
    %Interest income
    
    
    667
    
    
    
    0.2
    %
    
    
    451
    
    
    
    0.2
    %Interest expense
    
    
    (1,865
    )
    
    
    (0.6
    )%
    
    
    (1,784
    )
    
    
    (0.6
    )%Income before income taxes
    
    
    3,176
    
    
    
    1.1
    %
    
    
    255
    
    
    
    0.1
    %Income tax expense
    
    
    68
    
    
    
    0.0
    %
    
    
    173
    
    
    
    0.0
    %Net income
    
    $
    3,108
    
    
    
    1.1
    %
    
    $
    82
    
    
    
    0.0
    %
 NINE MONTHS ENDEDSeptember 30, 2006
    
    
    October 1, 2005Sales
    
    $
    886,722
    
    
    
    100.0
    %
    
    $
    841,209
    
    
    
    100.0
    %Cost of goods sold and occupancy costs
    
    
    619,992
    
    
    
    69.9
    %
    
    
    597,657
    
    
    
    71.0
    %Gross profit
    
    
    266,730
    
    
    
    30.1
    %
    
    
    243,552
    
    
    
    29.0
    %Direct store expenses
    
    
    208,481
    
    
    
    23.5
    %
    
    
    199,375
    
    
    
    23.7
    %Selling, general and administrative
expenses
    
    
    37,163
    
    
    
    4.2
    %
    
    
    32,691
    
    
    
    3.9
    %Loss on disposal of assets
    
    
    186
    
    
    
    0.0
    %
    
    
    87
    
    
    
    0.0
    %Pre-opening expenses
    
    
    3,692
    
    
    
    0.4
    %
    
    
    3,022
    
    
    
    0.4
    %Restructuring and asset impairment
charges, net
    
    
    2,225
    
    
    
    0.3
    %
    
    
    2,511
    
    
    
    0.3
    %Income from operations
    
    
    14,983
    
    
    
    1.7
    %
    
    
    5,866
    
    
    
    0.7
    %Loss on early extinguishment of debt
    
    
    
    
    
    
    0.0
    %
    
    
    (559
    )
    
    
    (0.1
    )%Interest income
    
    
    1,955
    
    
    
    0.2
    %
    
    
    1,136
    
    
    
    0.1
    %Interest expense
    
    
    (5,555
    )
    
    
    (0.6
    )%
    
    
    (6,095
    )
    
    
    (0.7
    )%Income before income taxes
    
    
    11,383
    
    
    
    1.3
    %
    
    
    348
    
    
    
    0.0
    %Income tax expense
    
    
    520
    
    
    
    0.1
    %
    
    
    496
    
    
    
    0.1
    %Net income (loss)
    
    $
    10,863
    
    
    
    1.2
    %
    
    $
    (148
    )
    
    
    0.0
    %
 Income Statement Analysis
 Sales
 % ChangeSeptember 30,
    
    
    October 1,
    
    
    2005 to2006
    
    
    2005
    
    
    2006For the three months ended (in thousands):
    
    $
    291,804
    
    
    $
    278,522
    
    
    
    4.8
    %For the nine months ended (in thousands):
    
    $
    886,722
    
    
    $
    841,209
    
    
    
    5.4
    %
  21




---



##### Table of Contents



Gross profit
 % ChangeSeptember 30,
    
    
    October 1,
    
    
    2005 to2006
    
    
    2005
    
    
    2006For the three months ended (in thousands):
    
    $
    85,673
    
    
    $
    80,737
    
    
    
    6.1
    %As a percent of sales for the three
months ended:
    
    
    29.4
    %
    
    
    29.0
    %
    
    
    0.4
    %For the nine months ended (in thousands):
    
    $
    266,730
    
    
    $
    243,552
    
    
    
    9.5
    %As a percent of sales for the nine months
ended:
    
    
    30.1
    %
    
    
    29.0
    %
    
    
    1.1
    %
  Direct store expenses
 % ChangeSeptember 30,
    
    
    October 1,
    
    
    2005 to2006
    
    
    2005
    
    
    2006For the three months ended (in thousands):
    
    $
    68,709
    
    
    $
    67,495
    
    
    
    1.8
    %As a percent of sales for the three
months ended:
    
    
    23.5
    %
    
    
    24.2
    %
    
    
    (0.7
    )%For the nine months ended (in thousands):
    
    $
    208,481
    
    
    $
    199,375
    
    
    
    4.6
    %As a percent of sales for the nine months
ended:
    
    
    23.5
    %
    
    
    23.7
    %
    
    
    (0.2
    )%
  Selling, general and administrative expenses
 % ChangeSeptember 30,
    
    
    October 1,
    
    
    2005 to2006
    
    
    2005
    
    
    2006For the three months ended (in thousands):
    
    $
    10,870
    
    
    $
    11,235
    
    
    
    (3.2
    )%As a percent of sales for the three months
ended:
    
    
    3.7
    %
    
    
    4.0
    %
    
    
    (0.3
    )%For the nine months ended (in thousands):
    
    $
    37,163
    
    
    $
    32,691
    
    
    
    13.7
    %As a percent of sales for the nine months ended:
    
    
    4.2
    %
    
    
    3.9
    %
    
    
    0.3
    %
  22




---



##### Table of Contents



Share-Based Payment
 Pre-opening expenses
 % ChangeSeptember 30,
    
    
    October 1,
    
    
    2005 to2006
    
    
    2005
    
    
    2006For the three months ended (in thousands):
    
    $
    1,441
    
    
    $
    325
    
    
    
    343.4
    %As a percent of sales for the three months ended:
    
    
    0.5
    %
    
    
    0.1
    %
    
    
    0.4
    %For the nine months ended (in thousands):
    
    $
    3,692
    
    
    $
    3,022
    
    
    
    22.2
    %As a percent of sales for the nine months ended:
    
    
    0.4
    %
    
    
    0.4
    %
    
    
    0.0
    %
   THREE MONTHS ENDED
    
    
    NINE MONTHS ENDEDSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005New stores
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    7
  Restructuring and asset impairment charges, net
 (in thousands):
 THREE MONTHS
    
    
    NINE MONTHSENDED
    
    
    ENDEDSept 30,
    
    
    Oct 1,
    
    
    Sept 30,
    
    
    Oct 1,2006
    
    
    2005
    
    
    2006
    
    
    2005Change in estimate related to lease-related
liabilities for sites previously closed
    
    $
    83
    
    
    $
    (96
    )
    
    $
    219
    
    
    $
    (243
    )Lease-related liability for sites closed
during the current period
    
    
    
    
    
    
    5
    
    
    
    1,362
    
    
    
    429Accretion expense on lease-related liabilities
    
    
    170
    
    
    
    121
    
    
    
    482
    
    
    
    347Severance for employees terminated during the
period
    
    
    (2
    )
    
    
    21
    
    
    
    117
    
    
    
    134Write off of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960Asset impairment charges
    
    
    9
    
    
    
    
    
    
    
    45
    
    
    
    884Total restructuring and asset
impairment expense
    
    $
    260
    
    
    $
    51
    
    
    $
    2,225
    
    
    $
    2,511
  23




---



##### Table of Contents



Note 10  Restructuring and Asset Impairment
Charges
 Interest income
 % ChangeSeptember 30,
    
    
    October 1,
    
    
    2005 to2006
    
    
    2005
    
    
    2006For the three months ended (in thousands):
    
    $
    667
    
    
    $
    451
    
    
    
    47.9
    %As a percent of sales for the three months ended:
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.0
    %For the nine months ended (in thousands):
    
    $
    1,955
    
    
    $
    1,136
    
    
    
    72.1
    %As a percent of sales for the nine months ended:
    
    
    0.2
    %
    
    
    0.1
    %
    
    
    0.1
    %
  Interest expense
 % ChangeSeptember 30,
    
    
    October 1,
    
    
    2005 to2006
    
    
    2005
    
    
    2006For the three months ended (in thousands):
    
    $
    1,865
    
    
    $
    1,784
    
    
    
    4.5
    %As a percent of sales for the three months
ended:
    
    
    0.6
    %
    
    
    0.6
    %
    
    
    0.0
    %For the nine months ended (in thousands):
    
    $
    5,555
    
    
    $
    6,095
    
    
    
    (8.9
    )%As a percent of sales for the nine months ended:
    
    
    0.6
    %
    
    
    0.7
    %
    
    
    (0.1
    )%
  Income tax expense
 % ChangeSeptember 30,
    
    
    October 1,
    
    
    2005 to2006
    
    
    2005
    
    
    2006For the three months ended (in thousands):
    
    $
    68
    
    
    $
    173
    
    
    
    (60.7
    %)As a percent of sales for the three months ended:
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Effective tax rate for the three months ended:
    
    
    2.1
    %
    
    
    67.8
    %
    
    
    (65.7
    %)For the nine months ended (in thousands):
    
    $
    520
    
    
    $
    496
    
    
    
    4.8
    %As a percent of sales for the nine months ended:
    
    
    0.1
    %
    
    
    0.1
    %
    
    
    0.0
    %Effective tax rate for the nine months ended:
    
    
    4.6
    %
    
    
    142.5
    %
    
    
    (137.9
    %)
   24




---



##### Table of Contents



Earnings before interest, taxes, depreciation and amortization, loss on early extinguishment of
debt, loss (gain) on asset disposals, net, restructuring and asset impairment charges (income),
net, and stock-based compensation expense, as adjusted (EBITDA, as adjusted )
 % ChangeSeptember 30,
    
    
    October 1,
    
    
    2005 to2006
    
    
    2005
    
    
    2006For the three months ended (in thousands):
    
    $
    11,881
    
    
    $
    8,338
    
    
    
    42.5
    %As a percent of sales for the three months
ended:
    
    
    4.1
    %
    
    
    3.0
    %
    
    
    1.1
    %For the nine months ended (in thousands):
    
    $
    38,968
    
    
    $
    28,482
    
    
    
    36.8
    %As a percent of sales for the nine months ended:
    
    
    4.4
    %
    
    
    3.4
    %
    
    
    1.0
    %
 Non GAAP Financial
Information.
 Liquidity and Capital Resources
     EBITDA. Non GAAP
Financial Information.
 Contingent convertible senior debentures
  25




---



##### Table of Contents



Credit facility.
  26




---



##### Table of Contents



Capital expenditures
  New Accounting Pronouncements
 Considering the Effect of Prior Year Misstatements when Qualifying Misstatements
in Current Year Financial Statements
 Fair Value Measurement
 Accounting for Uncertainty in Income
Taxes  An Interpretation of FASB Statement No. 109
  27




---



##### Table of Contents



How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation)
 Critical Accounting Policies and Estimates
   
    
    Goodwill valuation,
    
    Asset impairment charges,
    
    Restructuring charges and store closing costs,
    
    Inventory valuation and reserves,
    
    Self-insurance reserves,
    
    Tax valuation allowances, and
    
    Stock-based compensation expense
  Goodwill.
    28




---



##### Table of Contents



Impairment of long-lived assets.
   Restructuring and store closure costs.
   Inventory.
  29




---



##### Table of Contents



Self-insurance
 Tax valuation allowances. Accounting for Income Taxes
  Stock-based compensation expense Note 4  Stock-Based Compensation
 Cautionary Statement Regarding Forward-Looking Statements
   30




---



##### Table of Contents



Non GAAP Financial Information
 in
thousands
 THREE MONTHS ENDEDSeptember 30, 2006
    
    
    October 1, 2005Net income
    
    $
    3,108
    
    
    $
    82Interest expense, net of interest income
    
    
    1,198
    
    
    
    1,333Income tax expense
    
    
    68
    
    
    
    173Depreciation and amortization
    
    
    6,468
    
    
    
    6,517EBITDA
    
    
    10,842
    
    
    
    8,105Loss on asset disposals, net
    
    
    19
    
    
    
    43Stock-based compensation expense
    
    
    760
    
    
    
    139Restructuring and asset impairment charges, net
    
    
    260
    
    
    
    51EBITDA, as adjusted
    
    $
    11,881
    
    
    $
    8,338EBITDA, as a percentage of sales
    
    
    3.7
    %
    
    
    2.9
    %EBITDA, as adjusted, as a percentage of sales
    
    
    4.1
    %
    
    
    3.0
    %
 NINE MONTHS ENDEDSeptember 30, 2006
    
    
    October 1, 2005Net income (loss)
    
    $
    10,863
    
    
    $
    (148
    )Interest expense, net of interest income
    
    
    3,600
    
    
    
    4,959Income tax expense
    
    
    520
    
    
    
    496Depreciation and amortization
    
    
    19,525
    
    
    
    19,635EBITDA
    
    
    34,508
    
    
    
    24,942Loss on early extinguishment of debt
    
    
    
    
    
    
    559Loss on asset disposals, net
    
    
    186
    
    
    
    87Stock-based compensation expense
    
    
    2,049
    
    
    
    383Restructuring and asset impairment charges, net
    
    
    2,225
    
    
    
    2,511EBITDA, as adjusted
    
    $
    38,968
    
    
    $
    28,482EBITDA, as a percentage of sales
    
    
    3.9
    %
    
    
    3.0
    %EBITDA, as adjusted, as a percentage of sales
    
    
    4.4
    %
    
    
    3.4
    %
   31




---



##### Table of Contents



Comparable stores sales
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
 Internal Control Over Financial Reporting.
  32




---



##### Table of Contents



Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Tim Auchterlonie, individually and on behalf of all others similarly situated and the
general public, and Roes 1 to 1000 vs. Wild Oats Markets, Inc. and Does 1 through 100
 Ana Marie Hoeppner et al. v. Wild Oats Markets, Inc Auchterlonie
 Jason Puerto, et al. v. Wild Oats Markets, Inc
 3601 Group Inc. v. Wild Oats Northwest,
Inc., Wild Oats, Inc. and Wild Oats Markets, Inc.
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
   33




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  Past Annual
    
    Annual Salary, effectiveName
    
    Title
    
    Salary
    
    July 30, 2006Robert B. Dimond
    
    Chief Financial
Officer and Senior
Vice President
    
    $
    290,000
    
    
    $
    400,000Freya Brier
    
    Senior Vice
President, General
Counsel and
Corporate Secretary
    
    $
    265,000
    
    
    $
    315,000
  
 Item 6. Exhibits
 Exhibit Number
    
    Description10.1#**
    
    Sixth Amendment to Employment Agreement between Wild Oats
Markets, Inc. and Perry D. Odak, dated August 14, 2006. (1)10.2#**
    
    First Amendment to Employment Agreement between Wild Oats
Markets, Inc. and Robert B. Dimond, dated August 24, 2006. (2)10.3#+
    
    Employment Agreement dated October 4, 2006 between Roger E.
Davidson and Registrant.10.4#+
    
    Roger E. Davidson Equity Incentive Plan10.5#+
    
    Severance Agreement dated October 30, 2006 between Roger E.
Davidson and Registrant.31.1+
    
    CEO Certification under Section 302 of Sarbanes-Oxley Act of 200231.2+
    
    CFO Certification under Section 302 of Sarbanes-Oxley Act of 200232.1+
    
    CEO Certification under Section 906 of Sarbanes-Oxley Act of 200232.2+
    
    CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002
 
 #
    
    Management Compensation Plan.**
    
    Previously filed.+
    
    Included herewith.(1)
    
    Incorporated by reference to the Companys Current Report on Form 8-K dated August 14, 2006
(File No. 0-21577).(2)
    
    Incorporated by reference to the Companys Current Report on Form 8-K dated August 24, 2006
(File No. 0-21577).  34




---



##### Table of Contents



SIGNATURES
  Wild Oats Markets, Inc.
(Registrant)By:
    /s/   Robert B. DimondRobert B. DimondExecutive Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)  35




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description10.3#+
    
    Employment Agreement dated October 4, 2006 between Roger E.
Davidson and Registrant.10.4#+
    
    Roger E. Davidson Equity Incentive Plan10.5#+
    
    Severance Agreement dated October 30, 2006 between Roger E.
Davidson and Registrant.31.1+
    
    CEO Certification under Section 302 of Sarbanes-Oxley Act of 200231.2+
    
    CFO Certification under Section 302 of Sarbanes-Oxley Act of 200232.1+
    
    CEO Certification under Section 906 of Sarbanes-Oxley Act of 200232.2+
    
    CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002
 
 +
    
    Included herewith.(1)
    
    Incorporated by reference to the Companys Current Report on Form 8-K dated August 14, 2006
(File No. 0-21577).(2)
    
    Incorporated by reference to the Companys Current Report on Form 8-K dated August 24, 2006
(File No. 0-21577).  36