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MANAGEMENT 120B CASE 1 WHOLE FOODS MARKET (WFM) LEASES Objective: Constructively capitalize operating leases. Company Overview General Whole Foods Market is the world's leading retailer of natural and organic foods and America's first national \"Certified Organic\" grocer. Unless otherwise specified, references to \"Whole Foods Market,\" \"Company,\" or \"We\" in this Report include the Company and its consolidated, wholly owned subsidiaries. The Company was formed in 1980 and is based in Austin, Texas. We completed our initial public offering in January 1992, and our common stock trades on the NASDAQ Global Select Market under the symbol \"WFM.\" Our Company mission is to promote the vitality and well-being of all individuals by supplying the highest quality, most wholesome foods available. Since the purity of our food and the health of our bodies are directly related to the purity and health of our environment, our core mission is devoted to the promotion of organically grown foods, healthy eating, and the sustainability of our entire ecosystem. Through our growth, we have had a significant and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance over the last 31 years. We have one operating segment, natural and organic foods supermarkets. We are the largest retailer of natural and organic foods in the U.S. and the 10 th largest food retailer overall based on 2010 sales rankings from Progressive Grocer . As of September 25, 2011, we operated 311 stores in the United States, Canada, and the United Kingdom. Our stores average 38,000 square feet in size and 10 years in age, and are supported by our Austin headquarters, regional offices, distribution centers, bakehouse facilities, commissary kitchens, seafood-processing facilities, meat and produce procurement centers, and a specialty coffee, tea procurement and roasting operation. The following is a summary of our annual percentage sales and net long-lived assets by geographic area: 2011 2010 2009 Sales: United States 96.9% 97.0% 97.2% Canada and United Kingdom 3.1 3.0 2.8 Total sales 100.0% 100.0% 100.0% Long-lived assets, net: Page | 1 Management 120B United States Canada and United Kingdom Total long-lived assets, net 95.9% 4.1 100.0% 96.6% 3.4 100.0% 96.5% 3.5 100.0% A five-year summary of certain financial and operating information can be found in Part II, \"Item 6. Selected Financial Data,\" of this Annual Report on Form 10-K. See also Part II, \"Item 8. Financial Statements and Supplementary Data.\" Industry Overview According to Nielsen TDLinx and Progressive Grocer , the U.S. grocery industry, which includes conventional supermarkets, supercenters, limited-assortment and natural/gourmet-positioned supermarkets, had approximately $563 billion in sales in 2010, a 1% increase over the prior year. Within this broader category, natural product sales through retail channels were approximately $65 billion, a 7% increase over the prior year, according to Natural Foods Merchandiser , a leading trade publication for the natural foods industry. We believe the growth in sales of natural and organic foods is being driven by numerous factors, including: heightened awareness of the role that healthy eating plays in long-term wellness; a better-educated and wealthier populace whose median age is increasing each year; increasing consumer concern over the purity and safety of food; and environmental concerns. Our Core Values We believe that much of our success to date is because we remain a uniquely mission-driven company. Our core values succinctly express the purpose of our business, which is not only to make profits but to create value for all of our major stakeholders, each of which is linked interdependently. By maintaining our core values, regardless of how large we become, we are able to preserve what has always been special about our Company. Our core values are: Selling the highest quality natural and organic products available; Satisfying and delighting our customers; Supporting team member happiness and excellence; Creating wealth through profits and growth; Caring about our communities and our environment; Creating ongoing win-win partnerships with our suppliers; and Promoting the health of our stakeholders through healthy eating education. Differentiated Product Offering We offer a broad and differentiated selection of high-quality natural and organic products with a strong emphasis on perishable foods. Our product selection Page | 2 Management 120B includes, but is not limited to: produce, seafood, grocery, meat and poultry, bakery, prepared foods and catering, specialty (beer, wine and cheese), coffee and tea, nutritional supplements, vitamins, body care, educational products such as books, floral items, pet products and household products. We estimate our stores carry on average approximately 21,000 SKUs. The following is a summary of annual percentage sales by product category: 2011 2010 2009 Non-perishables 33.2% 33.5% 33.8% Prepared foods and bakery 18.8 18.8 19.1 Other perishables 48.0 47.7 47.1 Total sales 100.0% 100.0% 100.0% Natural foods can be defined as foods that are minimally processed, largely or completely free of artificial ingredients, preservatives and other non-naturally occurring chemicals and as near to their whole, natural state as possible. Organic foods are grown through methods intended to support and enhance the earth's natural balance. Under the U.S. Department of Agriculture's (\"USDA\") Organic Rule, implemented into federal law in 2002, all products labeled as \"organic\" in any form must be certified by a USDA-accredited certifying agency. Furthermore, all retailers, including Whole Foods Market, that handle, store and sell organic products must implement measures to protect their organic integrity. Generally, organic food products are produced using: agricultural management practices intended to promote and enhance ecosystem health; no genetically engineered seeds or crops, sewage sludge, long-lasting pesticides, herbicides or fungicides; livestock management practices intended to promote healthy, humanely treated animals by providing organically grown feed, fresh air and outdoor access while using no antibiotics or growth hormones; and food-processing practices intended to protect the integrity of the organic product and disallow irradiation, genetically modified organisms (\"GMOs\") or synthetic preservatives. Our Quality Standards We aspire to become an international brand synonymous with not just natural and organic foods, but also with being the highest quality food retailer in every community in which we are located. We believe our strict quality standards differentiate our stores from other supermarkets and enable us to attract and maintain a broad base of loyal customers. We carefully evaluate each and every product we sell. We feature foods that are free of artificial preservatives, colors, flavors, sweeteners and hydrogenated fats. Page | 3 Management 120B We are passionate about great tasting food and the pleasure of sharing it with others. We are committed to foods that are fresh, wholesome and safe to eat. We seek out and promote organically grown foods. We provide food and nutritional products that support health and wellbeing. Store Brands Our nationally driven store brands currently feature approximately 2,600 SKUs led by our primary brand, 365 Everyday Value , along with a grouping of \"exclusive\" and \"control brand\" products . While some of our store brands yield greater margins than their national brand alternative, their primary purpose is to help differentiate our product selection and provide more value offerings to our customers. In addition to our nationally driven programs, we have a number of store-made and regionally made fresh items sold under the Whole Foods Market label, and we offer specialty and organic coffee, tea and drinking chocolates through our Allegro Coffee Company subsidiary . Total sales of store-branded products across all categories were approximately 11% of our retail sales for both fiscal years 2011 and 2010. Value Programs We continue to evaluate and strengthen our value offerings, providing a clear range of choices in every category, and we believe our focus in this area has played a key role in driving our sales growth. In addition to supporting our 365 Everyday Value brand, we have lowered prices on thousands of known value items, extended value choices to our perishables departments, promoted our regional \"Madness Sales,\" and focused on stronger customer education. We also have continued our national The Whole Deal campaign, launched in fiscal year 2008, which includes our printed value guide available in all U.S. stores. Health Starts Here We are offering an increasing selection of Health Starts Here products in our stores. Health Starts Here is a mindful approach to healthy eating rooted in four simple ways to build better meals Whole Food, Plant-Strong TM , Healthy Fats, and Nutrient Dense. Products such as frozen items, breads and prepared foods that meet these guidelines carry our \"Health Starts Here\" logo. In addition, all of our stores feature signage on the Aggregate Nutrient Density Index (\"ANDI \"), a proprietary scoring system that ranks foods based on nutrient density (vitamins, minerals, phytochemicals and antioxidants) per calorie. Whole Trade Guarantee Whole Trade products sourced from developing countries meet our high quality standards, provide more money to producers, ensure better wages and working conditions for workers, and utilize sound environmental practices. Demand for our Whole Trade Guarantee products continues to grow. We currently offer over 1,500 items, with sales increasing 28% year over year to approximately $146.3 million in Page | 4 Management 120B fiscal year 2011. Whole Foods Market donates 1% of sales of exclusive Whole Trade products to the Whole Planet Foundation to help alleviate world poverty. Locally Grown We are committed to buying from local producers whose products meet our high quality standards, particularly those who are dedicated to environmentally friendly, sustainable agriculture. Whole Foods Market currently purchases produce from over 2,000 different farms through various suppliers. In fiscal year 2007, we established a budget of up to $10 million to promote local food production, and as of September 25, 2011, we had disbursed more than $5.5 million in loans to 97 local producers company-wide. Animal Welfare We are dedicated to promoting animal welfare on farms and ranches that raise animals for meat production, helping to create alternatives to the \"factory farm\" methods of raising livestock. We have encouraged innovative animal production practices to improve the quality and safety of the meat and poultry sold in our stores while also supporting humane living conditions for the animals. Work on our \"animal compassionate\" standards started in 2003, and additional standards development and implementation of a 5-Step TM Animal Welfare Rating system transitioned to the Global Animal Partnership foundation in 2008. Global Animal Partnership's 5-Step Animal Welfare Rating standards have been developed for beef cattle, pigs and broiler chickens and are in the works for other species as well. As of February 2011, our meat departments in all U.S. stores reflect these certifications. Seafood Sustainability In September 2010, we completed the launch of a color-coded, science-based seafood sustainability ratings program developed by partnering organizations, Blue Ocean Institute and Monterey Bay Aquarium. The program provides customers with the information they need to make informed decisions about their seafood purchases by rating non-Marine Stewardship Council (\"MSC\") certified wildcaught seafood based on key criteria for sustainable fisheries with solid, transparent ranking methods. With our promise to phase out all \"red-rated\" species by Earth Day 2012, we have deepened our commitment to having fully sustainable seafood departments. This new seafood ratings program builds upon our ongoing partnership with the MSC and complements Whole Foods Market's existing farmed seafood standards, which remain the highest in the industry. Farmed seafood at Whole Foods Market carries the \"Responsibly Farmed\" logo to indicate that it meets these high standards. Eco-Scale TM Currently, there are no government regulations requiring full disclosure of ingredients on cleaning products, so in April 2011, we introduced our Eco-Scale Rating System an industry-first set of tiered, green household standards to help customers make more informed choices for their homes and the planet. Under Page | 5 Management 120B our new Eco-Scale Rating System, all household cleaning products in our stores will list full ingredients on their packaging. This comprehensive, color-coded rating system will allow shoppers to easily identify a product's environmental impact and safety based on a red-orange-yellow-green color scale. We are committed to working with our vendors to evaluate and independently audit every product in our cleaning category, and all products in our stores will be required to meet our baseline orange standard by Earth Day, April 2012. Seasonality The Company's average weekly sales and gross profit are typically highest in the second and third fiscal quarters and lowest in the fourth fiscal quarter. Average weekly sales and gross profit are typically lower in the first fiscal quarter due to the product mix of holiday sales, and in the fourth fiscal quarter due to the seasonally slower sales during the summer months. Growth Strategy We are a Fortune 500 company, ranking number 273 on the 2011 list. Our sales have grown rapidly due to historically strong identical store sales growth, acquisitions and new store openings from approximately $92.5 million in fiscal year 1991, excluding the effect of pooling-of-interests transactions completed since 1991, to approximately $10.11 billion in fiscal year 2011, a 20-year compounded annual growth rate of approximately 26%. Over the last 10 fiscal years, our identical store sales growth has averaged approximately 7%. This growth was driven by an average 4% increase in transaction count and an average 3% increase in basket size, a mix of approximately 60% transaction count to 40% basket size. Our identical store sales growth for each of the last 10 fiscal years is shown in the following chart: Approximately 18% of our existing square footage was acquired, and while we may continue to pursue acquisitions of smaller chains that provide access to desirable geographic areas and experienced team members, such acquisitions are not expected to significantly impact our future store growth or financial results. Our growth strategy is to expand primarily through new store openings. We have a Page | 6 Management 120B disciplined, opportunistic real estate strategy, opening stores in existing trade areas as well as new areas, including international locations. We typically target stores located on premium real estate sites, and while we may open stores as small as 15,000 square feet or as large as 75,000 square feet, the majority of our new stores are expected to fall in the range of 35,000 to 45,000 square feet going forward. Our historical store growth and sales mix is summarized below: 2011 2010 2009 2008 2007 Stores at beginning of fiscal year 299 284 275 276 186 Stores opened 18 16 15 20 21 Acquired stores 2 109 Divested stores (2) (35) Relocated stores (6) (5) (7) (5) Closed stores (1) (1) (14) Stores at end of fiscal year 311 299 284 275 276 Remodels with major expansions(1) 1 2 1 2 Total gross square footage at end of fiscal year 11,832,000 11,231,000 10,566,000 9,895,000 9,312,000 Year-over-year growth 5% 6% 7% 6% 46% Sales mix: Identical stores 94.6% 93.2% 91.4% 80.9% 88.8% New/relocated stores and remodels with major expansions 4.7 6.0 7.8 9.9 8.4 Acquired stores 0.3 0.1 8.7 1.3 Other sales, primarily nonretail external sales 0.4 0.7 0.8 0.5 1.5 Total sales 100.0% 100.0% 100.0% 100.0% 100.0% (1) Defined as remodels with expansions of square footage greater than 20% completed during the fiscal year. Page | 7 Management 120B We remain focused on the right-sized store for each market. In response to the 2008-2009 recession, we trimmed approximately 1.4 million square feet from our development pipeline, downsizing 20 leases for stores in development and terminating an additional 22 leases. We now are rebuilding the pipeline, and we expect a higher number of store openings in fiscal year 2012. Our historical store development pipeline is summarized below: November 2, November 3, November 4, November 5, November 20, 2011 2010 2009 2008 2007 Stores in development Average size (gross square feet) Total gross square footage in development 62 52 53 66 87 35,000 39,000 45,000 49,000 51,000 2,192,000 2,052,000 2,410,000 3,294,000 4,485,000 Store Description Each of our stores is designed to fit the size and configuration of the particular location and to reflect the community in which it is located. We strive to transform food shopping from a chore into a dynamic experience by building and operating stores with a lively, inspirational atmosphere, mission-oriented dcor, well-trained team members, an exciting product mix that emphasizes healthy eating and our high quality standards, ever-changing selections, samples, open kitchens, scratch bakeries, hand-stacked produce, and prepared foods stations. We also incorporate many environmentally sustainable aspects into our store design. Our stores typically include sit-down eating areas, customer comment boards and customer service booths. In addition, some stores offer special services such as massage, valet parking, Wellness Centers, personal shopping and home delivery. We believe our stores play a unique role as a third place, besides the home and office, where people can gather, interact and learn while at the same time discovering the many joys of eating and sharing food. Most of our stores are located in high-traffic shopping areas on premier real estate sites and are either freestanding or in strip centers. We also have a number of urban stores located in high-density, mixed-use developments. In selecting store locations, we use an internally developed model to analyze potential sites based on various criteria such as education levels, population density and income levels within certain drive times. After we have selected a target site, our development group does a comprehensive site study and sales projection and works with our regional teams to develop construction and operating cost estimates. Each project must meet an internal Economic Value Added (\"EVA \") hurdle return, based on Page | 8 Management 120B our internal weighted-average cost of capital, which for new stores generally is expected to be cumulative positive EVA in five years or less. In its simplest definition, EVA is equivalent to net operating profits after taxes minus a charge on the cost of invested capital necessary to generate those profits. In March 2011, we lowered our internal weighted-average cost of capital metric to 8% from 9% to reflect our current financial structure. The required cash investment for new stores varies depending on the size of the store, geographic location, degree of work performed by the landlord and complexity of site development issues. To a significant degree, it also depends on how the project is structured, including costs for elements that often increase or decrease rent, e.g., lease acquisition costs, shell and/or garage costs, and landlord allowances. Because of these differences, the average cost per square foot may vary significantly from project to project and from year to year. Purchasing and Distribution The majority of our purchasing, particularly in dry grocery, occurs at the regional and national levels, enabling us to negotiate better volume discounts with major vendors and distributors while allowing our store buyers to focus on local products and the unique product mix necessary to keep the neighborhood market feel in our stores. We are increasingly focusing more of our purchasing on producer-direct and manufacturer-direct programs, and we remain committed to buying from local producers that meet our high quality standards. We own two produce procurement centers which facilitate the procurement and distribution of the majority of the produce we sell. We also operate four seafood processing and distribution facilities, a specialty coffee and tea procurement and roasting operation, and 10 regional distribution centers that focus primarily on perishables distribution to our stores across the U.S., Canada and the United Kingdom. In addition, we have five regional commissary kitchens and seven bakehouse facilities, all of which distribute products to our stores. Other products are typically procured through a combination of specialty wholesalers and direct distributors. United Natural Foods, Inc. (\"UNFI\") is our single largest third-party supplier, accounting for approximately 31% of our total purchases in fiscal year 2011. In June 2010, we extended our long-term relationship with UNFI as our primary supplier of dry grocery and frozen food products through 2020. Beginning in fiscal year 2011, UNFI also became our primary non-perishables distributor in two additional regions, allowing us to focus our internal distribution efforts in our regions around key perishables departments. Store Operations We strive to promote a strong company culture featuring a team approach to store operations that we believe is distinctly more empowering of team members than that of the traditional supermarket. Our domestic Whole Foods Market stores each employ between approximately 45 and 665 team members who generally comprise Page | 9 Management 120B 10 self-managed teams per store, each led by a team leader. Each team within a store is responsible for a different product offering or aspect of store operations such as prepared foods, grocery, or customer service, among others. We also promote a decentralized approach to store operations in which many decisions are made by teams at the individual store level. In this structure, an effective store team leader is critical to the success of the store. The store team leader works closely with one or more associate store team leaders, as well as with all of the department team leaders, to operate the store as efficiently and profitably as possible. Team members are involved at all levels of our business. We strive to create a company-wide consciousness of \"shared fate\" by uniting the interests of team members as closely as possible with those of our shareholders. One way we reinforce this concept is through our Gainsharing program. Under Gainsharing, as part of our annual planning process, each team receives a labor budget expressed as a percentage of their team's sales, with leverage built into the budgets on an overall company basis. When teams come in under budget due either to higher sales or lower labor costs, a portion of the surplus is divided among the team members and paid out every four weeks, and a portion is set aside in a savings pool. When teams are over budget (or in a labor deficit position), no Gainsharing money is paid out. Instead, the overage is taken out of the team's savings pool or, in the absence of savings, paid back using future surpluses. The savings pool is paid out annually after the end of the fiscal year to all teams with a positive balance. Rewarding our team members for increases in labor productivity, something they can control, gives them a direct stake in the success of our business. We also encourage stock ownership among team members through our broad-based team member stock option plan, stock purchase plan and 401(k) plan. Team Members As of September 25, 2011, we had approximately 64,200 team members, including approximately 48,200 full-time, 13,300 part-time and 2,700 seasonal team members. Full-time team members accounted for approximately 78% of all permanent positions at the end of fiscal year 2011 compared to 81% at the end of fiscal year 2010. Voluntary turnover of full-time team members was 9% in fiscal years 2011 and 2010, which we believe is very low for the food retailing industry and allows us to better serve our customers. All of our team members are nonunion, and we consider our team member relations to be very strong. For the past 14 years, our team members have helped Whole Foods Market become one of FORTUNE magazine's \"100 Best Companies to Work for in America.\" Ranking 24th overall and 7th among large companies in 2011, we are one of only 13 companies to make the \"100 Best\" list every year since its inception. Page | 10 Management 120B Requirements Prepare a letter to explain the difference between operating and capital leases and answer the following questions which relate to 2011 Whole Foods Market, Inc. financial statements, unless stated otherwise. What is the net amount of capital lease assets on the balance sheet? What is the total amount of capital lease obligations on the balance sheet? Calculate Whole Food Market's total debt to total assets ratio. What entry would Whole Food Market make in 2011 to record the effects of capital leases existing at September 25, 2011? You may omit the depreciation entry. What is the amount of operating lease obligations on the balance sheet? What is the present value of operating lease payments? What journal entry would be made to constructively capitalize the leases? (ignore the effects of taxes) Excerpts from its 2011 annual report are shown below. Page | 11 Management 120B Whole Foods Market, Inc. Consolidated Balance Sheets (In thousands) September 25, 2011 and September 26, 2010 Assets Current assets: Cash and cash equivalents Short-term investments available-for-sale securities Restricted cash Accounts receivable Merchandise inventories Prepaid expenses and other current assets Deferred income taxes Total current assets Property and equipment, net of accumulated depreciation and amortization Long-term investments available-for-sale securities Goodwill Intangible assets, net of accumulated amortization Deferred income taxes Other assets Total assets 2011 2010 $ 212,004 $ 131,996 442,320 329,738 91,956 86,802 175,310 133,346 336,799 323,487 73,579 54,686 121,176 101,464 1,453,144 1,161,519 1,997,212 1,886,130 52,815 96,146 662,938 665,224 67,234 69,064 50,148 99,156 8,584 9,301 $ 4,292,075 $ 3,986,540 Liabilities and Shareholders' Equity Current liabilities: Current installments of long-term debt and capital lease obligations Accounts payable Accrued payroll, bonus and other benefits due team members Dividends payable Other current liabilities Total current liabilities Long-term debt and capital lease obligations, less current installments Deferred lease liabilities Other long-term liabilities Total liabilities Shareholders' equity: Common stock, no par value, 300,000 shares authorized; 178,886 and 172,033 shares issued and outstanding at 2011 and 2010, respectively Accumulated other comprehensive income (loss) Retained earnings Total shareholders' equity Commitments and contingencies Total liabilities and shareholders' equity $ 466 $ 410 236,913 213,212 281,587 244,427 17,827 342,568 289,823 879,361 747,872 17,439 353,776 50,194 1,300,770 508,288 294,291 62,831 1,613,282 2,120,972 (164) 870,497 2,991,305 1,773,897 791 598,570 2,373,258 $ 4,292,075 $ 3,986,540 Page | 12 Management 120B Whole Foods Market, Inc. Consolidated Statements of Operations (In thousands, except per share amounts) Fiscal years ended September 25, 2011, September 26, 2010 and September 27, 2009 Sales Cost of goods sold and occupancy costs Gross profit Direct store expenses General and administrative expenses Pre-opening expenses Relocation, store closure and lease termination costs Operating income Interest expense Investment and other income Income before income taxes Provision for income taxes Net income Preferred stock dividends Income available to common shareholders 2011 2010 2009 $10,107,787 $ 9,005,794 $ 8,031,620 6,571,238 5,869,519 5,276,493 3,536,549 3,136,275 2,755,127 2,628,811 2,376,590 2,146,626 310,920 272,449 243,749 40,852 38,044 49,218 8,346 11,217 31,185 547,620 437,975 284,349 (3,882) (33,048) (36,856) 7,974 6,854 3,449 551,712 411,781 250,942 209,100 165,948 104,138 342,612 245,833 146,804 5,478 28,050 $ 342,612 $ 240,355 $ 118,754 Basic earnings per share Weighted average shares outstanding $ 1.96 $ 1.45 $ 0.85 175,221 166,244 140,414 Diluted earnings per share Weighted average shares outstanding, diluted basis $ 1.93 $ 1.43 $ 0.85 177,279 171,710 140,414 Dividends declared per common share $ 0.40 $ $ Page | 13 Management 120B Whole Foods Market, Inc. Consolidated Statements of Shareholders' Equity and Comprehensive Income (In thousands, except per share amounts) Fiscal years ended September 25, 2011, September 26, 2010 and September 27, 2009 Shares outstanding Balances at September 28, 2008 Net income Foreign currency translation adjustments Reclassification adjustments for amounts included in net income Change in unrealized losses, net of income taxes Comprehensive income Redeemable preferred stock dividends Issuance of common stock pursuant to team member stock plans Excess tax benefit related to exercise of team member stock options Share-based payment expense Other Balances at September 27, 2009 Net income Foreign currency translation adjustments Reclassification adjustments for amounts included in net income Change in unrealized losses, net of income taxes Comprehensive income Redeemable preferred stock dividends Conversion of preferred stock Issuance of common stock pursuant to team member stock plans Excess tax benefit related to exercise of team member stock options Common stock Accumulated other Total comprehensive Retained shareholders' income (loss) earnings equity 140,286 $1,266,141 $ 422 $239,461 $ 1,506,024 146,804 146,804 (8,748) (8,748) 8,440 8,440 (13,481) 256 4,286 4,286 54 12,795 (248) 54 12,795 (248) 140,542 1,283,028 (28,050) (13,481) 133,015 (28,050) (13,367) 358,215 245,833 1,627,876 245,833 1,564 1,564 12,943 12,943 (349) 259,991 358 29,311 5,195 413,052 1,822 47,020 47,020 2,708 2,708 (349) (5,478) (283) 413,052 Page | 14 Management 120B Share-based payment expense Balances at September 26, 2010 Net income Foreign currency translation adjustments Reclassification adjustments for amounts included in net income Change in unrealized gains, net of income taxes Comprehensive income Dividends ($0.40 per common share) Issuance of common stock pursuant to team member stock plans Excess tax benefit related to exercise of team member stock options Share-based payment expense Other Balances at September 25, 2011 22,894 172,033 1,773,897 22,894 791 598,570 342,612 2,373,258 342,612 245 245 9 9 341,657 6,857 301,591 18,225 27,259 (238) (4) 178,886 $2,120,972 $ (1,209) (70,447) (1,209) (70,447) 301,591 18,225 27,259 (238) (164)$870,497 $ 2,991,305 Page | 15 Management 120B Whole Foods Market, Inc. Consolidated Statements of Cash Flows (In thousands) Fiscal years ended September 25, 2011, September 26, 2010 and September 27, 2009 2011 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Loss (gain) on disposition of fixed assets Impairment of long-lived assets Share-based payment expense LIFO expense (benefit) Deferred income tax expense (benefit) Excess tax benefit related to exercise of team member stock options Deferred lease liabilities Other Net change in current assets and liabilities: Accounts receivable Merchandise inventories Prepaid expenses and other current assets Accounts payable Accrued payroll, bonus and other benefits due team members Other current liabilities Net change in other long-term liabilities Net cash provided by operating activities Cash flows from investing activities Development costs of new locations Other property and equipment expenditures Purchase of available-for-sale securities Sale of available-for-sale securities Increase in restricted cash Acquisition of intangible assets Payment for purchase of acquired entities, net of cash acquired Other investing activities Net cash used in investing activities Cash flows from financing activities Common stock dividends paid Preferred stock dividends paid Issuance of common stock Excess tax benefit related to exercise of team member stock options Proceeds from issuance of redeemable preferred stock, net Proceeds from long-term borrowings Payments on long-term debt and capital lease obligations 2010 2009 $ 342,612 $ 245,833 $ 146,804 287,109 2,228 1,317 27,259 10,250 19,540 275,589 (170) 2,237 22,894 (7,670) (33,534) 266,695 3,012 24,508 12,795 (5,598) 14,076 (22,741) 53,381 5,713 (2,982) 39,636 (2,371) (42) 48,029 2,800 (35,422) (23,267) (18,987) 23,768 (28,447) (3,048) (1,640) 23,454 10,408 21,732 21,415 6,527 37,204 53,831 (8,950) 754,845 36,133 20,030 (659) 585,285 11,985 14,696 (12,121) 587,721 (203,457) (171,379) (161,507) (85,414) (1,228,920) (1,072,243) 1,155,795 646,594 (5,154) (15,779) (5,157) (1,837) (247,999) (66,616) (70,406) (1,604) (1,972) (352) (450,724) (14,470) (878) (715,406) 342 (386,283) (52,620) 296,719 (8,500) 46,962 (19,833) 4,286 22,741 2,982 42 413,052 123,000 (490,394) (210,350) (318,370) Page | 16 Management 120B Other financing activities Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Interest paid Federal and state income taxes paid Non-cash transaction: Conversion of redeemable preferred stock into common stock (223,554) (168,906) (2,722) 199,455 (559) 893 (1,297) 80,008 (298,134) 399,596 131,996 430,130 30,534 $ 212,004 $ 131,996 $ 430,130 $ 15,837 $ 39,156 $ $ 192,485 $ 193,044 $ 43,685 69,701 $ 418,247 $ $ Page | 17 Management 120B (9) Leases The Company is committed under certain capital leases for rental of certain equipment, buildings, and land and certain operating leases for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates from 2012 to 2054. Amortization of equipment under capital lease is included with depreciation expense. Rental expense charged to operations under operating leases for fiscal years 2011, 2010 and 2009 totaled approximately $321.6 million, $303.5 million and $281.9 million, respectively. Minimum rental commitments and sublease rental income required by all noncancelable leases are approximately as follows (in thousands): Fiscal year 2012 Fiscal year 2013 Fiscal year 2014 Fiscal year 2015 Fiscal year 2016 Future fiscal years Less amounts representing interest Net present value of capital lease obligations Less current installments Long-term capital lease obligations, less current installments Capital $ 2,100 2,075 2,099 2,170 1,999 24,528 34,971 17,066 17,905 (466) Operating Sublease $ 319,519 $ 7,253 344,367 6,711 360,090 5,691 366,323 4,351 367,978 3,714 4,612,484 11,494 $6,370,761 $ 39,214 $ 17,439 The present values of future minimum obligations for capital leases shown above are calculated based on interest rates determined at the inception of the lease, or upon acquisition of the original lease. During fiscal years 2011, 2010 and 2009, the Company paid contingent rentals totaling approximately $9.8 million, $9.5 million and $9.4 million, respectively. Sublease rental income totaled approximately $6.7 million, $7.2 million and $6.3 million during fiscal years 2011, 2010 and 2009, respectively. Page | 18