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