##### 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 JUNE 30, 2007.
  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
    
    84-1100630(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)Incorporation or organization)
 1821 30th Street
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




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TABLE OF CONTENTS
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets, June 30, 2007 (unaudited) and
December 30, 2006
    
    
    3Consolidated Statements of Operations (unaudited), Three and
Six Months Ended June 30, 2007 and July 1, 2006
    
    
    4Consolidated Statements of Comprehensive Income (Loss)
(unaudited), Three and Six Months Ended June 30, 2007 and
July 1, 2006
    
    
    5Consolidated Statements of Cash Flows (unaudited), Three and
Six Months Ended June 30, 2007 and July 1, 2006
    
    
    6Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    28PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    28Item 1A.
    
    Risk Factors
    
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3.
    
    Defaults Upon Senior Securities
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    31Item 5.
    
    Other Information
    
    
    31Item 6.
    
    Exhibits
    
    
    31SIGNATURE AND EXHIBITSSignatures
    
    
    32Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 WILD OATS MARKETS, INC.
 
 Consolidated Balance Sheets  (in thousands, except share data)
 June 30, 2007
    
    
    December 30, 2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    30,830
    
    
    $
    40,420Short-term investments
    
    
    7,250
    
    
    
    13,675Inventories (net of reserves of $1,113 and $1,032, respectively)
    
    
    73,114
    
    
    
    67,753Accounts receivable (net of allowance for doubtful
accounts of $155 and $288, respectively)
    
    
    3,319
    
    
    
    7,581Prepaid expenses and other current assets
    
    
    8,956
    
    
    
    10,204Total current assets
    
    
    123,469
    
    
    
    139,633Property and equipment, net
    
    
    199,543
    
    
    
    192,061Goodwill, net
    
    
    105,124
    
    
    
    105,124Other intangible assets, net
    
    
    4,702
    
    
    
    4,810Deposits and other assets
    
    
    4,927
    
    
    
    4,831Deferred tax asset, net
    
    
    196
    
    
    
    179$
    437,961
    
    
    $
    446,638LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    59,780
    
    
    $
    57,147Book overdraft
    
    
    21,609
    
    
    
    29,888Accrued liabilities
    
    
    58,448
    
    
    
    64,470Current portion of debt, capital leases and
financing obligations
    
    
    414
    
    
    
    573Total current liabilities
    
    
    140,251
    
    
    
    152,078Long-term debt, capital leases and financing obligations
    
    
    147,512
    
    
    
    147,662Other long-term obligations
    
    
    37,546
    
    
    
    38,302325,309
    
    
    
    338,042Commitments 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, 32,577,922 and 32,454,554 shares issued;
and 29,915,902 and 29,795,291 shares outstanding,
respectively
    
    
    32
    
    
    
    32Treasury stock, at cost: 2,662,020 and 2,659,263
shares, respectively
    
    
    (37,223
    )
    
    
    (37,181
    )Additional paid-in capital
    
    
    243,687
    
    
    
    242,322Accumulated deficit
    
    
    (96,161
    )
    
    
    (97,912
    )Accumulated other comprehensive income
    
    
    2,317
    
    
    
    1,335Total stockholders equity
    
    
    112,652
    
    
    
    108,596$
    437,961
    
    
    $
    446,638
 The accompanying notes are an integral part of these consolidated financial statements.
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WILD OATS MARKETS, INC.
 
 Consolidated Statements of Operations  (in thousands, except per share amounts) (unaudited)
 THREE MONTHS
    
    
    SIX MONTHSENDED
    
    
    ENDEDJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Sales
    
    $
    311,779
    
    
    $
    296,561
    
    
    $
    621,721
    
    
    $
    594,918Cost of goods sold and occupancy costs
    
    
    212,472
    
    
    
    201,478
    
    
    
    423,248
    
    
    
    402,775Gross profit
    
    
    99,307
    
    
    
    95,083
    
    
    
    198,473
    
    
    
    192,143Operating expenses:Direct store expenses
    
    
    72,863
    
    
    
    69,928
    
    
    
    145,941
    
    
    
    139,749Depreciation and amortization
    
    
    6,965
    
    
    
    6,370
    
    
    
    13,681
    
    
    
    13,057Selling, general and administrative expenses
    
    
    16,407
    
    
    
    11,367
    
    
    
    30,429
    
    
    
    24,345Loss on disposal of assets, net
    
    
    263
    
    
    
    77
    
    
    
    282
    
    
    
    167Pre-opening expenses
    
    
    529
    
    
    
    792
    
    
    
    1,226
    
    
    
    2,251Restructuring and asset impairment charges,
net
    
    
    372
    
    
    
    295
    
    
    
    1,829
    
    
    
    1,965Income from operations
    
    
    1,908
    
    
    
    6,254
    
    
    
    5,085
    
    
    
    10,609Interest income
    
    
    399
    
    
    
    699
    
    
    
    950
    
    
    
    1,288Interest expense
    
    
    (1,777
    )
    
    
    (1,836
    )
    
    
    (3,617
    )
    
    
    (3,690
    )Income before income taxes
    
    
    530
    
    
    
    5,117
    
    
    
    2,418
    
    
    
    8,207Income tax expense
    
    
    403
    
    
    
    247
    
    
    
    667
    
    
    
    452Net income
    
    $
    127
    
    
    $
    4,870
    
    
    $
    1,751
    
    
    $
    7,755Net earnings per common share:Basic
    
    $
    0.00
    
    
    $
    0.17
    
    
    $
    0.06
    
    
    $
    0.27Diluted
    
    $
    0.00
    
    
    $
    0.16
    
    
    $
    0.06
    
    
    $
    0.26Weighted-average common shares outstanding, basic
    
    
    30,058
    
    
    
    29,236
    
    
    
    30,031
    
    
    
    29,115Dilutive effect of stock options and restricted stock units
    
    
    351
    
    
    
    730
    
    
    
    349
    
    
    
    829Weighted-average common shares outstanding, assuming dilution
    
    
    30,409
    
    
    
    29,966
    
    
    
    30,380
    
    
    
    29,944
 The accompanying notes are an integral part of these consolidated financial statements.
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WILD OATS MARKETS, INC.
 
 Consolidated Statements of Comprehensive Income (Loss)  (in thousands) (unaudited)
 THREE MONTHS
    
    
    SIX MONTHSENDED
    
    
    ENDEDJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    127
    
    
    $
    4,870
    
    
    $
    1,751
    
    
    $
    7,755Other comprehensive income:Foreign currency translation adjustments
    
    
    884
    
    
    
    526
    
    
    
    982
    
    
    
    481Unrealized gain (loss) on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Other comprehensive income
    
    
    884
    
    
    
    526
    
    
    
    982
    
    
    
    478Comprehensive income
    
    $
    1,011
    
    
    $
    5,396
    
    
    $
    2,733
    
    
    $
    8,233
 The accompanying notes are an integral part of these consolidated financial statements.
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WILD OATS MARKETS, INC.
 
 Consolidated Statements of Cash Flows  (in thousands) (unaudited)
 SIX MONTHS ENDEDJune 30,
    
    
    July 1,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,751
    
    
    $
    7,755Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    13,681
    
    
    
    13,057(Gain) loss on disposal of property and equipment
    
    
    (71
    )
    
    
    187Restructuring and asset impairment charges, net
    
    
    1,829
    
    
    
    1,965Interest on related party receivable
    
    
    
    
    
    
    (88
    )Stock-based compensation
    
    
    982
    
    
    
    1,289Accretion of debt issuance costs
    
    
    312
    
    
    
    312Change in assets and liabilities:Inventories, net
    
    
    (5,189
    )
    
    
    (5,992
    )Receivables, net, and other assets
    
    
    4,865
    
    
    
    (1,513
    )Accounts payable
    
    
    1,070
    
    
    
    3,562Accrued liabilities and other liabilities
    
    
    (9,016
    )
    
    
    496Net cash provided by operating activities
    
    
    10,214
    
    
    
    21,030CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (19,768
    )
    
    
    (15,059
    )Purchase of short-term investments
    
    
    (61,175
    )
    
    
    (71,830
    )Proceeds from sale of short-term investments
    
    
    67,600
    
    
    
    59,249Proceeds from sale of property and equipment
    
    
    362
    
    
    
    16Insurance proceeds from casualty losses
    
    
    225
    
    
    
    Net cash used in investing activities
    
    
    (12,756
    )
    
    
    (27,624
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net (decrease) increase in book overdraft
    
    
    (8,279
    )
    
    
    1,857Repayments on notes payable, long-term debt and capital leases
    
    
    (309
    )
    
    
    (261
    )Proceeds from issuance of common stock, net
    
    
    1,009
    
    
    
    9,079Purchase of treasury stock
    
    
    (42
    )
    
    
    (43
    )Net cash (used in) provided by financing activities
    
    
    (7,621
    )
    
    
    10,632Effect of exchange rate changes on cash
    
    
    573
    
    
    
    332Net (decrease) increase in cash and cash equivalents
    
    
    (9,590
    )
    
    
    4,370Cash and cash equivalents at beginning of period
    
    
    40,420
    
    
    
    35,250Cash and cash equivalents at end of period
    
    $
    30,830
    
    
    $
    39,620SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:Equipment acquired through capital lease
    
    $
    
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements.
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WILD OATS MARKETS, INC.
 
 Notes to Consolidated Financial Statements  (unaudited)
 1. Basis of Presentation and Summary of Significant Accounting Policies
    Pending Tender Offer and Merger.
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Principles of consolidation.
 Inventories.
 Reclassifications.
 2. New Accounting Pronouncements
 The Fair Value Option for Financial Assets and Financial
Liabilities  Including an amendment of FASB Statement No. 115
 Fair
Value Measurement
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3. Short-Term Investments
  4. Stock-Based Compensation
 in thousands
 THREE MONTHS ENDED
    
    
    SIX MONTHS ENDEDJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of goods sold and occupancy costs
    
    $
    1
    
    
    $
    1
    
    
    $
    2
    
    
    $
    5Direct store expenses
    
    
    33
    
    
    
    22
    
    
    
    59
    
    
    
    116Selling, general and administrative
expenses
    
    
    384
    
    
    
    488
    
    
    
    921
    
    
    
    1,168Total stock-based compensation expense
    
    $
    418
    
    
    $
    511
    
    
    $
    982
    
    
    $
    1,289
   SIX MONTHS ENDEDJune 30, 2007
    
    July 1, 2006Estimated dividends
    
    None
    
    NoneExpected volatility
    
    47%
    
    55% - 56%Risk-free interest rate
    
    4.76%
    
    4.34% - 4.98%Expected life (years)
    
    4.0
    
    4.0Weighted-average fair value per share
    
    $6.49
    
    $6.27
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Weighted-Number of
    
    
    Average ExerciseOptions
    
    
    PriceOutstanding as of December 30, 2006
    
    
    1,597,960
    
    
    $
    12.35Granted
    
    
    37,500
    
    
    $
    15.40Forfeited
    
    
    (190,340
    )
    
    $
    13.17Expired
    
    
    (18,268
    )
    
    $
    13.63Exercised
    
    
    (90,802
    )
    
    $
    9.69Outstanding as of June 30, 2007
    
    
    1,336,050
    
    
    $
    12.49Exercisable as of June 30, 2007
    
    
    967,337
    
    
    $
    11.72
  5. Property and Equipment
 in
thousands
 June 30, 2007
    
    
    December 30, 2006Machinery and equipment
    
    $
    160,253
    
    
    $
    150,005Buildings and leasehold improvements
    
    
    183,693
    
    
    
    167,276Construction in progress
    
    
    23,928
    
    
    
    31,740367,874
    
    
    
    349,021Less: accumulated depreciation
    
    
    (168,331
    )
    
    
    (156,960
    )Property and equipment, net
    
    $
    199,543
    
    
    $
    192,061
  6. Debt
 Contingent convertible senior debentures Note 8  Earnings Per Share
   10




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Credit facility.
  11




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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
  in thousands
 June 30,
    
    
    December 30,2007
    
    
    2006Leasehold interests
    
    $
    6,598
    
    
    $
    6,598Less accumulated amortization
    
    
    (2,240
    )
    
    
    (2,093
    )Leasehold interests, net
    
    
    4,358
    
    
    
    4,505Liquor licenses (indefinite lived)
    
    
    344
    
    
    
    305Other intangible assets, net
    
    $
    4,702
    
    
    $
    4,810
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in thousands
 FISCAL
    
    AMORTIZATIONYEAR
    
    EXPENSERemainder of 2007
    
    $1472008
    
    $2952009
    
    $2952010
    
    $2952011
    
    $2902012
    
    $290
 10. Restructuring and Asset Impairment Charges
 in thousands
 Change in estimate related to lease-related liabilities for sites previously
closed
    
    $
    (5
    )Accretion expense on lease-related liabilities
    
    
    361Severance for employees notified of termination
    
    
    (14
    )Asset impairment charges
    
    
    30Total restructuring and asset impairment charges
    
    $
    372
  
    
    Changes in estimate related to lease-related liabilities for sites previously closed
($5,000 of restructuring income)- During the second quarter of fiscal 2007, due to changes
in facts and circumstances, the Company adjusted an estimate for a location that was
accrued during a previous period.
    
    Accretion expense on lease-related liabilties ($361,000 of restructuring expense)-
During the second 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 ($14,000 of restructuring income)-
During the second quarter of 2007, the Company reversed existing accruals for severance not
taken from previous store closings. In addition, 40 employees were notified of their
involuntary termination in connection with the sale, related to the expiration of the
lease, of one store in New Jersey. Approximately $72,000 in severance expense related to
the New Jersey store was reclassified to the loss on the sale of assets. During the three
months ended June 30, 2007, $320,000 in benefits were paid to employees that were
terminated during the fourth quarter of 2006 and the second quarter of 2007.
    
    Asset impairment charges ($30,000 of restructuring expense) During the second quarter,
management wrote off $30,000 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
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in thousands
 Change in estimate related to lease-related liabilities for sites previously
closed
    
    $
    (97
    )Lease-related liabilities for the six months ended
    
    
    304Accretion expense on lease-related liabilities
    
    
    823Severance for employees terminated during the six months ended June 30, 2007
    
    
    363Asset impairment charges
    
    
    436Total restructuring and asset impairment charges
    
    $
    1,829
  
    
    Changes in estimate related to lease-related liabilities for sites previously closed
($97,000 of restructuring income) For the six months ended June 30, 2007, due to changes
in facts and circumstances, the Company adjusted estimates for two store locations that
were accrued during previous periods.
    
    Lease-related liability for a site identified for a future store ($304,000 of
restructuring expense) For the six months ended June 30, 2007, the Company determined
that a future store location was no longer suitable and recorded an accrual for the net
present value of the future expected minimum lease payments.
    
    Accretion expense on lease-related liabilties ($823,000 of restructuring expense) For
the six months ended June 30, 2007, the Company accrued accretion expense on reserves for
lease-related liabilities that were calculated using the net present value of the minimum
lease payments (net of sublease income).
    
    Severance for employees notified of termination in the first six months of fiscal 2007
($363,000 of restructuring expense) For the six months ended June 30, 2007, 68 employees
were notified of their involuntary termination in connection with a reorganization of the
Companys Home Office and regional functions and the sale, related to the expiration of the
lease, of one store in New Jersey. Approximately $72,000 of severance expense related to
the New Jersey store was reclassified to the loss on the sale of assets. During the six
months ended June 30, 2007, $1.0 million in benefits were paid to employees that were
terminated during the fourth quarter of 2006 and the first six months of 2007.
    
    Asset impairment charges ($436,000 of restructuring expense) For the six months ended
June 30, 2007, management wrote off $436,000 for the net book value of assets related to
sites identified for future store locations that were subsequently determined unsuitable.
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in
thousands
 2003 and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1stQtr
    
    
    2ndQtrEXIT PLANS
    
    Prior
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2007
    
    
    TotalBalance atDecember 31, 2005:
    
    $
    5,949
    
    
    $
    287
    
    
    $
    1,183
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,419Severance expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    809
    
    
    
    
    
    
    
    
    
    
    
    809Lease-related expense
    
    
    54
    
    
    
    
    
    
    
    724
    
    
    
    11,811
    
    
    
    
    
    
    
    
    
    
    
    12,589Cash paid:Severance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (449
    )
    
    
    
    
    
    
    
    
    
    
    (449
    )Lease-related
liabilities
    
    
    (1,147
    )
    
    
    
    
    
    
    (824
    )
    
    
    (1,195
    )
    
    
    
    
    
    
    
    
    
    
    (3,166
    )Provision adjustments
    
    
    20
    
    
    
    (7
    )
    
    
    
    
    
    
    936
    
    
    
    
    
    
    
    
    
    
    
    949Balance atDecember 30, 2006:
    
    $
    4,876
    
    
    $
    280
    
    
    $
    1,083
    
    
    $
    11,912
    
    
    $
    
    
    
    $
    
    
    
    $
    18,151Severance expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    317
    
    
    
    60
    
    
    
    
    
    
    
    377Lease-related expense
    
    
    99
    
    
    
    
    
    
    
    20
    
    
    
    251
    
    
    
    304
    
    
    
    
    
    
    
    674Cash paid:Severance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (666
    )
    
    
    (58
    )
    
    
    
    
    
    
    (724
    )Lease-related
liabilities
    
    
    (207
    )
    
    
    
    
    
    
    (178
    )
    
    
    (1,030
    )
    
    
    
    
    
    
    
    
    
    
    (1,415
    )Provision adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    530
    
    
    
    (2
    )
    
    
    
    
    
    
    528Balance atMarch 31, 2007:
    
    $
    4,768
    
    
    $
    280
    
    
    $
    925
    
    
    $
    11,314
    
    
    $
    304
    
    
    $
    
    
    
    $
    17,591Severance expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    3
    
    
    
    (14
    )Lease-related expense
    
    
    101
    
    
    
    
    
    
    
    17
    
    
    
    243
    
    
    
    (5
    )
    
    
    
    
    
    
    356Cash paid:Severance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (249
    )
    
    
    
    
    
    
    (71
    )
    
    
    (320
    )Lease-related
liabilities
    
    
    (608
    )
    
    
    
    
    
    
    (177
    )
    
    
    (1,026
    )
    
    
    
    
    
    
    
    
    
    
    (1,811
    )Provision adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    72
    
    
    
    77Balance atJune 30, 2007:
    
    $
    4,261
    (1)
    
    $
    280
    (1)
    
    $
    765
    (1)
    
    $
    10,265
(1)
        
    $
304
    (1)
        
    $
4
    (2)
        
    $
    15,879
 (1)
    
    The restructuring accrual balance consists of lease-related liabilities.(2)
    
    The restructuring accrual balance consists of lease-related liabilities and
$4 for employee termination benefits.  11. Income Taxes
 Accounting for
Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
  15




---



##### Table of Contents



12. Related Party Transactions
 Perry D. Odak
     16




---



##### Table of Contents



Other.
 13. Contingencies
 Federal Trade Commission, v. Whole Foods Market, Inc. and Wild Oats Markets, Inc. In the Matter of Whole Foods
Market, Inc. and Wild Oats Markets, Inc.
 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
  17




---



##### Table of Contents



Auchterlonie Ana Marie
Hoeppner et al. v. Wild Oats Markets, Inc. and Does 1 through 100 Jason Puerto, et al. v. Wild Oats Markets, Inc. and
Does 1 through 100 Hoeppner. Hoeppner Puerto Auchterlonie John
Montagne, et al., v. Wild Oats
Markets, Inc. and Does 1 through 100 Hoeppner Kelvin Massie, Anne Ress-Lemay and Gary Liss, individually and on behalf of all other similarly
situated and the California general public v. Wild Oats Markets, Inc. and Does 1 through 100
 3601 Group Inc. v. Wild Oats
Northwest, Inc., Wild Oats, Inc. and Wild Oats Markets, Inc.
 S/H Ahwatukee, LLC and YP Ahwatukee LLC v. Wild Oats Markets, Inc
 1861 Group v. Wild Oats
Markets, Inc.
  
 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.
  18




---



##### Table of Contents



Executive Summary
 Managements Discussion and Analysis of Financial Condition
and Results of Operations
 ® ® ®
     19




---



##### Table of Contents



Results of Operations
 in thousands  percentages
may not add due to rounding):
 THREE MONTHS ENDEDJune 30, 2007
    
    
    July 1, 2006Sales
    
    $
    311,779
    
    
    
    100.0
    %
    
    $
    296,561
    
    
    
    100.0
    %Cost of goods sold and occupancy costs
    
    
    212,472
    
    
    
    68.1
    %
    
    
    201,478
    
    
    
    67.9
    %Gross profit
    
    
    99,307
    
    
    
    31.9
    %
    
    
    95,083
    
    
    
    32.1
    %Direct store expenses
    
    
    72,863
    
    
    
    23.4
    %
    
    
    69,928
    
    
    
    23.6
    %Depreciation and amortization
    
    
    6,965
    
    
    
    2.2
    %
    
    
    6,370
    
    
    
    2.1
    %Selling, general and administrative expenses
    
    
    16,407
    
    
    
    5.3
    %
    
    
    11,367
    
    
    
    3.8
    %Loss on disposal of assets, net
    
    
    263
    
    
    
    0.1
    %
    
    
    77
    
    
    
    0.0
    %Pre-opening expenses
    
    
    529
    
    
    
    0.2
    %
    
    
    792
    
    
    
    0.3
    %Restructuring and asset impairment charges,
net
    
    
    372
    
    
    
    0.1
    %
    
    
    295
    
    
    
    0.1
    %Income from operations
    
    
    1,908
    
    
    
    0.6
    %
    
    
    6,254
    
    
    
    2.1
    %Interest income
    
    
    399
    
    
    
    0.1
    %
    
    
    699
    
    
    
    0.2
    %Interest expense
    
    
    (1,777
    )
    
    
    (0.6
    )%
    
    
    (1,836
    )
    
    
    (0.6
    )%Income before income taxes
    
    
    530
    
    
    
    0.2
    %
    
    
    5,117
    
    
    
    1.7
    %Income tax expense
    
    
    403
    
    
    
    0.1
    %
    
    
    247
    
    
    
    0.1
    %Net income
    
    $
    127
    
    
    
    0.0
    %
    
    $
    4,870
    
    
    
    1.6
    %
 SIX MONTHS ENDEDJune 30, 2007
    
    
    July 1, 2006Sales
    
    $
    621,721
    
    
    
    100.0
    %
    
    $
    594,918
    
    
    
    100.0
    %Cost of goods sold and occupancy costs
    
    
    423,248
    
    
    
    68.1
    %
    
    
    402,775
    
    
    
    67.7
    %Gross profit
    
    
    198,473
    
    
    
    31.9
    %
    
    
    192,143
    
    
    
    32.3
    %Direct store expenses
    
    
    145,941
    
    
    
    23.5
    %
    
    
    139,749
    
    
    
    23.5
    %Depreciation and amortization
    
    
    13,681
    
    
    
    2.2
    %
    
    
    13,057
    
    
    
    2.2
    %Selling, general and administrative expenses
    
    
    30,429
    
    
    
    4.9
    %
    
    
    24,345
    
    
    
    4.1
    %Loss on disposal of assets, net
    
    
    282
    
    
    
    0.0
    %
    
    
    167
    
    
    
    0.0
    %Pre-opening expenses
    
    
    1,226
    
    
    
    0.2
    %
    
    
    2,251
    
    
    
    0.4
    %Restructuring and asset impairment charges,
net
    
    
    1,829
    
    
    
    0.3
    %
    
    
    1,965
    
    
    
    0.3
    %Income from operations
    
    
    5,085
    
    
    
    0.8
    %
    
    
    10,609
    
    
    
    1.8
    %Interest income
    
    
    950
    
    
    
    0.2
    %
    
    
    1,288
    
    
    
    0.2
    %Interest expense
    
    
    (3,617
    )
    
    
    (0.6
    )%
    
    
    (3,690
    )
    
    
    (0.6
    )%Income before income taxes
    
    
    2,418
    
    
    
    0.4
    %
    
    
    8,207
    
    
    
    1.4
    %Income tax expense
    
    
    667
    
    
    
    0.1
    %
    
    
    452
    
    
    
    0.1
    %Net income
    
    $
    1,751
    
    
    
    0.3
    %
    
    $
    7,755
    
    
    
    1.3
    %
  20




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##### Table of Contents



Income Statement Analysis
 Sales
 % ChangeJune 30,
    
    
    July 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    311,779
    
    
    $
    296,561
    
    
    
    5.1
    %For the six months ended (in thousands):
    
    $
    621,721
    
    
    $
    594,918
    
    
    
    4.5
    %
  Gross profit
 % ChangeJune 30,
    
    
    July 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    99,307
    
    
    $
    95,083
    
    
    
    4.4
    %As a percent of sales for the three months
ended:
    
    
    31.9
    %
    
    
    32.1
    %
    
    
    (0.2
    )%For the six months ended (in thousands):
    
    $
    198,473
    
    
    $
    192,143
    
    
    
    3.3
    %As a percent of sales for the six months ended:
    
    
    31.9
    %
    
    
    32.3
    %
    
    
    (0.4
    )%
  Direct store expenses
 % ChangeJune 30,
    
    
    July 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    72,863
    
    
    $
    69,928
    
    
    
    4.2
    %As a percent of sales for the three months
ended:
    
    
    23.4
    %
    
    
    23.6
    %
    
    
    (0.2
    )%For the six months ended (in thousands):
    
    $
    145,941
    
    
    $
    139,749
    
    
    
    4.4
    %As a percent of sales for the six months ended:
    
    
    23.5
    %
    
    
    23.5
    %
    
    
    0.0
    %
   21




---



##### Table of Contents



Depreciation and amortization expense
 % ChangeJune 30,
    
    
    July 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    6,965
    
    
    $
    6,370
    
    
    
    9.3
    %As a percent of sales for the three months
ended:
    
    
    2.2
    %
    
    
    2.1
    %
    
    
    0.1
    %For the six months ended (in thousands):
    
    $
    13,681
    
    
    $
    13,057
    
    
    
    4.8
    %As a percent of sales for the six months ended:
    
    
    2.2
    %
    
    
    2.2
    %
    
    
    0.0
    %
  Selling, general and administrative expenses
 % ChangeJune 30,
    
    
    July 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    16,407
    
    
    $
    11,367
    
    
    
    44.3
    %As a percent of sales for the three months
ended:
    
    
    5.3
    %
    
    
    3.8
    %
    
    
    1.5
    %For the six months ended (in thousands):
    
    $
    30,429
    
    
    $
    24,345
    
    
    
    25.0
    %As a percent of sales for the six months ended:
    
    
    4.9
    %
    
    
    4.1
    %
    
    
    0.8
    %
  Pre-opening expenses
 % ChangeJune 30,
    
    
    July 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    529
    
    
    $
    792
    
    
    
    (33.2
    )%As a percent of sales for the three months ended:
    
    
    0.2
    %
    
    
    0.3
    %
    
    
    (0.1
    )%For the six months ended (in thousands):
    
    $
    1,226
    
    
    $
    2,251
    
    
    
    (45.5
    )%As a percent of sales for the six months ended:
    
    
    0.2
    %
    
    
    0.4
    %
    
    
    (0.2
    )%
    22




---



##### Table of Contents



Loss on disposal of assets, net
 % ChangeJune 30,
    
    
    July 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    263
    
    
    $
    77
    
    
    
    241.6
    %As a percent of sales for the three months ended:
    
    
    0.1
    %
    
    
    0.0
    %
    
    
    0.1
    %For the six months ended (in thousands):
    
    $
    282
    
    
    $
    167
    
    
    
    68.9
    %As a percent of sales for the six months ended:
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
  Restructuring and asset impairment charges, net
 (in thousands):
 THREE MONTHS
    
    
    SIX MONTHSENDED
    
    
    ENDEDJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Change in estimate related to lease-related
liabilities for sites previously closed
    
    $
    (5
    )
    
    $
    70
    
    
    $
    (97
    )
    
    $
    136Lease-related liabilities during the current period
    
    
    
    
    
    
    
    
    
    
    304
    
    
    
    1,362Accretion expense on lease-related liabilities
    
    
    361
    
    
    
    184
    
    
    
    823
    
    
    
    312Severance for employees terminated during the
period
    
    
    (14
    )
    
    
    5
    
    
    
    363
    
    
    
    119Asset impairment charges
    
    
    30
    
    
    
    36
    
    
    
    436
    
    
    
    36Total restructuring and asset impairment
charges
    
    $
    372
    
    
    $
    295
    
    
    $
    1,829
    
    
    $
    1,965
 Note 10  Restructuring and Asset Impairment Charges
 Interest income
 % ChangeJune 30,
    
    
    July 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    399
    
    
    $
    699
    
    
    
    (42.9
    )%As a percent of sales for the three months ended:
    
    
    0.1
    %
    
    
    0.2
    %
    
    
    (0.1
    )%For the six months ended (in thousands):
    
    $
    950
    
    
    $
    1,288
    
    
    
    (26.2
    )%As a percent of sales for the six months ended:
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.0
    %
   23




---



##### Table of Contents



Interest expense
 % ChangeJune 30,
    
    
    July 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    1,777
    
    
    $
    1,836
    
    
    
    (3.2
    )%As a percent of sales for the three months
ended:
    
    
    0.6
    %
    
    
    0.6
    %
    
    
    0.0
    %For the six months ended (in thousands):
    
    $
    3,617
    
    
    $
    3,690
    
    
    
    (2.0
    )%As a percent of sales for the six months ended:
    
    
    0.6
    %
    
    
    0.6
    %
    
    
    0.0
    %
  Income tax expense
 % ChangeJune 30,
    
    
    July 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    403
    
    
    $
    247
    
    
    
    63.2
    %As a percent of sales for the three months ended:
    
    
    0.1
    %
    
    
    0.1
    %
    
    
    0.0
    %Effective tax rate for the three months ended:
    
    
    76.0
    %
    
    
    4.8
    %
    
    
    71.2
    %For the six months ended (in thousands):
    
    $
    667
    
    
    $
    452
    
    
    
    47.6
    %As a percent of sales for the six months ended:
    
    
    0.1
    %
    
    
    0.1
    %
    
    
    0.0
    %Effective tax rate for the six months ended:
    
    
    27.6
    %
    
    
    5.5
    %
    
    
    22.1
    %
  Earnings before interest, taxes, depreciation and amortization loss (gain) on asset disposals, net,
restructuring and asset impairment charges (income), net, and stock-based compensation expense, as
adjusted (EBITDA, as adjusted )
 % ChangeJune 30,
    
    
    July 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    9,926
    
    
    $
    13,507
    
    
    
    (26.5
    )%As a percent of sales for the three months
ended:
    
    
    3.2
    %
    
    
    4.6
    %
    
    
    (1.4
    )%For the six months ended (in thousands):
    
    $
    21,859
    
    
    $
    27,087
    
    
    
    (19.3
    )%As a percent of sales for the six months ended:
    
    
    3.5
    %
    
    
    4.6
    %
    
    
    (1.1
    )%
 Non GAAP Financial Information.
  24




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##### Table of Contents



Liquidity and Capital Resources
     EBITDA. Non GAAP Financial Information.
  Capital expenditures
   25




---



##### Table of Contents



New Accounting Pronouncements
 The Fair Value Option for Financial Assets and Financial
Liabilities  Including an
amendment of FASB Statement No. 115
 Fair
Value Measurement
 Critical Accounting Policies and Estimates
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB
Statement No. 109
 Income taxes. Accounting for
Income Taxes
 Cautionary Statement Regarding Forward-Looking Statements
   26




---



##### Table of Contents



Non GAAP Financial Information
 in
thousands
 THREE MONTHS ENDEDJune 30, 2007
    
    
    July 1, 2006Net income
    
    $
    127
    
    
    $
    4,870Interest expense, net of interest income
    
    
    1,378
    
    
    
    1,137Income tax expense
    
    
    403
    
    
    
    247Depreciation and amortization
    
    
    6,965
    
    
    
    6,370EBITDA
    
    
    8,873
    
    
    
    12,624Loss on asset disposals, net
    
    
    263
    
    
    
    77Stock-based compensation expense
    
    
    418
    
    
    
    511Restructuring and asset impairment charges, net
    
    
    372
    
    
    
    295EBITDA, as adjusted
    
    $
    9,926
    
    
    $
    13,507EBITDA, as a percentage of sales
    
    
    2.8
    %
    
    
    4.3
    %EBITDA, as adjusted, as a percentage of sales
    
    
    3.2
    %
    
    
    4.6
    %
 SIX MONTHS ENDEDJune 30, 2007
    
    
    July 1, 2006Net income
    
    $
    1,751
    
    
    $
    7,755Interest expense, net of interest income
    
    
    2,667
    
    
    
    2,402Income tax expense
    
    
    667
    
    
    
    452Depreciation and amortization
    
    
    13,681
    
    
    
    13,057EBITDA
    
    
    18,766
    
    
    
    23,666Loss on asset disposals, net
    
    
    282
    
    
    
    167Stock-based compensation expense
    
    
    982
    
    
    
    1,289Restructuring and asset impairment charges, net
    
    
    1,829
    
    
    
    1,965EBITDA, as adjusted
    
    $
    21,859
    
    
    $
    27,087EBITDA, as a percentage of sales
    
    
    3.0
    %
    
    
    4.0
    %EBITDA, as adjusted, as a percentage of sales
    
    
    3.5
    %
    
    
    4.6
    %
   27




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##### 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.
 
 Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Federal Trade Commission, v. Whole Foods Market, Inc. and Wild Oats Markets, Inc. In the Matter of Whole Foods Market, Inc. and
Wild Oats Markets, Inc.
  28




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##### Table of Contents



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
 Auchterlonie Ana Marie Hoeppner et al. v. Wild
Oats Markets, Inc. and Does 1 through 100 Jason
Puerto, et al. v. Wild Oats Markets, Inc. and Does 1 through 100 Hoeppner Hoeppner Puerto Auchterlonie John Montagne, et al., v. Wild Oats Markets, Inc. and Does 1 through 100 Hoeppner Kelvin Massie, Anne Ress-Lemay and Gary
Liss, individually and on behalf of all other similarly situated and the California general public
v. Wild Oats Markets, Inc. and Does 1 through 100
 3601 Group Inc. v. Wild Oats Northwest,
Inc., Wild Oats, Inc. and Wild Oats Markets, Inc.
 S/H Ahwatukee, LLC and YP Ahwatukee LLC v. Wild Oats Markets, Inc.
 1861 Group v. Wild Oats
Markets, Inc.
   29




---



##### Table of Contents



Item 1A. Risk Factors
  Failure to complete the proposed Merger could negatively affect us. Federal Trade Commission,
v. Whole Foods Market, Inc. and Wild Oats Markets, Inc.
 
    
    the current market price of the Companys common stock may, to some degree,
reflect a market assumption that the Merger will occur, and a failure to complete
the Merger could result in a decline in the market price of such stock;
    
    the occurrence of any event, change or other circumstances that could give rise
to a termination of the Merger Agreement, including the occurrence of the Outside
Date;
    
    the outcome of any legal proceedings that may be instituted against us, members
of our Board of Directors and others relating to the Merger, including any
settlement of such proceedings that may be subject to court approval;
    
    the inability to complete the Merger due to the failure to obtain stockholder
approval (if required) or the failure to satisfy other conditions to consummation
of the Merger;
    
    the failure of the Merger to close for any other reason;
    
    our remedies against Whole Foods Market, Inc. with respect to certain breaches
of the Merger Agreement may not be adequate to cover our damages, including the
costs, fees, expenses and charges we have and may incur related to the Merger;
    
    the proposed Merger is disruptive to current business plans and operations;
    
    the proposed Merger may create difficulties in attracting employees;
    
    the number of days during which the Merger is pending creates difficulties in
retaining key employees;
    
    the effect of the announcement of the Merger on our business relationships,
operating results and business generally;
    
    the proposed Merger has delayed our ability to find and retain a permanent CEO
and CFO to develop and implement a new, long-term strategic plan for the Company;
    
    the proposed Merger affects our ability to obtain additional financing at
commercially reasonable rates; and
    
    the proposed Merger has diverted financial and management resources from
pursuing growth initiatives, including investing in new stores and securing new
locations for future stores.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
   30




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit Number
    
    Description31.1+
    
    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.  31




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##### Table of Contents



SIGNATURES
  Wild Oats Markets, Inc.
(Registrant)By:
    /s/   Gregory MaysGregory MaysInterim Chief Financial Officer
(Principal Financial and Accounting Officer)  32




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description31.1+
    
    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.  33