FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended April 12, 1998; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
----- -----
Commission File Number: 0-19797
WHOLE FOODS MARKET, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1989366
(State of (IRS employer
incorporation) identification no.)
601 N. Lamar
Suite 300
Austin, Texas 78703
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code:
512-477-4455
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
The number of shares of the registrant's common stock, no par value,
outstanding as of April 12, 1998 was 26,206,000 shares.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial statements
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
April 12, 1998 and September 28, 1997
(In thousands, except share data)
1998 1997
----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 35,834 $ 13,395
Marketable securities 25,928 1,089
Merchandise inventories 80,010 64,838
Accounts receivable and other 52,222 34,571
--------- ---------
Total current assets 193,994 113,893
--------- ---------
Net property and equipment 264,638 228,215
Excess of cost over net assets acquired, net 34,954 35,577
Other assets 28,597 21,993
--------- ---------
$ 522,183 $ 399,678
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 773 $ 1,171
Trade accounts payable 44,937 30,900
Accrued expenses and other 49,644 45,201
--------- ---------
Total current liabilities 95,354 77,272
--------- ---------
Long-term debt, less current installments 155,517 92,673
Other long-term liabilities 29,521 24,268
--------- ---------
Total liabilities 280,392 194,213
--------- ---------
Shareholders' equity:
Common stock, no par value, 100,000,000 shares
authorized; 26,206,000 and 24,453,000
shares issued and outstanding 206,168 192,514
Unrealized loss on securities available for sale (7) (125)
Retained earnings 35,630 13,076
--------- ---------
Total shareholders' equity 241,791 205,465
--------- ---------
$ 522,183 $ 399,678
========= =========
Page 2 of 11
<PAGE>
<TABLE>
<CAPTION>
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(In thousands, except per share data)
Twelve weeks ended Twenty-eight weeks ended
April 12 April 13 April 12 April 13
1998 1997 1998 1997
---------------------- ------------------------
<S> <C> <C>
Sales $ 324,811 $ 259,800 $ 732,599 $ 572,384
Cost of goods sold and occupancy costs 213,872 174,516 485,908 387,653
---------------------- ----------------------
Gross profit 110,939 85,284 246,691 184,731
Selling, general and administrative expenses 90,620 71,558 202,524 158,623
Pre-opening and relocation costs 1,462 1,129 2,527 2,733
Merger expenses -- -- 1,699 --
---------------------- ----------------------
Income from operations 18,857 12,597 39,941 23,375
Interest expense 1,534 1,519 3,532 3,281
Investment and other income (334) (101) (340) (280)
---------------------- ----------------------
Income before income taxes 17,657 11,179 36,749 20,374
Income taxes 6,533 3,961 13,597 7,168
---------------------- ----------------------
Net income $ 11,124 $ 7,218 $ 23,152 $ 13,206
====================== ======================
Basic earnings per share $ 0.43 $ 0.30 $ 0.89 $ 0.55
====================== ======================
Diluted earnings per share $ 0.40 $ 0.29 $ 0.84 $ 0.53
====================== ======================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3 of 11
<PAGE>
<TABLE>
<CAPTION>
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Twenty-eight weeks ended
April 12 April 13
1998 1997
------------------------
<S> <C>
Net cash flow from operating activities $37,719 $ 27,049
Cash flow from investing activities:
Acquisition of property and equipment (48,901) (33,652)
Acquisition of leasehold rights (2,555) (8,066)
Proceeds from marketable securities available for sale -- 573
Purchase of marketable securities available for sale (25,935) --
Other (1,038) (598)
--------------------
Net cash flow used by investing activities (78,429) (41,743)
--------------------
Cash flow from financing activities:
Net proceeds from bank borrowings 11,000 24,000
Net proceeds from sale of convertible debentures 111,749 --
Payments on long-term debt (73,019) (6,454)
Proceeds from issuance of common stock 13,365 1,185
Purchase of company stock -- (2,187)
Cash acquired in pooling-of-interests 54 --
--------------------
Net cash flow from financing activities 63,149 16,544
--------------------
Net increase in cash and cash equivalents 22,439 1,850
Cash and cash equivalents at beginning of period 13,395 3,997
--------------------
Cash and cash equivalents at end of period $ 35,834 $ 5,847
====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4 of 11
<PAGE>
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 12, 1998
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements of Whole Foods Market,
Inc. and subsidiaries ("Company") have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the
opinion of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Certain
information and footnote disclosure normally included in annual financial
statements prepared in conformity with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10K for the fiscal year ended September 28,
1997.
The Company's fiscal year ends on the last Sunday in September. The first fiscal
quarter is sixteen weeks, the second and third quarters each are twelve weeks
and the fourth quarter is twelve or thirteen weeks.
2. Business Combinations
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 stock. Also in December 1997, the Company acquired
Merchant of Vino, which operates four gourmet/natural food supermarkets and two
specialty wine and gourmet food shops in the greater Detroit metropolitan area,
for approximately 1.1 million shares of Company stock. The acquisitions were
accounted for using the pooling-of-interests method. Due to the immateriality of
the financial statements of these acquired entities 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 $2.1 million has been recorded to include results of
operations of these acquired entities prior to the combination in these
financial statements. Revenue and results of operations of these acquired
entities for the period from September 29, 1997 through the dates of acquisition
are not material to the combined results.
3. Long-Term Debt
During the second fiscal quarter, the Company issued a private offering under
Rule 144A of the Securities Act of 1933, as amended, of 5% zero coupon
convertible subordinated debentures with no sinking fund requirements and a
scheduled maturity date of March 2, 2018. This offering resulted in gross
proceeds to the Company of approximately $115 million including the
over-allotment option. The debentures are convertible at the option of the
holder, at anytime 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.
Debentures may be redeemed at the option of the holder on March 2, 2003, March
2, 2008 or March 2, 2013 for 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 purchase prices
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. All amounts outstanding under the Company's line of credit
agreement were repaid during the second fiscal quarter with proceeds from the
issuance of the convertible subordinated debentures.
Page 5 of 11
<PAGE>
4. Earnings Per Share
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Effective September 29,1997, the Company
adopted on a retroactive basis SFAS 128, which establishes standards for
computing and presenting earnings per share. Earnings per share for all periods
presented has been restated to reflect the adoption of SFAS 128. The adoption of
SFAS 128 did not have a material effect on the Company's financial statements.
<TABLE>
<CAPTION>
A reconciliation of the denominators of the basic and diluted earnings per share
calculations follows (in thousands):
Twelve weeks ended Twenty-eight weeks ended
April 12 April 13 April 12 April 13
1998 1997 1998 1997
----------------------- --------------------
<S> <C> <C> <C>
Denominator for basic earnings per
share - weighted average shares 26,094 24,155 25,990 24,114
Additional shares deemed outstanding from the
Assumed exercise of stock options 1,730 686 1,662 719
------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 27,824 24,841 27,652 24,833
=============================================
</TABLE>
Options to purchase approximately 1.5 million shares of common stock and
1,643,000 shares of common stock related to the $115 million in zero coupon
convertible subordinated debentures were not included in the computation of
diluted earnings per share for the twelve or twenty-eight week period ended
April 12, 1998, because to do so would be antidilutive.
5. Recent Pronouncement
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which
is effective for financial statements issued for periods beginning after
December 15, 1997. The Company plans to adopt SFAS 130 in fiscal year 1999. This
statement establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose financial statements.
Adoption of the statement will not result in significant additional disclosures
by the Company.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131), which is effective for financial statements
issued for periods beginning after December 15, 1997. The Company plans to adopt
SFAS 131 in fiscal year 1999. This statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
has not determined the impact of the adoption of this new accounting standard on
its consolidated financial statements.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5 on April 3, 1998. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. The SOP is
effective for financial statements for fiscal years beginning after December 15,
1998. The Company plans to adopt SOP 98-5 in fiscal year 2000. The adoption will
not have a material impact on the Company.
Page 6 of 11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS - Twelve and twenty-eight weeks ended April 12, 1998
compared to the same periods of the prior year.
General
The Company reports its results of operations on a fifty-two or fifty-three week
fiscal year ending on the last Sunday in September. The first fiscal quarter is
sixteen weeks, the second and third quarters each are twelve weeks and the
fourth quarter is twelve or thirteen weeks. In December 1997, the Company
acquired Allegro Coffee and Merchant of Vino in transactions that have been
accounted for using the pooling-of-interests method. Results of operations for
fiscal 1998 include the results of these acquired companies for the full year.
Prior year results have not been restated due to the immateriality of Allegro
Coffee and Merchant of Vino financial statements to the Company's consolidated
financial statements.
Sales
Sales increased 25% for the second fiscal quarter and 28% for the twenty-eight
weeks compared to the same periods of the prior fiscal year due to new stores
opened and acquired since last year, same store sales increases of approximately
11.8% for the quarter and 13.2% for the twenty-eight weeks, and an increase in
net sales at Amrion. The Company believes that current comparable store sales
increases have been greater than historical levels due to such factors as
increasing sales in stores acquired from Fresh Fields, the comparison of sales
from stores located in Southern California which were negatively impacted in the
prior year by the name change from Mrs. Gooch's to Whole Foods Market,
improvements in overall store execution and increased sales of newly released
private label products. Sales increases at Amrion resulted from improved
customer acquisition programs and expanded retail and mass market distribution
programs.
Gross Profit
Gross profit consists of retail sales less retail cost of goods sold and
occupancy costs, plus the net contribution from non-retail distribution and food
preparation operations. The Company's gross profit as a percentage of sales for
the twelve and twenty-eight weeks ended April 12, 1998 was 34.2% and 33.7%,
respectively, compared to 32.8% and 32.3% for the same periods of the prior
year. These increases reflect improved gross margins as stores mature, increased
national buying and private label initiatives and continued improvement in
margins at new stores. Additionally, gross profit is positively affected by
continued reductions in product cost as a percentage of sales at Amrion
resulting from increased in-house manufacturing and improved materials
procurement.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for the
twelve and twenty-eight weeks ended April 12, 1998 was 27.9% and 27.6%,
respectively, compared to 27.5% and 27.7% for the same periods of the prior
year. The percentage of sales increase in the current fiscal quarter is
primarily due to costs associated with building infrastructure in certain
regions to support growth in number of stores and expansion into new markets,
and personnel increases in our national offices, particularly related to
information systems.
Pre-Opening and Relocation Costs
Pre-opening and relocation costs for the twelve and twenty-eight weeks ended
April 12, 1998 relate to the openings of new Company stores in Boulder, Colorado
and Tempe, Arizona in the second quarter and the opening of one new store and
relocations of two stores in the first quarter. In the prior fiscal year, there
were two new store openings and one store relocation in the second quarter and
three new store openings in the first quarter. Subsequent to the end of the
second quarter, the Company has opened a new store in Winter Park, Florida. Two
new store openings and one store relocation are scheduled for the remainder of
the current fiscal year.
Page 7 of 11
<PAGE>
Interest Expense
Current year-to-date interest expense consists of costs related to the
convertible subordinated debentures, senior notes payable and bank line of
credit, net of capitalized interest associated with new store development. Net
interest expense for the second quarter was approximately $1,534,000 compared to
approximately $1,519,000 for the second quarter of the prior year. Current
year-to-date net interest expense was approximately $3,532,000 compared to
approximately $3,281,000 for the same period of the prior year. The Company
expects to incur greater interest expense in the remainder of fiscal 1998
compared to the same periods of the prior year due to increased total borrowings
outstanding after the issuance of the convertible subordinated debentures.
Investment and Other Income
Investment and other income for the current fiscal year consists primarily of
interest income related to the investment of a portion of the net proceeds from
the issuance of the convertible subordinated debentures. These excess proceeds
are invested in two separate investment accounts. A short-term corporate bond
portfolio, which invest in short-term high quality corporate bonds and a prime
money market portfolio, which invests in certificates of deposit, bankers'
acceptances, commercial paper and U.S. government securities. These funds seek
to provide high income while maintaining a high degree of stability of
principal.
LIQUIDITY AND CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
During the second fiscal quarter, Whole Foods Market issued a private offering
of 5% zero coupon convertible subordinated debentures with no sinking fund
requirements and a scheduled maturity date of March 2, 2018. This offering
resulted in gross proceeds to the Company of approximately $115 million
including over-allotment option. The Company used approximately $52 million of
the net proceeds to repay all amounts outstanding under its line of credit
agreement during the second quarter. The Company's bank credit agreement
currently provides for a revolving line of credit of up to $30 million. The
Company intends to modify its line of credit agreement to, among other matters,
reduce the amount available for borrowing and delete or modify certain
restrictive covenants. During the first fiscal quarter, the Company paid
approximately $8.8 million to retire all outstanding debt of Allegro and
Merchant of Vino in connection with those acquisitions.
Whole Foods Market's principal historical capital requirements have been the
funding of the development or acquisition of the new stores and, to lesser
extent, the resultant increase in the working capital requirements. The Company
estimates that cash requirements to open a new store will range from $3 million
to $12 million (after giving effect to any landlord construction allowance).
This excludes new store inventory of approximately $400,000, a substantial
portion of which is financed by the vendors of Whole Foods Market. During the
third fiscal quarter the Company has opened a new store in Winter Park, Florida.
Two new store openings and one store relocation are scheduled for the remainder
of the current fiscal year. The Company has eighteen stores currently under
development that are expected to open during the next two fiscal years.
Additionally, during fiscal 1998 the Company will commence construction of a new
manufacturing facility for the production of nutritional and nutriceutical
products at a total estimated cost of $25 to $30 million. The Company expects
that cash on hand plus cash generated from operations will be sufficient to
finance this expansion and other anticipated working capital and capital
expenditure requirements.
YEAR 2000 COMPLIANCE
Currently, there is a significant uncertainty in the software industry and among
software users regarding the impact of the year 2000 on installed software.
Software database modifications and/or implementation modifications will be
required to enable such software to distinguish between 21st and 20th century
dates. The Company uses third-party system software, some of which will need to
be modified or replaced in order to address year 2000 compliance. The Company is
continuing to evaluate the activities necessary to become year 2000 compliant
and, although the evaluation is ongoing, currently does not anticipate the
associated costs to be material.
Page 8 of 11
<PAGE>
RISK FACTORS
The Company wishes to caution readers that inherent risks and uncertainties
including those listed in the Company's Annual Report on Form 10-K for the year
ended September 28, 1997, among others, could cause the actual results of Whole
Foods Market to differ materially from those indicated by forward-looking
statements made in this Quarterly Report on Form 10-Q and other written
communications, as well as oral forward-looking statements made from time to
time by representatives of the Company. Except for historical information, the
matters discussed in such oral and written communications are forward looking
statements that involve risks and uncertainties, including but not limited to
general business conditions, the timely and successful development and opening
of new or relocated stores, the impact of competition and other factors which
are often beyond the control of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On March 30, 1998, the Company held its annual meeting of shareholders (i) to
elect eight directors to the Board of Directors of the Company who were
classified into three groups serving terms of office ranging from one to three
years. (ii) to consider and act upon a proposed amendment to the Articles of
Incorporation of the Company to increase the authorized number of shares of
common stock from 50 million to 100 million shares; and (iii) to consider and
act upon a proposed amendment to the Company's 1992 Stock Option Plan for Team
Members to increase the number of shares of common stock issuable upon exercise
of stock options under the Option Plan from 4.0 million to 5.3 million shares
and to limit the number of options granted in any year to an individual team
member to no more than 50,000 options. Each of the eight directors nominated by
the Company was elected and the amendments to the Articles of Incorporation and
Option Plan were approved, with voting results as follows:
<TABLE>
For Against Abstaining
---------- --------- ----------
<S> <C>
Board of Directors elections:
Dr. Cristina G. Banks 21,575,768 9,382 329,708
David W. Dupree 21,642,040 1,510 271,308
Dr. John B. Elstrott 21,640,018 3,532 271,308
Avram J. Goldberg 21,640,609 2,941 271,308
Fred Lager 21,643,307 9,243 271,308
John P. Mackey 21,641,914 1,636 271,308
Linda A. Mason 21,628,778 14,772 271,308
Dr. Ralph Z. Sorenson 21,632,940 10,610 271,308
Amendment to Articles of Incorporation 20,955,941 817,810 134,084
Amendment to Option Plan 15,047,372 6,714,984 152,150
</TABLE>
Page 9 of 11
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 4.1 Form of Zero Coupon Convertible Subordinated Debentures Due
2018 (1)
Exhibit 4.2 Indentures between the Company and Chase Bank of Texas,
National Association, As Trustee (1)
Exhibit 4.3 Registration Rights Agreement by and among the Company and BT
Alex Brown Incorporated and Morgan Stanley & Co. Incorporated (1)
Exhibit 27 Financial Data Schedule
(1) Filed as an exhibit to Registration Statement on Form S-3
(No.333-51419) and incorporated herein by reference.
(b) On March 2, 1998, the Company filed a Current Report on Form 8-K. Under
"Item 5. Other Events," the Company stated that in the Offering Memorandum
used in connection with the Offering of Zero Coupon Convertible
Subordinated Debentures Due 2018, all previous earnings (loss) per share
data had been restated to comply with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," and reflected the effect of such
restatement.
Page 10 of 11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Whole Foods Market, Inc.
---------------------------
Registrant
Date: May 21, 1998 By: /s/ Glenda Flanagan
-------------------
Glenda Flanagan
Vice President and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
Page 11 of 11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE WHOLE FOODS MARKET 1998 FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-END> APR-12-1998
<CASH> 35,834
<SECURITIES> 25,928
<RECEIVABLES> 15,667
<ALLOWANCES> 0
<INVENTORY> 80,010
<CURRENT-ASSETS> 193,994
<PP&E> 385,964
<DEPRECIATION> (121,326)
<TOTAL-ASSETS> 522,183
<CURRENT-LIABILITIES> 95,354
<BONDS> 115,009
0
0
<COMMON> 206,168
<OTHER-SE> 35,623
<TOTAL-LIABILITY-AND-EQUITY> 522,183
<SALES> 732,599
<TOTAL-REVENUES> 732,599
<CGS> 485,908
<TOTAL-COSTS> 485,908
<OTHER-EXPENSES> 206,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,532
<INCOME-PRETAX> 36,749
<INCOME-TAX> 13,597
<INCOME-CONTINUING> 23,152
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,152
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.84
</TABLE>
