##### 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 MARCH 31, 2007.
 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)
 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 Statements of Operations (unaudited), Three Months Ended March 31, 2007 and April 1, 2006
    
    
    4Consolidated Statements of Comprehensive Income (Loss) (unaudited), Three Months Ended March 31, 2007 and April 1, 2006
    
    
    5Consolidated Statements of Cash Flows (unaudited), Three Months Ended March 31, 2007 and April 1, 2006
    
    
    6Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operationsand Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    25PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3.
    
    Defaults Upon Senior Securities
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Item 5.
    
    Other Information
    
    
    27Item 6.
    
    Exhibits
    
    
    28SIGNATURE AND EXHIBITSSignatures
    
    
    29Exhibit 10.3Exhibit 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)
 March 31, 2007
    
    
    December 30, 2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    34,567
    
    
    $
    40,420Short-term investments
    
    
    8,250
    
    
    
    13,675Inventories (net of reserves of $1,062 and $1,032,
respectively)
    
    
    69,717
    
    
    
    67,753Accounts receivable (net of allowance for doubtful accounts
of $179 and $288, respectively)
    
    
    4,740
    
    
    
    7,581Prepaid expenses and other current assets
    
    
    9,883
    
    
    
    10,204Total current assets
    
    
    127,157
    
    
    
    139,633Property and equipment, net
    
    
    199,274
    
    
    
    192,061Goodwill, net
    
    
    105,124
    
    
    
    105,124Other intangible assets, net
    
    
    4,776
    
    
    
    4,810Deposits and other assets
    
    
    4,980
    
    
    
    4,831Deferred tax asset, net
    
    
    181
    
    
    
    179$
    441,492
    
    
    $
    446,638LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    57,622
    
    
    $
    57,147Book overdraft
    
    
    24,133
    
    
    
    29,888Accrued liabilities
    
    
    60,930
    
    
    
    64,470Current portion of debt, capital leases and financing
obligations
    
    
    500
    
    
    
    573Total current liabilities
    
    
    143,185
    
    
    
    152,078Long-term debt, capital leases and financing obligations
    
    
    147,596
    
    
    
    147,662Other long-term obligations
    
    
    39,147
    
    
    
    38,302329,928
    
    
    
    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, 32,540,392 and 32,454,554 shares issued; and 29,881,129 and
29,795,291 shares outstanding, respectively
    
    
    32
    
    
    
    32Treasury stock, at cost: 2,659,263 shares, respectively
    
    
    (37,181
    )
    
    
    (37,181
    )Additional paid-in capital
    
    
    243,568
    
    
    
    242,322Accumulated deficit
    
    
    (96,288
    )
    
    
    (97,912
    )Accumulated other comprehensive income
    
    
    1,433
    
    
    
    1,335Total stockholders equity
    
    
    111,564
    
    
    
    108,596$
    441,492
    
    
    $
    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 ENDEDMarch 31,
    
    
    April 1,2007
    
    
    2006Sales
    
    $
    309,942
    
    
    $
    298,357Cost of goods sold and occupancy costs
    
    
    210,776
    
    
    
    201,297Gross profit
    
    
    99,166
    
    
    
    97,060Operating expenses:Direct store expenses
    
    
    73,078
    
    
    
    69,821Depreciation and amortization
    
    
    6,716
    
    
    
    6,687Selling, general and administrative expenses
    
    
    14,022
    
    
    
    12,978Loss on disposal of assets
    
    
    19
    
    
    
    90Pre-opening expenses
    
    
    697
    
    
    
    1,459Restructuring and asset impairment charges, net
    
    
    1,457
    
    
    
    1,670Income from operations
    
    
    3,177
    
    
    
    4,355Interest income
    
    
    551
    
    
    
    589Interest expense
    
    
    (1,840
    )
    
    
    (1,854
    )Income before income taxes
    
    
    1,888
    
    
    
    3,090Income tax expense
    
    
    264
    
    
    
    205Net income
    
    $
    1,624
    
    
    $
    2,885Net earnings per common share:Basic
    
    $
    0.05
    
    
    $
    0.10Diluted
    
    $
    0.05
    
    
    $
    0.10Weighted-average common shares outstanding, basic
    
    
    30,005
    
    
    
    28,970Dilutive effect of stock options and restricted stock units
    
    
    337
    
    
    
    572Weighted-average common shares outstanding, assuming dilution
    
    
    30,342
    
    
    
    29,542
 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 ENDEDMarch 31,
    
    
    April 1,2007
    
    
    2006Net income
    
    $
    1,624
    
    
    $
    2,885Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    98
    
    
    
    (44
    )Unrealized gain (loss) on
available-for-sale securities
    
    
    
    
    
    
    (4
    )Other comprehensive income (loss)
    
    
    98
    
    
    
    (48
    )Comprehensive income
    
    $
    1,722
    
    
    $
    2,837
 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)
 THREE MONTHS ENDEDMarch 31,
    
    
    April 1,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,624
    
    
    $
    2,885Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    6,716
    
    
    
    6,687Loss on disposal of property and equipment
    
    
    19
    
    
    
    90Restructuring and asset impairment charges, net
    
    
    1,457
    
    
    
    1,670Interest on related party receivable
    
    
    
    
    
    
    (88
    )Stock-based compensation
    
    
    564
    
    
    
    778Accretion of debt issuance costs
    
    
    156
    
    
    
    156Change in assets and liabilities:Inventories, net
    
    
    (1,944
    )
    
    
    (2,651
    )Receivables, net, and other assets
    
    
    2,849
    
    
    
    15Accounts payable
    
    
    (1,827
    )
    
    
    3,506Accrued liabilities and other liabilities
    
    
    (3,771
    )
    
    
    133Net cash provided by operating activities
    
    
    5,843
    
    
    
    13,181CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (11,967
    )
    
    
    (5,759
    )Purchase of short-term investments
    
    
    (37,925
    )
    
    
    (21,410
    )Proceeds from sale of short-term investments
    
    
    43,350
    
    
    
    14,522Proceeds from sale of property and equipment
    
    
    2
    
    
    
    24Net cash used in investing activities
    
    
    (6,540
    )
    
    
    (12,623
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net decrease in book overdraft
    
    
    (5,755
    )
    
    
    (760
    )Repayments on notes payable, long-term debt and capital leases
    
    
    (139
    )
    
    
    (125
    )Proceeds from issuance of common stock, net
    
    
    682
    
    
    
    4,227Net cash (used in) provided by financing activities
    
    
    (5,212
    )
    
    
    3,342Effect of exchange rate changes on cash
    
    
    56
    
    
    
    (40
    )Net (decrease) increase in cash and cash equivalents
    
    
    (5,853
    )
    
    
    3,860Cash and cash equivalents at beginning of period
    
    
    40,420
    
    
    
    35,250Cash and cash equivalents at end of period
    
    $
    34,567
    
    
    $
    39,110SUPPLEMENTAL 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.
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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
 3. Short-Term Investments
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4. Stock-Based Compensation
 in thousands
 THREE MONTHS ENDEDMarch 31, 2007
    
    
    April 1, 2006Cost of goods sold and occupancy costs
    
    $
    1
    
    
    $
    4Direct Store expenses
    
    
    26
    
    
    
    94Selling, general and administrative expenses
    
    
    537
    
    
    
    680Total stock-based compensation expense
    
    $
    564
    
    
    $
    778
   THREE MONTHS ENDEDMarch 31, 2007
    
    
    April 1, 2006Estimated dividends
    
    None
    
    NoneExpected volatility
    
    
    47
    %
    
    
    56
    %Risk-free interest rate
    
    
    4.76
    %
    
    
    4.34% - 4.63
    %Expected life (years)
    
    
    4.0
    
    
    
    4.0Weighted-average fair value per share
    
    $
    6.49
    
    
    $
    5.31
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Weighted-Number of
    
    
    AverageOptions
    
    
    Exercise PriceOutstanding as of December 30, 2006
    
    
    1,597,960
    
    
    $
    12.35Granted
    
    
    37,500
    
    
    $
    15.40Forfeited
    
    
    (158,847
    )
    
    $
    13.53Exercised
    
    
    (56,071
    )
    
    $
    9.86Outstanding as of March 31, 2007
    
    
    1,420,542
    
    
    $
    12.40Exercisable as of March 31, 2007
    
    
    984,953
    
    
    $
    11.62
  5. Property and Equipment
 in
thousands
 March 31, 2007
    
    
    December 30, 2006Machinery and equipment
    
    $
    158,435
    
    
    $
    150,005Buildings and leasehold improvements
    
    
    182,771
    
    
    
    167,276Construction in progress
    
    
    21,142
    
    
    
    31,740362,348
    
    
    
    349,021Less: accumulated depreciation
    
    
    (163,074
    )
    
    
    (156,960
    )Property and equipment, net
    
    $
    199,274
    
    
    $
    192,061
  6. Debt
 Contingent convertible senior debentures Note 8  Earnings per Share
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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
 March 31,
    
    
    December 30,2007
    
    
    2006Leasehold interests
    
    $
    6,598
    
    
    $
    6,598Less accumulated amortization
    
    
    (2,166
    )
    
    
    (2,093
    )Leasehold interests, net
    
    
    4,432
    
    
    
    4,505Liquor licenses (indefinite lived)
    
    
    344
    
    
    
    305$
    4,776
    
    
    $
    4,810
 in thousands
 FISCAL
    
    AMORTIZATIONYEAR
    
    EXPENSERemainder of 2007
    
    $
    2212008
    
    $
    2952009
    
    $
    2952010
    
    $
    2952011
    
    $
    2902012
    
    $
    290
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10. Restructuring and Asset Impairment Charges
 in thousands
 Change in estimate related to lease-related liabilities for sites previously
closed
    
    $
    (92
    )Lease-related liability for a site identified for a future store
    
    
    304Accretion expense on lease-related liabilities
    
    
    462Severance for employees terminated during the first quarter of fiscal 2007
    
    
    377Asset impairment charges
    
    
    406Total restructuring and asset impairment charges
    
    $
    1,457
  
    
    Changes in estimate related to lease-related liabilities for sites previously closed
($92,000 of restructuring income)- During the first quarter of fiscal 2007, due to changes
in facts and circumstances, the Company adjusted an estimate for a location in Florida that
was closed during a previous period.
    
    Lease-related liability for a site identified for a future store ($304,000 of
restructuring expense) During the first quarter of fiscal 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 ($462,000 of restructuring expense)-
During the first 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 first quarter of fiscal 2007
($377,000 of restructuring expense)- During the first quarter of 2007, 28 employees were
notified of their involuntary termination in connection with a reorganization of the
Companys Home Office and regional functions. During the three months ended March 31,
2007, $723,000 in benefits were paid to employees that were terminated during the fourth
quarter of 2006 and the first quarter of 2007.
    
    Asset impairment charges ($406,000 of restructuring expense) During the first
quarter, management wrote off $406,000 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
 2003 and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1st QtrEXIT PLANS
    
    Prior
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    TotalBalance at
December 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 at
December 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 at
March 31, 2007:
    
    $
    4,768
    (1)
    
    $
    280
    (1)
    
    $
    925
    (1)
    
    $
    11,314
    (2)
    
    $
    304
    (1)
    
    $
    17,591
 (1)
    
    The restructuring accrual balance consists of lease-related liabilities.(2)
    
    The restructuring accrual balance consists of lease-related liabilities
and $267 for employee termination benefits.
  11. Income Taxes
 Accounting for
Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
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12. Related Party Transactions
 Perry D. Odak
  Note 14  Subsequent
Event
    15




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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
 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.
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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
 ® ® ®
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Results of Operations
 in thousands  percentages may
not add due to rounding):
 THREE MONTHS ENDEDMarch 31, 2007
    
    
    April 1, 2006Sales
    
    $
    309,942
    
    
    
    100.0
    %
    
    $
    298,357
    
    
    
    100.0
    %Cost of goods sold and occupancy costs
    
    
    210,776
    
    
    
    68.0
    %
    
    
    201,297
    
    
    
    67.5
    %Gross profit
    
    
    99,166
    
    
    
    32.0
    %
    
    
    97,060
    
    
    
    32.5
    %Direct store expenses
    
    
    73,078
    
    
    
    23.6
    %
    
    
    69,821
    
    
    
    23.4
    %Depreciation and amortization
    
    
    6,716
    
    
    
    2.2
    %
    
    
    6,687
    
    
    
    2.2
    %Selling, general and administrative expenses
    
    
    14,022
    
    
    
    4.5
    %
    
    
    12,978
    
    
    
    4.3
    %Loss on disposal of assets
    
    
    19
    
    
    
    0.0
    %
    
    
    90
    
    
    
    0.0
    %Pre-opening expenses
    
    
    697
    
    
    
    0.2
    %
    
    
    1,459
    
    
    
    0.5
    %Restructuring and asset impairment charges,
net
    
    
    1,457
    
    
    
    0.5
    %
    
    
    1,670
    
    
    
    0.6
    %Income from operations
    
    
    3,177
    
    
    
    1.0
    %
    
    
    4,355
    
    
    
    1.5
    %Interest income
    
    
    551
    
    
    
    0.2
    %
    
    
    589
    
    
    
    0.2
    %Interest expense
    
    
    (1,840
    )
    
    
    (0.6
    )%
    
    
    (1,854
    )
    
    
    (0.6
    )%Income before income taxes
    
    
    1,888
    
    
    
    0.6
    %
    
    
    3,090
    
    
    
    1.0
    %Income tax expense
    
    
    264
    
    
    
    0.1
    %
    
    
    205
    
    
    
    0.0
    %Net income
    
    $
    1,624
    
    
    
    0.5
    %
    
    $
    2,885
    
    
    
    1.0
    %
 Income Statement Analysis
 Sales
 % ChangeMarch 31,
    
    
    April 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    309,942
    
    
    $
    298,357
    
    
    
    3.9
    %
  18




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Gross profit
 % ChangeMarch 31,
    
    
    April 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    99,166
    
    
    $
    97,060
    
    
    
    2.2
    %As a percent of sales for the three
months ended:
    
    
    32.0
    %
    
    
    32.5
    %
    
    
    (0.5
    )%
  Direct store expenses
 % ChangeMarch 31,
    
    
    April 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    73,078
    
    
    $
    69,821
    
    
    
    4.7
    %As a percent of sales for the three
months ended:
    
    
    23.6
    %
    
    
    23.4
    %
    
    
    0.2
    %
  Depreciation and amortization expense
 % ChangeMarch 31,
    
    
    April 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    6,716
    
    
    $
    6,687
    
    
    
    0.4
    %As a percent of sales for the three
months ended:
    
    
    2.2
    %
    
    
    2.2
    %
    
    
    0.0
    %
  Selling, general and administrative expenses
 % ChangeMarch 31,
    
    
    April 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    14,022
    
    
    $
    12,978
    
    
    
    8.0
    %As a percent of sales for the three
months ended:
    
    
    4.5
    %
    
    
    4.3
    %
    
    
    0.2
    %
   19




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##### Table of Contents



Pre-opening expenses
 % ChangeMarch 31,
    
    
    April 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    697
    
    
    $
    1,459
    
    
    
    (52.2
    )%As a percent of sales for the three months ended:
    
    
    0.2
    %
    
    
    0.5
    %
    
    
    (0.3
    )%
   THREE MONTHS ENDEDMarch 31, 2007
    
    
    April 1, 2006New stores
    
    
    1
    
    
    
    1
  Restructuring and asset impairment charges, net
 (in thousands):
 THREE MONTHS ENDEDMarch 31, 2007
    
    
    April 1, 2006Change in estimate related to lease-related
liabilities for sites previously closed
    
    $
    (92
    )
    
    $
    66Lease-related liabilities during the current period
    
    
    304
    
    
    
    1,362Accretion expense on lease-related liabilities
    
    
    462
    
    
    
    128Severance for employees terminated during the period
    
    
    377
    
    
    
    114Asset impairment charges
    
    
    406
    
    
    
    Total restructuring and asset impairment charges
    
    $
    1,457
    
    
    $
    1,670
 Note 10  Restructuring and Asset Impairment Charges
 Interest income
 % ChangeMarch 31,
    
    
    April 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    551
    
    
    $
    589
    
    
    
    (6.5
    )%As a percent of sales for the three months ended:
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.0
    %
  20




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##### Table of Contents



Interest expense
 % ChangeMarch 31,
    
    
    April 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    1,840
    
    
    $
    1,854
    
    
    
    (0.8
    )%As a percent of sales for the three
months ended:
    
    
    0.6
    %
    
    
    0.6
    %
    
    
    0.0
    %
  Income tax expense
 % ChangeMarch 31,
    
    
    April 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    264
    
    
    $
    205
    
    
    
    28.8
    %As a percent of sales for the three months ended:
    
    
    0.1
    %
    
    
    0.0
    %
    
    
    0.1
    %Effective tax rate for the three months ended:
    
    
    14.0
    %
    
    
    6.6
    %
    
    
    7.4
    %
  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 )
 % ChangeMarch 31,
    
    
    April 1,
    
    
    2006 to2007
    
    
    2006
    
    
    2007For the three months ended (in thousands):
    
    $
    11,933
    
    
    $
    13,580
    
    
    
    (12.1
    )%As a percent of sales for the three
months ended:
    
    
    3.9
    %
    
    
    4.6
    %
    
    
    (0.7)
    %
 Non GAAP Financial Information.
 Liquidity and Capital Resources
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##### Table of Contents



EBITDA. Non GAAP Financial Information.
  Capital expenditures
  New Accounting Pronouncements
 The Fair Value Option for Financial Assets and Financial
Liabilities  Including an amendment of FASB Statement No. 115
 Fair
Value Measurement
  22




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##### Table of Contents



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
   23




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##### Table of Contents



Non GAAP Financial Information
 in
thousands
 THREE MONTHS ENDEDMarch 31, 2007
    
    
    April 1, 2006Net income
    
    $
    1,624
    
    
    $
    2,885Interest expense, net of interest income
    
    
    1,289
    
    
    
    1,265Income tax expense
    
    
    264
    
    
    
    205Depreciation and amortization
    
    
    6,716
    
    
    
    6,687EBITDA
    
    
    9,893
    
    
    
    11,042Loss on asset disposals, net
    
    
    19
    
    
    
    90Stock-based compensation expense
    
    
    564
    
    
    
    778Restructuring and asset impairment charges, net
    
    
    1,457
    
    
    
    1,670EBITDA, as adjusted
    
    $
    11,933
    
    
    $
    13,580EBITDA, as a percentage of sales
    
    
    3.2
    %
    
    
    3.7
    %EBITDA, as adjusted, as a percentage of sales
    
    
    3.9
    %
    
    
    4.6
    %
  Comparable stores sales
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
    24




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##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures
 Internal Control Over Financial Reporting.
 
 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
 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
  25




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##### Table of Contents



3601 Group Inc. v. Wild Oats Northwest,
Inc., Wild Oats, Inc. and Wild Oats Markets, Inc.
  
 Item 1A. Risk Factors
  Failure to complete the proposed Merger could negatively affect us.
 
    
    the current market price may 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 our common stock;
    
    the occurrence of any event, change or other circumstances that could give rise
to a termination of the Merger Agreement;
    
    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 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., the Purchaser and other
affiliates with respect to certain breaches of the Merger Agreement may not be
adequate to cover our damages;
    
    the proposed transactions disrupt current business plans and operations;
    
    the proposed Merger may create difficulties in attracting employees;
    
    the number of days during which the Merger transaction is pending may create
difficulties in retaining key employees;
    
    the effect of the announcement of the Merger on our business relationships,
operating results and business generally; and
    
    the costs, fees, expenses and charges we have and may incur related to the
Merger.
   26




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
    27




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##### Table of Contents



Item 6. Exhibits
 Exhibit Number
    
    Description2.1**
    
    Agreement and Plan of Merger, dated as of February 21, 2007, by
and among Whole Foods Market, Inc., WFMI Merger Co., and Wild
Oats Markets, Inc. (1)4.1**
    
    Amendment No. 3 to Rights Agreement, dated as of February 21,
2007, between Wild Oats Markets, Inc. and Wells Fargo, N.A., as
successor in interest to Norwest Bank Minneapolis, N.A., as
rights agent. (1)10.1**
    
    Tender and Support Agreement, dated as of February 21, 2007, by
and among Whole Foods Market, Inc., WFMI Merger Co., Wild Oats
Markets, Inc., Yucaipa American Alliance Fund I, L.P., and
Yucaipa American Alliance (Parallel) Fund I, L.P. (1)10.2#**
    
    Incentive Bonus Agreement between Wild Oats Markets, Inc.
and Gregory Mays, dated February 20, 2007. (2)10.3#+
    
    Memorandum dated March 7, 2007, confirming amendment to the
relocation expenses portion of the Employment Agreement between
Samuel M. Martin 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 from the Registrants Form 8-K dated February 22, 2007 (File No. 0-21577).(2)
    
    Incorporated by reference from the Registrants Form 8-K dated February 26, 2007 (File No. 0-21577).
  28




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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)  29