Whole Foods 2007 Annual Report Download - page 35

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expense on convertible debentures due to the voluntary conversion by holders of approximately $150.1 million of the
carrying amount of the debentures to approximately 6.0 million shares of Company common stock during fiscal year 2005.
The Company had approximately $17 million outstanding on its revolving line of credit at September 30, 2007 and no
amounts outstanding at the end of fiscal years 2006 and 2005. Company made the final principal payment of approximately
$5.7 million to retire its senior notes on May 16, 2006. The Company expects interest expense, net of investment and other
income, to range from approximately $35 million to $40 million in fiscal year 2008.
Investment and Other Income
Investment and other income includes investment gains and losses, interest income, rental income and other income totaling
approximately $11.3 million, $20.7 million and $9.6 million in fiscal years 2007, 2006 and 2005, respectively. The decrease
in investment and other income in fiscal year 2007 from the prior fiscal year primarily resulted from lower average
investment balances. The increase in investment and other income in fiscal year 2006 over the prior fiscal year primarily
resulted from higher yields on investments and higher average investment balances. Investment and other income for fiscal
year 2006 includes approximately $2.1 million of insurance proceeds related to Hurricane Katrina losses.
Income Taxes
Our effective tax rate on income was approximately 40.0% in fiscal years 2007 and 2006 and approximately 42.5% in fiscal
year 2005. The increase in our effective tax rate for fiscal year 2005 resulted primarily from the non-deductible portion of the
expense recognized for the accelerated vesting of stock options during the fourth quarter.
Share-Based Payments
The Company recognized share-based payments expense totaling approximately $19.9 million in fiscal year 2005. During
the fourth quarter of fiscal year 2005, the Company accelerated the vesting of all outstanding stock options, except options
held by the members of the executive team and certain options held by team members in the United Kingdom, in order to
prevent past option grants from having an impact on future results. The Company recognized an estimated share-based
payments expense totaling approximately $17.4 million in fiscal year 2005 related to this acceleration. The Company also
recognized share-based payments expense in fiscal year 2005 totaling approximately $2.5 million for modification of terms
of certain stock option grants and other compensation based on the intrinsic value of the Company’s common stock. The
Company's effective tax rate for the fourth quarter and fiscal year 2005 was higher than its historical rate primarily due to the
non-deductible portion of the expense recognized for the accelerated vesting of stock options.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard
(“SFAS”) No. 123R, “Share-Based Payment,” which requires all companies to recognize an expense for share-based
payments, including stock options, based on the fair value of the equity instrument. In April 2005, the Securities and
Exchange Commission (“SEC”) adopted a final rule amending Rule 4-01(a) of Regulation S-X amending the compliance
date for SFAS No. 123R to be effective starting with the first interim or annual reporting period of the first fiscal year
beginning on or after June 15, 2005. The provisions of SFAS No. 123R were effective for the Company’s first quarter of
fiscal year 2006.
The Company recognized share-based payments expense before income taxes under the requirements of SFAS No. 123R
totaling approximately $13.2 million and $9.4 million during fiscal years 2007 and 2006, respectively. Included in the fiscal
year 2007 and 2006 total expense is approximately $0.3 million and $1.2 million, respectively, for modification of terms of
certain stock option grants and approximately $4.4 million and $3.0 million, respectively, to increase the estimated charge
related to the 2005 acceleration based on actual experience. Share-based payments expense was included in the following
line items on the Consolidated Statements of Operations for the periods indicated (in thousands):
2007 2006 2005
Cost of goods sold and occupancy costs $ 475 $ 264 $ 1,192
Direct store expenses 7,093 3,555 10,092
General and administrative expenses 5,607 5,613 8,612
Share-based payments expense before income taxes 13,175 9,432 19,896
Income tax benefit (4,114) (2,724) (4,454)
Net share-based payments expense $ 9,061 $ 6,708 $ 15,442
The Company expects share-based payments expense before income taxes of approximately $2.0 million to $3.0 million per
quarter in the first two quarters of fiscal year 2008 and approximately $4.0 million to $5.0 million per quarter in the third and
fourth quarters of the fiscal year following the Company’s annual grant date early in the third quarter, when the majority of
options are granted.