UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended April 14, 2002; 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)
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 April 14, 2002 was 56,553,010 shares.
Page 1 of 13
Whole Foods Market, Inc.
Form 10-Q
Table of Contents
Page
Number
- ---------------------------------------------------------------------------------------------------------------------------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited), April 14, 2002 and September 30, 2001 3
Condensed Consolidated Income Statements (unaudited), for the twelve and twenty-eight weeks
ended April 14, 2002 and April 8, 2001 4
Condensed Consolidated Statements of Cash Flows (unaudited), for the twenty-eight weeks
ended April 14, 2002 and April 8, 2001 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 4. Submission of Matters to a Vote of Security Holders 12
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.
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands)
April 14, 2002 and September 30, 2001
Assets
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 19,077 1,843
Trade accounts receivable 32,028 24,859
Merchandise inventories 102,367 98,616
Prepaid expenses and other current assets 16,459 17,700
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 169,931 143,018
Property and equipment, net of accumulated depreciation and amortization 605,660 542,986
Long-term investments 4,869 4,706
Goodwill 80,522 67,258
Intangible assets, net of accumulated amortization 24,107 24,028
Other assets 28,596 28,800
Net assets of discontinued operations 3,000 18,375
- -------------------------------------------------------------------------------------------------------------------------
$ 916,685 829,171
=========================================================================================================================
Liabilities and Shareholders' Equity
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current installments of long-term debt and capital lease obligations $ 5,789 5,944
Trade accounts payable 57,388 50,468
Accrued payroll, bonus and employee benefits 53,523 41,265
Other accrued expenses 71,047 58,659
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 187,747 156,336
Long-term debt and capital lease obligations, less current installments 225,449 250,705
Other long-term liabilities 14,145 12,773
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 427,341 419,814
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value, 150,000 and 100,000 shares
authorized, 56,579 and 55,114 shares issued, 56,553 and
54,770 shares outstanding in 2002 and 2001, respectively 285,802 251,679
Common stock in treasury, at cost - (5,369)
Accumulated other comprehensive income 97 (30)
Retained earnings 203,445 163,077
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 489,344 409,357
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- -------------------------------------------------------------------------------------------------------------------------
$ 916,685 829,171
=========================================================================================================================
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 Twenty-eight weeks ended
April 14, April 8, April 14, April 8,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Sales $ 622,789 516,660 1,403,588 1,160,095
Cost of goods sold and occupancy costs 404,690 336,139 920,767 759,056
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 218,099 180,521 482,821 401,039
Direct store expenses 154,148 130,373 351,445 294,379
- -------------------------------------------------------------------------------------------------------------------------
Store contribution 63,951 50,148 131,376 106,660
General and administrative expenses 22,981 18,978 51,161 42,511
Pre-opening and relocation costs 5,382 2,012 7,621 4,659
- -------------------------------------------------------------------------------------------------------------------------
Operating income 35,588 29,158 72,594 59,490
Other income (expense):
Interest expense (2,473) (4,488) (6,442) (10,298)
Investment and other income 597 405 1,128 957
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 33,712 25,075 67,280 50,149
Provision for income taxes 13,485 10,030 26,912 20,060
Equity in losses of unconsolidated affiliate - 126 - 126
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 20,227 14,919 40,368 29,963
Discontinued operations, net of income taxes - 12,304 - 12,304
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 20,227 27,223 40,368 42,267
=========================================================================================================================
Basic earnings per share:
Income from continuing operations $ 0.36 0.28 0.73 0.56
Discontinued operations, net of income taxes - 0.23 - 0.23
- --------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.36 0.51 0.73 0.79
=========================================================================================================================
Weighted average shares outstanding 56,013 53,487 55,554 53,280
=========================================================================================================================
Diluted earnings per share:
Income from continuing operations $ 0.34 0.27 0.68 0.54
Discontinued operations, net of income taxes - 0.22 - 0.22
- --------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.34 0.49 0.68 0.76
=========================================================================================================================
Weighted average shares outstanding 63,152 55,532 59,357 55,627
=========================================================================================================================
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)
Twenty-eight weeks ended
April 14, April 8,
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 40,368 29,963
Adjustment to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 44,700 39,545
Net (gain) loss on disposal of fixed assets 1,947 (28)
Rent differential 1,029 315
Change in LIFO reserve 1,750 1,800
Interest accretion on long-term debt 3,737 3,565
Tax benefit related to exercise of employee stock options 13,607 3,358
Net change in current assets (5,522) (16,863)
Net change in current liabilities 14,530 13,644
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 116,146 75,299
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (29,026) (30,310)
Development costs of new store locations (52,589) (61,570)
Acquisition of intangible assets (1,241) (4,894)
Payments for purchase of acquired entities, net of cash acquired (35,975) -
Other investing activities (4,753) -
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (123,584) (96,774)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from long-term borrowings 32,000 25,000
Issuance of common stock 39,492 8,072
Payments on long-term debt and capital lease obligations (61,142) (1,836)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,350 31,236
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from discontinued operations:
Net cash provided by (used in) discontinued operations 14,322 (8,208)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 17,234 1,553
Cash and cash equivalents at beginning of period 1,843 395
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 19,077 1,948
=========================================================================================================================
Supplemental disclosures of cash flow information:
Interest paid $ 2,709 5,719
=========================================================================================================================
Federal and state income taxes paid $ 11,054 13,922
=========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5 of 13
Whole Foods Market, Inc.
Notes To Condensed Consolidated Financial Statements (Unaudited)
April 14, 2002
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Whole
Foods Market, Inc. and subsidiaries ("Company") have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the
opinion of management, all adjustments, consisting of normal recurring accruals
as well as the accounting change to adopt Statement of Financial Accounting
Standards (SFAS) 142, "Goodwill and Other Intangible Assets," considered
necessary for a fair presentation have been included. Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, and expenses. Examples include
accounting for depreciation and amortization, inventory, allowance for doubtful
accounts, long-term investments, team member benefit plans, team member health
insurance plans, income taxes and contingencies. Actual results may differ from
these estimates. Interim results are not necessarily indicative of results for
any other interim period or for a full fiscal year. The information included in
this Form 10-Q should be read in conjunction with Management's Discussion and
Analysis and the consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10K for the fiscal year ended September 30,
2001.
Our fiscal year ends on the last Sunday in September. The first fiscal quarter
is sixteen weeks, the second and third quarters each are twelve weeks and the
fourth quarter is twelve or thirteen weeks.
Where appropriate, we have reclassified prior year financial statements to
conform to current year presentation.
(2) Earnings Per Share
The computation of basic earnings per share is based on the number of weighted
average common shares outstanding during the period. The computation of diluted
earnings per share includes the dilutive effect of common stock equivalents
consisting of common shares deemed outstanding from the assumed exercise of
stock options and the assumed conversion of zero coupon convertible subordinated
debentures. A reconciliation of the numerators and denominators of the basic and
diluted earnings per share calculations follows (in thousands):
Twelve weeks ended Twenty-eight weeks ended
April 14, April 8, April 14, April 8,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Net income (numerator for basic earnings per share) $ 20,227 27,223 40,368 42,267
Interest on 5% zero coupon convertible subordinated
debentures, net of income taxes 987 - - -
- -------------------------------------------------------------------------------------------------------------------------
Adjusted net income (numerator for diluted earnings
per share) $ 21,214 27,223 40,368 42,267
=========================================================================================================================
Weighted average common shares outstanding (denominator
for basic earnings per share) 56,013 53,487 55,554 53,280
Potential common shares outstanding:
Assumed conversion of 5% zero coupon convertible
subordinated debentures 3,286 - - -
Assumed exercise of stock options 3,853 2,045 3,803 2,347
- -------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding and
potential additional common shares outstanding
(denominator for diluted earnings per share) 63,152 55,532 59,357 55,627
=========================================================================================================================
Basic earnings per share $ 0.36 0.51 0.73 0.79
=========================================================================================================================
Diluted earnings per share $ 0.34 0.49 0.68 0.76
=========================================================================================================================
Page 6 of 13
Options to purchase approximately 866,000 shares and 371,000 shares of common
stock were not included in the computation of diluted earnings per share for the
twelve and twenty-eight week periods ended April 14, 2002, respectively, because
their effect would have been antidilutive. Options to purchase approximately
2,287,000 shares and 2,246,000 shares of common stock were not included in the
computation of diluted earnings per share for the twelve and twenty-eight week
periods ended April 8, 2001, 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
twenty-eight week period ended April 14, 2002 and the twelve and twenty-eight
week periods ended April 8, 2001 because their effect would have been
antidilutive.
(3) Comprehensive Income
The Company's comprehensive income was comprised of net income, unrealized gains
and losses on available for sale securities and foreign currency translation
adjustment, net of income taxes. Comprehensive income, net of related tax
effects, was as follows (in thousands):
Twelve weeks ended Twenty-eight weeks ended
April 14, April 8, April 14, April 8,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 20,227 27,223 40,368 42,267
Unrealized gain (loss), net 86 - 163 -
Foreign currency translation adjustment, net 13 - (36) -
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 20,326 27,223 40,495 42,267
=========================================================================================================================
(4) Business Combinations
On October 31, 2001, we completed the acquisition of certain assets of Harry's
Farmer's Markets, Inc., in exchange for approximately $36 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 was accounted
for using the purchase method. Accordingly, the purchase price has been
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 of approximately $8.5 million have been
recorded as goodwill. Results of acquired operations are included in our
condensed consolidated income statements for the period beginning October 31,
2001 through April 14, 2002.
(5) Goodwill and Other Intangible Assets
We adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," effective the beginning of the first
quarter of fiscal year 2002. 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. There was no impairment of goodwill upon adoption
of SFAS 142. During the first quarter of fiscal year 2002, we acquired goodwill
totaling approximately $8.5 million in connection with the Harry's Farmers
Market acquisition.
Page 7 of 13
Net income and earnings per share for the twelve and twenty-eight weeks ended
April 8, 2001 adjusted to exclude amortization expense (net of income taxes) is
as follows (in thousands, except per share data):
Twelve Twenty-eight
weeks weeks
- -------------------------------------------------------------------------------------------------------------------------
Reported net income $27,223 42,267
Add back goodwill amortization, net 368 828
- -------------------------------------------------------------------------------------------------------------------------
Adjusted net income $27,591 43,095
=========================================================================================================================
Basic earnings per share:
Reported net income $0.51 0.79
Add back goodwill amortization, net 0.01 0.02
- -------------------------------------------------------------------------------------------------------------------------
Adjusted net income $0.52 0.81
=========================================================================================================================
Diluted earnings per share:
Reported net income $0.49 0.76
Add back goodwill amortization, net 0.01 0.01
- -------------------------------------------------------------------------------------------------------------------------
Adjusted net income $0.50 0.77
=========================================================================================================================
All of the Company's acquired intangible assets are subject to amortization.
Amortization expense is recorded on a straight-line basis over the life of the
related agreement, currently one to twenty-six years for contract-based
intangible assets and one to five years for marketing-related and other
intangible assets. During the first quarter of fiscal year 2002, we acquired
intangible assets totaling approximately $1.1 million in connection with the
Harry's Farmers Market acquisition. Amortization associated with intangible
assets totaled approximately $0.8 million and $2.1 million for the twelve and
twenty-eight weeks ended April 14, 2002, respectively, and approximately $1.6
million and $3.1 million, respectively, for the same periods of the prior fiscal
year. The components of intangible assets were as follows (in thousands):
April 14, 2002 September 30, 2001
Gross carrying Accumulated Gross carrying Accumulated
amount amortization amount amortization
- ---------------------------------------------------------------------------------------------------------------------------
Contract-based $ 29,098 (7,639) 28,098 (6,151)
Marketing-related and other $ 4,509 (1,861) 4,144 (2,063)
===========================================================================================================================
Amortization associated with the net carrying amount of intangible assets at
April 14, 2002 is estimated to be $1.3 million for the remainder of fiscal year
2002, $2.6 million in fiscal year 2003, $2.3 million in fiscal year 2004, $2.3
million in fiscal year 2005 and $1.7 million in fiscal year 2006.
(6) Recent Accounting Pronouncements
The Financial Accounting Standards Board ("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.
Page 8 of 13
Item 2. 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 131 stores as of April 14, 2002. We operate in one reportable
segment, natural foods supermarkets. We have one store 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. The Company reports its results of operations on a fifty-two or
fifty-three week fiscal year ending on the last Sunday in September. The first
fiscal quarter is sixteen weeks, the second and third quarters each are twelve
weeks and the fourth quarter is twelve or thirteen weeks.
Results of Operations
The following table sets forth the Company's results of operations data
expressed as a percentage of sales:
Twelve weeks ended Twenty-eight weeks ended
April 14, April 8, April 14, April 8,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 65.0 65.1 65.6 65.4
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 35.0 34.9 34.4 34.6
Direct store expenses 24.8 25.2 25.0 25.4
- -------------------------------------------------------------------------------------------------------------------------
Store contribution 10.3 9.7 9.4 9.2
General and administrative expenses 3.7 3.7 3.6 3.7
Pre-opening and relocation costs 0.9 0.4 0.5 0.4
- -------------------------------------------------------------------------------------------------------------------------
Operating income 5.7 5.6 5.2 5.1
Other income (expense):
Interest expense (0.4) (0.9) (0.5) (0.9)
Investment and other income 0.1 0.1 0.1 0.1
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 5.4 4.9 4.8 4.3
Provision for income taxes 2.2 1.9 1.9 1.7
Equity in losses of unconsolidated affiliate - - - -
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 3.2 2.9 2.9 2.6
Discontinued operations, net of income taxes - 2.4 - 1.1
- -------------------------------------------------------------------------------------------------------------------------
Net income 3.2% 5.3% 2.9% 3.6%
=========================================================================================================================
Figures may not add due to rounding.
Sales
Sales increased 20.5% and 21.0% for the twelve and twenty-eight weeks ended
April 14, 2002, respectively, compared to the same periods of the prior fiscal
year. These increases were driven by comparable store sales growth of
approximately 10.1% and 9.8%, respectively, and 17% year-over-year square
footage growth. Sales of a store are deemed to be comparable commencing in the
fifty-third full week after the store was opened or acquired. Sales in identical
stores, which exclude three relocated stores, increased approximately 9.1% and
8.2%, respectively. Comparable and identical store sales increases resulted
largely from an increase in the number of customer transactions, with basket
size increasing slightly. We believe this was caused by a combination of various
factors, including but not limited to: an increase in new customers who
generally have a lower average basket size, more in-store emphasis on our value
image and private label line in some parts of the country, an impact from the
economy on some customers' buying habits who may be trading down to lower priced
items or perhaps shopping more often.
Gross Profit
Gross profit consists of sales less cost of goods sold and occupancy costs plus
contribution from non-retail distribution and food preparation operations. The
Company's gross profit as a percentage of sales for the twelve and twenty-eight
weeks ended April 14, 2002 was approximately 35.0% and 34.4%, respectively,
compared to approximately 34.9% and 34.6%, respectively, for the same periods of
the prior fiscal year. 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 at comparable stores for the twelve and twenty-eight weeks
ended April 14, 2002 increased 12 and 15 basis points, respectively, to
approximately 35.7% and 35.2%, respectively. This increase was due to various
factors including increased national buying and private label initiatives which
continue to lower the cost of product purchased on a national basis, and
continued improvement in store execution with respect to product procurement,
merchandising and controlling spoilage.
Page 9 of 13
Store Contribution
Store contribution consists of gross profit less direct store expenses. For all
stores, store contribution as a percentage of sales was approximately 10.3% and
9.4% for the twelve and twenty-eight weeks ended April 14, 2002, respectively,
compared to approximately 9.7% and 9.2%, respectively, for the same periods of
the prior fiscal year. For comparable stores, store contribution as a percentage
of sales was approximately 11.0 % and 10.3% for the twelve and twenty-eight
weeks ended April 14, 2002, respectively, partially driven by a 47 and 54 basis
point decrease in direct store expenses, respectively. For all stores, direct
store expenses as a percentage of sales was approximately 24.8% and 25.0% for
the twelve and twenty-eight weeks ended April 14, 2002, respectively, compared
to approximately 25.2% and 25.4%, respectively, for the same periods of the
prior fiscal year. These decreases reflect a greater focus on leveraging of
labor and other direct expenses. Higher operating expenses of new stores
continue to have a partially offsetting impact.
General and Administrative Expenses
General and administrative expenses as a percentage of sales were approximately
3.7% and 3.6% for the twelve and twenty-eight weeks ended April 14, 2002,
respectively, compared to approximately 3.7% for both of the same periods of the
prior fiscal year. Current year general and administrative expenses reflect the
increased costs of infrastructure for the new South region which were offset by
lower amortization expense related to the adoption of SFAS No. 142 and the
expiration of certain assets related to non-compete agreements. Whole Foods
Market has historically been able to expand without significant increases in
general and administrative costs.
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.
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 costs for the twelve and twenty-eight weeks ended
April 14, 2002 consist primarily of costs associated with the opening of one new
store during the first fiscal quarter, three new stores during the second fiscal
quarter, and three new stores opened in the first thirty days of the third
fiscal quarter. Relocation costs for the twelve and twenty-eight weeks ended
April 14, 2002 consist primarily of costs associated with the relocation of one
store during the first fiscal quarter, the relocation of two non-retail
facilities during the second fiscal quarter, and an approximate $1.5 million
write-off associated with a recent decision to relocate a store in the Dallas
market. In the prior year, pre-opening and relocation costs for the twelve and
twenty-eight weeks consisted 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 one new store opened
subsequent to the end of the second 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. Net interest expense for the
twelve and twenty-eight weeks ended April 14, 2002 totaled approximately $2.5
million and $6.4 million, respectively, compared to approximately $4.5 million
and $10.3 million, respectively, for the same periods of the prior fiscal year.
These decreases are primarily due to lower interest rates and lower amounts
outstanding under the Company's bank line of credit in fiscal 2002. Capitalized
interest for the twelve and twenty-eight weeks ended April 14, 2002 totaled
approximately $0.5 million and $0.8 million, respectively, compared to
approximately $0.5 million and $1.3 million, respectively, for the same periods
of the prior fiscal year.
Investment and Other Income
Investment and other income consists primarily of interest, rental and other
income. Investment and other income for the twelve and twenty-eight weeks ended
April 14, 2002 totaled approximately $0.6 million and $1.1 million,
respectively, compared to approximately $0.4 million and $1.0 million,
respectively, for the same periods of the prior fiscal year.
Discontinued Operations
Pursuant to a formal plan adopted in fiscal year 2000, the NatureSmart
nutritional supplements business has been segregated from continuing operations
and reported as discontinued operations in the accompanying condensed
consolidated financial statements. Discontinued operations had no impact on the
accompanying condensed consolidated income statements for the twelve and
twenty-eight weeks ended April 14, 2002. In the second quarter of the prior
fiscal year, we recorded an adjustment to discontinued operations of
approximately $12.3 million, net of income taxes of approximately $1.8 million,
as a result of the sale of our interest in NatureSmart. Cash flows from
discontinued operations in the accompanying condensed consolidated statement of
cash flows for the twenty-eight weeks ended April 14, 2002 include net proceeds
totaling approximately $15 million from the sale during the first quarter of the
facility in Thornton, Colorado that was used by NatureSmart.
Page 10 of 13
Liquidity and Capital Resources and Changes in Financial Condition
We generated cash from operating activities of approximately $116.1 million and
$75.3 million for the twenty-eight weeks ended April 14, 2002 and April 8, 2001,
respectively. Cash flows from operating activities resulted primarily from our
net income plus non-cash expenses and changes in operating working capital.
The Company has a $220 million revolving line of credit available through June
28, 2003. The credit agreement contains certain restrictive covenants, including
the prohibition of the payment of dividends on common stock, and 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 April 14, 2002, approximately $61 million was
drawn and approximately $155 million was available under the agreement.
Subsequent to the end of the second fiscal quarter, we paid down $16 million on
our line of credit and had $45 million drawn at May 17, 2002. At September 30,
2001, approximately $90 million was drawn and approximately $126 million was
available under the agreement. The average interest rate on amounts outstanding
under this agreement at April 14, 2002 was approximately 2.88%. The Company has
zero coupon convertible subordinated debentures outstanding with a carrying
value of approximately $141 million at April 14, 2002. The debentures have an
effective yield to maturity of 5 percent and a principal amount at maturity on
March 2, 2018 of approximately $309 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 totaling approximately
$148 million, $189 million and $242 million, respectively. The Company, at its
option, may elect to pay any such purchase price in cash or in shares of common
stock, or any combination thereof. We also have outstanding at April 14, 2002
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. Subsequent to
the end of the second fiscal quarter, we paid our annual principal installment
and have outstanding approximately $22.9 million at May 17, 2002. Net cash
provided by financing activities was approximately $10.4 million and $31.2
million for the twenty-eight weeks ended April 14, 2002 and April 8, 2001,
respectively.
Whole Foods Market's principal capital requirements have been the funding of the
development or acquisition of new stores and to lesser extent, the resultant
increase in working capital requirements. We estimate that cash requirements to
open a new store will range from $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 May
17, 2002 we had signed leases for 20 new stores averaging approximately 37,000
square feet in size. We expect to open or acquire approximately 15 to 20 new
stores per year, including relocations of existing stores, in each of the next
two fiscal years. We will incur additional capital expenditures in the current
fiscal year in connection with ongoing equipment upgrades and resets at existing
stores and continued development of management information systems. During the
first quarter the Company completed the acquisition of three Harry's Farmer's
Market perishables superstores in Atlanta, Georgia in exchange for approximately
$36 million in cash plus the assumption of certain liabilities. Net cash used in
investing activities was approximately $123.6 million and $96.8 million for the
twenty-eight weeks ended April 14, 2002 and April 8, 2001, 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.
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 year ended September
30, 2001. These risks and uncertainties and additional risks and uncertainties
not presently known to us or that we currently deem immaterial may cause our
business, financial condition, operating results and cash flows to be materially
adversely affected. Except for the historical information contained herein, the
matters discussed in this analysis are forward looking statements that involve
risks and uncertainties, including but not limited to general business
conditions, the timely development and opening of new stores, the impact of
competition, and other factors which are often beyond the control of the
Company. The Company does not undertake any obligation to update forward-looking
statements except as required by law.
Page 11 of 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's market risk exposures from
those reported in our Annual Report on Form 10-K for the year ended September
30, 2001.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On March 25, 2002, the Company held its annual meeting of shareholders at which
shareholders were asked the following:
(i) to elect to the Board of Directors two directors to serve a three-year
term expiring at the annual meeting of shareholders in 2005;
(ii) to approve an amendment to the Company's Articles of Incorporation to
increase the authorized number of shares of common stock from 100 million
to 150 million shares; and,
(iii) to approve an amendment to the Company's 1992 Incentive Stock Option Plan
for Team Members ("Team Member Plan") to increase the number of shares of
the Company's common stock reserved for issuance under the Team Member
Plan from 14.4 million to 16.4 million shares.
Voting results were as follows:
For Against Abstaining
---------- --------- ----------
(i) Director elections:
Avram J. Goldberg 49,788,965 243,702 147,774
Linda A. Mason 49,939,876 92,791 147,774
(ii) Amendment to Articles of Incorporation 49,119,692 979,316 81,443
(iii) Amendment to Team Member Plan 46,375,617 3,676,045 128,779
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fiscal quarter ended
April 14, 2002.
Page 12 of 13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Whole Foods Market, Inc.
Registrant
Date: May 21, 2002 By: /s/ Glenda Flanagan
------------- -------------------
Glenda Flanagan
Executive Vice President and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
Page 13 of 13