Whole Foods 2007 Annual Report Download - page 67

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Share-based payments expense related to vesting stock options recognized during fiscal years 2007 and 2006 totaled
approximately $8.1 million and $4.6 million, respectively.
During 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 a share-based payments charge totaling
approximately $17.4 million related to this acceleration, which was determined by measuring the intrinsic value on the date
of the acceleration for all options that would have expired in the future unexercisable had the acceleration not occurred. The
calculation of this charge required that management make estimates and assumptions concerning future team member
turnover. During fiscal year 2007 and fiscal year 2006 the Company recognized an additional $4.4 million and $3.0 million
share-based payments charge, respectively, related to this acceleration to adjust for actual experience. Additional adjustments
in future periods may be necessary as actual results could differ from these estimates and assumptions.
The Company also recognized share-based payments expense totaling approximately $0.3 million, $1.2 million and $2.5
million for modifications of terms of certain stock option grants and other compensation based on the intrinsic value of the
Company’s common stock during fiscal years 2007, 2006 and 2005, respectively.
During fiscal year 2007, the Company issued 4,500 stock options to the Whole Planet Foundation. These options were
granted at an option price equal to the market value of the stock at the grant date and are exercisable ratably over a four-year
period beginning one year from grant date and have a five-year life. The total grant-date fair value of $61,000 was expensed
in fiscal year 2007 as a charitable contribution.
The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions:
2007 2006 2005
Expected dividend yield 1.80% 1.26% 0.84%
Risk-free interest rate 4.75% 5.04% 4.14%
Expected volatility 31.22% 29.40% 48.30%
Expected life, in years 3.29 3.22 2.10
Risk-free interest rate is based on the US treasury yield curve on the date of the grant for the time period equal to the
expected term of the grant for fiscal years 2007 and 2006 and the seven-year zero coupon treasury bill rate on the date of the
grant for fiscal year 2005. Expected volatility is calculated using a ratio of implied volatility based on comparable Long-
Term Equity Anticipation Securities (“LEAPS”) and four-year historical volatility for fiscal years 2007 and 2006. The
Company determined the use of implied volatility versus historical volatility represents a more accurate calculation of option
fair value. In fiscal year 2005, expected volatility was calculated using the daily historical volatility over the last seven years.
Expected life is calculated in two tranches based on weighted average percentage of unexpired options and exercise-after-
vesting information over the last five years for fiscal years 2007 and 2006. During fiscal year 2005, expected life was
calculated in five salary tranches based on weighted average exercise-after-vesting information over the last seven years.
Unvested options are included in the term calculation using the “mid-point scenario” which assumes that unvested options
will be exercised half-way between vest and expiration date. The assumptions used to calculate the fair value of options
granted are evaluated and revised, as necessary, to reflect market conditions and experience.
In addition to the above valuation assumptions, SFAS No. 123R requires the company to estimate an annual forfeiture rate
for unvested options and true up fair value expense accordingly. The company monitors actual forfeiture experience and
adjusts the rate from time to time as necessary.
Prior to the effective date of SFAS No. 123R, the Company applied APB No. 25 and related interpretations for our stock
option grants. APB No. 25 provides that the compensation expense relative to our team member stock options is measured
based on the intrinsic value of the stock option at date of grant.