10-Q 1 d10q.txt FORM 10-Q (Q.E. 7/1/2001) FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended July 1, 2001; or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________________ to _________________. Commission File Number: 0-19797 WHOLE FOODS MARKET, INC. (Exact name of registrant as specified in its charter) Texas 74-1989366 (State of (IRS employer incorporation) identification no.) 601 N. Lamar Suite 300 Austin, Texas 78703 (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code: 512-477-4455 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- The number of shares of the registrant's common stock, no par value, outstanding as of July 1, 2001 was 53,968,814 shares. Page 1 of 13 WHOLE FOODS MARKET, INC. AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS Part I. Financial Information
Page ---- Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets (unaudited), July 1, 2001 and September 24, 2000 3 Condensed Consolidated Income Statements (unaudited), for the twelve and forty weeks ended July 1, 2001 and July 2, 2000 4 Condensed Consolidated Statements of Cash Flows (unaudited), for the forty weeks ended July 1, 2001 and July 2, 2000 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 12 Signature 13
Page 2 of 13 Part 1. Financial Information Item 1. Financial Statements Whole Foods Market, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (unaudited, in thousands) July 1, 2001 and September 24, 2000
Assets 2001 2000 ----------------------------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 3,072 395 Trade accounts receivable 24,423 21,836 Merchandise inventories 104,247 93,858 Prepaid expenses and other current assets 18,616 35,632 ----------------------------------------------------------------------------------------------------------------------- Total current assets 150,358 151,721 Property and equipment, net of accumulated depreciation and amortization 532,500 468,678 Long-term investments 9,256 9,632 Acquired leasehold rights, net of accumulated amortization 15,585 13,753 Excess of cost over net assets acquired, net of accumulated amortization 67,872 69,867 Other assets, net of accumulated amortization 36,479 17,628 Net assets of discontinued operations 16,347 29,120 ----------------------------------------------------------------------------------------------------------------------- $828,397 760,399 ----------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity 2001 2000 ----------------------------------------------------------------------------------------------------------------------- Current liabilities: Current installments of long-term debt and capital lease obligations $ 6,103 7,884 Trade accounts payable 50,456 49,985 Accrued payroll, bonus and employee benefits 45,614 37,534 Other accrued expenses 46,422 47,238 ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 148,595 142,641 Long-term debt and capital lease obligations, less current installments 284,780 298,070 Other long-term liabilities 12,541 12,531 ----------------------------------------------------------------------------------------------------------------------- Total liabilities 445,916 453,242 ----------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock, no par value, 200,000 shares authorized, 54,824 and 54,444 shares issued, 53,969 and 52,932 shares outstanding in 2001 and 2000, respectively 242,284 235,648 Common stock in treasury, at cost (13,387) (23,688) Retained earnings 153,584 95,197 ----------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 382,481 307,157 ----------------------------------------------------------------------------------------------------------------------- Commitments and contingencies ----------------------------------------------------------------------------------------------------------------------- $828,397 760,399 -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 of 13 Whole Foods Market, Inc. and Subsidiaries Condensed Consolidated Income Statements (unaudited, in thousands except per share amounts)
Twelve weeks ended Forty weeks ended July 1 July 2 July 1 July 2 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- Sales $535,584 442,557 1,695,679 1,400,296 Cost of goods sold and occupancy costs 347,867 288,643 1,106,923 919,248 ---------------------------------------------------------------------------------------------------------------------------------- Gross profit 187,717 153,914 588,756 481,048 Selling, general and administrative expenses 154,233 123,809 487,781 393,062 Amortization expense 2,108 1,466 5,450 4,315 Pre-opening and relocation costs 941 2,306 5,600 8,376 ---------------------------------------------------------------------------------------------------------------------------------- Operating income 30,435 26,333 89,925 75,295 Other income (expense): Interest expense (3,926) (3,647) (14,224) (10,802) Investment and other income 357 408 1,314 1,305 ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes and cumulative effect of change in accounting principle 26,866 23,094 77,015 65,798 Provision for income taxes 10,746 9,700 30,806 27,615 Equity in losses of unconsolidated affiliate - - 126 - ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before cumulative effect of change in accounting principle 16,120 13,394 46,083 38,183 Discontinued operations: Income (loss) from discontinued operations, net of income taxes - - - (218) Gain (loss) on disposal, net of income taxes - - 12,304 - ---------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 16,120 13,394 58,387 37,965 Cumulative effect of change in accounting principle, net of income taxes - - - (375) ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 16,120 13,394 58,387 37,590 ---------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share: Income from continuing operations before cumulative effect of change in accounting principle $ 0.30 0.26 0.86 0.73 Discontinued operations: Income (loss) from discontinued operations, net of income taxes - - - - Gain (loss) on disposal, net of income taxes - - 0.23 - Cumulative effect of change in accounting principle, net of income taxes - - - (0.01) ---------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.30 0.26 1.09 0.72 ---------------------------------------------------------------------------------------------------------------------------------- Weighted average shares 53,750 52,286 53,423 52,124 ---------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share: Income from continuing operations before cumulative effect of change in accounting principle $ 0.29 0.25 0.83 0.70 Discontinued operations: Income (loss) from discontinued operations, net of income taxes - - - - Gain (loss) on disposal, net of income taxes - - 0.22 - Cumulative effect of change in accounting principle, net of income taxes - - - (0.01) ---------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.29 0.25 1.05 0.69 ---------------------------------------------------------------------------------------------------------------------------------- Weighted average shares 59,396 54,650 55,773 54,195 ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 of 13 Whole Foods Market, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited, in thousands)
Forty weeks ended July 1 July 2 2001 2000 ----------------------------------------------------------------------------------------- Cash flows from operating activities: Income from continuing operations $ 46,083 38,183 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 59,143 46,871 Net gain on disposal of fixed assets (46) (782) Rent differential 467 1,426 Change in LIFO reserve 2,851 2,288 Interest accretion on long-term debt 5,296 4,875 Tax benefit related to exercise of employee stock options 4,797 2,313 Net change in current assets (18,397) (21,686) Net change in current liabilities 13,522 19,066 ----------------------------------------------------------------------------------------- Net cash provided by operating activities 113,716 92,554 ----------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisition of property and equipment (116,310) (115,612) Acquisition of intangible assets (4,894) (591) Acquisition of minority interest - (1,281) Payments for purchase of acquired entities, net of cash acquired - (25,700) ----------------------------------------------------------------------------------------- Net cash used in investing activities (121,204) (143,184) ----------------------------------------------------------------------------------------- Cash flows from financing activities: Net proceeds from long-term borrowings 25,000 70,000 Issuance of common stock 13,579 4,692 Payments on long-term debt and capital lease obligations (43,574) (6,349) Purchase of treasury stock - (13,534) ----------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (4,995) 54,809 ----------------------------------------------------------------------------------------- Cash flows from discontinued operations: Net cash provided by (used in) discontinued operations 15,160 (7,761) ----------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,677 (3,582) Cash and cash equivalents at beginning of period 395 3,582 ----------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 3,072 - ----------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Interest paid $ 8,910 5,001 ----------------------------------------------------------------------------------------- Federal and state income taxes paid $ 20,077 18,921 -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 of 13 Whole Foods Market, Inc. And Subsidiaries Notes To Condensed Consolidated Financial Statements (unaudited) July 1, 2001 (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Whole Foods Market, Inc. and subsidiaries (our "Company") have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Certain information and footnote disclosure normally included in annual financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10K for the fiscal year ended September 24, 2000. Our fiscal year ends on the last Sunday in September. The first fiscal quarter is sixteen weeks, the second and third fiscal quarters each are twelve weeks and the fourth fiscal quarter is twelve or thirteen weeks. (2) Stock Split On May 10, 2001, our Board of Directors declared a 2-for-1 stock split of the Company's common stock in the form of a 100% stock dividend to stockholders of record as of May 21, 2001. The distribution of such dividend occurred on June 4, 2001. All applicable share and per share information has been retroactively restated in the accompanying condensed consolidated financial statements to reflect the stock split. (3) Earnings Per Share A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in thousands):
Twelve weeks ended Forty weeks ended July 1 July 2 July 1 July 2 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------- Net income (numerator for basic earnings per share) $16,120 13,394 58,387 37,590 Interest on 5% zero coupon convertible subordinated debentures, net of income taxes 933 - - - ---------------------------------------------------------------------------------------------------- Adjusted net income (numerator for diluted earnings per share) $17,053 13,394 58,387 37,590 ---------------------------------------------------------------------------------------------------- Weighted average common shares outstanding (denominator for basic earnings per share) 53,750 52,286 53,423 52,124 Potential common shares outstanding: Assumed conversion of 5% zero coupon convertible subordinated debentures 3,286 - - - Assumed exercise of stock options 2,360 2,364 2,350 2,071 ---------------------------------------------------------------------------------------------------- Weighted average common shares outstanding and potential additional common shares outstanding (denominator for diluted earnings per share) 59,396 54,650 55,773 54,195 ---------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.30 0.26 1.09 0.72 ---------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.29 0.25 1.05 0.69 ---------------------------------------------------------------------------------------------------- (continued)
Page 6 of 13 (3) Earnings Per Share, continued Options to purchase approximately 2,122,000 shares and 2,209,000 shares of common stock were not included in the computation of diluted earnings per share for the twelve and forty week periods ended July 1, 2001, respectively, because their effect would have been antidilutive. Options to purchase approximately 2,663,000 shares and 2,724,000 shares of common stock were not included in the computation of diluted earnings per share for the twelve and forty week periods ended July 2, 2000, respectively, because their effect would have been antidilutive. The potential conversion of approximately 3,286,000 shares of common stock related to the zero coupon convertible subordinated debentures was not included in the computations of diluted earnings per share for the forty week period ended July 1, 2001 and the twelve and forty week periods ended July 2, 2000 because their effect would have been antidilutive. (4) Discontinued Operations In November 2000, the Company adopted a formal plan to sell the NatureSmart (formerly Amrion, Inc.) business of manufacturing and direct marketing of nutritional supplements. The NatureSmart business has been segregated from continuing operations and reported as discontinued operations in the accompanying condensed consolidated financial statements. The loss on disposition of the NatureSmart business reported at September 24, 2000 included the writedown to estimated net realizable value of the business being discontinued, costs associated with the planned disposal and the estimated loss from operations of the discontinued business through the expected date of disposition. On May 16, 2001, the Company completed the sale of all of its interest in NatureSmart to NBTY, Inc. for approximately $28 million in cash. Accordingly, the Company re-evaluated its estimates used to determine the loss on disposition of the NatureSmart business and recorded an adjustment in the second fiscal quarter of 2001 to reduce the loss on disposal by approximately $12.3 million, net of income taxes of approximately $1.8 million. At closing, NBTY also signed a short-term lease on the facility that was used by NatureSmart, which is still held for sale by the Company. The assets and liabilities of discontinued operations, which have been reflected on a net basis on the accompanying condensed consolidated balance sheets, are summarized as follows (in thousands):
July 1 September 24 2001 2000 ---------------------------------------------------------------- Current assets $ - 11,392 Long-term assets 16,347 29,187 ---------------------------------------------------------------- Total assets 16,347 40,579 ---------------------------------------------------------------- Current liabilities - 11,459 ---------------------------------------------------------------- Net assets of discontinued operations $16,347 29,120 ----------------------------------------------------------------
(5) Adoption of Accounting Standards The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" in June 1998 as amended by SFAS No. 138, which was issued in June 2000. SFAS No. 133 establishes reporting standards for derivative instruments and hedging activities that require an entity to recognize all derivatives as assets or liabilities measured at fair value and is effective for financial statements issued for all fiscal quarters of fiscal years beginning after June 15, 2000. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposure to changes in the fair value, variable cash flow, or foreign currency of a recognized asset or liability or certain other transactions and firm commitments. The Company adopted SFAS No. 133 in the first quarter of fiscal year 2001. The adoption of SFAS No. 133 did not have any financial accounting effect on the Company's consolidated financial statements. The FASB issued SFAS No. 141, "Business Combinations," on July 20, 2001. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. The Company adopted SFAS No. 141 effective the beginning of the fourth quarter of fiscal year 2001. The adoption of SFAS No. 141 did not have any financial accounting effect on the Company's consolidated financial statements. (continued) Page 7 of 13 (5) Adoption of Accounting Standards, continued The FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," on July 20, 2001. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that separable intangible assets that have finite lives will continue to be amortized over their useful lives and that goodwill and indefinite-lived intangible assets will no longer be amortized but will be reviewed for impairment annually, or more frequently if impairment indicators arise. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle. Any impairment loss recognized subsequent to initial adoption of SFAS No. 142 will be recorded as a charge to current period earnings. The provisions of SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001 and must be applied as of the beginning of a fiscal year. Early adoption is permitted for companies with fiscal years beginning after March 15, 2001. The Company plans to adopt the provisions of this statement on October 1, 2001. We are currently evaluating the provisions of SFAS No. 142 and have not yet determined the effect that adoption of this standard will have on the Company's consolidated financial statements. (6) Subsequent Event Subsequent to the end of the third quarter of fiscal 2001, the Company agreed to acquire certain assets of Harry's Farmer's Markets, Inc., in exchange for approximately $35 million in cash plus the assumption of certain liabilities. The assets to be acquired are all assets relating to the three perishables superstores in Atlanta, Georgia, including but not limited to real estate, the Harry's Farmers Market trade name, distribution center and other support and office facilities. This transaction is expected to close in November 2001 and will be accounted for using the purchase method. Accordingly, the purchase price will be allocated to tangible and identifiable intangible assets acquired based on their estimated fair values at the date of acquisition. Total costs in excess of tangible and intangible assets acquired will be recorded as goodwill. Page 8 of 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - Twelve and forty weeks ended July 1, 2001 compared to the same periods of the prior year. General We report our results of operations on a fifty-two or fifty-three week fiscal year ending on the last Sunday in September. The first fiscal quarter is sixteen weeks, the second and third fiscal quarters each are twelve weeks and the fourth fiscal quarter is twelve or thirteen weeks. The following table sets forth our results of operations data expressed as a percentage of sales:
Twelve weeks ended Forty weeks ended July 1 July 2 July 1 July 2 2001 2000 2001 2000 ------------------------------------------------------------------------ Sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold and occupancy costs 65.0 65.2 65.3 65.6 ------------------------------------------------------------------------ Gross profit 35.0 34.8 34.7 34.4 Selling, general and administrative expenses 28.8 28.0 28.8 28.1 Amortization expense 0.4 0.3 0.3 0.3 Pre-opening and relocation costs 0.2 0.5 0.3 0.6 ------------------------------------------------------------------------ Operating income 5.7 6.0 5.3 5.4 Other income (expense): Interest expense (0.7) (0.8) (0.8) (0.8) Investment and other income 0.1 0.1 0.1 0.1 ------------------------------------------------------------------------ Income from continuing operations before income taxes and cumulative effect of change in accounting principle 5.0 5.2 4.5 4.7 Provision for income taxes 2.0 2.2 1.8 2.0 Equity in losses of unconsolidated affiliate - - - - ------------------------------------------------------------------------ Income from continuing operations before cumulative effect of change in accounting principle 3.0 3.0 2.7 2.7 Discontinued operations: Income (loss) from discontinued operations, net of income taxes - - - - Gain (loss) on disposal, net of income taxes - - 0.7 - ------------------------------------------------------------------------ Income before cumulative effect of change in accounting principle 3.0 3.0 3.4 2.7 Cumulative effect of change in accounting principle, net of income taxes - - - - ------------------------------------------------------------------------ Net income 3.0% 3.0% 3.4% 2.7% ------------------------------------------------------------------------
Figures may not add due to rounding. Sales Sales from continuing operations increased 21.0% and 21.1% for the twelve and forty weeks ended July 1, 2001, respectively, compared to the same periods of the prior fiscal year. These increases reflect the addition of twelve new stores and one relocated store over the last year and comparable store sales increases of 10.1% and 9.0%, for the twelve and forty weeks ended July 1, 2001, respectively. Sales in identical stores, which excludes relocations, increased 8.8% and 7.7% for the twelve and forty weeks ended July 1, 2001, respectively. Comparable and identical store sales increases generally result from an increase in average transaction amounts and in the number of customer transactions, reflecting an increase in market share as the stores mature in a particular market. Gross Profit Gross profit from continuing operations consists of sales less cost of goods sold and occupancy costs plus contribution from non-retail distribution and food preparation operations. The Company's gross profit as a percentage of sales was 35.0% and 34.7% for the twelve and forty weeks ended July 1, 2001, respectively, compared to 34.8% and 34.4%, respectively, for the same periods of the prior fiscal year. These increases reflect ongoing initiatives in the areas of coordinated purchasing, category management and private label products that continue to result in lower cost of goods sold. Gross profit for the twelve and forty weeks ended July 1, 2001 was negatively impacted by higher utility costs, which increased as a percentage of sales by 15 basis points and 20 basis points over the same periods of the prior year, respectively. Page 9 of 13 Selling, General and Administrative Expenses Selling, general and administrative expenses from continuing operations as a percentage of sales were 28.8% for both the twelve and forty weeks ended July 1, 2001 compared to 28.0% and 28.1%, respectively, for the same periods of the prior fiscal year. These increases reflect increased wage costs and additional depreciation associated with new investments in information systems and the acceleration of depreciation related to recently replaced software. Direct store expenses as a percentage of sales for the twelve and forty weeks ended July 1, 2001 were 25.2% and 25.3%, respectively, compared to 25.2% and 24.9%, respectively, for the same periods of the prior fiscal year. The year-to-date increase in direct store expenses as a percentage of sales reflects higher direct store expenses at new and acquired stores. Amortization Expense Amortization expense from continuing operations as a percentage of sales for the twelve and forty weeks ended July 1, 2001 was 0.4% and 0.3%, respectively, compared to 0.3% for both the twelve and forty week periods of the prior fiscal year. Amortization expense consists primarily of costs associated with the amortization of excess of cost over net assets acquired and non-competition agreements. Pre-opening and Relocation Costs Pre-opening costs include costs associated with hiring and training personnel, supplies and certain occupancy and miscellaneous costs related to new locations. In the first quarter of fiscal year 2000 we reported the cumulative effect of a change in accounting principle, a one-time charge totaling approximately $375,000, net of approximately $272,000 of taxes, representing start-up costs capitalized at September 26, 1999. Relocation costs consist of moving costs, remaining lease payments, accelerated depreciation costs and other costs associated with replaced facilities and other related expenses. Pre-opening and relocation costs for the twelve and forty weeks ended July 1, 2001 consist primarily of costs associated with our openings of three new stores during the first fiscal quarter, two new stores and one relocated store during the second fiscal quarter and two new stores during the third fiscal quarter. In the prior year, pre-opening and relocation costs for the twelve and forty weeks were associated with our openings of five new stores during the first fiscal quarter, four new stores during the second fiscal quarter and two new stores and one relocated store during the third fiscal quarter. Interest Expense Interest expense consists of costs related to the convertible subordinated debentures, senior notes payable and bank line of credit, net of capitalized interest associated with new store development. Interest expense net of capitalized interest for the twelve and forty weeks ended July 1, 2001 totaled approximately $3.9 million and $14.2 million, respectively, compared to approximately $3.6 million and $10.8 million, respectively, for the same periods of the prior fiscal year. These increases are due primarily to additional amounts outstanding under our bank line of credit in fiscal 2001. Capitalized interest for the twelve and forty weeks ended July 1, 2001 totaled approximately $0.5 million and $1.3 million, respectively, compared to approximately $0.4 million and $1.4 million, respectively, for the same periods of the prior fiscal year. Investment and Other Income Investment and other income for the twelve and forty weeks ended July 1, 2001 totaled approximately $0.4 million and $1.3 million, respectively, compared to approximately $0.4 million and $1.3 million, respectively, for the same periods of the prior fiscal year. Investment and other income consists primarily of interest, rental and other income. Equity in Losses of Unconsolidated Affiliate Equity in losses of unconsolidated affiliate represents the Company's net share of losses of Gaiam.com, a subsidiary of Gaiam, Inc. in which we have a minority common equity investment and commercial agreements for the sale of products on co-branded sections of the Gaiam.com Web site. Our net share of equity-method losses for the forty weeks ended July 1, 2001 totaled approximately $126,000. Page 10 of 13 Discontinued Operations In November 2000, the Company adopted a formal plan to sell the NatureSmart (formerly Amrion, Inc.) business of manufacturing and direct marketing of nutritional supplements. The NatureSmart business has been segregated from continuing operations and reported as discontinued operations in the accompanying consolidated financial statements. The loss on disposition of the NatureSmart business reported at September 24, 2000 included the writedown to estimated net realizable value of the business being discontinued, costs associated with the planned disposal and the estimated loss from operations of the discontinued business through the expected date of disposition. On May 16, 2001, the Company completed the sale of all of its interest in NatureSmart to NBTY, Inc. for approximately $28 million in cash. Accordingly, the Company re-evaluated its estimates used to determine the loss on disposition of the NatureSmart business and recorded an adjustment in the second fiscal quarter of 2001 to reduce the loss on disposal by approximately $12.3 million, net of income taxes of approximately $1.8 million. Economic Value Added (EVA(R)) Our goal is to improve long-term intrinsic value measured by improvement in EVA. For the twelve and forty weeks ended July 1, 2001, the Company generated negative EVA of approximately $5.9 million and $25.4 million, respectively, compared to negative EVA of approximately $6.3 million and $25.3 million, respectively, for the same periods of the prior fiscal year. Although our stores produce very strong EVA on average, we currently have negative EVA due to the capital charge on approximately $300 million of unrecorded implied goodwill related to previous pooling acquisitions. Net operating profit after tax (NOPAT) for the third fiscal quarter increased approximately 16% over prior year to approximately $18.4 million, and year-to-date NOPAT increased approximately 19% over prior year to approximately $54.2 million. Total capital at the end of the period increased approximately 9% over the prior year to approximately $971 million. Liquidity and Capital Resources and Changes in Financial Condition For the forty weeks ended July 1, 2001 and July 2, 2000, net cash provided by operating activities was approximately $113.7 million and $92.6 million, respectively. Net cash used in financing activities was approximately $5.0 million for the forty weeks ended July 1, 2001 compared to net cash provided by financing activities of approximately $54.8 million for the same period of the prior fiscal year. Our principal historical capital requirements have been the funding of the development or acquisition of new stores and to a lesser extent, the resultant increase in working capital requirements. We estimate that cash requirements to open a new store will range from approximately $3 million to $12 million (after giving effect to any landlord construction allowance). This excludes new store inventory of approximately $750,000, a portion of which is financed by our vendors. Net cash used in investing activities was approximately $121.2 million and $143.2 million for the forty weeks July 1, 2001 and July 2, 2000, respectively. We plan to open four new stores and relocate one store during the fourth quarter of fiscal 2001. The Company has twenty-four stores currently under development that are expected to open during the next two fiscal years. During the second quarter of fiscal 2001, the Company negotiated an extended and expanded credit facility of $220 million. During the third quarter of fiscal 2001, the Company sold all of its interest in NatureSmart for approximately $28 million in cash. At July 1, 2001 the Company had $125 million outstanding under the line of credit. Subsequent to the end of the third fiscal quarter of 2001, we have paid down our credit line by an additional $15 million and have approximately $106 million available at August 14, 2001. Subsequent to the end of the third quarter of fiscal 2001, the Company agreed to acquire substantially all of the assets of Harry's Farmer's Markets, Inc. in exchange for approximately $35 million in cash. We expect that cash generated from operations and cash available under our existing credit facility will be sufficient to finance this acquisition as well as current planned expansion and other anticipated working capital and capital expenditure requirements. We continually evaluate the need to establish other sources of working capital and will seek those considered appropriate based upon the Company's needs and market conditions. Risk Factors We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward- looking statements that we make from time to time in filings with the Securities and Exchange Commission, news releases, reports, proxy statements, registration statements and other written communications, as well as oral forward-looking statements made from time to time by representatives of our Company. These risks and uncertainties include, but are not limited to, those listed in the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 2000. These risks and uncertainties and additional risks and uncertainties not presently known to us or that we currently deem immaterial may cause our business, financial condition, operating results and cash flows to be materially adversely affected. Except for the historical information contained herein, the matters discussed in this analysis are forward looking statements that involve risks and uncertainties, including but not limited to general business conditions, the timely development and opening of new stores, the impact of competition and other factors which are often beyond the control of the Company. The Company does not undertake any obligation to update forward-looking statements except as required by law. Page 11 of 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the Company's market risk exposures from those reported in our Annual Report on Form 10-K for the fiscal year ended September 24, 2000. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K The Company filed a report on Form 8-K dated April 12, 2001 announcing the appointment of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending September 30, 2001. Page 12 of 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Whole Foods Market, Inc. ------------------------ Registrant Date: August 14, 2001 By: Glenda Flanagan ---------------- --------------- Glenda Flanagan Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer) Page 13 of 13