Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for fiscal year ended September 29, 1996; 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 employment
incorporation) identification no.)
601 North Lamar Suite 300
Austin, Texas 78703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
512-477-4455
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value
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, 1996 was $354 million. The number of shares of the
registrant's common stock, no par value, outstanding as of November 30, 1996 was
19,212,500.
The following document is incorporated by reference into the part of this
annual report on Form 10-K as indicated: Portions of the registrant's Definitive
Proxy Statement for the annual meeting of shareholders to be held on March 24,
1997 are incorporated into Part III to the extent indicated herein.
PART I
Item 1. Business
Whole Foods Market, Inc. (the "Company" or "Whole Foods") owns and operates
the country's largest chain of natural foods supermarkets, featuring food made
from natural ingredients free of unnecessary additives. The Company opened its
first store in Austin, Texas in 1980 and operated 68 stores in ten states as of
September 29, 1996. The Company's stores average approximately 23,000 square
feet and offer a broad selection of foods at competitive prices with an emphasis
on customer service. The Company has designed its stores to attract
quality-oriented consumers who are interested in health, nutrition, food safety
and preserving the environment. Product offerings include organically grown and
high-grade commercial produce; grocery products and environmentally safe
household items; meat, poultry and seafood free of growth hormones and
antibiotics; bulk foods, such as nuts, candies, dried fruit and whole
unprocessed grains and cereals; specialty gourmet foods such as beer, wine,
coffee and cheese; prepared foods, such as fresh bakery goods, soups, salads,
hot entrees and sandwiches; vitamins, body care products and cosmetics; and
miscellaneous items including books and magazines emphasizing health and
nutrition.
The Natural Foods Industry
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 in general are as near to their whole,
natural state as possible. According to The Natural Foods Merchandiser, a
leading trade publication for the industry, natural foods sales have grown at a
compound annual rate of approximately 17% over the last five years to
approximately $9.17 billion in 1995. This growth is being propelled by several
factors, including increasing consumer concern over the purity and safety of
food due to the presence of pesticide residues, artificial ingredients and other
chemicals; environmental concerns due to the degradation of water and soil
quality; and healthier eating patterns due to a better educated populace whose
median age is increasing each year. While organic and natural food products have
higher costs of production, the Company believes that due to changes in
demographics and buying habits a significant segment of the population now
attributes added value to high-quality natural food and accordingly is willing
to pay higher prices for such food items.
According to the June 1996 issue of The Natural Foods Merchandiser, there
were 6,600 natural/health food stores in 1995 in the United States, representing
$6.12 billion of the industry's sales in 1995. While natural and health food
stores have historically provided only a limited selection of products, the
natural foods supermarket-size formats provide a complete grocery shopping
alternative to conventional supermarkets. The Company believes that besides its
own stores there are less than 75 other natural foods stores larger than 10,000
square feet throughout the country. Whole Foods also believes that the growth of
larger supermarket-size natural foods stores has increased consumer awareness of
and demand for natural foods.
Strategy
In fiscal 1996, the Company had sales per gross square foot of $636, which
the Company believes is higher than most other traditional supermarket or food
retailers. The Company attributes these successful results to its ability to
differentiate itself from other retailers competing for consumers' food dollars
by tailoring its product mix, service standards and store environment to satisfy
the needs of the natural foods shopper and to appeal to the broader market of
quality-oriented consumers. The Company targets consumers aged 25 to 50 who are
better educated and more affluent than the populace as a whole.
Products
The Company offers its customers approximately 10,000 to 14,000 food and
non-food products. The broad product selection in the Whole Foods stores is
designed to meet the needs of natural foods shoppers as well as gourmet
customers. The Company has been able to expand the breadth of its product
offerings by monitoring the market for new products and by responding to
customer input. In addition, the Company is currently expanding a line of
private label products in order to further enhance its quality image and
customer loyalty.
Quality Standards
The Company's objective is to supply the highest quality natural foods to
its customers. The Company defines quality in terms of nutrition, freshness,
appearance and taste. The Company has the following product minimum quality
standards:
* We feature and prepare foods that are free of artificial sweeteners,
colors, flavors and preservatives.
* We actively seek out and support sources of organically grown foods.
* We feature seafood, poultry and meat that are free of added growth
hormones, antibiotics, nitrates or other chemicals.
* We feature grains and grain products that have not been bleached or
bromated.
* We sell only household and personal care products that have been proven
safe through non-animal testing methods.
* We do not sell food that has been irradiated.
Store Operations
The Company has promoted a strong company culture featuring a team approach
to store operations which the Company believes is distinctly more empowering of
employees than that of the traditional supermarket. Each store employs between
65 and 277 people, organized into up to nine teams, each led by a team leader.
Each team is responsible for a different aspect of store operations, such as
produce; grocery; meat, poultry and seafood; prepared foods; bakery goods;
beer/wine/cheese; nutrition products (vitamins, herbs and body care); customer
service; and the front-end section which runs the customer check-out counters.
The store teams have significant authority over the store operations for which
they are responsible. For example, many teams make buying and pricing decisions
for the products sold in their area, subject to general guidelines established
by the Company. Teams take collective responsibility for hiring, achieving
operational goals and making group decisions which might impact team
performance.
The Company intends to create a company-wide consciousness of "shared fate"
by uniting the self-interest of the team members as closely as possible to the
self-interest of the customers and of the shareholders. One way the Company
reinforces this concept is through its two gainsharing bonus programs, one which
rewards team sales and labor productivity and the other which rewards team
profitability on such factors as achievement of targeted gross margins within a
stated range and the rate of inventory turnover. Another way the Company
reinforces the shared fate concept is by facilitating team member stock
ownership. All team members are eligible for stock option grants under the Team
Member Stock Option Plan either through seniority or promotion, and to purchase
stock through payroll deductions under the Team Member Stock Purchase Plan. By
making its team members stakeholders in the organization, the Company believes
it has lessened the potential for an adversarial relationship between management
and employees.
The Company believes that it helps to inspire its team members by providing
them with a greater sense of purpose and mission in their work. For many Team
Members, their job is an extension of their personal philosophy and lifestyle.
Team Members can feel they are contributing to the good of others by selling
pure and nutritious foods, by contributing to long-term sustainable agriculture
and by promoting a pesticide-free and healthier environment. Additionally, the
Company has a program which provides paid time off to Team Members for working
with qualified community service organizations.
Because of the Company's decentralized management structure, an effective
store team leader (store manager) is critical to the success of the store. Store
team leaders are paid a salary plus a bonus based on store profit contribution.
The store team leader works closely with the associate store team leader and
store merchandiser, as well as with all the team leaders, to operate the store
as efficiently and profitably as possible.
Purchasing and Distribution
Purchasing is generally decentralized to permit each store, within certain
parameters determined by the Company, to customize its product mix to better
meet the needs of its customers. Volume discounts are negotiated with major
vendors on both a national and a regional basis or by groups of stores in an
effort to achieve some economies of scale. Buyers generally purchase many of
their grocery products from regional wholesale suppliers while the remainder of
products are purchased directly from producers.
The stores purchase certain products directly from Company-owned regional
wholesalers, which pool the stores' purchasing power together to negotiate the
most favorable terms. With respect to bakery products and in certain regions
with respect to prepared foods, the Company has established separate kitchens or
commissaries to prepare such foods for distribution to stores within the region.
Store Description
Each of the stores are generally located in high-traffic shopping areas and
are either free-standing or in strip centers. The Company has no prototype
store. Each store's layout is customized to the actual size and configuration of
the particular location. The Company emphasizes strong visual presentations in
all key traffic areas of its stores. Merchandising displays are changed
frequently and often incorporate seasonal themes. The stores also sponsor a
variety of organized in-store activities, such as store tours, samplings, taste
fairs and other special events. To further a sense of community and interaction
with customers, the stores typically include sit-down eating areas, customer
comment boards and centrally located information booths. In addition, many
stores offer special services, such as home delivery.
Expansion Strategy
The expansion strategy of the Company is to open or acquire stores in
existing regions and in metropolitan areas where the Company believes it can
become a leading natural foods supermarket retailer. During fiscal year 1992,
the Company acquired two stores operating as Wellspring Grocery in North
Carolina, and the Company opened a new store in Mill Valley, California. In
fiscal 1993, the Company opened new stores in Raleigh, North Carolina; Chicago,
Illinois; San Antonio, Texas and Ann Arbor, Michigan and acquired 13 stores as
follows: In October 1992, the Company acquired all of the outstanding stock of
Bread & Circus, Inc. ("Bread & Circus"), the largest natural foods supermarket
retailer in the Northeast, then operating six natural foods supermarkets located
in Massachusetts and Rhode Island. The consideration for the stock consisted of
approximately $20.0 million in cash and 691,770 shares of common stock. In
September 1993, the Company acquired all of the outstanding stock of Mrs.
Gooch's Natural Food Markets, Inc. ("Mrs. Gooch's"), which owned and operated
seven natural foods supermarkets in the southern California area. The Company
issued 2,970,596 shares of its common stock in connection with the acquisition,
which was accounted for as a pooling of interests.
In fiscal 1994, the Company opened new stores in Houston, Texas; Cambridge,
Massachusetts; Los Gatos, California; Chicago, Illinois and Dallas, Texas.
In fiscal 1995, the Company closed its three existing stores in Austin and
replaced them with two larger, updated stores. Additionally, the Company opened
four new stores outside of Austin, one each in Plano, Texas; Boston,
Massachusetts; Tustin, California; and St. Paul, Minnesota. In February 1995,
the Company acquired substantially all assets and assumed certain liabilities of
Unicorn Village, Ltd. (Unicorn), a natural foods supermarket in Southern
Florida, in exchange for approximately $4.1 million in cash. Also in February
1995, the Company acquired the outstanding stock of Cana Foods, Inc. doing
business as Bread of Life, which operated two natural foods supermarkets in
Northern California, in exchange for approximately $5 million in cash.
In fiscal 1996, the Company opened new stores in Sherman Oaks, CA;
Washington, DC; Lakeview, IL; Arlington, VA; Madison, WI and San Francisco, CA.
In December 1995, the Company acquired the outstanding stock of Natural
Merchants Exchange, Inc. doing business as Oak Street Market, which operated a
natural foods market in Evanston, Illinois, in exchange for approximately
195,000 shares of newly issued Company stock. The acquisition was accounted for
using the pooling of interests method. In August 1996, the Company acquired all
of the outstanding stock of Fresh Fields Market, Inc., which operated twenty-two
natural foods supermarkets, in exchange for approximately 4,750,000 shares of
newly issued Company stock. The acquisition was accounted for using the pooling
of interests method. Subsequent to the acquisition, three stores have been
closed and two others are scheduled for relocation pursuant to a plan to close
or relocate duplicate stores as a result of the acquisition.
In fiscal 1997, the Company intends to open approximately five new stores
and relocate two existing stores.
In selecting store locations, the Company uses an internally-developed
model to analyze potential markets on such criteria as income levels, population
density and educational levels. Whole Foods believes that a metropolitan area
with population in excess of 200,000 is generally large enough to support a
Whole Foods Market. After the Company has selected a target site, it retains an
independent third party consultant to project sales. The Company intends to
cluster several stores in the larger metropolitan areas. Clustering stores
permits advantages such as increased purchasing power, specialized expertise in
all team areas, greater advancement opportunities for store staff and economies
of scale in promotion and advertising.
The Company typically opens a new store approximately one year after a
store site is selected and the lease is signed. The Company estimates that its
cash requirements to open a new store will range (depending on the size of the
new store, geographic location, degree of work performed by the landlord, and
complexity of site development issues) from $3 million to $12 million, excluding
new store inventory (approximately $400,000).
Marketing
The Company spends less on advertising than traditional supermarkets,
instead relying primarily on word-of-mouth recommendations from its customers.
The Company allocates about half of its marketing budget to region-wide programs
and the remainder to the individual store's marketing efforts. The stores spend
most of their own marketing budgets on store events such as taste fairs,
classes, store tours and product samplings. Each store also has a separate
budget for making contributions to a variety of philanthropic and community
activities, creating goodwill and maintaining a high profile in the community.
The Company presently contributes approximately 5% of its after tax profits in
the form of cash or products to not-for-profit organizations.
Competition
The Company's competitors currently include other natural foods
supermarkets, traditional and specialty supermarkets, other natural foods stores
and small specialty stores. Although the company has historically encountered
limited competition in its geographic markets with other stores operating in the
natural foods supermarket format, it has faced increased competition in recent
years from such stores, particularly in new markets, and expects to encounter
additional competition from such stores in its existing markets and in new
markets. When the Company faces such direct competition, there can be no
assurance that the Company will be able to compete effectively or that increased
competition will not adversely impact the Company's results of operations. In
addition, traditional and specialty supermarkets compete with the Company in one
or more product categories and may expand more aggressively in marketing a broad
range of natural foods and thereby compete more directly with the Company for
products, customers and locations. Some of the Company's competitors have been
in business longer or have greater financial or marketing resources than the
Company and may be able to devote greater resources to securing suitable
locations and to the sourcing, promotion and sale of their products.
Government Regulation
The stores are subject to various federal, state and local laws,
regulations and administrative practices affecting its business and 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. Difficulties or failures in obtaining or
maintaining required licenses or other required approvals could delay or prevent
the opening of new stores or adversely affect the operations of existing stores.
Employees
As of September 29, 1996, the Company employed approximately 9848 persons,
including approximately 8108 full-time and 1740 part-time employees. The Company
sponsors a partially self-insured health care benefits plan for participating
employees. The Company does not subscribe to any workers' compensation insurance
program with respect to its employees in Texas and instead maintains a reserve
for job-related injury claims. The employees of the Company are not represented
by a labor union or collective bargaining agreement. The Company stores in
Berkeley and Los Gatos, CA and in St. Paul, MN were subjected to informational
pickets by the local retail clerks' and butchers' unions for a period of
approximately ten to eighteen months after their opening. The Company store in
Madison, WI has been under an informational picket by the local retail union
from its opening through the time of this printing.
Trademarks
The names "Whole Foods Market," "Wellspring," "Bread & Circus," "Mrs.
Gooch's", "Unicorn Village Market", "Fresh Fields Market", "Good for You Foods"
and the Company's stylized logos are registered service marks of the Company.
Risk Factors
The Company wishes to caution readers that the following important factors,
among others, could cause the actual results of Whole Foods Market to differ
materially from those indicated by forward-looking statements made from time to
time in 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 the Company. Except for historical
information, the matters discussed in such oral and written communications are
forward looking statements that involve risks and uncertainties, including but
not limited to general business conditions, the timely and successful
development and opening of new stores, the impact of competition and other risks
detailed below.
Expansion Strategy. Whole Food's 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 the
Company's expansion strategy can be successfully executed.
Continued growth of Whole Foods Market will depend to a significant degree
upon its ability to open or acquire new stores in existing and new markets and
to operate these stores on a successful basis. Further, the Company's expansion
strategy is dependent on finding suitable locations, and the Company faces
intense competition with other retailers for such sites. There can be no
assurance that the Company will be able to open or acquire new stores in a
timely manner and to operate them on a successful basis. In addition, there can
be no assurance that the Company can successfully hire and train new employees
and integrate such employees into the programs and policies of the Company or
adapt its distribution, management information and other operating systems to
the extent necessary to operate new or acquired stores in a successful and
profitable manner and adequately supply natural foods products to these stores
at competitive prices.
There can be no assurance that Whole Foods Market will continue to grow
through acquisitions. To the extent the Company further expands by acquiring
existing stores, there can be no assurance that Whole Foods Market can
successfully integrate such stores into its operations and support systems, and
that the operations of acquired stores will not be adversely affected as the
Company's decentralized approach to store operations is introduced to such
stores.
The acquisition of existing stores and the opening of new stores requires
significant amounts of capital. In the past, the Company's 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 the Company in the future.
Quarterly Fluctuations. The Company's quarterly results of operations may
fluctuate significantly as the result of the timing of new store openings and
the range of operating results which may be generated from newly opened stores.
It is Whole Foods Markets policy to expense the pre-opening costs associated
with a new store opening during the quarter in which the store is opened.
Accordingly, quarter to quarter comparisons of results of operations have been
and will be materially impacted by the timing of new store openings. In
addition, the Company's quarterly operating results could be adversely affected
by losses from new stores, variations in the mix of product sales, price changes
in response to competitive factors, increases in merchandise costs and possible
supply shortages, as well as by the factors listed below in "Operating Results".
Competition. Whole Foods Market's competitors currently include other
natural foods stores, large and small traditional and specialty supermarkets and
grocery stores. These stores compete with the Company in one or more product
categories. In addition, traditional and specialty supermarkets are expanding
more aggressively in marketing a broad range of natural foods and thereby
competing directly with the Company for products, customers and locations. Some
of these potential competitors have been in business longer or have greater
financial or marketing resources than Whole Foods Market and may be able to
devote greater resources to the sourcing, promotion and sale of 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.
Personnel Matters. Whole Foods Market is dependent upon a number of key
management and other personnel. The loss of the services of a significant number
of key personnel within a short period of time could have a material adverse
effect upon the Company. Whole Foods Market's continued success is also
dependent upon its ability to attract and retain qualified employees to meet the
Company's future needs. The Company faces intense competition for qualified
personnel, many of whom are subject to offers from competing employers, and
there can be no assurance that Whole Foods Market will be able to attract and
retain such personnel. Whole Foods Market does not currently maintain key person
insurance on any employee.
Integration of Fresh Fields' Operations. Whole Foods Market anticipates
reducing Fresh Fields' overhead expenses by adopting Whole Foods Market's
decentralized approach to store management. Whole Foods Market will also seek to
improve the operating profitability of the Fresh Fields stores through enhanced
purchasing power, improved utilization of distribution facilities and other
economies of scale resulting from the Merger. There can be no assurance that
Whole Foods Market will be able to achieve the economies of scale and other
operating enhancements it seeks in the Fresh Fields operations, or that these
economies of scale can be achieved in a period of time currently anticipated by
management.
The acquisition of Fresh Fields has materially increased the scope of the
Company's operations from 48 to 68 stores, after giving effect to the closing or
relocation of duplicate stores. The integration of the Fresh Fields operations
into the Whole Foods Market organization is a significant undertaking. While
Whole Foods Market has experience in acquiring and integrating other businesses
into Whole Foods Market's operations, Fresh Fields has a larger number of stores
and employees and substantially greater revenues than any of the companies
previously acquired by Whole Foods Market. In addition, the integration will be
implemented without the benefit of the Fresh Fields' executive management. There
can be no assurance that the operations of Fresh Fields' stores will not be
adversely affected by the introduction of the Company's team approach to store
operations or the response of customers to the changes in operations and
merchandising mix made by the Company. The integration of Fresh Fields into the
Company will require the dedication of management resources which may
temporarily detract from attention to the day-to-day business of the Company.
Conversion to Whole Foods Market Name. The change of the Fresh Fields
stores to the Whole Foods Market name might cause short term confusion among
customers and lead to a reduction in sales because of the loss of the goodwill
associated with the Fresh Fields' name. Acceptance by customers of the Whole
Foods Market brand may take longer and be more difficult or expensive than
management anticipates.
Legal Matters. From time to time Whole Foods Market is the subject of
various lawsuits arising in the ordinary course of business. Although not
currently anticipated by management, there is potential for the Company's
results to be materially impacted by legal and settlement expenses related to
such lawsuits.
Whole Foods Market is a non-subscriber to Worker's Compensation Insurance
in the State of Texas. There is some potential for the Company's results to be
materially impacted by medical, lost time and other costs associated with
on-the-job injuries.
The Company provides partially self-insured, voluntary employee benefits
plans which provide health care and other benefits to participating employees.
The plans are designed to provide specified levels of coverage, with excess
insurance coverage provided by a commercial insurer. There is some potential for
Whole Foods Market's results to be materially impacted by claims made in excess
of reserves therefore.
Informational Picketing. Certain of the Company's stores have 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.
Fresh Fields is not currently a party to any collective bargaining
agreement. Its stores have also been subject to informational picketing and
negative publicity campaigns by members of unions. Because of changes in Fresh
Fields' operations in connection with the Merger, there could be an increased
risk of efforts to organize employees by labor unions or by employees on their
own initiative. Unionization of any material portion of Fresh Fields employees
would adversely affect the operations of the business and could reduce the level
of profitability.
Operating Results. The Company's ability to meet expected results for any
period may be negatively impacted by many factors, as described above and
including, but not limited, to the following:
(i) reductions in sales caused by competitive issues, product availability,
weather and other factors; (ii) losses generated by new stores or higher than
expected pre-opening costs; (iii) higher than expected costs and expenses at
store, regional and national levels; (iv) lower than expected gross margins
resulting from the impact of competition or other factors; (v) higher than
expected interest expense due to higher than expected interest rates or
borrowings outstanding; and (vi) delays in new store openings.
Whole Foods Market's ability to increase same store sales during any period
will be directly impacted by competition, availability of product and other
factors which are often beyond the control of the Company.
Item 2. Properties
The Company owns the New Orleans store location. All other stores,
distribution centers and bakehouses are leased, with expiration dates ranging
from 1 to 21 years. The Company has options to renew most of its leases with
renewal periods ranging from 5 to 50 years.
In 1995, the Company developed a project in Austin, Texas which houses one
of the new Austin stores (named Sixth and Lamar), the new corporate
headquarters, and a bookstore. The underlying property is leased from a third
party under a ground lease which has a base term of twenty years with ten
options to renew for five years each. The Company has entered into a lease with
the bookstore which has a base term of twenty years with two options to renew
for five years each. Certain officers of the Company are also shareholders of
the bookstore, owning a combined 18.5% of the outstanding stock. The Company
believes that the terms of the lease between the Company and the bookstore are
on terms no less favorable to the Company than could have been negotiated with
an independently owned retailer. This is partially based on an appraisal of the
lease by an independent appraisal firm. The income from this lease is not
material to the operations of the Company.
Item 3. Legal Proceedings
From time to time, the Company is involved in lawsuits that the Company
considers to be in the normal course of its business which have not resulted in
any material losses to date.
Item 4. Submission of Matters to a Vote of Security Holders
On August 30, 1996, the Company held a Special Meeting of its Shareholders.
At the Special Meeting, the shareholders were asked to consider and act upon the
following:
Proposal (1) The merger and related Agreement and Plan of Merger pursuant to
which a wholly owned subsidiary of the Company merged into Fresh Fields Markets,
Inc. ("Fresh Fields") resulting in Fresh Fields becoming a wholly owned
subsidiary of the Company.
Proposal (2) The amendment to the Articles of Incorporation of Whole Foods
Market to increase the authorized number of shares of common stock of Whole
Foods Market from 30 million to 50 million shares; and Proposal (3) The
amendment to the 1992 Stock Option Plan for Team Members to increase the number
of shares of common stock of Whole Foods Market issuable upon exercise of stock
options under the Plan from 2million to 3million shares of common stock.
The following indicates the number of shares voted for and against the proposals
as well as abstentions.
Proposal Votes For Votes Against Votes Abstained
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(1) 9,224,929 16,012 52,436
(2) 11,928,194 104,988 51,885
(3) 6,775,221 2,378,993 139,163
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's Common Stock is traded on the NASDAQ National Market System
under the symbol "WFMI." The following sets forth the high and
low last reported sales prices for the Company's last two fiscal years.
Fiscal 1995
September 26, 1994 to January 15 $16.75 $ 9.50
January 16, 1995 to April 9, 1995 $14.13 $10.75
April 10, 1995 to July 2, 1995 $16.13 $11.50
July 3, 1995 to September 24, 1995 $15.75 $11.88
Fiscal 1996
September 25, 1995 to January 14, 1996 $15.00 $10.94
January 15, 1996 to April 7, 1996 $18.50 $13.75
April 8, 1996 to June 30, 1996 $28.50 $17.75
July 1, 1996 to September 29, 1996 $35.88 $24.00
The Company had approximately 987 record holders of its common stock as of
November 30, 1996.
The Company intends to retain any earnings for use in its business and
therefore does not anticipate paying any cash dividends in the foreseeable
future. The Company's present bank credit agreement restricts the payment of
cash dividends on common stock.
The Company sold the following unregistered securities in fiscal 1996:
(1) On May 16, 1996, the Company issued 7.29% Senior Notes due May 16,
2006 (the "Notes"). No underwriters were involved in the sale of
the Notes; therefore, no underwriting discounts or commissions
were paid. The Notes were issued to institutional investors. The
aggregate offering price was $40 million which was paid by the
investors in cash. Due to the limited number of offerees and the
financial sophistication of the offerees, the sale was made in
reliance on Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act").
(2) In December 1995, the Company issued 195,205 shares ("Shares") of
Common Stock in a merger between a subsidiary of the Company and
National Merchants Exchange, Inc. doing business as Oak Street
Market ("Oak Street"), which operated one natural foods grocery
store in Evanston, Illinois. No underwriters were involved in the
sale of the Shares; therefore, no underwriting discounts or
commissions were paid. This offering was made to the two former
shareholders of Oak Street. Due to the limited number of offerees
and the business relationship to the offerees, the sale was made
in reliance on Section 4(2) of the Securities Act.
Item 6. Selected Financial Data
Whole Foods Market, Inc. and Subsidiaries
Summary Financial Information In thousands, except per share and operating data
Sept 29 Sept 24 Sept 25 Sept 26 Sept 27
1996 1995 1994 1993 1992
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Consolidated Statements of Operations1
Sales $ 892,098 709,935 572,050 439,254 245,684
Cost of goods sold and occupancy costs 613,056 480,781 387,682 297,647 167,845
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Gross profit 279,042 229,154 184,368 141,607 77,839
Direct store expenses 217,048 183,655 144,383 113,690 61,207
General and administrative expenses 33,559 30,777 25,151 21,644 13,399
Pre-opening costs 3,964 4,029 3,387 4,985 1,087
Relocation costs 1,939 2,332 5,758 2,457 564
Non-recurring expenses 38,516 * 282 3,094 656
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Income (loss) from operations (15,984) 8,361 5,407 (4,263) 926
Net interest income (expense) (4,661) (1,941) 264 536 546
- -------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (20,645) 6,420 5,671 (3,727) 1,472
Provision (credit) for income taxes (3,411) 5,347 6,035 4,727 2,422
- -------------------------------------------------------------------------------------------------------
Net income (loss) $ (17,234) 1,073 (364) (8,454) (950)
=======================================================================================================
Net income (loss) per share $ (0.90) 0.06 (0.02) (0.50) (0.08)
=======================================================================================================
Shares/weighted average shares outstanding 19,179 18,924 18,340 17,018 12,418
=======================================================================================================
Operating Data
Number of stores at end of period 68 61 49 42 25
Store sales per square foot $ 636 625 639 597 599
Average weekly sales per store $ 253,555 238,776 243,520 217,116 202,629
Comparable store sales increase (2) 5.40% 6.19% 9.93% 11.56% 7.41%
Consolidated Balance Sheet Data (End of year)
Working capital (deficiency) $ 4,887 (4,400) 18,080 11,344 36,957
Total assets 310,604 266,814 203,417 162,338 98,386
Long-term debt (including current maturities) 85,291 53,721 8,389 5,607 3,148
Shareholders' equity 146,447 152,633 152,045 123,540 75,736
1. The combined financial information and operating data for periods prior to
the acquisition of Fresh Fields is based on the respective historical
financial statements and other financial information of the Company and
Fresh Fields. For fiscal year 1996, Whole Foods Market financial
information as of and for the fiscal year ended September 29, 1996 has been
combined with Fresh Fields information as of and for the twelve months
ended September 30, 1996. For all other years presented, Whole Foods Market
financial information as of and for the fiscal years ended in September as
indicated above has been combined with Fresh Fields financial information
as of and for the fiscal years ended on the Saturday closest to December 31
of the same year.
2. 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
after the store was opened or acquired. The comparable store sales increase
for fiscal 1996 is based on comparable 53-week years.
Item 7. Management's Discussion & Analysis
Whole Foods Market, Inc. and Subsidiaries Management's Discussion & 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 68 stores as of September 29, 1996 both by opening new stores and
acquiring existing stores from third parties. The results of the Company's
operations have been and will continue to be materially affected by the timing
and number of new store openings. New stores may incur operating losses for the
first one or two years of operations. The Company's results of operations are
reported on a 52- or 53-week fiscal year ending on the last Sunday in September.
Fiscal year 1996 is a 53-week year. Fiscal years 1995 and 1994 are 52-week
years.
On August 30, 1996 the shareholders approved the pooling-of-interests merger
between Whole Foods Market and Fresh Fields Market, Inc., a 22 store chain of
natural foods markets located primarily on the East Coast and in the Chicago
area. The information contained herein has been restated to present the combined
results of operations for the years shown. For fiscal year 1996, Whole Foods
Market financial information as of and for the fiscal year ended September 29,
1996 has been combined with Fresh Fields information as of and for the twelve
months ended September 30, 1996. For all other years presented, Whole Foods
Market financial information as of and for the fiscal years ended the last
Sunday in September has been combined with Fresh Fields financial information as
of and for the fiscal years ended on the Saturday closest to December 31 of the
same year.
Development Activity
The following is a schedule of stores opened, relocated, closed and acquired
during fiscal years 1996, 1995 and 1994:
Store Name Location Date
- ---------- -------- ----
Woodway Houston, TX opened 10/93
Springfield Springfield, VA opened 10/93
Fresh Pond Cambridge, MA opened 12/93
Los Gatos Los Gatos, CA opened 4/94
Evanston Evanston, IL opened 5/94
Elston Chicago, IL opened 6/94 closed 9/96
Skillman Dallas, TX opened 7/94
River Forest River Forest, IL opened 9/94
Rockville Rockville, MD relocated 10/94
Plano Plano, TX opened 11/94
Symphony Cambridge, MA opened 1/95
Campbell Campbell, CA acquired 2/95
Cupertino Cupertino, CA acquired 2/95 relocated 8/96
Aventura Aventura, FL acquired 2/95
Greenwich Greenwich, CT opened 3/95
Wynnewood Wynnewood, NJ opened 4/95
Sixth and Gateway Austin, TX 3 stores relocated to 2 in April/May 95
St. Paul St. Paul, MN opened 5/95
Milburn Milburn, NJ opened 6/95
Montclair Montclair, NJ opened 6/95
Tustin Tustin, CA opened 7/95
Gaithersburg Gaithersburg, MD opened 9/95 closed 10/96
Reston Reston, VA opened 11/95
Oak Street Evanston, IL acquired 12/95 closed 9/96
Sherman Oaks West Sherman Oaks, CA opened 1/96
Tenley Washington, DC opened 1/96
Georgetown Washington, DC opened 1/96
Lakeview Lakeview, IL opened 2/96
Manhasset Munsey Park, NY opened 2/96
Arlington Arlington, VA opened 2/96
Durham Durham, NC relocated 2/96
Mt. Washington Baltimore, MD opened 5/96
Madison Madison, WI opened 6/96
West LA Los Angeles, CA relocated 7/96
Franklin San Francisco, CA opened 7/96
Whole Foods Market, Inc. and Subsidiaries
Managements Discussion & Analysis of Financial Condition and Results of
Operations
Results of Operations
The following table sets forth the statement of operations data of Whole Foods
Market expressed as a percentage of sales for the fiscal years indicated:
1996 1995 1994
- ------------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 68.7 67.7 67.8
- ------------------------------------------------------------------------------
Gross profit 31.3 32.3 32.2
Direct store expenses 24.3 25.9 25.2
General and administrative expenses 3.8 4.3 4.4
Pre-opening costs 0.4 0.6 0.6
Relocation-related costs 0.2 0.3 1.0
Non-recurring expenses 4.3 * *
- ------------------------------------------------------------------------------
Income (loss) from operations (1.8) 1.2 1.0
Net interest income (expense) (0.5) (0.3) *
- ------------------------------------------------------------------------------
Income (loss) before income taxes (2.3) 0.9 1.0
Provision (credit) for income taxes (0.4) 0.8 1.1
- ------------------------------------------------------------------------------
Net income (loss) (1.9)% 0.1% (0.1)%
- ------------------------------------------------------------------------------
Figures may not add due to rounding
Sales
Sales for all years shown reflect increases due to new stores opened and
acquired, and due to comparable store sales increases of 5.40%, 6.19% and 9.93%
for fiscal years 1996, 1995 and 1994, respectively. Sales of a store are deemed
to be comparable commencing in the fifty-third full week after the store was
opened or acquired. Comparable store sales increases may be negatively impacted
by cannibalization from newly opened Whole Foods Market stores or competition
from other stores. Comparable store sales in Southern California in the latter
months of fiscal 1996 were negatively impacted by the name change from Mrs.
Gooch's to Whole Foods Market, and in fiscal 1994 by the January 1994 earthquake
which caused significant damage to the Los Angeles area. Comparable store sales
increases generally resulted from an increase in the number of customer
transactions and slightly higher average transaction amounts, reflecting an
increase in market share as the stores mature in a particular market. The
Company believes that these comparable store sales trends may not necessarily be
indicative of future results of operations.
Gross Profit
Gross profit consists of sales less cost of goods sold and occupancy costs, plus
contribution from non-retail operations. The Company's consolidated gross profit
in fiscal year 1996 decreased as a percentage of sales to 31.3% primarily due to
a price reduction strategy which negatively impacted gross profit in the Fresh
Fields stores as compared to the prior year. Although some components of the
price reduction strategy may be continued in the future, the Company expects the
gross margins in the Fresh Fields stores to be greater in fiscal 1997 than in
fiscal 1996. Gross profit in the Whole Foods Market stores increased in
fiscal
1996 as compared to fiscal 1995 by approximately 50 basis points due to
a
decrease in cost of goods sold as a percentage of sales and improved
operations,
offset somewhat by an increase in occupancy costs as a percentage of sales.
This decrease in cost of goods sold was due to improved performance from new
stores
with respect to product procurement and merchandising and controlling spoilage,
and from national buying initiatives which lowered the cost of product purchased
on a national basis. Gross profit in fiscal 1995 increased slightly as a
percentage of sales to 32.3% from 32.2% in fiscal 1994, due primarily to
improved performance from new stores. In all years, gross profit margins were
positively
affected by the improved margins as stores mature and by the increased
percentage of sales in certain regions and in departments such as prepared foods
where the Company achieves higher gross profits. Gross profit margins were
negatively impacted in fiscal 1994 by a decrease in the dollar and percentage
contribution from non-retail operations from 1993. Relative to other stores in a
region, gross profit margins tend to be lower for new stores and increase as
stores mature, reflecting increasing experience levels and operational
efficiencies of the store teams.
Whole Foods Market, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition and Results of
Operations
Direct Store Expenses
Direct store expenses in fiscal 1996 decreased as a percentage of sales to 24.3%
from 25.9% during fiscal 1995 and 25.2% during fiscal 1994. This 1996 decrease
was due to the impact of reductions in labor and other costs in the Fresh Fields
stores at the time of implementation of the above-mentioned price reduction
strategy. This decrease was offset by certain other factors, primarily new store
openings. Given the lower level of sales generated at new stores during the
initial period of operations of such stores, direct store expenses for new
stores as a percentage of sales are higher on average than those for mature
stores. Absent a significant factor such as labor reductions, the Company has
historically experienced increases in this percentage due to the growth of the
Company's operations in regions where the Company experiences higher operating
costs and to the increased percentage of sales in higher gross margin, more
labor intensive departments, and to higher direct expenses from new stores.
General and Administrative Expenses
General and administrative expenses (including amortization) in fiscal 1996
decreased as a percentage of sales to 3.8% from 4.3% in fiscal 1995 and 4.4% in
fiscal 1994. These decreases were generally due to increases in sales without
comparable increases in corporate staff, and in 1996 to reductions in the staff
of the Fresh Fields corporate office. Also, the Company made personnel
reductions and other changes which lowered certain costs in the Southern
California region in 1994 as a result of the acquisition and in 1996 as a result
of a restructuring in that region. Whole Foods Market has historically been able
to expand without a significant increase in general and administrative costs.
However, in certain circumstances the Company has increased the number of
administrative and support personnel at the regional and national levels in
connection with the implementation of new accounting and management information
systems and to support current and planned growth.
Pre-opening Costs
Whole Foods Market developed and opened nine new stores in 1996, ten new stores
in 1995 and seven new stores in 1994. Pre-opening costs in those three years
were $4.0 million, $4.0 million and $3.4 million, respectively. Pre-opening
costs consist primarily of labor costs, supplies and advertising expenses and
are generally incurred during the three-month period prior to the store opening.
Pre-opening costs are generally higher in locations which are some distance from
an existing base of operations due to higher training, travel and moving costs.
The Company expenses pre-opening costs in the quarter in which the store is
opened.
Relocation Costs
During fiscal 1996 the Company relocated stores in Cupertino, West Los Angeles
and Durham to new, larger locations and relocated the Fresh Fields corporate
office. In fiscal year 1995, the Company relocated its three Austin stores to
two new, larger stores and its corporate offices to the same facility as its new
downtown store. In fiscal year 1994, the Fresh Fields Rockville store was
relocated to a new, larger location. Relocation costs consist of losses on
dispositions of fixed assets and inventory, remaining lease payments on old
facilities and other miscellaneous relocation expenses.
Non-recurring Expenses
In fiscal year 1996 expenses including losses on the disposition of store
assets, remaining rent and lease termination costs have been recognized pursuant
to a plan initiated at the time of the Fresh Fields acquisition to close or
relocate duplicate stores. Specifically, the plan includes the following store
changes: (1) the Fresh Fields Elston store in the Chicago area was closed in
September 1996. The sales of the nearby Whole Foods Market Lincoln Park and
Lakeview stores increased as a result of the transfer of customers to those
stores, and the Company expects that the combined profits from those two stores
after the Elston closing will be greater in fiscal 1997 than the combined
profits would have been from the three stores if the Elston store had not been
closed; (2) the Whole Foods Market Oak Street store in the Chicago area was
closed in September 1996. The sales of the nearby Fresh Fields Evanston store
increased as a result of the transfer of customers to that store, and the
Company expects that the profits from the Evanston store in 1997 will be greater
than the combined profits from the Evanston and Oak Street stores if the Oak
Street store had not been closed; (3) the Fresh Fields Gaithersburg store in the
Washington DC area was closed in November 1996 just prior to the opening of the
Whole Foods Market Vienna store. The Company believes that the initial sales of
the Vienna store were positively impacted by the transfer of customers from the
Gaithersburg store, and that the profits from the Vienna store in 1997 will be
greater than the combined profits from the Vienna and Gaithersburg stores if the
Gaithersburg store had not been closed; and, (4) the Fresh Fields Evanston and
Naperville stores in the Chicago area will be relocated in 1997 to two nearby
Whole Foods Market stores which are currently under construction. The Company
believes that the two new stores will service a trade area which overlaps with
the current trade area of the two existing stores, and that the new stores will
experience greater sales and profits as a result of the closing of the two
existing stores.
Whole Foods Market, Inc. and Subsidiaries Management's
Discussion & Analysis of Financial Condition and Results of Operations
The five stores which have been or are expected to be closed or relocated had
combined sales and profits of approximately $53.4 million and $500,000,
respectively, in fiscal 1996. The Elston store was experiencing operating losses
prior to its closing, and the Gaithersburg store was operating at approximately
a breakeven level. The Evanston, Naperville and Oak Street stores were
profitable in fiscal 1996. The majority of Company Team Members in the
above-specified closed or relocated stores have been or will be transferred to
other stores in the Company.
Other components of the 1996 non-recurring expense include severance,
transaction expenses, duplicate system disposal costs and conforming accounting
adjustments associated with the acquisition of Fresh Fields, and severance and
other costs associated with the restructuring of the Southern California region.
Net Interest Expense/Income
From the time of the Whole Foods Market initial public offering in 1992 until
1995, new store development and acquisitions were financed primarily through
equity offerings and with funds generated from operations. In fiscal 1995, the
Company began drawing on its $75 million bank line of credit to fund expansion
needs which exceeded cash flow from operations. In 1996, the Company continued
to draw on that line of credit and refinanced a portion of the outstanding
balance with $40 million in newly issued senior notes. Interest expense related
to these borrowings was $4.7 million in fiscal 1996 and $1.9 million in fiscal
1995, net of capitalized interest associated with stores under development. Net
interest income in fiscal 1994 was $7,000.
Taxes
Fresh Fields incurred significant net operating losses from its inception until
the time of the acquisition by Whole Foods Market. However, for income tax
purposes the losses incurred by Fresh Fields prior to the date of the
acquisition cannot be used to offset the historical income earned by Whole Foods
Market. The income tax provision for fiscal periods prior to the merger is the
expense associated with Whole Foods Market's income before taxes. Certain merger
transaction costs that were expensed for book accounting and reporting purposes
in fiscal 1996 are not deductible for federal income tax purposes. As of
September 29, 1996, the Company has a tax net operating loss carryforward of
approximately $28 million which is available to offset certain future taxable
income. As of September 29, 1996, the Company does not consider it more likely
than not that the Fresh Fields net operating loss carryforwards will be utilized
in the near future since they are available only to offset taxable income of
Fresh Fields, and Fresh Fields has not generated taxable income in any year
since its inception. In addition, the use of the net operating loss
carryforwards in any one year is limited due to the application of certain tax
laws.
The Company's effective tax rate decreased slightly in 1995 to 39.4% from 41%
in fiscal 1994. The Company believes that its effective tax rate in 1997 will be
lower than the 1995 and 1994 tax rates.
Business Combinations
On August 30, 1996, the Company completed the acquisition of Fresh Fields
Market, Inc., which operated 22 natural foods supermarkets in exchange for
approximately 4.8 million shares of common stock, plus the assumption of
approximately 399,000 shares of outstanding options to purchase common stock.
The acquisition was accounted for using the pooling-of-interests method.
In December 1995, the Company completed the acquisition of Natural Merchants
Exchange, Inc. doing business as Oak Street Market which operated a natural
foods market in Evanston, Illinois, in exchange for approximately 195,000 shares
of common stock. The acquisition was accounted for using the
pooling-of-interests method. Due to the immateriality of Oak Street financial
statements to the Company's consolidated financial statements, financial
information for the periods prior to the combination has not been restated.
In February 1995, the Company acquired the outstanding stock of Cana Foods,
Inc., doing business as Bread of Life, which operated two natural foods
supermarkets in Northern California, in exchange for approximately $5 million in
cash. Also in February 1995, the Company acquired substantially all assets and
assumed certain liabilities of Unicorn Village, Ltd., a natural foods
supermarket in Southern Florida, in exchange for approximately $4.1 million in
cash.Both of these acquisitions were accounted for using the purchase method,
and the results of operations of the two entities have been consolidated with
the results of operations of the Company from the dates of acquisition.
Whole Foods Market, Inc. and Subsidiaries Management's Discussion & Analysis of
Financial Condition and Results of Operations
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 1996 is a 53-week year so the fourth quarter consists of 13 weeks. Fiscal
year 1995 is a 52-week year and the fourth quarter consists 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
the Company's annual sales from existing stores. Quarter-to-quarter comparisons
of results of operations are materially impacted by the number and timing of new
store openings for which related costs are deferred as incurred and expensed in
the quarter the store is opened. The Company believes that the historical
pattern of quarterly sales and income as a percentage of the annual total may
not be indicative of the pattern in future years. The following table sets forth
selected quarterly unaudited financial information for the 1996 and 1995 fiscal
years (in thousands, except per share data):
1st 2nd 3rd 4th
1996 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------
Sales $ 244,986 203,912 213,402 229,798
Gross profit 76,205 65,829 68,256 68,752
Pre-opening costs 383 2,320 609 652
Non-recurring expenses o 1,984 o 36,532
Income (loss) from operations 3,429 3,259 7,827 (30,499)
Income (loss) before income taxes 2,563 2,399 6,956 (32,563)
Net income (loss) 41 1,517 4,663 (23,455)
Net income (loss) per share $ 0.00 0.08 0.23 (1.22)
Shares/weighted average shares outstanding 19,175 19,419 19,995 19,179
- -------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
1995 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------
Sales $ 195,027 161,864 167,601 171,442
Gross profit 60,742 51,853 53,839 53,641
Pre-opening costs 900 488 1,326 868
Income (loss) from operations (2,866) 4,726 859 1,723
Income (loss) before income taxes (2,947) 4,617 572 1,080
Net income (loss) (4,539) 2,845 (156) (175)
Net income (loss) per share $ (0.24) 0.15 (0.01) (0.01)
Shares/weighted average shares outstanding 18,750 18,900 18,988 18,961
- -------------------------------------------------------------------------------------------------
Results for the fourth quarter of fiscal year 1996 include costs totaling
approximately $36.2 million (pre-tax) related to the acquisition of Fresh
Fields. Quarterly results for fiscal year 1995 combine Whole Foods Market
historical results for each fiscal quarter with Fresh Fields results restated to
those fiscal quarters and therefore do not total to fiscal year 1995 results in
the Consolidated Statements of Operations.
Whole Foods Market, Inc. and Subsidiaries
Management's Discussion & Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources
At September 29, 1996, the Company's working capital was approximately $4.9
million and the ratio of current assets to current liabilities was 1.09 to 1.0.
Net cash flow from operating activities was approximately $26.5 million, $32.4
million and $21.3 million in fiscal 1996, 1995 and 1994, respectively.
In December 1994 Whole Foods Market entered into a bank credit agreement which
provides for a revolving line of credit of up to $75 million. The amounts
borrowed under this agreement are convertible into a four year term loan upon
the expiration of the revolving credit term on June 30, 1999.Principal payments
are to be made in quarterly installments beginning September 30, 1999. This
credit agreement contains certain restrictive covenants, including restrictions
upon the payment of dividends on common stock. The credit agreement also
contains certain affirmative covenants, including the maintenance of certain
financial ratios as defined in the agreement. All outstanding amounts borrowed
under this agreement bear interest at the Company's option of either a defined
base rate or the Eurodollar rate plus a premium. In May 1996 the Company
refinanced a portion of this debt with the issuance of $40 million of senior
unsecured notes, bearing interest at 7.29% and payable in seven equal annual
installments beginning May 16, 2000. The notes contain certain affirmative and
negative covenants, including maintenance of certain financial ratios. At
September 29, 1996 and September 24, 1995 approximately $44.1 million and $46.1
million, respectively, was drawn under the line of credit agreement. Net cash
flow from financing activities was approximately $37.7 million, $43.9 million
and $30.3 million in fiscal 1996, 1995 and 1994, respectively.
Whole Foods Market's principal capital requirements have been the funding of
the development or acquisition of new stores and, to a lesser extent, the
resultant increase in working capital requirements. The Company estimates that
cash requirements to open a new store will range from $3 million to $12 million
(after giving effect to any landlord construction allowance). This excludes new
store inventory of approximately $400,000, a substantial portion of which is
financed by the vendors of Whole Foods Market. In fiscal 1997, Whole Foods
Market plans to open approximately five new stores, relocate two existing stores
and will have under development stores that will open in fiscal 1998. The
Company will incur additional capital expenditures in fiscal 1997 in connection
with ongoing equipment upgrades and resets at its existing stores and continued
development of its management information systems. Net cash flow used by
investing activities was approximately $71.0 million, $89.7 million and $48.0
million in fiscal 1996, 1995 and 1994, respectively. The Company expects that
cash generated from operations and bank borrowings will be sufficient to fund
its planned store openings and other cash needs through the end of fiscal 1997,
absent any material cash acquisitions.
Adoption of Accounting Standards
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards no. 121 (Accounting for the Impairment of
Long-Lived Assets), which is effective for fiscal years beginning after December
15, 1995. The Company plans to adopt Statement no.121 in fiscal year 1997. The
Company does not anticipate any material impact on its financial statements as a
result of the adoption of Statement no. 121. The FASB also has issued Statement
of Financial Accounting Standards no. 123 (Accounting for Stock-Based
Compensation), which is effective for fiscal years beginning after December 15,
1995. The Company plans to adopt Statement no.123 in fiscal year 1997. The
Company has not determined the impact of and whether the fair value based method
of accounting for stock-based compensation will be adopted for purposes of
preparing its basic financial statements.
Disclaimer on Forward Looking Statements
Except for the historical information contained herein, the matters discussed in
this analysis are forward looking statements that involve risks and
uncertainties, including but not limited to general business conditions, the
timely development and opening of new stores, the impact of competition, and the
other risks detailed from time to time in the Company's SEC reports, including
the report on Form 10-K for the year ended September 29, 1996.
Item 8. Financial Statements and Supplementary Data
See Item 14 (a).
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information included under the caption "Directors and Executive
Officers" in the Company's proxy statement for the annual meeting of
shareholders to be held on March 24, 1997, to be filed with the Commission on or
before January 27, 1997, is incorporated herein by reference.
Item 11. Executive Compensation
The information included under the caption "Directors and Executive
Officers--Executive Compensation" in the Company's proxy statement for the
annual meeting of shareholders to be held on March 24, 1997, to be filed with
the Commission on or before January 27, 1997, is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information included under the caption "Beneficial Ownership of Common
Stock" in the Company's proxy statement for the annual meeting of shareholders
to be held on March 24, 1997, to be filed with the Commission on or before
January 27, 1997, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information included under the caption "Directors and Executive
Officers--Certain Transactions" in the Company's proxy statement for the annual
meeting of shareholders to be held on March 24, 1997, to be filed with the
Commission on or before January 27, 1997, is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Schedules.
Reference is made to the listing on page F-1 of all financial
statements and schedules filed as a part of this report.
(b) Reports on Form 8-K
The registrant filed on August 30, 1996 a Form 8-K reporting
on the consummation of the merger agreement with Fresh Fields.
Financial statements were incorporated from Form S-4 (File No.
333-7719).
(c) (3) Exhibits
Reference is made to the Exhibit Index on page E-1 for a list
of all exhibits filed as a part of this report.
Whole Foods Market, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets at September 29, 1996 and September 24, 1995
Consolidated Statements of Operations for the fiscal years ended September 29,
1996, September 24, 1995 and September 25, 1994
Consolidated Statements of Shareholders' Equity for the fiscal years ended
September 29, 1996, September 24, 1995 and September 25, 1994
Consolidated Statements of Cash Flows for the fiscal years ended September 29,
1996, September 24, 1995 and September 25, 1994
Notes to Consolidated Financial Statements
Whole Foods Market, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors
Whole Foods Market, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Whole Foods
Market, Inc. and subsidiaries ("Company") as of September 29, 1996 and September
24, 1995 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the fiscal years in the three-year period
ended September 29, 1996. 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 generally accepted auditing
standards. 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 29, 1996 and September 24, 1995, and the
results of their operations and their cash flows for each of the fiscal years in
the three-year period ended September 29, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick, LLP
Austin, Texas
November 15, 1996
Whole Foods Market, Inc. and Subsidiaries
Consolidated Balance Sheets In thousands, except share data
September 29, 1996 and September 24, 1995
Assets
1996 1995
- --------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 1,720 8,597
Trade accounts receivable 4,706 2,986
Merchandise inventories 38,077 30,974
Prepaid expenses and other current assets 5,433 4,269
Deferred income taxes 11,692 1,637
- --------------------------------------------------------------------------------------------------------
Total current assets 61,628 48,463
- --------------------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation and amortization 197,178 165,888
Acquired leasehold rights, net of accumulated amortization 6,991 7,029
Excess of cost over net assets acquired, net of accumulated amortization 36,722 37,644
Other assets, net of accumulated amortization 8,085 7,790
- --------------------------------------------------------------------------------------------------------
$ 310,604 266,814
- --------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
1996 1995
- --------------------------------------------------------------------------------------------------------
Current liabilities:
Current installments of long-term debt and capital lease obligations $ 1,014 1,815
Trade accounts payable 22,756 17,106
Accrued payroll, bonus and employee benefits 9,983 13,992
Other accrued expenses 22,988 19,950
- --------------------------------------------------------------------------------------------------------
Total current liabilities 56,741 52,863
- --------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations, less current installments 84,277 51,906
Deferred rent liability 5,607 4,725
Other long-term liabilities 10,819 542
Deferred income taxes 6,713 4,145
- --------------------------------------------------------------------------------------------------------
Total liabilities 164,157 114,181
- --------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value, 50,000,000 shares authorized; 19,179,000 and
18,416,000 shares issued and outstanding in 1996 and 1995, respectively 170,122 162,869
Retained deficit (23,675) (10,236)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 146,447 152,633
- --------------------------------------------------------------------------------------------------------
Commitments and contingencies
$ 310,604 266,814
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Operations In thousands, except per share data Fiscal
Years Ended September 29, 1996, September 24, 1995 and September 25, 1994
1996 1995 1994
- ---------------------------------------------------------------------------------------------
Sales $ 892,098 709,935 572,050
Cost of goods sold and occupancy costs 613,056 480,781 387,682
- ---------------------------------------------------------------------------------------------
Gross profit 279,042 229,154 184,368
- ---------------------------------------------------------------------------------------------
Direct store expenses 217,048 183,655 144,383
General and administrative expenses 33,559 30,777 25,151
Pre-opening costs 3,964 4,029 3,387
Relocation costs 1,939 2,332 5,758
Non-recurring expenses 38,516 o 282
- ---------------------------------------------------------------------------------------------
Income (loss) from operations (15,984) 8,361 5,407
- ---------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (4,671) (2,368) (109)
Interest and other income 10 427 373
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes (20,645) 6,420 5,671
Provision (credit) for income taxes (3,411) 5,347 6,035
- ---------------------------------------------------------------------------------------------
Net income (loss) $ (17,234) 1,073 (364)
- ---------------------------------------------------------------------------------------------
Net income (loss) per common share $ (0.90) 0.06 (0.02)
Shares outstanding, 1996 and 1994, and
weighted average shares outstanding, 1995 19,179 18,924 18,356
- ---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity In thousands
Fiscal Years Ended September 29, 1996, September 24, 1995 and September 25, 1994
Retained Total
Shares Common Earnings Shareholders'
Issued Stock (Deficit) Equity
- -----------------------------------------------------------------------------------------------------
Balance at September 26, 1993, as previously reported 12,851 $65,160 10,305 75,465
Adjustments for 1996 pooling-of-interests combination 4,036 68,367 (21,232) 47,135
- -----------------------------------------------------------------------------------------------------
Balance at September 26, 1993, as restated 16,887 133,527 (10,927) 122,600
- -----------------------------------------------------------------------------------------------------
Issuance of common stock 1,277 27,578 o 27,578
Shares subject to expired put option 192 1,308 o 1,308
Accretion to price associated with
common shares subject to put option o o (18) (18)
Net loss o o (364) (364)
- -----------------------------------------------------------------------------------------------------
Balance at September 25, 1994 18,356 162,413 (11,309) 151,104
- -----------------------------------------------------------------------------------------------------
Issuance of common stock 60 456 o 456
Net income o o 1,073 1,073
- -----------------------------------------------------------------------------------------------------
Balance at September 24, 1995 18,416 162,869 (10,236) 152,633
- -----------------------------------------------------------------------------------------------------
Adjustment to conform fiscal year of pooled entity o o 3,491 3,491
Oak Street business combination 195 8 304 312
Issuance of common stock 568 6,187 o 6,187
Tax benefit related to exercise of employee stock options o 1,058 o 1,058
Net loss o o (17,234) (17,234)
- -----------------------------------------------------------------------------------------------------
Balance at September 29, 1996 19,179 $170,122 (23,675) 146,447
- -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Cash Flows In thousands
Fiscal Years Ended September 29, 1996, September 24, 1995 and September 25, 1994
1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Cash flow from operating activities
Net income (loss) $ (17,234) 1,073 (364)
Non-cash expenses included in net income:
Depreciation and amortization 25,525 20,023 15,142
Relocation and closing costs 194 1,106 5,554
Loss on disposal of fixed assets 1,163 615 o
Deferred income taxes (benefit) (6,427) 1,655 1,609
Change in LIFO reserve 746 516 432
Rent differential 882 397 117
Loss provision on disposal of fixed assets 12,477 o o
Loss provision on disposal of other assets 4,124 o o
Lease termination provisions 10,033 o o
Adjustment to conform fiscal year of pooled entity 3,491 o o
Other 267 (364) (7)
Net change in current assets and liabilities:
Trade accounts receivable (1,749) (829) (1,839)
Merchandise inventories (8,500) (7,588) (5,566)
Prepaid expenses and other current assets (2,014) 2,989 (1,760)
Trade accounts payable 5,513 2,240 4,865
Accrued payroll, bonus and employee benefits (4,010) 3,927 1,697
Other accrued expenses 1,970 6,673 1,415
- -----------------------------------------------------------------------------------------------------
Net cash flow from operating activities 26,451 32,433 21,295
- -----------------------------------------------------------------------------------------------------
Cash flow from investing activities
Acquisition of property and equipment (18,236) (39,251) (27,181)
Development costs of new store locations (50,288) (36,483) (16,788)
Proceeds from the sale of property and equipment o 383 o
Acquired leasehold and licensing rights o (2,836) (4,001)
Payment for purchase of acquired entities, net of cash acquired o (8,947) o
Issuance of note receivable o (2,568) o
Other investing activities (2,480) o o
- -----------------------------------------------------------------------------------------------------
Net cash flow from investing activities (71,004) (89,702) (47,970)
- -----------------------------------------------------------------------------------------------------
(continued)
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued) In thousands Fiscal Years
Ended September 29, 1996, September 24, 1995 and September 25, 1994
1996 1995 1994
Cash flow from financing activities
Net proceeds from long-term borrowings $ 80,000 45,509 9,000
Payments on long-term debt and capital lease obligations (48,511) (2,081) (6,314)
Issuance of stocks and warrants 6,187 456 27,578
- -----------------------------------------------------------------------------------------------------
Net cash flow from financing activities 37,676 43,884 30,264
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,877) (13,385) 3,589
Cash and cash equivalents at beginning of year 8,597 21,982 18,393
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,720 8,597 21,982
- -----------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information Interest and income taxes paid:
Interest $ 3,647 1,821 474
- -----------------------------------------------------------------------------------------------------
Federal and state income taxes $ 3,832 2,841 5,696
- -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Fiscal Years Ended September 29, 1996, September 24, 1995 and September 25, 1994
(1) Corporate Organization
The consolidated Financial statements include the accounts of Whole Foods
Market, Inc. and its wholly-owned subsidiaries ("Company"). All significant
intercompany accounts and transactions are eliminated upon consolidation. Where
appropriate, prior years' financial statements have been reclassified to conform
with the 1996 presentation.
(2) Summary of Significant Accounting Policies
Single industry segment
The Company engages in one line of business, the operation of natural food
supermarkets. As of September 29, 1996, the Company operated 68 stores, all of
which are located in the United States.
Definition of fiscal year
The Company reports its results of operations on a 52- or 53-week fiscal year
ending on the last Sunday in September. Fiscal year 1996 is a 53- week year.
Fiscal years 1995 and 1994 are 52-week years.
Cash equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with an original maturity of 90 days or
less to be cash equivalents.
Inventories
Inventories, both retail and wholesale, are valued at the lower of cost or
market. Cost is principally determined by the last-in, first-out (LIFO) method.
The inventory of one subsidiary is determined by the first-in, first-out (FIFO)
method. The excess of estimated current costs over LIFO carrying value was
approximately $2,426,000 and $1,680,000 at September 29, 1996 and September 24,
1995, respectively.
Property and equipment
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation is provided over the estimated useful lives (5 to 15
years) using the straight-line method. Leasehold improvements are amortized on
the straight-line method over the shorter of the estimated useful lives of the
improvements or the terms of the related leases.
Pre-opening costs include hiring and training personnel, supplies and certain
occupancy and miscellaneous costs related to new store locations, and are
expensed in the quarter of store opening. Capitalized pre-opening costs related
to stores not yet open at September 29, 1996 totaled $658,000. There were no
significant capitalized pre-opening costs related to stores not yet open at
September 24, 1995. Costs related to a projected site determined to be
unsatisfactory and general site selection costs which cannot be identified with
a specific store location are charged to operations currently.
Other assets
Acquired leasehold rights are amortized as rent expense over the remaining lease
term at the date of acquisition using the straight-line method. Accumulated
amortization of acquired leasehold rights at September 29, 1996 and September
24, 1995 is $895,000 and $672,000, respectively. Excess of cost over net assets
acquired is amortized over 40 years using the straight-line method. Accumulated
amortization of excess of cost over net assets acquired at September 29, 1996
and September 24, 1995 is $4,689,000 and $3,547,000, respectively.
The carrying value of the excess cost over net assets acquired is evaluated
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 of each subsidiary.
Certain costs associated with the issuance of debt are capitalized and
amortized over the life of the related agreement using the straight-line method.
Included in other assets at September 29,1996 and September 24,1995 is a note
receivable of approximately $2,459,000 and $2,568,000, respectively. Accumulated
amortization of other assets at September 29, 1996 and September 24, 1995 is
$455,000 and $774,000, respectively.
(continued)
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(2) Summary of Significant Accounting Policies, continued
Income taxes
The Company uses the asset and liability approach which accounts for deferred
income taxes by applying statutory tax rates in effect at the balance sheet date
to differences between the book basis and the tax basis of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The deferred tax assets and
liabilities are adjusted in income to reflect changes in tax laws or rates in
the period that includes the enactment date.
Net income (loss) per common and common equivalent share
Net income per common and common equivalent share are based on the weighted
average number of shares outstanding during the of the fiscal period. Net loss
per common share is based on the actual number of shares outstanding at the end
of the fiscal period. Common stock options (whether or not exercisable) are
common stock equivalents and have been included in the computation of primary
net income per common and common equivalent share when they are dilutive.
Options outstanding have been included in the computation of primary and fully
diluted net income per common and common equivalent share based on the number of
shares assumable upon exercise less the number of shares assumed to be
repurchased at the greater of the average or ending market price per share
determined on a quarterly basis. Fully diluted earnings per share are not
significantly different from primary earnings per share.
Net loss for calculation of primary and fully diluted earnings per share in
1994 was adjusted for the income effect of the accretion to exercise price
associated with common shares subject to put option.
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. Estimates are used when accounting for depreciation and
amortization, employee benefit plans, taxes, restructuring reserves and
contingencies.
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(3) Business Combinations
Fresh Fields Markets, Inc.
On June 13, 1996 the Board of Directors of the Company approved the merger with
Fresh Fields Markets, Inc. (Fresh Fields), which operated natural foods
supermarkets in Washington D.C., Chicago, Philadelphia and New York, in exchange
for approximately 4,750,000 shares of the Company's common stock plus the
assumption of approximately 399,000 outstanding options to purchase common
stock. The merger was completed on August 30, 1996 and was accounted for using
the pooling-of-interests method.
Financial information for the periods prior to the business combination is
summarized below. The combined financial statement amounts are based on the
respective historical financial statements and the notes thereto. The combined
sales and net income (loss) summarized below combine the Company's historical
sales and net income (loss) for the fiscal years ended September 29,1996,
September 24, 1995 and September 25, 1994, with Fresh Fields historical sales
and net loss for the twelve months ended September 30, 1996, and the fiscal
years ended December 30, 1995 and December 31, 1994 (in thousands except per
share data).
1996 1995 1994
- --------------------------------------------------------------------------------
Sales
Whole Foods Market $ 622,246 496,374 401,685
Fresh Fields 269,852 213,561 170,365
- --------------------------------------------------------------------------------
Combined $ 892,098 709,935 572,050
- --------------------------------------------------------------------------------
Net income (loss)
Whole Foods Market $ (16,289) 8,220 8,639
Fresh Fields (945) (7,147) (9,003)
- --------------------------------------------------------------------------------
Combined $ (17,234) 1,073 (364)
- --------------------------------------------------------------------------------
Combined net income (loss) per share $ (0.90) 0.06 (0.02)
- --------------------------------------------------------------------------------
Statement of operations amounts for Fresh Fields which are included in both the
September 29, 1996 and September 24, 1995 columns in the accompanying
consolidated statements of operations and shareholders' equity are for the
three-month period ended December 30, 1995, which is summarized as follows (in
thousands):
- --------------------------------------------------------------------------------
Revenues $ 63,294
Expenses 59,803
- --------------------------------------------------------------------------------
Net income $ 3,491
- --------------------------------------------------------------------------------
Oak Street Market
In December 1995, the Company completed the acquisition of Natural Merchants
Exchange, Inc. doing business as Oak Street Market (Oak Street), which operated
a natural foods market in Evanston, Illinois, in exchange for approximately
195,000 shares of common stock. The acquisition was accounted for using the
pooling-of-interests method. Due to the immateriality of Oak Street financial
statements to the Company's consolidated financial statements, financial
information for the periods prior to the combination has not been restated. An
adjustment to decrease retained deficit by $304,000 has been recorded to include
results of Oak Street operations for the periods prior to the combination in
these financial statements. Revenue and results of operations of Oak Street for
the period from September 25, 1995 through the date of acquisition are not
material to the combined results.
(continued)
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(3) Business Combinations, continued
Cana Foods, Inc. and Unicorn Village, Ltd.
In February 1995, the Company acquired the outstanding stock of Cana Foods, Inc.
doing business as Bread of Life, which operated two natural foods supermarkets
in Northern California, in exchange for approximately $4,999,000 in cash. The
acquisition was accounted for using the purchase method and the excess of cost
over fair value of the assets acquired of approximately $4,393,000 was allocated
to goodwill, which is being amortized on a straight-line basis over 40 years.
Also in February 1995,the Company acquired substantially all assets and assumed
certain liabilities of Unicorn Village, Ltd. (Unicorn), a natural foods
supermarket in Southern Florida. Consideration for this acquisition was in the
form of cash of approximately $4,110,000 plus $125,000 a year for a five-year
noncompetition agreement. The acquisition was accounted for using the purchase
method, and the excess of cost over fair value of the assets acquired of
approximately $3,481,000 was allocated to goodwill, which is being amortized on
a straight-line basis over 40 years.
The fair values of Bread of Life's and Unicorn's assets and liabilities at the
date of acquisition are presented as follows (in thousands):
Bread of Life Unicorn
- -------------------------------------------------------------------------------------------------
Current assets $ 775 968
Property and equipment 623 478
Other assets * 19
Goodwill 4,393 3,481
Current liabilities (781) (804)
Other liabilities (11) (32)
- -------------------------------------------------------------------------------------------------
Net assets acquired $ 4,999 4,110
- -------------------------------------------------------------------------------------------------
Pro forma results of operations are not presented due to the immaterial effect
of the company acquired on consolidated results of operations.
(4) Non-recurring Expenses
Non-recurring expenses for fiscal year 1996 consist primarily of transaction and
other costs associated with the acquisition of Fresh Fields and with the
reorganization of the Southern California region, including severance costs and
expenses related to changing the names of the stores from Mrs. Gooch's to Whole
Foods Market, as follows (in thousands):
- -------------------------------------------------------------------------------------------------
Transaction-related costs and severance $ 8,577
Duplicate systems disposal costs and other transaction-related accounting adjustments 6,730
Store closing and relocation costs 20,907
- -------------------------------------------------------------------------------------------------
Total costs associated with the acquisition of Fresh Fields 36,214
Southern California reorganization costs 2,144
Other 158
- -------------------------------------------------------------------------------------------------
Total non-recurring expenses $ 38,516
- -------------------------------------------------------------------------------------------------
Expenses including losses on the disposition of store assets and lease
termination costs have been recognized pursuant to a plan initiated at the time
of the Fresh Fields acquisition to close or relocate duplicate stores.
Specifically, the plan includes the following store changes: (1) the Fresh
Fields Elston store in the Chicago area was closed in September 1996; (2) the
Whole Foods Market Oak Street store in the Chicago area was closed in September
1996; (3) the Fresh Fields Gaithersburg store in the Washington DC area was
closed in November 1996 just prior to the opening of the Whole Foods Market
Vienna store; and, (4) the Fresh Fields Evanston and Naperville stores in the
Chicago area will be relocated in 1997 to two nearby Whole Foods Market stores
which are currently under construction. Fiscal 1996 revenue and net operating
income for these stores totaled approximately $53,395,000 and $513,000,
respectively. At September 29, 1996, the final disposition of store assets and
the termination of operating leases at these locations remain under the plan,
which will be completed as soon as is practicable after the related stores are
closed or relocated. Liabilities totaling approximately $10,033,000 for
remaining rent and lease termination costs have been recorded as part of store
closing and relocation costs.
Costs associated with the reorganization of the Southern California region
include severance and relocation payments, costs associated with changing the
names of the stores from Mrs. Gooch's to Whole Foods Market, systems and process
conversion costs and other reorganization expenses.
Non-recurring expenses for fiscal year 1994 include damages and other costs
associated with the Southern California earthquake in that year.
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(5) Quarterly Results (unaudited)
Quarterly results of entities acquired in purchase business combinations are
included from the respective dates of acquisition. For fiscal year 1996, the
first quarter is 16 weeks, the second and third quarters are each 12 weeks, and
the fourth quarter is 13 weeks. For fiscal year 1995, the first quarter is 16
weeks and the remaining quarters are each 12 weeks. Quarterly results for the
years ended September 29, 1996 and September 24, 1995 are as follows (in
thousands except per share data):
1st 2nd 3rd 4th
1996 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------
Sales $ 244,986 203,912 213,402 229,798
Gross profit 76,205 65,829 68,256 68,752
Pre-opening costs 383 2,320 609 652
Non-recurring expenses * 1,984 * 36,532
Income (loss) from operations 3,429 3,259 7,827 (30,499)
Income (loss) before income taxes 2,563 2,399 6,956 (32,563)
Net income (loss) 41 1,517 4,663 (23,455)
Net income (loss) per share $ 0.00 0.08 0.23 (1.22)
Shares/weighted average shares outstanding 19,175 19,419 19,995 19,179
- -----------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
1995 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------
Sales $ 195,027 161,864 167,601 171,442
Gross profit 60,742 51,853 53,839 53,641
Pre-opening costs 900 488 1,326 868
Income (loss) from operations (2,866) 4,726 859 1,723
Income (loss) before income taxes (2,947) 4,617 572 1,080
Net income (loss) (4,539) 2,845 (156) (175)
Net income (loss) per share $ (0.24) 0.15 (0.01) (0.01)
Shares/weighted average shares outstanding 18,750 18,900 18,988 18,961
- -----------------------------------------------------------------------------------------------------
Results for the fourth quarter of fiscal year 1996 include costs totaling
approximately $36,200,000 (pre-tax) related to the acquisition of Fresh Fields.
Quarterly results for fiscal year 1995 combine Whole Foods Market historical
results for each fiscal quarter with Fresh Fields results restated to those
fiscal quarters and therefore do not total to fiscal year 1995 results in the
Consolidated Statements of Operations.
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(6) Property and Equipment
Balances of major classes of property and equipment are as follows (in
thousands):
1996 1995
- ----------------------------------------------------------------------------------------
Land and building $ 12,943 11,065
Fixtures and equipment 112,975 105,077
Leasehold improvements 121,712 82,568
Vehicles 462 775
Equipment under capital lease 1,891 2,512
Construction in progress 14,253 14,499
- ----------------------------------------------------------------------------------------
264,236 216,496
Less accumulated depreciation and amortization 67,058 50,608
- ----------------------------------------------------------------------------------------
$ 197,178 165,888
- ----------------------------------------------------------------------------------------
Depreciation and amortization expense related to property and equipment was
approximately $23,633,000, $18,112,000 and $13,589,000 for fiscal years 1996,
1995 and 1994, respectively.
Leasehold improvements and construction in progress include approximately
$1,183,000, $809,000 and $372,000 of interest capitalized during 1996, 1995 and
1994, respectively.
(7) Long-Term Debt
The Company has long-term debt and obligations under capital leases as follows
(in thousands):
1996 1995
- ----------------------------------------------------------------------------------------
Obligations under capital lease agreements for equipment,
due in monthly installments through 1998 $ 1,139 2,488
Notes payable to banks 44,100 51,100
Senior unsecured notes 40,000 *
Other notes payable 52 133
- ----------------------------------------------------------------------------------------
85,291 53,721
Less current installments 1,014 1,815
- ----------------------------------------------------------------------------------------
$ 84,277 51,906
- ----------------------------------------------------------------------------------------
The Company has entered into a bank credit agreement which provides for a
revolving line of credit of up to $75,000,000. The amounts borrowed under this
agreement are convertible into a four year term loan upon the expiration of the
revolving credit term on June 30, 1999. Principal payments are to be made in
quarterly installments beginning September 30, 1999. This credit agreement
contains certain restrictive covenants, including restrictions upon 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 the Company's option of either a defined base rate or the
Eurodollar rate plus a premium. Commitment fees ranging from 0.1875% to 0.25% of
the undrawn amount are payable under this agreement. At September 29, 1996 and
September 24, 1995, approximately $44,100,000 and $46,100,000, respectively, was
drawn under this agreement and the Company was in compliance with the debt
covenants.
In July 1995, Fresh Fields entered into a credit agreement with several banks
which provided for direct borrowings and the issuance of standby letters of
credit. A balance of $5,000,000 was outstanding under this credit agreement as
of September 24, 1995. The outstanding balance under this credit agreement was
paid off concurrent with the acquisition of Fresh Fields.
In May 1996,the Company issued $40,000,000 of senior unsecured notes payable
to refinance existing indebtedness. The notes bear interest at 7.29% and are
payable in seven equal installments beginning May 16, 2000. The notes contain
certain affirmative and negative covenants, including maintenance of certain
financial ratios as defined in the agreement. At September 29, 1996, the Company
was in compliance with the debt covenants.
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(8) Leases
The Company and its subsidiaries are 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 1996 to 2017. Rental expense charged to operations under operating leases
for the fiscal years ended 1996, 1995 and 1994 aggregated approximately
$24,644,000, $19,300,000 and $14,486,000, respectively.
Minimum rental commitments required by all noncancelable leases are
approximately as follows (in thousands):
Capital Operating
- --------------------------------------------------------------------------------
1997 $ 985 26,821
1998 148 28,399
1999 28 28,601
2000 * 28,724
2001 * 28,838
Future years * 263,409
- --------------------------------------------------------------------------------
1,161
Less amounts representing interest 22
- --------------------------------------------------------------------------------
1,139
Less current installments 965
- --------------------------------------------------------------------------------
$ 174
- --------------------------------------------------------------------------------
Minimum rentals for operating leases do not include certain amounts of
contingent rentals which may become due under the provisions of leases for
retail space. These agreements provide that minimum rentals may be increased
based on a percent of annual sales from the retail space. During 1996, 1995 and
1994, the Company paid contingent rentals of approximately $981,000, $587,000
and $367,000, respectively.
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(9) Income Taxes
Components of total income tax expense (benefit) are as follows (in thousands):
1996 1995 1994
- -------------------------------------------------------------------------------------------------
Current federal income tax $ 3,046 2,687 3,347
Current state income tax 925 1,005 1,079
- -------------------------------------------------------------------------------------------------
Total current tax 3,971 3,692 4,426
- -------------------------------------------------------------------------------------------------
Deferred federal income tax (7,085) 1,358 1,315
Deferred state income tax (297) 297 294
- -------------------------------------------------------------------------------------------------
Total deferred tax (7,382) 1,655 1,609
- -------------------------------------------------------------------------------------------------
Total income tax expense (benefit) $ (3,411) 5,347 6,035
- -------------------------------------------------------------------------------------------------
Actual income tax expense (benefit) differed from the amount computed by
applying statutory corporate income tax rates to income before taxes as follows
(in thousands):
1996 1995 1994
- -------------------------------------------------------------------------------------------------
Federal tax based on statutory rates $ (7,126) 2,183 1,928
Increase (reduction) in income taxes resulting from:
Net loss of pooled entity 768 2,465 3,102
Non-deductible merger transaction costs 1,682 * *
Non-deductible amortization of cost in
excess of net assets acquired 348 327 307
Other, net 609 (474) (207)
Deductible state income taxes (319) (457) (468)
- -------------------------------------------------------------------------------------------------
Total federal taxes (4,038) 4,044 4,662
State income taxes 627 1,303 1,373
- -------------------------------------------------------------------------------------------------
Total income tax expense (benefit) $ (3,411) 5,347 6,035
- -------------------------------------------------------------------------------------------------
(continued)
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(9) Income Taxes, continued
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows
(in thousands):
Deferred tax assets 1996 1995
- --------------------------------------------------------------------------------------------------
Compensated absences, principally due to Financial reporting accrual $ 990 1,853
Rent differential, principally due to Financial reporting pro-rata expense 838 968
Estimated buyout of capital leases not currently deductible for tax purposes 341 313
Estimate of difference between fair market value of store operating leases
and actual amounts paid 270 261
Capital leases treated as operating leases for tax purposes 49 250
Inventories, principally due to additional costs inventoried for tax
purposes pursuant to the Tax Reform Act of 1986 530 288
Reorganization costs not currently deductible 8,623 1,091
Alternative minimum tax credit 1,543 *
Acquired net operating loss carryforwards 10,765 11,060
Other 324 280
- --------------------------------------------------------------------------------------------------
Total gross deferred tax assets 24,273 16,364
Valuation allowance (10,765) (12,460)
- --------------------------------------------------------------------------------------------------
Total net deferred tax assets $ 13,508 3,904
- --------------------------------------------------------------------------------------------------
Deferred tax liabilities 1996 1995
- --------------------------------------------------------------------------------------------------
Financial basis of fixed assets in excess of tax basis $ (7,736) (5,765)
Capitalized acquisition costs expensed for tax purposes (580) (524)
Other (213) (123)
- --------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (8,529) (6,412)
- --------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 4,979 (2,508)
- --------------------------------------------------------------------------------------------------
The Company has provided a full valuation allowance for the net operating loss
carryforwards acquired in the Fresh Fields business combination based upon
review of the historical performance of the acquired subsidiary and other tax
limitations. The valuation allowance decreased by approximately $1,695,000 in
1996 and increased by approximately $2,322,000 in 1995. Management believes it
is more likely than not that the Company will fully realize the remaining
deferred tax assets in the form of future tax deductions since the temporary
differences will reverse in the near future.
As of September 29, 1996, the Company has the following tax net operating loss
carryforwards available (in thousands):
Expiration
- --------------------------------------------------------------------------------
2006 $ 63
2007 3,702
2008 10,784
2009 8,678
2010 4,734
- --------------------------------------------------------------------------------
Total $ 27,961
- --------------------------------------------------------------------------------
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(10) Shareholders' Equity
The Company has stock option and incentive plans for the purchase of up to
4,367,000 shares of common stock by employees and directors. Options granted
under these plans are exercisable over seven to ten years from date of grant,
subject to a four to five year vesting schedule. During fiscal 1996, options
were exercised for the purchase of 558,000 shares at $0.90-27.02 per share.
During fiscal 1995, options were exercised for the purchase of 38,000 shares at
$1.20-15.31 per share. During fiscal year 1994, options were exercised for the
purchase of 138,000 shares at $1.20-11.07 per share.
A summary of options outstanding at September 29, 1996 follows (in thousands
except exercise price):
Total shares Total shares
stated in exercisable at
Fiscal Year Options Granted Options Granted Sept. 29, 1996 Exercise Price
- ------------------------------------------------------------------------------------------------
1987 45 45 $ 1.20
1988 20 20 2.50
1989 40 40 2.50
1991 177 177 3.13-3.40
1992 155 117 3.40-11.07
1993 450 231 8.75-22.51
1994 509 299 16.31-25.22
1995 531 207 0.90-27.02
1996 702 40 17.38-33.50
- ------------------------------------------------------------------------------------------------
2,629 1,176
- ------------------------------------------------------------------------------------------------
(11) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable,
trade accounts payable, accrued payroll, bonus and employee benefits, and other
accrued expenses approximate fair value because of the short maturity of those
instruments. The carrying value of notes payable to bank approximates fair value
due to variable interest rates charged on these notes. The carrying value and
fair value of senior unsecured notes at September 29, 1996 is $40,000,000 and
approximately $39,340,000, respectively. The Company estimated the fair value of
senior unsecured notes by discounting the future cash flows at the rates
currently available to the Company for similar debt instruments of comparable
maturities.
(12) Commitments and Contingencies
The Company provides partially self-insured, voluntary employee benefits plans
which provide, among other benefits, health care benefits to participating
employees. The plans are designed to provide specified levels of coverage, with
excess insurance coverage provided by a commercial insurer. The Company's
exposure related to claims associated with unreported cases or underestimated
future costs associated with known cases for which the Company is partially
self-insured at September 29, 1996 has been estimated based on management's
review of claims outstanding at fiscal year end, claims reported subsequent to
fiscal year end and management's knowledge of the typical length of time from
date of occurrence to date of reported claim.
The Company is a non-subscriber to workers' compensation insurance in Texas.
Claims associated with unreported cases at September 29, 1996 are not considered
to be significant based on management's review of 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. Due to the nature of job related
injury claims, the inherent difficulty in estimating the ultimate costs of fully
developed claims and because of the wide range of potential losses, the
Company's reserve estimate could be more or less than the amount ultimately paid
upon settlement of claims.
The Company is a party to certain legal proceedings arising in the ordinary
course of business. After consultation with counsel and a review of available
facts, management believes that damages, if any, arising from litigation will
not be material to the Company's Financial position or results of operations.
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 27, 1996 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 27, 1996.
Name Title
---- -----
/s/ John 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/ Dr. Cristina G. Banks
- -------------------------
Dr. Cristina G. Banks Director
/s/ Dr. John B. Elstrott
- ------------------------
Dr. John B. Elstrott Director
/s/ Avram J. Goldberg
- ----------------------
Avram J. Goldberg Director
/s/ Linda A. Mason
- ------------------
Linda A. Mason Director
/s/ Dr. Ralph Z. Sorenson
- --------------------------
Dr. Ralph Z. Sorenson Director
/s/ James P. Sud
- ----------------
James P. Sud Director
INDEX TO EXHIBITS
- -----------------
Exhibits
--------
3.1 Restated Articles of Incorporation of the Registrant, as amended
(2)
3.2 By-laws of the Registrant adopted May 23, 1995 (6)
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)
10.5 Form of Retention Agreement between the executive officers of the
Registrant and the Registrant (3)
10.6 Form of amendment to Retention Agreement (1)
10.7 Amended and Restated Loan Agreement, dated December 27, 1994,by
and among the Registrant, the subsidiaries of the Registrant and
Texas Commerce Bank National Association (6)
10.8 First Amendment dated May 16, 1996 to Amended And Restated Loan
Agreement, dated December 27, 1994, by and among Registrant, the
subsidiaries of the Registrant and Texas Commerce Bank National
Association (7)
10.9 1992 Stock Option Plan for Team Members, as amended (1)
10.10 1992 Stock Option Plan for Outside Directors (1)
10.11 1993 Team Member Stock Purchase Plan (1)
10.12 Second Amended and Restated 1991 Stock Incentive Plan of Fresh
Fields Markets, Inc. with amendments thereto (4)
10.13 1994 Director Stock Option Plan with amendments thereto (4)
10.14 Note Purchase Agreement, dated May 16, 1996, by and among the
registrant and the purchasers of $40 million of 7.29% Senior Notes
due May 16, 2006 (7)
23.1 Consent of KPMG Peat Marwick LLP (8)
27.1 Financial Data Schedule (8)
99.1 Proxy Statement for Annual Meeting of Shareholders to be held on
March 24, 1997 (5)
(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-8 (No. 33-11273)
and incorporated herein by reference.
(5) To be filed with the Commission on or before January 27, 1997 and
incorporated herein by reference.
(6) Filed as an exhibit to registrants Form 10-K for year ended September
24, 1995 and incorporated herein by reference.
(7) Filed as an exhibit to registrants Form 10-K for year ended September
29, 1996 and incorporated herein by reference.
(8) Filed herewith.
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Whole Foods Market, Inc.:
We consent to incorporation by reference in the registration statements (No.
333-11271 and No. 333-11273) on Form S-8, the registration statement (No.
333-7719) on Form S-4, and the registration statement (No. 333-968) on Form S-3
of Whole Foods Market, Inc. of our report dated November 15, 1996, relating to
the consolidated balance sheets of Whole Foods Market, Inc. and subsidiaries as
of September 29, 1996 and September 24, 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
fiscal years in the three fiscal-year period ended September 29, 1996, which
report appears in the September 29, 1996 annual report on Form 10-K of Whole
Foods Market, Inc.
Austin, Texas
July 10, 1997