Whole Foods 2007 Annual Report Download - page 43

37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to interest rate changes and changes in market values of our investments and long-term debt. We do not use
financial instruments for trading or other speculative purposes. We are also exposed to foreign exchange fluctuations on our
foreign subsidiaries.
Interest Rate Risk
We seek to minimize the risks from interest rate fluctuations through ongoing evaluation of the composition of our
investments and long-term debt. Our line of credit borrowings do not give rise to significant fair value risk because these
borrowings have revolving maturities. At September 30, 2007, approximately $17 million was outstanding under our line of
credit agreement. At September 24, 2006, the Company held interest-bearing instruments that were classified as cash and
cash equivalents and short-term investments. These investments were of a short-term nature, and therefore changes in interest
rates would not likely have had a material impact on the valuation of these instruments or interest income. We classified
these investments as available-for-sale and, accordingly, recorded them at fair value on our balance sheet. At September 24,
2006, these investments totaled approximately $203.9 million and earned an average interest rate of approximately 3.8%. At
September 24, 2006, an unrealized gain of approximately $0.1 million related to these investments was included as a
component of shareholders’ equity.
During fiscal year 2007, the Company entered into a $700 million, five-year term loan agreement to finance the acquisition
of Wild Oats Markets. The loan bears interest at our option of the alternative base rate or the LIBOR rate plus an applicable
margin, 1% as of September 30, 2007, based on the Company’s Moody’s and S&P rating. Our term loans do not give rise to
significant fair value risk because they are variable interest rate loans with revolving maturities which reflect market changes
to interest rates. Subsequent to the end of fiscal year 2007, the Company entered into a three-year interest rate swap
agreement with a notional amount of $490 million to fix the interest rate at 5.718%, inclusive of the applicable margin and
associated fees, to help manage our exposure to interest rate fluctuations.
Interest Rate and Market Risk
Our zero coupon subordinated convertible debentures have fixed interest rates, and the fair value of these instruments is
affected by both changes in the market price of our stock and changes in market interest rates. During fiscal year 2007 and
2006 approximately $5.8 million and $5.0 million, respectively, of the carrying amount, of the debentures were converted, at
the option of the holder, into Company common stock. The zero coupon subordinated convertible debentures have an
effective yield to maturity of 5% and had an outstanding balance of approximately $2.7 million and $8.3 million at
September 30, 2007 and September 24, 2006, respectively. At September 30, 2007 the interest rate and market risk
associated with the convertible debentures is not material. At September 24, 2006 the estimated fair value of the convertible
debentures exceeded the carrying amount by approximately $11.0 million. Should interest rates or the market value of our
stock increase or decrease, the estimated fair value of the zero coupon subordinated debentures would decrease or increase
accordingly.
Market Risk
We regularly review the carrying value of our investments to identify and record losses when events and circumstances
indicate that such declines in the fair value of such assets below our accounting basis are other-than-temporary.
Foreign Currency Risk
The Company is exposed to foreign currency exchange risk. We own and operate seven natural and organic foods
supermarkets in Canada and six natural and organic foods supermarkets in the United Kingdom. Sales made from the
Canadian and United Kingdom stores are made in exchange for Canadian dollars and Great Britain pounds, respectively. We
do not hedge against this risk because of the small amounts of funds at risk.