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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 24, 2000
COMMISSION FILE NUMBER: 0-19797
WHOLE FOODS MARKET, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1989366
(State of (IRS employment
incorporation) identification no.)
601 North Lamar Suite 300
AUSTIN, TEXAS 78703
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
512-477-4455
Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value
Preferred Stock Purchase Rights
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 ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on November 30, 2000 was $1,536,295,260.
The number of shares of the registrant's common stock, no par value, outstanding
as of November 30, 2000 was 26,177,332.
1
PART I
Item 1. Business
Whole Foods Market, Inc. owns and operates the country's largest chain of
natural foods supermarkets. Our Company mission is to improve the health, well-
being, and healing of both people and of the planet. To achieve this mission, we
plan to continue to expand our retail operations to offer the highest quality
and most nutritious foods to more and more customers, helping them to live
healthier and more vital lives. Through our growth, we have had a large and
positive impact on the natural and organic foods movement throughout the United
States, helping lead the industry to nationwide acceptance over the last twenty
years.
We opened our first store in Austin, Texas in 1980 and as of September 24, 2000,
we operated 117 stores in 22 states plus the District of Columbia. Our sales
have grown rapidly through internal expansion, acquisitions and same store sales
growth, from approximately $92.5 million in fiscal year 1991 to approximately
$1.8 billion in fiscal year 2000, a compounded annual growth rate of
approximately 39%. Our stores currently average approximately 27,000 square feet
in size and approximately $17 million in annual sales. Sales per gross square
foot as of our most recent fiscal year end was approximately $660, which we
believe is higher than most conventional supermarkets or food retailers,
including competitors in the large-store segment of the natural foods industry.
Our stores are supported by regional distribution centers, bake houses,
commissary kitchens, a seafood processing facility, a produce procurement and
field inspection office, and a coffee roasting operation. We have the goal of
becoming a national brand synonymous with not just natural and organic foods,
but with being the best supermarket in every community in which we are located.
In fiscal year 2000, we merged Amrion, our direct marketing and nutritional
supplement manufacturing subsidiary, and WholeFoods.com, our Internet business,
to form WholePeople.com. In June 2000, WholePeople.com's Internet properties
were merged into Gaiam.com in exchange for common stock in Gaiam.com and the
remaining business was renamed NatureSmart. Subsequent to the end of the current
fiscal year, our Board of Directors adopted a plan to discontinue the business
of manufacturing and direct marketing of nutritional supplements at NatureSmart.
The Natural Products Industry
According to a leading trade publication for the industry, natural products
sales have grown to over $28 billion in 1999, increasing 11% for the second year
in a row. The natural products we offer in our stores include:
. natural and organic foods and beverages,
. dietary supplements,
. natural personal care products,
. natural household goods, and
. educational products
Natural foods can be defined as foods which are minimally processed, largely or
completely free of artificial ingredients, preservatives and other non-naturally
occurring chemicals and as near to their whole, natural state as possible.
Organic is an ecological production management system that promotes and enhances
biodiversity, biological cycles, and soil biological activity. It is based on
the minimal use of off-farm inputs and on management practices that restore,
maintain and enhance ecological harmony.
Sales growth for natural and organic foods is being driven by numerous factors
including:
. increasing consumer concern over the purity and safety of food due to the
presence of pesticide residues, growth hormones, artificial ingredients and
other chemicals, and genetically engineered ingredients;
. environmental concerns due to the degradation of water and soil quality; and
. healthier eating patterns driven by a better-educated populace whose median
age is increasing each year.
2
Business Strategy
Whole Foods Market is the country's largest sales volume retailer of natural
products. We believe that much of our success to date is because we remain
uniquely mission driven. We are highly selective about what we sell, we believe
in providing an empowering work environment for our team members and we are
committed to sustainable agriculture.
Whole Foods. We obtain our products locally and from all over the world, often
from small, uniquely dedicated food artisans. We strive to offer the highest
quality, least processed, most flavorful and naturally preserved foods. We
believe that food in its purest state--unadulterated by artificial additives,
sweeteners, colorings and preservatives--is the best tasting and most nutritious
food available.
Whole People. We recruit the best people we can to become part of our team. We
empower them to make many operational decisions, creating a respectful workplace
where team members are treated fairly and are highly motivated to succeed. We
look for team members who are passionate about food but who are also well-
rounded human beings who can play a critical role in helping to build our stores
into profitable and beneficial parts of their communities.
Whole Planet. We believe companies, like individuals, must assume their share of
responsibility for our planet. On a global basis we actively support organic
farming--the best method for promoting sustainable agriculture and protecting
the environment and farm workers. On a local basis, we are actively involved in
our communities by supporting food banks, sponsoring neighborhood events,
compensating our team members for community service work, and contributing at
least 5% of our after-tax profits in the form of cash or products to not-for-
profit organizations.
Growth Strategy
Whole Foods Market's growth strategy is to expand through a combination of new
store openings and acquisitions of existing stores. We have a disciplined,
opportunistic real estate and acquisition strategy, opening or acquiring stores
in existing trade areas as well as new markets. Our new stores typically range
between 25,000 to 45,000 square feet and are located on premium real estate
sites. We have also grown through acquisitions, with approximately 50% of our
store base consisting of acquired stores. As the natural foods retailing
industry is highly fragmented and comprised of many smaller local and regional
chains, we expect to continue to pursue acquisitions of smaller chains that
provide us access to desirable locations and markets as well as experienced team
members. Our historical store growth is summarized below:
Fiscal Year (1)
2000 1999 1998 1997 1996
-------------------------------------------
Beginning of year 100 87 75 68 41
Stores opened 17 9 9 7 8
Acquired stores 3 5 6 2 24
Relocations and closures (3) (1) (3) (2) (5)
-------------------------------------------
End of year 117 100 87 75 68
-------------------------------------------
Total square footage, end of year (in thousands) 3,180 2,584 2,092 1,724 1,563
-------------------------------------------
(1) Stores acquired in pooling transactions are reflected as acquired in the
period in which the applicable transaction closed.
As of November 30, 2000, we had signed leases for over 20 stores averaging
approximately 34,000 square feet in size. We expect to open or acquire
approximately 15 to 20 stores per year, including relocations of existing
stores, in each of the next two fiscal years. We believe that going forward more
of our growth will come from developing new stores than from acquiring existing
stores.
Products
On average, our stores carry approximately 20,000 SKU's of food and non-food
products. We have a broad product selection with a heavy emphasis on perishable
foods designed to appeal to both natural foods and gourmet shoppers. Most of our
products are from natural food vendors; however, we do sell a limited selection
of conventional national brands that meet our quality goals.
3
Quality Goals. Our objective is to sell our customers the highest quality foods
available. We define quality in terms of nutrition, freshness, appearance and
taste and have the following product quality goals:
. Whole Foods. We evaluate each and every product that we sell.
. Natural. We feature foods that are free from artificial preservatives,
colors, flavors and sweeteners.
. Taste. We are passionate about great tasting food and the pleasure of sharing
it with others.
. Freshness. We are committed to foods that are fresh, wholesome and safe to
eat.
. Organic. We seek out and promote organically grown foods.
. Wellness. We provide foods and nutritional products that support health and
well being.
Product Categories. Our product categories include: produce, grocery, meat and
poultry, seafood, bakery, prepared foods, specialty (beer/wine/cheese),
nutritional supplements, body care, pet products, floral, household products and
educational products such as books.
Nutritional Supplements. Our nutrition departments offer a vast array of
vitamins, supplements, herbs and teas, homeopathic remedies and information on
alternative healthcare. The departments are staffed with team members who have
strong product knowledge. In an effort to make the departments easier for
customers to shop, the departments are organized based on product structure and
function categories such as Joint Health, Stress Reduction and Men's Health.
Along with many branded products, we also offer our own private label products
under the "Whole Foods" and "365" labels.
Private Label Products. Because of the relative lack of national brands within
the natural products industry, we have a unique private label opportunity. We
have taken advantage of this opportunity and have expanded our private label
offerings over the last several years. We now have four different lines of
products featuring over 1,000 SKU's. Our private label sales in grocery and
nutrition currently account for approximately 12% of our total sales in those
product categories. The "Whole Foods" label began in 1992 and markets "best of
class" premium and super premium products. We seek out artisan food producers,
small batch production and hand-tested recipes for products included in this
program. In 1997, we introduced a line of products under the "365" label which
emphasizes every day value products. These products meet our quality goals but
are less expensive than alternative products that we sell. In 1999, we
introduced a product line that appeals to our younger customers under the "Whole
Kids" label. After supplying our stores with specialty and organic coffees, teas
and brewing equipment for many years, Allegro Coffee Company was acquired by
Whole Foods Market in December of 1997.
Store Operations
Team Approach to Store Operations. We have promoted a strong Company culture
featuring a team approach to store operations which we believe is distinctly
more empowering of employees than that of the traditional supermarket. Our
stores employ between 31 and 400 team members who are organized into up to
eleven teams, each led by a team leader. Each team is responsible for a
different product category or aspect of store operations such as customer
service or the front-end which runs the customer checkout stations. We promote a
decentralized team approach to store operations in which many personnel,
merchandising and operating decisions are made by teams at the individual store
level. Because of our decentralized management structure, an effective store
team leader is critical to the success of the store. The store team leader works
closely with one or more associate store team leaders, as well as with all the
department team leaders, to operate the store as efficiently and profitably as
possible. Store team leaders are paid a salary plus an Economic Value Added
("EVA"(TM))-based bonus and are eligible to receive stock options.
We believe team members are inspired by work that provides them with a greater
sense of purpose and mission. For many team members, their job with us is an
extension of their personal philosophy and lifestyle. Many team members feel
they are contributing to the good of others by selling clean and nutritious
foods, by contributing to long-term sustainable agriculture and by promoting a
pesticide-free and healthier environment. We have a program that provides paid
time off to team members for working with qualified community service
organizations. For the past four years, Fortune magazine has selected us as one
of the "100 Best Companies to Work for in America."
4
We strive to create a Company-wide consciousness of "shared fate" by uniting the
self-interests of team members as closely as possible to the self-interests of
our shareholders. One way we reinforce this concept is through a gainsharing
program rewarding a team's labor productivity. We also encourage stock ownership
among team members through the following programs:
. Team Member Stock Option Plan. Team members are eligible for stock options
through seniority, promotion or at the discretion of senior regional or
national leadership.
. Team Member Stock Purchase Plan. Team members can purchase restricted stock
at a discount through payroll deductions.
. Team Member 401(K) Plan. Whole Foods Market stock is an investment option
within our Company 401(K) plan.
Store Description. We do not have a standard store design model. Instead, each
store's design is customized to fit the size and configuration of the particular
location and community in which it is located. We transformed food shopping from
a chore into a dynamic experience by building and operating stores with colorful
decor, well-trained team members, exciting product mixes, teams of in-store
chefs, ever-changing selections, samples, open kitchens, scratch bakeries, hand-
stacked produce, prepared foods stations and European-style charcuterie
departments. To further a sense of community and interaction with customers, our
stores typically include sit-down eating areas, customer comment boards and
centrally located information booths. We have "Take Action" centers for our
customers who want to be informed on important issues relative to environmental,
legislative, food safety and product quality issues that can directly affect our
customers' health and well being. In addition, some stores offer special
services such as massage, valet parking and home delivery. Whole Foods Market
stores play a unique role as a "third place"--besides the home and the office--
where people can gather, interact and learn while at the same time discovering
the many joys of eating and sharing food.
Site Selection. Each of our stores is generally located in a high-traffic
shopping area and is either freestanding or in a strip center. In selecting
store locations, we use an internally developed model to analyze potential
markets based on various criteria such as education levels, population density
and income levels. Approximately 95% of our existing stores are located in the
top fifty statistical metropolitan areas. We primarily seek to open large format
stores which range in size between 25,000 to 45,000 square feet and are located
on premier real estate sites, often in urban, high population locales. After we
have selected a target site, our site consultant does a comprehensive site study
and sales projection. Potential sites must also pass EVA hurdles. Stores
currently under development average approximately 34,000 square feet. In
addition, we opportunistically pursue smaller store sites which we believe can
achieve our sales and EVA targets.
New stores typically open approximately 12 to 24 months after a store lease is
signed. The required cash investment for new stores varies depending on the size
of the new store, geographic location, degree of work performed by the landlord
and complexity of site development issues. For the past three years, that has
ranged from approximately $3 million to $12 million, excluding new store
inventory of approximately $750,000, and pre-opening expenses have averaged
approximately $500,000.
Purchasing and Distribution
Our buyers purchase products for retail sale from regional wholesale suppliers
and vendors. Over the last few years, we have shifted the majority of our
purchasing operations from the store to the regional and national level. By
purchasing on a regional and national level, we are able to negotiate better
volume discounts with major vendors and distributors. We own and operate seven
regional distribution centers across the country. The largest of our regional
distribution centers, Texas Health Distributors in Austin, Texas, distributes
natural products to our stores in Texas, New Mexico, Colorado and Louisiana.
Our other regional distribution centers primarily distribute produce and our
private label products to our stores in their respective regions. In addition,
we own a seafood wharf, a produce procurement center, a specialty coffee roaster
and distributor and have established regional commissaries and bakehouses, all
of which distribute products to our stores.
5
Marketing
We spend less on advertising than conventional supermarkets, instead relying
primarily on word-of-mouth recommendations from our customers. We allocate about
half of our marketing budget to region-wide programs and the remainder to our
individual stores' marketing efforts. Our stores spend most of their marketing
budgets on store events such as taste fairs, classes, store tours and product
samplings. We encourage the adoption of a natural and organic lifestyle by
extending our customer education initiatives beyond the store to include
proactive public relations programs. To create goodwill and maintain a high
profile within its community, each store also has a separate budget for making
contributions to a variety of philanthropic and community activities. We
presently contribute at least 5% of our after-tax profits in the form of cash or
products to not-for-profit organizations.
Certain of our stores offer a loyalty card program, Whole Foods Rewards(TM),
which is designed to give our loyal customers meaningful savings and rewards
when they shop in our stores.
Customer Service
One of our core values as a Company is to satisfy and delight our customers. We
want to meet or exceed their expectations on every shopping trip. We know that
by doing so we turn customers into advocates for our business. Advocates do more
than shop with us, they talk about Whole Foods to their friends and others. We
want to serve our customers competently, efficiently, knowledgeably and with
flair. We generate greater appreciation and loyalty from our customers by
educating them about natural and organic foods, health, nutrition and the
environment through our in-store "Take Action" centers as well as on our
corporate web site at www.wholefoodsmarket.com which features a library of
------------------------
information about environmental, legislative, food safety and product quality
issues.
Team Members
As of September 24, 2000, we had approximately 18,500 team members, including
approximately 15,400 full-time, 2,300 part-time and 800 seasonal team members.
We sponsor a partially self-insured health care benefits plan for participating
employees. We maintain a reserve for job-related injury claims rather than
subscribing to a workers' compensation insurance program for our team members in
Texas. All of our team members are eligible to receive stock options. While our
stores have been subject to informational pickets from time to time by certain
local retail clerks' and butchers' unions, none of our team members are
represented by a labor union or collective bargaining agreement. For the past
four years, Fortune magazine has selected Whole Foods Market as one of the "100
Best Companies to Work for in America."
Economic Value Added
In fiscal year 1999, we adopted an EVA management and incentive system. In its
simplest definition, EVA is equivalent to net operating profits after taxes
minus a charge for the cost of capital necessary to generate that profit. EVA
has become a foundation for improved business decisions across the Company, and
we are pleased with how well the program has been implemented to date.
One of our core strengths is our decentralized culture, where decisions are made
at the store level, close to the customer. This is one of our strongest
competitive advantages, and EVA is an excellent complement to our culture. We
believe that EVA is the framework that team members can use to help make
decisions that will create sustainable shareholder value. Rather than taking
decision-making authority away from local areas as we grow, we instead are
developing tools for our team members to use to help them make better decisions.
As a result, EVA is strengthening financial discipline in decisions made
throughout the Company. The impact is already being seen in how we look at
capital investments and make decisions that affect our operating results.
In fiscal year 2000, we integrated the EVA decision-making model throughout our
retail operations. We are using EVA extensively for capital investment
decisions, from evaluating new store real estate decisions to determining store
remodeling needs. Capital investments are evaluated through a series of EVA
analyses. We are turning down projects that do not add value to the Company in
the short or long term. Operating decisions in stores have also been enhanced by
the EVA decision-making model. Our emphasis is on EVA improvement, as we want to
challenge our teams to continue to innovate and grow in new ways. We believe
that opportunities always exist to increase sales and margins, and to lower
operating expenses in ways that benefit all of our stakeholders. We believe that
focusing on EVA improvement encourages continuous improvement of our business.
6
Over 250 leaders throughout the Company are now on EVA-based incentive plans, of
which the primary measure is EVA improvement. EVA-based plans cover our senior
executive leadership, regional leadership and the store leadership team in all
stores. We are excited about the progress that we have made with EVA in the
short time since we adopted the program and expect to continue to expand its use
throughout the Company in the coming years.
We believe that our extensive training on EVA, followed by the incentive plan
development and implementation, has blended EVA very well into our culture.
Using EVA, we believe that we have taken one of our strongest competitive
advantages and are making it even stronger.
Competition
Food retailing is a large, intensely competitive industry. While we primarily
compete within the smaller natural foods supermarket niche, on a broader scale
our competitors include local, regional and national conventional and specialty
supermarkets, smaller specialty stores as well as restaurants.
Natural and organic foods are one of the fastest growing segments of food
retailing today, and most supermarkets have begun offering at least a limited
selection of these products and may choose to expand their selection more
aggressively. We have found it works to our benefit for conventional
supermarkets to offer natural and organic products for two reasons. First, it
helps fulfill our Company mission of improving the health, well-being, and
healing of both people and of the planet. Second, it helps create new customers
for us. As more people are exposed to the benefits of natural and organic
products, they are more likely to become Whole Foods Market customers as we are
the "category killer" for natural and organic products, offering what we believe
is the largest selection and most informed customer service at competitive
prices.
According to a leading trade publication, the natural products business remained
stable in 1999 as the percentage of sales in most sectors varied less than 1%
from those in 1998. Natural products retailers account for approximately 50% of
the overall market for natural products.
Strategic Relationships
We have entered into a strategic relationship with Gaiam, Inc., a lifestyle
company catering to customers who value the environment, personal development
and healthy living. This relationship consists of our preferred equity
investment and minority common equity investment in the company's Internet
subsidiary, Gaiam.com, Inc., and commercial agreements which vary in scope from
a joint marketing agreement to the sale of products on co-branded sections of
the Gaiam.com Web site.
We believe that this investment and commercial arrangement is attractive for a
variety of reasons. First, our customers receive access to a wider range of
desirable products and services. Second, we are able to generate revenue from
the strategic partners because we help them sell to our customer base. Third, we
have the opportunity to participate in the future success of Gaiam and Gaiam.com
as a result of our ownership interest. We believe that our strategic partners
are also well served as a result of the opportunity to grow their customer base
quickly and build brand recognition.
Government and Public Affairs
Our stores are subject to various federal, state and local laws, regulations and
administrative practices affecting our business. We must comply with provisions
regulating health and sanitation standards, food labeling, equal employment,
minimum wages and licensing for the sale of food and, in some stores, alcoholic
beverages.
The manufacturing, processing, formulating, packaging, labeling and advertising
of products are subject to regulation by various federal agencies including the
Food and Drug Administration ("FDA"), the Federal Trade Commission ("FTC"), the
Consumer Product Safety Commission ("CPSC"), the United States Department of
Agriculture ("USDA") and the Environmental Protection Agency ("EPA"). The
composition and labeling of nutritional supplements are most actively regulated
by the FDA under the provisions of the Federal Food, Drug and Cosmetic Act
("FFDC Act"). The FFDC Act has been revised in recent years with respect to
dietary supplements by the Nutrition Labeling and Education Act and by the
Dietary Supplement Health and Education Act. We believe we are in material
compliance with product labeling requirements.
7
Margaret Wittenberg, our Vice President of Governmental and Public Affairs, has
served on numerous government boards and industry committees to create and
strengthen the USDA's proposed National Organic Standards, counseling the USDA
and the EPA on pesticide tolerance levels, controlling the use and labeling of
Genetically Modified Organisms ("GMOs") in the food chain and preserving marine
fisheries.
The USDA released the National Organic Standards in December 2000. The National
Organic Standards will facilitate interstate commerce and marketing of fresh and
processed foods that are organically produced, and will help provide assurance
to our customers that such products meet consistent, uniform standards.
Trademarks
Trademarks owned by the Company or its subsidiaries that have been registered or
are pending in the United States Patent and Trademark Office include, but are
not limited to: "Whole Foods Market," "wholefoodsmarket.com," "365 Every Day
Value," "Allegro Coffee Company," "NatureSmart," "Bread & Circus," "Bread of
Life," "Fresh Fields," "Merchant of Vino," "Wellspring Grocery," "Whole Kids,"
and "Whole Foods, Whole People, Whole Planet." The Company or its subsidiaries
also holds registrations and maintains common law trademark rights for stylized
logos and brand names for products created by NatureSmart, Allegro Coffee
Company and many of its private label products.
Additional Factors That May Affect Future Results
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 risks described
below. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. The
cautionary statements below discuss important factors that could cause our
business, financial condition, operating results and cash flows to be materially
adversely affected.
Our Growth is Dependent on New Store Openings and Acquisitions
Our strategy is to expand through a combination of new store openings and
acquisitions of existing stores. Successful implementation of this strategy is
contingent on numerous conditions, some of which are described below, and there
can be no assurance that our expansion strategy can be successfully executed.
Our continued growth depends to a significant degree on our ability to open or
acquire new stores in existing and new markets and to operate these stores
successfully. Our expansion strategy is dependent on finding suitable locations,
and we face intense competition from other retailers for such sites. We may not
be able to timely open new stores or operate them successfully. In addition, we
may not be able to successfully hire and train new team members, or integrate
those team members into the programs and policies of our Company. We may not be
able to adapt our distribution, management information and other operating
systems to adequately supply products to new stores at competitive prices so
that we can operate the stores in a successful and profitable manner.
There can be no assurance that we will continue to grow through acquisitions.
For the acquisitions that we do make, we may not be able to successfully
integrate those businesses into our operations and support systems, or the
operations of acquired businesses may be adversely affected by the introduction
of our decentralized operational approach.
We May Experience Significant Fluctuations in Our Quarterly Operating Results
Our quarterly operating results could fluctuate for many reasons, including
losses from new stores, variations in the mix of product sales, price changes in
response to competitive factors, increases in merchandise costs, possible supply
shortages and potential uninsured casualty losses. In addition, our quarterly
operating results may fluctuate significantly as the result of the timing of
acquisitions, the timing of new store openings, and the range of operating
results generated from newly opened stores.
8
Quarter to quarter comparisons of results of operations have been and may be
materially impacted by the timing of new store openings. Effective the beginning
of fiscal year 2000, we charged our new store pre-opening costs to expense as
incurred in accordance with Statement of Position ("SOP") 98-5 "Reporting on the
Costs of Start-up Activities" issued by the American Institute of Certified
Public Accountants ("AICPA"). In fiscal year 1999 and prior years, we
capitalized pre-opening costs as incurred and subsequently expensed such amounts
in the quarter of the location opening.
We May Not Be Able to Complete the Sale of NatureSmart as Planned
We have accounted for and presented the NatureSmart business of manufacturing
and direct marketing of nutritional supplements as discontinued operations in
the accompanying consolidated financial statements. We intend to dispose of the
NatureSmart business through the sale of our ownership of its operating units
and assets. If we are unable to complete the sale in the expected timeframe, we
may need to continue to operate and finance NatureSmart, and, consequently, our
borrowing capacity for retail operations could be affected and management's
focus could be diverted from our retail operations.
We have recorded a loss on disposition of the NatureSmart business totaling
approximately $24 million, representing the writedown to estimated net
realizable value of the business being discontinued, costs associated with the
planned disposal, and estimated loss from operations of the discontinued
business through the expected date of disposition, net of income tax benefit.
If we are unable to complete the sale of the NatureSmart business in the
expected timeframe, or if the estimates used in determining the loss on disposal
change significantly, our financial position, results of operations and cash
flows could be adversely affected.
Capital Needed for Expansion May Not be Available
The acquisition of existing stores, the opening of new stores and the
development of new production and distribution facilities require significant
amounts of capital. In the past, our growth has been funded primarily through
proceeds from public offerings, bank debt, private placements of debt, and
internally generated cash flow. These and other sources of capital may not be
available to us in the future. In addition, restrictive covenants which may be
imposed by our lenders may restrict our ability to fund our growth.
Increased Competition May Have an Adverse Effect on Profitability
Our competitors currently include other natural foods supermarkets, conventional
and specialty supermarkets, other natural foods stores, small specialty stores
and restaurants. These businesses compete with us in one or more product
categories. In addition, traditional and specialty supermarkets are expanding
more aggressively in marketing a broad range of natural foods, thereby competing
directly with us for products, customers and locations. Some of these potential
competitors have been in business longer or have greater financial or marketing
resources than we do and may be able to devote greater resources to sourcing,
promoting and selling their products. Increased competition may have an adverse
effect on profitability as the result of lower sales, lower gross profits,
and/or greater operating costs such as marketing.
The sales of nutritional supplements, nutriceuticals and other fitness and
health-related products are highly competitive, and we expect to face continued
competitive pressure in the future.
Legal Proceedings Could Materially Impact Our Results
From time to time we are party to legal proceedings including matters involving
personnel and employment issues, intellectual property, and other proceedings
arising in the ordinary course of business. Although not currently anticipated
by management, our results could be materially impacted by the decisions and
expenses related to such proceedings.
We May Be Subject to Product Liability Claims if People Are Harmed By the
Products We Sell
There is increasing governmental scrutiny of and public awareness regarding food
safety. We believe that many customers choose to shop our stores because of
their interest in health, nutrition and food safety. Although we have
intensified our retail food safety procedures, we believe that our customers
hold us to a higher standard than conventional supermarkets. The real or
perceived sale of contaminated food products by us could result in product
liability claims, the settlement or outcome of which might have a material
adverse effect on our operations.
9
The Loss of Key Management Could Negatively Affect Our Business
We are dependent upon a number of key management and other team members. If we
were to lose the services of a significant number of key team members within a
short period of time, it could have a material adverse effect on our operations.
We do not maintain key person insurance on any team member. Our continued
success is also dependent upon our ability to attract and retain qualified team
members to meet our future growth needs. We face intense competition for
qualified team members, many of whom are subject to offers from competing
employers. We may not be able to attract and retain team members as necessary to
operate our business.
Information Picketing May Impact Our Sales
Our new and existing stores have from time to time been subjected to
informational picketing and negative publicity campaigns by members of various
local trade unions. These informational pickets and campaigns may have the
effect of lowering the sales volumes of new or existing stores.
Acquired Operations May Experience Integration Issues
By acquiring many new stores and certain manufacturing type businesses in the
last several years, we have materially increased the scope of our operations by
entering new markets and increasing the number of our stores we operate. There
can be no assurance that comparable store sales of acquired stores will increase
to or be maintained at the level achieved by our existing stores. Additionally,
the operations of acquired stores may be adversely affected as a result of the
introduction of our decentralized team approach to store operations, or the
response of customers to the changes in operations and merchandising mix that we
may make. The integration of acquired operations into our operations will
require the dedication of management resources that may temporarily detract
attention from our day-to-day business.
Unfavorable Changes in Government Regulation Could Harm our Business
Our stores are subject to various federal, state and local laws, regulations and
administrative practices affecting our business, and we must comply with
provisions regulating health and sanitation standards, food labeling, equal
employment, minimum wages and licensing for the sale of food and, in some
stores, alcoholic beverages. Our new store openings could be delayed or
prevented or our existing stores could be impacted by difficulties or failures
in our ability to obtain or maintain required approvals or licenses.
The manufacturing, processing, formulating, packaging, labeling and advertising
of products are subject to regulation by various federal agencies including the
FDA, the FTC, the CPSC, the USDA and the EPA. The composition and labeling of
nutritional supplements are most actively regulated by the FDA under the
provisions of the FFDC Act. The FFDC Act has been revised in recent years with
respect to dietary supplements by the Nutrition Labeling and Education Act and
by the Dietary Supplement Health and Education Act.
Released by the USDA in December 2000, the National Organic Standards will
facilitate interstate commerce and marketing of fresh and processed food that is
organically produced and will provide an assurance to our customers that such
products meet consistent, uniform standards. Compliance with these standards
might pose an unbearable burden on some of our suppliers that may cause a
disruption in some of our product offerings.
We cannot predict the nature of future laws, regulations, interpretations or
applications, or determine what effect either additional government regulations
or administrative orders, when and if promulgated, or disparate federal, state
and local regulatory schemes would have on our business in the future. They
could, however, require the reformulation of certain products to meet new
standards, the recall or discontinuance of certain products not able to be
reformulated, additional record keeping, expanded documentation of the
properties of certain products, expanded or different labeling and/or scientific
substantiation. Any or all of such requirements could have an adverse effect on
our results of operations and financial condition.
10
Our Stock Price is Volatile
The market price of our common stock could be subject to significant fluctuation
in response to various market factors and events. These market factors include
variations in our earnings results, changes in earnings estimates by securities
analysts, publicity regarding us, our competitors, the health food industry
generally, new statutes or regulations or changes in the interpretation of
existing statutes or regulations affecting the health food industry
specifically, sales of substantial amounts of common stock in the public market
or the perception that such sales could occur and other factors.
In addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated to the operating performance
of particular companies. These market fluctuations also may adversely affect the
market price of our common stock. Volatility in the price of our common stock,
changes in prevailing interest rates and changes in perception of our
creditworthiness may in the future adversely affect the price of our convertible
subordinated debentures.
Information System Upgrades or Integrations May Disrupt Our Operations or
Financial Reporting
We continually evaluate and upgrade our management information systems. We have
completed a number of acquisitions in recent years, and the information systems
of some of the acquired operations have not been fully integrated with our
information systems. Although we do not anticipate any disruption in our
operations or financial reporting as a result of system upgrades or system
integrations, there can be no assurance that such disruption will not occur or
that the desired benefits from the system upgrades will be realized.
We May Not Be Able to Adequately Protect Our Intellectual Property Rights
We rely on a combination of patent, trademark, trade secret and copyright law
and internal procedures and nondisclosure agreements to protect our intellectual
property. There can be no assurance that our intellectual property rights can be
successfully asserted in the future or will not be invalidated, circumvented or
challenged. In addition, the laws of certain foreign countries in which our
products may be produced or sold do not protect our intellectual property rights
to the same extent as the laws of the United States. Failure to protect our
proprietary information could have a material adverse effect on our business,
results of operations and financial condition.
Self-Insured Benefits Plan Claims Could Materially Impact Our Results
We provide partially self-insured, voluntary team member benefits plans that
provide, among other benefits, health care benefits to participating team
members. The plans are designed to provide specified levels of coverage, with
excess insurance coverage provided by a commercial insurer. Although not
currently anticipated by management, our results could be materially impacted by
claims and other expenses related to such plans.
11
Item 2. Properties
At September 24, 2000, we operated 117 stores in twenty-two states and the
District of Columbia. We own the New Orleans, Berkeley and Atlanta store
locations. We also own a building in Austin, Texas which houses one of our
stores, the corporate headquarters and a bookstore. The underlying property is
leased from a third party under a ground lease which has a base term of twenty
years with ten options to renew for five years each. We also own manufacturing,
distribution warehousing and office facilities in Thornton, Colorado and an
undeveloped property in Westminster, Colorado that are associated with
discontinued operations and are actively being marketed. All other stores,
distribution centers, bakehouses and administrative facilities are leased, with
expiration dates ranging from 1 to 40 years. The Company has options to renew
most of its leases with renewal periods ranging from 5 to 50 years. The
following table shows the number of Company stores by state and the District of
Columbia as of September 24, 2000:
Number Number Number
Location of Stores Location of Stores Location of Stores
- -----------------------------------------------------------------------------------------------
Arizona 1 Louisiana 1 North Carolina 5
California 32 Maryland 5 Pennsylvania 5
Colorado 1 Massachusetts 11 Rhode Island 1
Connecticut 1 Michigan 8 Texas 12
District of Columbia 2 Minnesota 2 Virginia 7
Florida 5 New Jersey 4 Washington 1
Georgia 2 New Mexico 1 Wisconsin 1
Illinois 8 New York 1
- -----------------------------------------------------------------------------------------------
The Company has a lease with the bookstore at its building in Austin, Texas.
Certain officers of the Company are also shareholders of the bookstore in which
they own a combined approximately 13% of the outstanding stock. We believe that
the terms of the lease with the bookstore are on terms no less favorable to the
Company than could have been negotiated with an independently owned retailer.
This is partially based on an appraisal of the lease by an independent appraisal
firm. The income from this lease is not material to the Company's operations.
Item 3. Legal Proceedings
From time to time, the Company is involved in lawsuits that we consider to be in
the normal course of business which have not resulted in any material losses to
date.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock is traded on the Nasdaq Stock Market under the symbol
"WFMI." The following sets forth the high and low sales prices of the Company's
common stock for the last two fiscal years:
High Low
- ----------------------------------------------------------------------------
Fiscal Year 2000
September 27, 1999 to January 16, 2000 $48.00 $30.25
January 17, 2000 to April 9, 2000 48.00 36.25
April 10, 2000 to July 2, 2000 55.63 34.38
July 3, 2000 to September 24, 2000 60.00 40.38
Fiscal Year 1999
September 28, 1998 to January 17, 1999 $50.75 $32.00
January 18, 1999 to April 11, 1999 42.75 28.25
April 12, 1999 to July 4, 1999 48.75 36.75
July 5, 1999 to September 26, 1999 48.00 32.38
- ----------------------------------------------------------------------------
The Company had approximately 1,374 record holders of its common stock as of
November 30, 2000.
The Company intends to retain any earnings for use in its business and therefore
does not anticipate paying any cash dividend in the foreseeable future. The
Company's present bank credit agreement contains certain restrictive covenants
that include the prohibition of the payment of dividends on common stock.
13
Item 6. Selected Financial Data
Whole Foods Market, Inc. and Subsidiaries
Summary Financial Information In thousands, except per share and operating data
Sept 24 Sept 26 Sept 27 Sept 28 Sept 29
2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations Data (1) (2)
Sales $1,838,630 1,492,519 1,308,070 1,049,283 892,098
Cost of goods sold and occupancy costs 1,205,096 985,000 873,088 709,692 613,056
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 633,534 507,519 434,982 339,591 279,042
Selling, general and administrative expenses 516,418 420,094 357,941 290,440 249,045
Pre-opening and relocation costs 10,497 5,914 3,979 5,243 5,903
Amortization expense 5,926 3,507 2,841 2,415 1,563
Asset disposal costs - 5,940 - - 2,302
Merger expenses - - 1,699 - 36,214
- ---------------------------------------------------------------------------------------------------------------------
Operating income (loss) 100,693 72,064 68,522 41,493 (15,985)
Other income (expense):
Interest expense (15,093) (8,248) (7,677) (6,033) (5,084)
Investment and other income (loss) (8,015) 1,800 2,303 27 423
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income
taxes and equity in losses of unconsolidated affiliates 77,585 65,616 63,148 35,487 (20,646)
Provision (benefit) for income taxes 34,584 25,590 23,454 11,327 (3,411)
Equity in losses of unconsolidated affiliates 14,074 - - - -
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle 28,927 40,026 39,694 24,160 (17,235)
Discontinued operations:
Income (loss) from discontinued operations, net of
income taxes (9,415) 2,129 5,701 2,484 4,520
Loss on disposal, net of income taxes (23,968) - - - -
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle (4,456) 42,155 45,395 26,644 (12,715)
Cumulative effect of change in accounting principle,
net of income taxes (375) - - - -
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,831) 42,155 45,395 26,644 (12,715)
- ---------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 1.11 1.52 1.52 1.00 (0.74)
Income (loss) from discontinued operations,
net of income taxes (1.28) 0.08 0.22 0.10 0.19
Cumulative effect of change in accounting principle,
net of income taxes (0.01) - - - -
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.18) 1.60 1.74 1.10 (0.54)
- ---------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 26,124 26,374 26,159 24,194 23,366
- ---------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 1.06 1.46 1.43 0.96 (0.74)
Income (loss) from discontinued operations,
net of income taxes (1.23) 0.08 0.21 0.10 0.19
Cumulative effect of change in accounting principle,
net of income taxes (0.01) - - - -
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.18) 1.54 1.64 1.06 (0.54)
- ---------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding, diluted basis 27,185 27,446 27,744 25,162 23,366
- ---------------------------------------------------------------------------------------------------------------------
(continued)
14
Whole Foods Market, Inc. and Subsidiaries
Summary Financial Information (continued) In thousands, except per share and
operating data
Sept 24 Sept 26 Sept 27 Sept 28 Sept 29
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets Data (End of Year) (2)
Net working capital $ 9,080 (3,937) 70,975 20,331 4,887
Total assets 760,399 655,463 537,593 390,877 336,181
Long-term debt (including current maturities) 305,954 215,462 158,988 93,508 85,291
Shareholders' equity 307,157 311,220 277,273 205,465 172,024
Operating Data
Number of stores at end of period 117 100 87 75 68
Store sales per gross square foot $ 660 661 670 638 636
Average weekly sales per store $324,710 309,836 291,690 277,141 253,555
Comparable store sales increase (3) 8.6% 7.7% 11.0% 8.3% 5.4%
- -------------------------------------------------------------------------------------------------------
(1) Fiscal years 2000, 1999, 1998 and 1997 are 52-week years and fiscal year
1996 is a 53-week year.
(2) See note 9 to the consolidated financial statements for discussion of
discontinued operations in fiscal year 2000. Financial information for all
years presented has been reclassified as a result of discontinued
operations in fiscal year 2000.
(3) For internal reporting purposes, the Company's fiscal year is comprised of
13 accounting periods generally consisting of four weeks each. Sales of a
store are deemed to be "comparable" commencing in the fifty-third full week
during which the store was open.
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Whole Foods Market opened its first store in Texas in 1980 and has expanded its
operations to 117 stores as of September 24, 2000 both by opening new stores and
acquiring existing stores from third parties. We operate in one reportable
segment, natural foods supermarkets. All of the Company's operations are
domestic. Our results of operations have been and will continue to be materially
affected by the timing and number of new store openings. New stores may incur
operating losses for the first one or two years of operations. Our results of
operations are reported on a 52- or 53-week fiscal year ending on the last
Sunday in September. Fiscal years 2000, 1999 and 1998 are 52-week years. Fiscal
year 2001 is a 53-week year.
In November 2000, the Company announced that it had adopted a plan to dispose of
the NatureSmart (formerly Amrion) business of manufacturing and direct marketing
of nutritional supplements. Accordingly, the NatureSmart business and related
net assets have been recorded as discontinued operations in the consolidated
financial statements for all years presented. The following discussion and
analysis refer only to continuing operations.
Results of Operations
The following table sets forth the statements of operations data of Whole Foods
Market expressed as a percentage of total sales for the fiscal years indicated:
2000 1999 1998
- ------------------------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 65.5 66.0 66.7
- ------------------------------------------------------------------------------------------
Gross profit 34.5 34.0 33.3
Selling, general and administrative expenses 28.1 28.1 27.4
Pre-opening and relocation costs 0.6 0.4 0.3
Amortization expense 0.3 0.2 0.2
Asset disposal costs - 0.4 -
Merger expenses - - 0.1
- ------------------------------------------------------------------------------------------
Operating income 5.5 4.8 5.2
Other income (expense):
Interest expense (0.8) (0.6) (0.6)
Investment and other income (loss) (0.4) 0.1 0.2
- ------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and equity in losses of unconsolidated affiliates 4.2 4.4 4.8
Provision for income taxes 1.9 1.7 1.8
Equity in losses of unconsolidated affiliates 0.8 - -
- ------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of change in accounting principle 1.6 2.7 3.0
Discontinued operations:
Income (loss) from discontinued operations, net of income taxes (0.5) 0.1 0.4
Loss on disposal, net of income taxes (1.3) - -
- ------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle (0.2) 2.8 3.5
Cumulative effect of change in accounting principle,
net of income taxes - - -
- ------------------------------------------------------------------------------------------
Net income (loss) (0.3)% 2.8% 3.5%
- ------------------------------------------------------------------------------------------
Figures may not add due to rounding.
16
Sales
Sales from continuing operations increased 23.2%, 14.1% and 24.7% in fiscal
years 2000, 1999 and 1998, respectively. Sales for all years shown reflect
increases due to new stores opened and acquired and comparable store sales
increases of approximately 8.6%, 7.7% and 11.0% in fiscal years 2000, 1999 and
1998, respectively. Sales of a store are deemed to be comparable commencing in
the fifty-third full week after the store was opened or acquired. Comparable
store sales increases generally resulted from an increase in the number of
customer transactions and slightly higher average transaction amounts,
reflecting an increase in market share as the stores mature in a particular
market. These increases are due to such factors as improvements in overall store
execution and increased sales of private label products.
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 gross profit from continuing operations as a percentage of sales was
34.5%, 34.0% and 33.3% in fiscal years 2000, 1999 and 1998, respectively. These
increases reflect increased national buying, category management and private
label initiatives, which lower the cost of product purchased on a national
basis. Additionally, continued improvement by new stores with respect to product
procurement, merchandising and controlling spoilage has contributed to these
increases in gross profit. In all years, gross profit margins were also
positively affected by margin improvements as stores mature. Relative to other
stores in a region, gross profit margins tend to be lower for new stores and
increase as stores mature, reflecting lower spoilage as volumes increase, as
well as increasing experience levels and operational efficiencies of the store
teams. Gross profit margins were positively affected in all years by the
increased percentage of sales in certain regions and in certain departments such
as prepared foods where we achieve higher gross profits.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations as a
percentage of sales were 28.1% in both fiscal years 2000 and 1999 and 27.4% in
fiscal year 1998. Fiscal year 2000 selling, general and administrative expenses
reflect higher direct store expenses as a percentage of sales at new and
acquired stores added over the last year. In fiscal year 1999 we increased the
number of administrative and support personnel at the regional and national
levels to support current and planned growth incurred additional costs related
to the implementation of new management information systems and procedures
required to address our potential Year 2000 issues. Whole Foods Market has
historically been able to expand without a significant increase in general and
administrative costs.
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. 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. We adopted SOP 98-5 effective the
beginning of the first quarter of fiscal year 2000. In accordance with SOP 98-5,
in the first quarter of fiscal year 2000 we have 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. In fiscal year 1999 and prior years, we capitalized pre-opening costs as
incurred and subsequently expensed such amounts in the quarter of the location
opening. Whole Foods Market developed and opened seventeen stores in fiscal year
2000, nine stores in fiscal year 1999 and nine stores in fiscal 1998. Of these,
three stores were relocations in fiscal year 2000, one store in fiscal year 1999
and three stores in fiscal year 1998. Pre-opening and relocation costs were
approximately $10.5 million $5.9 million and $4.0 million in fiscal years 2000,
1999 and 1998, respectively.
Amortization Expense
Amortization expense consists primarily of costs associated with the
amortization of excess of cost over net assets acquired and non-competition
agreements. Amortization expense from continuing operations as a percentage of
sales was 0.3% in fiscal year 2000 and 0.2% in both fiscal years 1999 and 1998.
17
Asset Disposal Costs
During the fourth quarter of fiscal year 1999, we recognized asset disposal
costs totaling approximately $5.9 million. Costs associated with the disposal of
accounting and distribution software which was replaced with the implementation
of new financial software totaled approximately $2.8 million. Costs associated
with other hardware and software disposals totaled approximately $3.1 million
and consisted of the writeoffs of certain Year 2000 non-compliant or obsolete
hardware and certain software under development that we determined would not be
placed in service. Substantially all activities related to the asset disposals
were completed in fiscal year 1999.
Interest Expense
Interest expense consists of costs related to the Company's convertible
subordinated debentures, senior notes and bank line of credit, net of
capitalized interest associated with new store development and internally
developed software. Interest expense related to our Company's borrowings, net of
amounts capitalized, was approximately $15.1 million, $8.2 million and $7.7
million in fiscal years 2000, 1999 and 1998, respectively. The annual increases
in net interest expense are due primarily to additional amounts outstanding
under the Company's bank line of credit.
Investment and Other Income (Loss)
During fiscal year 2000, we determined that recent events and circumstances,
including the apparent inability of the investee to obtain additional funding,
had caused a decline in value that was other than temporary of our preferred
stock investment in American WholeHealth, Inc. As a result of this decline in
value, in fiscal year 2000 we recognized a $10 million pre-tax loss associated
with the writeoff of the Company's preferred stock investment in American
WholeHealth, Inc. Investment and other income (loss) for fiscal year 2000 also
includes interest, rental and other income totaling approximately $2.0 million.
Investment and other income (loss) for fiscal years 1999 and 1998 consists
primarily of interest income earned on a short-term corporate bond portfolio and
a prime money market portfolio.
Income Taxes
Our effective tax rate on income from continuing operations was approximately
44.6%, 39.0% and 37.1% for fiscal years 2000, 1999 and 1998, respectively. Our
effective tax rate for fiscal year 2000 was higher than in prior years due to
the writeoff of the Company's $10 million investment in American WholeHealth,
Inc. and a corresponding valuation allowance that was established on the related
deferred tax asset. Excluding the impact of this investment loss, our effective
rate on income from continuing operations for fiscal year 2000 was approximately
39.5% The lower income tax rate for fiscal year 1998 reflects the elimination of
the valuation allowance of approximately $7.8 million previously provided on net
operating loss carryforwards assumed in the Fresh Fields acquisition. At
September 24, 2000, the Company had net operating loss carryforwards totaling
approximately $47.9 million. We consider it more likely than not that all net
operating loss carryforwards will be utilized.
Equity in Losses of Unconsolidated Affiliates
Equity in losses of unconsolidated affiliates represents the Company's share of
losses of companies in which we have investments that give us the ability to
exercise significant influence, but not control, over the investee. Equity in
losses of unconsolidated affiliates for fiscal year 2000 totaled approximately
$14.1 million and consisted primarily of the Company's share of WholePeople.com
Internet operations losses, including WholePeople.com's investment losses on
Internet-related preferred and common stock investments totaling approximately
$12.4 million.
Discontinued Operations
In November 2000, the Company adopted a formal plan to sell the NatureSmart
business of manufacturing and direct marketing of nutritional supplements.
Accordingly, the NatureSmart business has been accounted for and presented as
discontinued operations in the consolidated financial statements. In fiscal year
2000, we recorded a loss on disposition of the NatureSmart business totaling
approximately $24 million, representing the writedown to estimated net
realizable value of the business being discontinued, costs associated with the
planned disposal, and estimated loss from operations of the discontinued
business through the expected date of disposition, net of income tax benefit.
Net loss from discontinued operations in fiscal year 2000 was approximately $9.4
million. Net income from discontinued operations in fiscal years 1999 and 1998
was approximately $2.1 million and $5.7 million, respectively.
18
Business Combinations
In February 2000, we 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 was allocated to
net assets acquired based on their estimated fair values at the date of
acquisition. This allocation resulted in goodwill totaling approximately $23.9
million, which is being amortized on a straight-line basis over 20 years.
In April 1999, we acquired the outstanding stock of Nature's Heartland, Inc.,
which operated four natural foods supermarkets in the greater Boston
metropolitan area, in exchange for approximately $24.5 million in cash. This
transaction was accounted for using the purchase method and, accordingly, the
purchase price was allocated to net assets acquired based on their estimated
fair values at the date of acquisition. This allocation resulted in goodwill of
approximately $13.5 million, which is being amortized on a straight-line basis
over 40 years.
In December 1997, we acquired Merchant of Vino, which operated four
gourmet/natural foods stores and two specialty wine and gourmet food shops in
the Detroit area, in exchange for approximately 1 million shares of Company
common stock. Also in December 1997, the Company acquired Allegro Coffee
Company, a specialty coffee roaster and distributor based in Boulder, Colorado,
in exchange for approximately 175,000 shares of Company common stock. These
acquisitions were accounted for using the pooling-of-interests method.
Transaction and other merger-related costs associated with these acquisitions
totaled approximately $1.7 million.
19
Quarterly Results
The first quarter consists of 16 weeks, the second and third quarters each
consist of 12 weeks and the fourth quarter consists of 12 or 13 weeks. Fiscal
years 2000 and 1999 are 52-week years with the fourth quarters consisting of 12
weeks. Because the first quarter is longer than the remaining quarters and
contains both the Thanksgiving and Christmas holidays, it typically represents a
larger share of our annual sales from existing stores. We adopted SOP 98-5,
which requires costs of start-up activities to be expensed as incurred,
effective the beginning of the first quarter of fiscal year 2000. In fiscal year
1999 and prior years, we capitalized pre-opening costs as incurred and
subsequently expensed such amounts in the quarter of the location opening.
Quarter to quarter comparisons of results of operations have been and may be
materially impacted by the timing of new store openings. We believe that the
historical pattern of quarterly sales and income as a percentage of the annual
total may not be indicative of the pattern in future years. The following tables
set forth selected quarterly unaudited consolidated statements of operations
information for the fiscal years ended September 24, 2000 and September 26, 1999
(in thousands except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------
2000
Sales $532,626 $425,113 $442,557 $438,334
Gross profit 179,592 147,542 153,914 152,486
Income (loss) from continuing operations 12,050 12,739 13,394 (9,256)
Net income (loss) 11,457 12,739 13,394 (42,421)
Basic earnings (loss) per share:
From continuing operations 0.46 0.49 0.51 (0.35)
Net income (loss) 0.44 0.49 0.51 (1.61)
Diluted earnings (loss) per share:
From continuing operations 0.45 0.47 0.49 (0.35)
Net income (loss) 0.43 0.47 0.49 (1.61)
1999
Sales $432,207 $341,395 $360,804 $358,113
Gross profit 143,046 116,498 123,727 124,248
Income from continuing operations 11,566 10,449 11,259 6,752
Net income 12,955 11,647 12,050 5,503
Basic earnings per share:
From continuing operations 0.44 0.40 0.43 0.26
Net income 0.49 0.44 0.46 0.21
Diluted earnings per share:
From continuing operations 0.42 0.38 0.41 0.25
Net income 0.47 0.43 0.44 0.20
- -----------------------------------------------------------------------------------
Results for the fourth quarter of fiscal year 2000 include writedown of
investments totaling approximately $22.4 million in continuing operations and
approximately $24.0 million after-tax loss on disposal of the NatureSmart
business of manufacturing and direct marketing of nutritional supplements.
Quarterly results have been reclassified to reflect discontinued operations and,
accordingly, differ from those previously reported in our quarterly reports on
Form 10-Q for fiscal year 2000 with regard to certain line items. Net income is
not affected by the reclassifications. Results for the fourth quarter of fiscal
year 1999 include asset disposal costs totaling approximately $5.9 million.
20
Liquidity and Capital Resources
At September 24, 2000 and September 26, 1999, our working capital was
approximately $9.1 million and negative $3.9 million, respectively, and the
ratio of current assets to current liabilities was 1.06 to 1 and 0.97 to 1,
respectively. Net cash provided by operating activities was approximately $124.2
million, $116.6 million and $87.5 million in fiscal years 2000, 1999 and 1998,
respectively.
On February 7, 2000, we amended our bank credit agreement to increase our
revolving line of credit to up to $160 million through June 28, 2002. Under
terms of the amended agreement, on June 29, 2000 we subsequently increased our
revolving line of credit to up to $195 million through June 28, 2002. This
credit agreement contains certain restrictive covenants, including the
prohibition of the payment of dividends on common stock. The credit agreement
also contains certain affirmative covenants including maintenance of certain
financial ratios as defined in the agreement. All outstanding amounts borrowed
under this agreement bear interest at our option of either a defined base rate
or the Eurodollar rate plus a premium. Commitment fees ranging from 0.20% to
0.30% of the undrawn amount are payable under this agreement. At September 24,
2000, approximately $137 million was drawn and approximately $54 million was
available under the agreement. At September 26, 1999, approximately $49 million
was drawn and approximately $44 million was available under the agreement. At
November 30, 2000, approximately $157 million was drawn and approximately $34
million was available under the agreement. The average interest rate on amounts
outstanding under this agreement at September 24, 2000 was approximately 7.73%.
During 1998 we issued zero coupon convertible subordinated debentures for
approximately $115 million. The issue price of the debentures resulted in an
effective yield to maturity of 5 percent. The principal amount of the debentures
at maturity is approximately $308.8 million. All amounts outstanding under the
Company's line of credit were repaid during the second quarter of fiscal year
1998 with proceeds from the issuance of the convertible subordinated debentures.
The debentures are convertible at the option of the holder, at any time on or
prior to maturity, unless previously redeemed or otherwise purchased. Debentures
may be redeemed at the option of the holder on March 2, 2003, March 2, 2008 or
March 2, 2013 for a purchase price equal to issue price plus accrued original
issue discount to such dates. The Company also has outstanding approximately
$34.3 million of senior unsecured notes that bear interest at 7.29% payable
quarterly. Principal on the senior notes is payable in annual installments of
approximately $5.7 million through May 16, 2006. The Board of Directors has
authorized the Company to repurchase up to $50 million in outstanding shares of
Company common stock. During fiscal years 2000 and 1999, we repurchased 429,000
and 608,000 shares, respectively, of our common stock for an aggregate cost of
approximately $13.5 million and $18.9 million, respectively. Net cash provided
by financing activities was approximately $77.9 million, $36.4 million and $61.0
million in fiscal years 2000, 1999 and 1998, respectively.
Whole Foods Market's principal 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. As of November 30, 2000, we had signed leases for over 20 stores
averaging approximately 34,000 square feet in size. We expect to open or acquire
approximately 15 to 20 stores per year, including relocations of existing
stores, in each of the next two fiscal years. We will incur additional capital
expenditures in fiscal year 2001 in connection with ongoing equipment upgrades
and resets at existing stores and continued development of management
information systems. Net cash used in investing activities was approximately
$180.7 million, $159.8 million and $118.2 million in fiscal years 2000, 1999 and
1998, respectively. We expect that planned expansion and other anticipated
working capital and capital expenditure requirements will be funded by cash
generated from operations and long-term debt. 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.
21
Development Activity
The following is a schedule of stores opened, relocated and acquired during
fiscal years 2000, 1999 and 1998:
Store Location Date
- --------------------------------------------------------------------------------------------------
Quarry San Antonio, TX relocated October 1997
Brentwood Brentwood, CA opened October 1997
Evanston Evanston, IL relocated December 1997
Birmingham Birmingham, MI acquired December 1997
Farmington Hills Farmington Hills, MI acquired December 1997
Plymouth Ann Arbor, MI acquired December 1997
Rochester Rochester, MI acquired December 1997
Somerset Troy, MI acquired December 1997
Troy Troy, MI acquired December 1997
Pearl Boulder, CO opened February 1998
Tempe Tempe, AZ opened March 1998
Winter Park Winter Park, FL opened April 1998
Marlton Marlton, NJ opened May 1998
Monterey/Granary Monterey, CA relocated June 1998
Coral Springs Coral Springs, FL opened September 1998
Preston Dallas, TX opened February 1999
Good Nature Grocery Walnut Creek, CA acquired April 1999
Briarcliff Atlanta, GA opened April 1999
Pasadena Pasadena, CA opened April 1999
Bedford Bedford, MA acquired April 1999
Bellingham Bellingham, MA acquired April 1999
Newtonville Newton, MA acquired April 1999
Wayland Wayland, MA acquired April 1999
Biscayne Aventura, FL relocated May 1999
Costa Mesa Costa Mesa, CA opened July 1999
Parkway Arlington, TX opened August 1999
Gold Coast Chicago, IL opened September 1999
Jenkintown Jenkintown, PA opened September 1999
Torrance Torrance, CA opened September 1999
Woodland Hills Woodland Hills, CA relocated October 1999
Roosevelt Square Seattle, WA opened November 1999
Lake Calhoun Lake Calhoun, MN opened December 1999
Cerrillos Cerrillos, NM opened December 1999
Winston-Salem Winston-Salem, NC opened January 2000
West Bloomfield West Bloomfield, MI relocated February 2000
Petaluma Petaluma, CA acquired February 2000
Santa Rosa Santa Rosa, CA acquired February 2000
Sebastopol Sebastapol, CA acquired February 2000
West Hollywood West Hollywood, CA relocated February 2000
San Ramon San Ramon, CA opened March 2000
Food & Wine Garage West Hollywood, CA opened April 2000
Cary Cary, NC opened May 2000
Edgewater Edgewater, NJ opened May 2000
Kirby Houston, TX opened May 2000
Farmington Farmington Hills, MI opened August 2000
Deerfield Deerfield, IL opened August 2000
Sandy Springs Sandy Springs, GA opened August 2000
Fresno Fresno, CA opened September 2000
Silver Spring Silver Spring, MD opened September 2000
- --------------------------------------------------------------------------------------------------
22
Adoption of Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133") 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. We will adopt SFAS No. 133 in
the first quarter of fiscal year 2001. The adoption of SFAS No. 133 will not
have a material impact on the Company's consolidated financial statements.
Disclaimer on Forward Looking Statements
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 the
other risks detailed herein and from time to time in our filings with the
Securities and Exchange Commission. The Company does not undertake any
obligation to update forward-looking statements.
23
Item 7(a) Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate changes and changes in the market value
of its investments. We are not a party to any derivative arrangement and do not
use financial instruments for trading or other speculative purposes.
Interest Rate Risk. The Company is exposed to cash flow and fair value risk from
changes in interest rates, which may affect its financial position, results of
operations and cash flows. In seeking to minimize the risks from interest rate
fluctuations, we attempt to manage our exposures through ongoing evaluation of
the composition of our long-term debt.
Our line-of-credit borrowings do not give rise to significant fair value risk
because these borrowings have maturities of less than three months. At September
24, 2000, approximately $137 million was outstanding under our line of credit
agreement at an average interest rate of approximately 7.73%. A 100 basis point
change in interest rate would affect interest expense on the line of credit
borrowings by approximately $1.4 million on an annual basis based on the
outstanding balance at September 24, 2000. At September 26, 1999 approximately
$49 million was outstanding under our line of credit agreement at an average
interest rate of approximately 7.01%. Our senior unsecured notes and
subordinated convertible debentures have fixed interest rates, and the fair
value of these instruments is affected by changes in market interest rates. The
senior unsecured notes bear interest at a fixed rate of 7.29% and have an
outstanding balance of $34.3 million and $40.0 million at September 24, 2000 and
September 26, 1999, respectively. At September 24, 2000 and September 26, 1999,
the estimated fair value of the senior notes exceeded the carrying amount by
approximately $260,000 and $400,000, respectively. The zero coupon subordinated
convertible debentures have an effective yield to maturity of 5% and an
outstanding balance of approximately $130.8 million and $124.4 million at
September 24, 2000 and September 26, 1999, respectively. At September 24, 2000
and September 26, 1999, the carrying amount of the convertible debentures
exceeded the estimated fair value by approximately $9.6 million and $22.7
million, respectively. Should interest rates increase or decrease, the estimated
fair values of the senior notes and the zero coupon subordinated debentures
would decrease or increase accordingly.
Investment Risk. We have investments in both common and preferred equity
securities of Gaiam.com, a non-public Internet company, for business and
strategic purposes. These investments are accounted for using the equity method.
The common equity securities have a carrying value of approximately $4.8 million
at September 24, 2000. The preferred equity securities have a carrying value of
approximately $4.8 million at September 24, 2000. At September 26, 1999, we had
common equity investments totaling approximately $3.6 million and preferred
equity investments totaling approximately $20 million, both accounted for under
the cost method. During fiscal year 2000, we contributed the common equity
investment and $10 million of the preferred investment to our WholePeople.com
affiliate. During fiscal year 2000, the Company and WholePeople.com recognized
impairment losses totaling $20 million on the preferred investments and
approximately $2.4 million on the common equity investment.
Item 8. Financial Statements and Supplementary Data
See Item 14 (a).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
24
PART III
Item 10. Directors and Executive Officers
A brief description of each of our executive officers and directors is provided
below. We have staggered terms for members of our Board of Directors under which
only a designated number of our directors stand for reelection each year. The
term of office of David W. Dupree, Fred "Chico" Lager, and John P. Mackey will
expire at the annual meeting of shareholders in 2001. The term of office of
Jirka Rysavy will expire at the annual meeting of shareholders in 2002. The term
of office of Avram J. Goldberg, Dr. John B. Elstrott, and Dr. Ralph Z. Sorenson
will expire at the annual meeting of shareholders in 2003. The term of office
for the directors elected at the 2001 annual meeting will expire in 2004. All
officers serve at the discretion of the Board of Directors.
John P. Mackey, 47, co-founder of the Company, has served as Chairman of the
Board and Chief Executive Officer since 1980.
Chris Hitt, 51, has served as President of the Company since January 1, 1999.
Mr. Hitt has held various positions with the Company since 1985 including
President of the Mid-Atlantic, Northern Pacific, Northeast and Southwest
Regions.
Glenda Flanagan, 47, has served as Vice President and Chief Financial Officer of
the Company since December 1988.
James P. Sud, 48, has served as Vice President and Chief Operating Officer since
May 1997. Mr. Sud had been President of MPS Production Company, an independent
oil and gas company engaged in exploration, production and oil field equipment
services since 1977. Mr. Sud served as a director of the Company from 1980 to
March 1997.
Michael Besancon, 54, has served as President of the Mid-Atlantic Region since
January 1999. Mr. Besancon joined the Company in 1995, serving as Purchasing
Director for the Southern Pacific Region before becoming the Vice President for
that region in 1996.
Rich Cundiff, 43, has served as President of the Southern Pacific Region since
January 1996. Mr. Cundiff has held various positions with the Company since
1988, including President and Vice President of the Southwest Region and Store
Team Leader.
A.C. Gallo, 47, has served as President of the Northeast Region since July 1996.
Mr. Gallo has held various positions with the Company and with Bread & Circus,
Inc., which was acquired by the Company in October 1992, including Vice
President of the Northeast Region, Vice President of Perishables and Produce
Coordinator.
Juan Nunez, 42, has served as President of the Florida Region since September
1998. Mr. Nunez has held various positions with the Company and with Mrs.
Gooch's Natural Food Markets, Inc., which was acquired by the Company in
September 1993, including Vice President of the Southwest Region, Director of
Store Operations, and Store Team Leader.
Walter Robb, 47, has served as President of the Northern California Region since
August 1993. Prior to becoming Regional President, Mr. Robb served as Store Team
Leader since joining the Company in 1991.
Dan Rodenberg, 45, has served as President of the Midwest Region since January
1997. Mr. Rodenberg has held various positions with the Company since 1989,
including Vice President of the Mid-Atlantic and Midwest Regions and Store Team
Leader.
Lee Valkenaar, 45, has served as President of the Southwest Region since January
1996. Mr. Valkenaar has held various positions with the Company since 1987,
including Vice President of the Southwest Region and Store Team Leader.
David W. Dupree, 47, has served as director of the Company since August 1996.
Mr. Dupree is a Managing Partner and founder of The Halifax Group, a limited
partnership founded to pursue small and mid cap investment opportunities. He was
the Managing Director of The Carlyle Group, a Washington, D.C. based merchant
banking concern, from 1992 to 1998. Mr. Dupree also serves as a director of
Insight Health Services Corp.
25
Dr. John B. Elstrott, 52, has served as a director of the Company since February
1995. Dr. Elstrott is the founding director of the Levy Rosenblum Institute for
Entrepreneurship at Tulane University's A. B. Freeman School of Business which
was started in 1991. He has been on the faculty at Tulane since 1982.
Avram J. Goldberg, 71, has served as a director of the Company since May 1994.
Mr. Goldberg has been the Chairman of the Board of AVCAR Group, Ltd., a
consulting firm specializing in the retail industry, since 1989.
Fred "Chico" Lager, 46, has served as a director of the Company since January
1996. Mr. Lager has been a Trustee of Fenimore Asset Management Trust, a mutual
fund company, since 1997. Mr. Lager has been a self-employed consultant, working
with a select number of emerging small businesses, since 1991.
Jirka Rysavy, 46, has served as a director of the Company since June 2000. Mr.
Rysavy is the founder, Chairman and Chief Executive Officer of Gaiam, Inc
(Nasdaq-GAIA). He has been Chairman since Gaiam's inception in 1988 and became
the full-time Chief Executive Officer in December 1998. In 1986 Mr. Rysavy
founded Corporate Express, a $4 billion corporate supplier of non-production
goods, and until September 1998 was its Chairman and Chief Executive Officer.
Dr. Ralph Z. Sorenson, 67, has served as a director of the Company since
December 1994. Dr. Sorenson is Managing Partner of the Sorenson Limited
Partnership, a venture investment partnership. He is also Professor Emeritus of
business administration at the University of Colorado, Boulder and has served in
various capacities at the University of Colorado since July 1992, including Dean
of the College of Business and Graduate School of Business Administration. Dr.
Sorenson also serves as a director of the Polaroid Corporation, Houghton Mifflin
Company, Eaton Vance Inc. and Exabyte Corporation.
Each of our non-employee directors receives $4,000 for each Board of Directors
meeting attended and $2,000 for attendance via telephone. For each telephone
Board meeting which is greater than one hour in length and in which a majority
of directors participate, a $500 fee is paid. Each non-employee Board Committee
chair receives an annual retainer of $2,000. The lead director, selected
annually by the Board, receives an annual retainer of $5,000. Each non-employee
director receives $500 for each Board Committee meeting attended in conjunction
with a Board meeting, and $2,000 for each Board Committee meeting attended in
person apart from a Board meeting. In addition, directors are reimbursed for
reasonable expenses incurred in attending Board of Directors meetings. Directors
who are employees of the Company are not paid any separate fees for serving as
directors.
The Board of Directors held eleven meetings in fiscal year 2000. No director
attended fewer than 75% of the meetings of the Board or the Board Committee
meetings of which they were required to attend.
In addition, under our option plan for outside directors, each newly elected
director receives an option as of the date of his or her election to purchase
10,000 shares of our common stock at an exercise equal to the closing price of
our common stock on the date of grant. Incumbent directors receive an option
grant as of the date of our annual meeting of shareholders to purchase 2,000
shares of our common stock at an exercise price equal to the closing price of
our common stock on the date of grant if the director attended at least two-
thirds of the meeting of our Board of Directors held in the preceding year.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, our directors and executive
officers, and persons who own more than 10% of our common stock, are required to
report their initial ownership of our common stock and any subsequent changes in
that ownership to the Securities and Exchange Commission. Specific due dates
have been established for these reports, and the Company is required to disclose
any failure to file by these dates. Based solely upon a review of Forms 3, 4 and
5 furnished to us, we believe that all of our directors, officers and applicable
shareholders filed these reports on a timely basis.
26
Item 11. Executive Compensation
The following table includes compensation that we paid or accrued during the
three-year period ended September 24, 2000 to or for our Chief Executive Officer
and the certain other of our highest compensated executive officers whose total
compensation exceeded $100,000.
Summary Compensation Table
- -----------------------------
Company
Annual Other Stock
Name and Principal Position Year Salary (1) Bonus Compensation (2) Options
- ----------------------------- ---- --------- -------- --------------- -------
John P. Mackey 2000 $210,000 $ - $250 4,000
CEO 1999 200,000 50,000 500 9,000
1998 185,000 90,000 500 9,000
Chris Hitt 2000 $189,000 $ 71,000 $250 4,000
President 1999 180,000 72,000 500 4,000
1998 165,000 94,000 500 -
Glenda Flanagan 2000 $173,000 $ 71,000 $250 4,000
CFO 1999 165,000 65,000 500 4,000
1998 150,000 125,000 500 4,000
James P. Sud 2000 $173,000 $ 71,000 $250 4,000
COO 1999 165,000 65,000 500 4,000
1998 150,000 125,000 500 4,000
Michael Besancon 2000 $145,000 $ 87,000 $250 4,000
Regional President 1999 125,000 106,000 500 4,000
1998 125,000 30,000 500 4,000
(1) We have a policy that limits the cash compensation paid in any one year to
any officer to fourteen times the average full time salary of all team
members. Amounts earned in excess of the salary limitation may be deferred
to future years, subject to certain restrictions.
(2) Except as otherwise indicated, the amounts indicated reflect our
contributions on behalf of the persons indicated to the Whole Foods Market,
Inc. Team Member 401(k) Plan. In fiscal year 2000, our contribution was a
maximum of $250 paid in shares of our common stock. In fiscal years 1999
and 1998, our contribution was a maximum of $500 paid in shares of our
common stock.
27
Option Plans
The following table sets forth certain information with respect to the options
granted during the fiscal year ended September 24, 2000 to each of our executive
officers listed in the Summary Compensation Table as shown under the caption
"Executive Compensation."
Option Grants in Fiscal Year 2000
- ---------------------------------
Percent of
Total Options Exercise or Potential Realizable Value at
Number of Granted to Base Price Assumed Annual Rates of Stock Price
Options Employees in in Dollars Expiration Appreciation for Option Term (1)
Name Granted Fiscal Year per Share (2) Date 5 % 10 %
---- ------- ----------- ------------- ---- ------- --------
John P. Mackey 4,000 (3) $41.875 3/27/07 $68,189 $158,910
Chris Hitt 4,000 (3) 41.875 3/27/07 68,189 158,910
Glenda Flanagan 4,000 (3) 41.875 3/27/07 68,189 158,910
James P. Sud 4,000 (3) 41.875 3/27/07 68,189 158,910
Michael Besancon 4,000 (3) 41.875 3/27/07 68,189 158,910
(1) The 5% and 10% assumed annual rates of appreciation are mandated by the
rules of the Securities and Exchange Commission and do not reflect our
estimates or projections of future prices of the shares of our common
stock. There can be no assurance that the amounts reflected in this table
will be achieved.
(2) Closing price of common stock at date of grant.
(3) Less than 1%.
The following table includes certain information with respect to the options
exercised or held by the executive officers named above during the year ended
September 24, 2000. The number of options held at September 24, 2000 includes
options granted under the 1992 Option Plan for Team Members and under the 1987
Option and Incentive Plan (the "1987 Plan"). The 1987 Plan was terminated in
1992, except as to options previously granted.
Aggregated Option Exercises in Fiscal Year 2000 and Fiscal Year End Option
- --------------------------------------------------------------------------
Values
- ------
Number of Value of Unexercised
Shares Unexercised Options In-the-Money Options (2)
Acquired Value at September 24, 2000 at September 24,2000
-------------------------- --------------------------
Name on Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ ----------- ------------- ----------- -------------
John P. Mackey - $ - 79,500 17,500 $2,980,750 $253,000
Chris Hitt - - 44,536 7,900 1,345,757 126,888
Glenda Flanagan - - 67,000 10,000 2,580,975 129,875
James P. Sud - - 22,300 12,500 651,438 204,563
Michael Besancon 5,560 141,726 4,750 17,000 23,125 161,656
(1) Based upon the market price received for the underlying shares of common
stock of Whole Foods Market received upon exercise and the option exercise
price.
(2) Based upon the closing price of the common stock of Whole Foods Market on
September 22, 2000, which was $51.875 per share.
28
Compensation Committee Interlocks and Insider Participation
No member of our Board's compensation committee has served as one of our
officers or employees at any time. None of our executive officers serves as a
member of the compensation committee of any other company that has an executive
officer serving as a member of our Board of Directors. None of our executive
officers serves as a member of the board of directors of any other company that
has an executive officer serving as a member of our Board's compensation
committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table presents the beneficial ownership of our common stock as of
November 30, 2000 for (i) each person whom beneficially owns more than 5% of the
outstanding shares of our common stock, (ii) each director of the Company, (iii)
each executive officer of the Company listed in the Summary Compensation Table
under "Executive Compensation," and (iv) all of our directors and officers as a
group. Except pursuant to applicable community property laws and except as
otherwise indicated, each shareholder identified in the table possesses sole
voting and investment power with respect to its or his shares.
Shares Owned (1)
-------------------
Name Number Percent
- ---- --------- --------
American Express Financial Corp. (2) 2,824,245 10%
Wellington Management CO (3) 1,654,700 6%
William Blair & Company, L.L.C. (4) 1,388,657 5%
Michael Besancon (5) 7,315 *
David W. Dupree (6) 12,092 *
Dr. John B. Elstrott (7) 11,800 *
Glenda Flanagan (8) 73,213 *
Avram J. Goldberg (9) 20,600 *
Christopher Hitt (10) 57,563 *
Fred "Chico" Lager (11) 14,817 *
John P. Mackey (12) 346,440 1%
Jirka Rysavy (13) 20,000
Dr. Ralph Z. Sorenson (14) 15,000 *
James P. Sud (15) 53,575 *
All directors and officers
as a group (17 persons) 800,168 3%
* Less than one percent
(1) Includes shares issuable upon exercise of stock options, which are vested
or will be vested prior to January 29, 2001.
(2) Based on information contained in Schedule 13G, as filed on September 10,
2000. The amount indicated reflects American Express Financial
Corporation's beneficial ownership as of August 31, 2000. Of the shares
indicated, American Express Financial has the sole voting power and sole
power to dispose of zero shares. The address of such shareholder is 200 AXP
Financial Center, Minneapolis, Minnesota 55474.
(3) Based on information provided as of September 30, 2000. The address of such
shareholder is 75 State Street, Boston, Massachusetts 02109.
(4) Based on information provided as of September 30, 2000. The address of such
shareholder is 222 West Adams Street, Chicago, Illinois 60606.
(5) Includes options to purchase 7,250 shares of common stock.
(6) Includes options to purchase 6,123 shares of common stock.
(7) Includes options to purchase 1,000 shares of common stock.
(8) Includes options to purchase 67,000 shares of common stock.
(9) Includes options to purchase 17,000 shares of common stock.
(10) Includes options to purchase 44,536 shares of common stock.
(11) Includes options to purchase 13,000 shares of common stock.
(12) Includes options to purchase 82,000 shares of common stock.
(13) Includes options to purchase 0 shares of common stock.
(14) Includes options to purchase 15,000 shares of common stock.
(15) Includes options to purchase 22,300 shares of common stock.
29
Item 13. Certain Relationships and Related Transactions
In January 2000, the Company and certain venture capital investors formed
WholePeople.com, Inc. ("WholePeople.com"). The Company contributed its Internet
and supplements businesses in consideration of the issuance of WholePeople.com's
Preferred Stock, and the venture capital investors contributed cash in
consideration of the issuance of WholePeople.com's Class A Common Stock. In June
2000, WholePeople.com contributed its Internet business to a subsidiary of
Gaiam, Inc. ("Gaiam"), which was immediately merged into a newly formed
subsidiary corporation, Gaiam.com, Inc. ("Gaiam.com"). WholePeople.com and Gaiam
own 49.9% and 50.1%, respectively, of the outstanding common stock of Gaiam.com.
Jirka Rysavy, Gaiam's chairman and majority stockholder, was elected to our
Board of Directors. Mr. Mackey was elected to the Gaiam board of directors. Mr.
Rysavy and Mr. Mackey are each a director and executive officer of Gaiam.com.
The Company does not exercise control over Gaiam.com and therefore has accounted
for its investment in Gaiam.com common stock using the equity method.
In a separate transaction in June 2000, WholePeople.com purchased from Gaiam the
outstanding preferred shares of Gaiam.com for $6.0 million. These shares are
redeemable at their face amount upon the occurrence of an initial public
offering of Gaiam.com.
In addition, Infocenter, Inc., a company controlled by Mr. Rysavy, acquired from
a subsidiary of WholePeople.com in June 2000, for a nominal purchase price,
certain assets not contributed to Gaiam.com including in-store kiosks, trade
show booths and $500,000 cash and a $3.0 million note obligation.
Separately, the Company entered into a marketing agreement with Gaiam in June
2000. Under the agreement, the Company agreed (i) to permit the distribution of
the Gaiam catalog within our stores or by mail to our customers, (ii) to permit
Gaiam to test market the sale of Gaiam products within certain of our stores and
(iii) to allow Gaiam.com to purchase our products for resale on the Gaiam.com
website. Gaiam agreed to permit the distribution of the Company's promotional
materials, such as new store openings, to Gaiam's customers. Gaiam and the
Company also agreed to provide their standard employee product discounts to the
other's employees.
John P. Mackey and Glenda Flanagan, executive officers of the Company, own
approximately 13% in the aggregate of BookPeople, Inc. which leases facilities
from the Company. The lease provides for an aggregate annual minimum rent of
approximately $391,000, which we received in rental income in fiscal year 2000.
Retention Agreements
Since November 1991, the Company has entered into Retention Agreements with
certain executive officers of the Company or its subsidiaries which provide for
certain benefits upon an involuntary termination of employment other than for
cause after a "Triggering Event." A Triggering Event includes a merger of the
Company with and into an unaffiliated corporation if the Company is not the
surviving corporation or the sale of all or substantially all of the Company's
assets. The benefits to be received by the executive officer whose employment is
terminated after a Triggering Event occurs include receipt of his or her annual
salary through the one-year period following the date of the termination of
employment and the immediate vesting of any outstanding stock options granted to
such executive officer.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Schedules. Reference is made to the
listing on page 31 of all financial statements filed as a part of this
report. No schedules are required.
(b) (3) Exhibits
Reference is made to the Exhibit Index on page 52 for a list of all
exhibits filed as a part of this report.
30
Whole Foods Market, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
Number
- ----------------------------------------------------------------------------------------------------------------
Independent Auditors' Report 32
Consolidated Balance Sheets at September 24, 2000 and September 26, 1999 33
Consolidated Statements of Operations for the fiscal years ended September 24, 2000,
September 26, 1999 and September 27, 1998 34
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the
fiscal years ended September 24, 2000, September 26, 1999 and September 27, 1998 35
Consolidated Statements of Cash Flows for the fiscal years ended September 24, 2000,
September 26, 1999 and September 27, 1998 36
Notes to Consolidated Financial Statements 38
- ----------------------------------------------------------------------------------------------------------------
31
Whole Foods Market, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors
Whole Foods Market, Inc.
We have audited the accompanying consolidated balance sheets of Whole Foods
Market, Inc. and subsidiaries ("Company") as of September 24, 2000 and September
26, 1999 and the related consolidated statements of operations, shareholders'
equity and comprehensive income, and cash flows for each of the fiscal years in
the three-year period ended September 24, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Whole Foods Market,
Inc. and subsidiaries as of September 24, 2000 and September 26, 1999, and the
results of their operations and their cash flows for each of the fiscal years in
the three-year period ended September 24, 2000, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for pre-opening costs in fiscal year 2000.
/s/ KPMG LLP
Austin, Texas
November 21, 2000
32
Whole Foods Market, Inc. and Subsidiaries
Consolidated Balance Sheets In thousands
September 24, 2000 and September 26, 1999
Assets
2000 1999
- --------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 395 3,582
Trade accounts receivable 21,836 17,834
Merchandise inventories 93,858 75,535
Prepaid expenses and other current assets 8,883 8,890
Deferred income taxes 26,749 7,407
- --------------------------------------------------------------------------------------------------
Total current assets 151,721 113,248
Property and equipment, net of accumulated depreciation and amortization 468,678 373,956
Long-term investments 9,632 23,600
Acquired leasehold rights, net of accumulated amortization 13,753 14,150
Excess of cost over net assets acquired, net of accumulated amortization 69,867 47,815
Deferred income taxes 1,925 -
Other assets, net of accumulated amortization 15,703 19,002
Net assets of discontinued operations 29,120 63,692
- --------------------------------------------------------------------------------------------------
$760,399 655,463
- --------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
2000 1999
- --------------------------------------------------------------------------------------------------
Current liabilities:
Current installments of long-term debt and capital lease obligations $ 7,884 6,640
Trade accounts payable 49,985 45,829
Accrued payroll, bonus and employee benefits 37,534 29,494
Other accrued expenses 47,238 35,222
- --------------------------------------------------------------------------------------------------
Total current liabilities 142,641 117,185
Long-term debt and capital lease obligations, less current installments 298,070 208,822
Deferred rent liabilities 10,801 9,375
Other long-term liabilities 1,730 4,314
Deferred income taxes - 4,547
- --------------------------------------------------------------------------------------------------
Total liabilities 453,242 344,243
- --------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value, 100,000 shares authorized,
27,222 and 26,986 shares issued, 26,466 and 26,378
shares outstanding in 2000 and 1999, respectively 235,648 230,131
Common stock in treasury, at cost (23,688) (18,939)
Retained earnings 95,197 100,028
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 307,157 311,220
- --------------------------------------------------------------------------------------------------
Commitments and contingencies
- --------------------------------------------------------------------------------------------------
$760,399 655,463
- --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
33
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Operations In thousands, except per share data
Fiscal years ended September 24, 2000, September 26, 1999 and September 27, 1998
2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Sales $1,838,630 1,492,519 1,308,070
Cost of goods sold and occupancy costs 1,205,096 985,000 873,088
- ------------------------------------------------------------------------------------------------------
Gross profit 633,534 507,519 434,982
Selling, general and administrative expenses 516,418 420,094 357,941
Pre-opening and relocation costs 10,497 5,914 3,979
Amortization expense 5,926 3,507 2,841
Asset disposal costs - 5,940 -
Merger expenses - - 1,699
- ------------------------------------------------------------------------------------------------------
Operating income 100,693 72,064 68,522
Other income (expense):
Interest expense (15,093) (8,248) (7,677)
Investment and other income (loss) (8,015) 1,800 2,303
- ------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes and
equity in losses of unconsolidated affiliates 77,585 65,616 63,148
Provision for income taxes 34,584 25,590 23,454
Equity in losses of unconsolidated affiliates 14,074 - -
- ------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of change in accounting principle 28,927 40,026 39,694
Discontinued operations:
Income (loss) from discontinued operations, net of income taxes (9,415) 2,129 5,701
Loss on disposal, net of income taxes (23,968) - -
- ------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle (4,456) 42,155 45,395
Cumulative effect of change in accounting principle,
net of income taxes (375) - -
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,831) 42,155 45,395
- ------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Income from continuing operations before cumulative
effect of change in accounting principle $ 1.11 1.52 1.52
Income (loss) from discontinued operations, net of income taxes (1.28) 0.08 0.22
Cumulative effect of change in accounting principle,
net of income taxes (0.01) - -
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.18) 1.60 1.74
- ------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 26,124 26,374 26,159
- ------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Income from continuing operations before cumulative
effect of change in accounting principle $ 1.06 1.46 1.43
Income (loss) from discontinued operations, net of income taxes (1.23) 0.08 0.21
Cumulative effect of change in accounting principle,
net of income taxes (0.01) - -
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.18) 1.54 1.64
- ------------------------------------------------------------------------------------------------------
Weighted average shares outstanding, diluted basis 27,185 27,446 27,744
- ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
34
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income In
thousands
Fiscal years ended September 24, 2000, September 26, 1999 and September 27, 1998
Accumulated
Common Other Total
Shares Common Stock in Comprehensive Retained Shareholders'
Outstanding Stock Treasury Income (Loss) Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at September 28, 1997 24,453 $192,514 - (125) 13,076 205,465
- ----------------------------------------------------------------------------------------------------------------------------------
Net income - - - - 45,395 45,395
Change in unrealized gain (loss)
on investments - - - 336 - 336
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income - - - 336 45,395 45,731
Acquisitions 1,187 2,027 - - (598) 1,429
Issuance of common stock 860 14,925 - - - 14,925
Tax benefit related to exercise of
employee stock options - 9,723 - - - 9,723
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at September 27, 1998 26,500 219,189 - 211 57,873 277,273
- ----------------------------------------------------------------------------------------------------------------------------------
Net income - - - - 42,155 42,155
Change in unrealized gain (loss)
on investments - - - (211) - (211)
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income - - - (211) 42,155 41,944
Issuance of common stock 486 7,049 - - - 7,049
Common stock purchased (608) - (18,939) - - (18,939)
Tax benefit related to exercise of
employee stock options - 3,893 - - - 3,893
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at September 26, 1999 26,378 230,131 (18,939) - 100,028 311,220
- ----------------------------------------------------------------------------------------------------------------------------------
Net and comprehensive loss - - - - (4,831) (4,831)
Issuance of common stock 236 1,247 - - - 1,247
Issuance of common stock from treasury 281 - 8,785 - - 8,785
Common stock purchased (429) - (13,534) - - (13,534)
Tax benefit related to exercise of
employee stock options - 4,541 - - - 4,541
Other - (271) - - - (271)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at September 24, 2000 26,466 $235,648 (23,688) - 95,197 307,157
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
35
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Cash Flows In thousands
Fiscal years ended September 24, 2000, September 26, 1999 and September 27, 1998
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income from continuing operations $ 28,927 40,026 39,694
Adjustments to reconcile income from continuing operations
to net cash flows provided by operating activities:
Depreciation and amortization 63,892 49,627 39,337
Loss on disposal of fixed assets 2,574 1,174 1,277
Asset disposal costs - 5,940 -
Deferred income tax expense (benefit) 866 4,945 (452)
Change in LIFO reserve (136) 834 417
Rent differential 1,426 1,443 1,525
Tax benefit related to exercise of employee stock options 4,541 3,893 9,723
Interest accretion on long-term debt 6,367 6,058 3,337
Equity in losses of unconsolidated affiliates 14,074 - -
Impairment loss on long-term investments 10,000 - -
Lease termination and other merger accrual payments (648) (2,169) (8,497)
Net change in current assets and liabilities:
Trade accounts receivable (3,735) (5,483) (1,614)
Merchandise inventories (16,648) (7,874) (11,554)
Prepaid expenses and other current assets 16 (5,806) 2,289
Trade accounts payable 2,446 13,220 (197)
Accrued payroll, bonus and employee benefits 8,040 2,984 4,868
Other accrued expenses 2,207 7,758 7,343
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 124,209 116,570 87,496
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Acquisition of property and equipment (41,671) (53,496) (33,960)
Development costs of new store locations (110,864) (80,976) (54,521)
Acquisition of intangible assets (1,086) (3,997) (3,962)
Purchase of marketable securities and other long-term investments - (23,600) (25,594)
Proceeds from sale of marketable securities - 26,808 -
Payment for purchase of acquired entities, net of cash acquired (25,700) (24,500) -
Other investing activities (1,386) - (191)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (180,707) (159,761) (118,228)
- ------------------------------------------------------------------------------------------------------------------------------
(continued)
36
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued) In thousands
Fiscal years ended September 24, 2000, September 26, 1999 and September 27, 1998
2000 1999 1998
- --------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from long-term borrowings $ 88,000 49,000 11,000
Net proceeds from issuance of convertible debentures - - 111,748
Payments on long-term debt and capital lease obligations (6,625) (673) (76,631)
Issuance of common stock 10,032 7,049 14,925
Purchase of treasury stock (13,534) (18,939) -
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 77,873 36,437 61,042
- --------------------------------------------------------------------------------------------
Cash flows from discontinued operations
Net cash used in discontinued operations (24,562) (23,312) (9,046)
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,187) (30,066) 21,264
Cash and cash equivalents at beginning of year 3,582 33,648 12,384
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 395 3,582 33,648
- --------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Interest and income taxes paid:
Interest $ 11,185 3,245 5,691
- --------------------------------------------------------------------------------------------
Federal and state income taxes $ 30,661 21,159 16,618
- --------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
37
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Fiscal years ended September 24, 2000, September 26, 1999 and September 27, 1998
(1) Corporate Organization
The consolidated financial statements include the accounts of Whole Foods
Market, Inc. and its subsidiaries ("Company"). All significant majority-owned
subsidiaries are consolidated on a line-by-line basis. All significant
intercompany accounts and transactions are eliminated upon consolidation.
(2) Summary of Significant Accounting Policies
Definition of Fiscal Year
We report our results of operations on a 52- or 53-week fiscal year ending on
the last Sunday in September. Fiscal years 2000, 1999 and 1998 are 52-week
years.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, we consider all
highly liquid investments with an original maturity of 90 days or less to be
cash equivalents.
Investments in Debt and Equity Securities
We account for investments in affiliated entities in which we have the ability
to exercise significant influence, but not control, of an investee, generally an
ownership interest of the voting stock of between 20% and 50%, using the equity
method of accounting. Accordingly, the Company's share of the investee's
earnings or loss is included in the accompanying consolidated statements of
operations in "Equity in losses of unconsolidated affiliates." Our investments
in equity-method investees are included in the accompanying consolidated balance
sheets in "Long-term investments." The portion of our investment in an equity-
method investee that exceeds our share of the net assets of the investee, if
any, is amortized as a reduction to income (currently over a period of five
years). The excess cost amount is included in " Long-term investments" on the
accompanying consolidated balance sheets, and the amortization is included in
"Equity in losses of unconsolidated affiliates" in the accompanying consolidated
statements of operations.
We classify our investments in equity securities that have readily determinable
fair values and are not accounted for under the equity method and our
investments in debt securities as available-for-sale. Available-for-sale
securities are recorded at fair value. Unrealized holding gains and losses, net
of the related tax effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of shareholders' equity until
realized. A decline in the fair value of any available-for-sale security below
cost that is deemed to be other than temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings and a new
cost basis of the security is established.
All other investments, which consist of equity investments which do not have
readily determinable fair values or for which we do not have the ability to
exercise significant influence, are accounted for under the cost method of
accounting and are included in the accompanying consolidated balance sheets in
"Long-term investments." Dividends and other distributions of earnings from cost
method investees, if any, are included in income when declared.
During fiscal year 2000, we determined that recent events and circumstances,
including the apparent inability of the investee to obtain additional funding,
had caused a decline in value that was other than temporary of our preferred
stock investment in American WholeHealth, Inc. As a result of this decline in
value, in fiscal year 2000 we recognized a $10 million pre-tax loss associated
with the writeoff of the Company's preferred stock investment in American
WholeHealth, Inc. which is included in investment and other income (loss) in the
accompanying consolidated statements of operations.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable,
trade accounts payable, accrued payroll, bonus and employee benefits, and other
accrued expenses approximate fair value because of the short maturity of those
instruments. The carrying value of notes payable to banks approximates fair
value due to variable interest rates charged on these notes. Marketable
securities are stated at fair value with unrealized gains and losses included as
a component of shareholders' equity until realized. The fair value of long-term
investments accounted for under the cost method is estimated, where practicable,
based on prices recently paid for shares in those companies.
(continued)
38
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies, continued
Fair Value of Financial Instruments, continued
The fair value of convertible subordinated debentures is estimated using quoted
market prices. The fair value of senior unsecured notes is estimated by
discounting the future cash flows at the rates currently available to us for
similar debt instruments of comparable maturities.
Carrying amounts and fair values of the Company's financial instruments other
than those for which carrying amounts approximate fair values as noted above are
as follows (in thousands):
2000 1999
----------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------
Convertible subordinated debentures $130,787 121,207 124,419 101,656
Senior unsecured notes 34,286 34,545 40,000 40,444
- ---------------------------------------------------------------------------
Inventories
We value our inventories, both retail and wholesale, at the lower of cost or
market. Cost is principally determined by the last-in, first-out ("LIFO")
method. The manufactured inventories of Allegro Coffee Company are determined by
the first-in, first-out ("FIFO") method. The excess of estimated current costs
over LIFO carrying value was approximately $4.5 million at both September 24,
2000 and September 26, 1999. Balances of inventories are as follows (in
thousands):
2000 1999
- ---------------------------------------------------------------------------
Manufactured inventories:
Raw materials $ 1,499 1,792
Finished goods 363 983
- ---------------------------------------------------------------------------
Total manufactured inventories 1,862 2,775
- ---------------------------------------------------------------------------
Other inventories, net of LIFO reserve 91,996 72,760
- ---------------------------------------------------------------------------
$ 93,858 75,535
- ---------------------------------------------------------------------------
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. We provide depreciation of equipment over the estimated useful
lives (generally 3 to 15 years) using the straight-line method. We provide
amortization of leasehold improvements on the straight-line method over the
shorter of the estimated useful lives of the improvements or the terms of the
related leases. Costs related to a projected site determined to be
unsatisfactory and general site selection costs which cannot be identified with
a specific store location are charged to operations currently.
Acquired Leasehold Rights
We amortize acquired leasehold rights to rent expense over the remaining lease
term using the straight-line method. Accumulated amortization of acquired
leasehold rights at September 24, 2000 and September 26, 1999 totaled
approximately $3.1 million and $2.2 million, respectively.
Excess of Cost Over Net Assets Acquired
We amortize excess of cost over net assets acquired over 20 to 40 years using
the straight-line method. Accumulated amortization of excess of cost over net
assets acquired at September 24, 2000 and September 26, 1999 totaled
approximately $10.5 million and $8.3 million, respectively. We evaluate the
carrying value of the excess of cost over net assets acquired periodically in
relation to such factors as the occurrence of a significant event, the operating
performance of each acquired subsidiary and the estimated future undiscounted
cash flows of the underlying business. If the sum of the estimated future
undiscounted cash flows is less than the carrying value of the excess of cost
over net assets acquired, a loss is recognized for the difference.
(continued)
39
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies, continued
Other Assets
Other assets include non-competition agreements, trademarks and certain costs
associated with the issuance of debt. Non-competition agreements and debt
issuance costs are amortized over the life of the related agreement using the
straight-line method. We amortize trademarks over 40 years using the straight-
line method. Accumulated amortization included in other assets at September 24,
2000 and September 26, 1999 totaled approximately $7.3 million and $6.1 million,
respectively.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
We evaluate long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Revenue Recognition
We recognize revenue for sales of our products at the point of sale.
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.
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. We adopted SOP 98-5 effective the beginning of
the first quarter of fiscal year 2000. In fiscal year 1999 and prior years, we
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 we 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 adoption of SOP 98-5 did
not have a material impact on our consolidated financial statements. Relocation
costs consist of moving costs, remaining lease payments, accelerated
depreciation costs and other costs associated with replaced facilities and other
related expenses.
Advertising
We charge advertising costs to expense as incurred. Advertising expense related
to continuing operations for fiscal years 2000, 1999 and 1998 was approximately
$11.2 million, $10.4 million and $9.3 million, respectively.
Income Taxes
We use the asset and liability approach which accounts for deferred income taxes
by applying statutory tax rates in effect at the balance sheet date to
differences between the book basis and the tax basis of assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The deferred tax assets and
liabilities are adjusted in income to reflect changes in tax laws or rates in
the period that includes the enactment date.
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock-Based Compensation," we continue to apply
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees" and related interpretations in accounting for our stock
option grants. APB No. 25 provides that the compensation expense relative to our
team member stock options is measured based on the intrinsic value of the stock
option.
Earnings (Loss) per Share
Basic earnings (loss) per share is based on the weighted average number of
common shares outstanding during the fiscal period. Diluted earnings (loss) per
share is based on the weighted average number of common shares outstanding plus,
where applicable, the additional common shares that would have been outstanding
as a result of the conversion of dilutive options and convertible debt.
(continued)
40
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies, continued
Comprehensive Income
The Company's comprehensive income in fiscal years 1999 and 1998 consisted of
net income and changes in unrealized gains and losses on marketable securities,
net of tax. Comprehensive income is reflected in the consolidated statements of
shareholders' equity and comprehensive income.
Segment Information
We adopted Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS No. 131") in
fiscal year 1999. We operate in one reportable segment, natural foods
supermarkets. All of the Company's operations are domestic.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. Actual results could differ
from those estimates. We use estimates when accounting for depreciation and
amortization, allowance for doubtful accounts, employee benefit plans, income
taxes, reorganization reserves, disposal of discontinued operations and
contingencies.
Reclassifications
Where appropriate, we have reclassified prior years' financial statements to
conform to current year presentation.
(3) Property and Equipment
Balances of major classes of property and equipment are as follows (in
thousands):
2000 1999
- ------------------------------------------------------------------------------
Land $ 9,730 9,399
Buildings and leasehold improvements 322,246 229,995
Fixtures and equipment 282,130 248,367
Construction in progress and equipment not yet in service 60,844 52,383
- ------------------------------------------------------------------------------
674,950 540,144
Less accumulated depreciation and amortization 206,272 166,188
- ------------------------------------------------------------------------------
$468,678 373,956
- ------------------------------------------------------------------------------
Depreciation and amortization expense related to property and equipment totaled
approximately $57.1 million, $44.9 million and $35.6 million for fiscal years
2000, 1999 and 1998, respectively. Property and equipment includes approximately
$2.3 million, $1.8 million and $0.7 million of interest capitalized during
fiscal years 2000, 1999 and 1998, respectively.
41
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(4) Long-Term Debt
We have long-term debt and obligations under capital leases as follows (in
thousands):
2000 1999
- --------------------------------------------------------------------------------
Obligations under capital lease agreements for equipment,
due in monthly installments through 2005 $ 800 1,716
Notes payable to banks 137,000 49,000
Senior unsecured notes 34,286 40,000
Convertible debentures, including accreted interest 130,787 124,419
Other notes payable 3,081 327
- --------------------------------------------------------------------------------
305,954 215,462
Less current installments 7,884 6,640
- --------------------------------------------------------------------------------
$298,070 208,822
- --------------------------------------------------------------------------------
On February 7, 2000, we amended our bank credit agreement to increase our
revolving line of credit to up to $160 million through June 28, 2002. Under
terms of the amended agreement, on June 29, 2000 we subsequently increased our
revolving line of credit to up to $195 million through June 28, 2002. This
credit agreement contains certain restrictive covenants, including the
prohibition of the payment of dividends on common stock. The credit agreement
also contains certain affirmative covenants including maintenance of certain
financial ratios as defined in the agreement. At September 24, 2000 the Company
was in compliance with the debt covenants. All outstanding amounts borrowed
under this agreement bear interest at our option of either a defined base rate
or the Eurodollar rate plus a premium. Commitment fees ranging from 0.20% to
0.30% of the undrawn amount are payable under this agreement. At September 24,
2000, approximately $137 million was drawn and at September 26, 1999,
approximately $49 million was drawn under the agreement. The average interest
rate on amounts outstanding under this agreement at September 24, 2000 was
approximately 7.73%. The amounts available to the Company under this line of
credit were effectively reduced by outstanding letters of credit totaling
approximately $3.9 million and $6.9 million at September 24, 2000 and September
26, 1999, respectively.
During the second quarter of fiscal year 1998, we issued a private offering
under Rule 144A of the Securities Act of 1933, as amended, of zero coupon
convertible subordinated debentures with no sinking fund requirement and a
scheduled maturity date of March 2, 2018. The debentures were subsequently
registered. The offering resulted in gross proceeds to the Company of
approximately $115 million. The issue price of the debentures results in an
effective yield to maturity of 5 percent. The principal amount of the debentures
at maturity is approximately $308.8 million. The debentures are convertible at
the option of the holder, at any time on or prior to maturity, unless previously
redeemed or otherwise purchased. The debentures have a conversion rate of 5.320
shares per $1,000 principal amount at maturity, initially representing a
conversion price of approximately $70 per share of common stock, or
approximately 1,643,000 shares. The debentures may be redeemed at the option of
the holder on March 2, 2003, March 2, 2008 or March 2, 2013 at the issue price
plus accrued original discount to the date of redemption. Subject to certain
limitations, at our option, we may elect to pay this purchase price in cash,
shares of common stock or any combination thereof. The debentures may also be
redeemed in cash at the option of the holder if there is a change in control at
the issue price plus accrued original discount to the date of redemption.
Subsequent to March 2, 2003, at our option, we may redeem the debentures for
cash, in whole or in part, at redemption prices equal to the issue price plus
accrued original discount to the date of redemption. The debentures are
subordinated in the right of payment to all existing and future senior
indebtedness.
We also have outstanding approximately $34.3 million of senior unsecured notes
that bear interest at 7.29% payable quarterly. Principal on the senior notes is
payable in annual installments of approximately $5.7 million through May 16,
2006. The notes contain certain affirmative and negative covenants, including
maintenance of certain financial ratios as defined in the agreement. At
September 24, 2000 and September 26, 1999, the Company was in compliance with
the debt covenants.
42
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(5) Leases
The Company is committed under certain capital leases for rental of equipment
and certain operating leases for rental of facilities and equipment. These
leases expire or become subject to renewal at various dates from 2001 to 2040.
Rental expense charged to operations under operating leases for fiscal years
2000, 1999 and 1998 totaled approximately $47.1 million, $38.4 million and $34.8
million, respectively. Minimum rental commitments required by all noncancelable
leases are approximately as follows (in thousands):
Capital Operating
- ---------------------------------------------------------------------
2001 $646 $ 54,548
2002 168 56,418
2003 12 55,073
2004 12 53,543
2005 2 52,070
Future years - 474,776
- --------------------------------------------------------- --------
840 $746,428
--------
Less amounts representing interest 40
- ---------------------------------------------------------
800
Less current installments 612
- ---------------------------------------------------------
$188
- ---------------------------------------------------------
Minimum rentals for operating leases do not include certain amounts of
contingent rentals which may become due under the provisions of leases for
retail space. These agreements provide that minimum rentals may be increased
based on a percent of annual sales from the retail space. During fiscal years
2000, 1999 and 1998, we paid contingent rentals of approximately $2.2 million,
$2.0 million and $1.5 million, respectively. Certain officers of the Company own
approximately 13% of a business which leases facilities from the Company under a
lease that commenced in fiscal year 1995. Rental income from this lease totaled
approximately $0.4 million during fiscal years 2000 and 1999 and approximately
$0.5 million during fiscal year 1998.
(6) Income Taxes
Components of income tax expense attributable to continuing operations are as
follows (in thousands):
2000 1999 1998
- -----------------------------------------------------------------------
Current federal income tax $27,249 15,834 18,776
Current state income tax 6,469 4,811 5,130
- -----------------------------------------------------------------------
Total current tax 33,718 20,645 23,906
- -----------------------------------------------------------------------
Deferred federal income tax 560 4,620 (802)
Deferred state income tax 306 325 350
- -----------------------------------------------------------------------
Total deferred tax 866 4,945 (452)
- -----------------------------------------------------------------------
Total income tax expense $34,584 25,590 23,454
- -----------------------------------------------------------------------
(continued)
43
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(6) Income Taxes, continued
Actual income tax expense differed from the amount computed by applying
statutory corporate income tax rates to income from continuing operations before
income taxes as follows (in thousands):
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Federal tax based on statutory rates $27,154 22,966 22,102
Increase (reduction) in income taxes resulting from:
Non-deductible merger transaction costs - - 2,640
Non-deductible amortization of cost in excess
of net assets acquired 536 389 356
Increase (reduction) in valuation allowance 3,950 - (7,760)
Deductible state income taxes (2,371) (1,797) (1,918)
Other, net (1,460) (1,104) 2,554
- ------------------------------------------------------------------------------------------------------------
Total federal taxes 27,809 20,454 17,974
State income taxes 6,775 5,136 5,480
- ------------------------------------------------------------------------------------------------------------
Total income tax expense $34,584 25,590 23,454
- ------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows (in
thousands):
2000 1999
- ------------------------------------------------------------------------------------------------------------
Current deferred tax assets (liabilities):
Compensated absences, principally due to financial reporting accrual $ 6,794 5,516
Inventories, principally due to additional costs inventoried
for tax purposes 1,377 1,488
Net operating loss carryforwards 19,164 468
Other (586) (65)
- ------------------------------------------------------------------------------------------------------------
Net current deferred tax asset 26,749 7,407
- ------------------------------------------------------------------------------------------------------------
Long-term deferred tax assets (liabilities):
Lease termination and other merger accruals 991 914
Rent differential, principally due to financial
reporting of pro rata expense 4,683 4,012
Capital loss carryforwards 7,153 -
Financial basis of fixed assets in excess of tax basis (2,049) (8,990)
Capitalized costs expensed for tax purposes (1,728) (510)
Other 28 27
- ------------------------------------------------------------------------------------------------------------
Total long term deferred tax assets (liabilities) 9,078 (4,547)
Valuation allowance against long-term assets (7,153) -
- ------------------------------------------------------------------------------------------------------------
Net long term deferred tax asset (liability) 1,925 (4,547)
- ------------------------------------------------------------------------------------------------------------
Net deferred tax asset $28,674 2,860
- ------------------------------------------------------------------------------------------------------------
The Company has provided a valuation allowance of approximately $7.2 million for
deferred tax assets associated with capital loss carryforwards for which
management has determined it is more likely than not that the deferred tax asset
will not be realized. Management believes that it is more likely than not that
the Company will fully realize the remaining deferred tax assets in the form of
future tax deductions based on the nature of these deductible temporary
differences and a history of profitable operations. As of September 24, 2000,
the Company had net operating loss carryforwards totaling approximately $47.9
million that will expire in 2020.
44
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(7) Business Combinations
Natural Abilities
In February 2000, we 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
$23.9 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.
Nature's Heartland
In April 1999, we acquired the outstanding stock of Nature's Heartland, Inc.,
which operated four natural foods supermarkets in the greater Boston
metropolitan area, in exchange for approximately $24.5 million in cash. This
transaction was accounted for using the purchase method and, accordingly, the
purchase price was allocated to net assets acquired based on their estimated
fair values at the date of acquisition. This allocation resulted in goodwill of
approximately $13.5 million, which is being amortized on a straight-line basis
over 40 years.
Merchant of Vino
In December 1997, we acquired Merchant of Vino, which operated four
gourmet/natural food supermarkets and two specialty wine and gourmet food shops
in the greater Detroit metropolitan area, for approximately 1 million shares of
Company common stock. The acquisition was accounted for using the pooling-of-
interests method. Due to the immateriality of the financial statements of the
acquired entity to the Company's consolidated financial statements, financial
information for the periods prior to the acquisition was not restated. An
adjustment to decrease retained earnings by approximately $1.8 million was
recorded to include results of operations of the acquired entity prior to the
combination in these consolidated financial statements. Revenue and results of
operations of the acquired entity for the period from September 29, 1997 through
the date of acquisition are not material to the combined results. Transaction
and other merger-related costs associated with the acquisition of Merchant of
Vino totaled approximately $1.1 million.
Allegro Coffee Company
In December 1997, we acquired Allegro Coffee Company, a specialty coffee roaster
and distributor based in Boulder, Colorado, for approximately 175,000 shares of
Company common stock. The acquisition was accounted for using the pooling-of-
interests method. Due to the immateriality of the financial statements of the
acquired entity to the Company's consolidated financial statements, financial
information for the periods prior to the acquisition was not restated. An
adjustment to increase retained earnings by approximately $1.2 million was
recorded to include results of operations of the acquired entity prior to the
combination in these consolidated financial statements. Revenue and results of
operations of the acquired entity for the period from September 29, 1997 through
the date of acquisition are not material to the combined results. Transaction
and other merger-related costs associated with the acquisition of Allegro Coffee
Company totaled approximately $0.6 million.
45
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(8) Investments in Internet Operations
Effective January 14, 2000, we contributed our Amrion, Inc. and WholeFoods.com,
Inc. subsidiaries to WholePeople.com, Inc., 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 $20.0 million.
WholePeople.com issued an additional 968,977 shares of Class A common stock to
the investors at $6.3985 per share, representing an aggregate purchase price of
$6.2 million. Together with the initial investment of $20.0 million and
subsequent Class A common stock issuance of $5.0 million during the third
quarter to the Investors, the Investors' total investment was $31.2 million for
4,876,142 shares of Class A common stock.
Effective June 30, 2000, WholePeople.com restructured its Internet operations by
merging its Internet business into a subsidiary of Gaiam, Inc., a newly formed
company named Gaiam.com, Inc. WholePeople.com received a 49.9% interest in the
common stock of Gaiam.com. Pursuant to the restructuring, the WholePeople.com
web site was replaced by the Gaiam.com web site. WholePeople.com recognized a
pre-tax restructuring charge of approximately $24.3 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. The remaining business of
manufacturing and direct marketing of nutritional supplements formerly known as
Amrion was renamed NatureSmart. In addition to these restructuring charges, in
fiscal year 2000 WholePeople.com incurred other pre-tax operating losses from
Internet operations totaling approximately $9.5 million. WholePeople.com also
recognized pre-tax investment losses on Internet-related preferred stock and
common stock investments totaling approximately $12.4 million. In a separate
transaction in June 2000, WholePeople.com purchased from Gaiam the outstanding
preferred shares of Gaiam.com for $6.0 million. These shares are redeemable at
their face amount upon the occurrence of an initial public offering of
Gaiam.com.
We accounted for our investment in WholePeople.com Internet operations using the
equity method. In applying the equity method, losses were allocated to the stock
classes in accordance with the terms of the common and preferred stockholders'
agreements. Accordingly, effective January 14, 2000, the Internet operating
results of WholePeople.com were not reflected in our consolidated results of
operations as long as positive common stock equity was available in
WholePeople.com. Equity in losses in unconsolidated affiliates in the
accompanying consolidated financial statements includes after-tax losses
totaling approximately $14.1 million incurred in WholePeople.com Internet
operations after common equity had been reduced to zero. We subsequently
acquired the common stock of WholePeople.com. As a result, we obtained deferred
tax assets associated with net operating loss and capital loss carryforwards
totaling approximately $19.2 million and $7.2 million, respectively. The Company
assumed ownership of the Gaiam.com preferred and common equity investments upon
adoption of the plan to sell NatureSmart. We have accounted for our investment
in Gaiam.com common stock using the equity method and have recognized earnings
of Gaiam.com in proportion to our ownership percentage. The Company's investment
in Gaiam.com is not material in relation to its financial position or results of
operations and therefore summarized financial information for Gaiam.com is not
presented.
(9) 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. Accordingly, the NatureSmart business is accounted for
and presented as discontinued operations in the accompanying consolidated
financial statements. We have recorded a net loss on disposition of the
NatureSmart business totaling approximately $24 million, representing 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, net of income tax benefit of approximately $8.4 million.
(continued)
46
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(9) Discontinued Operations, continued
The assets and liabilities of NatureSmart, which have been reflected on a net
basis on the consolidated balance sheets, are summarized as follows (in
thousands):
2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Current assets $ 11,392 27,377
Long-term assets 29,187 40,587
- -----------------------------------------------------------------------------------------------------------------------
Total assets 40,579 67,964
- -----------------------------------------------------------------------------------------------------------------------
Current liabilities 11,459 4,170
Long-term liabilities - 102
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 11,459 4,272
- -----------------------------------------------------------------------------------------------------------------------
Net assets of discontinued operations $ 29,120 63,692
- -----------------------------------------------------------------------------------------------------------------------
Summary statements of operations data for discontinued operations follows (in
thousands):
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Sales $ 64,277 78,539 83,355
Operating income (loss) (14,587) 2,945 8,891
Provision (benefit) for income taxes (5,172) 816 3,190
Income (loss) from discontinued operations (9,415) 2,129 5,701
- -----------------------------------------------------------------------------------------------------------------------
(10) Shareholders' Equity
Treasury Stock
The Board of Directors has authorized the Company to repurchase up to $50
million in outstanding shares of Company common stock. During fiscal years 2000
and 1999, we repurchased 429,000 shares and 608,000 shares, respectively, of our
common stock for an aggregate cost of approximately $13.5 million and $18.9
million, respectively. In fiscal year 2000, we reissued shares from treasury at
average cost for certain options exercised. During fiscal year 2000,
approximately 281,000 shares were reissued from treasury for a total of
approximately $8.8 million.
Preferred Stock Purchase Rights
On September 22, 1999, the Company's Board of Directors declared a dividend of
one Right to purchase preferred stock ("Right") for each outstanding share of
Company common stock to shareholders of record at the close of business on
October 4, 1999. Each right initially entitles the registered holder to purchase
from the Company a fractional share consisting of one one-thousandth of a share
of Series A Junior Participating Preferred Stock, par value $.01 per share, at a
purchase price of $225 per fractional share, subject to adjustment. The Rights
generally will not become exercisable until ten days after a public announcement
that a person or group has acquired 15% or more of Company common stock (thereby
becoming an "Acquiring Person") or the commencement of a tender or exchange
offer that would result in an Acquiring Person (the earlier of such dates being
called the "Distribution Date"). Rights will be issued with all shares of
Company common stock issued from the record date to the Distribution Date. Until
the Distribution Date, the Rights will be evidenced by the certificates
representing Company common stock and will be transferable only with our common
stock. Generally, if any person or group becomes an Acquiring Person, each
right, other than Rights beneficially owned by the Acquiring Person (which will
thereupon become void), will thereafter entitle its holder to purchase, at the
Rights' then current exercise price, shares of our common stock having a market
value of two times the exercise price of the Right. If, after there is an
Acquiring Person, and the Company or a majority of its assets is acquired in
certain transactions, each Right not owned by an Acquiring Person will entitle
its holder to purchase, at a discount, shares of common stock of the acquiring
entity (or its parent) in the transaction. After there is an Acquiring Person,
the Company's Board of Directors may, under certain circumstances, exchange
shares of our common stock or other securities for each Right not held by an
Acquiring Person. At any time until ten days after a public announcement that
the Rights have been triggered, our Company will generally be entitled to redeem
the Rights for $.01 and to amend the rights in any manner. Certain subsequent
amendments are also permitted. The Rights expire on September 22, 2009.
47
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(11) Earnings (Loss) per Share
A reconciliation of the denominators of the basic and diluted earnings (loss)
per share calculations follows (in thousands):
2000 1999 1998
- -------------------------------------------------------------------
Denominator for basic income (loss)
per share: weighted average shares 26,124 26,374 26,159
Additional shares deemed outstanding from
the assumed exercise of stock options 1,061 1,072 1,585
- -------------------------------------------------------------------
Denominator for diluted income (loss)
per share: adjusted weighted average
shares and assumed conversions 27,185 27,446 27,744
- -------------------------------------------------------------------
The computation of diluted earnings (loss) per share does not include
approximately 1.6 million shares of common stock related to the zero coupon
convertible subordinated debentures at the end of fiscal years 2000, 1999 and
1998 and options to purchase approximately 1.3 million shares, 1.5 million
shares and 1.0 million shares of common stock at the end of fiscal years 2000,
1999 and 1998, respectively, because to do so would be antidilutive.
(12) Team Member Benefit Plans
Team Member Stock Option Plans
Our Company grants options to purchase common stock under our 1992 Stock Option
Plans, as amended. Under these plans, options are granted at an option price
equal to the market value of the stock at the date of grant and are generally
exercisable ratably over a four-year period beginning one year from date of
grant. Options granted in fiscal years 2000, 1999 and 1998 expire seven years
from date of grant. Our Company has, in connection with certain of our business
combinations, assumed the stock option plans of the acquired companies. All
options outstanding under our Company's previous plans and plans assumed in
business combinations continue to be governed by the terms and conditions of
those grants. At September 24, 2000, September 26, 1999 and September 27, 1998
approximately 0.3 million, 0.5 million and 1.4 million shares of our common
stock, respectively, were available for option grants.
The following table summarizes option activity (in thousands, except per share
data):
Weighted
Number Average
of Options Exercise
Outstanding Price
- -----------------------------------------------------------------------------
Balance at September 28, 1997 3,105 $17.36
Options granted 1,580 68.39
Options exercised (839) 16.70
Options canceled (126) 41.06
- -----------------------------------------------------------------------------
Balance at September 27, 1998 3,720 38.38
Options granted 1,165 32.17
Options exercised (471) 13.04
Options canceled (291) 46.59
- -----------------------------------------------------------------------------
Balance at September 26, 1999 4,123 38.91
Options granted 1,389 42.09
Options exercised (505) 20.00
Options canceled (316) 49.37
- -----------------------------------------------------------------------------
Balance at September 24, 2000 4,691 $41.01
- -----------------------------------------------------------------------------
(continued)
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(12) Team Member Benefit Plans
Team Member Stock Option Plans, continued
A summary of options outstanding and exercisable at September 24, 2000 follows
(in thousands, except per share data):
Options Outstanding Options Exercisable
--------------------------------- ---------------------------
Range of Weighted Average Weighted Weighted
Exercise Prices Number Remaining Average Number Average
- ------------------
From To Outstanding Life (in Years) Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------
$ 0.90 $19.50 665 2.76 $14.45 657 $14.42
21.50 27.63 476 3.42 23.07 357 23.34
31.88 38.25 943 5.35 32.14 236 32.31
41.88 49.75 1,476 6.33 42.41 62 45.19
69.75 69.75 1,131 4.49 69.75 590 69.75
- ----------------------------------------------------------------------------------------------------
Total 4,691 4.89 $41.01 1,902 $36.48
- ----------------------------------------------------------------------------------------------------
At September 26, 1999 and September 27, 1998, approximately 1.5 million and 1.1
million outstanding options, respectively, were exercisable. The weighted
average exercise price for outstanding exercisable options was $29.79 and $16.10
at September 26, 1999 and September 27, 1998, respectively.
As required by SFAS No. 123, we have determined pro forma net income and net
income per common share as if compensation costs had been recognized based on
the fair value of the options granted to team members. The fair value of stock
option grants has been estimated at the date of grant using the Black-Scholes
multiple option pricing model with the following weighted average assumptions:
2000 1999 1998
- -----------------------------------------------------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 6.13% 5.23% 5.63%
Expected volatility 54.21% 54.89% 53.72%
Expected life, in years 3.46 3.40 3.37
- -----------------------------------------------------------------------
The weighted average estimated fair values at grant date of team member stock
options granted during fiscal years 2000, 1999 and 1998 were $18.58, $13.91 and
$30.03, respectively. Had we recognized compensation cost based on the fair
value of stock options granted to team members at grant date as determined using
the Black-Scholes option valuation model described above consistent with SFAS
No. 123, net income (loss) and diluted income (loss) per share would have
changed to the pro forma amounts shown below (in thousands, except per share
data):
2000 1999 1998
- ---------------------------------------------------------------------------
Net income (loss):
As reported $ (4,831) 42,155 45,395
Pro forma (15,558) 30,175 36,437
Diluted income (loss) per share:
As reported $ (0.18) 1.54 1.64
Pro forma (0.57) 1.10 1.31
- ---------------------------------------------------------------------------
The above pro forma disclosures may not be representative of the effects on net
income and net income per common share in future years because they do not take
into consideration pro forma compensation expense related additional stock
options that may be granted in future years.
(continued)
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(12) Team Member Benefit Plans
Team Member Stock Purchase Plan
Our Company offers a team member stock purchase plan to all full-time team
members with a minimum of 400 hours of service. Under this plan, participating
team members may purchase our common stock each fiscal quarter through payroll
deductions. Participants in the stock purchase plan may elect to purchase
unrestricted shares at 100 percent of market value or restricted shares at 85
percent of market value on the purchase date. Participants are required to hold
restricted shares for two years before selling them. We issued approximately
12,000, 15,000 and 8,000 shares under this plan in fiscal years 2000, 1999 and
1998, respectively.
Team Member 401(k) Plan
Our Company offers a team member 401(k) plan to all team members with a minimum
of one year of service and 1,000 service hours in the plan year. Matching
contributions under this plan, determined at the Company's discretion, totaled
approximately $0.6 million, $1.1 million and $0.8 million in fiscal years 2000,
1999 and 1998, respectively. Matching contributions in fiscal years 2000 and
1999 were made in Company common stock purchased in open market transactions
totaling approximately 14,000 shares and approximately 32,000 shares,
respectively, and approximately 13,000 newly-issued shares in fiscal year 1998.
(13) Asset Disposal Costs
During the fourth quarter of fiscal year 1999, we recognized asset disposal
costs totaling approximately $5.9 million. Costs associated with the disposal of
accounting and distribution software which was replaced with the implementation
of new financial software totaled approximately $2.8 million. Costs associated
with other hardware and software disposals totaled approximately $3.1 million
and consisted of the writeoffs of certain Year 2000 non-compliant or obsolete
hardware and certain software under development that we determined would not be
placed in service. Substantially all activities related to the asset disposals
were completed in fiscal year 1999.
(14) Commitments and Contingencies
Our Company provides partially self-insured, voluntary team member benefits
plans which provide, among other benefits, health care benefits to participating
team members. The plans are designed to provide specified levels of coverage,
with excess insurance coverage provided by a commercial insurer. Our exposure
related to claims associated with unreported cases or underestimated future
costs associated with known cases for which our Company is partially
self-insured at September 24, 2000 has been estimated based on management's
review of claims outstanding at fiscal year end, claims reported subsequent to
fiscal year end and management's knowledge of the typical length of time from
date of occurrence to date of reported claim.
The Company is a party to legal proceedings and claims which arise in the
ordinary course of business. While it is not possible to predict the outcome of
the Company's litigation matters, management does not believe that the outcome
of any of those matters will have a material adverse effect on the our
consolidated financial position, operating results or cash flows.
50
SIGNATURES
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 hereunto duly authorized.
WHOLE FOODS MARKET, INC.
Date: December 21, 2000 By: /s/ Glenda Flanagan
-------------------
Glenda Flanagan, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on December 21, 2000.
Name Title
---- -----
/s/ John P. Mackey
- ------------------
John Mackey Chairman of the Board, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Glenda Flanagan
- -------------------
Glenda Flanagan Chief Financial Officer (Principal Financial and
Accounting Officer)
/s/ David W. Dupree
- -------------------
David W. Dupree Director
/s/ Dr. John B. Elstrott
- ------------------------
Dr. John B. Elstrott Director
/s/ Avram J. Goldberg
- ---------------------
Avram J. Goldberg Director
/s/ Fred Lager
- --------------
Fred Lager Director
/s/ Jirka Rysavy
- ----------------
Jirka Rysavy Director
/s/ Dr. Ralph Z. Sorenson
- -------------------------
Dr. Ralph Z. Sorenson Director
51
INDEX TO EXHIBITS
2.1 Stock Purchase Agreement, among the Registrant, Whole Foods Market
Group, Inc. and Natural Abilities, Inc. (14)
3.1 Restated Articles of Incorporation of the Registrant, as amended (2)
3.2 By-laws of the Registrant adopted May 23, 1995 (8)
4.1 Form of Zero Coupon Convertible Subordinated Debentures Due 2018. (4)
4.2 Indentures between the Company and Chase Bank of Texas, National
Association, as Trustee. (4)
4.3 Registration Rights Agreement by and among the Company and BT Alex
Brown Incorporated and Morgan Stanley & Co. Incorporated. (4)
4.4 Shareholder Rights Agreement, dated September 22, 1999, between the
Registrant, Whole Foods Market, Inc. and Securities Transfer
Corporation (7)
10.1 1987 Stock Option and Incentive Plan for Employees (3)
10.2 1987 Stock Option Plan for Outside Directors (3)
10.3 1993 Team Member Stock Ownership Plan (1)
10.4 Form of Retention Agreement between the executive officers of the
Registrant and the Registrant (3)
10.5 Form of amendment to Retention Agreement (1)
10.6 Amended and Restated Credit Agreement, dated June 28, 1999,by and
among the Registrant, the subsidiaries of the Registrant and Chase
Bank of Texas, National Association (12)
10.7 First Amendment dated November 3, 1999 to Amended and Restated Credit
Agreement, dated June 28, 1999, by and among Registrant, the
subsidiaries of the Registrant, Chase Bank of Texas, National
Association. (14)
10.8 Second Amendment dated February 7,2000 to Amended and Restated Credit
Agreement, dated June 28, 1999, by and among Registrant, the
subsidiaries of the Registrant, Chase Bank of Texas, National
Association, Wells Fargo Bank Texas, National Association, First
Union National Bank, Bankboston, National Association, and Chase
Securities Inc. (14)
10.9 1992 Stock Option Plan for Team Members, as amended (1)
10.10 1992 Stock Option Plan for Outside Directors (1)
10.11 1993 Team Member Stock Purchase Plan (1)
10.12 Second Amended and Restated 1991 Stock Incentive Plan of Fresh Fields
Markets, Inc. with amendments thereto (5)
10.13 1994 Director Stock Option Plan with amendments thereto (5)
10.14 Non-Qualified Stock Option Plan of Amrion, Inc. (6)
10.15 1994 Non-Employee Director Stock Option Plan of Amrion, Inc. (6)
12.1 Computation of Ratio of Earnings to Fixed Charges (14)
21.1 Subsidiaries of the Registrant (14)
23.1 Consent of KPMG LLP (14)
27.1 Financial Data Schedule (14)
99.1 Proxy Statement for Annual Meeting of Shareholders to be held March
26, 2001. (13)
(1) Filed as an exhibit to Registration Statement on Form S-4 (No. 33-63824)
and incorporated herein by reference.
(2) Filed as an exhibit to Registration Statement on Form S-3 (No.33-69362)
and incorporated herein by reference.
(3) Filed as an exhibit to Registration Statement on Form S-1 (No. 33-44214)
and incorporated herein by reference.
(4) Filed as an exhibit to Registration Statement on Form S-3 (No. 333-51419)
and incorporated herein by reference.
(5) Filed as an exhibit to Registration Statement on Form S-8 (No. 33-11273)
and incorporated herein by reference.
(6) Filed as an exhibit to Registration Statement on Form S-8 (No. 33-35809)
and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Form 8-K (No. 033-44214)
and incorporated herein by reference
(continued)
52
INDEX TO EXHIBITS, continued
(8) Filed as an exhibit to Registrant's Form 10-K for year ended September
24, 1995 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Form 10-K for year ended September
29, 1996 and incorporated herein by reference.
(10) Filed as an exhibit to Registrant's Form 10-K for year ended September
28, 1997 and incorporated herein by reference.
(11) Filed as an exhibit to Registrant's Form 10-K for year ended September
27, 1998 and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Form 10-K for year ended September
26, 1999 and incorporated herein by reference.
(13) To be filed with the Securities and Exchange Commission and incorporated
herein by reference.
(14) Filed herewith
53