FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 1999
COMMISSION FILE NUMBER: 0-19797
WHOLE FOODS MARKET, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1989366
(State of (IRS employment
incorporation) identification no.)
601 North Lamar Suite 300
AUSTIN, TEXAS 78703
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
512-477-4455
Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on November 30, 1999 was $1,006,383,630.
The number of shares of the registrant's common stock, no par value, outstanding
as of November 30, 1999 was 25,956,871.
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 27, 2000
are incorporated into Part III to the extent indicated herein.
PART I
Item 1. BUSINESS
Whole Foods Market is the country's largest retailer of natural foods as defined
by sales. The Company opened its first store in Austin, Texas in 1980 and
operated 100 stores in 20 states and the District of Columbia as of September
26, 1999. As a result of both acquisitions and internal expansion, the Company
has grown rapidly from sales of approximately $92.5 million in fiscal 1991 to
approximately $1.6 billion in fiscal 1999. At the end of fiscal 1999, the
Company's stores averaged approximately 26,000 square feet and $16 million in
sales. Sales per gross square foot were approximately $661, which the Company
believes is higher than most conventional supermarkets or food retailers,
including competitors in the large-store segment of the natural foods industry.
Through Amrion, its subsidiary acquired in September 1997, the Company is
engaged in developing, producing and marketing high quality nutriceuticals and
nutritional supplements. Amrion's products include nutriceuticals, herbs, herbal
formulas, vitamins, minerals and homeopathic products. The Company also engages
in specialty coffee roasting and distribution through Allegro Coffee Company,
its subsidiary acquired in December 1997, and in Internet commerce through
WholeFoods.com, its subsidiary formed in fiscal 1999. Internet users can access
information about the Company and its products at http://www.wholefoods.com.
In fiscal 2000, the Company plans to merge Amrion and WholeFoods.com into a new
subsidiary, WholePeople.com. WholePeople.com is intended to be the leading
Internet brand in the "Whole Living" industry and the home page for individuals
who use their purchasing power to express their commitment to a healthy
lifestyle and concern for the environment. The Company will transition its
Internet commerce operations from WholeFoods.com to the WholePeople.com Web site
in fiscal 2000.
Financial information about industry segments is included under the caption
"Segment Information" in the Notes to Consolidated Financial Statements.
The Natural Products Industry
According to a leading trade publication for the industry, natural products
sales have grown to over $25 billion in 1998. The Company's natural product
offerings include natural foods and nutritional supplements. 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.
Sales growth for natural foods has resulted from 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. Sales growth for vitamin and nutritional supplements has
resulted from an increased national interest in preventative health choices,
favorable consumer attitude shifts toward natural health care, increased
consumer willingness toward self-care in resistance to rising health care costs
and a rapidly growing demographic segment of the population over 40 years old
concerned with aging and disease. Additionally, public awareness of the positive
effects of vitamins and other nutritional supplements on health has been
heightened by widely publicized reports of favorable research findings. Recent
estimates indicate that approximately 40% of the U.S. population use nutritional
supplements in some form.
According to a leading trade publication for the industry, there were
approximately 16,500 natural products retail stores in 1998 in the United
States. While natural/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.
Whole Foods Market also believes that the growth of larger supermarket-size
natural foods stores has increased consumer awareness of and demand for natural
foods.
2
Business Strategy
Whole Foods Market is the country's largest sales volume retailer of natural
products. The Company believes its success to date is the result of its ability
to differentiate itself from other retailers competing for consumers' food
dollars by tailoring its product mix, customer service attitude and store
environment to satisfy the needs of the natural foods shopper and to appeal to
the broader market of quality-oriented consumers. Each element of the Company's
strategy is designed to enhance and build the Whole Foods Market brand name and
to engender a high degree of loyalty among the Company's customers.
Product Offerings
o Quality Standards. The Company is committed to offering its customers
the highest quality products. It features products that are free of
artificial flavors, sweeteners, colors, preservatives and added
chemicals. To better ensure quality and to enhance merchandising, the
Company has acquired or developed businesses that manufacture and
distribute significant product categories. For instance, Whole Foods
Market operates regional bakehouses and commissaries, a seafood wharf,
a nutritional supplement manufacturer and a coffee roaster.
o Broad Product Assortment. The Company provides its customers the
convenience of one-stop shopping by offering not only a broader
product selection than is available in smaller natural foods stores
but also by having a full range of merchandise categories comparable
to those available in conventional supermarkets. The Company's stores
carry approximately 20,000 SKU's on average and feature categories
such as prepared foods, vitamins and nutriceuticals, bakery items and
specialty wines and cheeses which the Company believes differentiate
it from many other food retailers.
o Private Label Products. Under the premium "Whole Foods" and "Whole
Kids" labels and the value-priced "365" label, the Company offers its
customers unique, high quality goods available only at Whole Foods
Market stores. The Company developed its private label products to
enhance its offering of natural food brands which are typically not as
well known as larger national brands found in conventional
supermarkets. The Company believes that customers trust the Whole
Foods Market name because of its position as the industry leader and
reputation for quality.
o Competitive Pricing. The Company seeks to price its products at or
below comparable products in its geographic markets.
Company Culture
o Decentralized Team Approach. The Company promotes a decentralized team
approach to store operations in which many personnel, merchandising
and operating decisions are made by employee teams at the individual
store level. This approach allows the Company to better tailor its
store environment and product offering to local markets and customers.
o Employees (Team Members) as "Stakeholders." The Company believes it
has been successful in motivating its team members by making them
stakeholders in the organization through its "gainsharing" programs,
which reward specifically targeted performance such as team labor
productivity, and through its stock option and stock purchase plans.
In addition, since 1996 the Company has made its employer's match in
the Company's 401(k) plan in Company stock.
o Customer Service Attitude. Due to the Company's distinctive company
culture which creates a sense of personal responsibility among its
team members, Whole Foods Market team members' self interest and job
satisfaction are closely tied to ensuring customer satisfaction.
o Sense of Purpose. The Company believes that by promoting healthy,
nutritious and environmentally safe products it helps inspire its team
members by providing them with a greater sense of purpose and mission
in their work.
3
The Shopping Experience
o Large Format Stores. Averaging approximately 26,000 square feet, the
Company's stores are significantly larger than typical natural foods
stores, more closely resembling the size of some conventional
supermarkets.
o Information Orientation. To familiarize customers with natural food
products and to inform them about developments in the natural foods
industry, the Company provides a significant amount of product
information throughout each store. Most stores also contain a
centrally located, fully staffed information booth. In addition, the
Company trains store team members to be knowledgeable about its
products and to provide information and a high level of service to its
customers.
o Appealing Shopping Environment. The Company has designed its stores to
create a sense of warmth, fun and informality. Many stores feature
juice and coffee bars, in-store massage therapists and other amenities
which provide convenience and service to its customers.
In fiscal 1999, the Company adopted an Economic Value Added (EVA) management and
incentive system. In its simplest definition, EVA is equivalent to net operating
profits after taxes minus a charge for the cost of capital necessary to generate
that profit. The Company believes that EVA will have a positive impact on its
financial results as the focus of its incentive programs shifts from the income
statement to the balance sheet. Currently the Company employs over 16,000 Team
Members, and has a culture primarily structured around decentralization, teams,
networking, and individual empowerment. This culture has been one of the
Company's strongest competitive advantages. The Company believes that EVA will
provide a unifying measurement and incentive system that will blend with its
existing empowerment culture to provide essential tools for Team Members to
collectively create additional sustainable shareholder value.
Growth Strategy
Whole Foods Market's growth strategy is to expand through a combination of new
store openings and the acquisition of existing stores. The Company seeks to open
or acquire stores in existing regions and in metropolitan areas where the
Company believes it can become a leading natural foods supermarket. The Company
primarily seeks to open large format stores which range between 25,000 to 50,000
square feet, located on premium real estate sites, often in urban, high
population locales. The Company has also grown through acquisitions, as the
natural foods retailing industry is extremely fragmented and comprised of many
smaller local and regional chains. The Company believes that the acquisition of
smaller chains may provide access to desirable locations and markets and pursues
such acquisitions on an opportunistic basis.
Historical store growth is summarized below:
Fiscal Year (1)
1995 1996 1997 1998 1999
-----------------------------------------------------------
Beginning of year 35 41 68 75 87
New and acquired stores 9 32 9 15 14
Relocations and closures (3) (5) (2) (3) (1)
-------------------------------------------------------------
End of year 41 68 75 87 100
-------------------------------------------------------------
Total square footage, end of year (in thousands) 862 1,563 1,724 2,092 2,584
-------------------------------------------------------------
(1) Stores acquired in pooling transactions are reflected as acquired in the
period in which the applicable transaction closed.
As of November 30, 1999 the Company had signed leases for an additional 29
stores with an average total store size of approximately 35,000 square feet. The
Company expects to open approximately twenty stores per year, including
relocations of existing stores, in each of the next two fiscal years.
4
Products
The Company's stores carry approximately 20,000 SKU's on average of food and
non-food products. The Company's broad product selection 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 carefully monitoring
the market for new products and by responding to customer input. Many national
brands featured in conventional supermarkets are not available at Whole Foods
Market because they do not meet the Company's quality standards. The Company's
product line consists primarily of products from natural food vendors which
typically do not have the resources to build brand recognition with consumers.
Quality Standards. The Company's objective is to sell its customers the highest
quality foods available. The Company defines quality in terms of nutrition,
freshness, appearance and taste and has the following product quality goals:
o Whole Foods. The Company evaluates each and every product that is
sold.
o Natural. The Company features foods that are free from artificial
preservatives, colors, flavors and sweeteners.
o Taste. The Company is passionate about great tasting food and the
pleasure of sharing it with others.
o Freshness. The Company is committed to foods that are fresh, wholesome
and safe to eat.
o Organic. The Company seeks out and promotes organically grown foods.
o Wellness. The Company provides foods and nutritional products that
support health and well-being.
Product Categories. The Company's product offerings include organic and high
quality conventional produce; convenient and tasty prepared foods; high quality
natural and conventional meats; a variety of wild and natural farm-raised
seafood; a bakery featuring Whole Foods Market brand crusty breads; choice
selections of specialty cheeses, beer and wine; a mixture of natural, organic,
gourmet and ethnic grocery products; numerous value priced items in the bulk
department; and a nutrition area offering a complete alternative pharmacy with
holistic remedies, herbs, vitamins and supplements as well as body care.
Private Label Products. The Company has expanded its private label offerings
over the last several years and has developed three different lines of products.
The "Whole Foods" label program began in 1992 and markets "best of class"
premium and super premium products. The Company seeks out artisan food
producers, small batch production and hand-tested recipes for products included
in this program. In 1997, the Company introduced a new line of products under
the "365" label which emphasizes every day value products. The goal of this
program is to find products that meet the Company's quality standards but are
less expensive than alternative products available to the Company. In 1999, the
Company introduced a product line that appeals to its younger customers under
the "Whole Kids" label. The Company markets its private label products to its
customer through special displays and distinctive packaging.
Nutritional Supplements. Amrion currently markets and sells more than 850
products, including nutriceuticals, herbs, herbal formulas, vitamins, minerals
and homeopathic products. Amrion products are dietary nutritional supplements
and not pharmaceutical or medicinal products, and these products are sold under
Company-owned trademarks primarily through direct marketing. Whole Foods Market
introduced private label nutritional supplements and nutriceuticals manufactured
by Amrion in its retail stores during fiscal 1998. Amrion has also assisted in
the redesign of many of the Company's nutrition departments, which have been
merchandised in a more customer-friendly manner with extensive product
information available at point of sale.
5
Store Operations
Team Approach to 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 12 and 350 people, organized into up to
eleven 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; specialty; body care and nutrition
products (nutritional supplements and herbs); customer service; and the
front-end section which runs the customer check-out stations. The Company
promotes a decentralized team approach to store operations in which many
personnel, merchandising and operating decisions are made by employee teams at
the individual store level.
The Company strives to create a company-wide consciousness of "shared fate" by
uniting the self-interests of team members as closely as possible to the
self-interests of customers and of shareholders. One way the Company reinforces
this concept is through its various gainsharing programs, which reward
specifically targeted performance such as team labor productivity. There is also
a team member incentive program which rewards team members for specific goals
such as sales increases of private label products. The Company also reinforces
the shared fate concept by offering team members three programs which encourage
stock ownership. Team members are eligible for stock options under the Team
Member Stock Option Plan either through seniority, promotion or at the
discretion of senior management. Team members can also purchase restricted stock
at a discount through payroll deductions under the Team Member Stock Purchase
Plan. In addition, since 1996 the Company has made its employer's match in the
Company's 401(k) plan in Company stock. The Company believes encouraging team
members to become shareholders aligns the interests of team members with the
interests of its shareholders.
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.
Many team members feel they are contributing to the good of others by selling
clean and nutritious foods, by contributing to long-term sustainable agriculture
and by promoting a pesticide-free and healthier environment. 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 one or more associate store team leaders, as well as with all
the department team leaders, to operate the store as efficiently and profitably
as possible. For the past two years, Fortune magazine has selected Whole Foods
Market, Inc. as one of the "100 Best Companies to Work for in America."
Store Description. Each store's design 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, some stores offer special services such as valet parking or home
delivery.
Site Selection. Each of the stores are generally located in high-traffic
shopping areas and are either freestanding or in strip centers. In selecting
store locations, the Company uses an internally-developed model to analyze
potential markets on such criteria as education levels, population density, and
income levels. After the Company has selected a target site, its consultant does
a comprehensive site study and sales projection. The Company primarily seeks to
open large format stores which range between 25,000 to 50,000 square feet,
located on premier real estate sites, often in urban, high population locales.
Stores currently under development average approximately 35,000 square feet. In
addition, the Company will also opportunistically pursue smaller store sites
which it believes can achieve management's sales and return on investment
targets.
6
The Company typically opens a new store approximately 12 to 24 months 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 approximately $3 million to $12
million, excluding new store inventory (approximately $750,000). The Company
incurred in fiscal 1999 on average approximately $530,000 in pre-opening
expenses for new stores other than relocated stores.
Purchasing and Distribution
The Company's buyers purchase products for retail sale from regional wholesale
suppliers and vendors. Over the last few years, the Company has shifted the
majority of its purchasing operations from the store to the regional and
national level. By purchasing on a regional and national level, the Company is
able to negotiate better volume discounts with major vendors and distributors.
The Company expects upgrades to its information systems to improve the Company's
purchasing leverage by providing product and quantity information by supplier on
a regional and company-wide basis. The Company owns and operates seven regional
distribution centers across the country. The largest of the Company's regional
distribution centers, Texas Health Distributors in Austin, Texas, distributes
natural products to the Company's stores in Texas, Colorado and Louisiana as
well as to other food retailers.
The other six regional distribution centers primarily distribute produce and the
Company's private label products to Company stores in their respective regions.
In addition, the Company owns a seafood wharf, a produce procurement center, a
specialty coffee roaster and distributor and has established regional
commissaries and bakehouses, all of which distribute products to the Company's
stores. Relocation of Amrion's operations to the Company's new manufacturing,
distribution warehousing and office facilities in Thornton, Colorado began in
fiscal 1999 and will be completed in fiscal 2000.
Amrion currently imports approximately 75% of its raw materials from various
foreign countries. Amrion has developed strategic partnerships with key domestic
and international raw material suppliers. Supply contracts between Amrion and
principal raw material suppliers are negotiated each year and provide reasonable
assurance that Amrion's supply of raw materials will not be interrupted.
However, alternative sources of Amrion's materials are generally available in
the event a supplier is unable to deliver as specified in the written supply
contract. The termination of supply by one or more of its vendors could have a
temporary adverse effect on Amrion's sales. The cost incurred by Amrion for its
raw materials could rise in the event of a deterioration of the value of the
U.S. Dollar against the foreign currencies of Amrion's suppliers. Further cost
increases could result due to the increase in demand relative to the supply of
these products from the overall growth in the natural products industry.
Marketing
The Company spends less on advertising than conventional 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.
Amrion utilizes direct mail of Company designed catalogs, brochures and
individual mail pieces which highlight product lines and current promotional
activities. Amrion complements its direct mail activities with print
advertising, free standing inserts and package insert programs. Additionally,
Amrion's retail and health care professional divisions, which target health food
stores, health care providers and mass merchandisers, utilize marketing
strategies which include direct mail, telemarketing contact, personal visits
from sales representatives, consumer and trade advertising, point of sale
materials, free standing inserts with coupons in newspapers and radio
advertising. The Company also utilizes Amrion's expertise to market Whole Foods
Market private label products through catalog and Internet-based sales.
7
Competition
The Company's competitors currently include other natural foods supermarkets,
conventional and specialty supermarkets, other natural foods stores, small
specialty stores and online retailers. Although the Company historically has
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, conventional 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.
The business of developing, manufacturing and marketing vitamins, minerals and
other nutritional supplements is highly competitive. It is not possible to
accurately assess the number and size of competitors, as the nutritional
supplement industry is composed of many small companies, many of which are
privately-held and do not publish sales and marketing figures. The Company
believes that Amrion's competitive pricing, quality of advertising,
comprehensive lines of quality products and customer service commitment enable
it to compete favorably with other vitamin and nutritional supplement companies.
The Company believes that competition will intensify as more companies offer
competitive products and services over the Internet.
Government Regulation
The Company's 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.
The manufacturing, processing, formulating, packaging, labeling and advertising
of products, particularly the nutriceutical and nutritional supplement products
developed, produced and marketed by Amrion, are subject to regulation by one or
more federal agencies, including the Food and Drug Administration ("FDA"), the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission
("CPSC"), the United States Department of Agriculture ("USDA") and the
Environmental Protection Agency ("EPA"). Amrion's activities are also regulated
by various agencies of the states, localities and foreign countries to which
Amrion's products are distributed and in which Amrion's products are sold. The
composition and labeling of nutritional supplements and nutriceuticals, which
comprise a significant majority of Amrion's products, is most actively regulated
by the FDA under the provisions of the Federal Food, Drug and Cosmetic Act
("FFDC Act"). The FFDC Act has been revised in recent years with respect to
dietary supplements by the Nutrition Labeling and Education Act of 1990 ("NLEA")
and by the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). Final
rules establishing labeling and notification requirements for dietary
supplements were promulgated by the FDA on September 23, 1997, and the labeling
portion of the regulations became effective on March 23, 1999. The Company
believes it is in material compliance with these labeling requirements.
Employees
As of September 26, 1999, the Company had approximately 16,600 employees,
including approximately 13,700 full-time and 2,900 part-time employees. For the
past two years, Fortune magazine has selected Whole Foods Market, Inc. as one of
the "100 Best Companies to Work for in America." 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. Certain of the Company's stores
have been, and certain stores continue to be, subjected to informational pickets
by the local retail clerks' and butchers' unions.
8
Trademarks
Trademarks owned by the Company that have been registered or pending in the
United States Patent and Trademark Office include "Whole Foods Market," "365
Every Day Value," "Allegro Coffee Company," "Amrion," "Bread & Circus," "Bread
of Life," "Fresh Fields," "Merchant of Vino," "Wellspring Grocery," "Whole
Food," "Whole Kids," "Whole Foods, Whole People, Whole Planet," "WholeFoods.com"
and "WholePeople.com." The Company also holds registrations and maintains common
law trademark rights for its stylized logos and brand names for products created
by Amrion, Allegro and many of its private label products.
Factors That May Affect Future Results
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 in this report.
Forward-looking statements 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. Additional risks and uncertainties not presently known to the Company or
that the Company currently deems immaterial may also have a material adverse
impact on the Company's financial condition or operations. The Company does not
undertake any obligation to update forward-looking statements. "Forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, can be identified by the use of predictive, future-tense or
forward-looking terminology, such as "believes," "anticipates," "expects,"
"estimates," "may," "will" or similar terms. Forward-looking statements also
include projections of financial performance, statements regarding management's
plans and objectives and statements concerning any assumptions relating to the
foregoing.
Growth Dependent on Expansion. The Company's strategy is to expand through a
combination of new store openings and acquisitions of existing stores as well as
the possible acquisition or development of businesses with complementary product
lines and related lines of business. 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 Whole Foods Market
faces intense competition with other retailers for such sites. There can be no
assurance that Whole Foods Market 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 Whole Foods Market can successfully hire and train new
employees and integrate them into the programs and policies of Whole Foods
Market 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 Whole Foods Market further expands by acquiring
existing businesses, there can be no assurance that Whole Foods Market can
successfully integrate the acquired businesses into its operations and support
systems, and that the operations of acquired businesses will not be adversely
affected as the Company's decentralized approach to operations is introduced.
Quarterly Fluctuations. 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, possible supply shortages and the timing of acquisitions. In
addition, 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. In fiscal
1999 and prior years, the Company capitalized pre-opening costs and expensed
such amounts in the quarter of the location opening. The American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-5
"Reporting on the Costs of Start-up Activities" in April 1998. SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred
and is effective for financial statements issued for fiscal years beginning
after December 15, 1998. Effective the beginning of fiscal year 2000, the
Company will charge pre-opening costs to expense as incurred in accordance with
SOP 98-5. Quarter to quarter comparisons of results of operations have been and
may be materially impacted by the timing of new store openings.
9
Capital Needed for Expansion. The acquisition of existing stores, the opening of
new stores and the development of new production and distribution facilities
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 Whole Foods Market in the future.
Competition. The Company's competitors currently include other natural foods
supermarkets, conventional and specialty supermarkets, other natural foods
stores, small specialty stores and online retailers. These businesses compete
with Whole Foods Market 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
Whole Foods Market 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.
The sales of nutritional supplements, nutriceuticals and other fitness and
health-related products are highly competitive, and the Company expects to face
such continued competitive pressure in the future. Amrion's nutritional
supplement products, which are its largest source of revenue, compete on a
national and regional basis directly with other specialty health retailers,
nutritional supplement manufacturers and mass merchandisers such as drug stores
and supermarkets. Many of these competitors are substantially larger and have
greater resources than Whole Foods Market.
The Company believes that competition will intensify as more companies offer
competitive products and services over the Internet.
Food Safety. There is increasing governmental scrutiny of and public awareness
regarding food safety. The Company believes that many customers choose to shop
at Whole Foods Market because of their interest in health, nutrition and food
safety. Although the Company has intensified its food safety procedures for
perishables, it anticipates that its customers will hold it to a higher standard
than conventional supermarkets. The sale of contaminated food products, or the
perception of such sale, by the Company could have a material adverse effect on
its operations.
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 Whole Foods Market. The Company's continued success is also
dependent upon its ability to attract and retain qualified employees to meet
Whole Foods Market'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 maintain key
person insurance on any employee.
Integration of Acquired Operations. By acquiring many new stores and certain
manufacturing type businesses in the last several years, the Company has
materially increased the scope of its operations by (i) increasing the number of
its stores and entering new markets and (ii) including the manufacturing of
nutriceuticals and nutritional supplements and the direct marketing of these.
There can be no assurance that comparable store sales of acquired stores will
increase to or be maintained at the level achieved by existing Whole Foods
Market stores. Additionally, there can be no assurance that the operations of
acquired stores will not be adversely affected as a result of 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 new ownership. With
respect to the Company's acquisition of manufacturing operations, there can be
no assurance that current retail stores which are customers of the acquired
companies will continue to do business with such companies, nor can there be any
assurance that Whole Foods Market can realize the expected benefits from the
acquisition of these companies. The integration of acquired operations into
Whole Foods Market will require the dedication of management resources which may
temporarily detract from attention to day-to-day business of the Company.
10
Government Regulation. The Company's 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.
The manufacturing, processing, formulating, packaging, labeling and advertising
of products, particularly the nutriceutical and nutritional supplement products
developed, produced and marketed by Amrion, are subject to regulation by one or
more federal agencies, including the FDA, the FTC, the CPSC, the USDA and the
EPA. Amrion's activities are also regulated by various agencies of the states,
localities and foreign countries to which Amrion's products are distributed and
in which Amrion's products are sold. The composition and labeling of nutritional
supplements and nutriceuticals, which comprise a significant majority of
Amrion's products, is most actively regulated by the FDA under the provisions of
the FFDC Act. The FFDC Act has been revised in recent years with respect to
dietary supplements by the NLEA and by the DSHEA. Final rules establishing
labeling and notification requirements for dietary supplements were promulgated
by the FDA on September 23, 1997, and the labeling portion of the regulations
became effective on March 23, 1999. The Company believes it is in material
compliance with these labeling requirements.
The Company cannot predict the nature of future laws, regulations,
interpretations or applications, nor can it determine what effect either
additional government regulations or administrative orders, when and if
promulgated, or disparate federal, state and local regulatory schemes would have
on its business in the future. They could, however, require the reformulation of
certain products to meet new standards, the recall or discontinuance of certain
products not able to be reformulated, additional record keeping, expanded
documentation of the properties of certain products, expanded or different
labeling and/or scientific substantiation. Any or all of such requirements could
have an adverse effect on the Company's results of operations and financial
condition. Government regulations in foreign countries where Amrion plans to
expand sales may prevent or delay entry into the market or prevent or delay the
introduction, or require the reformulation, of certain of Amrion's products.
Internet Operations. In fiscal 2000, the Company plans to merge Amrion and
WholeFoods.com into a new subsidiary, WholePeople.com, and expects to begin
operation of the WholePeople.com Web site in fiscal 2000. WholeFoods.com is
currently operating at a loss, and there can be no assurance that the Company
will be able to operate an Internet commerce business profitably in the future.
WholePeople.com's success depends in part on the Company's ability to migrate
some of its natural foods supermarket customers and Amrion catalog customers to
online customers. There can be no assurance that the Company can successfully
migrate these customers or that their migration will not require a significantly
higher than expected level of expenditures. The Company may choose to expand
online operations by developing new Web sites, offering products or services not
currently offered or expanding market presence through relationships with third
parties. There can be no assurance that any new web site or product category
launched by the Company will be favorably received. In addition, expansion of
our online business may require significant additional expenditures. The online
market for the Company's products and services is extremely competitive, and
competition may intensify. The Company must also compete to retain its existing
online customers. Many of the Company's potential online competitors are larger
and have greater financial, marketing and other resources than ours. There can
be no assurance that the Company will be able to successfully compete with other
online retailers.
Future revenue and profit, if any, of the Company's Internet operations
substantially depend upon the widespread acceptance and use of the Internet. Any
change in the required Internet infrastructure, standards or protocols may
require the Company to incur substantial expenditures in order to adapt to these
changing or emerging technologies. The Company's ability to successfully
receive, fill and deliver orders and ability to provide high-quality customer
service over the Internet largely depends on the operation of its technical
systems. These systems could be vulnerable to, among other factors, disruptions
caused by system failures, power losses, communication problems, natural
disasters, break-ins and similar problems. Any system interruptions that result
in the unavailability of the Company's Web site or reduced order fulfillment
performance would reduce customer satisfaction and could result in negative
publicity and decrease the volume of goods sold.
11
A number of legislative and regulatory proposals relating to Internet commerce
are under consideration by federal, state, local and foreign governments.
Additional burdens imposed by the adoption of new laws or the application of
existing laws to the Internet may decrease the growth in the use of the
Internet, which could in turn decrease the demand for the Company's online
services, increase costs of doing business over the Internet or otherwise
adversely affect the Company's operations. As a publisher of online content, the
Company is subject to potential liability for copyright, patent or trademark
infringement or other claims based on the nature and content of materials we
publish or distribute. The Company currently holds various Web domain names
including "WholePeople.com" Currently, domain name acquisition and maintenance
is regulated by governmental agencies and their designees. The regulation of
domain names will change in the future, and requirements for the name
acquisition and maintenance of domain names will be affected. There can be no
assurance that the Company will be able to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the value
of the Company's trademarks, and any such inability could have a material
adverse effect on its operations.
Possible Volatility of Convertible Subordinated Debentures and Common Stock
Price. The market price of the Company's convertible subordinated debentures and
common stock could be subject to significant fluctuation in response to various
market factors and events, including variations in the Company's earning
results, changes in earnings estimates by securities analysts, publicity
regarding the Company, its competitors, the health food industry generally, new
statutes or regulations or changes in the interpretation of existing statutes or
regulations affecting the health food industry specifically, sales of
substantial amounts of common stock in the public market or the perception that
such sales could occur and other factors. In addition, in recent years, the
stock market has experienced broad price and volume fluctuations that often have
been unrelated to the operating performance of particular companies. These
market fluctuations also may adversely affect the market price of the debentures
and the common stock. Volatility in the price of the Company's common stock,
changes in prevailing interest rates and changes in perception of the Company's
creditworthiness may in the future adversely affect the price of the debentures.
Information System Upgrades and Year 2000 Issues. The Company continually
evaluates and upgrades its management information systems. The Company has
completed a number of acquisitions in recent years, and the information systems
of some of the acquired operations have not been fully integrated with the
Company's information systems. Although the Company does not anticipate any
disruption in its operations or financial reporting as a result of system
upgrades or system integrations, there can be no assurance that such disruption
will not occur or that the desired benefits from the system upgrades will be
realized.
Information on the Company's Year 2000 issues is included under the caption
"Year 2000 Issues" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Self-Insured Benefits Plans. The Company provides partially self-insured,
voluntary Team Member benefits plans which provide, among other benefits, health
care benefits to participating Team Members. The plans are designed to provide
specified levels of coverage, with excess insurance coverage provided by a
commercial insurer. Although not currently anticipated by management, the
Company's results could be materially impacted by claims and other expenses
related to such plans.
Negative Impact of Litigation Possible. From time to time the Company is a party
to legal proceedings including matters involving personnel and employment issues
and other proceedings arising in the ordinary course of business. Additionally,
like other retailers, distributors and manufacturers of products that are
ingested, the Company faces an inherent risk of exposure to product liability
claims in the event that the use of its products results in injury. Although not
currently anticipated by management, the Company's results could be materially
impacted by legal and settlement expenses related to such lawsuits.
12
Item 2. Properties
At September 26, 1999, the Company operated 100 stores in twenty states and the
District of Columbia. The Company owns the New Orleans, Berkeley and Atlanta
store locations. The Company owns the underlying property for its store in Santa
Fe which opened in December 1999. The Company also owns a building in Austin,
Texas which houses one of its stores, the corporate headquarters and a
bookstore. The underlying property is leased from a third party under a ground
lease which has a base term of twenty years with ten options to renew for five
years each. The Company owns manufacturing, distribution warehousing and office
facilities near Boulder, Colorado and in Thornton, Colorado and an undeveloped
property in Westminster, Colorado. All other stores, distribution centers,
bakehouses and administrative facilities are leased, with expiration dates
ranging from 1 to 25 years. The Company has options to renew most of its leases
with renewal periods ranging from 5 to 50 years. The following table shows the
number of Company stores by state and the District of Columbia as of September
26, 1999:
Number Number Number
Location of Stores Location of Stores Location of Stores
- -----------------------------------------------------------------------------------------------------------------------
Arizona 1 Illinois 7 New York 1
California 25 Louisiana 1 North Carolina 3
Colorado 1 Maryland 4 Pennsylvania 5
Connecticut 1 Massachusetts 11 Rhode Island 1
District of Columbia 2 Michigan 7 Texas 12
Florida 5 Minnesota 1 Virginia 7
Georgia 1 New Jersey 3 Wisconsin 1
- ------------------------------------------------------------------------------------------------------------------------
The Company has a lease with the bookstore at its building in Austin, Texas.
Certain officers of the Company are also shareholders of the bookstore in which
they own a combined 13% 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
Not applicable.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock is traded on the Nasdaq Stock Market under the symbol
"WFMI." The following sets forth the high and low sales prices of the Company's
common stock for the last two fiscal years:
Fiscal 1999 High Low
- --------------------------------------------------------------------------------
September 28, 1998 to January 17, 1999 $50.75 $32.00
January 18, 1999 to April 11, 1999 42.75 28.25
April 12, 1999 to July 4, 1999 48.75 36.75
July 5, 1999 to September 26, 1999 48.00 32.38
- --------------------------------------------------------------------------------
Fiscal 1998 High Low
- --------------------------------------------------------------------------------
September 29, 1997 to January 18, 1998 $51.38 $34.63
January 19, 1998 to April 12, 1998 70.13 44.50
April 13, 1998 to July 5, 1998 67.50 53.00
July 6, 1998 to September 27, 1998 66.50 35.50
- --------------------------------------------------------------------------------
The Company had approximately 1,520 record holders of its common stock as of
November 30, 1999.
The Company intends to retain any earnings for use in its business and therefore
does not anticipate paying any cash dividend in the foreseeable future. The
Company's present bank credit agreement contains certain restrictive covenants
that include the prohibition of the payment of dividends on common stock.
14
Item 6. Selected Financial Data
Whole Foods Market, Inc. and Subsidiaries
Summary Financial Information In thousands, except per share and operating data
Sept 26 Sept 27 Sept 28 Sept 29 Sept 24
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations Data (1):
Sales $ 1,567,879 1,389,768 1,117,346 946,353 748,691
Cost of goods sold and occupancy costs 1,029,350 921,104 749,551 645,925 504,211
Inventory writeoffs associated with reorganization 2,480 - - - -
- -------------------------------------------------------------------------------------------------------------------
Gross profit 536,049 468,664 367,795 300,428 244,480
Selling, general and administrative expenses 448,147 385,573 312,703 266,107 225,755
Pre-opening and relocation costs 5,914 3,979 5,243 5,903 6,361
Merger expenses - 1,699 4,887 36,214 -
Other reorganization and asset disposal costs 6,979 - - 2,302 -
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 75,009 77,413 44,962 (10,098) 12,364
Interest expense (8,248) (7,685) (6,044) (4,671) (2,368)
Investment and other income 2,345 2,328 450 650 1,087
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 69,106 72,056 39,368 (14,119) 11,083
Provision (credit) for income taxes 26,951 26,661 12,724 (1,404) 6,899
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 42,155 45,395 26,644 (12,715) 4,184
===================================================================================================================
Basic income (loss) per common share $ 1.60 1.74 1.10 (0.54) 0.18
===================================================================================================================
Weighted average common shares outstanding 26,374 26,159 24,194 23,366 22,724
===================================================================================================================
Diluted income (loss) per common share $ 1.54 1.64 1.06 (0.54) 0.18
===================================================================================================================
Weighted average shares outstanding,
diluted basis 27,446 27,744 25,162 23,366 23,404
===================================================================================================================
Operating Data:
- -------------------------------------------------------------------------------------------------------------------
Number of stores at end of period 100 87 75 68 61
Store sales per gross square foot $ 661 670 638 636 625
Average weekly sales per store $ 309,836 291,690 277,141 253,555 238,776
Comparable store sales increase (2) 7.7% 11.0% 8.3% 5.4% 6.2%
- -------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets Data (End of Year):
- -------------------------------------------------------------------------------------------------------------------
Working capital $ 19,270 93,064 35,427 15,648 871
Total assets 659,735 544,808 398,484 340,819 290,414
Long-term debt (including current maturities) 215,517 159,016 93,844 85,291 53,721
Shareholders' equity 311,220 277,273 205,465 172,024 172,353
- -------------------------------------------------------------------------------------------------------------------
(1) Fiscal years 1999, 1998, 1997, and 1995 are 52-week years and fiscal year
1996 is a 53-week 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
during which the store was open.
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Whole Foods Market opened its first store in Texas in 1980 and has expanded its
operations to 100 stores as of September 26, 1999 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 years 1999, 1998 and 1997 are 52-week years. Financial information about
industry segments is included under the caption "Segment Information" in the
Notes to Consolidated Financial Statements.
Development Activity
The following is a schedule of stores opened, relocated and acquired during
fiscal years 1999, 1998 and 1997:
Store Location Date
- ----------------------------------------------------------------------------------------------
Vienna Vienna, VA opened November 1996
La Jolla La Jolla, CA opened November 1996
Philadelphia Philadelphia, PA opened January 1997
Wheaton Wheaton, IL relocated February 1997
Hillcrest San Diego, CA opened April 1997
San Rafael San Rafael, CA opened April 1997
Federal Ft. Lauderdale, FL acquired April 1997
Plantation Plantation, FL acquired April 1997
Granary Monterey, CA acquired April 1997
Quarry San Antonio, TX relocated October 1997
Brentwood Brentwood, CA opened October 1997
Evanston Evanston, IL relocated December 1997
Birmingham Birmingham, MI acquired December 1997
Farmington Hills Farmington Hills, MI acquired December 1997
Plymouth Ann Arbor, MI acquired December 1997
Rochester Rochester, MI acquired December 1997
Somerset Troy, MI acquired December 1997
Troy Troy, MI acquired December 1997
Pearl Boulder, CO opened February 1998
Tempe Tempe, AZ opened March 1998
Winter Park Winter Park, FL opened April 1998
Marlton Marlton, NJ opened May 1998
Monterey/Granary Monterey, CA relocated June 1998
Coral Springs Coral Springs, FL opened September 1998
Preston Dallas, TX opened February 1999
Good Nature Grocery Walnut Creek, CA acquired April 1999
Briarcliff Atlanta, GA opened April 1999
Pasadena Pasadena, CA opened April 1999
Bedford Bedford, MA acquired April 1999
Bellingham Bellingham, MA acquired April 1999
Newtonville Newton, MA acquired April 1999
Wayland Wayland, MA acquired April 1999
Biscayne Aventura, FL relocated May 1999
Costa Mesa Costa Mesa, CA opened July 1999
Parkway Arlington, TX opened August 1999
Gold Coast Chicago, IL opened September 1999
Torrance Torrance, CA opened September 1999
Jenkintown Jenkintown, PA opened September 1999
- ----------------------------------------------------------------------------------------------
16
Results of Operations
The following table sets forth the statement of operations data of Whole Foods
Market expressed as a percentage of total sales for the fiscal years indicated:
Year Ended 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Sales:
Natural foods supermarkets 94.8% 93.5% 93.9%
Direct marketing 5.0 6.0 6.1
Other 0.8 1.0 0.0
Intersegment sales (0.6) (0.5) 0.0
- ---------------------------------------------------------------------------------------------------------------
Total sales 100.0 100.0 100.0
Cost of goods sold and occupancy costs 65.7 66.3 67.1
Inventory writeoffs associated with reorganization 0.2 0.0 0.0
- ---------------------------------------------------------------------------------------------------------------
Gross profit 34.1 33.7 32.9
Selling, general and administrative expenses 28.6 27.7 28.0
Pre-opening and relocation costs 0.4 0.3 0.5
Merger expenses 0.0 0.1 0.4
Other reorganization and asset disposal costs 0.4 0.0 0.0
- ---------------------------------------------------------------------------------------------------------------
Income from operations 4.8 5.6 4.0
Interest expense (0.5) (0.6) (0.5)
Investment and other income 0.1 0.2 0.0
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 4.4 5.2 3.5
Provision for income taxes 1.7 1.9 1.1
- ---------------------------------------------------------------------------------------------------------------
Net income 2.7% 3.3% 2.4%
===============================================================================================================
Figures may not add due to rounding.
Sales
Total sales increased 12.8%, 24.4% and 18.1% in fiscal years 1999, 1998 and
1997, respectively. Sales in the natural foods supermarket segment for all years
shown reflect increases due to new stores opened and acquired and comparable
store sales increases of 7.7%, 11.0%, and 8.3% in fiscal years 1999, 1998 and
1997, respectively. Sales of a store are deemed to be comparable commencing in
the fifty-third full week after the store was opened or acquired. Comparable
store sales increases generally resulted from an increase in the number of
customer transactions and slightly higher average transaction amounts,
reflecting an increase in market share as the stores mature in a particular
market. These increases are due to such factors as improvements in overall store
execution and increased sales of private label products. Sales in the direct
marketing segment decreased from the prior year by 5.8% in fiscal year 1999 as a
result of a decline in international sales and increased competition in the
supplement category. Sales in the direct marketing segment increased by 20.0%
and 25.5% in fiscal years 1998 and 1997, respectively, as a result of
improvements in customer acquisition and expanded retail and mass market
distribution programs. External sales at Allegro Coffee Company have declined
since it was acquired by the Company as a result of increased focus on internal
distribution. The Company believes that historical sales trends may not
necessarily be indicative of future results of operations.
17
Gross Profit
Gross profit consists of sales less cost of goods sold and occupancy costs plus
contribution from non-retail grocery distribution and food preparation
operations. Gross profit in fiscal year 1999 also includes inventory writeoffs
associated with the elimination of certain business lines at Amrion. The
Company's consolidated gross profit in fiscal year 1999 increased as a
percentage of sales to 34.1% from 33.7% in fiscal year 1998 and from 32.9% in
fiscal year 1997. In the Company's natural foods supermarket segment, these
increases reflect increased national buying and private label initiatives which
continue to lower the cost of product purchased on a national basis, and
continued improvement by new stores with respect to product procurement and
merchandising and controlling spoilage. In all years, gross profit margins were
positively affected by margin improvements as stores mature. Relative to other
stores in a region, gross profit margins tend to be lower for new stores and
increase as stores mature, reflecting lower spoilage as volumes increase, as
well as increasing experience levels and operational efficiencies of the store
teams. Additionally, gross profit margins were positively affected in all years
by the increased percentage of sales in certain regions and in departments such
as prepared foods where the Company achieves higher gross profits. Gross profits
of the Company's direct marketing segment were negatively affected in 1999 by
increased competition and overall weakness in the nutritional supplement
category. For fiscal years 1998 and 1997, gross profits of the Company's direct
marketing segment were positively affected by reductions in product cost as a
percentage of sales, offset by a slight increase in indirect costs in fiscal
1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales were
28.6%, 27.7% and 28.0% for fiscal years 1999, 1998 and 1997, respectively. In
fiscal year 1999 the Company's natural foods supermarket segment had an increase
in the number of administrative and support personnel at the regional and
national levels to support current and planned growth and the implementation of
new management information systems and costs incurred to address the Company's
Year 2000 issues. Whole Foods Market has historically been able to expand
without a significant increase in general and administrative costs. In all
years, selling, general and administrative expenses as a percentage of sales at
the Company's direct marketing segment increased as a result of higher market
development costs, increased administrative staff related to the Company's
direct marketing operations and a decline in international market sales.
Selling, general and administrative expenses also increased as a percentage of
sales in the current fiscal year as a result of start-up costs associated with
WholeFoods.com.
Pre-opening and Relocation Costs
Pre-opening costs include costs associated with hiring and training personnel,
supplies and certain occupancy and miscellaneous costs related to new store and
facility openings. 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. In fiscal 1999 and prior years, the Company capitalized
pre-opening costs and expensed such amounts in the quarter of the location
opening. Effective the beginning of fiscal year 2000, the Company will charge
pre-opening costs to expense as incurred in accordance with SOP 98-5. Relocation
costs consist of losses on the disposition of inventories, remaining lease
payments and other costs of holding idle replaced facilities and other related
expenses. Whole Foods Market developed and opened eight new stores in fiscal
1999, six new stores in fiscal 1998 and five new stores in fiscal 1997.
Additionally, the Company relocated one store in fiscal 1999, three stores in
fiscal 1998 and one store in fiscal 1997. Pre-opening and relocation costs in
fiscal 1999, 1998 and 1997 were approximately $5.9 million, $4.0 million and
$5.2 million, respectively.
Reorganization and Asset Disposal Costs
During the fourth quarter of fiscal 1999, the Company recognized reorganization
and asset disposal costs totaling approximately $9.5 million. Included in this
total are costs associated with the elimination of certain business lines at
Amrion, the disposal of accounting and distribution software, and other hardware
and software disposals. Reorganization costs associated with business lines
eliminated totaled approximately $3.5 million and consisted primarily of
inventory writeoffs totaling approximately $2.5 million that have been
classified as a component of cost of goods sold and the writedown of other
remaining assets to net realizable value. Costs associated with the disposal of
accounting and distribution software which was replaced with the implementation
of new financial software totaled approximately $2.8 million. Costs associated
with other hardware and software disposals totaled approximately $3.1 million
and consisted of the writeoffs of certain Year 2000 non-compliant or obsolete
hardware and certain software under development that the Company determined
would not be placed in service. Substantially all activities related to the
reorganization and asset disposals have been completed.
18
Interest Expense
Interest expense consists of costs related to Company's convertible subordinated
debentures, senior notes and bank line of credit, net of capitalized interest
associated with new location development and internally developed software.
Interest expense related to the Company's borrowings, net of amounts
capitalized, was approximately $8.2 million in fiscal 1999, $7.7 million in
fiscal 1998 and $6.0 million in fiscal 1997.
Investment and Other Income
Investment and other income for fiscal 1999 and 1998 consists primarily of
interest income earned on a short-term corporate bond portfolio and a prime
money market portfolio. In fiscal 1997, investment and other income consists
primarily of interest income generated from U.S. Treasury and agency securities.
Investment and other income was approximately $2.3 million, $2.3 million and
$450,000 in fiscal 1999, 1998 and 1997, respectively.
Income Taxes
The Company's effective tax rate was 39%, 37% and 32.3% in fiscal years 1999,
1998 and 1997, respectively. The income tax rates for fiscal 1998 and 1997
reflect reductions in the valuation allowance previously provided on net
operating loss carryforwards assumed in the Fresh Fields acquisition of
approximately $7.8 million and $3.1 million, respectively, which eliminated the
valuation allowance during fiscal 1998. As of September 26, 1999, the Company
considers it more likely than not that all net operating loss carryforwards will
be utilized. As of September 26, 1999, the Company had remaining net operating
loss carryforwards of approximately $1.1 million which are available to offset
certain future taxable income. The Company expects its effective tax rate for
fiscal 2000 will be higher than its effective rate for fiscal 1999.
Business Combinations
In April 1999, the Company acquired the outstanding stock of Nature's Heartland,
Inc., which operated four natural foods supermarkets in the greater Boston
metropolitan area, in exchange for approximately $25 million in cash. This
transaction was accounted for using the purchase method and, accordingly, the
purchase price was allocated to net assets acquired based on their estimated
fair values at the date of acquisition. This allocation resulted in acquired
goodwill of approximately $13.5 million, which is being amortized on a
straight-line basis over 40 years.
In December 1997, the Company acquired Merchant of Vino, which operated four
gourmet/natural foods stores and two specialty wine and gourmet food shops in
the Detroit area, in exchange for approximately 1 million shares of Company
common stock. Also in fiscal 1998, the Company acquired Allegro Coffee Company,
a specialty coffee roaster and distributor based in Boulder, Colorado, in
exchange for approximately 175,000 shares of Company common stock. These
acquisitions were accounted for using the pooling-of-interests method. Due to
the immateriality of Merchant of Vino and Allegro financial statements to the
Company's consolidated financial statements, financial information for the
periods prior to fiscal 1998 was not restated. Transaction and other
merger-related costs associated with these acquisitions totaled approximately
$1.7 million.
In September 1997, the Company acquired Amrion in exchange for approximately 4.7
million shares of Company common stock, plus the assumption of approximately
330,000 outstanding options to purchase shares of common stock. The merger was
accounted for using the pooling-of-interests method and, accordingly, financial
information for the periods prior to the merger date was restated to reflect the
business combination. Transaction and other merger-related costs associated with
the acquisition of Amrion totaled approximately $4.9 million. Also in fiscal
1997, the Company acquired three natural foods markets in exchange for a total
of approximately 230,000 shares of Company common stock. These acquisitions were
accounted for using the pooling-of-interests method. Due to the immateriality of
the financial statements of these acquired companies to the Company's
consolidated financial statements, financial information for the periods prior
to the combination was not restated.
19
Quarterly Results
The first quarter consists of 16 weeks, the second and third quarters each
consist of 12 weeks and the fourth quarter consists of 12 or 13 weeks. Fiscal
year 1999 and 1998 are 52-week years with the fourth quarters consisting of 12
weeks. Because the first quarter is longer than the remaining quarters and
contains both the Thanksgiving and Christmas holidays, it typically represents a
larger share of the Company's annual sales from existing stores. In fiscal 1999
and prior years, the Company capitalized pre-opening costs and expensed such
amounts in the quarter of the location opening. Effective the beginning of
fiscal year 2000, the Company will charge pre-opening costs to expense as
incurred in accordance with SOP 98-5. Quarter to quarter comparisons of results
of operations have been and may be materially impacted by the timing of new
store openings. 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 tables set forth selected quarterly
unaudited consolidated statements of operations and operating information for
the fiscal years ended September 26, 1999 and September 27, 1998 (in thousands
except per share data):
1st 2nd 3rd 4th
1999 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
Sales $ 456,239 358,872 377,580 375,188
Gross profit 153,210 124,240 130,446 128,153
Pre-opening and relocation costs - 2,243 809 2,862
Other reorganization and asset disposal costs - - - 6,979
Income from operations 22,905 20,513 21,513 10,078
Income before income taxes 21,238 19,094 19,753 9,021
Net income 12,955 11,647 12,050 5,503
Basic income per share $ 0.49 0.44 0.46 0.21
Weighted average common shares outstanding 26,552 26,339 26,205 26,342
Diluted income per share $ 0.47 0.43 0.44 0.20
Weighted average shares outstanding - diluted basis 27,694 27,156 27,428 27,425
Average weekly sales per store $ 305 319 316 303
- -------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
1998 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
Sales $ 407,788 324,811 330,999 326,170
Gross profit 135,752 110,939 110,832 111,141
Pre-opening and relocation costs 1,065 1,462 1,024 428
Merger expenses 1,699 - - -
Income from operations 21,084 18,857 18,921 18,551
Income before income taxes 19,092 17,657 17,621 17,686
Net income 12,028 11,124 11,101 11,142
Basic income per share $ 0.46 0.43 0.42 0.42
Weighted average common shares outstanding 25,913 26,094 26,279 26,435
Diluted income per share $ 0.44 0.40 0.40 0.40
Weighted average shares outstanding - diluted basis 27,523 27,824 27,880 27,824
Average weekly sales per store $ 287 299 299 290
- -------------------------------------------------------------------------------------------------------------------
20
Liquidity and Capital Resources
At September 26, 1999 and September 27, 1998, the Company's working capital was
approximately $19.3 million and $93.1 million, respectively, and the ratio of
current assets to current liabilities was 1.16 to 1 and 2.02 to 1, respectively.
Net cash provided by operating activities was approximately $123.2 million,
$90.9 million and $54.0 million in fiscal 1999, 1998 and 1997, respectively.
Whole Foods Market maintains a bank credit agreement which provides a revolving
line of credit of up to $100 million through June 28, 2002. This credit
agreement contains certain restrictive covenants, including the prohibition of
the payment of dividends on common stock. The credit agreement also contains
certain affirmative covenants including maintenance of certain financial ratios
as defined in the agreement. All outstanding amounts borrowed under this
agreement bear interest at the Company's option of either a defined base rate or
the Eurodollar rate plus a premium. Commitment fees ranging from 0.20% to 0.30%
of the undrawn amount are payable under this agreement. At September 26, 1999,
approximately $49 million was drawn and approximately $44 million was available
under the agreement. At September 27, 1998, there were no amounts drawn under
the agreement. The average interest rate on amounts outstanding under this
agreement at September 26, 1999 was approximately 6.45%. During 1998 the Company
issued zero coupon convertible subordinated debentures for approximately $115
million. The issue price of the debentures results in an effective yield to
maturity of 5 percent. The debentures are convertible at the option of the
holder, at any time on or prior to maturity, unless previously redeemed or
otherwise purchased. Debentures may be redeemed at the option of the holder on
March 2, 2003, March 2, 2008 or March 2, 2013 for a purchase price equal to
issue price plus accrued original issue discount to such dates. Subject to
certain limitations, the Company, at its option, may elect to pay this purchase
price in cash, shares of common stock or any combination thereof. Debentures may
also be redeemed in cash at the option of the holder if there is a change in
control at a purchase price equal to issue price plus original issue discount to
the date of redemption. Subsequent to March 2, 2003, the debentures are
redeemable at the option of the Company for cash, in whole or in part, at
redemption prices equal to issue price plus accrued original issue discount to
date of redemption. The debentures are subordinated in the right of payment to
all existing and future senior indebtedness. The Company also has outstanding
$40 million of senior unsecured notes, bearing interest at 7.29% and payable in
seven equal annual installments of approximately $5,714,000 beginning May 16,
2000. The Board of Directors has authorized the Company to repurchase up to $50
million in outstanding shares of Company common stock. During fiscal year 1999,
the Company repurchased 608,000 shares of its common stock for an aggregate cost
of approximately $18,939,000. During the first quarter of fiscal year 2000, the
Company repurchased an additional 429,000 shares of its common stock for an
aggregate cost of approximately $13,534,000. Net cash provided by financing
activities was approximately $36.5 million, $60.7 million and $11.8 million in
fiscal 1999, 1998 and 1997, 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 approximately $3 million to $12
million (after giving effect to any landlord construction allowance). This
excludes new store inventory of approximately $750,000, a portion of which is
financed by the vendors of Whole Foods Market. The Company expects to open
approximately twenty to twenty-five stores in fiscal 2000 and will have under
development additional stores that will open in fiscal 2001. The Company will
incur additional capital expenditures in fiscal 2000 in connection with ongoing
equipment upgrades and resets at its existing stores, development of facilities
for WholePeople.com and continued development of its management information
systems. Net cash used in investing activities was approximately $187.3 million,
$128.3 million and $56.4 million in fiscal 1999, 1998 and 1997, respectively.
The Company expects that cash generated from operations and available under its
current bank credit agreement will be sufficient to fund planned store openings
and other cash needs through the end of fiscal 2000, absent any material cash
acquisitions.
21
Year 2000 Issues
During fiscal 1998, the Company established a project team to coordinate
existing Year 2000 activities and address remaining Year 2000 issues. The
Company adopted a Year 2000 plan consisting of five phases: Phase I inventory
and ranking of the Company's systems and components, equipment, and suppliers
that may be vulnerable to Year 2000 problems; Phase II - assessment of items
identified in Phase I; Phase III - remediation or replacement of non-compliant
systems and components; Phase IV - testing and implementation of systems for
which remediation or replacement is complete; and Phase V - development of
contingency plans to mitigate the potential adverse effects on the Company's
operations that have been determined to be most reasonably likely based upon the
results of Phases I through IV. The Company has completed Phases I through IV.
This completion status includes all information systems ("IS") software and
hardware and non-IS equipment with embedded systems. Phase V, contingency
planning, is substantially completed and will continue to be updated for the
remainder of 1999.
The Company has identified significant third parties upon which it relies and
has communicated with these third parties through questionnaires and interviews
or otherwise obtained information to determine, to the extent practical, their
Year 2000 readiness. The Company has received no indication from these third
parties that their systems will not be Year 2000 compliant. The Company has
developed contingency plans to secure products and services from alternative
sources in the event the current parties suffer significant disruption as a
result of Year 2000 systems failures.
Expenses associated with the Year 2000 Plan have totaled approximately $815,000
to date. Additionally hardware and software purchases totaling approximately
$1.8 million have been capitalized to date pursuant to the Year 2000 Plan. These
expenditures have been funded through operating cash flows. The Company does not
expect that the total expenditures remaining under the Year 2000 Plan will be
material to its financial condition or results of operations.
The Company believes that the Year 2000 Plan will address its Year 2000 issues
but can make no assurance that its efforts will be fully effective or that Year
2000 issues will not have a material adverse impact on the Company's results of
operations. Should the Company or significant third parties upon which it relies
have a Year 2000 systems failure, the Company believes that the most significant
impact would likely be the inability of one or more stores to electronically
process customer sales, to conduct operations due to the failure of utility
companies to provide services or to receive products from certain vendors. The
Company has developed contingency plans that include performing certain
processes manually and securing products and services from alternative sources
to address these and other potential risks. Due to the general uncertainty
inherent in Year 2000 issues, the contingency planning process is ongoing and
will continue to be updated as additional information becomes available.
Adoption of Accounting Standards
The AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" in March 1998. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998 and establishes criteria for
capitalizing certain internal use software costs. The Company will adopt SOP
98-1 in fiscal year 2000. The adoption of SOP 98-1 will not have a material
impact on the Company's consolidated financial statements.
The AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities" in
April 1998. SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred and is effective for financial statements
issued for fiscal years beginning after December 15, 1998. The Company will
adopt SOP 98-5 effective the first quarter of fiscal year 2000, with the initial
application recognized as the cumulative effect of a change in accounting
principle. Capitalized pre-opening costs at September 26, 1999 totaled
approximately $647,000. In fiscal 1999 and prior years, the Company capitalized
pre-opening costs and expensed such amounts in the quarter of the location
opening.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133") in June 1998. SFAS No. 133 establishes reporting
standards for derivative instruments and hedging activities that require an
entity to recognize all derivatives as assets or liabilities measured at fair
value and is effective for financial statements issued for all fiscal quarters
of fiscal years beginning after June 15, 2000. If certain conditions are met, a
derivative may be specifically designated as a hedge of the exposure to changes
in the fair market value, variable cash flow, or foreign currency of a
recognized asset or liability or certain other transactions and firm
commitments. The Company will adopt SFAS No. 133 in fiscal year 2001. The
Company is evaluating the impact of SFAS No.133 on its consolidated financial
statements.
22
Disclaimer on Forward Looking Statements
Except for the historical information contained herein, the matters discussed in
this analysis are forward looking statements that involve risks and
uncertainties, including but not limited to general business conditions, the
timely development and opening of new stores, the impact of competition, and the
other risks detailed herein and from time to time in the Company's filings with
the Securities and Exchange Commission. The Company does not undertake any
obligation to update forward-looking statements.
Item 7(a) Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate changes and changes in the market value
of its investments. The Company is not a party to any derivative arrangement and
does not use financial instruments for trading or other speculative purposes.
The impact of the foreign exchange fluctuations on the Company's foreign
subsidiary is not material.
Interest Rate Risk. The Company is exposed to cash flow and fair value risk from
changes in interest rates, which may affect its financial position, results of
operations and cash flows. In seeking to minimize the risks from interest rate
fluctuations, the Company manages exposures through ongoing evaluation of the
composition of its long-term debt.
The Company's senior unsecured notes and subordinated convertible debentures
have fixed interest rates, and the fair value of these instruments is affected
by changes in market interest rates. The senior unsecured notes bear interest at
a fixed rate of 7.29% and have an outstanding balance of $40.0 million at
September 26, 1999 and September 27, 1998. At September 26, 1999 and September
27, 1998, the estimated fair value of the senior notes exceeded the carrying
amount by approximately $400,000 and $2.8 million, respectively. The zero coupon
subordinated convertible debentures have an effective yield to maturity of 5%
and an outstanding balance of approximately $124.4 million and $118.4 million at
September 26, 1999 and September 27, 1998, respectively. At September 26, 1999
and September 27, 1998, the carrying amount of the convertible debentures
exceeded the estimated fair value by approximately $22.7 million and $12.8
million, respectively. Should interest rates increase or decrease, the estimated
fair values of the senior notes and the zero coupon subordinated debentures
would decrease or increase accordingly.
Investment Risk. The Company has investments in equity securities of public and
non-public companies for business and strategic purposes. At September 26, 1999,
the carrying and fair values of the Company's investment in equity securities of
publicly-held companies were approximately $3.6 million. Changes in the market
may affect the fair value of these securities; however, such gains and losses
would not be realized unless the investments are sold. The Company's investments
in equity securities of non-public companies are accounted for under the cost
method and have a carrying value of approximately $20.0 million at September 26,
1999. The Company reviews such factors as prices recently paid for shares in
companies in which it invests and the underlying operating and cash flow
performance in assessing the carrying values of its investments to determine if
a decline in their fair value below cost is other than temporary. No impairment
losses have resulted to date based on these analyses.
Item 8. Financial Statements and Supplementary Data
See Item 14 (a).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
23
PART III
Item 10. Directors and Executive Officers of the Registrant
A brief description of each executive officer and director of the Company is
provided below. The Company has a "staggered" board of directors in which only a
portion of the Company's directors stand for reelection each year. The term of
office of Avram J. Goldberg, Dr. John B. Elstrott and Dr. Ralph Z. Sorenson will
expire at the annual meeting of shareholders in 2000, the term of office of
David W. Dupree, Fred "Chico" Lager and John P. Mackey will expire at the annual
meeting of shareholders in 2001, and the term of office of Linda A. Mason and
Jirka Rysavy will expire at the annual meeting of shareholders in 2002. The term
of office for the directors elected at this annual meeting will expire in 2003.
All officers serve at the discretion of the Board of Directors.
John P. Mackey, 46, co-founder of the Company, has served as Chairman of the
Board and Chief Executive Officer since 1980.
Chris Hitt, 50, has served as President of the Company since January 1999. Mr.
Hitt has held various positions with the Company since 1985 including President
of the Mid-Atlantic, Northern California, Northeast, Southeast, and Southwest
Regions.
Glenda Flanagan, 45, has served as Vice President and Chief Financial Officer of
the Company since December 1988.
James P. Sud, 47, has served as Vice President and Chief Operating Officer since
May 1997. Mr. Sud had been President of MPS Production Company, an independent
oil and gas company engaged in exploration, production and oil field equipment
services from 1977 to May 1997. Mr. Sud served as a director of the Company from
1980 to March 1997.
Michael Besancon, 53, has served as President of the Mid-Atlantic Region since
January 1999. Mr. Besancon joined the Company in 1995, serving as purchasing
director for the Southern Pacific Region before becoming the Vice President for
that region in 1996.
Rich Cundiff, 42, has served as President of the Southern Pacific Region since
January 1996. Mr. Cundiff has held various positions with the Company since
1988, including President and Vice President of the Southwest Region and store
team leader.
A.C. Gallo, 46, has served as President of the Northeast Region since July 1996.
Mr. Gallo has held various positions with the Company and with Bread & Circus,
Inc., which was acquired by the Company in October 1992, including Vice
President of the Northeast Region, Vice President of Perishables and produce
coordinator.
Juan Nunez, 41, has served as President of the Florida Region since September
1998. Mr. Nunez has held various positions with the Company and with Mrs.
Gooch's Natural Food Markets, Inc., which was acquired by the Company in
September 1993, including Vice President of the Southwest Region, Director of
Store Operations, and store team leader.
Walter Robb, 46, has been with the Company since 1991 and served as President of
the Northern Pacific Region since August 1993.
Dan Rodenberg, 44, has served as President of the Midwest Region since January
1997. Mr. Rodenberg has held various positions with the Company since 1989,
including Vice President of the Mid-Atlantic and Midwest Regions and store team
leader.
Lee Valkenaar, 44, has served as President of the Southwest Region since January
1996. Mr. Valkenaar has held various store team leader positions with the
Company since 1987.
David W. Dupree, 46, has served as director of the Company since August 1996.
Mr. Dupree is a Managing Partner and founder of The Halifax Group, a limited
partnership founded to pursue small and mid cap investment opportunities. He was
the Managing Director of The Carlyle Group, a Washington, D.C. based merchant
banking concern, from 1992 to 1998. Mr. Dupree also serves as a director of
Insight Health Services Corp.
24
Dr. John B. Elstrott, 51, has served as a director of the Company since February
1995. Dr. Elstrott is the founding director of the Levy Rosenblum Institute for
Entrepreneurship at Tulane University's A.B. Freeman School of Business which
was started in 1991. He has been on the faculty at Tulane since 1982.
Avram J. Goldberg, 70, has served as a director of the Company since May 1994.
Mr. Goldberg has been the Chairman of the Board of AVCAR Group, Ltd., a
consulting firm specializing in the retail industry, since 1989.
Fred "Chico" Lager, 45, has served as a director of the Company since January
1996. Mr. Lager has been a Trustee of Fenimore Asset Management Trust, a mutual
fund company, since 1997. Mr. Lager has been a self-employed consultant, working
with a select number of emerging small businesses, since 1991.
Linda A. Mason, 45, has served as a director of the Company since July 1992.
Mrs. Mason is the co-founder of Bright Horizons Family Solutions, Inc., which
operates work-site childcare centers, and served as its President from 1986 to
July 1998. Since July 1998, she has served as Chairman of the Board.
Jirka Rysavy, 45, has served as a director of the Company since November 1998.
Mr. Rysavy is the founder, Chairman and Chief Executive Officer of Gaiam, Inc.
which provides goods, services and information to customers who value the
environment, a sustainable economy, healthy lifestyles and personal development.
He has been Chairman since Gaiam's inception in 1988 and became the full-time
Chief Executive Officer in December 1998. Mr. Rysavy is also Chairman Emeritus
and a director of Corporate Express, Inc., a $4 billion corporate supplier of
non-production goods. Mr. Rysavy founded Corporate Express in 1986 and until
September 1998 was its Chairman and Chief Executive Officer.
Dr. Ralph Z. Sorenson, 66, has served as a director of the Company since
December 1994. Dr. Sorenson is currently Professor Emeritus of business
administration at the University of Colorado, Boulder and has served in various
capacities at the University of Colorado since July 1992, including Dean of the
College of Business and Graduate School of Business Administration. Dr. Sorenson
serves as a director of the Polaroid Corporation, Houghton Mifflin Company,
Eaton Vance, Inc. and Exabyte Corporation.
Each non-employee director of the Company receives $3,000 for each Board of
Directors meeting he or she attends and $500 for each telephone meeting called
by the Company which is greater than one hour in length and in which a majority
of directors participate. Each non-employee committee chair receives an annual
retainer of $1,500. Each non-employee director receives $500 for each committee
meeting attended. In addition, directors are reimbursed for reasonable expenses
incurred in attending Board of Directors meetings. Directors who are employees
of the Company are not paid any separate fees for serving as directors.
The Board of Directors held seven meetings in fiscal 1999. No director attended
fewer than 75% of the meetings of the Board (and any committees thereof) which
they were required to attend.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, the Company's directors and
executive officers, and persons who own more than 10% of the Company's common
stock, are required to report their initial ownership of the Company's common
stock and any subsequent changes in that ownership to the Securities and
Exchange Commission. Specific due dates have been established for these reports,
and the Company is required to disclose any failure to file by these dates.
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company, the
Company believes that all of its directors, officers and applicable shareholders
timely filed these reports.
In addition, under the Company's option plan for outside directors, each newly
elected director receives an option as of the date of his or her election to
purchase 10,000 shares of the Company's common stock at an exercise equal to the
closing price of the Company's common stock on the date of grant. Incumbent
directors receive an option grant as of the date of the Company's annual meeting
of shareholders to purchase 2,000 shares of the Company's common stock at an
exercise price equal to the closing price of the Company's common stock on the
date of grant if the director attended at least two-thirds of the meeting of the
Company's Board of Directors held in the preceding year.
25
Item 11. Executive Compensation
The following table sets forth information concerning compensation paid or
accrued by the Company during the three-year period ended September 26, 1999 to
or for the Company's Chief Executive Officer and the certain other highest
compensated executive officers of the Company whose total compensation exceeded
$100,000.
Summary Compensation Table
- --------------------------
Other Company
Annual Stock
Name and Principal Position Year Salary (1) Bonus Compensation (2) Options
- -------------------------------------------------------------------------------------------------------
John P. Mackey 1999 $200,000 $ 50,000 $ - 9,000
CEO 1998 185,000 90,000 500 9,000
1997 170,000 93,000 500 9,000
Chris Hitt 1999 $180,000 $ 72,000 $ - 4,000
President 1998 165,000 94,000 500 -
1997 150,000 68,900 500 3,600
Glenda Flanagan 1999 $165,000 $ 65,000 $ - 4,000
CFO 1998 150,000 125,000 500 4,000
1997 135,000 105,000 500 4,000
James P. Sud 1999 $165,000 $ 65,000 $ - 4,000
COO 1998 150,000 125,000 500 4,000
1997 (3) 90,000 47,600 - 14,000
Walter Robb 1999 $175,000 $ 79,000 $ - 3,900
Regional President 1998 130,000 145,000 500 4,000
Northern Pacific Region 1997 130,000 92,000 500 4,000
- -----------------------------------------------------------------------------------------------------
(1) The Company has a policy that limits the cash compensation paid in any one
year to any Team Member to ten times the average full time salary of all
Team Members. Amounts earned in excess of the salary limitation may be
deferred to the next year, subject to certain restrictions.
(2) The amounts indicated reflect the Company's contributions on behalf of the
persons indicated to the Whole Foods Market, Inc. Savings Plan and Trust.
In 1997 and 1998, the Company's contribution was a maximum of $500 paid in
shares of the Company's common stock. The Company's contribution for 1999
has not been determined as of November 30, 1999.
(3) Salary and bonus for 1997 are prorated to reflect May 1, 1997 employment
date.
26
Option Plans
The following table sets forth certain information with respect to the options
granted during the fiscal year ended September 26, 1999 to each executive
officer of the Company listed in the Summary Compensation Table set forth under
the caption "Executive Compensation."
Option Grants in Fiscal Year 1999
- ---------------------------------
Percent of
Total Options Exercise or Potential Realizable Value at
Number of Granted to Base Price Assumed Annual Rates of Stock Price
Options Employees in in Dollars Expiration Appreciation for Option Term (1)
Name Granted Fiscal Year per Share (2) Date 5 % 10 %
- ----------------------------------------------------------------------------------------------------------------
John P. Mackey 9,000 * $31.875 3/29/06 $116,787 $272,163
Chris Hitt 4,000 * $31.875 3/29/06 $51,905 $120,961
Glenda Flanagan 4,000 * $31.875 3/29/06 $51,905 $120,961
James P. Sud 4,000 * $31.875 3/29/06 $51,905 $120,961
Walter Robb 3,900 * $31.875 3/29/06 $50,608 $117,937
---------------------------------------------------------------------------------------------------------------
* Less than one percent
(1) The 5% and 10% assumed annual rates of appreciation are mandated by the
rules of the Securities and Exchange Commission and do not reflect the
Company's estimates or projections of future prices of the shares of the
Company's common stock. There can be no assurance that the amounts
reflected in this table will be achieved.
(2) Closing price of common stock at date of grant.
The following table sets forth certain information with respect to the options
exercised by the executive officers named above during the year ended September
26, 1999 or held by such persons at September 26, 1999. The number of options
held at September 26, 1999 includes options granted under the 1992 Option Plan
for Team Members and under the 1987 Option and Incentive Plan (the "1987 Plan").
The 1987 Plan was terminated by the Company in 1992, except as to options
previously granted.
Aggregated Option Exercises in Fiscal Year 1999 and Fiscal Year End Option
Values
- --------------------------------------------------------------------------------
Number of Value of Unexercised
Shares Unexercised Options In-the-Money Options (2)
Acquired Value at September 26, 1999 at September 26, 1999
--------------------- -----------------------
Name on Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
John P. Mackey 20,000 $663,350 69,700 23,300 $1,495,459 $10,062
Chris Hitt - - 34,181 14,255 $439,459 $83,509
Glenda Flanagan 5,100 $160,238 60,950 12,050 $1,309,667 $65,294
James P.Sud - - 15,900 14,900 $214,438 $98,231
Walter Robb 2,670 $108,945 33,738 10,212 $432,796 $52,748
- ----------------------------------------------------------------------------------------------------------------
(1) Based upon the market price of the underlying shares of common stock of
Whole Foods Market at date of exercise and the option exercise price.
(2) Based upon the closing price of the common stock of Whole Foods Market on
September 26, 1999, which was $33.094 per share.
27
Compensation Committee Interlocks and Insider Participation
No executive officer of the Company served as a member of the Compensation
Committee (or other board committee performing similar functions or, in the
absence of any such committee, the entire board of directors) of another
corporation, one of whose executive officers served on the Compensation
Committee. No executive officer of the Company served as a director of another
corporation, one of whose executive officers served on the Compensation
Committee. No executive officer of the Company served as a member of the
Compensation Committee (or other board committee performing equivalent functions
or, in the absence of any such committee, the entire board of directors) of
another corporation, one of whose executive officers served as a director of the
Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of November 30, 1999 for (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of common stock, (ii) each director of the Company, (iii)
each executive officer of the Company listed in the Summary Compensation Table
set forth under the caption "Executive Compensation," and (iv) all of the
directors and officers of the Company as a group. Except pursuant to applicable
community property laws and except as otherwise indicated, each shareholder
identified in the table possesses sole voting and investment power with respect
to its or his shares.
Shares Owned (1)
-----------------------------------------------
Name Number Percent
- --------------------------------------------------------------------------------------------------------------
Wellington Management Company (2) 1,717,600 6%
David W. Dupree (3) 9,551 *
Dr. John B. Elstrott (4) 7,800 *
Glenda Flanagan (5) 66,974 *
Avram J. Goldberg (6) 18,200 *
Chris Hitt (7) 52,205 *
Fred "Chico" Lager (8) 13,317 *
John P. Mackey (9) 321,567 1%
Linda A. Mason (10) 18,000 *
Walter Robb (11) 44,598 *
Dr. Ralph Z. Sorenson (12) 13,000 *
James P. Sud (13) 57,475 *
All directors and officers as a group (18 persons) 776,039 3%
- --------------------------------------------------------------------------------------------------------------
* Less than one percent
(1) Includes shares issuable upon exercise of stock options, which are vested
or will be vested prior to January 29, 2000.
(2) Based on information contained in Schedule 13G, as filed on February 9,
1999. The amount indicated reflects Wellington Management Company's
beneficial ownership as of December 31, 1998. Of the shares indicated,
Wellington Management Company has the sole voting power of 0 shares and the
sole power to dispose of 0 shares. The address of such shareholder is 75
State Street, Boston, Massachusetts 02109.
(3) Includes options to purchase 3,582 shares of common stock.
(4) Includes options to purchase 3,500 shares of common stock.
(5) Includes options to purchase 60,950 shares of common stock.
(6) Includes options to purchase 14,600 shares of common stock.
(7) Includes options to purchase 34,181 shares of common stock.
(8) Includes options to purchase 11,500 shares of common stock.
(9) Includes options to purchase 72,200 shares of common stock.
(10) Includes options to purchase 18,000 shares of common stock.
(11) Includes options to purchase 33,738 shares of common stock.
(12) Includes options to purchase 13,000 shares of common stock.
(13) Includes options to purchase 15,900 shares of common stock.
28
Item 13. Certain Relationships and Related Transactions
John P. Mackey and Glenda Flanagan, executive officers of the Company, own
approximately 13% in the aggregate of BookPeople, Inc. which leases facilities
from the Company. The lease provides for an aggregate annual minimum rent of
approximately $391,000 which was received in rental income by the Company in
fiscal 1999.
Retention Agreements
Since November 1991, the Company has entered into Retention Agreements with the
executive officers of the Company or its subsidiaries which provide for certain
benefits upon an involuntary termination of employment other than for cause
after a "Triggering Event." A Triggering Event includes a merger of the Company
with and into an unaffiliated corporation if the Company is not the surviving
corporation or the sale of all or substantially all of the Company's assets. The
benefits to be received by the executive officer whose employment is terminated
after a Triggering Event occurs include receipt of his or her annual salary
through the one-year period following the date of the termination of employment
and the immediate vesting of any outstanding stock options granted to such
executive officer.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Schedules.
Reference is made to the listing on page 30 of all financial statements
filed as a part of this report. No schedules are required.
(b) (3) Exhibits
Reference is made to the Exhibit Index on page 53 for a list of all
exhibits filed as a part of this report.
29
Whole Foods Market, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
Number
- ---------------------------------------------------------------------------------------------------------
Independent Auditors' Report 31
Consolidated Balance Sheets at September 26, 1999 and September 27, 1998 32
Consolidated Statements of Operations for the fiscal years ended September 26, 1999,
September 27, 1998 and September 28, 1997 33
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the
fiscal years ended September 26, 1999, September 27, 1998 and September 28, 1997 34
Consolidated Statements of Cash Flows for the fiscal years ended September 26, 1999,
September 27, 1998 and September 28, 1997 35
Notes to Consolidated Financial Statements 37
- ---------------------------------------------------------------------------------------------------------
30
Whole Foods Market, Inc. and Subsidiaries
Independent Auditors' Report
The Board of Directors
Whole Foods Market, Inc.
We have audited the accompanying consolidated balance sheets of Whole Foods
Market, Inc. and subsidiaries ("Company") as of September 26, 1999 and September
27, 1998 and the related consolidated statements of operations, shareholders'
equity and comprehensive income, and cash flows for each of the fiscal years in
the three-year period ended September 26, 1999. 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 26, 1999 and September 27, 1998, and the
results of their operations and their cash flows for each of the fiscal years in
the three-year period ended September 26, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
- -----------------
Austin, Texas
November 15, 1999
31
Whole Foods Market, Inc. and Subsidiaries
Consolidated Balance Sheets In thousands
September 26, 1999 and September 27, 1998
Assets
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 9,019 36,674
Marketable securities - 27,019
Trade accounts receivable 19,578 15,201
Merchandise inventories 93,452 85,628
Prepaid expenses and other current assets 11,169 8,870
Deferred income taxes 7,407 10,701
- -------------------------------------------------------------------------------------------------------------------
Total current assets 140,625 184,093
Property and equipment, net of accumulated depreciation and amortization 407,204 291,478
Marketable securities and other long-term investments 23,600 -
Acquired leasehold rights, net of accumulated amortization 14,150 12,150
Excess of cost over net assets acquired, net of accumulated amortization 49,288 35,802
Other assets, net of accumulated amortization 24,868 21,285
- -------------------------------------------------------------------------------------------------------------------
$ 659,735 544,808
===================================================================================================================
Liabilities and Shareholders' Equity
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current installments of long-term debt and capital lease obligations $ 6,655 343
Trade accounts payable 49,038 34,137
Accrued payroll, bonus and employee benefits 29,638 26,670
Other accrued expenses 36,024 29,879
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 121,355 91,029
Long-term debt and capital lease obligations, less current installments 208,862
158,673
Deferred rent liability 9,375 7,932
Other long-term liabilities 4,376 6,792
Deferred income taxes 4,547 3,109
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 348,515 267,535
- -------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value, 100,000 shares authorized, 26,986 and 26,500 shares
issued, 26,378 and 26,500
shares outstanding in 1999 and 1998, respectively 230,131 219,189
Common stock in treasury, at cost (18,939) -
Accumulated other comprehensive income - 211
Retained earnings 100,028 57,873
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 311,220 277,273
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- -------------------------------------------------------------------------------------------------------------------
$ 659,735 544,808
===================================================================================================================
See accompanying notes to consolidated financial statements.
32
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Operations In thousands, except per share data
Fiscal years ended September 26, 1999, September 27, 1998 and September 28, 1997
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Sales $ 1,567,879 1,389,768 1,117,346
Cost of goods sold and occupancy costs 1,029,350 921,104 749,551
Inventory writeoffs associated with reorganization 2,480 - -
- -------------------------------------------------------------------------------------------------------------------
Gross profit 536,049 468,664 367,795
Selling, general and administrative expenses 448,147 385,573 312,703
Pre-opening and relocation costs 5,914 3,979 5,243
Merger expenses - 1,699 4,887
Other reorganization and asset disposal costs 6,979 - -
- -------------------------------------------------------------------------------------------------------------------
Income from operations 75,009 77,413 44,962
Other income (expense):
Interest expense (8,248) (7,685) (6,044)
Investment and other income 2,345 2,328 450
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 69,106 72,056 39,368
Provision for income taxes 26,951 26,661 12,724
- -------------------------------------------------------------------------------------------------------------------
Net income $ 42,155 45,395 26,644
===================================================================================================================
Basic income per common share $ 1.60 1.74 1.10
===================================================================================================================
Weighted average common shares outstanding 26,374 26,159 24,194
===================================================================================================================
Diluted income per common share $ 1.54 1.64 1.06
===================================================================================================================
Weighted average shares outstanding, diluted basis 27,446 27,744 25,162
===================================================================================================================
See accompanying notes to consolidated financial statements.
33
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income In thousands
Fiscal years ended September 26, 1999, September 27, 1998 and September 28, 1997
Accumulated
Common Other Retained Total
Shares Common Stock in Comprehensive Earnings Shareholders'
Outstanding Stock Treasury Income (Loss) (Deficit) Equity
- -------------------------------------------------------------------------------------------------------------------
Balances at September 29, 1996 23,792 $ 183,305 - (217) (11,064) 172,024
- -------------------------------------------------------------------------------------------------------------------
Net income - - - - 26,644 26,644
Change in unrealized gain (loss)
on investments - - - 92 - 92
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income - - - 92 26,644 26,736
Adjustment to conform fiscal year of
pooled entity - - - - (1,268) (1,268)
Other acquisitions 244 2,200 - - (1,236) 964
Issuance of common stock 514 7,907 - - - 7,907
Common stock purchased and retired (97) (2,187) - - - (2,187)
Tax benefit related to exercise of
employee stock options - 1,289 - - - 1,289
- -------------------------------------------------------------------------------------------------------------------
Balances at September 28, 1997 24,453 192,514 - (125) 13,076 205,465
- -------------------------------------------------------------------------------------------------------------------
Net income - - - - 45,395 45,395
Change in unrealized gain (loss)
on investments - - - 336 - 336
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income - - - 336 45,395 45,731
Acquisitions 1,187 2,027 - - (598) 1,429
Issuance of common stock 860 14,925 - - - 14,925
Tax benefit related to exercise of
employee stock options - 9,723 - - - 9,723
- -------------------------------------------------------------------------------------------------------------------
Balances at September 27, 1998 26,500 219,189 - 211 57,873 277,273
- -------------------------------------------------------------------------------------------------------------------
Net income - - - - 42,155 42,155
Change in unrealized gain (loss)
on investments - - - (211) - (211)
- --------------------------------------------------------------------------------------------------------------------
Comprehensive income - - - (211) 42,155 41,944
Issuance of common stock 486 7,049 - - - 7,049
Common stock purchased (608) - (18,939) - - (18,939)
Tax benefit related to exercise of
employee stock options - 3,893 - - - 3,893
- -------------------------------------------------------------------------------------------------------------------
Balances at September 26, 1999 26,378 $ 230,131 (18,939) - 100,028 311,220
===================================================================================================================
See accompanying notes to consolidated financial statements.
34
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Cash Flows In thousands
Fiscal years ended September 26, 1999, September 27, 1998 and September 28, 1997
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 42,155 45,395 26,644
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization 53,339 42,307 34,456
Loss on disposal of fixed assets 1,285 1,421 1,945
Reorganization and asset disposal costs 9,459 - -
Other loss provisions - - 1,088
Deferred income tax expense (benefit) 4,732 (1,204) (1,390)
Change in LIFO reserve 834 417 800
Rent differential 1,443 1,525 800
Tax benefit related to exercise of employee stock options 3,893 9,723 1,289
Interest accretion on long-term debt 6,058 3,337 -
Adjustment to conform fiscal year of pooled entity - - (1,268)
Lease termination and other merger accrual payments (2,169) (8,497) (2,956)
Other - - 449
Net change in current assets and liabilities:
Trade accounts receivable (5,751) (1,922) (4,681)
Merchandise inventories (8,093) (14,442) (18,694)
Prepaid expenses and other current assets (4,986) 883 (510)
Trade accounts payable 11,854 (947) 3,934
Accrued payroll, bonus and employee benefits 2,724 4,948 9,671
Other accrued expenses 6,414 7,929 2,464
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 123,191 90,873 54,041
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Acquisition of property and equipment (75,048) (41,197) (31,062)
Development costs of new store locations (80,976) (54,521) (24,566)
Acquisition of intangible assets (9,994) (4,984) (6,693)
Purchase of marketable securities and other long-term investments (23,600) (25,594) -
Proceeds from sale of marketable securities 26,808 - 5,899
Payment for purchase of acquired entities, net of cash acquired (24,500) (1,841) -
Other investing activities - (191) -
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (187,310) (128,328) (56,422)
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. (continued)
35
Whole Foods Market, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued) In thousands
Fiscal years ended September 26, 1999, September 27, 1998 and September 28, 1997
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from issuance of convertible debentures $ - 111,748 -
Net proceeds from long-term borrowings 49,000 11,000 24,336
Payments on long-term debt and capital lease obligations (646) (76,939) (18,277)
Issuance of common stock 7,049 14,925 7,907
Purchase of treasury stock (18,939) - (2,187)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 36,464 60,734 11,779
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (27,655) 23,279 9,398
Cash and cash equivalents at beginning of year 36,674 13,395 3,997
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,019 36,674 13,395
===================================================================================================================
Supplemental disclosures of cash flow information
Interest and income taxes paid:
Interest $ 3,245 5,691 6,733
===================================================================================================================
Federal and state income taxes $ 21,159 16,618 11,221
===================================================================================================================
See accompanying notes to consolidated financial statements.
36
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Fiscal years ended September 26, 1999, September 27, 1998 and September 28, 1997
(1) Corporate Organization
The consolidated financial statements include the accounts of Whole Foods
Market, Inc. and its subsidiaries ("Company"). All significant majority-owned
subsidiaries are consolidated on a line-by-line basis. All significant
intercompany accounts and transactions are eliminated upon consolidation. Where
appropriate, prior years' financial statements have been reclassified to conform
with the 1999 presentation.
(2) Summary of Significant Accounting Policies
Business
The Company and its subsidiaries engage in the sale of natural food and
nutritional products, primarily through its natural foods supermarkets and
direct marketing of nutritional supplements. As of September 26, 1999, the
Company operated 100 stores, all of which are located in the United States, and
engaged in direct marketing of nutritional supplements primarily 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 years 1999, 1998 and 1997 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.
Investments in Debt and Equity Securities
Marketable securities and other long-term investments at September 26, 1999
consisted of investments in equity instruments of public and non-public
companies. Marketable securities at September 27, 1998 consisted of investments
in short-term high quality corporate bond funds. The Company classifies its
investments in debt and equity securities of public companies as
available-for-sale. Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of shareholders' equity until realized. A decline in the fair
value of any available-for-sale security below cost that is deemed to be other
than temporary results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis of the security is
established. The Company's investments in equity securities of non-public
companies at September 26, 1999 are accounted for under the cost method.
Realized gains and losses from the sale of investments in debt and equity
securities are determined on a specific identification basis. Dividend and
interest income are recognized when earned.
(continued)
37
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies, continued
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable,
trade accounts payable, accrued payroll, bonus and employee benefits, and other
accrued expenses approximate fair value because of the short maturity of those
instruments. The carrying value of notes payable to banks approximates fair
value due to variable interest rates charged on these notes. Marketable
securities are stated at fair value with unrealized gains and losses included as
a component of shareholders' equity until realized. The fair value of long-term
investments accounted for under the cost method is estimated, where practicable,
based on prices recently paid for shares in those companies. The fair value of
convertible subordinated debentures is estimated using quoted market prices. The
fair value of senior unsecured notes is estimated by discounting the future cash
flows at the rates currently available to the Company for similar debt
instruments of comparable maturities. Carrying amounts and fair values of the
Company's financial instruments other than those for which carrying amounts
approximate fair values as noted above are as follows (in thousands):
1999 1998
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------
Assets:
Marketable securities, short-term $ - - $ 27,019 27,019
Marketable securities, long-term 3,600 3,600 - -
Other long-term investments 20,000 20,000 - -
Liabilities:
Convertible subordinated debentures $ 124,419 101,656 $ 118,361 105,581
Senior unsecured notes 40,000 40,444 40,000 42,842
===================================================================================================================
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 manufactured inventories of Amrion and Allegro are determined by the
first-in, first-out ("FIFO") method. The excess of estimated current costs over
LIFO carrying value was approximately $4,492,000 and $3,658,000 at September 26,
1999 and September 27, 1998, respectively. Balances of inventories are as
follows (in thousands):
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Manufactured inventories:
Raw materials $ 11,380 10,472
Work in process 651 363
Finished goods 8,451 12,446
- -------------------------------------------------------------------------------------------------------------------
Total manufactured inventories 20,482 23,281
- -------------------------------------------------------------------------------------------------------------------
Other inventories, net of LIFO reserve 72,970 62,347
- -------------------------------------------------------------------------------------------------------------------
$ 93,452 85,628
===================================================================================================================
(continued)
38
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies, continued
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation of equipment is provided over the estimated useful
lives (generally 3 to 15 years) using the straight-line method. Leasehold
improvements are depreciated on the straight-line method over the shorter of the
estimated useful lives of the improvements or the terms of the related leases.
Costs related to a projected site determined to be unsatisfactory and general
site selection costs which cannot be identified with a specific store location
are charged to operations currently.
Pre-opening costs include costs associated with hiring and training personnel,
supplies and certain occupancy and miscellaneous costs related to new locations.
In fiscal 1999 and prior years, the Company capitalized pre-opening costs and
expensed such amounts in the quarter of the location opening. The AICPA issued
SOP 98-5, "Reporting on the Costs of Start-up Activities" in April 1998. SOP
98-5 requires costs of start-up activities and organization costs to be expensed
as incurred and is effective for financial statements issued for fiscal years
beginning after December 15, 1998. The Company will adopt SOP 98-5 in fiscal
year 2000, with the initial application recognized as the cumulative effect of a
change in accounting principle. Capitalized pre-opening costs at September 26,
1999 totaled approximately $647,000.
Acquired Leasehold Rights
Acquired leasehold rights are amortized as rent expense over the remaining lease
term using the straight-line method. Accumulated amortization of acquired
leasehold rights at September 26, 1999 and September 27, 1998 totaled
approximately $2,238,000 and $2,081,000, respectively.
Excess of Cost Over Net Assets Acquired
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 26, 1999 and September 27, 1998 totaled approximately
$8,301,000 and $6,973,000, respectively. The carrying value of the excess of
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.
Other Assets
Other assets include non-competition agreements, trademarks and certain costs
associated with the issuance of debt. Non-competition agreements and debt
issuance costs are amortized over the life of the related agreement using the
straight-line method. Trademarks are amortized over 40 years using the
straight-line method. Also included in other assets at September 26, 1999 and
September 27, 1998 was a note receivable with a carrying amount of approximately
$2,213,000 and $2,341,000, respectively. Accumulated amortization included in
other assets at September 26, 1999 and September 27, 1998 totaled approximately
$6,358,000 and $3,497,000, respectively.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company evaluates long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Advertising
The Company expenses the production costs of advertising when the advertising
first takes place, except for direct-response advertising which is capitalized
and amortized over its expected period of future benefit. Direct response
advertising consists primarily of direct mail advertising, including deferred
promotional mailing costs, of the Company's products. The capitalized costs of
mailed promotional materials are amortized over the expected promotional benefit
period of three months. Advertising expense for fiscal years 1999, 1998 and 1997
was approximately $17,628,000, $19,121,000 and $14,403,000, respectively.
(continued)
39
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.
Income per Share
Basic income per share is based on the weighted average number of common shares
outstanding during the fiscal period. Diluted income per share is based on the
weighted average number of common shares outstanding plus, where applicable, the
additional common shares that would have been outstanding as a result of the
conversion of dilutive options and convertible debt.
A reconciliation of the denominators of the basic and diluted income per share
calculations follows (in thousands):
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Denominator for basic income per
share: weighted average shares 26,374 26,159 24,194
Additional shares deemed outstanding from
the assumed exercise of stock options 1,072 1,585 968
- -------------------------------------------------------------------------------------------------------
Denominator for diluted income per
share: adjusted weighted average
shares and assumed conversions 27,446 27,744 25,162
=======================================================================================================
The computation of diluted income per share does not include approximately
1,643,000 shares of common stock related to the zero coupon convertible
subordinated debentures at the end of fiscal years 1999 and 1998 and options to
purchase approximately 1,508,000 shares, 1,014,000 shares and 380,000 shares of
common stock at the end of fiscal years 1999, 1998 and 1997, respectively,
because to do so would be antidilutive.
Comprehensive Income
Effective September 28, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose financial statements.
Financial statements for all periods presented have been restated to reflect the
adoption of SFAS No. 130. The Company's comprehensive income consisted of net
income and changes in unrealized gains and losses on marketable securities, net
of tax. Comprehensive income is reflected in the consolidated statements of
shareholders' equity and comprehensive income.
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, allowance for doubtful accounts, employee benefit plans, taxes,
reorganization reserves and contingencies.
40
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3) Business Combinations
Nature's Heartland
In April 1999, the Company acquired the outstanding stock of Nature's Heartland,
Inc., which operated four natural foods supermarkets in the greater Boston
metropolitan area, in exchange for approximately $25 million in cash. This
transaction was accounted for using the purchase method and, accordingly, the
purchase price was allocated to net assets acquired based on their estimated
fair values at the date of acquisition. This allocation resulted in acquired
goodwill of approximately $13.5 million, which is being amortized on a
straight-line basis over 40 years. Pro forma results of operations are not
presented due to the immaterial effect of the acquired company's results on
consolidated results of operations.
Merchant of Vino
In December 1997, the Company acquired Merchant of Vino, which operated four
gourmet/natural food supermarkets and two specialty wine and gourmet food shops
in the greater Detroit metropolitan area, for approximately 1 million shares of
Company common stock. The acquisition was accounted for using the
pooling-of-interests method. Due to the immateriality of the financial
statements of the acquired entity to the Company's consolidated financial
statements, financial information for the periods prior to fiscal 1998 has not
been restated. An adjustment to decrease retained earnings by approximately $1.8
million was recorded to include results of operations of the acquired entity
prior to the combination in these consolidated financial statements. Revenue and
results of operations of the acquired entity for the period from September 29,
1997 through the date of acquisition are not material to the combined results.
Transaction and other merger-related costs associated with the acquisition of
Merchant of Vino totaled approximately $1,139,000.
Allegro Coffee Company
In December 1997, the Company acquired Allegro Coffee Company, a specialty
coffee roaster and distributor based in Boulder, Colorado, for approximately
175,000 shares of Company common stock. The acquisition was accounted for using
the pooling-of-interests method. Due to the immateriality of the financial
statements of the acquired entity to the Company's consolidated financial
statements, financial information for the periods prior to fiscal 1998 has not
been restated. An adjustment to increase retained earnings by approximately $1.2
million was recorded to include results of operations of the acquired entity
prior to the combination in these consolidated financial statements. Revenue and
results of operations of the acquired entity for the period from September 29,
1997 through the date of acquisition are not material to the combined results.
Transaction and other merger-related costs associated with the acquisition of
Allegro Coffee Company totaled approximately $560,000.
Amrion, Inc.
In September 1997, the Company acquired Amrion, Inc., a Boulder, Colorado-based
company engaged in developing, producing and marketing nutriceuticals and
nutritional supplements, in exchange for approximately 4,680,000 shares of
Company common stock plus the assumption of approximately 330,000 outstanding
options to purchase shares of common stock. The merger was accounted for using
the pooling-of-interests method and, accordingly, financial information for the
periods prior to the merger date was restated to reflect the business
combination. Transaction and other merger-related costs associated with the
acquisition of Amrion totaled approximately $4,887,000.
Granary Market
In August 1997, the Company acquired Organic Merchants, Inc., doing business as
Granary Market ("Granary"), which operated a natural foods market in Monterey,
California, in exchange for approximately 33,000 shares of Company common stock.
The acquisition was accounted for using the pooling-of-interests method. Due to
the immateriality of Granary financial statements to the Company's consolidated
financial statements, financial information for the periods prior to the
combination was not restated. An adjustment to increase retained earnings by
approximately $346,000 was recorded to include results of Granary operations for
the periods prior to the combination in these consolidated financial statements.
Revenue and results of operations of Granary for the period from September 30,
1996 through the date of acquisition were not material to the combined results.
(continued)
41
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3) Business Combinations, continued
Bread of Life
In April 1997, the Company acquired Bread of Life, Inc. ("Bread of Life"), which
operated two natural foods markets in South Florida, in exchange for
approximately 200,000 shares of Company common stock. The acquisition was
accounted for using the pooling-of-interests method. Due to the immateriality of
Bread of Life financial statements to the Company's consolidated financial
statements, financial information for the periods prior to the combination was
not restated. An adjustment to decrease retained earnings by approximately
$1,582,000 was recorded to include results of Bread of Life operations for the
periods prior to the combination in these consolidated financial statements.
Revenue and results of operations of Bread of Life for the period from September
30, 1996 through the date of acquisition were not material to the combined
results.
(4) Reorganization and Asset Disposal Costs
During the fourth quarter of fiscal 1999, the Company recognized reorganization
and asset disposal costs totaling approximately $9,459,000. Included in this
total are costs associated with the elimination of certain business lines at
Amrion, the disposal of accounting and distribution software, and other hardware
and software disposals. Reorganization costs associated with business lines
eliminated totaled approximately $3,519,000 and consisted primarily of inventory
writeoffs totaling approximately $2,480,000 that have been classified as a
component of cost of goods sold and the writedown of other remaining assets to
net realizable value. Costs associated with the disposal of accounting and
distribution software which was replaced with the implementation of new
financial software totaled approximately $2,848,000. Costs associated with other
hardware and software disposals totaled approximately $3,092,000 and consisted
of the writeoffs of certain Year 2000 non-compliant or obsolete hardware and
certain software under development that the Company determined would not be
placed in service. Substantially all activities related to the reorganization
and asset disposals have been completed.
(5) Property and Equipment
Balances of major classes of property and equipment are as follows (in
thousands):
1999 1998
- -------------------------------------------------------------------------------------------------------
Land $ 13,595 11,051
Buildings and leasehold improvements 238,766 190,341
Fixtures and equipment 259,979 207,534
Construction in progress and equipment not yet in service 67,535 20,196
- -------------------------------------------------------------------------------------------------------
579,875 429,122
Less accumulated depreciation and amortization 172,671 137,644
- -------------------------------------------------------------------------------------------------------
$ 407,204 291,478
=======================================================================================================
Depreciation and amortization expense related to property and equipment totaled
approximately $46,967,000, $37,344,000 and $30,725,000 for fiscal years 1999,
1998 and 1997, respectively. Property and equipment includes approximately
$1,759,000, $735,000 and $769,000 of interest capitalized during fiscal years
1999, 1998 and 1997, respectively.
42
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(6) Long-Term Debt
The Company has long-term debt and obligations under capital leases as follows
(in thousands):
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Obligations under capital lease agreements for equipment,
due in monthly installments through 2005 $ 1,716 590
Notes payable to banks 49,000 -
Senior unsecured notes 40,000 40,000
Convertible debentures, including accreted interest 124,419 118,361
Other notes payable 382 65
- -------------------------------------------------------------------------------------------------------------------
215,517 159,016
Less current installments 6,655 343
- -------------------------------------------------------------------------------------------------------------------
$ 208,862 158,673
===================================================================================================================
The Company's bank credit agreement was amended in June 1999 to provide a
revolving line of credit of up to $100 million through June 28, 2002. This
credit agreement contains certain restrictive covenants, including the
prohibition of the payment of dividends on common stock. The credit agreement
also contains certain affirmative covenants including maintenance of certain
financial ratios as defined in the agreement. All outstanding amounts borrowed
under this agreement bear interest at the Company's option of either a defined
base rate or the Eurodollar rate plus a premium. Commitment fees ranging from
0.20% to 0.30% of the undrawn amount are payable under this agreement. At
September 26, 1999, approximately $49 million was drawn and at September 27,
1998, there were no amounts drawn under the agreement. The average interest rate
on amounts outstanding under this agreement at September 26, 1999 was
approximately 6.45%. The amounts available to the Company under this line of
credit were effectively reduced by outstanding letters of credit totaling
approximately $6.9 million and $5.8 million at September 26, 1999 and September
27, 1998, respectively.
During the second quarter of fiscal 1998, the Company issued a private offering
under Rule 144A of the Securities Act of 1933, as amended, of zero coupon
convertible subordinated debentures with no sinking fund requirement and a
scheduled maturity date of March 2, 2018. The debentures were subsequently
registered. The offering resulted in gross proceeds to the Company of
approximately $115 million. The issue price of the debentures results in an
effective yield to maturity of 5 percent. The principal amount of the debentures
at maturity is approximately $308.8 million. The debentures are convertible at
the option of the holder, at any time on or prior to maturity, unless previously
redeemed or otherwise purchased. The debentures have a conversion rate of 5.320
shares per $1,000 principal amount at maturity, initially representing a
conversion price of approximately $70 per share of common stock, or
approximately 1,643,000 shares. The debentures may be redeemed at the option of
the holder on March 2, 2003, March 2, 2008 or March 2, 2013 at the issue price
plus accrued original discount to the date of redemption. Subject to certain
limitations, the Company, at its option, may elect to pay this purchase price in
cash, shares of common stock or any combination thereof. The debentures may also
be redeemed in cash at the option of the holder if there is a change in control
at the issue price plus accrued original discount to the date of redemption.
Subsequent to March 2, 2003, the Company, at its option, may redeem the
debentures for cash, in whole or in part, at redemption prices equal to the
issue price plus accrued original discount to the date of redemption. The
debentures are subordinated in the right of payment to all existing and future
senior indebtedness. All amounts outstanding under the Company's line of credit
were repaid during the second quarter of fiscal 1998 with proceeds from the
issuance of the convertible subordinated debentures.
Senior unsecured notes payable bear interest at 7.29% and are payable in seven
equal annual installments of approximately $5,714,000 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 26, 1999 and September 27, 1998, the Company was in compliance with
the debt covenants.
43
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(7) Leases
The Company is committed under certain capital leases for rental of equipment
and certain operating leases for rental of facilities and equipment. These
leases expire or become subject to renewal at various dates from 2000 to 2024.
Rental expense charged to operations under operating leases for fiscal years
1999, 1998 and 1997 totaled approximately $38,870,000, $35,180,000 and
$29,153,000, respectively. Minimum rental commitments required by all
noncancelable leases are approximately as follows (in thousands):
Capital Operating
- -------------------------------------------------------------------------------------------------------------------
2000 $ 975 51,212
2001 666 53,140
2002 188 52,505
2003 12 50,572
2004 12 49,053
Future years 2 464,302
- ---------------------------------------------------------------------------------------------
1,855
Less amounts representing interest 139
- ---------------------------------------------------------------------------------------------
1,716
Less current installments 879
- ---------------------------------------------------------------------------------------------
$ 837
===================================================================================================================
Minimum rentals for operating leases do not include certain amounts of
contingent rentals which may become due under the provisions of leases for
retail space. These agreements provide that minimum rentals may be increased
based on a percent of annual sales from the retail space. During fiscal 1999,
1998 and 1997, the Company paid contingent rentals of approximately $2,022,000,
$1,456,000 and $1,200,000 respectively. Certain officers of the Company own
approximately 13% of a business which leases facilities from the Company under a
lease that commenced in fiscal 1995. The Company's rental income from this lease
during fiscal years 1999, 1998 and 1997 totaled approximately $391,000, $456,000
and $582,000, respectively.
(8) Income Taxes
Components of total income tax expense are as follows (in thousands):
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Current federal income tax $ 17,255 22,165 11,556
Current state income tax 4,964 5,700 2,558
- -------------------------------------------------------------------------------------------------------------------
Total current tax 22,219 27,865 14,114
- -------------------------------------------------------------------------------------------------------------------
Deferred federal income tax 4,423 (1,463) 271
Deferred state income tax 309 259 (1,661)
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax 4,732 (1,204) (1,390)
- -------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 26,951 26,661 12,724
===================================================================================================================
(continued)
44
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(8) Income Taxes, continued
Actual income tax expense differed from the amount computed by applying
statutory corporate income tax rates to income before taxes as follows (in
thousands):
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Federal tax based on statutory rates $ 24,187 25,220 13,779
Increase (reduction) in income taxes resulting from:
Non-deductible merger transaction costs - 2,677 646
Non-deductible amortization of cost in excess
of net assets acquired 389 356 354
Reduction in valuation allowance - (7,760) (3,086)
Deductible state income taxes (1,846) (2,085) (895)
Other, net (1,052) 2,294 1,029
- -------------------------------------------------------------------------------------------------------------------
Total federal taxes 21,678 20,702 11,827
State income taxes 5,273 5,959 897
- -------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 26,951 26,661 12,724
===================================================================================================================
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):
Current deferred tax assets (liabilities) 1999 1998
===================================================================================================================
Compensated absences, principally due to financial reporting accrual $ 5,516 4,500
Inventories, principally due to additional costs inventoried
for tax purposes pursuant to the Tax Reform Act of 1986 1,488 2,843
Alternative minimum tax credit - 245
Acquired net operating loss carryforwards 468 3,235
Other (65) (122)
- -------------------------------------------------------------------------------------------------------------------
Net current deferred tax asset $ 7,407 10,701
===================================================================================================================
Long-term deferred tax assets (liabilities) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Lease termination and other merger accruals $ 914 1,462
Rent differential, principally due to financial
reporting of pro rata expense 4,012 3,405
Financial basis of fixed assets in excess of tax basis (8,990) (7,052)
Capitalized costs expensed for tax purposes (510) (1,092)
Other 27 168
- -------------------------------------------------------------------------------------------------------------------
Net long term deferred tax liability (4,547) (3,109)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 2,860 7,592
===================================================================================================================
Management believes that it is more likely than not that the Company will fully
realize the total deferred tax assets based on the nature of these deductible
temporary differences and a history of profitable operations. As of September
26, 1999, the Company had net operating loss carryforwards assumed in the Fresh
Fields acquisition totaling approximately $1.1 million that will begin to expire
in 2003 and are subject to certain limitations on use.
45
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(9) Shareholders' Equity
Treasury Stock
The Board of Directors has authorized the Company to repurchase up to $50
million in outstanding shares of Company common stock. During fiscal year 1999,
the Company repurchased 608,000 shares of its common stock for an aggregate cost
of approximately $18,939,000. During the first quarter of fiscal year 2000, the
Company repurchased an additional 429,000 shares of its common stock for an
aggregate cost of approximately $13,534,000.
Preferred Stock Purchase Rights
On September 22, 1999, the Company's Board of Directors declared a dividend of
one Right to purchase preferred stock ("Right") for each outstanding share of
Company common stock to shareholders of record at the close of business on
October 4, 1999. Each right initially entitles the registered holder to purchase
from the Company a fractional share consisting of one one-thousandth of a share
of Series A Junior Participating Preferred Stock, par value $.01 per share, at a
purchase price of $225 per fractional share, subject to adjustment. The Rights
generally will not become exercisable until ten days after a public announcement
that a person or group has acquired 15% or more of Company common stock (thereby
becoming an "Acquiring Person") or the commencement of a tender or exchange
offer that would result in an Acquiring Person (the earlier of such dates being
called the "Distribution Date"). Rights will be issued with all shares of
Company common stock issued from the record date to the Distribution Date. Until
the Distribution Date, the Rights will be evidenced by the certificates
representing Company common stock and will be transferable only with Company
common stock. Generally, if any person or group becomes an Acquiring Person,
each right, other than Rights beneficially owned by the Acquiring Person (which
will thereupon become void), will thereafter entitle its holder to purchase, at
the Rights' then current exercise price, shares of the Company's common stock
having a market value of two times the exercise price of the Right. If, after
there is an Acquiring Person, and the Company or a majority of its assets is
acquired in certain transactions, each Right not owned by an Acquiring Person
will entitle its holder to purchase, at a discount, shares of common stock of
the acquiring entity (or its parent) in the transaction. After there is an
Acquiring Person, the Company's Board of Directors may, under certain
circumstances, exchange shares of the Company's common stock or other securities
for each Right not held by an Acquiring Person. At any time until ten days after
a public announcement that the Rights have been triggered, the Company will
generally be entitled to redeem the Rights for $.01 and to amend the rights in
any manner. Certain subsequent amendments are also permitted. The Rights expire
on September 22, 2009.
(10) Team Member Benefit Plans
Team Member Stock Option Plans
The Company grants options to purchase common stock under its 1992 Stock Option
Plans, as amended. Under these plans, options are granted at an option price
equal to the market value of the stock at the date of grant and are generally
exercisable ratably over a four-year period beginning one year from date of
grant. Options granted in fiscal years 1999, 1998 and 1997 expire seven years
from date of grant. The Company has, in connection with certain of its business
combinations, assumed the stock option plans of the acquired companies. All
options outstanding under the Company's previous plans and plans assumed in
business combinations continue to be governed by the terms and conditions of
those grants. At September 26, 1999, September 27, 1998 and September 28, 1997,
approximately 519,000, 1,378,000 and 1,570,000 shares of Company common stock,
respectively, were available for option grants.
(continued)
46
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(10) Team Member Benefit Plans
Team Member Stock Option Plans, continued
The following table summarizes option activity (in thousands, except per share
data):
Weighted
Number Average
of Options Exercise
Outstanding Price
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 29, 1996 2,688 $ 17.19
Options granted 665 22.48
Options assumed 330 9.28
Options exercised (413) 16.13
Options canceled (165) 22.26
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 28, 1997 3,105 17.36
Options granted 1,580 68.39
Options exercised (839) 16.70
Options canceled (126) 41.06
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 27, 1998 3,720 38.38
Options granted 1,165 32.17
Options exercised (471) 13.04
Options canceled (291) 46.59
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 26, 1999 4,123 $ 38.91
======================================================================================================================
A summary of options outstanding and exercisable at September 26, 1999 follows
(in thousands, except per share data):
Options Outstanding Options Exercisable
---------------------------------- -----------------------------
Range of Weighted Average Weighted Weighted
Exercise Prices Number Remaining Average Number Average
From To Outstanding Life (in Years) Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------------------
$ 0.90 $19.50 933 3.83 $ 14.46 763 $ 14.18
21.50 27.63 626 4.43 22.90 341 23.15
31.88 36.50 1,177 6.34 32.06 47 33.47
42.38 69.75 1,387 5.47 68.39 360 68.74
--------------------------------------------------------------------------------------------------------------------
Total 4,123 5.19 $ 38.91 1,511 $ 29.79
====================================================================================================================
At September 27, 1998 and September 28, 1997, approximately 1,091,000 and
1,282,000 outstanding options, respectively, were exercisable. The weighted
average exercise price for outstanding exercisable options was $16.10 and $15.36
at September 27, 1998 and September 28, 1997, respectively.
(continued)
47
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(10) Team Member Benefit Plans
Team Member Stock Option Plans, continued
In accordance with Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock-Based Compensation," the Company continues to
apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its stock option
grants. Accordingly, no compensation expense has been recognized for option
grants to Team Members. As required by SFAS No. 123, the Company has determined
pro forma net income and net income per common share as if compensation costs
had been recognized based on the fair value of the options granted to Team
Members. The fair value of stock option grants has been estimated at the date of
grant using the Black-Scholes multiple option pricing model with the following
weighted average assumptions:
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 5.23% 5.63% 6.79%
Expected volatility 54.89% 53.72% 54.28%
Expected life, in years 3.40 3.37 3.28
=======================================================================================================================
The weighted average estimated fair values at grant date of Team Member stock
options granted during fiscal years 1999, 1998 and 1997 were $13.91, $30.03 and
$10.46, respectively. Had the Company recognized compensation cost based on the
fair value of stock options granted to Team Members at grant date as determined
using the Black-Scholes option valuation model described above consistent with
SFAS No. 123, net income and diluted income per common share would have changed
to the pro forma amounts shown below (in thousands, except per share data):
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Net income:
As reported $42,155 45,395 26,644
Pro forma $30,175 36,437 23,660
Diluted income per common share:
As reported $1.54 1.64 1.06
Pro forma $1.10 1.31 0.94
======================================================================================================================
The above pro forma disclosures may not be representative of the effects on net
income and net income per common share in future years because they do not take
into consideration pro forma compensation expense related to grants awarded
prior to fiscal year 1996 or additional stock options that may be granted in
future years.
Team Member Stock Purchase Plan
The Company offers a Team Member stock purchase plan to all full-time Team
Members with a minimum of 400 hours of service. Under this plan, participating
Team Members may purchase common stock of the Company each fiscal quarter
through payroll deductions. Participants in the plan may elect to purchase
unrestricted shares of stock at 100 percent of its market value or restricted
shares at 85 percent of its market value on the purchase date. Participants are
required to hold restricted shares for two years before selling them.
Approximately 15,000, 8,000 and 9,000 shares were issued by the Company under
this plan in fiscal 1999, 1998 and 1997, respectively.
Team Member 401(k) Plan
The Company offers a Team Member 401(k) plan to all Team Members with a minimum
of one year of service and 1,000 service hours in the plan year. Company
matching contributions under this plan, determined at the Company's discretion,
totaled approximately $1,111,000, $821,000 and $436,000 in fiscal 1999, 1998 and
1997, respectively. Matching contributions were made in Company common stock
totaling approximately 32,000 shares purchased in open market transactions in
fiscal 1999 and approximately 13,000 and 15,000 newly-issued shares in fiscal
1998 and 1997, respectively.
48
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(11) Quarterly Results (unaudited)
For fiscal years 1999 and 1998, the first quarter is 16 weeks and the remaining
quarters are each 12 weeks. The following tables set forth selected quarterly
unaudited consolidated statements of operations and operating information for
the fiscal years ended September 26, 1999 and September 27, 1998 (in thousands
except per share data):
1st 2nd 3rd 4th
1999 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
Sales $ 456,239 358,872 377,580 375,188
Gross profit 153,210 124,240 130,446 128,153
Pre-opening and relocation costs - 2,243 809 2,862
Other reorganization and asset disposal costs - - - 6,979
Income from operations 22,905 20,513 21,513 10,078
Income before income taxes 21,238 19,094 19,753 9,021
Net income 12,955 11,647 12,050 5,503
Basic income per share $ 0.49 0.44 0.46 0.21
Weighted average common shares outstanding 26,552 26,339 26,205 26,342
Diluted income per share $ 0.47 0.43 0.44 0.20
Weighted average shares outstanding - diluted basis 27,694 27,156 27,428 27,425
Average weekly sales per store $ 305 319 316 303
- -------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
1998 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
Sales $ 407,788 324,811 330,999 326,170
Gross profit 135,752 110,939 110,832 111,141
Pre-opening and relocation costs 1,065 1,462 1,024 428
Merger expenses 1,699 - - -
Income from operations 21,084 18,857 18,921 18,551
Income before income taxes 19,092 17,657 17,621 17,686
Net income 12,028 11,124 11,101 11,142
Basic income per share $ 0.46 0.43 0.42 0.42
Weighted average common shares outstanding 25,913 26,094 26,279 26,435
Diluted income per share $ 0.44 0.40 0.40 0.40
Weighted average shares outstanding - diluted basis 27,523 27,824 27,880 27,824
Average weekly sales per store $ 287 299 299 290
- -------------------------------------------------------------------------------------------------------------------
49
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(12) Segment Information
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131") which establishes standards for reporting information about
operating segments and related disclosures about products, geographic
information, and major customers. The Company has identified three business
segments based on management responsibility and the nature of products and
services: natural foods supermarkets, direct marketing and other. The natural
foods supermarket segment includes all activities associated with retail sale of
natural food and nutritional products through the Company's supermarkets. The
direct marketing segment includes all activities of Amrion, which is engaged in
developing, producing and marketing high quality nutriceuticals and nutritional
supplements. The "Other" segment includes Allegro Coffee Company and all
activities, including start-up costs, of the Company's Internet subsidiary,
WholeFoods.com. The Company evaluates segments based on income from operations,
which is defined as income before interest expense, investment and other income,
and income taxes. Intersegment sales consist primarily of sales by Allegro
Coffee Company and Amrion to natural foods supermarkets recorded using internal
transfer prices based on cost. Costs and assets associated with corporate
administrative activities are not allocated and are included in the natural
foods supermarkets segment. Merger costs in 1998 and 1997 were associated with
the natural foods supermarket segment. The Company does not rely on any major
customers as a source of revenue. Summary segment information follows (in
thousands):
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Sales:
Natural foods supermarkets $ 1,485,618 1,299,147 1,049,283
Direct marketing 78,539 83,355 68,063
Other 13,255 13,847 -
- -------------------------------------------------------------------------------------------------------------------
1,577,412 1,396,349 1,117,346
Intersegment sales (9,533) (6,581) -
- -------------------------------------------------------------------------------------------------------------------
Total $ 1,567,879 1,389,768 1,117,346
===================================================================================================================
Other reorganization and asset disposal costs:
Natural foods supermarkets $ 5,940 - -
Direct marketing 1,039 - -
Other - - -
- -------------------------------------------------------------------------------------------------------------------
Total $ 6,979 - -
===================================================================================================================
Depreciation and amortization:
Natural foods supermarkets $ 48,902 38,156 32,362
Direct marketing 3,579 3,681 2,094
Other 858 470 -
- -------------------------------------------------------------------------------------------------------------------
Total $ 53,339 42,307 34,456
===================================================================================================================
Income from operations and reconciliation to income before income taxes:
Natural foods supermarkets $ 74,926 68,121 36,606
Direct marketing 2,945 8,891 8,356
Other (2,862) 401 -
- -------------------------------------------------------------------------------------------------------------------
Income from operations 75,009 77,413 44,962
Interest expense (8,248) (7,685) (6,044)
Investment and other income 2,345 2,328 450
- -------------------------------------------------------------------------------------------------------------------
Total $ 69,106 72,056 39,368
===================================================================================================================
(continued)
50
Whole Foods Market, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(12) Segment Information, continued
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Total assets:
Natural foods supermarkets $ 605,538 494,141 366,408
Direct marketing 47,257 45,679 32,076
Other 6,940 4,988 -
- -------------------------------------------------------------------------------------------------------------------
Total $ 659,735 544,808 398,484
===================================================================================================================
Expenditures for additions to long-lived assets:
Natural foods supermarkets $ 182,207 96,935 56,749
Direct marketing 2,981 7,109 4,647
Other 3,043 572 -
- -------------------------------------------------------------------------------------------------------------------
Total $ 188,231 104,616 61,396
===================================================================================================================
(13) Commitments and Contingencies
The Company provides partially self-insured, voluntary Team Member benefits
plans which provide, among other benefits, health care benefits to participating
Team Members. The plans are designed to provide specified levels of coverage,
with excess insurance coverage provided by a commercial insurer. 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 26, 1999 has been estimated based on management's
review of claims outstanding at fiscal year end, claims reported subsequent to
fiscal year end and management's knowledge of the typical length of time from
date of occurrence to date of reported claim.
The Company is a party to legal proceedings including matters involving
personnel and employment issues and other proceedings arising in the ordinary
course of business. Plaintiffs in certain of these proceedings may seek to
recover large and sometimes unspecified amounts, and some matters may remain
unresolved for several years. It is not possible to predict a range of possible
loss for the Company's litigation matters, and losses could be material to
operating results in a future reporting period. However, 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.
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WHOLE FOODS MARKET, INC.
Date: December 21, 1999 By: /s/ Glenda Flanagan
-------------------
Glenda Flanagan, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on December 21, 1999.
Name Title
/s/ John P. Mackey
- -------------------------
John Mackey Chairman of the Board, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Glenda Flanagan
- -------------------------
Glenda Flanagan Chief Financial Officer (Principal Financial
and Accounting Officer)
/s/ David W. Dupree
- -------------------------
David W. Dupree Director
/s/ Dr. John B. Elstrott
- ------------------------
Dr. John B. Elstrott Director
/s/ Avram J. Goldberg
- -------------------------
Avram J. Goldberg Director
/s/ Fred Lager
- -------------------------
Fred Lager Director
/s/ Linda A. Mason
- -------------------------
Linda A. Mason Director
/s/ Jirka Rysavy
- -------------------------
Jirka Rysavy Director
/s/ Dr. Ralph Z. Sorenson
- -------------------------
Dr. Ralph Z. Sorenson Director
INDEX TO EXHIBITS
2.1 Stock Purchase Agreement, among the Registrant, Whole Foods
Market Group, Inc. and Nature's Heartland, Inc. (13)
2.2 Amendment to Stock Purchase Agreement, among the Registrant,
Whole Foods Market Group, Inc. and Nature's Heartland, Inc. (13)
3.1 Restated Articles of Incorporation of the Registrant, as amended (2)
3.2 By-laws of the Registrant adopted May 23, 1995 (8)
4.1 Form of Zero Coupon Convertible Subordinated Debentures Due 2018 (4)
4.2 Indentures between the Company and Chase Bank of Texas, National
Association, as Trustee (4)
4.3 Registration Rights Agreement by and among the Company and BT
Alex Brown Incorporated and Morgan Stanley & Co. Incorporated (4)
4.4 Shareholder Rights Agreement, dated September 22, 1999, between
the Registrant, Whole Foods Market, Inc. and Securities
Transfer Corporation (7)
10.1 1987 Stock Option and Incentive Plan for Employees (3)
10.2 1987 Stock Option Plan for Outside Directors (3)
10.3 1993 Team Member Stock Ownership Plan (1)
10.5 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 Credit Agreement, dated December 27, 1994,
by and among the Registrant, the subsidiaries of the Registrant
and Texas Commerce Bank National Association (8)
10.8 First Amendment dated May 16, 1996 to Amended and Restated
Credit Agreement, dated December 27, 1994, by and among
Registrant, the subsidiaries of the Registrant and Texas
Commerce Bank National Association (9)
10.9 Second Amendment dated December 24, 1996 to Amended and Restated
Credit Agreement, dated December 27, 1994, by and among
Registrant, the subsidiaries of the Registrant and Texas
Commerce Bank National Association (10)
10.10 Third Amendment dated March 24, 1997 to Amended and Restated
Credit Agreement, dated December 27, 1994, by and among
Registrant, the subsidiaries of the Registrant and Texas
Commerce Bank National Association (10)
10.11 Fourth Amendment dated September 2, 1997 to Amended and Restated
Credit Agreement, dated December 27, 1994, by and among
Registrant, the subsidiaries of the Registrant and Texas
Commerce Bank National Association (10)
10.12 Fifth Amendment dated December 19, 1997 to Amended and Restated
Credit Agreement, dated December 27, 1994, by and among
Registrant, the subsidiaries of the Registrant and Texas
Commerce Bank National Association (11)
10.13 Sixth Amendment dated June 28, 1999 to Amended and Restated
Credit Agreement, dated December 27, 1994, by and among
Registrant, the subsidiaries of the Registrant and Chase Bank of
Texas, National Association (13)
10.14 1992 Stock Option Plan for Team Members, as amended (1)
10.15 1992 Stock Option Plan for Outside Directors (1)
10.16 1993 Team Member Stock Purchase Plan (1)
10.17 Second Amended and Restated 1991 Stock Incentive Plan of Fresh
Fields Markets, Inc. with amendments thereto (5)
10.18 1994 Director Stock Option Plan with amendments thereto (5)
10.19 Non-Qualified Stock Option Plan of Amrion, Inc. (6)
10.20 1994 Non-Employee Director Stock Option Plan of Amrion, Inc. (6)
12.1 Computation of Ratio of Earnings to Fixed Charges (13)
21.1 Subsidiaries of the Registrant (13)
23.1 Consent of KPMG LLP (13)
27.1 Financial Data Schedule (13)
99.1 Proxy Statement for Annual Meeting of Shareholders to be held
March 27, 2000 (12)
(continued)
53
INDEX TO EXHIBITS, continued
(1) Filed as an exhibit to Registration Statement on Form S-4 (No. 33-63824)
and incorporated herein by reference
(2) Filed as an exhibit to Registration Statement on Form S-3 (No.33-69362)
and incorporated herein by reference
(3) Filed as an exhibit to Registration Statement on Form S-1 (No.
33-44214) and incorporated herein by reference
(4) Filed as an exhibit to Registration Statement on Form S-3 (No.
333-51419) and incorporated herein by reference
(5) Filed as an exhibit to Registration Statement on Form S-8 (No.
33-11273) and incorporated herein by reference
(6) Filed as an exhibit to Registration Statement on Form S-8 (No.
33-35809) and incorporated herein by reference
(7) Filed as an exhibit to Registrant's Form 8-K (No. 033-44214) and
incorporated herein by reference
(8) Filed as an exhibit to Registrant's Form 10-K for year ended September
24, 1995 and incorporated herein by reference
(9) Filed as an exhibit to Registrant's Form 10-K for year ended September
29, 1996 and incorporated herein by reference
(10) Filed as an exhibit to Registrant's Form 10-K for year ended September
28, 1997 and incorporated herein by reference
(11) Filed as an exhibit to Registrant's Form 10-K for year ended September
27, 1998 and incorporated herein by reference
(12) To be filed with the Securities and Exchange Commission and incorporated
herein by reference
(13) Filed herewith
54