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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
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 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, 2001 was $2,340,191,896.
The number of shares of the registrant's common stock, no par value, outstanding
as of November 30, 2001 was 55,282,673.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth
herein, is incorporated by reference from the Registrant's definitive proxy
statement relating to the annual meeting of stockholders to be held on March 25,
2002.
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Whole Foods Market, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended September 30, 2001
Table of Contents
Page
Number
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PART I
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 4(a). Executive Officers of the Registrant 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 15
Item 6. Selected Consolidated Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Consolidated Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 46
PART III
Item 10. Directors and Executive Officers of the Registrant 46
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial Owners and Management 46
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 46
SIGNATURES 48
- -------------------------------------------------------------------------------------------------------------------
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This Report on Form 10-K contains forward-looking statements within the meaning
of Section 21E of the Securities and Exchange Act of 1934 concerning our current
expectations, assumptions, estimates and projections about the future. These
forward-looking statements are subject to risks and uncertainties that could
cause our actual results to differ materially from those indicated in the
forward-looking statements. Please see "Item 1. Business - Additional Factors
That May Affect Future Results" for a discussion of risks and uncertainties that
may affect our business.
PART I
Item 1. Business
General
Whole Foods Market, Inc. owns and operates the country's largest chain of
natural and organic 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-one years.
We opened our first store in Austin, Texas in 1980 and as of September 30, 2001,
we operated 126 stores in 23 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
$2.3 billion in fiscal year 2001, a compounded annual growth rate of
approximately 38%. Our stores currently average approximately 29,000 square feet
in size and approximately $18 million in annual sales. Sales per gross square
foot as of our most recent fiscal year end was approximately $689, 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 food retailer in every community in which we are
located.
On October 31, 2001, we completed the acquisition of the three Harry's Farmer's
Markets perishables superstores in Atlanta, Georgia. We believe the Harry's
acquisition will provide us with significant support infrastructure for the
southern geographic region as well as provide significant knowledge and
expertise in operating perishable superstores that we will be able to leverage
across the Company.
The Natural Products Industry
According to a leading trade publication for the industry, natural products
sales have grown to over $32 billion in 2000, a 7% increase over the prior year.
The natural products we offer in our stores include:
o natural and organic foods and beverages,
o dietary supplements,
o natural personal care products,
o natural household goods, and
o 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.
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Sales growth for natural and organic foods is being driven by numerous factors
including:
o healthier eating patterns driven by a better-educated populace whose median
age is increasing each year;
o 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; and
o environmental concerns due to the degradation of water and soil quality.
Business Strategy
Whole Foods Market is the country's largest retailer of natural and organic
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, which we believe is 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 50,000 square feet and are located on premium real estate
sites. We have also grown through acquisitions, with approximately 40% 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)
2001 2000 1999 1998 1997
--------------------------------------------------------------
Beginning of year 117 100 87 75 68
Stores opened 12 17 9 9 7
Acquired stores - 3 5 6 2
Relocations and closures (3) (3) (1) (3) (2)
--------------------------------------------------------------
End of year 126 117 100 87 75
--------------------------------------------------------------
Total square footage, end of year (in thousands) 3,598 3,180 2,584 2,092 1,724
--------------------------------------------------------------
(1) Stores acquired in pooling transactions are reflected as acquired in the
period in which the applicable transaction closed.
As of November 30, 2001, we had signed leases for 20 stores averaging
approximately 35,000 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.
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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.
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:
o Whole Foods. We evaluate each and every product that we sell.
o Natural. We feature foods that are free from artificial preservatives,
colors, flavors and sweeteners.
o Taste. We are passionate about great tasting food and the pleasure of
sharing it with others.
o Freshness. We are committed to foods that are fresh, wholesome and safe to
eat.
o Organic. We seek out and promote organically grown foods.
o 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 1,200 SKU's. Our private label sales in grocery and
nutrition currently account for approximately 15% 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. These products meet our quality goals but are less
expensive than alternative products that we sell. In 1999, we introduced the
country's first organic food product line developed just for children 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 promote a strong Company culture featuring
a team approach to store operations that we believe is distinctly more
empowering of employees than that of the traditional supermarket. Our stores
employ between 26 and 386 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.
5
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."
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:
o 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.
o Team Member Stock Purchase Plan. Team members can purchase restricted stock
at a discount through payroll deductions.
o 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 50,000 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 35,000 square feet.
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. Over the past three years, that has
ranged from approximately $2 million to $16 million. This excludes new store
inventory of approximately $750,000, a portion of which is financed by our
vendors. Pre-opening expenses have averaged approximately $600,000 over the past
three years.
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 eight
regional distribution centers across the country. The largest of our regional
distribution centers, Southwest Distribution Center in Austin, Texas,
distributes natural products to our stores in Texas 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 bake houses, all
of which distribute products to our stores.
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Marketing
We spend less on advertising than conventional supermarkets, instead relying
primarily on word-of-mouth recommendations from our customers. We allocate our
marketing budget among region-wide programs, our individual stores' marketing
efforts, and a new national brand awareness initiative focusing primarily on
national and major market public relations and consumer research. Our stores
spend most of their marketing budgets on in-store marketing signs and other
materials, store events such as taste fairs, classes, 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.
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 30, 2001, we had approximately 20,800 team members, including
approximately 17,300 full-time, 2,400 part-time and 1,100 seasonal team members.
We sponsor a partially self-insured health care benefits plan for participating
team members. 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.
We are using EVA extensively for capital investment decisions, from evaluating
new store real estate decisions to determining store remodeling needs. We are
turning down projects that do not add value to the Company in the short or long
term. Operating decisions in stores are also being 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.
Over 350 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.
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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. 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, natural products retailers continue to
have a higher natural products market share and continue to grow their market
share faster than that of the mass market.
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 primarily consists of 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 strategic relationship 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. Finally, 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.
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 National Organic Standards were released by the USDA in December 2000, with
implementation into Federal law set for October 2002. 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.
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Trademarks
Trademarks owned by the Company or its subsidiaries include, but are not limited
to: "Whole Foods Market," "Whole Foods Market 365 Every Day Value," "Allegro
Coffee Company," "Bread & Circus," "Fresh Fields," "Merchant of Vino,"
"Wellspring," "Whole Kids," "Whole People" and "Whole Foods, Whole People, Whole
Planet." The Company or its subsidiaries also holds registrations or
applications, and maintains common law trademark rights for stylized logos and
brand names for products created by 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, the range of operating results
generated from newly opened stores and changes in estimates associated with the
disposal of discontinued operations. Quarter to quarter comparisons of results
of operations have been and may be materially impacted by the timing of new
store openings.
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 that may be
imposed by our lenders may restrict our ability to fund our growth.
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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.
Our Business May be Sensitive to Economic Conditions that Impact Consumer
Spending
Our results of operations may be sensitive to changes in overall economic
conditions that impact consumer spending, including discretionary spending.
Future economic conditions affecting disposable consumer income such as
employment levels, business conditions, interest rates and tax rates could
reduce consumer spending or cause consumers to shift their spending to our
competitors. A general reduction in the level of discretionary spending or
shifts in consumer discretionary spending to our competitors could adversely
affect our growth and profitability.
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.
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.
10
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, with full implementation into law set for
October 2002, 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.
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.
11
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.
Investment Losses Could Adversely Impact Our Results
We have investments in both common and preferred equity securities of Gaiam.com,
a non-public Internet company, and a marketable equity investment in Gaiam,
Inc., its parent company. During fiscal year 2001, we determined that these
investments had suffered declines in value that were other than temporary due to
lower market valuations of Internet-related companies. As a result, we
recognized losses totaling approximately $5.5 million to reduce our investments
in Gaiam.com to their estimated fair values of approximately $3.5 million. Many
factors outside of our control determine whether or not our investments will be
successful. Such factors include the ability of an investee to obtain additional
financing or to achieve commercial success with its products or services.
Accordingly, there can be no assurances that we will be able to recover the
carrying amount of these investments.
Results of Examinations by the Internal Revenue Service and Other Taxing
Authorities Could Materially Impact Our Results
We are subject to periodic audits and examinations by the Internal Revenue
Service ("IRS") and other state and local taxing authorities. The Company's
team member 401(k) plan is currently under examination by the IRS for the years
ended December 31, 1997 and 1996. This examination is ongoing, and no assertions
or assessments as a result of the examination have been made by the IRS to date.
Although not currently anticipated by management, our results could be
materially impacted by the determinations and expenses related to these and
other proceedings by the IRS and other state and local taxing authorities.
12
Item 2. Properties
At September 30, 2001, we operated 126 stores in 23 states and the District of
Columbia. We own store locations in New Orleans, Berkeley and Atlanta. 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 remaining base term of approximately
twelve years plus ten options to renew for five years each. On November 20, 2001
we completed the sale of the facility in Thornton, Colorado that was associated
with discontinued operations. We also own an undeveloped property in
Westminster, Colorado that is associated with discontinued operations and is
actively being marketed. All other stores, distribution centers, bakehouses and
administrative facilities are leased, with expiration dates ranging from 1 to 40
years. We have options to renew most of our leases with renewal periods ranging
from 5 to 50 years. The following table shows the number of our stores by state
and the District of Columbia as of September 30, 2001:
Number Number Number
Location of Stores Location of Stores Location of Stores
- -----------------------------------------------------------------------------------------------------------------------
Arizona 1 Louisiana 1 New York 2
California 32 Maryland 5 North Carolina 5
Colorado 2 Massachusetts 13 Pennsylvania 6
Connecticut 1 Michigan 7 Rhode Island 1
District of Columbia 3 Minnesota 2 Texas 13
Florida 6 Missouri 1 Virginia 7
Georgia 2 New Jersey 5 Washington 1
Illinois 8 New Mexico 1 Wisconsin 1
- ----------------------------------------------------------------------------------------------------------------------
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.
Item 4(a). Executive Officers of the Registrant
The following table sets forth the name, age and position of each of the persons
who was serving as executive officer of the Company as of November 30, 2001:
Name Age Position
- ----------------------------------------------------------------------------------------------------------------------
John P. Mackey 48 Chairman of the Board, Chief Executive Officer and President
Glenda Flanagan 48 Executive Vice President and Chief Financial Officer
A.C. Gallo 48 Executive Vice President of Operations, East Coast Division
Walter Robb 48 Executive Vice President of Operations, West Coast Division
James P. Sud 49 Executive Vice President of Growth and Business Development
Michael Besancon 55 President, Southern Pacific Region
Anthony Gilmore 41 President, Southwest Region
David Lannon 35 President, Northeast Region
Ron Megahan 39 President, Northern Pacific Region
Ken Meyer 37 President, South Region
Juan Nunez 43 President, Florida Region
Dan Rodenberg 46 President, Midwest Region
Lee Valkenaar 46 President, Mid Atlantic Region
- ----------------------------------------------------------------------------------------------------------------------
John P. Mackey, co-founder of the Company, has served as Chairman of the Board
and Chief Executive Officer since 1980. Mr. Mackey has also served as President
since June 2001.
13
Glenda Flanagan has served as Executive Vice President and Chief Financial
Officer of the Company since December 1988.
A.C. Gallo has served as Executive Vice President of Operations, East Coast
Division since February 2001. 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 and President of the Northeast Region.
Walter Robb has served as Executive Vice President of Operations, West Coast
Division since February 2001. Since joining the Company in 1991, Mr. Robb has
also served as Store Team Leader and President of the Northern Pacific Region.
James P. Sud has served as Executive Vice President of Growth and Business
Development since February 2001. Mr. Sud joined the Company in May 1997 and
served as Vice President and Chief Operating Officer until February 2001. 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 has served as President of the Southern Pacific Region since
February 2001. Mr. Besancon has held various positions within the Company since
1995, including Purchasing Director, Vice President of the Southern Pacific
Region and President of the Mid-Atlantic Region.
Anthony Gilmore has served as President of the Southwest Region since March
2001. Mr. Gilmore has held various positions with the Company since 1996
including Store Team Leader and Vice President of the Southeast Region.
David Lannon has served as President of the Northeast Region since March 2001.
Mr. Lannon has held various positions with the Company and with Bread & Circus,
Inc., which was acquired by the Company in October 1992, including Store Team
Leader, Director of Store Operations and Vice President of the Northeast Region.
Ron Megahan has served as President of the Northern Pacific Region since June
2001. Mr. Megahan has held various positions with the Company since 1989
including Store Team Leader.
Ken Meyer has served as President of the South Region since March 2001. Mr.
Meyer has held various positions with the Company since 1996 including Store
Team Leader and Vice President of the Southwest Region.
Juan Nunez 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 Store Team Leader, Director of Store Operations and Vice President of
the Southwest Region.
Dan Rodenberg has served as President of the Midwest Region since January 1997.
Mr. Rodenberg has held various positions with the Company since 1989, including
Store Team Leader and Vice President of the Mid-Atlantic and Midwest Regions.
Lee Valkenaar has served as President of the Mid Atlantic Region since March
2001. Mr. Valkenaar has held various positions with the Company since 1987,
including Store Team Leader, Vice President and President of the Southwest
Region.
14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 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. All applicable amounts have been
adjusted to reflect the two-for-one split of the common stock effected on June
4, 2001 in the form of a stock dividend.
High Low
- ----------------------------------------------------------------------------------------------------------------------
Fiscal Year 2001
September 25, 2000 to January 14, 2001 $31.88 $22.13
January 15, 2001 to April 8, 2001 29.81 19.47
April 9, 2001 to July 1, 2001 29.42 19.99
July 2, 2001 to September 30, 2001 35.87 25.50
Fiscal Year 2000
September 27, 1999 to January 16, 2000 $24.00 $15.13
January 17, 2000 to April 9, 2000 24.00 18.13
April 10, 2000 to July 2, 2000 27.82 17.19
July 3, 2000 to September 24, 2000 30.00 20.19
- ----------------------------------------------------------------------------------------------------------------------
The Company had 1,320 record holders of its common stock as of November 30,
2001.
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.
15
Item 6. Selected Consolidated Financial Data
Whole Foods Market, Inc.
Summary Financial Information
(in thousands, except per share and operating data)
Sept 30 Sept 24 Sept 26 Sept 27 Sept 28
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations Data (1) (2)
Sales $ 2,272,231 1,838,630 1,492,519 1,308,070 1,049,283
Cost of goods sold and occupancy costs 1,482,477 1,205,096 985,000 873,088 709,692
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 789,754 633,534 507,519 434,982 339,591
Selling, general and administrative expenses 652,974 516,418 420,094 357,941 290,440
Pre-opening and relocation costs 8,539 10,497 5,914 3,979 5,243
Amortization expense 7,098 5,926 3,507 2,841 2,415
Store closure and asset disposal costs 9,425 - 5,940 - -
Merger expenses - - - 1,699 -
- ------------------------------------------------------------------------------------------------------------------------------
Operating income 111,718 100,693 72,064 68,522 41,493
Other income (expense):
Interest expense (17,891) (15,093) (8,248) (7,677) (6,033)
Investment and other income (loss) 1,628 (8,015) 1,800 2,303 27
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes and equity in losses of unconsolidated affiliates 95,455 77,585 65,616 63,148 35,487
Provision for income taxes 38,182 34,584 25,590 23,454 11,327
Equity in losses of unconsolidated affiliates 5,626 14,074 - - -
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of change in accounting principle 51,647 28,927 40,026 39,694 24,160
Discontinued operations:
Income (loss) from discontinued operations, net of
income taxes - (9,415) 2,129 5,701 2,484
Gain (loss) on disposal, net of income taxes 16,233 (23,968) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle 67,880 (4,456) 42,155 45,395 26,644
Cumulative effect of change in accounting principle,
net of income taxes - (375) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 67,880 (4,831) 42,155 45,395 26,644
- ------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Income from continuing operations before
cumulative effect of change in accounting principle$ 0.96 0.55 0.76 0.76 0.50
Income (loss) from discontinued operations,
net of income taxes 0.30 (0.63) 0.04 0.11 0.05
Cumulative effect of change in accounting principle,
net of income taxes - (0.01) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.26 (0.09) 0.80 0.87 0.55
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 53,664 52,248 52,748 52,318 48,388
- ------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Income from continuing operations before
cumulative effect of change in accounting principle $ 0.92 0.53 0.73 0.72 0.48
Income (loss) from discontinued operations,
net of income taxes 0.29 (0.61) 0.04 0.10 0.05
Cumulative effect of change in accounting principle,
net of income taxes - (0.01) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.21 (0.09) 0.77 0.82 0.53
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding, diluted basis 56,185 54,370 54,892 55,488 50,342
- ------------------------------------------------------------------------------------------------------------------------------
(continued)
16
Whole Foods Market, Inc.
Summary Financial Information (continued)
(in thousands, except per share and operating data)
Sept 30 Sept 24 Sept 26 Sept 27 Sept 28
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets Data (End of Year) (2)
Net working capital $ (11,596) (11,929) (3,937) 70,975 20,331
Total assets 829,171 760,399 655,463 537,593 390,877
Long-term debt (including current maturities) 256,649 305,954 215,462 158,988 93,508
Shareholders' equity 409,357 307,157 311,220 277,273 205,465
Operating Data
Number of stores at end of fiscal year 126 117 100 87 75
Store sales per gross square foot $ 689 660 661 670 638
Average weekly sales per store $ 353,000 325,000 310,000 292,000 277,000
Comparable store sales increase (3) 9.2% 8.6% 7.7% 11.0% 8.3%
- -----------------------------------------------------------------------------------------------------------------------
(1) Fiscal year 2001 is a 53-week year and fiscal years 2000, 1999, 1998 and
1997 are 52-week years.
(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.
17
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 126 stores as of September 30, 2001 both by opening new stores and
acquiring existing stores from third parties. We operate in one reportable
segment, natural foods supermarkets. We currently have one store in development
in Toronto, Canada. All of our remaining 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 generally become profitable during
their first year of operation, although some new stores may incur operating
losses for the first one to three years of operations. Our results of operations
are reported on a 52- or 53-week year ending on the last Sunday in September.
Fiscal year 2001 is a 53-week year, and fiscal years 2000 and 1999 are 52-week
years.
In November 2000, the Company adopted a plan to dispose of the NatureSmart
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:
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 65.2 65.5 66.0
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 34.8 34.5 34.0
Selling, general and administrative expenses 28.7 28.1 28.1
Pre-opening and relocation costs 0.4 0.6 0.4
Amortization expense 0.3 0.3 0.2
Store closure and asset disposal costs 0.4 - 0.4
- ---------------------------------------------------------------------------------------------------------------------
Operating income 4.9 5.5 4.8
Other income (expense):
Interest expense (0.8) (0.8) (0.6)
Investment and other income (loss) 0.1 (0.4) 0.1
- ---------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and equity in losses of unconsolidated affiliates 4.2 4.2 4.4
Provision for income taxes 1.7 1.9 1.7
Equity in losses of unconsolidated affiliates 0.3 0.8 -
- ---------------------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of change in accounting principle 2.3 1.6 2.7
Discontinued operations:
Income (loss) from discontinued operations, net of income taxes - (0.5) 0.1
Gain (loss) on disposal, net of income taxes 0.7 (1.3) -
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle 3.0 (0.2) 2.8
Cumulative effect of change in accounting principle,
net of income taxes - - -
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) 3.0% (0.3)% 2.8%
- ---------------------------------------------------------------------------------------------------------------------
Figures may not add due to rounding.
18
Sales
Sales from continuing operations increased 23.6%, 23.2% and 14.1% in fiscal
years 2001, 2000 and 1999, respectively. Adjusted to reflect a fifty-two week
period in fiscal year 2001, sales from continuing operations increased 21.3%.
Sales for all years shown reflect increases due to new stores opened and
acquired and comparable store sales increases of approximately 9.2%, 8.6% and
7.7% in fiscal years 2001, 2000 and 1999, respectively. Sales of a store are
deemed to be comparable commencing in the fifty-third full week after the store
was opened or acquired. Identical store sales, which exclude relocations,
increased approximately 8.0%, 7.0% and 6.6% in fiscal years 2001, 2000 and 1999,
respectively. Comparable and identical 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. Our
gross profit from continuing operations as a percentage of sales was 34.8%,
34.5%, and 34.0% in fiscal years 2001, 2000 and 1999, 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 shrink 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 shrink 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. Gross profit margins were
negatively affected in fiscal year 2001 by an increase in utilities expense as a
percentage of sales of approximately 21 basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations as a
percentage of sales were 28.7% in 2001 and 28.1% in both fiscal years 2000 and
1999. For fiscal year 2001, general and administrative expenses reflect
increases in wage costs and depreciation from investments in information
systems. These increases were partially offset by an overall decrease in direct
store expenses. Fiscal year 2000 selling, general and administrative expenses
reflect higher direct store expenses as a percentage of sales and a greater
percentage of our total sales at new and acquired stores added over the prior
year. In fiscal year 1999 we incurred additional general and administrative
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. We adopted AICPA Statement of Position ("SOP") 98-5 "Reporting
on the Costs of Start-up Activities" 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 twelve stores in fiscal year 2001, seventeen
stores in fiscal year 2000, and nine stores in fiscal year 1999. Of these, two
stores were relocations in fiscal year 2001, three stores were relocations in
fiscal year 2000, and one store was a relocation in fiscal year 1999.
Pre-opening and relocation costs were approximately $8.5 million $10.5 million
and $5.9 million in fiscal years 2001, 2000 and 1999, 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 both fiscal years 2001 and 2000 and 0.2% in fiscal year 1999.
19
Store Closure and Asset Disposal Costs
During the fourth quarter of fiscal year 2001, we recognized store closure costs
totaling approximately $9.4 million related to the decision to close three
locations, all of which were previously acquired in multi-store transactions.
Store closure costs include writedowns of leasehold improvements and store
equipment to estimated fair values totaling approximately $5.6 million and
estimated lease termination costs and other disposal costs totaling
approximately $3.8 million. Termination of leases will be completed as soon as
is practicable after the related stores are closed during fiscal year 2002. We
expect to complete substantially all other activities related to these store
closures in fiscal year 2002. 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 our 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 $17.9 million, $15.1 million and $8.2 million in
fiscal years 2001, 2000 and 1999, respectively. The annual increases in net
interest expense are due primarily to additional amounts outstanding under our
bank line of credit and the semi-annual compounding of interest on our zero
coupon convertible subordinated debentures.
Investment and Other Income (Loss)
Investment and other income (loss) for fiscal year 2001 and 2000 includes
interest, rental and other income totaling approximately $1.6 million and $2.0
million, respectively. During fiscal year 2000, we determined that our preferred
stock investment in American WholeHealth, Inc. had suffered a decline in value
that was other than temporary. As a result, we recognized a $10 million pre-tax
loss in fiscal year 2000 associated with the writeoff of this investment.
Investment and other income for fiscal year 1999 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
40.0%, 44.6%, and 39.0% for fiscal years 2001, 2000 and 1999, respectively. Our
effective tax rate for fiscal year 2000 reflects the capital loss associated
with the writeoff of our $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%. At September 30, 2001, we had net operating loss carryforwards totaling
approximately $46 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 our 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 2001 totaled approximately $5.6
million and consisted primarily of the writedown of our investment in Gaiam.com
to its estimated fair value and our share of Gaiam.com losses. During fiscal
year 2001, we determined that our investment in Gaiam.com had suffered a decline
in value that was other than temporary due to lower market valuations of
Internet-related companies. As a result, we recognized a loss of approximately
$5.5 million to reduce our investment in Gaiam.com to its estimated fair value.
Equity in losses of unconsolidated affiliates for fiscal year 2000 totaled
approximately $14.1 million and consisted primarily of our 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.
20
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 taxes. In May
2001, we completed the sale of all of our interest in NatureSmart for
approximately $28 million in cash. Subsequent to the end of the fiscal year, we
completed the sale of the facility in Thornton, Colorado that was used by
NatureSmart for approximately $15 million in cash. The gain on disposal of
approximately $16.2 million in fiscal year 2001 consists primarily of proceeds
from these sales in excess of the amounts previously estimated and a reduction
in the estimated future liabilities of the discontinued operations, net of
taxes. Net loss from discontinued operations in fiscal year 2000 was
approximately $9.4 million. Net income from discontinued operations in fiscal
year 1999 was approximately $2.1 million.
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 has been amortized on a straight-line basis over 20 years since
date of acquisition.
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 has been amortized on a straight-line basis
over 40 years since date of acquisition.
Subsequent to the end of fiscal year 2001, we completed the acquisition of
certain assets of Harry's Farmer's Markets, Inc., in exchange for approximately
$35 million in cash plus the assumption of certain liabilities. The assets
acquired are all assets relating to the three perishables superstores in
Atlanta, Georgia, including but not limited to real estate, the Harry's Farmers
Market trade name, distribution center and other support and office facilities.
This transaction will be accounted for using the purchase method. Accordingly,
the purchase price will be allocated to tangible and identifiable intangible
assets acquired based on their estimated fair values at the date of acquisition.
Total costs in excess of tangible and intangible assets acquired will be
recorded as goodwill.
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
year 2001 is a 53-week year with the fourth quarter consisting of 13 weeks.
Fiscal year 2000 is a 52-week year with the fourth quarter 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. 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.
21
The following tables set forth selected quarterly unaudited consolidated
statements of operations information for the fiscal years ended September 30,
2001 and September 24, 2000 (in thousands except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
2001
Sales $643,435 $516,660 $535,584 $576,552
Gross profit 220,518 180,521 187,717 200,998
Income from continuing operations 15,044 14,919 16,120 5,564
Net income 15,044 27,223 16,120 9,493
Basic earnings per share:
From continuing operations 0.28 0.28 0.30 0.10
Net income 0.28 0.51 0.30 0.17
Diluted earnings per share:
From continuing operations 0.27 0.27 0.29 0.10
Net income 0.27 0.49 0.29 0.17
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 0.23 0.24 0.26 (0.18)
Net income (loss) 0.22 0.24 0.26 (0.81)
Diluted earnings (loss) per share:
From continuing operations 0.22 0.24 0.25 (0.18)
Net income (loss) 0.21 0.24 0.25 (0.81)
- -------------------------------------------------------------------------------------------------------------------
Net income for the fourth quarter of fiscal year 2001 includes a writedown of
our investments in Gaiam.com totaling approximately $5.5 million in continuing
operations and a gain on disposal of approximately $3.9 million related to the
sale of the NatureSmart business.
22
Liquidity and Capital Resources
We generated cash from operating activities of approximately $173.0 million,
$124.2 million and $116.6 million in fiscal years 2001, 2000 and 1999,
respectively. Cash flows from operating activities resulted primarily from our
net income less non-cash expenses and changes in operating working capital.
On March 1, 2001, we amended our bank credit agreement to increase our revolving
line of credit to $220 million through June 28, 2003. 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 LIBOR rate plus
a premium. Commitment fees ranging from 0.20% to 0.30% of the undrawn amount are
payable under this agreement. At September 30, 2001, approximately $90.0 million
was drawn and approximately $126.3 million was available under the agreement. At
September 24, 2000, approximately $137.0 million was drawn and approximately
$54.1 million was available under the agreement. At November 30, 2001,
approximately $102.0 million was drawn and approximately $114.3 million was
available under the agreement. The average interest rate on amounts outstanding
under this agreement at September 30, 2001 was approximately 4.63%. We have
outstanding zero coupon convertible subordinated debentures having a carrying
amount of approximately $137.6 million at September 30, 2001. The debentures
have an effective yield to maturity of 5 percent and a principal amount at
maturity on March 2, 2018 of 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. 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. We also have outstanding at September 30, 2001 approximately $28.6
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. During fiscal years 2000 and 1999, we
repurchased 858,000 and 1,216,000 shares, respectively, of our common stock for
an aggregate cost of approximately $13.5 million and $18.9 million,
respectively. Net cash used in financing activities was approximately $30.2
million in fiscal year 2001. Net cash provided by financing activities,
primarily borrowings on our line of credit, was approximately $77.9 million and
$36.4 million in fiscal years 2000 and 1999, respectively.
Whole Foods Market's principal capital requirements have been the funding of the
development or acquisition of new stores and acquisition of property and
equipment for existing stores. We estimate that cash requirements to open a new
store will range from approximately $2 million to $16 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, 2001, we had signed leases for 20 stores averaging approximately
35,000 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
2002 in connection with ongoing equipment upgrades and resets at existing stores
and continued development of management information systems. On October 31,
2001, we completed the acquisition of the three Harry's Farmer's Markets
perishables superstores in Atlanta, Georgia in exchange for approximately $35
million in cash plus the assumption of certain liabilities. Net cash used in
investing activities was approximately $156.9 million, $180.7 million and $159.8
million in fiscal years 2001, 2000 and 1999, 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.
23
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," in June 1998 as amended by SFAS No. 138, which was
issued in June 2000. SFAS No. 133 establishes reporting standards for derivative
instruments and hedging activities that require an entity to recognize all
derivatives as assets or liabilities measured at fair value and is effective for
financial statements issued for all fiscal quarters of fiscal years beginning
after June 15, 2000. If certain conditions are met, a derivative may be
specifically designated as a hedge of the exposure to changes in the fair value,
variable cash flow, or foreign currency of a recognized asset or liability or
certain other transactions and firm commitments. We adopted SFAS No. 133 in the
first quarter of fiscal year 2001. The adoption of SFAS No. 133 did not have any
financial accounting effect on our consolidated financial statements.
The FASB issued SFAS No. 141, "Business Combinations," in June 2001. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. We adopted SFAS No. 141 effective the beginning of the fourth
quarter of fiscal year 2001. The adoption of SFAS No. 141 did not have any
financial accounting effect on our consolidated financial statements.
The FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," in June
2001. SFAS No. 142 provides that separable intangible assets that have finite
lives will continue to be amortized over their useful lives and that goodwill
and indefinite-lived intangible assets will no longer be amortized but will be
reviewed for impairment annually, or more frequently if impairment indicators
arise. Under the provisions of SFAS No. 142, any impairment loss identified upon
adoption of this standard is recognized as a cumulative effect of a change in
accounting principle. Any impairment loss recognized subsequent to initial
adoption of SFAS No. 142 will be recorded as a charge to current period
earnings. The provisions of SFAS No. 142 are required to be applied starting
with fiscal years beginning after December 15, 2001 and must be applied as of
the beginning of a fiscal year. Early adoption is permitted for companies with
fiscal years beginning after March 15, 2001. We adopted the provisions of SFAS
No. 142, including the provisions for nonamortization of goodwill, on October 1,
2001. Pre-tax goodwill amortization was approximately $3.1 million, $2.2 million
and $1.3 million during fiscal years 2001, 2000 and 1999, respectively.
Application of the nonamortization provisions of SFAS No. 142 is expected to
result in an annual increase in net income of approximately $1.9 million, or
approximately $.03 per share, in fiscal year 2002. We are evaluating the
transitional goodwill impairment provisions of SFAS No. 142 but currently do not
expect the adoption of these to have a material impact on our consolidated
financial statements.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," in
June 2001. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and is effective for financial statements
issued for fiscal years beginning after June 15, 2002, with early application
encouraged. We will adopt SFAS No. 143 in the first quarter of fiscal year 2003.
We are evaluating the impact of the adoption of SFAS No. 143 on our consolidated
financial statements.
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in August 2001. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and other related accounting guidance. SFAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years, with early application
encouraged. The provisions of this Statement generally are to be applied
prospectively. We will adopt SFAS No. 144 in the first quarter of fiscal year
2003. We are evaluating the impact of the adoption of SFAS No. 144 on our
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
changes in government regulation. For a discussion of these and other risks and
uncertainties that may affect our business, please see "Item 1. Business -
Additional Factors That May Affect Future Results." The Company does not
undertake any obligation to update forward-looking statements.
24
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate changes and changes in the market value of our
investments. We are not a party to any derivative arrangement and do not use
financial instruments for trading or other speculative purposes. The impact of
foreign exchange fluctuations on our foreign subsidiary is not material.
Interest Rate Risk. We are 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 revolving maturities of less than three months. At
September 30, 2001, approximately $90 million was outstanding under our line of
credit agreement at an average interest rate of approximately 4.63%. A 100 basis
point change in interest rate would affect interest expense on the line of
credit borrowings by approximately $900,000 on an annual basis based on the
outstanding balance at September 30, 2001. At September 24, 2000 approximately
$137 million was outstanding under our line of credit agreement at an average
interest rate of approximately 7.73%. 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 $28.6 million and $34.3 million at September 30, 2001 and
September 24, 2000, respectively. At September 30, 2001 and September 24, 2000,
the estimated fair value of the senior notes exceeded the carrying amount by
approximately $1.8 million and $260,000, respectively. The zero coupon
subordinated convertible debentures have an effective yield to maturity of 5%
and an outstanding balance of approximately $137.6 million and $130.8 million at
September 30, 2001 and September 24, 2000, respectively. At September 30, 2001
and September 24, 2000, the carrying amount of the convertible debentures
exceeded the estimated fair value by approximately $630,000 and $9.6 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.
For these investments, our policy is to regularly review the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values. During fiscal year 2001, we determined that these investments
had suffered declines in value that were other than temporary due to lower
market valuations of Internet-related companies. As a result, we recognized
losses totaling approximately $5.5 million to reduce our investments in
Gaiam.com to their estimated fair values of approximately $3.5 million. At
September 30, 2001 we also have a marketable equity investment in Gaiam, Inc.
totaling approximately $1.2 million. Gaiam, Inc. common stock is traded on the
Nasdaq Stock Market (symbol: GAIA).
Item 8. Consolidated Financial Statements and Supplementary Data
Whole Foods Market, Inc.
Index to Consolidated Financial Statements
Page
Number
----------------------------------------------------------------------------------------------------------------
Independent Auditors' Reports 26
Consolidated Balance Sheets at September 30, 2001 and September 24, 2000 28
Consolidated Statements of Operations for the fiscal years ended September 30, 2001,
September 24, 2000 and September 26, 1999 29
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the
fiscal years ended September 30, 2001, September 24, 2000 and September 26, 1999 30
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2001,
September 24, 2000 and September 26, 1999 31
Notes to Consolidated Financial Statements 32
----------------------------------------------------------------------------------------------------------------
No schedules are required.
25
Whole Foods Market, Inc.
Independent Auditors' Report
The Board of Directors
Whole Foods Market, Inc.
We have audited the accompanying consolidated balance sheet of Whole Foods
Market, Inc. and subsidiaries ("Company") as of September 30, 2001 and the
related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for the fiscal year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides 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 30, 2001 and the results of their
operations and their cash flows for the fiscal year then ended, in conformity
with accounting principles generally accepted in the United.
/s/ Ernst & Young LLP
Austin, Texas
November 14, 2001
26
Whole Foods Market, Inc.
Independent Auditors' Report
The Board of Directors
Whole Foods Market, Inc.
We have audited the accompanying consolidated balance sheet of Whole Foods
Market, Inc. and subsidiaries ("Company") as of September 24, 2000 and the
related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the fiscal years in the two
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 the results of their
operations and their cash flows for each of the fiscal years in the two 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
27
Whole Foods Market, Inc.
Consolidated Balance Sheets
(in thousands)
September 30, 2001 and September 24, 2000
Assets
2001 2000
- -------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 1,843 395
Trade accounts receivable 24,039 21,836
Merchandise inventories 98,616 93,858
Prepaid expenses and other current assets 11,693 8,883
Deferred income taxes 8,549 5,740
- -------------------------------------------------------------------------------------------------------------------
Total current assets 144,740 130,712
Property and equipment, net of accumulated depreciation and amortization 542,986 468,678
Long-term investments 4,706 9,632
Acquired leasehold rights, net of accumulated amortization 15,648 13,753
Excess of cost over net assets acquired, net of accumulated amortization 67,258 69,867
Deferred income taxes 20,287 22,934
Other assets, net of accumulated amortization 15,171 15,703
Net assets of discontinued operations 18,375 29,120
- -------------------------------------------------------------------------------------------------------------------
$ 829,171 760,399
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
2001 2000
- -------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current installments of long-term debt and capital lease obligations $ 5,944 7,884
Trade accounts payable 50,468 49,985
Accrued payroll, bonuses and team member benefits 41,265 37,534
Other accrued expenses 58,659 47,238
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 156,336 142,641
Long-term debt and capital lease obligations, less current installments 250,705 298,070
Deferred rent liabilities 11,653 10,801
Other long-term liabilities 1,120 1,730
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 419,814 453,242
- -------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value, 100,000 shares authorized, 55,114 and 54,445 shares
issued, 54,770 and 52,932
shares outstanding in 2001 and 2000, respectively 251,679 235,648
Common stock in treasury, at cost (5,369) (23,688)
Accumulated other comprehensive income (30) -
Retained earnings 163,077 95,197
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 409,357 307,157
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- -------------------------------------------------------------------------------------------------------------------
$ 829,171 760,399
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
28
Whole Foods Market, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Fiscal years ended September 30, 2001, September 24, 2000 and September 26, 1999
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Sales $ 2,272,231 1,838,630 1,492,519
Cost of goods sold and occupancy costs 1,482,477 1,205,096 985,000
- -------------------------------------------------------------------------------------------------------------------
Gross profit 789,754 633,534 507,519
Selling, general and administrative expenses 652,974 516,418 420,094
Pre-opening and relocation costs 8,539 10,497 5,914
Amortization expense 7,098 5,926 3,507
Store closure and asset disposal costs 9,425 - 5,940
- -------------------------------------------------------------------------------------------------------------------
Operating income 111,718 100,693 72,064
Other income (expense):
Interest expense (17,891) (15,093) (8,248)
Investment and other income (loss) 1,628 (8,015) 1,800
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes and
equity in losses of unconsolidated affiliates 95,455 77,585 65,616
Provision for income taxes 38,182 34,584 25,590
Equity in losses of unconsolidated affiliates 5,626 14,074 -
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of change in accounting principle 51,647 28,927 40,026
Discontinued operations:
Income (loss) from discontinued operations, net of income taxes - (9,415) 2,129
Gain (loss) on disposal, net of income taxes 16,233 (23,968) -
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle 67,880 (4,456) 42,155
Cumulative effect of change in accounting principle,
net of income taxes - (375) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 67,880 (4,831) 42,155
- -------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Income from continuing operations before cumulative
effect of change in accounting principle $ 0.96 0.55 0.76
Income (loss) from discontinued operations, net of income taxes 0.30 (0.63) 0.04
Cumulative effect of change in accounting principle,
net of income taxes - (0.01) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.26 (0.09) 0.80
- -------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 53,664 52,248 52,748
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Income from continuing operations before cumulative
effect of change in accounting principle $ 0.92 0.53 0.73
Income (loss) from discontinued operations, net of income taxes - (0.61) 0.04
Cumulative effect of change in accounting principle,
net of income taxes 0.29 (0.01) -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.21 (0.09) 0.77
- -------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding, diluted basis 56,185 54,370 54,892
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
29
Whole Foods Market, Inc.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(in thousands)
Fiscal years ended September 30, 2001, September 24, 2000 and
September 26, 1999
Accumulated
Common Other Total
Shares Common Stock in Comprehensive Retained Shareholders'
Outstanding Stock Treasury Income (Loss) Earnings Equity
- -------------------------------------------------------------------------------------------------------------------
Balances at September 27, 1998 53,000 $ 219,189 - 211 57,873 277,273
- -------------------------------------------------------------------------------------------------------------------
Net income - - - - 42,155 42,155
Change in unrealized gain (loss)
on investments, net of income taxes - - - (211) - (211)
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income - - - (211) 42,155 41,944
Issuance of common stock 972 7,049 - - - 7,049
Purchase of treasury stock (1,216) - (18,939) - - (18,939)
Tax benefit related to exercise of
team member stock options - 3,893 - - - 3,893
- -------------------------------------------------------------------------------------------------------------------
Balances at September 26, 1999 52,756 230,131 (18,939) - 100,028 311,220
- -------------------------------------------------------------------------------------------------------------------
Net and comprehensive loss - - - - (4,831) (4,831)
Issuance of common stock 472 1,247 - - - 1,247
Issuance of common stock from treasury 562 - 8,785 - - 8,785
Purchase of treasury stock (858) - (13,534) - - (13,534)
Tax benefit related to exercise of
team member stock options - 4,541 - - - 4,541
Other - (271) - - - (271)
- -------------------------------------------------------------------------------------------------------------------
Balances at September 24, 2000 52,932 235,648 (23,688) - 95,197 307,157
- -------------------------------------------------------------------------------------------------------------------
Net income - - - - 67,880 67,880
Foreign currency translation adjustment,
net of income taxes - - - (30) - (30)
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income - - - (30) 67,880 67,850
Issuance of common stock 668 4,860 - - - 4,860
Issuance of common stock from treasury 1,170 - 18,319 - - 18,319
Tax benefit related to exercise of
team member stock options - 9,211 - - - 9,211
Other - 1,960 - - - 1,960
- -------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2001 54,770 $ 251,679 (5,369) (30) 163,077 409,357
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
30
Whole Foods Market, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Fiscal years ended September 30, 2001, September 24, 2000 and September 26, 1999
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income from continuing operations $ 51,647 28,927 40,026
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 78,823 63,892 49,627
Loss on disposal of fixed assets 1,917 2,574 1,174
Store closure and asset disposal costs 9,425 - 5,940
Deferred income tax expense (benefit) (834) 866 4,945
Change in LIFO reserve 3,554 (136) 834
Rent differential 852 1,426 1,443
Tax benefit related to exercise of team member stock options 9,211 4,541 3,893
Interest accretion on long-term debt 6,828 6,367 6,058
Equity in losses of unconsolidated affiliates 5,626 14,074 -
Impairment loss on long-term investments - 10,000 -
Lease termination and other merger accrual payments (596) (648) (2,169)
Net change in current assets and liabilities:
Trade accounts receivable (2,203) (3,735) (5,483)
Merchandise inventories (8,312) (16,648) (7,874)
Prepaid expenses and other current assets (2,810) 16 (5,806)
Trade accounts payable 483 2,446 13,220
Accrued payroll, bonuses and team member benefits 3,731 8,040 2,984
Other accrued expenses 15,694 2,207 7,758
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 173,036 124,209 116,570
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Acquisition of property and equipment (49,009) (41,671) (53,496)
Development costs of new store locations (103,896) (110,864) (80,976)
Acquisition of intangible assets (4,023) (1,086) (3,997)
Purchase of marketable securities and other long-term investments - - (23,600)
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) -
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (156,928) (180,707) (159,761)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from long-term borrowings 25,000 88,000 49,000
Payments on long-term debt and capital lease obligations (78,383) (6,625) (673)
Issuance of common stock 23,179 10,032 7,049
Purchase of treasury stock - (13,534) (18,939)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (30,204) 77,873 36,437
- -------------------------------------------------------------------------------------------------------------------
Cash flows from discontinued operations
Net cash provided by (used in) discontinued operations 15,544 (24,562) (23,312)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,448 (3,187) (30,066)
Cash and cash equivalents at beginning of year 395 3,582 33,648
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,843 395 3,582
- -------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Interest and income taxes paid:
Interest $ 11,108 11,185 3,245
- -------------------------------------------------------------------------------------------------------------------
Federal and state income taxes $ 29,021 30,661 21,159
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
31
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements
Fiscal years ended September 30, 2001, September 24, 2000 and September 26, 1999
(1) Company
Whole Foods Market, Inc. owns and operates the country's largest chain of
natural and organic 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-one years. We opened our first store in Austin, Texas in 1980 and as
of September 30, 2001, we operated 126 stores in 23 states plus the District of
Columbia.
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 year 2001 is a 53-week year and fiscal
years 2000 and 1999 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
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, our share of the investee's earnings or loss
is included on the accompanying consolidated statements of operations in "Equity
in losses of unconsolidated affiliates." Our investments in equity-method
investees are included on 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.
We classify as available-for-sale 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. 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 have been accounted for under the cost method of
accounting.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable,
trade accounts payable, accrued payroll, bonuses and team member 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.
32
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (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 our financial instruments other than those for which carrying amounts
approximate fair values as noted above are as follows (in thousands):
2001 2000
----------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------
Convertible subordinated debentures $ 137,615 136,987 130,787 121,207
Senior unsecured notes 28,572 30,342 34,286 34,545
- -------------------------------------------------------------------------------------------------------------------
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 $8.0 million and $4.5 million at
September 30, 2001 and September 24, 2000, respectively. Balances of inventories
are as follows (in thousands):
2001 2000
- -------------------------------------------------------------------------------------------------------------------
Manufactured inventories:
Raw materials $ 1,508 1,499
Finished goods 419 363
- -------------------------------------------------------------------------------------------------------------------
Total manufactured inventories 1,927 1,862
- -------------------------------------------------------------------------------------------------------------------
Other inventories, net of LIFO reserve 96,689 91,996
- -------------------------------------------------------------------------------------------------------------------
$ 98,616 93,858
- -------------------------------------------------------------------------------------------------------------------
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 that 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 30, 2001 and September 24, 2000 totaled
approximately $4.2 million and $3.1 million, respectively.
Excess of Cost Over Net Assets Acquired
We have amortized the 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 30, 2001 and September 24, 2000 totaled
approximately $13.1 million and $10.5 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, an impairment charge is recognized for the difference.
Other Assets
Other assets include non-competition agreements, deposits 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. Accumulated amortization included in other assets at
September 30, 2001 and September 24, 2000 totaled approximately $3.7 million and
$7.3 million, respectively.
33
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
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, which include costs associated with hiring and training
personnel, supplies and certain occupancy and miscellaneous costs related to new
locations, are expensed as incurred. We adopted SOP 98-5 "Reporting on the Costs
of Start-up Activities" 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, other costs associated with replaced facilities and other related
expenses.
Advertising
We charge advertising costs to expense as incurred. Advertising and marketing
expense related to continuing operations for fiscal years 2001, 2000 and 1999
was approximately $12.1 million, $11.2 million and $10.4 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 continuing operations 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 at date of grant
Stock Split
On June 4, 2001 the Company effected a 2-for-1 stock split of the Company's
common stock in the form of a 100% stock dividend. All applicable share and per
share information has been retroactively restated in these consolidated
financial statements to reflect the stock split.
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.
34
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
Foreign Currency Translation
The Company's international operations use their local currency as their
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date. Income and expense accounts are translated at
the average monthly exchange rates during the year. Resulting translation
adjustments are recorded as a separate component of accumulated other
comprehensive income.
Segment Information
We operate in one reportable segment, natural foods supermarkets. We currently
have one store in development in Toronto, Canada. All of our remaining
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, long-term investments, team
member benefit plans, team member health insurance 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.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," in June 1998 as amended by SFAS No. 138, which was
issued in June 2000. SFAS No. 133 establishes reporting standards for derivative
instruments and hedging activities that require an entity to recognize all
derivatives as assets or liabilities measured at fair value and is effective for
financial statements issued for all fiscal quarters of fiscal years beginning
after June 15, 2000. If certain conditions are met, a derivative may be
specifically designated as a hedge of the exposure to changes in the fair value,
variable cash flow, or foreign currency of a recognized asset or liability or
certain other transactions and firm commitments. We adopted SFAS No. 133 in the
first quarter of fiscal year 2001. The adoption of SFAS No. 133 did not have any
financial accounting effect on our consolidated financial statements.
The FASB issued SFAS No. 141, "Business Combinations," in June 2001. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. We adopted SFAS No. 141 effective the beginning of the fourth
quarter of fiscal year 2001. The adoption of SFAS No. 141 did not have any
financial accounting effect on our consolidated financial statements.
The FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," in June
2001. SFAS No. 142 provides that separable intangible assets that have finite
lives will continue to be amortized over their useful lives and that goodwill
and indefinite-lived intangible assets will no longer be amortized but will be
reviewed for impairment annually, or more frequently if impairment indicators
arise. Under the provisions of SFAS No. 142, any impairment loss identified upon
adoption of this standard is recognized as a cumulative effect of a change in
accounting principle. Any impairment loss recognized subsequent to initial
adoption of SFAS No. 142 will be recorded as a charge to current period
earnings. The provisions of SFAS No. 142 are required to be applied starting
with fiscal years beginning after December 15, 2001 and must be applied as of
the beginning of a fiscal year. Early adoption is permitted for companies with
fiscal years beginning after March 15, 2001. We adopted the provisions of SFAS
No. 142, including the provisions for nonamortization of goodwill, on October 1,
2001. Pre-tax goodwill amortization was approximately $3.1 million, $2.2 million
and $1.3 million during fiscal years 2001, 2000 and 1999, respectively.
Application of the nonamortization provisions of SFAS No. 142 is expected to
result in an annual increase in net income of approximately $1.9 million, or
approximately $.03 per share, in fiscal year 2002. We are evaluating the
transitional goodwill impairment provisions of SFAS No. 142 but currently do not
expect the adoption of these to have a material impact on our consolidated
financial statements.
35
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," in
June 2001. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and is effective for financial statements
issued for fiscal years beginning after June 15, 2002, with early application
encouraged. We will adopt SFAS No. 143 in the first quarter of fiscal year 2003.
We are evaluating the impact of the adoption of SFAS No. 143 on our consolidated
financial statements.
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in August 2001. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and other related accounting guidance. SFAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years, with early application
encouraged. The provisions of this Statement generally are to be applied
prospectively. We will adopt SFAS No. 144 in the first quarter of fiscal year
2003. We are evaluating the impact of the adoption of SFAS No. 144 on our
consolidated financial statements.
(3) Property and Equipment
Balances of major classes of property and equipment are as follows (in
thousands):
2001 2000
- -------------------------------------------------------------------------------------------------------------------
Land $ 9,730 9,730
Buildings and leasehold improvements 398,069 322,246
Fixtures and equipment 380,195 282,130
Construction in progress and equipment not yet in service 26,969 60,844
- -------------------------------------------------------------------------------------------------------------------
814,963 674,950
Less accumulated depreciation and amortization 271,977 206,272
- -------------------------------------------------------------------------------------------------------------------
$ 542,986 468,678
- -------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense related to property and equipment totaled
approximately $70.8 million, $57.1 million and $44.9 million for fiscal years
2001, 2000 and 1999, respectively. Property and equipment includes approximately
$2.1 million, $2.3 million and $1.8 million of interest capitalized during
fiscal years 2001, 2000 and 1999, respectively.
(4) Long-Term Debt
We have long-term debt and obligations under capital leases as follows (in
thousands):
2001 2000
- -------------------------------------------------------------------------------------------------------------------
Obligations under capital lease agreements for equipment,
due in monthly installments through 2005 $ 220 800
Notes payable to banks 90,000 137,000
Senior unsecured notes 28,572 34,286
Convertible debentures, including accreted interest 137,615 130,787
Other notes payable 242 3,081
- -------------------------------------------------------------------------------------------------------------------
256,649 305,954
Less current installments 5,944 7,884
- -------------------------------------------------------------------------------------------------------------------
$ 250,705 298,070
- -------------------------------------------------------------------------------------------------------------------
36
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
On March 1, 2001, we amended our bank credit agreement to increase our revolving
line of credit to $220 million through June 28, 2003. 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 30, 2001 and September 24, 2000, we were
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
LIBOR rate plus a premium. Commitment fees ranging from 0.20% to 0.30% of the
undrawn amount are payable under this agreement. At September 30, 2001,
approximately $90 million was drawn and at September 24, 2000, approximately
$137 million was drawn under the agreement. The average interest rate on amounts
outstanding under this agreement at September 30, 2001 was approximately 4.63%.
The amounts available to the Company under this line of credit were effectively
reduced by outstanding letters of credit totaling approximately $3.7 million and
$3.9 million at September 30, 2001 and September 24, 2000, 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 2.660
shares per $1,000 principal amount at maturity, initially representing a
conversion price of approximately $35 per share of common stock, or
approximately 3,286,000 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 $28.6 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 30, 2001 and September 24, 2000, we were in compliance with the debt
covenants.
(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 2002 to 2040.
Rental expense charged to operations under operating leases for fiscal years
2001, 2000 and 1999 totaled approximately $57.3 million, $47.1 million and $38.4
million, respectively. Minimum rental commitments required by all noncancelable
leases are approximately as follows (in thousands):
Capital Operating
- --------------------------------------------------------------------------------
2002 $ 176 $ 61,491
2003 25 64,054
2004 25 62,535
2005 4 60,789
2006 - 59,175
Future years - 529,648
- ---------------------------------------------------------- ----------
230 $ 837,692
----------
Less amounts representing interest 10
- ----------------------------------------------------------
220
Less current installments 171
- ----------------------------------------------------------
$ 49
- --------------------------------------------------------------------------------
37
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
Minimum rentals for operating leases do not include certain amounts of
contingent rentals that 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 2001, 2000
and 1999, we paid contingent rentals of approximately $2.7 million, $2.2 million
and $2.0 million, respectively. Certain officers of the Company own
approximately 13% of a business that 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 2001, 2000 and 1999.
(6) Income Taxes
Components of income tax expense attributable to continuing operations are as
follows (in thousands):
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Current federal income tax $ 32,372 27,249 15,834
Current state income tax 6,644 6,469 4,811
- -------------------------------------------------------------------------------------------------------------------
Total current tax 39,016 33,718 20,645
- -------------------------------------------------------------------------------------------------------------------
Deferred federal income tax (397) 560 4,620
Deferred state income tax (437) 306 325
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax (834) 866 4,945
- -------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 38,182 34,584 25,590
- -------------------------------------------------------------------------------------------------------------------
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):
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Federal tax based on statutory rates $ 33,409 27,154 22,966
Increase (reduction) in income taxes resulting from:
Non-deductible amortization of cost in excess
of net assets acquired 337 536 389
Increase in valuation allowance 223 3,950 -
Deductible state income taxes (2,172) (2,371) (1,797)
Other, net 178 (1,460) (1,104)
- -------------------------------------------------------------------------------------------------------------------
Total federal taxes 31,975 27,809 20,454
State income taxes 6,207 6,775 5,136
- -------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 38,182 34,584 25,590
- -------------------------------------------------------------------------------------------------------------------
38
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities for continuing
operations are as follows (in thousands):
2001 2000
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Compensated absences, principally due to financial reporting accrual $ 8,553 6,794
Inventories, principally due to additional costs inventoried
for tax purposes 2,111 1,377
Lease termination and other merger accruals 996 991
Rent differential, principally due to financial
reporting of pro rata expense 5,074 4,683
Net operating loss carryforwards 18,444 19,164
Capital loss carryforwards 8,940 7,153
Other 19 28
- -------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 44,137 40,190
Valuation allowance (8,940) (7,153)
- -------------------------------------------------------------------------------------------------------------------
35,197 33,037
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Financial basis of fixed assets in excess of tax basis (4,753) (2,049)
Capitalized costs expensed for tax purposes (1,222) (1,728)
Other (386) (586)
- -------------------------------------------------------------------------------------------------------------------
(6,361) (4,363)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 28,836 28,674
- -------------------------------------------------------------------------------------------------------------------
Deferred taxes for continuing operations have been classified on the
consolidated balance sheets as follows:
2001 2000
- -------------------------------------------------------------------------------------------------------------------
Currrent assets $ 8,549 5,740
Noncurrent assets 20,287 22,934
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 28,836 28,674
- -------------------------------------------------------------------------------------------------------------------
We have provided a valuation allowance of approximately $8.9 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. The valuation allowance increased by approximately $1.7
million in fiscal year 2001 primarily due to additional capital losses.
Management believes that it is more likely than not that we 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 30, 2001, we had tax net operating loss
carryforwards totaling approximately $46 million that will expire in 2020.
(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 has been amortized on a straight-line basis over 20 years
since date of acquisition.
39
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
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 has been amortized on a straight-line basis
over 40 years since date of acquisition.
(8) Investments in Internet-related 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 losses of Gaiam.com in proportion to our ownership
percentage. During fiscal year 2001, we determined that our investment in
Internet-related operations had suffered a decline in value that was other than
temporary due to lower market valuations of such companies. As a result, we
recognized a loss of approximately $5.5 million to reduce our investment in
Gaiam.com to its estimated fair value of approximately $3.5 million as of
September 30, 2001. This loss is included in the accompanying consolidated
statements of operations in "Equity in losses of unconsolidated affiliates."
During fiscal year 2000, we determined that our preferred stock investment in
American WholeHealth, Inc. had suffered a decline in value that was other than
temporary. As a result, we recognized a $10 million pre-tax loss in fiscal year
2000 associated with the writeoff of this investment. This loss is included in
"Investment and Other Income (Loss)" in the accompanying consolidated statements
of operations.
40
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
(9) Discontinued Operations
In November 2000, the Company adopted a formal plan to sell the NatureSmart
business of manufacturing and direct marketing of nutritional supplements. The
NatureSmart business has been segregated from continuing operations and reported
as discontinued operations in the accompanying condensed consolidated financial
statements. The loss on disposition of the NatureSmart business reported at
September 24, 2000 included the writedown to estimated net realizable value of
the business being discontinued, costs associated with the planned disposal and
the estimated loss from operations of the discontinued business through the
expected date of disposition, net of taxes.
In May 2001, we completed the sale of all of our interest in NatureSmart for
approximately $28 million in cash. On November 20, 2001 we completed the sale of
the facility in Thornton, Colorado that was used by NatureSmart for
approximately $15 million in cash. The gain on disposal in fiscal year 2001
consists primarily of proceeds from these sales in excess of amounts previously
estimated and a reduction in the estimated future liabilities of the
discontinued operations, net of taxes.
The assets and liabilities related to discontinued operations, which have been
reflected on a net basis on the consolidated balance sheets, are summarized as
follows (in thousands):
2001 2000
- -------------------------------------------------------------------------------------------------------------------
Current assets $ - 11,392
Long-term assets 18,375 29,187
- -------------------------------------------------------------------------------------------------------------------
Total assets 18,375 40,579
- -------------------------------------------------------------------------------------------------------------------
Current liabilities - 11,459
Long-term liabilities - -
- -------------------------------------------------------------------------------------------------------------------
Total liabilities - 11,459
- -------------------------------------------------------------------------------------------------------------------
Net assets of discontinued operations $ 18,375 29,120
- -------------------------------------------------------------------------------------------------------------------
Summary statements of operations data for discontinued operations follows (in
thousands):
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations:
Operating income (loss) $ - (14,587) 2,945
Provision (benefit) for income taxes - (5,172) 816
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations, net of taxes - (9,415) 2,129
- -------------------------------------------------------------------------------------------------------------------
Gain (loss) on disposal:
Gain (loss) on disposal $ 17,107 (32,415) -
Provision (benefit) for income taxes 874 (8,447) -
- -------------------------------------------------------------------------------------------------------------------
Gain (loss) on disposal, net of taxes 16,233 (23,968) -
- -------------------------------------------------------------------------------------------------------------------
(10) Store Closure and Asset Disposal Costs
During the fourth quarter of fiscal year 2001 we recognized store closure costs
totaling approximately $9.4 million associated with the decision to close three
stores, all of which were previously acquired in multi-store transactions. Store
closure costs include writedowns of leasehold improvements and store equipment
to estimated fair values totaling approximately $5.6 million and estimated lease
termination costs and other disposal costs totaling approximately $3.8 million.
During fiscal year 2001, these three stores generated combined sales totaling
approximately $10.5 million and combined negative cash flows totaling
approximately $1.0 million. Termination of leases will be completed as soon as
is practicable after the related stores are closed during fiscal year 2002. We
expect to complete substantially all other activities related to these store
closures in fiscal year 2002.
41
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
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.
(11) 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 858,000 shares and 1,216,000 shares, respectively, of
our common stock for an aggregate cost of approximately $13.5 million and $18.9
million, respectively. In fiscal years 2001 and 2000, we reissued shares from
treasury at average cost for certain options exercised. During fiscal years 2001
and 2000, approximately 1,170,000 shares and 562,000 shares, respectively, were
reissued from treasury for a total of approximately $18.3 million and $8.8
million, respectively.
Preferred Stock Purchase Rights
On September 22, 1999, the Company's Board of Directors declared a dividend of
one-half 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.
(12) Earnings (Loss) per Share
A reconciliation of the denominators of the basic and diluted earnings (loss)
per share calculations follows (in thousands):
2001 2000 1999
- -------------------------------------------------------------------------------
Denominator for basic earnings (loss)
per share: weighted average shares 53,664 52,248 52,748
Additional shares deemed outstanding from
the assumed exercise of stock options 2,521 2,122 2,144
- -------------------------------------------------------------------------------
Denominator for diluted earnings (loss)
per share: adjusted weighted average
shares and assumed conversions 56,185 54,370 54,892
- -------------------------------------------------------------------------------
42
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
The computation of diluted earnings (loss) per share does not include
approximately 3.3 million shares of common stock related to the zero coupon
convertible subordinated debentures at the end of fiscal years 2001, 2000 and
1999 and options to purchase approximately 2.2 million shares, 2.6 million
shares and 3.0 million shares of common stock at the end of fiscal years 2001,
2000 and 1999, respectively, because to do so would be antidilutive.
(13) 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 2001, 2000 and 1999 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 30, 2001, September 24, 2000 and September 26, 1999
approximately 0.7 million, 0.6 million and 1.0 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 27, 1998 7,440 $ 19.19
Options granted 2,330 16.09
Options exercised (942) 6.52
Options canceled (582) 23.30
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 26, 1999 8,246 19.46
Options granted 2,778 21.05
Options exercised (1,010) 10.00
Options canceled (632) 24.69
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 24, 2000 9,382 20.51
Options granted 2,949 22.92
Options exercised (1,801) 12.88
Options canceled (790) 24.19
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 9,740 $ 22.35
- ----------------------------------------------------------------------------------------------------------------------
A summary of options outstanding and exercisable at September 30, 2001 follows
(in thousands, except per share data):
Options Outstanding Options Exercisable
Range of ------------------------------------ ------------------------------
Exercise Prices Weighted Average Weighted Weighted
--------------- Number Remaining Average Number Average
From To Outstanding Life (in Years) Exercise Price Exercisable Exercise Price
-------------------------------------------------------------------------------------------------------------------
$ 0.45 $9.75 672 2.18 $ 8.26 671 $ 8.26
10.75 13.81 548 2.47 11.31 542 11.29
15.94 19.13 1,366 4.42 16.08 559 16.12
20.94 24.88 5,130 6.00 22.11 489 21.28
28.30 34.88 2,024 3.48 34.86 1,539 34.88
-------------------------------------------------------------------------------------------------------------------
Total 9,740 4.79 $ 22.35 3,800 $ 22.30
-------------------------------------------------------------------------------------------------------------------
At September 24, 2000 and September 26, 1999, approximately 3.8 million and 3.0
million outstanding options, respectively, were exercisable. The weighted
average exercise price for outstanding exercisable options was $18.24 and $14.90
at September 24, 2000 and September 26, 1999, respectively.
43
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
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:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Expected dividend yield 0.00 0.00% 0.00%
Risk-free interest rate 4.95% 6.13% 5.23%
Expected volatility 53.26% 54.21% 54.89%
Expected life, in years 3.63 3.46 3.40
- ------------------------------------------------------------------------------------------------------------------------
The weighted average estimated fair values at grant date of team member stock
options granted during fiscal years 2001, 2000 and 1999 were $9.97, $9.29 and
$6.96, 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):
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss):
As reported $ 67,880 (4,831) 42,155
Pro forma 55,704 (15,558) 30,175
Diluted income (loss) per share:
As reported $ 1.21 (0.09) 0.77
Pro forma 0.99 (0.29) 0.55
- ------------------------------------------------------------------------------------------------------------------------
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
21,000, 24,000 and 30,000 shares under this plan in fiscal years 2001, 2000 and
1999, respectively.
Team Member 401(k) Plan
Our Company offers a team member 401(k) plan to all team members with a minimum
of 1,000 service hours in a year. Matching contributions under this plan,
determined at the Company's discretion, totaled approximately $1.4 million, $0.6
million and $1.1 million in fiscal years 2001, 2000 and 1999, respectively.
Matching contributions in fiscal years 2001, 2000 and 1999 were made in Company
common stock purchased in open market transactions totaling approximately 67,000
shares, 28,000 shares and 64,000 shares, respectively.
(14) Commitments and Contingencies
The Company provides 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. 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 30, 2001 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.
44
Whole Foods Market, Inc.
Notes to Consolidated Financial Statements (continued)
The Company's team member 401(k) plan is currently under examination by the
Internal Revenue Service ("IRS") for the years ended December 31, 1997 and 1996.
This examination is ongoing, and no assertions or assessments as a result of the
examination have been made by the IRS to date.
The Company is a party to legal proceedings and claims that 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
(15) Subsequent Event
On October 31, 2001, we completed the acquisition of certain assets of Harry's
Farmer's Markets, Inc., in exchange for approximately $35 million in cash plus
the assumption of certain liabilities. The assets acquired are all assets
relating to the three perishables superstores in Atlanta, Georgia, including but
not limited to real estate, the Harry's Farmers Market trade name, distribution
center and other support and office facilities. This transaction will be
accounted for using the purchase method. Accordingly, the purchase price will be
allocated to tangible and identifiable intangible assets acquired based on their
estimated fair values at the date of acquisition. Total costs in excess of
tangible and intangible assets acquired will be recorded as goodwill.
45
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company's report on Form 8-K dated April 12, 2001 announcing the appointment
of Ernst & Young LLP as the Company's independent auditors for the fiscal year
ending September 30, 2001 is incorporated herein by reference.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information regarding directors is incorporated herein by reference from the
section entitled "Election of Directors" of the Company's definitive Proxy
Statement (the "Proxy Statement") to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, for the registrants' Annual Meeting
of Stockholders to be held on March. The Proxy Statement is anticipated to be
filed within 120 days after the end of the registrant's fiscal year ended
September 30, 2001. For information regarding executive officers of the Company,
see the Information appearing under the caption "Executive Officers of the
Registrant" in Part I, Item 4(a) of this Report on Form 10-K.
Item 11. Executive Compensation
Information regarding executive compensation is incorporated herein by reference
from the section entitled "Executive Compensation" of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled "
Beneficial Ownership of Shares" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements: See Index to Consolidated Financial
Statements at Item 8 on page 25 of this report.
(2) Financial Statement Schedules: No schedules are required.
(3) Exhibits are incorporated herein by reference or are filed with this
report as indicated below:
Index to Exhibits
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)
46
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 Second Amended and Restated Credit Agreement, dated February 7,2000,
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. (9)
10.7 First Amendment, dated March 1, 2001, to Second Amended and Restated
credit Agreement, dated February 7, 2000, 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. (11)
10.8 1992 Stock Option Plan for Team Members, as amended (1)
10.9 1992 Stock Option Plan for Outside Directors (1)
10.10 1993 Team Member Stock Purchase Plan (1)
10.11 Second Amended and Restated 1991 Stock Incentive Plan of Fresh Fields
Markets, Inc. with amendments thereto (5)
10.12 1994 Director Stock Option Plan with amendments thereto (5)
10.13 Non-Qualified Stock Option Plan of Amrion, Inc. (6)
10.14 1994 Non-Employee Director Stock Option Plan of Amrion, Inc. (6)
12.1 Computation of Ratio of Earnings to Fixed Charges (11)
21.1 Subsidiaries of the Registrant (11)
23.1 Consent of Ernst & Young LLP (11)
23.2 Consent of KPMG LLP (11)
99.1 Proxy Statement for Annual Meeting of Shareholders to be held March
25, 2002 (10)
(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.
(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 24,
2000 and incorporated herein by reference.
(10) To be filed with the Securities and Exchange Commission and incorporated
herein by reference.
(11) Filed herewith.
47
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 20, 2001 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 20, 2001.
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/ Jirka Rysavy
- --------------------------
Jirka Rysavy Director
/s/ Dr. Ralph Z. Sorenson
- --------------------------
Dr. Ralph Z. Sorenson Director
48