-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q8HmpmwfuK8mw/vQPBWnBFJmUvjX2cL6L8vbeEEg481e4YI67bQLP3VkGP0DQ7KV ufdQb7/b0n+br3EE+aJdRA== /in/edgar/work/20000815/0001106013-00-000241/0001106013-00-000241.txt : 20000922 0001106013-00-000241.hdr.sgml : 20000921 ACCESSION NUMBER: 0001106013-00-000241 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000702 FILED AS OF DATE: 20000815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WHOLE FOODS MARKET INC CENTRAL INDEX KEY: 0000865436 STANDARD INDUSTRIAL CLASSIFICATION: [5411 ] IRS NUMBER: 741989366 STATE OF INCORPORATION: TX FISCAL YEAR END: 0929 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19797 FILM NUMBER: 702898 BUSINESS ADDRESS: STREET 1: 601 N LAMAR BLVD STREET 2: STE 300 CITY: AUSTIN STATE: TX ZIP: 78703 BUSINESS PHONE: 5124774455 MAIL ADDRESS: STREET 1: 601 N LAMAR BLVD STREET 2: STE 300 CITY: AUSTIN STATE: TX ZIP: 78703 10-Q 1 0001.txt FORM 10-Q FOR THE PERIOD ENDED 07-02-2000 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 2, 2000; 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 2, 2000 was 26,226,288 shares. Page 1 of 14 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 2, 2000 and September 26, 1999 3 Condensed Consolidated Income Statements (Unaudited), for the 12 and 40 weeks ended July 2, 2000 and July 4, 1999 4 Condensed Consolidated Statements of Cash Flows (Unaudited), for the 40 weeks ended July 2, 2000 and July 4, 1999 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 13 Signature 14
Page 2 of 14 Part 1. Financial Information Item 1. Financial Statements Whole Foods Market, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) In thousands July 2, 2000 and September 26, 1999
Assets 2000 1999 - ---------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ - 9,019 Trade accounts receivable 22,110 19,578 Merchandise inventories 90,888 93,452 Prepaid expenses and other current assets 18,500 18,576 - ---------------------------------------------------------------------------------------------- Total current assets 131,498 140,625 Property and equipment, net of accumulated depreciation and amortization 466,930 407,204 Long-term investment in marketable securities - 3,600 Long-term investments in preferred stock 56,137 20,000 Acquired leasehold rights, net of accumulated amortization 13,991 14,150 Excess of cost over net assets acquired, net of accumulated amortization 70,212 49,288 Other assets, net of accumulated amortization 36,375 24,868 - ---------------------------------------------------------------------------------------------- $775,143 659,735 ============================================================================================== Liabilities and Shareholders' Equity - ---------------------------------------------------------------------------------------------- 2000 1999 Current liabilities: Current installments of long-term debt and capital lease obligations 6,372 6,655 Trade accounts payable 53,808 49,038 Accrued payroll, bonus and employee benefits 36,966 29,638 Other accrued expenses 43,590 36,024 - ---------------------------------------------------------------------------------------------- Total current liabilities 140,736 121,355 Long-term debt and capital lease obligations, less current installments 278,546 208,862 Other long-term liabilities 17,173 18,928 - ---------------------------------------------------------------------------------------------- Total liabilities 436,455 348,515 - ---------------------------------------------------------------------------------------------- Shareholders' equity: Common stock, no par value, 100,000 shares authorized, 27,136 and 26,873 shares issued, 26,226 and 26,265 shares outstanding in 2000 and 1999, respectively 229,545 230,131 Common stock in treasury, at cost (28,475) (18,939) Retained earnings 137,618 100,028 - ---------------------------------------------------------------------------------------------- Total shareholders' equity 338,688 311,220 - ---------------------------------------------------------------------------------------------- Commitments and contingencies - ---------------------------------------------------------------------------------------------- $775,143 659,735 ==============================================================================================
See accompanying notes to condensed consolidated financial statements. Page 3 of 14 Whole Foods Market, Inc. and Subsidiaries Condensed Consolidated Income Statements (Unaudited) In thousands, except per share data
Twelve weeks ended Forty weeks ended July 2 July 4 July 2 July 4 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Sales $ 442,557 377,580 1,420,230 1,192,691 Cost of goods sold and occupancy costs 288,643 247,134 930,764 784,795 - --------------------------------------------------------------------------------------------------------------------------- Gross profit 153,914 130,446 489,466 407,896 Selling, general and administrative expenses 125,275 108,124 405,974 339,913 Pre-opening and relocation costs 2,306 809 8,485 3,052 - --------------------------------------------------------------------------------------------------------------------------- Income from operations 26,333 21,513 75,007 64,931 Other income (expense): Interest expense (3,647) (2,014) (10,865) (6,617) Investment and other income 408 254 1,315 1,771 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting principle 23,094 19,753 65,457 60,085 Provision for income taxes 9,700 7,703 27,492 23,433 - --------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 13,394 12,050 37,965 36,652 Cumulative effect of change in accounting principle, net of $272 of income taxes - - (375) - - --------------------------------------------------------------------------------------------------------------------------- Net income $ 13,394 12,050 37,590 36,652 =========================================================================================================================== Basic earnings per share: Income before cumulative effect of change in accounting principle $ 0.51 0.46 1.46 1.39 Cumulative effect of change in accounting principle, net of income taxes - - (0.01) - - --------------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.51 0.46 1.44 1.39 =========================================================================================================================== Weighted average shares outstanding 26,143 26,205 26,062 26,384 =========================================================================================================================== Diluted earnings per share: Income before cumulative effect of change in accounting principle $ 0.49 0.44 1.40 1.34 Cumulative effect of change in accounting principle, net of income taxes - - (0.01) - - --------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.49 0.44 1.39 1.34 =========================================================================================================================== Weighted average shares outstanding 27,325 27,428 27,097 27,436 ===========================================================================================================================
See accompanying notes to condensed consolidated financial statements. Page 4 of 14 Whole Foods Market, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) In thousands
Forty weeks ended July 2 July 4 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 95,105 77,358 - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisition of property and equipment (123,083) (100,386) Acquisition of leasehold rights (591) (3,611) Payments for purchase of acquired entities, net of cash acquired (25,700) (24,500) Cash contributed to WholePeople.com (4,478) - Increase in long-term receivable from Amrion (3,800) - Purchase of Sourdough minority interest (1,281) - Proceeds from sale of marketable securities - 27,633 Purchase of marketable securities available for sale - (543) - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (158,933) (101,407) - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net proceeds from long-term borrowings 70,000 15,000 Issuance of common stock 4,692 5,322 Payments on long-term debt and capital lease obligations (6,349) (481) Purchase of treasury stock (13,534) (18,939) - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 54,809 902 - ---------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (9,019) (23,147) Cash and cash equivalents at beginning of period 9,019 36,674 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ - 13,527 ============================================================================================================================ Supplemental disclosures of cash flow information: Interest paid $ 5,001 2,768 ============================================================================================================================ Federal and state income taxes paid $ 18,921 12,483 ============================================================================================================================
Non-cash investing and financing activities: Effective January 14, 2000, the Company contributed its Amrion, Inc. and WholeFoods.com, Inc. subsidiaries to WholePeople.com, Inc., a newly formed Delaware corporation in exchange for 14,530,000 shares of convertible preferred stock of WholePeople.com. Net assets of the contributed subsidiaries totaled approximately $46.1 million, including cash of approximately $4.5 million. See note 4. See accompanying notes to condensed consolidated financial statements. Page 5 of 14 Whole Foods Market, Inc. And Subsidiaries Notes To Condensed Consolidated Financial Statements (Unaudited) July 2, 2000 (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Whole Foods Market, Inc. and subsidiaries ("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 the Company's Annual Report on Form 10K for the fiscal year ended September 26, 1999. The Company's fiscal year ends on the last Sunday in September. The first fiscal quarter is sixteen weeks, the second and third quarters each are twelve weeks and the fourth quarter is twelve or thirteen weeks. (2) Earnings Per Share The computation of basic earnings per share is based on the number of weighted average common shares outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of common shares deemed outstanding from the assumed exercise of stock options. A reconciliation of the denominators of the basic and diluted earnings per share calculations follows (in thousands):
Twelve weeks ended Forty weeks ended July 2 July 4 July 2 July 4 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------- Denominator for basic earnings per share: weighted average shares 26,143 26,205 26,062 26,384 Additional shares deemed outstanding from the assumed exercise of stock options 1,182 1,223 1,035 1,052 - ---------------------------------------------------------------------------------------------- Denominator for diluted earnings per share: adjusted weighted average shares and assumed exercises 27,325 27,428 27,097 27,436 ==============================================================================================
The computations of diluted earnings per share for the twelve and forty week periods ended July 2, 2000 do not include options to purchase approximately 1,349,000 shares and 1,367,000 shares, respectively, of common stock because to do so would be antidilutive. The computations of diluted earnings per share for the twelve and forty week periods ended July 4, 1999 do not include options to purchase approximately 1,477,000 shares and 1,529,000 shares, respectively, of common stock because to do so would be antidilutive. The computations of diluted earnings per share for all periods presented do not include approximately 1,643,000 shares of common stock related to the zero coupon convertible subordinated debentures because to do so would be antidilutive. Page 6 of 14 (3) Segment Information In the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting information about operating segments in interim and annual financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Effective the beginning of the second quarter of fiscal 2000, the Company has operated in one reportable segment, natural foods supermarkets. The natural foods supermarkets segment includes the Company's stores and supporting operations, including Allegro Coffee Company. In the first quarter of fiscal 2000, the Company operated in two reportable segments, the natural foods supermarkets segment and the WholePeople.com segment. The WholePeople.com segment consisted of the Company's direct marketing and Internet operations, which merged operations into a single segment effective the beginning of the first quarter of fiscal 2000. In the prior year, the direct marketing operations were classified as a separate operating segment, and Internet operations were classified with operations of Allegro Coffee Company as "Other." The accompanying condensed consolidated financial statements reflect the results of operations of WholePeople.com as a consolidated wholly-owned subsidiary through the end of the first quarter in the current fiscal year and in all periods of the prior fiscal year. Effective January 14, 2000, the Company has accounted for its investment in WholePeople.com preferred stock using the equity method. In applying the equity method, losses have been allocated to the stock classes in accordance with the terms of the common and preferred stockholders' agreements. Accordingly, operating results of WholePeople.com are not reflected in the Company's consolidated results of operations as long as positive common stock equity is available in WholePeople.com and the Company's liquidation preference on the preferred stock supports its carrying value. Effective June 30, 2000, WholePeople.com restructured its Internet operations by merging its Internet business with Gaiam, Inc. into a newly formed company named Gaiam.com, Inc. The WholePeople.com web site has been replaced by the Gaiam.com web site and the remaining WholePeople.com business has been renamed Amrion. In the third quarter, Amrion recognized an after-tax charge of approximately $15 million, which consisted of the write-off of its Internet web site, expenses associated with the transfer of Internet operations to Gaiam.com and severance costs. Excluding this one-time charge, for the twelve and twenty-four weeks ended July 2, 2000 Amrion incurred losses from operations of approximately $12.5 million and $17.6 million, respectively. See note 4. Prior period information has been reclassified to conform to the fiscal 2000 classification. A reconciliation to consolidated sales follows (in thousands):
Twelve weeks ended Forty weeks ended July 2 July 4 July 2 July 4 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ Natural foods supermarkets $442,557 360,671 1,399,579 1,134,249 Sales of unconsolidated equity investment included in consolidated sales through end of first quarter 2000 - 16,909 20,651 58,442 - ------------------------------------------------------------------------------------------------------------------------------ Consolidated sales $442,557 377,580 1,420,230 1,192,691 ==============================================================================================================================
A reconciliation to consolidated income from operations follows (in thousands):
Twelve weeks ended Forty weeks ended July 2 July 4 July 2 July 4 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ Natural foods supermarkets $ 26,333 21,461 76,914 61,952 Income (loss) from operations of unconsolidated equity investment included in consolidated income from operations through end of first quarter 2000 - 52 (1,907) 2,979 - ------------------------------------------------------------------------------------------------------------------------------ Consolidated income from operations $ 26,333 21,513 75,007 64,931 ==============================================================================================================================
Page 7of 14 (4) Investment in Amrion (formerly WholePeople.com) Effective January 14, 2000, the Company contributed its Amrion, Inc. and WholeFoods.com, Inc. subsidiaries to WholePeople.com, Inc., a newly formed Delaware corporation in exchange for 14,530,000 shares of convertible preferred stock of WholePeople.com. Net assets of the contributed subsidiaries totaled approximately $46.1 million. Concurrent with the preferred stock issuance, WholePeople.com issued 3,125,732 shares of Class A common stock of WholePeople.com to unaffiliated investors (the "Investors") at $6.3985 per share, representing an aggregate purchase price of $20 million. The Investors further committed to acquire an additional 2,344,268 shares of Class A common stock at the same price, representing an additional aggregate purchase price of $15 million, upon 20 business days' notice from WholePeople.com. The Investors were granted the right to require WholePeople.com to issue such shares in the event WholePeople.com fails to provide such notice prior to the earlier of September 24, 2000 or the consummation of an initial public offering of WholePeople.com. WholePeople.com has established a stock option plan pursuant to which 5,000,000 shares of Class B common stock of WholePeople.com have been reserved for issuance upon exercise of options granted thereunder. As of July 2, 2000, no options have been granted under the plan. Effective June 30, 2000, WholePeople.com restructured its Internet operations by merging its Internet business with Gaiam, Inc. into a newly formed company named Gaiam.com, Inc. The WholePeople.com web site has been replaced by the Gaiam.com web site and the remaining WholePeople.com business has been renamed Amrion. Concurrent with the restructuring, Amrion (formerly WholePeople.com) issued an additional 968,977 shares of Class A common stock to unaffiliated investors (the "Investors") at $6.3985 per share, representing an aggregate purchase price of $6,200,000. Together with the initial investment of $20 million and subsequent Class A common stock issuance of $5 million during the third quarter to the Investors, the Investors' total investment is $31.2 million for 4,876,142 of Class A common stock. The Investors have no further obligation to purchase Class A Common Stock, and Amrion has no further right to issue drawdown certificates to the Investors. Following the merger, Amrion owns 49.9% of Gaiam.com. Amrion will account for its investment in Gaiam.com using the equity method and will recognize earnings and losses of Gaiam.com in proportion to its ownership percentage. At July 2, 2000, the Company owned approximately 75% of the voting capital stock of Amrion and the holders of Class A common stock owned approximately 25%. Each share of Amrion preferred stock is entitled to 10 votes per share, and each share of Class A common stock and Class B common stock is entitled to one vote per share. Prior to an initial public offering, Amrion has granted certain substantive participating rights to the holders of Class A common stock. In the event that Amrion fails to complete an initial public offering prior to January 14, 2003, the holders of Class A common stock will be entitled to elect a majority of the board of directors of Amrion and to require other shareholders to participate proportionately with the holders of Class A common stock in any bona fide, arms length business combination proposed by the holders of Class A common stock and involving Amrion. In the event of a liquidation of Amrion, the holders of Amrion preferred stock are entitled to receive a preference equal to the net book value of the net assets contributed by the Company to Amrion before any amounts are distributed to the holders of Class A common stock or Class B common stock. The shares of Amrion preferred stock are convertible into Class A common stock at any time at the sole option of the holder(s) of such shares. Effective January 14, 2000, the Company has accounted for its investment in Amrion preferred stock using the equity method, whereby the initial investment is equal to the net book value of the net assets contributed. In applying the equity method, losses have been allocated to the stock classes in accordance with the terms of the common and preferred stockholders' agreements. Accordingly, effective January 14, 2000, the operating results of Amrion are not reflected in the Company's consolidated results of operations as long as positive common stock equity is available in Amrion and the Company's liquidation preference on the preferred stock supports its carrying value. In the third quarter, Amrion recognized an after-tax charge of approximately $15 million, which consisted of the write-off of its Internet web site, expenses associated with the transfer of Internet operations to Gaiam.com and severance costs. Excluding this one-time charge, for the twelve and twenty-four weeks ended July 2, 2000 Amrion incurred losses from operations of approximately $12.5 million and $17.6 million, respectively. Excluding this one-time charge, for the twelve and twenty-four weeks ended July 2, 2000 Amrion incurred a net loss after taxes of approximately $7.4 million and $11.5 million, respectively. As of July 2, 2000, the common shareholders' equity in Amrion is approximately $5 million. The accompanying condensed consolidated financial statements reflect the results of operations of Amrion and WholeFoods.com as consolidated wholly-owned subsidiaries through the end of the first quarter in the current fiscal year and in all periods of the prior fiscal year, and reflect the financial position of Amrion and WholeFoods.com as consolidated wholly-owned subsidiaries at September 26, 1999. Page 8 of 14 (5) Comprehensive Income Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income is the total of net income and other comprehensive income, which consists of foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. The Company's comprehensive income was comprised of net income and unrealized gains and losses on available for sale securities, net of tax. Comprehensive income, net of related tax effects, was as follows (in thousands): Twelve weeks ended Forty weeks ended July 2 July 4 July 2 July 4 2000 1999 2000 1999 - ------------------------------------------------------------------------------ Net income $13,394 12,050 37,590 36,652 Unrealized gain (loss), net - - - (140) - ------------------------------------------------------------------------------ Comprehensive income $13,394 12,050 37,590 36,512 ============================================================================== (6) Business Combination During the second quarter of fiscal 2000, the Company acquired substantially all of the assets of Natural Abilities, Inc., which operated three natural foods supermarkets in the Sonoma County, California area, in exchange for approximately $25.7 million in cash plus the assumption of certain liabilities. This transaction was accounted for using the purchase method and, accordingly, the purchase price has been allocated to net assets acquired based on their estimated fair values at the date of acquisition. This allocation resulted in goodwill totaling approximately $23.6 million, which is being amortized on a straight-line basis over 20 years. Pro forma results of operations are not presented due to the immaterial effect of the acquired company's results on consolidated results of operations. Page 9 of 14 7) Adoption of Accounting Standards The American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" in March 1998. SOP 98-1 is effective for fiscal years beginning after December 15, 1998 and establishes criteria for capitalizing certain internal use software costs. The Company has adopted SOP 98-1 effective the beginning of the first quarter of fiscal year 2000. The adoption of SOP 98-1 did not have a material impact on the Company's consolidated financial statements. The AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities" in April 1998. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred and is effective for financial statements issued for fiscal years beginning after December 15, 1998. The Company has adopted SOP 98-5 effective the beginning of the first quarter of fiscal year 2000. In fiscal 1999 and prior years, the Company capitalized pre-opening costs and expensed such amounts in the quarter of the location opening. In accordance with SOP 98-5, in the first quarter of fiscal year 2000 the Company has reported the cumulative effect of a change in accounting principle, a one-time charge totaling approximately $375,000 after taxes, representing start-up costs capitalized at September 26, 1999. The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") in June 1998. 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 market value, variable cash flow, or foreign currency of a recognized asset or liability or certain other transactions and firm commitments. The Company will adopt SFAS No. 133 in fiscal year 2001. The Company is evaluating the impact of SFAS No.133 on its consolidated financial statements. The FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"), in March 2000. This interpretation clarifies the application of APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and, among other issues, addresses the definition of employee for purposes of applying APB 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of previously fixed stock options or awards and the accounting for an exchange of stock compensation awards in a business combination. The provisions of FIN 44 affecting the Company are effective July 1, 2000 and have been applied on a prospective basis. The adoption of FIN 44 did not have a material impact on the Company's consolidated financial statements. Page 10 of 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - Twelve and forty weeks ended July 2, 2000 compared to the same periods of the prior year. General The Company reports its 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 quarters each are twelve weeks and the fourth quarter is twelve or thirteen weeks. The following table sets forth the Company's results of operations data expressed as a percentage of sales:
Twelve weeks ended Forty weeks ended July 2 July 4 July 2 July 4 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold and occupancy costs 65.2 65.5 65.5 65.8 - ------------------------------------------------------------------------------------------------------------------- Gross profit 34.8 34.6 34.5 34.2 Selling, general and administrative expenses 28.3 28.6 28.6 28.5 Pre-opening and relocation costs 0.5 0.2 0.6 0.3 - ------------------------------------------------------------------------------------------------------------------- Income from operations 6.0 5.7 5.3 5.4 Other income (expense): Interest expense (0.8) (0.5) (0.8) (0.6) Investment and other income 0.1 0.1 0.1 0.2 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting principle 5.2 5.2 4.6 5.0 Provision for income taxes 2.2 2.0 1.9 2.0 - ------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 3.0 3.2 2.7 3.1 Cumulative effect of change in accounting principle, net of $272 of income taxes - - - - - ------------------------------------------------------------------------------------------------------------------- Net income 3.0% 3.2% 2.7% 3.1% =================================================================================================================== Figures may not add due to rounding.
Sales Sales increased 17.2% and 19.1% for the twelve and forty weeks ended July 2, 2000, respectively, compared to the same periods of the prior fiscal year. Core retail sales at natural foods supermarkets totaled $443 million and $1,400 million for the twelve and forty weeks ended July 2, 2000, respectively. This represents increases of 22.7% and 23.4% over the same periods of the prior year due to the addition of seventeen new and acquired stores to the store base over the last year and comparable store sales increases of approximately 8.1% and 8.7%, respectively. Sales in identical stores, which excludes relocations, increased 6.5% and 7.2% for the twelve and forty weeks ended July 2, 2000, 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 consists of sales less cost of goods sold and occupancy costs plus contribution from non-retail distribution and food preparation operations. The Company's consolidated gross profit as a percentage of sales was 34.8% and 34.5% for the twelve and forty weeks ended July 2, 2000, respectively, compared to 34.6% and 34.2%, respectively, for the same periods of the prior fiscal year. Core retail gross profit at natural foods supermarkets as a percentage of sales was 34.8% and 34.4% for the twelve and forty weeks ended July 2, 2000, respectively, compared to 34.2% and 33.5%, respectively, for the same periods of the prior fiscal year. These increases reflect increased national buying and private label initiatives which continue to lower the cost of product purchased on a national basis, increased percentage of sales in certain regions and departments where the Company achieves higher gross profits, and continued improvement in store execution with respect to product procurement, merchandising and controlling spoilage. Page 11 of 14 Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of sales were 28.3% and 28.6% for the twelve and forty weeks ended July 2, 2000, respectively, compared to 28.6% and 28.5%, respectively, for the same periods of the prior fiscal year. Core retail selling, general and administrative expenses as a percentage of sales were 28.3% and 28.3% for the twelve and forty weeks ended July 2, 2000, respectively, compared to 28.0% and 27.8%, respectively, for the same periods of the prior fiscal year. These increases were due entirely to higher direct store expenses as a percentage of sales at new and acquired stores added over the last year. Direct store expenses as a percentage of sales at existing stores for the twelve and forty weeks ended July 2, 2000, were consistent with the same periods of the prior fiscal year. Year-to-date consolidated selling, general and administrative expenses include increases at WholePeople.com in the first fiscal quarter that were the result of increased staffing and other costs associated with web site and product category development costs. Store Contribution Store contribution consists of core retail gross profit less direct store expenses. Store contribution as a percentage of core retail sales was 9.6% and 9.4% for the twelve and forty weeks ended July 2, 2000, respectively, compared to 9.7% and 9.3%, respectively, for the same periods of the prior fiscal year. Pre-opening and Relocation Costs Pre-opening costs include hiring and training personnel, supplies, and certain occupancy and miscellaneous costs related to new store and facility openings and are incurred primarily in the thirty days prior to a new store opening. Relocation costs consist of moving costs, remaining lease payments, accelerated depreciation costs and other costs associated with replaced facilities and other related expenses. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred and is effective for financial statements issued for fiscal years beginning after December 15, 1998. The Company has adopted SOP 98-5 effective the beginning of the first quarter of fiscal year 2000. In fiscal 1999 and prior years, the Company capitalized pre- opening costs as incurred and subsequently expensed such amounts in the quarter of the location opening. Pre-opening and relocation costs for the twelve and forty weeks ended July 2, 2000 consist primarily of costs associated with the openings of five new stores during the first quarter, four new stores during the second quarter and two new stores and one relocated store in the third quarter. In the prior year, pre-opening and relocation costs for the twelve and forty weeks were associated with the opening of one new store and the relocation of one store in the second quarter and two new stores in the third 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. Net interest expense for the twelve and forty weeks ended July 2, 2000 totaled approximately $3.6 million and $10.9 million, respectively, compared to approximately $2.0 million and $6.6 million, respectively, for the same periods of the prior fiscal year. These increases are due primarily to additional amounts outstanding under the Company's bank line of credit in fiscal 2000. Capitalized interest for the twelve and forty weeks ended July 2, 2000 totaled approximately $0.4 million and $1.7 million, respectively, compared to approximately $0.3 million and $0.9 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 2, 2000 totaled approximately $0.4 million and $1.3 million, respectively, compared to $0.3 million and $1.8 million, respectively, for the same periods of the prior fiscal year. The decrease for the forty week period was primarily due to a decline in interest income earned through the second quarter of the prior year on investments in available for sale securities. Cumulative Effect of Change in Accounting Principle In accordance with SOP 98-5, in the first quarter of fiscal year 2000 the Company reported the cumulative effect of a change in accounting principle, a one-time charge totaling approximately $375,000 after taxes, representing start- up costs capitalized at September 26, 1999. Page 12 of 14 Liquidity and Capital Resources and Changes in Financial Condition During the first quarter of fiscal 2000, the Company repurchased 429,000 shares of its common stock for approximately $13.5 million. During the second quarter of fiscal year 2000, the Company acquired substantially all of the assets of Natural Abilities, Inc. in exchange for approximately $25.7 million in cash plus the assumption of certain liabilities. Whole Foods Market's principal historical capital requirements have been the funding of the development or acquisition of new stores, expansions and improvements in existing stores and increases in overall working capital requirements. The Company estimates that cash requirements to open a new store will range from $3 million to $12 million (after giving effect to any landlord construction allowance). This excludes new store inventory of approximately $750,000, a substantial portion of which is financed by the vendors of Whole Foods Market. Five stores are expected to open during the fourth fiscal quarter. The Company has twenty-five stores currently under development that are expected to open during the next three fiscal years. The Company expects that planned expansion and other anticipated working capital and capital expenditure requirements will be funded by cash generated from operations and bank lines of credit. The Company continually evaluates the need to establish other sources of working capital and will seek those considered appropriate based upon the Company's needs and market conditions. During the third quarter of fiscal 2000, the Company expanded its current credit facility to $195 million. At July 2, 2000 the Company had $120 million outstanding under the line of credit. Risk Factors The Company wishes to caution readers that inherent risks and uncertainties including those listed in the Company's Annual Report on Form 10-K for the year ended September 26, 1999, among others, could cause the actual results of Whole Foods Market to differ materially from those indicated by forward-looking statements made in this Quarterly Report on Form 10-Q. "Forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 can be identified by the use of predictive, future-tense or forward- looking terminology, such as "believes," "anticipates," "expects," "estimates," "may," "will" or similar terms. Forward-looking statements also include projections of financial performance, statements regarding management's plans and objectives and statements concerning any assumptions relating to the foregoing. Except for historical information, the matters discussed in this report are forward looking statements that involve risks and uncertainties, including but not limited to general business conditions, the timely and successful development and opening of new or relocated stores, the impact of competition, impairment of the value of investments and other factors which are often beyond the control of the Company. Additionally, effective January 14, 2000, the operating results of Amrion (formerly WholePeople.com) are not reflected in the Company's consolidated results of operations as long as positive common stock equity is available in Amrion and the Company's liquidation preference on the preferred stock supports its carrying value. As of July 2, 2000, the common shareholders' equity in Amrion is approximately $5 million. There can be no assurance that Amrion will be able to operate profitably, that its investment in Gaiam.com will not result in recognition of losses on the equity method, or that Amrion will be able to obtain additional public or private financing, and therefore if positive common stock equity is no longer available in Amrion or the Company's liquidation preference on the preferred stock no longer supports its carrying value, the Company's future consolidated results of operations may include results of Amrion. The Company does not undertake any obligation to update forward-looking statements. 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 the Company's Annual Report on Form 10-K for the year ended September 26, 1999. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) The following exhibit is filed with this report: Exhibit 27 Financial Data Schedule (b) The Company did not file any reports on Form 8-K during the fiscal quarter ended July 2, 2000. Page 13 of 14 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 15, 2000 By: Glenda Flanagan ---------------- --------------- Glenda Flanagan Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer) Page 14 of 14 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE WHOLE FOODS MARKET JULY 2, 2000 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 10-MOS SEP-24-2000 JUL-02-2000 0 0 22,110 0 90,888 131,498 466,930 0 775,143 140,736 0 0 0 201,070 137,618 775,143 1,420,230 1,420,230 930,764 930,764 413,144 0 10,865 65,457 27,492 37,965 0 0 375 37,590 1.44 1.39
-----END PRIVACY-ENHANCED MESSAGE-----