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Profits Cannot Be Measured by Cash Flow

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					Financial Statements:
  Balance Sheet
 Income Statement
The basic difference between accounting value (or “book” value) and market value
The difference between accounting income and cash flow
How to determine a firm’s cash flow from its financial statements
 Calculate cash flow
The difference between average and marginal tax rates
 Calculate taxes




Financial Statements:
  Balance Sheet
 Income Statement
The basic difference between accounting value (or “book” value) and market value
The difference between accounting income and cash flow
How to determine a firm’s cash flow from its financial statements
 Calculate cash flow
The difference between average and marginal tax rates
 Calculate taxes
                            Assumptions
Year 1                                               12/31/2006
Year 2                                               12/31/2007
Company Name                                    RAD Corporation
Shares outstanding (in 000,000), Dec 31, 2007              210
               Balance Sheet is a snapshot of the account balances on the last day of the period

            Assets = Liabilities + Shareholders' Equity
                                                       RAD Corporation
                                                  Balance Sheet ($ in Millions)
                                        Balance Sheet as of December 31, 2006 and 2007
               Assets                                                       Liabilities and Shareholders' Equity
                            2006          2007
Current assets                                     Current Liabilities
  Cash                        $119       $183       Accounts Payable
  Accounts Receivable          465        698       Notes Payable
  Inventory                    563        565         Total
    Total                    $1,147     $1,446
Fixed Assets                                       Long-term debt
  Net Fixed Assets            1,654     1,719         Total Liabilities

                                                   Shareholders' Equity
                                                    Common Stock and paid-in surplus
                                                    Retained Earnings
                                                      Total
Total Assets                 $2,801     $3,165     Total Liabilities and Shareholders' Equity



Why is this called the balance sheet?
day of the period

 s' Equity

 eholders' Equity
                2006      2007

                 $237    $278
                   206     133
                  $443    $411

                   418     464
                  $861    $875


                   610     638
                1,330    1,652
                $1,940   $2,290
                $2,801   $3,165
               Balance Sheet is a snapshot of the account balances on the last day of the period

            Assets = Liabilities + Shareholders' Equity
                                                       RAD Corporation
                                                  Balance Sheet ($ in Millions)
                                        Balance Sheet as of December 31, 2006 and 2007
               Assets                                                       Liabilities and Shareholders' Equity
                            2006          2007
Current assets                                     Current Liabilities
  Cash                        $119       $183       Accounts Payable
  Accounts Receivable          465        698       Notes Payable
  Inventory                    563        565         Total
    Total                    $1,147     $1,446
Fixed Assets                                       Long-term debt
  Net Fixed Assets            1,654     1,719         Total Liabilities

                                                   Shareholders' Equity
                                                    Common Stock and paid-in surplus
                                                    Retained Earnings
                                                      Total
Total Assets                 $2,801     $3,165     Total Liabilities and Shareholders' Equity



Why is this called the balance sheet?
day of the period

 s' Equity

 eholders' Equity
                2006      2007

                 $237    $278
                   206     133
                  $443    $411

                   418     464
                  $861    $875


                   610     638
                1,330    1,652
                $1,940   $2,290
                $2,801   $3,165



                $2,801   $2,801 TRUE
                  Assumptions
Name                     Your Name
CA                                    3,000.00
NFA                                  15,000.00
CL                                    2,800.00
LTD                                   8,000.00

                    Solve for:
Shareholders' Equity =
NWC =

                                      Your Name Company
                                         Balance Sheet
                     Assets                                Liabilities + Owners' Equity
CA                                               CL
NFA                                              LTD
                                                 Owners Equity
Total Assets                                     Total Liabilities + Owners' Equity
                  Assumptions
Name                     Your Name
CA                                    3,000.00
NFA                                  15,000.00
CL                                    2,800.00
LTD                                   8,000.00

                    Solve for:
Shareholders' Equity =
NWC =

                                      Your Name Company
                                         Balance Sheet
                     Assets                                Liabilities + Owners' Equity
CA                       $            3,000.00   CL                                   $ 2,800.00
NFA                                  15,000.00   LTD                                  $ 8,000.00
                                                 Owners Equity                            7,200.00
Total Assets             $           18,000.00   Total Liabilities + Owners' Equity   $ 18,000.00
                                                       Total Liabilities and
        Total Assets                                   Shareholders' Equity

                                 Net Working
                                   Capital               Current Liabilities
       Current assets


                                                          Long-term debt
        Fixed Assets
    Tangible Fixed Assets
   Intangible Fixed Assets                             Shareholders' Equity

Net Working Capital is the short-term capital (Cash) that the firm has to work with

* Capital is a term that means assets (this term is often used in economics and finance)
* Firm means corporation in this example


What is the working Capital
for the Rad Corp at the end
of 2006?
                                                       Total Liabilities and
        Total Assets                                   Shareholders' Equity

                                 Net Working
                                   Capital               Current Liabilities
       Current assets


                                                          Long-term debt
        Fixed Assets
    Tangible Fixed Assets
   Intangible Fixed Assets                             Shareholders' Equity

Net Working Capital is the short-term capital (Cash) that the firm has to work with

* Capital is a term that means assets (this term is often used in economics and finance)
* Firm means corporation in this example


What is the working Capital
for the Rad Corp at the end
of 2006?                            704
 Current Assets       $250
  Fixed Assets        $625
Current Liabilities   $130
 Long-term Debt       $265

                                       Assets                     Liabilities and Shareholders' Equity
                             Current Assets      $250   Current Liabilities
                             Fixed Assets        $625   Long-term Debt
                                                        Total Liabilities
                                                        Shareholders' Equity
                             Total Assets               Total Liabilities and Shareholders' Equity

                             Working Capital =
holders' Equity
                  $130
                  $265
        Assumptions
 Current Assets       $250
  Fixed Assets        $625
Current Liabilities   $130
 Long-term Debt       $265

                                       Assets                        Liabilities and Shareholders' Equity
                             Current Assets       $250     Current Liabilities
                             Fixed Assets         $625     Long-term Debt
                                                           Total Liabilities
                                                           Shareholders' Equity
                             Total Assets         $875     Total Liabilities and Shareholders' Equity

                             Working Capital = $250 - $130 = $120
holders' Equity
                  $130
                  $265
                  $395
                  $480
                  $875
                                   Assumptions
Name                                                Your Company
Date 1                                              12/31/2009
Date 2                                              12/31/2010
Statement                                           Balance Sheet
                                                    Income Statement
Accounts:                                           Net Fixed Assets
                                                    Depreciation Expense
Balance Sheet Net Fixed Assets, December 31, 2009   500,000.00
Balance Sheet Net Fixed Assets, December 31, 2010   650,000.00
2010 Income Statement Depreciation Expense          115,000.00

Net Capital Spending for 2010

                                   Assumptions
Name                                                Your Company
Date 1                                              12/31/2009
Date 2                                              12/31/2010
Statement                                           Balance Sheet
                                                    Income Statement
Accounts:                                           Net Fixed Assets
                                                    Depreciation Expense
Balance Sheet Net Fixed Assets, December 31, 2009   500,000.00
Balance Sheet Net Fixed Assets, December 31, 2010   350,000.00
2010 Income Statement Depreciation Expense          25,000.00

Net Capital Spending for 2010
                                   Assumptions
Name                                                Your Company
Date 1                                              12/31/2009
Date 2                                              12/31/2010
Statement                                           Balance Sheet
                                                    Income Statement
Accounts:                                           Net Fixed Assets
                                                    Depreciation Expense
Balance Sheet Net Fixed Assets, December 31, 2009   500,000.00
Balance Sheet Net Fixed Assets, December 31, 2010   650,000.00
2010 Income Statement Depreciation Expense          115,000.00

Net Capital Spending for 2010                       265,000.00

                                   Assumptions
Name                                                Your Company
Date 1                                              12/31/2009
Date 2                                              12/31/2010
Statement                                           Balance Sheet
                                                    Income Statement
Accounts:                                           Net Fixed Assets
                                                    Depreciation Expense
Balance Sheet Net Fixed Assets, December 31, 2009   500,000.00
Balance Sheet Net Fixed Assets, December 31, 2010   350,000.00
2010 Income Statement Depreciation Expense          25,000.00

Net Capital Spending for 2010                       (125,000.00)
Liquidity: How Quickly An Asset Can Be Converted To
Liquidity has two dimensions:
   Ease of conversion to cash
   Loss of value because you have to sell it quickly
Highly liquid asset:
   Quickly sold without significant loss of value (inventory, short-term investments)
Illiquid asset:
   Cannot be sold quickly without significant price reduction (machinery, building)
Items on balance sheet are listed in order of decreasing liquidity (most liquid are first)

Liquidity is valuable:
  Firm can readily pay bills and buy assets quickly
Liquid assets such as cash tend to be less profitable than illiquid assets such as buildings/trucks and subdivisions
of business
  Too many liquid assets may mean the firm is not investing in profitable assets such as machinery to make
  products or purchases of other businesses
Assets   =                 Debt                 +        Shareholders' Equity
 Use                                          Source
  of                                            of
Funds                                         Funds
             Fixed Claim (contractual claim)       Residual Claim
             Interest expense (cash out) is a      Dividend (Cash out) is not tax
             tax deductible item                   deductible
             Paid first during bankruptcy          Get what's left over
The topic of whether to use Debt or Equity to raise funds is called "Capital Structure"
The term "Financial Leverage" is used when the firm has debt
 The more debt (as a % of assets), the more leverage
 Leverage can magnify:
   Gains
   Losses
 More later!
Asset’s Market or Book Value
Market value
 The amount of cash we would get if we sold it
 You never know for sure until you sell it
Book value
 The historical cost that was recorded when the firm purchased the asset
   Required under GAAP (Generally Accepted Accounting Principals). Some Financial Assets are recorded at market value.
 Book value of assets often does not reflect the firm’s most valuable assets such as:
   Talented employees/ managers
   Customer list
   Reputation

Shareholders’ Equity
 The market value for a share of stock is virtually always different that its book value
The goal of the financial manager is to maximize the market value for the stock
Thus, the financial manager is more interested in the MARKET VALUE than the book value
ded at market value.
                         Assumptions
Name:                                       Queen's Corp
Fixed Assets Book Value                          $800.00
Fixed Assets Apprised Market Value             $1,200.00
Net Working Capital Book Value                   $500.00
Net Working Capital Market Value (perhaps
inventory value increased)                       $800.00
Long-term Debt                                   $400.00
What is book value of equity?                                                                   Queen's Corp
What is the market value of equity?                                                           Balance Sheets
                                                                                         Market Value vs. Book
                                                                            Assets
                                                                               Book   Market
                                                           Net Working Capital
                                                            Net Fixed Assets
       Queen's Corp
     Balance Sheets
Market Value vs. Book Value
                          Liabilities and Shareholders' Equity
                                             Book        Market
                    Long-term Debt
                    Shareholders' Equity
                         Assumptions
Name:                                       Queen's Corp
Fixed Assets Book Value                          $800.00
Fixed Assets Apprised Market Value             $1,200.00
Net Working Capital Book Value                   $500.00
Net Working Capital Market Value (perhaps
inventory value increased)                       $800.00
Long-term Debt                                   $400.00
What is book value of equity?                                                                      Queen's Corp
What is the market value of equity?                                                              Balance Sheets
                                                                                            Market Value vs. Book
                                                                            Assets
                                                                               Book       Market
                                                           Net Working Capital    $500.00   $800.00
                                                            Net Fixed Assets       800.00 1,200.00
                                                                                $1,300.00 $2,000.00
       Queen's Corp
     Balance Sheets
Market Value vs. Book Value
                          Liabilities and Shareholders' Equity
                                             Book        Market
                    Long-term Debt              $400.00    $400.00
                    Shareholders' Equity         900.00 1,600.00
                                              $1,300.00 $2,000.00
         Revenues = Sales = Net Sales = Amounts earned by business from delivering products or services to customer. Ex
      shoes, business gets $100; the $100 is the Revenue. Revenues may take the form of cash, credit card receipts, or ac
                                                                  from customer later).
      Expenses = Costs associated with creating Revenues. Example01: The business paid $50 for the shoes and sold the
       the $50 is an expense called "Cost Of Goods Sold" or COGS. Example02: Employee's pay is an expense to the busi
                                             paid in cash, immediately or at a future time (accounts payable).


           Income Statement = Profits = Earnings = Shows profit for period. Income Statement Formula is: Revenues - Exp
                                                   Net Income does not necessarily mean “Cash in”.


                                  RAD Corporation
                            Income Statement ($ in Millions)
                        For The Year Ended December 31, 2007
Rev   Net Sales                                                         $1,600
Ex    Cost of Goods Sold                                                    841
Ex    Depreciation                                                           71
      Earnings before interest and tax                                    $688
Ex    Interest paid                                                          76
      Taxable income                                                      $612
Ex    Taxes                                                                202
      Net Income                                                          $410

      Dividends =                                                       $88.00
      Addition to retained earnings =
      Shares outstanding (in 000,000), Dec 31, 2007 =                      210
      Earnings per share (EPS) = $410/210 = $1.95 =
      Dividends per share = $88/210 = $0.42 =
  products or services to customer. Example: Customer gets
 m of cash, credit card receipts, or accounts receivable (collect
 ).
s paid $50 for the shoes and sold the shoes for $100 Revenue;
 loyee's pay is an expense to the business. Expenses may be
me (accounts payable).


tatement Formula is: Revenues - Expenses = Net Income
mean “Cash in”.
                      RAD Corporation
                Income Statement ($ in Millions)
            For The Year Ended December 31, 2007
Net Sales                                          $1,600
Cost of Goods Sold                                     841
Depreciation                                            71
Earnings before interest and tax                     $688
Interest paid                                           76
Taxable income                                       $612
Taxes                                                 202
Net Income                                           $410

Dividends =                                        $88.00
Additionoutstanding earnings = Dec 31,
Shares to retained (in 000,000),
2007 =                                               210
Earnings per share (EPS) = $410/210 =               $1.95
Dividends per share = $88/210 = $0.42 =             $0.42
UPS Trucks Cost                                                         $   5,000,000.00
Salvage Value                                                           $     250,000.00
Years in Use                                                                           10
SL Depreciation Expense for one Year = (Cost-Salvage)/Years =           $     475,000.00

  The Cash went out the first year, but the Depreciation Expense shows up each year even
                           though the cash was paid out in year 1
       Depreciation is a non-cash expense that shows up on the Income Statement
UPS Trucks Cost                                                         $   5,000,000.00
Salvage Value                                                           $     250,000.00
Years in Use                                                                           10
SL Depreciation Expense for one Year = (Cost-Salvage)/Years =           $     475,000.00

  The Cash went out the first year, but the Depreciation Expense shows up each year even
                           though the cash was paid out in year 1
       Depreciation is a non-cash expense that shows up on the Income Statement
UPS Trucks Cost           $ 1,000,000.00
Salvage Value             $ 100,000.00
Years in Use                             5
                          $ 180,000.00
SL Depreciation Expense for one Year = (Cost-Salvage)/Years =

                         Year 1          Year 2          Year 3          Year 4          Year 5
Revenue                     2,000,000.00    2,000,000.00    2,000,000.00    2,000,000.00    2,000,000.00
Non-Cash Depr Expense
Other Expenses              1,200,000.00 1,200,000.00 1,200,000.00 1,200,000.00 1,200,000.00
Other Expenses            $ 800,000.00 $ 800,000.00 $ 800,000.00 $ 800,000.00 $ 800,000.00
UPS Trucks Cost           $ 1,000,000.00
Salvage Value             $ 100,000.00
Years in Use                             5
                          $ 180,000.00
SL Depreciation Expense for one Year = (Cost-Salvage)/Years =

                      Year 1          Year 2          Year 3          Year 4          Year 5
Revenue                  2,000,000.00    2,000,000.00    2,000,000.00    2,000,000.00    2,000,000.00
Non-Cash Depr Expense $ 180,000.00 $ 180,000.00 $ 180,000.00 $ 180,000.00 $ 180,000.00
Other Expenses           1,200,000.00    1,200,000.00    1,200,000.00    1,200,000.00    1,200,000.00
Other Expenses         $ 620,000.00 $ 620,000.00 $ 620,000.00 $ 620,000.00 $ 620,000.00
              RAD Corporation                                                                              RAD Corporation
        Income Statement ($ in Millions)                                                              Balance Sheet ($ in Mil
    For The Year Ended December 31, 2007                                                    Balance Sheet as of December 31
Net Sales                                $1,600                      Assets
Cost of Goods Sold                           841                                        2006     2007
Depreciation                                  71             Current assets
Earnings before interest and tax           $688                Cash                     $119   $183
Interest paid                                 76               Accounts Receivable       465    698
Taxable income                             $612                Inventory                 563    565
Taxes                                       202                  Total                 $1,147 $1,446
Net Income                                 $410              Fixed Assets
                                                              Net Fixed Assets         1,654    1,719
Dividends =                              $88.00
Addition to retained earnings =




                                                             Total Assets              $2,801 $3,165


Accounting Information does not always give us good information about Cash Flows
In Finance, usually Cash Flows are used for analysis. Because of this, we need to be able to take accounting information and c

How do we calculate the change in anything?
End - Beg
              RAD Corporation
         Balance Sheet ($ in Millions)
alance Sheet as of December 31, 2006 and 2007
                  Liabilities and Shareholders' Equity
                                                            2006    2007
           Current Liabilities
            Accounts Payable                                $237    $278
            Notes Payable                                     206     133
             Total                                           $443    $411

           Long-term debt                                     418    464
               Total Liabilities                             $861   $875


           Shareholders' Equity
            Common Stock and paid-in surplus                   610   638
            Retained Earnings                               1,330 1,652
              Total                                         $1,940 $2,290
           Total Liabilities and Shareholders' Equity       $2,801 $3,165



e accounting information and convert it to Cash Flows ==>
                               Cash flow to creditors        Cash flow to stockholders
 Cash flow from assets    =                              +
                                  (bondholders)                      (owners)




 Cash flow from assets    =     Operating cash flow      -     Net capital spending      -




                              Earnings before interest
  Operating cash flow     =                              +         Depreciation          -
                                 and taxes (EBIT)




                                                                Beginning net fixed
  Net capital spending    =   Ending net fixed assets    -                               +
                                                                     assets




                              Ending NWC (End CA -           Beginning NWC (Beg CA -
    Change in NWC         =                              -
                                     End CL)                         Beg CL)




 Cash flow to creditors                                       Net new borrowing (end
                          =        Interest paid         -
    (bondholders)                                            long-term debt - beg LTD)




                                                               Net new equity raised
Cash flow to stockholders                                     (end Common stock &
                          =       Dividends paid         -
        (owners)                                             Paid-in surplus - beg CS
                                                                      & PIS)
Change in net working
   capital (NWC)




       Taxes




    Depreciation
                              8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - In Class Example


                                                      Assumptions                                      Entrepreneur Corporation
                 Name:                                           Entrepreneur Corporation                  Income Statement
                 Year 1                                                        12/31/2009              For The Year Ended 2010
                 Year 2                                                        12/31/2010
                 Tax Rate                                                             34%
                 Statements                                      Income Statement
                                                                 Balance Sheet
                                                      Requirements:
                 Prepare an Income Statement for 2010
                 Prepare an Balance Sheet for 2009 and 2010
                 Calculate cash flows from assets for 2010
                 Calculate cash flows to creditors 2010
                 Calculate cash flows to stockholders 2010
                 Account Name                                                        2009       2010
                 Sales                                                           3,810.00       4237
                 Cost of goods sold                                              2,063.00   2,198.00
                 Depreciation                                                      995.00   1,438.00
                 Interest                                                          245.00     287.00
                 Dividends                                                         120.00     130.00
                 Current assets                                                  2,060.00   2,466.00
                 Net fixed assets                                                6,790.00   7,407.00
                 Current liabilities                                             1,014.00   1,346.00
                 Long-term debt                                                  2,889.00   2,976.00




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                 8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - In Class Example


                                    Entrepreneur Corporation                                    Entrepreneur Corp
                                        Income Statement                                              Balance She
                                    For The Year Ended 2010                              December 31, 2009 and De
                   Sales                                                       Assets
                   Cost of goods sold
                   Depreciation
                   Earnings before interest and tax
                   Interest
                   Taxable income
                   Taxes
                   Net Income


                   Dividends
                   Addition to retained earnings




Page 40 of 256                                                                          Finance is Fun!
                                              8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - In Class Example


                                                              Entrepreneur Corporation
                                                                    Balance Sheet
                                                       December 31, 2009 and December 31, 2010
                                    Assets                                            Liabilities and Owners' Equity
                                       2009           2010                                                             2009   2010
                 Current assets                               Current liabilities
                 Net fixed assets                             Long-term debt
                                                              Total Liabilities
                                                              Change in Common Stock and Paid-in surplus
                                                              Change in Retained earnings
                                                              Total Owners' Equity
                 Total Assets                                 Total Liabilities and Owners' Equity




Page 41 of 256                                                                                                                       Finance is Fun!
                                            8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - In Class Example


                  Cash flow from assets        =     Cash flow to creditors    +   Cash flow to stockholders

                  Cash flow from assets        =   Cash flow from operations   -     Net capital spending      -   Change in NWC

                 Cash flow from operations     =             EBIT              +         Depreciation          -       Taxes

                   Net capital spending        =     End net fixed assets      -     Beg net fixed assets      +    Depreciation


                     Change in NWC             =          End NWC              -          Beg NWC

                   Cash flow to creditors      =            Interest           -      Net new borrowing


                 Cash flow to stockholders     =           Dividends           -        Net new equity




Page 42 of 256                                                                                                                     Finance is Fun!
                          8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - In Class Example (an)


                                                      Assumptions                                        Entrepreneur Corporation
                 Name:                                           Entrepreneur Corporation                    Income Statement
                 Year 1                                                        12/31/2009                For The Year Ended 2010
                 Year 2                                                        12/31/2010
                 Tax Rate                                                             34%
                 Statements                                      Income Statement
                                                                 Balance Sheet
                                                      Requirements:
                 Prepare an Income Statement for 2010            Done
                 Prepare an Balance Sheet for 2009 and 2010      Done
                 Calculate cash flows from assets for 2010                        (197.00)    (197.00)
                 Calculate cash flows to creditors 2010                           200.00
                 Calculate cash flows to stockholders 2010                        (397.00)
                 Account Name                                                        2009        2010
                 Sales                                                           3,810.00        4237
                 Cost of goods sold                                              2,063.00    2,198.00
                 Depreciation                                                      995.00    1,438.00
                 Interest                                                          245.00      287.00
                 Dividends                                                         120.00      130.00
                 Current assets                                                  2,060.00    2,466.00
                 Net fixed assets                                                6,790.00    7,407.00
                 Current liabilities                                             1,014.00    1,346.00
                 Long-term debt                                                  2,889.00    2,976.00




Page 43 of 256                                                                                               Finance is Fun!
                 8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - In Class Example (an)


                                      Entrepreneur Corporation                              Entrepreneur Corp
                                          Income Statement                                        Balance She
                                      For The Year Ended 2010                        December 31, 2009 and De
                     Sales                                        $4,237.00
                     Cost of goods sold                            2,198.00
                     Depreciation                                  1,438.00
                     Earnings before interest and tax                601.00
                     Interest                                        287.00
                     Taxable income                                  314.00
                     Taxes                                           107.00
                     Net Income                                    $207.00


                     Dividends                                     $130.00
                     Addition to retained earnings                   $77.00




Page 44 of 256                                                                      Finance is Fun!
                                           8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - In Class Example (an)


                                                              Entrepreneur Corporation
                                                                    Balance Sheet
                                                       December 31, 2009 and December 31, 2010
                                    Assets                                           Liabilities and Owners' Equity
                                       2009           2010                                                          2009           2010
                 Current assets      $2,060.00   $2,466.00   Current liabilities                                  $1,014.00      $1,346.00
                 Net fixed assets     6,790.00    7,407.00   Long-term debt                                           2,889.00    2,976.00
                                                             Total Liabilities                                        3,903.00    4,322.00
                                                             Change in Common Stock and Paid-in surplus                            527.00
                                                             Change in Retained earnings                                            77.00
                                                             Total Owners' Equity                                     4,947.00 $5,551.00
                 Total Assets        $8,850.00   $9,873.00   Total Liabilities and Owners' Equity                 $8,850.00      $9,873.00




Page 45 of 256                                                                                                                               Finance is Fun!
                                          8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - In Class Example (an)


                  Cash flow from assets        =     Cash flow to creditors    +   Cash flow to stockholders True
                         (197.00)                           200.00                         (397.00)
                  Cash flow from assets        =   Cash flow from operations   -     Net capital spending      -  Change in NWC
                         (197.00)                          1,932.00                        2,055.00                   74.00
                 Cash flow from operations     =             EBIT              +         Depreciation          -      Taxes
                         1,932.00                                          601             1,438.00                  107.00
                   Net capital spending        =     End net fixed assets      -     Beg net fixed assets    +    Depreciation
                         2,055.00                         7,407.00                        6,790.00                 1,438.00
                     Change in NWC             =          End NWC              -          Beg NWC
                         74.00                                          1120              1,046.00
                   Cash flow to creditors      =           Interest            -     Net new borrowing
                          200.00                           287.00                          87.00
                 Cash flow to stockholders     =          Dividends            -       Net new equity
                         (397.00)                          $130.00                        $527.00




Page 46 of 256                                                                                                                    Finance is Fun!
                                                                   Interest on Debt is Rent on Money
                                                             Interest on Debt is deductable on your tax bill
If you use Debt to buy a new asset worth =                                        $ 500.00
The annual interest rate, compunded annually =                                          8.00%
Tax Rate                                                                               30.00%
Interest on Debt the first year = $500.00*8.00% = $40.00                          $     40.00

Because Interest on Debt is tax deductable, the $40.00 you paid is subtracted
from earnings, you save $40.00*30.00% = $12.00. In essence, you avoid paying
$12.00 which is a savings to you. If you had not used debt, but instead used
equity, you would not have received the $12.00 savings.                          $     12.00
Total Cash going out is then = $40.00 - $12.00 =                                 $     28.00

                                Income Statement with Debt                                                     Income S
Net Sales                                                                        $ 1,000.00
Expeneses                                                                            400.00
 Earnings Before Interest and tax                                                    600.00
 Interest                                                                             40.00
Taxable earnings                                                                     560.00
Tax
 Net Income

Difference between Debt and No Debt =

Why Debt Good = Saves cash

Why Debt Bad = Too much and you may go bankrupt
bt is Rent on Money
eductable on your tax bill




             Cash going out to the bank ==>




             <== Cash coming in from the savings on your tax bill


                                  Income Statement without Debt
             Net Sales                                              $ 1,000.00
             Expenses                                                   400.00
              Earnings Before Interest and tax                          600.00
              Interest                                                     -
             Taxable earnings                                           600.00
             Tax
              Net Income
                                                                   Interest on Debt is Rent on Money
                                                             Interest on Debt is deductable on your tax bill
If you use Debt to buy a new asset worth =                                        $ 500.00
The annual interest rate, compunded annually =                                          8.00%
Tax Rate                                                                               30.00%
Interest on Debt the first year = $500.00*8.00% = $40.00                          $     40.00

Because Interest on Debt is tax deductable, the $40.00 you paid is subtracted
from earnings, you save $40.00*30.00% = $12.00. In essence, you avoid paying
$12.00 which is a savings to you. If you had not used debt, but instead used
equity, you would not have received the $12.00 savings.                          $     12.00
Total Cash going out is then = $40.00 - $12.00 =                                 $     28.00

                                Income Statement with Debt                                                     Income
Net Sales                                                                        $ 1,000.00
Expeneses                                                                            400.00
 Earnings Before Interest and tax                                                    600.00
 Interest                                                                             40.00
Taxable earnings                                                                     560.00
Tax                                                                                  168.00
 Net Income                                                                      $ 392.00

Difference between Debt and No Debt =

Why Debt Good = Saves cash

Why Debt Bad = Too much and you may go bankrupt
bt is Rent on Money
eductable on your tax bill




             Cash going out to the bank ==>




             <== Cash coming in from the savings on your tax bill


                                    Income Statement with Debt
             Net Sales                                              $ 1,000.00
             Expenses                                                   400.00
              Earnings Before Interest and tax                          600.00
              Interest                                                     -
             Taxable earnings                                           600.00
             Tax                                                        180.00
              Net Income                                            $ 420.00
               Assumptions
Taxable Income            300,000.00

                             Tax Rate Table
Income From              Income To          Tax Rate
                  -                50,000                           15.00%
               50,001              75,000                           25.00%
               75,001             100,000                           34.00%
              100,001             335,000                           39.00%
              335,001         10,000,000                            34.00%
           10,000,001         15,000,000                            35.00%
           15,000,001         18,333,333                            38.00%
           18,333,334      +                                        35.00%
                                                                               Taxable Income = $3
                                                                                 Calculate tax for en




Average Tax Rates = total taxes/taxable income
Marginal Tax Rates = rate used on the next taxable $
* In Finance it is the marginal tax rate that is used in cash flow analysis.
This is because if you are considering a new project, any new cash flows
                      will be taxed at the marginal rate
             Taxable Income = $300,000.00
               Calculate tax for entire year
$50,000*15.00%                                  7,500.00
($75,000-$50,000)*25.00%                        6,250.00
($100,000-$75,000)*34.00%                       8,500.00
($300,000-$100,000)*39.00%                     78,000.00


Average Tax Rate =

Marginal Tax Rate for next dollar =
               Assumptions
Taxable Income            300,000.00

                             Tax Rate Table
Income From              Income To          Tax Rate
                  -                50,000                           15.00%
               50,001              75,000                           25.00%
               75,001             100,000                           34.00%
              100,001             335,000                           39.00%
              335,001         10,000,000                            34.00%
           10,000,001         15,000,000                            35.00%
           15,000,001         18,333,333                            38.00%
           18,333,334      +                                        35.00%
                                                                               Taxable Income = $3
                                                                                 Calculate tax for en




Average Tax Rates = total taxes/taxable income
Marginal Tax Rates = rate used on the next taxable $
* In Finance it is the marginal tax rate that is used in cash flow analysis.
This is because if you are considering a new project, any new cash flows
                      will be taxed at the marginal rate
             Taxable Income = $300,000.00
               Calculate tax for entire year
$50,000*15.00%                                   7,500.00
($75,000-$50,000)*25.00%                         6,250.00
($100,000-$75,000)*34.00%                        8,500.00
($300,000-$100,000)*39.00%                      78,000.00   check:
                                               100,250.00     100250


Average Tax Rate =                               0.33417

Marginal Tax Rate for next dollar =              0.39000
              Rate
taxable earnings         Cumulative Amount Tax From Previous br
           0    15.00%                      0
     50,000     25.00%                   7500
     75,000     34.00%             13,750.00
    100,000     39.00%             22,250.00
    335,000     34.00%            113,900.00
 10,000,000     35.00%           3,400,000.00
 15,000,000     38.00%           5,150,000.00
 18,333,333     35.00%           6,416,667.00
Amount Tax From Previous brackets
8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls                    2005 C Corporation Tax Rates                                                Accounting Is Fun!


                                                2004 Corporate Income Tax Rates (for C corporations)
                                             http://www.givingto.msu.edu/pgaol/html/2004_federal_income_tax_rates.html
           VLOOKUP                  Over         But Not Over    Tax from previous   Rate for this bracket           The tax is   Of excess over
                                                                           bracket

              $0              $0                $50,000                                    15.00%                    15%               0
           $50,001          50,000               75,000               $7,500               25.00%                7,500 + 25%       $50,000
           $75,001          75,000              100,000               13,750               34.00%               13,750 + 34%        75,000
          $100,001         100,000              335,000               22,250               39.00%               22,250 + 39%       100,000
          $335,001         335,000             10,000,000            113,900               34.00%              113,900 + 34%       335,000
         $10,000,001      10,000,000           15,000,000           3,400,000              35.00%             3,400,000 + 35%     10,000,000
         $15,000,001      15,000,000           18,333,333           5,150,000              38.00%             5,150,000 + 38%     15,000,000
         $18,333,334      18,333,333                                                       35.00%                    35%               0

                       The corporate rate schedule neutralizes the benefit of the two lowest brackets for higher-income corporations by levying
                       a 5% surtax on corporate taxable income between $100,001 and $335,000. Corporations which pay tax at the corporate
                        level (C corporations) with taxable incomes of at least $335,001 but not over $10 million essentially pay a flat 34% tax.
                         Taxable income over $10 million is taxed at 35%, but with a surtax of the lesser of $100,000 or 3% of taxable income
                                                over $15 million. Above $18,333,333, the tax rate becomes a flat 35%.
                         Corporations that have made an S election generally are not taxed as corporations. Instead, their net income passes
                                        through and is taxed directly to the shareholders on their personal income tax returns.

                        Certain personal service corporations are taxed at a flat rate of 35% regardless of the amount of their taxable income.



                                                                                                             Taxable Income =       300,000.00
                                                                                                             Total Tax =                100250




                                                                    Page 57 of 256
http://finance.yahoo.com/q?s=wfmi                                           http://biz.yahoo.com/f/g/g.html

Whole Foods Market, Inc.
Consolidated Balance Sheets
(In thousands)
September 24, 2006 and September 25, 2005




 Assets
 Current assets:
 Cash and cash equivalents
 Short-term investments – available-for-sale securities
 Restricted cash
 Trade 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
 Goodwill
 Intangible assets, net of accumulated amortization
 Deferred income taxes
 Other assets

     Total assets




Liabilities and Shareholders’ Equity
 Current liabilities:
 Current installments of long-term debt and capital lease obligations
 Trade 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 rent liability
 Other long-term liabilities

     Total liabilities

 Shareholders’ equity:
 Common stock, no par value, 300,000 shares authorized;
 142,198 and 136,017 shares issued, 139,607 and 135,908 shares
 outstanding in 2006 and 2005, respectively
 Common stock in treasury, at cost
 Accumulated other comprehensive income
 Retained earnings

 Total shareholders’ equity

 Commitments and contingencies

     Total liabilities and shareholders’ equity


The accompanying notes are an integral part of these consolidated financial statements.

                                                  37




Table of Contents

Whole Foods Market, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Fiscal years ended September 24, 2006, September 25, 2005 and September 26, 2004




 Sales
 Cost of goods sold and occupancy costs

     Gross profit
 Direct store expenses
 General and administrative expenses
 Pre-opening and relocation costs

     Operating income
 Other income (expense):
 Interest expense
 Investment and other income

    Income before income taxes
 Provision for income taxes

     Net income
 Basic earnings per share


 Weighted average shares outstanding


 Diluted earnings per share


 Weighted average shares outstanding, diluted basis


 Dividends declared per share


The accompanying notes are an integral part of these consolidated financial statements.

                                                38




Table of Contents

Whole Foods Market, Inc.
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
(In thousands)
Fiscal years ended September 24, 2006, September 25, 2005 and September 26, 2004




 Balances at September 28, 2003

 Net income
 Foreign currency translation adjustments
 Reclassification adjustments for losses included in net income
 Change in unrealized gain (loss) on investments, net of income taxes

 Comprehensive income
 Dividends ($0.30 per share)
 Issuance of common stock pursuant to team member stock plans
 Issuance of common stock in connection with acquisition
 Tax benefit related to exercise of team member stock options
 Other

 Balances at September 26, 2004

 Net income
 Foreign currency translation adjustments
 Reclassification adjustments for losses included in net income
 Change in unrealized gain (loss) on investments, net of income taxes

 Comprehensive income
 Dividends ($0.47 per share)
 Issuance of common stock pursuant to team member stock plans
 Tax benefit related to exercise of team member stock options
 Share-based compensation
 Conversion of subordinated debentures

 Balances at September 25, 2005

 Net income
 Foreign currency translation adjustments
 Change in unrealized gain (loss) on investments, net of income taxes

 Comprehensive income
 Dividends ($2.45 per share)
 Issuance of common stock pursuant to team member stock plans
 Purchase of treasury stock
 Excess tax benefit related to exercise of team member stock options
 Share-based compensation
 Conversion of subordinated debentures

 Balances at September 24, 2006


The accompanying notes are an integral part of these consolidated financial statements.

                                                39




Table of Contents

Whole Foods Market, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Fiscal years ended September 24, 2006, September 25, 2005 and September 26, 2004




 Cash flows from operating activities
 Net income
 Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation and amortization
     Loss on disposal of fixed assets
     Share-based compensation
     Deferred income tax expense (benefit)
     Tax benefit related to exercise of team member stock options
     Excess tax benefit related to exercise of team member stock options
     Interest accretion on long-term debt
     Deferred rent
     Other
     Net change in current assets and liabilities:
         Trade accounts receivable
         Merchandise inventories
         Prepaid expenses and other current assets
         Trade accounts payable
         Accrued payroll, bonus and other benefits due team member
         Other accrued expenses

     Net cash provided by operating activities

Cash flows from investing activities
 Development costs of new store locations
 Other property, plant and equipment expenditures
 Proceeds from hurricane insurance
 Acquisition of intangible assets
 Change in notes receivable
 Purchase of available-for-sale securities
 Sale of available-for-sale securities
 Increase in restricted cash
 Payment for purchase of acquired entities, net of cash acquired
 Other investing activities

     Net cash used in investing activities

Cash flows from financing activities
 Dividends paid
 Issuance of common stock
 Purchase of treasury stock
 Excess tax benefit related to exercise of team member stock options
 Payments on long-term debt and capital lease obligations

     Net cash provided by (used in) financing activities

 Net change in cash and cash equivalents
 Cash and cash equivalents at beginning of year

 Cash and cash equivalents at end of year
 Supplemental disclosures of cash flow information:
    Interest paid
    Federal and state income taxes paid
 Non-cash transactions:
    Common stock issued in connection with acquisition
    Conversion of convertible debentures into common stock, net of fees



Whole Foods Market, Inc.
Notes to Consolidated Financial Statements
Fiscal years ended September 24, 2006, September 25, 2005 and September 26, 2004
(1) Description of Business
Whole Foods Market, Inc. and its consolidated subsidiaries (collectively ―Whole Foods Market,‖ ―Company,‖ or ―We‖) own and operate the
(2) Summary of Significant Accounting Policies
Definition of Fiscal Year
We report our results of operations on a 52- or 53-week fiscal year ending on the last Sunday in September. Fiscal years 2006, 2005 and 200
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. A
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.
Investments
We classify as available-for-sale our cash equivalent investments and our short-term and long-term investments in debt and equity securities
Restricted Cash
Restricted cash primarily relates to cash held as collateral to support projected workers’ compensation obligations.
Inventories
We value our inventories at the lower of cost or market. Cost was determined using the last-in, first-out (―LIFO‖) method for approximately
Cost was determined using the retail method for approximately 54% of inventories in fiscal years 2006 and 2005. Under the retail method, th

                                                  41




Table of Contents

Our largest supplier, United Natural Foods, Inc., accounted for approximately 22%, 22% and 20% of our total purchases in fiscal years 2006
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. We provide depreciation of equipment over the e
Operating Leases
The Company leases stores, distribution centers, bakehouses and administrative facilities under operating leases. Store lease agreements gene
Goodwill
Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired less liabil
Intangible Assets
Intangible assets include acquired leasehold rights, liquor licenses, license agreements, non-competition agreements and debt issuance costs.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
We evaluate long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carry
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued payroll, bonuses and team me
                                                  42




Table of Contents

The fair value of convertible subordinated debentures is estimated using quoted market prices. The fair value of senior unsecured notes is est




 Convertible subordinated debentures
 Senior unsecured notes
Insurance and Self-Insurance Reserves
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’ compensation, gen
Revenue Recognition
We recognize revenue for sales of our products at the point of sale. Discounts provided to customers at the point of sale are recognized as a r
Cost of Goods Sold and Occupancy Costs
Cost of goods sold includes cost of inventory sold during the period, net of discounts and allowances, contribution from non-retail distributio
Advertising
Advertising and marketing expense for fiscal years 2006, 2005 and 2004 was approximately $24.0 million, $20.1 million and $17.4 million,
Pre-opening and Relocation Costs
Pre-opening costs include rent expense incurred during construction of new stores and costs related to new store openings including costs ass
Share-Based Compensation
Our Company maintains several share-based incentive plans. We grant options to purchase common stock under our 1992 Stock Option Plan

                                                  43




Table of Contents

service. Under this plan, participating team members may purchase our common stock each calendar quarter through payroll deductions. Par
Prior to the effective date of revised Statement of Financial Accounting Standards (―SFAS‖) No. 123R, ―Share-Based Payment,‖ the Compan
Effective the beginning of the first quarter of fiscal year 2006, the Company adopted the provisions of SFAS No. 123R using the modified pr
SFAS No. 123R requires the Company to value unvested stock options granted prior to its adoption of SFAS No. 123 under the fair value me
Prior to the adoption of SFAS No. 123R, the Company presented the tax savings resulting from tax deductions resulting from the exercise of
In November 2005, the FASB issued Staff Position No. FAS 123R-3, ―Transition Election Related to Accounting for the Tax Effects of the S
Income Taxes
We recognize deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet date to differences betwe
Earnings per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during the fiscal period. Diluted earnings p

                                                  44
Table of Contents

Comprehensive Income
Comprehensive income consists of net income, foreign currency translation adjustments, and unrealized gains and losses on marketable secu
Foreign Currency Translation
The Company’s Canadian and United Kingdom operations use their local currency as their functional currency. Assets and liabilities are tran
Segment Information
We operate in one reportable segment, natural foods supermarkets. We currently have three stores in Canada and six stores in the United Kin
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
Reclassifications
Where appropriate, we have reclassified prior years’ financial statements to conform to current year presentation.
Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.108 (―SAB No. 108‖), ―Considering the E
In September 2006, the FASB issued SFAS No. 157, ―Fair Value Measures.‖ SFAS No. 157 defines fair value, establishes a framework for m
In July 2006, the FASB issued Interpretation 48 (―FIN 48‖), ―Accounting for Uncertainty in Income Taxes,‖ an interpretation of SFAS No. 1

                                                45




Table of Contents

In March 2006, the Emerging Issues Task Force (―EITF‖) reached a consensus on EITF Issue No. 06-3, ―How Taxes Collected from Custom
In May 2005, the FASB issued SFAS No. 154, ―Accounting Changes and Error Corrections, a Replacement of Accounting Principles Board
(3) Natural Disaster Costs
The Company has two stores in the New Orleans area which were damaged by and closed due to Hurricane Katrina during the fourth quarter
(4) Property and Equipment
Balances of major classes of property and equipment are as follows (in thousands):




 Land
 Buildings and leasehold improvements
 Fixtures and equipment
 Construction in progress and equipment not yet in service



 Less accumulated depreciation and amortization




Depreciation and amortization expense related to property and equipment totaled approximately $152.4 million, $129.8 million and $111.2 m
                                                   46




Table of Contents

accelerated depreciation and other asset impairments totaling approximately $13.1 million and $5.9 million at September 24, 2006 and Septe
(5) Business Combinations
Fresh & Wild Holdings Limited
On January 31, 2004, we acquired all of the outstanding stock of Fresh & Wild Holdings Limited (―Fresh & Wild‖) for a total of approximat
Select Fish LLC
On October 27, 2003, we acquired certain assets of Select Fish LLC (―Select Fish‖) in exchange for approximately $3 million in cash plus th


-6                                                                                                      Goodwill
                                                                                                        and Other
                                                                                                        Intangible
                                                                                                        Assets
Goodwill and indefinite-lived intangible assets are reviewed for impairment annually, or more frequently if impairment indicators arise. We a
Definite-lived intangible assets are amortized over the useful life of the related agreement. We acquired definite-lived intangible assets totali




 Indefinite-lived contract-based
 Definite-lived contract-based
 Definite-lived marketing-related and other




Amortization associated with the net carrying amount of intangible assets is estimated to be approximately $2.4 million in fiscal year 2007, $

                                                   47




Table of Contents

(7) Long-Term Debt
We have long-term debt and obligations under capital leases as follows (in thousands):




 Obligations under capital lease agreements for equipment, due in monthly installments through
 2012
 Senior unsecured notes
 Convertible debentures, including accreted interest

 Total Long-term debt
 Less current installments

 Long-term debt, less current installments


On October 1, 2004, we amended our credit facility to extend the maturity of our $100 million revolving line of credit to October 1, 2009. Th
We have outstanding zero coupon convertible subordinated debentures which had a carrying amount of approximately $8.3 million and $12.
We also had outstanding senior unsecured notes that bear interest at 7.29% payable quarterly with a carrying amount of approximately $5.7 m
(8) Leases
The Company is committed under certain capital leases for rental of equipment and certain operating leases for rental of facilities and equipm

                                                  48




Table of Contents

Rental expense charged to operations under operating leases for fiscal years 2006, 2005 and 2004 totaled approximately $153.1 million, $12




 2007
 2008
 2009
 2010
 2011
 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


During fiscal years 2006, 2005 and 2004, we paid contingent rentals totaling approximately $9.6 million, $7.6 million and $4.8 million, resp
(9) Income Taxes
Components of income tax expense are as follows (in thousands):




 Current federal income tax
 Current state income tax

 Total current tax

 Deferred federal income tax
 Deferred state income tax

 Total deferred income tax

 Total income tax expense


Actual income tax expense differed from the amount computed by applying statutory corporate income tax rates to income before income tax




 Federal income tax based on statutory rates
 Increase (reduction) in income taxes resulting from:
     Change in valuation allowance
     Tax exempt interest
     Share-based compensation
     Deductible state income taxes
     Other, net

 Total federal income taxes
 State income taxes

 Total income tax expense



                                                 49




Table of Contents

Current income taxes payable as of September 24, 2006 and September 25, 2005 totaled approximately $27.2 million and $5.2 million, respe




 Deferred tax assets:
    Compensation-related costs
    Insurance-related costs
    Inventories
    Lease and other termination accruals
    Rent differential
    Net domestic and international operating loss carryforwards
      Capital loss carryforwards

      Gross deferred tax assets
      Valuation allowance




  Deferred tax liabilities:
     Financial basis of fixed assets in excess of tax basis
     Inventories
     Capitalized costs expensed for tax purposes
     Other




  Net deferred tax asset



  Deferred taxes have been classified on the consolidated balance sheets as follows:



  Current assets
  Noncurrent assets

  Net deferred tax asset


As of September 24, 2006, we had international operating loss carryforwards totaling approximately $32.5 million, of which approximately $
(10) Investments
We had short-term cash equivalent investments totaling approximately $10.1 million and $325.7 million at September 24, 2006 and Septemb
As of September 24, 2006, we also had short-term available-for-sale securities, generally consisting of state and local government obligation

                                                   50




Table of Contents

(11) Shareholders’ Equity
Dividends
The Company’s Board of Directors approved the following dividends during fiscal years 2006 and 2005 (in thousands, except per share amo




Date of Declaration
  Fiscal year 2006:
 November 9, 2005

 November 9, 2005
 March 6, 2006
 June 13, 2006

 Fiscal year 2005:
 November 10, 2004
 April 5, 2005
 June 7, 2005
 September 14, 2005

On September 27, 2006, the Company’s Board of Directors approved a quarterly dividend of $0.15 per share that was paid on October 23, 2
On November 9, 2005, the Company’s Board of Directors approved a two-for-one stock split to be distributed on December 27, 2005 to shar
Treasury Stock
On November 8, 2005, the Company’s Board of Directors approved a stock repurchase program of up to $200 million over the next four yea
On November 6, 2006, the Company’s Board of Directors approved a $100 million increase in the Company’s stock repurchase program, bri
(12) Earnings per Share
The computation of basic earnings per share is based on the number of weighted average common shares outstanding during the period. The

                                                 51




Table of Contents

A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in thousands, except pe




 Net income (numerator for basic earnings per share)
 Interest on 5% zero coupon convertible subordinated debentures, net of income taxes

 Adjusted net income (numerator for diluted earnings per share)


 Weighted average common shares outstanding (denominator for basic earnings per share)



 Potential common shares outstanding:
    Assumed conversion of 5% zero coupon convertible subordinated debentures
    Assumed exercise of stock options

 Weighted average common shares outstanding and potential additional common shares outstanding
 (denominator for diluted earnings per share)

 Basic earnings per share
 Diluted earnings per share


The computation of diluted earnings per share does not include options to purchase approximately 4.3 million, 158,000 shares and 6,000 sha
(13) Share-Based Compensation
Total share-based compensation expense recognized during fiscal year 2006 and fiscal year 2005 was approximately $9.4 million and $19.9
Stock Option Plan
We grant options to purchase common stock under our 1992 Stock Option Plans, as amended. Under these plans, options are granted at an op

                                                 52




Table of Contents

The following table summarizes option activity (in thousands, except per share amounts):




 Outstanding options September 28, 2003
 Options granted
 Options exercised
 Options expired

 Outstanding options at September 26, 2004
 Options granted
 Options exercised
 Options expired

 Outstanding options at September 25, 2005
 Options granted
 Options exercised
 Options expired
 Options forfeited

 Outstanding options at September 24, 2006

 Vested/expected to vest at September 24, 2006

 Exercisable options at September 24, 2006


The weighted average fair values of options granted during fiscal years 2006, 2005 and 2004 were $17.04, $15.19 and $14.69, respectively.
A summary of options outstanding and exercisable at September 24, 2006 follows (share amounts in thousands):
                                                                    Range of
                                                                 Exercise Prices

                                                 From

                                                                                                 $10.47
 21.76
 39.61
 41.05
 54.75
 68.96

Total


Share-based compensation expense related to vesting stock options recognized during fiscal year 2006 totaled approximately $4.6 million.
During fiscal year 2005, the Company accelerated the vesting of all outstanding stock options, except options held by the members of the exe

                                                  53




Table of Contents

The Company also recognized share-based compensation totaling approximately $1.2 million and $2.5 million for modifications of terms of
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




 Expected dividend yield
 Risk-free interest rate
 Expected volatility
 Expected life, in years
Risk-free interest rate is based on the US treasury yield curve for a three and a half-year term and the seven-year zero coupon treasury bill rat
Prior to the effective date of revised Statement of Financial Accounting Standards (―SFAS‖) No. 123R, ―Share-Based Payment,‖ the Compan
In accordance with SFAS No. 123R, the Company adopted the provisions of SFAS No. 123R in the first quarter of fiscal year 2006 using the




 Reported net income
 Share-based compensation expense, net of income taxes
 Pro forma expense, net of income taxes

 Pro forma net income (loss)


 Basic earnings per share:
     Reported
     Share-based compensation expense
     Pro forma adjustment

     Pro forma basic earnings (loss) per share


 Diluted earnings per share:
    Reported
    Share-based compensation expense
    Pro forma adjustment

     Pro forma diluted earnings (loss) per share


Pro forma disclosures for fiscal year 2006 are not presented because the amounts are recognized in the Consolidated Statement of Operations

                                                   54




Table of Contents

Team Member Stock Purchase Plan
Our Company also offers a team member stock purchase plan to all full-time team members with a minimum of 400 hours of service. Under
(14) Team Member 401(k) Plan
Our Company offers a team member 401(k) plan to all team members with a minimum of 1,000 services hours in one year. In fiscal years 20
(15) Quarterly Results (unaudited)
The Company’s first quarter consists of 16 weeks, and the second, third and fourth quarters consist of 12 weeks. Because the first quarter is l
The Company accelerated the vesting of all outstanding stock options on September 22, 2005 in order to prevent past option grants from hav
The Company has two stores in the New Orleans area which were damaged by and closed due to Hurricane Katrina during the fourth quarter

                                                   55




Table of Contents

The following tables set forth selected quarterly unaudited consolidated statements of operations information for the fiscal years ended Septe




Fiscal Year 2006
  Sales
  Cost of goods sold and occupancy costs

     Gross profit
 Direct store expenses
 General and administrative expenses
 Pre-opening and relocation costs

     Operating income
 Other income (expense)
 Interest expense
 Investment and other income

 Income before income taxes
 Provision for income taxes

     Net income


 Basic earnings per share


 Diluted earnings per share


 Dividends declared per share




Fiscal Year 2005
  Sales
  Cost of goods sold and occupancy costs

     Gross profit
 Direct store expenses
 General and administrative expenses
 Pre-opening and relocation costs

     Operating income
 Other income (expense)
 Interest expense
 Investment and other income

    Income before income taxes
 Provision for income taxes

     Net income


 Basic earnings per share


 Diluted earnings per share
 Dividends declared per share


(15) Commitments and Contingencies
The Company uses a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’ compensation, gen
From time to time we are a party to legal proceedings including matters involving personnel and employment issues, personal injury, intellec
The Company has entered into Retention Agreements with certain executive officers of the Company or its subsidiaries which provide for ce

                                                 56




Table of Contents

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under th
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in R
The Company’s independent registered public accounting firm, Ernst & Young LLP, audited management’s assessment of internal control ov
Item 9B. Other Information.
Not applicable.

                                                 57




Table of Contents

                                              PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item about our Company’s Executive Officers is included in Part I, ―Item 1. Business‖ of this Report on For
The Company has adopted a Code of Conduct and Ethics for Team Members and Directors pursuant to section 406 of the Sarbanes-Oxley A
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference from the registrant’s definitive Proxy Statement for the Annual Me
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item about our Company’s securities authorized for issuance under equity compensation plans as of Septem
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by reference from the registrant’s definitive Proxy Statement for the Annual Me
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated herein by reference from the registrant’s definitive Proxy Statement for the Annual Me
http://biz.yahoo.com/f/g/g.html




                   2006                   2005




          $                  2,252    $           308,524
                           193,847                    —
                            60,065                 36,922
                            82,137                 66,682
                           203,727                174,848
                            33,804                 45,965
                            48,149                 39,588


                            623,981                672,529
                          1,236,133              1,054,605
                            113,494                112,476
                             34,767                 21,990
                             29,412                 22,452
                              5,209                  5,244

          $               2,042,996   $          1,889,296



                   2006                   2005




          $                     49    $             5,932
                           121,857                103,348
                           153,014                126,981
                               —                   17,208
                           234,850                164,914


                           509,770                418,383
                             8,606                 12,932
                           120,421                 91,775
                                56                    530

                           638,853                523,620
           1,147,872                 874,972
             (99,964 )                   —
               6,975                   4,405
             349,260                 486,299

           1,404,143                1,365,676




$          2,042,996     $          1,889,296




    2006                     2005                     2004

$          5,607,376     $          4,701,289     $
           3,647,734                3,052,184


           1,959,642                1,649,105
           1,421,968                1,223,473
             181,244                  158,864
              37,421                   37,035


            319,009                  229,733

                (32 )                  (2,223 )
             20,736                     9,623


            339,713                  237,133
            135,885                  100,782

$           203,828      $           136,351      $
$                 1.46          $                  1.05                      $


               139,328                          130,090


$                 1.41          $                  0.99                      $


               145,082                          139,950


$                 2.45          $                  0.47                      $




    Shares                   Common                           Common

Outstanding                   Stock                           Stock in
                                                              Treasury


    120,140              $            423,297             $              —


         —                               —                               —
         —                               —                               —
         —                               —                               —
         —                               —                               —


         —                                —                              —
         —                                —                              —
       4,184                           59,518                            —
         478                           16,375                            —
         —                             35,583                            —
          12                              334                            —

    124,814                           535,107                            —


         —                               —                               —
       —                               —                              —
       —                               —                              —
       —                               —                              —


        —                              —                              —
        —                              —                              —
      5,042                        110,293                            —
        —                           62,643                            —
        —                           19,135                            —
      6,052                        147,794                            —

    135,908                        874,972                            —


       —                               —                              —
       —                               —                              —
       —                               —                              —


        —                              —                               —
        —                              —                               —
      5,510                        199,450                             —
     (2,005 )                          —                           (99,964 )
        —                           59,096                             —
        —                            9,432                             —
        194                          4,922                             —

    139,607               $       1,147,872                    $   (99,964 )




         2006                                 2005                             2004



$               203,828       $                      136,351               $

                156,223                              133,759
       6,291             15,886
       9,432             19,135
     (15,521 )          (27,873 )
         —               62,643
     (52,008 )              —
         460              4,120
      26,607             16,080
         693              1,317

    (17,720 )            (2,027 )
    (32,200 )           (21,486 )
     (7,849 )            (4,151 )
     18,509              12,597
     26,033              26,445
    129,886              38,023

    452,664            410,819



    (208,588   )       (207,792   )
    (131,614   )       (116,318   )
       3,308                —
     (16,332   )         (1,500   )
         —               13,500
    (555,095   )            —
     362,209                —
     (23,143   )        (10,132   )
         —                  —
         —                  —

    (569,255 )         (322,242 )



    (358,075 )          (54,683 )
     222,030             85,816
     (99,964 )              —
      52,008                —
      (5,680 )           (5,933 )

    (189,681 )          25,200


    (306,272 )         113,777
     308,524           194,747

$      2,252       $   308,524        $
                $                  607                             $                            1,063                             $
                $               70,220                             $                           74,706                             $

                $                   —                              $                              —                               $
                $                 4,922                            $                          147,794                             $




mpany,‖ or ―We‖) own and operate the largest chain of natural and organic foods supermarkets. Our Company mission is to promote vitality and well-bein



mber. Fiscal years 2006, 2005 and 2004 were 52-week years.

erally accepted accounting principles. All significant majority-owned subsidiaries are consolidated on a line-by-line basis, and all significant intercompany




vestments in debt and equity securities that have readily determinable fair values. Available-for-sale investments are recorded at fair value. Unrealized hold

 obligations.

 t (―LIFO‖) method for approximately 94% of inventories in fiscal years 2006 and 2005. Under the LIFO method, the cost assigned to items sold is based o
6 and 2005. Under the retail method, the valuation of inventories at cost and the resulting gross margins are determined by applying a cost-to-retail ratio fo




our total purchases in fiscal years 2006, 2005 and 2004, respectively.

de depreciation of equipment over the estimated useful lives (generally three to 15 years) using the straight-line method. We provide amortization of leaseh

ing leases. Store lease agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for percentage of sales in excess o

o identifiable assets acquired less liabilities assumed. Goodwill is reviewed for impairment annually, or more frequently if impairment indicators arise, on a

on agreements and debt issuance costs. Indefinite-lived intangible assets are reviewed for impairment annually, or more frequently if impairment indicators

 in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comp

 accrued payroll, bonuses and team member benefits, and other accrued expenses approximate fair value because of the short maturity of those instruments
 r value of senior unsecured notes is estimated by discounting the future cash flows at the rates currently available to us for similar debt instruments of com



                                              2006                                                                                       2005

                        Carrying                              Estimated Fair                                       Carrying
                        Amount                                    Value                                            Amount

               $                   8,320               $                   19,298                         $                   12,850
                                     —                                        —                                                5,714

 bilities for workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care

 t the point of sale are recognized as a reduction in sales as the products are sold.

contribution from non-retail distribution and food preparation operations, shipping and handling costs and occupancy costs. The Company receives variou

 lion, $20.1 million and $17.4 million, respectively. These amounts are shown net of vendor allowances received for co-operative advertising of approxima

 new store openings including costs associated with hiring and training personnel, smallwares, supplies and other miscellaneous costs. Rent expense is gen

 ock under our 1992 Stock Option Plans, as amended. Under these plans, options are granted at an option price equal to the market value of the stock at the




quarter through payroll deductions. Participants in the stock purchase plan may elect to purchase unrestricted shares at 100 percent of market value or restr
R, ―Share-Based Payment,‖ the Company applied Accounting Principles Board Opinion No. 25 (―APB No. 25‖), ―Accounting for Stock Issued to Employe
 SFAS No. 123R using the modified prospective transition method. Under this method, prior periods were not restated. The Company’s methods used to d
  SFAS No. 123 under the fair value method and expense these amounts in the income statement over the stock option’s remaining vesting period. In the fo
 ductions resulting from the exercise of stock options as an operating cash flow, in accordance with Emerging Issues Task Force (―EITF‖) Issue No. 00-15,
 Accounting for the Tax Effects of the Share-Based Payment Awards‖ (―FSP FAS 123R-3‖). The Company has elected to adopt the transition guidance for

balance sheet date to differences between the book basis and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using ena

ng the fiscal period. Diluted earnings per share is based on the weighted average number of common shares outstanding plus, where applicable, the additio
ed gains and losses on marketable securities, net of income taxes. Comprehensive income is reflected in the Consolidated Statements of Shareholders’ Equ

currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the averag

Canada and six stores in the United Kingdom. All of our remaining operations are domestic.

quires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liab




8 (―SAB No. 108‖), ―Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements.‖ SA
air value, establishes a framework for measuring fair value, and requires additional disclosures about fair value measurements. SFAS No. 157 applies to fa
axes,‖ an interpretation of SFAS No. 109, ―Accounting for Income Taxes.‖ FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a




3, ―How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross versus N
ement of Accounting Principles Board Opinion No. 20 and FASB Statement No. 3.‖ SFAS No. 154 requires retrospective application to prior periods’ fina

icane Katrina during the fourth quarter of fiscal year 2005, and accordingly the Company recorded expenses totaling approximately $16.5 million for relat




                        2006                                    2005

              $                  39,993              $                   34,396
                                955,130                                 784,000
                                779,050                                 692,403
                                168,105                                 133,061


                               1,942,278                               1,643,860
                                 706,145                                 589,255

              $                1,236,133             $                 1,054,605


 4 million, $129.8 million and $111.2 million for fiscal years 2006, 2005 and 2004, respectively. Property and equipment included accumulated
illion at September 24, 2006 and September 25, 2005, respectively. Property and equipment includes approximately $0.9 million, $3.0 million and $2.1 m



esh & Wild‖) for a total of approximately $20 million in cash and approximately $16 million in Company common stock, totaling 477,470 shares. The acq

pproximately $3 million in cash plus the assumption of certain liabilities. All assets acquired relate to a seafood processing and distribution facility located




tly if impairment indicators arise. We allocate goodwill to one reporting unit for goodwill impairment testing. During fiscal year 2006, we acquired goodw
d definite-lived intangible assets totaling approximately $15.7 million and $1.5 million during fiscal years 2006 and 2005, respectively, consisting primari



                                             2006                                                                                                     2005

                     Gross carrying                           Accumulated                                                    Gross carrying
                        amount                                amortization                                                      amount

              $                      774              $                      —                                         $                     723
                                  45,579                                 (11,833 )                                                        32,597
                                   2,242                                  (1,995 )                                                         2,921

              $                   48,595              $                  (13,828 )                                     $                  36,241


ately $2.4 million in fiscal year 2007, $2.3 million in fiscal year 2008, $2.3 million in fiscal year 2009, $2.2 million in fiscal year 2010 and $2.2 million in




                         2006                                    2005


              $                       335             $                        300
                                      —                                      5,714
                                   8,320                                  12,850


                                   8,655                                  18,864
                                      49                                   5,932

              $                    8,606             $                    12,932


 ng line of credit to October 1, 2009. The credit agreement contains certain affirmative covenants including maintenance of certain financial ratios and cert
 f approximately $8.3 million and $12.9 million at September 24, 2006 and September 25, 2005, respectively. The debentures have an effective yield to ma
arrying amount of approximately $5.7 million at September 25, 2005. The Company made the final principal payment totaling approximately $5.7 million

eases for rental of facilities and equipment. These leases expire or become subject to renewal clauses at various dates from 2006 to 2038. Amortization of




led approximately $153.1 million, $124.8 million and $99.9 million, respectively. Minimum rental commitments required by all non-cancelable leases are



                       Capital                                Operating

              $                      58              $                  162,827
                                     93                                 227,490
                                     89                                 247,284
                                     74                                 246,028
                                     39                                 243,331
                                     25                               3,636,926

                                    378              $                4,763,886


                                     43


                                    335
                                     49

              $                     286


on, $7.6 million and $4.8 million, respectively. No asset retirement obligations have been incurred associated with operating leases. Sublease rental incom




                         2006                                                      2005                                                    2004

              $                  120,774                          $                          106,087                             $
                                30,632                                                          22,568

                               151,406                                                         128,655


                               (13,350 )                                                       (22,462 )
                                (2,171 )                                                        (5,411 )

                               (15,521 )                                                       (27,873 )

             $                 135,885                             $                           100,782                             $


e tax rates to income before income taxes as follows (in thousands):



                        2006                                                       2005                                                       2004

             $                 118,900                             $                            82,997                             $

                                    (31   )                                                       1,639
                                 (1,352   )                                                         —
                                   (462   )                                                       3,310
                                 (9,962   )                                                      (6,005 )
                                    331                                                           1,684


                               107,424                                                          83,625
                                28,461                                                          17,157

             $                 135,885                             $                           100,782                             $




y $27.2 million and $5.2 million, respectively. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and d



                        2006                                                       2005



             $                  43,303                             $                            34,009
                                16,889                                                          14,380
                                   —                                                             2,879
                                    18                                                             359
                                41,717                                                          31,434
                                10,461                                                          16,606
                                    2,810                                                      7,231


                                  115,198                                                   106,898
                                  (13,271 )                                                 (17,364 )

                                  101,927                                                     89,534



                                  (21,858   )                                                (24,673 )
                                     (313   )                                                    —
                                   (1,290   )                                                 (1,841 )
                                     (905   )                                                   (980 )

                                  (24,366 )                                                  (27,494 )

             $                     77,561                            $                        62,040




                        2006                                                     2005

             $                     48,149                            $                        39,588
                                   29,412                                                     22,452

             $                     77,561                            $                        62,040


32.5 million, of which approximately $11.8 million will begin to expire in fiscal year 2008 and approximately $20.7 million has an indefinite life. During

on at September 24, 2006 and September 25, 2005, respectively.
 state and local government obligations totaling approximately $193.8 million. Gross unrealized gains on the securities totals approximately $77,000 as of




05 (in thousands, except per share amounts):



                      Dividend                                                                                               Total
                      per Share                     Date of Record                Date of Payment                           Amount
                                                    January 13,
             $                    0.15                    2006                    January 23, 2006               $                 20,918
                                     2               13-Jan-06                           23-Jan-06                                277,904
                                  0.15               14-Apr-06                          24-Apr-06                                  21,004
                                  0.15                14-Jul-06                          24-Jul-06                                 21,186



             $                     0.1                 7-Jan-05                          17-Jan-05               $                 12,088
                                  0.13               15-Apr-05                           25-Apr-05                                 16,345
                                  0.13                15-Jul-05                           25-Jul-05                                16,834
                                                    October 14,
                                  0.13                     2005                   October 24, 2005                                 17,063
r share that was paid on October 23, 2006 to shareholders of record on October 13, 2006. On November 2, 2006, the Company’s Board of Directors appro
tributed on December 27, 2005 to shareholders of record at the close of business on December 12, 2005. The stock split was effected in the form of a stoc

to $200 million over the next four years. During the fourth quarter of fiscal year 2006, the Company repurchased on the open market approximately 2.0 m
mpany’s stock repurchase program, bringing the total remaining authorization to $200 million over the next three years. The specific timing and repurchas

res outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of com




ations follows (in thousands, except per share amounts):



                        2006                                  2005                                             2004

             $                 203,828              $                136,351                          $               129,512
                                   283                                 2,539                                            4,697

             $                 204,111              $                138,890                          $               134,209



                               139,328                               130,090                                          122,648



                                   363                                 3,414                                            6,562
                                 5,391                                 6,446                                            6,244



                               145,082                               139,950                                          135,454


             $                    1.46              $                   1.05                          $                  1.06
              $                    1.41              $                        0.99                      $                    0.99


 million, 158,000 shares and 6,000 shares of common stock at the end of fiscal years 2006, 2005 and 2004, respectively, due to their antidilutive effect.

approximately $9.4 million and $19.9 million, respectively. Of these totals, approximately $3.6 million and $10.1 million was included in ―Direct store ex

hese plans, options are granted at an option price equal to the market value of the stock at the grant date and are generally exercisable ratably over a four-y




                   Number                                     Weighted                                      Weighted                       Aggregate
                  of Options                                   Average                                      Average                         Intrinsic

               Outstanding                                  Exercise Price                               Remaining                           Value
                                                                                                        Contractual Li
                                                                                                              fe

                     15,728                          $                       17.53
                      5,240                                                  39.54
                     (4,154 )                                                14.13
                       (674 )                                                 23.9


                     16,140                          $                       25.69
                     12,112                                                  59.82
                     (4,996 )                                                21.64
                       (711 )                                                37.33


                     22,545                          $                       44.58
                      1,444                                                     69
                     (5,466 )                                                   36
                       (202 )                                                56.57
                        (46 )                                                64.52

                     18,275                          $                       48.82                               4.74               $

                     18,031                          $                       48.55                               4.75               $

                     16,551                          $                       47.11                               4.75               $


7.04, $15.19 and $14.69, respectively. The aggregate intrinsic value of stock options at exercise, represented in the table above, was approximately $180.0
                                                                                                           Options Outstanding

                                                                                     Weighted Average                              Weighted

                                                         Number                            Remaining                               Average

                          To                            Outstanding                   Life (in Years)                            Exercise Price

               $                    20.48                    1,554                                      1.19              $                       11.38
                                    38.31                    2,721                                      3.17                                      26.16
                                    39.61                    2,632                                      4.61                                      39.61
                                    54.17                    4,753                                      5.57                                      53.56
                                    66.81                    5,206                                      5.97                                      66.69
                                    73.14                    1,409                                      4.62                                         69

                                                            18,275                                      4.74              $                       48.82


 totaled approximately $4.6 million.
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 grant




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 du
ption pricing model with the following weighted average assumptions:



                   2006                                    2005                                                 2004

                      1.26 %                                   0.84 %                                               0.76 %
                      5.04 %                                   4.14 %                                               4.72 %
                      29.4 %                                   48.3 %                                              49.48 %
                      3.22                                      2.1                                                  3.3
 even-year zero coupon treasury bill rate on the dates of the annual grant in fiscal year 2006 and fiscal year 2005, respectively. Expected volatility is calcul
R, ―Share-Based Payment,‖ the Company applied Accounting Principles Board Opinion No. 25 (―APB No. 25‖), ―Accounting for Stock Issued to Employe
rst quarter of fiscal year 2006 using the modified prospective approach. Under this method, prior periods are not restated. As a result of adoption, the Com



                          2005                                                      2004

               $                  136,351                             $                           129,512
                                   15,309                                                             —
                                 (179,616 )                                                       (23,888 )

               $                  (27,956 )                           $                           105,624
              $                      1.05                          $                               1.06
                                     0.12                                                           —
                                    (1.38 )                                                       (0.20 )

              $                     (0.21 )                        $                              0.86



              $                      0.99                          $                               0.99
                                     0.12                                                           —
                                    (1.31 )                                                       (0.17 )

              $                     (0.20 )                        $                              0.82


e Consolidated Statement of Operations.




nimum of 400 hours of service. Under this plan, participating team members may purchase our common stock each fiscal quarter through payroll deduction

es hours in one year. In fiscal years 2006 and 2005, the Company made a matching contribution to the plan of approximately $2.3 million in cash. The Co

12 weeks. Because the first quarter is longer than the remaining quarters, it typically represents a larger share of our annual sales from existing stores. Qua
 to prevent past option grants from having an impact on future results. The Company incurred a share-based compensation charge totaling approximately $
icane Katrina during the fourth quarter of fiscal year 2005, and accordingly the Company recorded expenses totaling approximately $16.5 million for relat




mation for the fiscal years ended September 24, 2006 and September 25, 2005 (in thousands except per share amounts):



                        First                                                     Second                                                     Third
                       Quarter                                                    Quarter                                                   Quarter



              $                 1,666,953                          $                         1,311,520                             $
                                1,092,018                                                      848,020


                                 574,935                                                       463,500
              424,438                     330,470
               50,889                      43,421
                8,491                       7,324


               91,117                      82,285

                   (3 )                       —
                6,082                       4,068


               97,196                      86,353
               38,878                      34,542

$              58,318      $               51,811     $


$                 0.42     $                  0.37    $


$                  0.4     $                  0.36    $


$                 2.15     $                  0.15    $



     First                     Second                      Third
    Quarter                    Quarter                    Quarter



$            1,368,328     $             1,085,158    $
               895,486                     697,686


              472,842                     387,472
              348,380                     276,313
               40,401                      34,773
                6,599                      10,265


               77,462                      66,121

                (1,708 )                     (342 )
                 1,194                      2,113


               76,948                      67,892
               30,778                      27,158

$              46,170      $               40,734     $


$                 0.37     $                  0.31    $


$                 0.34     $                  0.29    $
              $                      0.1                            $                               0.13                            $



bilities for workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care
oyment issues, personal injury, intellectual property and other proceedings arising in the ordinary course of business which have not resulted in any materia
or its subsidiaries which provide for certain benefits upon an involuntary termination of employment other than for cause after a ―Triggering Event.‖ A Tri




hief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) u

Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to mater

 over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of the Com
ment’s assessment of internal control over financial reporting and also independently assessed the effectiveness of our internal control over financial report




Item 1. Business‖ of this Report on Form 10-K under the caption ―Executive Officers of the Registrant.‖ All other information required by this item is inco
o section 406 of the Sarbanes-Oxley Act. A copy of our Code of Conduct and Ethics is publicly available on our Company website at http://www.wholefoo

ve Proxy Statement for the Annual Meeting of Shareholders.

quity compensation plans as of September 24, 2006 is included in Part I, ―Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters an

ve Proxy Statement for the Annual Meeting of Shareholders.

ve Proxy Statement for the Annual Meeting of Shareholders.
2004

       3,864,950
       2,523,816


       1,341,134
         986,040
         119,800
          18,648


        216,646

          (7,249 )
           6,456


        215,853
         86,341

        129,512
   1.06


122,648


   0.99


135,454


    0.3




              Accumulated                  Retained

                 Other                     Earnings
              Comprehensive
              Income (Loss)
          $                   1,624    $              320,055


                               —                      129,512
                               856                        —
                                88                        —
                              (515 )                      —


                               429                    129,512
                               —                      (37,089 )
                               —                          —
                               —                          —
                               —                          —
                               —                          —

                              2,053                   412,478


                               —                      136,351
                     1,893             —
                     1,063             —
                      (604 )           —


                     2,352         136,351
                       —           (62,530 )
                       —               —
                       —               —
                       —               —
                       —               —

                     4,405         486,299


                       —           203,828
                     2,494             —
                        76             —


                     2,570          203,828
                       —           (340,867 )
                       —                —
                       —                —
                       —                —
                       —                —
                       —                —

                 $   6,975     $   349,260




2004



       129,512

       115,157
  5,769
    —
   (682 )
 35,583
    —
  7,551
 11,109
 (1,133 )

 (19,158 )
 (27,868 )
  (2,940 )
  12,515
  29,646
  35,279

330,340



(156,728   )
(109,739   )
     —
     —
 (13,500   )
     —
     —
 (26,790   )
 (18,873   )
   1,332

(324,298 )



 (27,728 )
  59,518
     —
     —
  (8,864 )

 22,926


 28,968
165,779

194,747
                     2,127
                    60,372

                    16,375
                       293




omote vitality and well-being for all individuals by supplying the highest quality, most wholesome foods available. Through our growth, we have had a larg




all significant intercompany accounts and transactions are eliminated upon consolidation.




 t fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale investments are excluded from earnings and are reported




gned to items sold is based on the cost of the most recent items purchased. As a result, the costs of the first items purchased remain in inventory and are use
ying a cost-to-retail ratio for various groupings of similar items to the retail value of inventories. Inherent in the retail inventory method calculations are ce




ovide amortization of leasehold improvements on the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of

rcentage of sales in excess of specified levels. Most of our lease agreements include renewal periods at the Company’s option. We recognize rent holiday p

airment indicators arise, on a reporting unit level. We allocate goodwill to one reporting unit for goodwill impairment testing. We determine fair value utili

 tly if impairment indicators arise. We amortize definite-lived intangible assets on a straight-line basis over the life of the related agreement, currently one t

used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets

maturity of those instruments. Investments are stated at fair value with unrealized gains and losses included as a component of shareholders’ equity until rea
 lar debt instruments of comparable maturities. Carrying amounts and estimated fair values of our financial instruments other than those for which carrying



     2005

                     Estimated Fair
                         Value

              $                   34,635
                                   5,828

ity and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical




 e Company receives various rebates from third party vendors in the form of quantity discounts and payments under cooperative advertising agreements. Q

 ve advertising of approximately $1.2 million, $1.2 million and $1.0 million in fiscal years 2006, 2005 and 2004, respectively. Advertising costs are charge

s costs. Rent expense is generally incurred approximately nine months prior to a store’s opening date. Other pre-opening costs are incurred primarily in the

rket value of the stock at the grant date and are generally exercisable ratably over a four-year period beginning one year from grant date and have a five-ye




 ent of market value or restricted shares at 85 percent of market value on the purchase date.
 or Stock Issued to Employees‖ and related interpretations for our stock option grants. APB No. 25 provides that the compensation expense relative to our
 mpany’s methods used to determine share-based compensation, which includes the utilization of the Black-Scholes option pricing model, requires extensiv
ing vesting period. In the fourth quarter of fiscal year 2005, the Company accelerated the vesting of all outstanding stock options, except options held by th
e (―EITF‖) Issue No. 00-15, ―Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqua
t the transition guidance for the additional paid-in-capital pool (―APIC pool‖) pool in paragraph 81 of SFAS No. 123R. The prescribed transition method i

 ities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. D

where applicable, the additional common shares that would have been outstanding as a result of the conversion of dilutive options and convertible debt.
ments of Shareholders’ Equity and Comprehensive Income. At September 24, 2006, accumulated other comprehensive income consisted of foreign currenc

s are translated at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a separate component of accumula




of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ f




r Financial Statements.‖ SAB No. 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatem
SFAS No. 157 applies to fair value measurements that are already required or permitted by other accounting standards, except for measurements of share-
ncome taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. The interpretation applies to all tax positions accounted




ment (that is, Gross versus Net Presentation). Taxes within the scope of EITF Issue No. 06-3 include any taxes assessed by a governmental authority that a
ication to prior periods’ financial statements for changes in accounting principles, unless it is impracticable to determine either the period-specific effects o

ately $16.5 million for related estimated net losses. The main components of the $16.5 million expense were estimated impaired assets totaling approximat




ded accumulated
on, $3.0 million and $2.1 million of interest capitalized during fiscal years 2006, 2005 and 2004, respectively. Development costs of new store locations to



ing 477,470 shares. The acquisition of Fresh & Wild, which owned and operated seven natural and organic food stores in London and Bristol, England, pr

 distribution facility located in Seattle, Washington. This transaction was accounted for using the purchase method. Accordingly the purchase price was all




ar 2006, we acquired goodwill totaling approximately $1.1 million, primarily related to the acquisition of one small store in Portland, Maine. We acquired
pectively, consisting primarily of acquired leasehold rights. Amortization associated with intangible assets totaled approximately $2.5 million, $2.8 million



                  2005

                                   Accumulated
                                   amortization

                           $                      —
                                              (11,827 )
                                               (2,425 )

                           $                  (14,252 )


ar 2010 and $2.2 million in fiscal year 2011.
 ain financial ratios and certain negative covenants including limitations on additional indebtedness as defined in the agreement. At September 24, 2006 an
have an effective yield to maturity of 5 percent and a scheduled maturity date of March 2, 2018. The debentures are convertible at the option of the holder,
approximately $5.7 million to retire its senior notes on May 16, 2006.

6 to 2038. Amortization of equipment under capital lease is included with depreciation expense.




ll non-cancelable leases are approximately as follows (in thousands):




ases. Sublease rental income totaled approximately $1.6 million, $1.3 million and $1.4 million during fiscal years 2006, 2005 and 2004, respectively. John




           2004

                   70,750
                   16,272

                   87,022


                       284
                      (965 )

                      (681 )

                   86,341




           2004

                   75,548

                     2,310
                       —
                       —
                    (5,357 )
                    (1,467 )


                   71,034
                   15,307

                   86,341




the deferred tax assets and deferred tax liabilities are as follows (in thousands):
s an indefinite life. During fiscal year 2006, approximately $31,000 of the valuation allowance related to the utilization of certain operating and capital los



pproximately $77,000 as of September 24, 2006.
y’s Board of Directors approved a 20% increase in the Company’s quarterly dividend to $0.18 per share payable on January 22, 2007 to shareholders of re
ffected in the form of a stock dividend. Shareholders received one additional share of Whole Foods Market common stock for each share owned. All share

market approximately 2.0 million shares of Company common stock that were held in treasury at September 24, 2006. The average price per share paid wa
ecific timing and repurchase amounts will vary based on market conditions, securities law limitations and other factors and will be made using the Compa

equivalents consisting of common shares deemed outstanding from the assumed exercise of stock options and the assumed conversion of zero coupon conv
 their antidilutive effect.

included in ―Direct store expenses‖, $5.5 million and $8.6 million was included in ―General and administrative expenses‖, and $0.3 million and $1.2 millio

cisable ratably over a four-year period beginning one year from grant date. Options granted in fiscal year 2006 expire five years from the date of grant and




         Aggregate
          Intrinsic

           Value




                      243,726

                      243,691

                      239,831


, was approximately $180.0 million during fiscal year 2006. Total gross unrecognized share-based compensation expense related to nonvested stock option
                                           Options Exercisable

                                                                 Weighted

                            Number                               Average

                           Exercisable                      Exercise Price

                                1,554                $                       11.38
                                2,683                                        26.13
                                2,596                                        39.61
                                4,588                                        53.77
                                5,130                                        66.74
                                  —                                            n/a

                               16,551                $                       47.11



to prevent past option grants from having an impact on future results. The Company recognized a share-based compensation charge totaling approximately




ompany’s common stock during fiscal years 2006 and 2005, respectively.




Expected volatility is calculated using a ratio of implied volatility based on comparable Long-Term Equity Anticipation Securities (―LEAPS‖) and four-ye
or Stock Issued to Employees‖ and related interpretations for our stock option grants. APB No. 25 provides that the compensation expense relative to our
result of adoption, the Company’s income before income taxes and net income for fiscal year 2006, are $6.4 million and $3.8 million lower, respectively,
er through payroll deductions. Participants in the stock purchase plan may elect to purchase unrestricted shares at 100 percent of market value or restricted

2.3 million in cash. The Company did not make a matching contribution to the plan in fiscal year 2004.

es from existing stores. Quarter to quarter comparisons of results of operations have been and may be materially impacted by the timing of new store openi
 ge totaling approximately $18.2 million in the fourth quarter of fiscal year 2005, primarily a non-cash charge related to this accelerated vesting of options.
ately $16.5 million for related estimated net losses.




           Third                                                Fourth
          Quarter                                              Quarter



                   1,337,886                          $              1,291,017
                     866,260                                           841,436


                    471,626                                              449,581
          335,555                   331,505
           43,955                    42,979
            7,860                    13,746


           84,256                    61,351

               (8 )                     (21 )
            5,581                     5,005


           89,829                    66,335
           35,931                    26,534

           53,898     $              39,801


              0.38    $                0.29


              0.37    $                0.28


              0.15    $                —



 Third                    Fourth
Quarter                   Quarter



         1,132,736    $         1,115,067
           733,931                725,081


          398,805                   389,986
          285,804                   312,976
           39,618                    44,072
            8,777                    11,394


           64,606                    21,544

             (163 )                     (10 )
            2,868                     3,448


           67,311                    24,982
           26,924                    15,922

           40,387     $               9,060


              0.31    $                0.07


              0.29    $                0.06
                      0.13                            $                    0.13



ity and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical
e not resulted in any material losses to date. Although not currently anticipated by management, our results could be materially impacted by the decisions a
a ―Triggering Event.‖ A Triggering Event includes a merger of the Company with and into an unaffiliated corporation if the Company is not the surviving




s 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ―Exchange Act‖)) as of the end of the period covered by this report

 e reasonably likely to materially affect, the Company’s internal control over financial reporting.

he participation of the Company’s management, including our principal executive officer and principal financial officer, the Company conducted an evalua
 ontrol over financial reporting. Ernst & Young LLP has issued their attestation report which is included in Part II, Item 8 of this Report on Form 10-K.




 required by this item is incorporated herein by reference from the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be hel
bsite at http://www.wholefoodsmarket.com/investor/corporategovernance/codeofconduct.pdf. The information contained on our Web site is not incorporate




ated Stockholder Matters and Issuer Purchases of Equity Securities‖ of this Report on Form 10-K. All other information required by this item is incorpora
        Total

    Shareholders’
       Equity


$               744,976


                129,512
                    856
                     88
                   (515 )


                129,941
                (37,089 )
                 59,518
                 16,375
                 35,583
                    334

                949,638


                136,351
       1,893
       1,063
        (604 )


     138,703
     (62,530 )
     110,293
      62,643
      19,135
     147,794

    1,365,676


     203,828
       2,494
          76


     206,398
    (340,867 )
     199,450
     (99,964 )
      59,096
       9,432
       4,922

$   1,404,143
hrough our growth, we have had a large and positive impact on the natural and organic foods movement throughout the United States, helping lead the ind




xcluded from earnings and are reported as a separate component of shareholders’ equity until realized. A decline in the fair value of any available-for-sale s




chased remain in inventory and are used to value ending inventory. The excess of estimated current costs over LIFO carrying value, or LIFO reserve, was a
l inventory method calculations are certain management judgments and estimates, including shrinkage, which could impact the ending inventory valuation




es of the improvements or the terms of the related leases. Terms of leases used in the determination of estimated useful lives may include renewal periods a

’s option. We recognize rent holiday periods and scheduled rent increases on a straight-line basis over the lease term beginning with the date the Company

t testing. We determine fair value utilizing both a market value method and discounted projected future cash flows compared to our carrying value for the p

 the related agreement, currently one to 48 years for contract-based intangible assets and one to five years for marketing-related and other identifiable intan

e generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying am

onent of shareholders’ equity until realized.
ts other than those for which carrying amounts approximate fair values as noted above are as follows (in thousands):




ated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. While we believe that our




 ooperative advertising agreements. Quantity discounts and co-operative advertising discounts in excess of identifiable advertising costs are recognized as

pectively. Advertising costs are charged to expense as incurred and are included in the ―Direct store expenses‖ line item in the Consolidated Statements of

ning costs are incurred primarily in the 30 days prior to a new store opening. Pre-opening costs are expensed as incurred. Relocation costs, which consist of

ear from grant date and have a five-year term. The grant date is established once the Company’s Board of Directors approves the grant and all key terms ha




 compensation expense relative to our team member stock options is measured based on the intrinsic value of the stock option at date of grant.
option pricing model, requires extensive use of accounting judgment and financial estimates, including estimates of the expected term team members will re
 tock 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 prev
  Company upon Exercise of a Nonqualified Employee Stock Option.‖ SFAS No. 123R requires the Company to reflect gross tax savings resulting from tax
  R. The prescribed transition method is a detailed method to establish the beginning balance of the APIC pool related to the tax effects of share-based com

differences are expected to reverse. Deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the period that includes the ena

utive options and convertible debt.
ve income consisted of foreign currency translation adjustment gains of approximately $6.9 million and unrealized gains on marketable securities of approx

  as a separate component of accumulated other comprehensive income.




  reported. Actual results could differ from those estimates. We use estimates when accounting for depreciation and amortization, allowance for doubtful ac




 onsidered when quantifying misstatements in current-year financial statements. SAB No. 108 requires an entity to quantify misstatements using a balance s
 ds, except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value and does not change existing
 applies to all tax positions accounted for in accordance with Statement 109 and requires a recognition threshold and measurement attribute for the financia




 sed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer and may include, but are no
mine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accou

ed impaired assets totaling approximately $12.2 million, estimated inventory losses totaling approximately $2.5 million, salaries and relocation allowances
 opment costs of new store locations totaled approximately $208.6 million, 207.8 million and $156.7 million in fiscal years 2006, 2005 and 2004, respectiv



 es in London and Bristol, England, provided a platform for expansion of the Whole Foods Market brand in the United Kingdom. This transaction was acco

Accordingly the purchase price was allocated to tangible and identifiable intangible assets acquired based on their estimated fair values at the date of the ac




 tore in Portland, Maine. We acquired indefinite-lived intangible assets totaling approximately $50,000 and $0.7 million during fiscal years 2006 and 2005
proximately $2.5 million, $2.8 million, and 3.0 million during fiscal years 2006, 2005 and 2004, respectively. The components of intangible assets were as
agreement. At September 24, 2006 and September 25, 2005, we were in compliance with the applicable debt covenants. All outstanding amounts borrowed
onvertible at the option of the holder, at any time on or prior to maturity, unless previously redeemed or otherwise purchased. The debentures may be rede




06, 2005 and 2004, respectively. John Mackey and Glenda Chamberlain, executive officers of the Company, own approximately 51% and 2%, respectivel
on of certain operating and capital loss carryforwards was released. Additionally, the valuation allowance decreased by approximately $4.1 million due to
anuary 22, 2007 to shareholders of record on January 12, 2007. The Company will pay future dividends at the discretion of the Board of Directors. The co
stock for each share owned. All share and per share amounts in these financial statements have been adjusted to reflect the effect of the stock split. All sha

6. The average price per share paid was $49.85, for a total of approximately $100 million. At September 25, 2005, we had no shares of Company common
ors and will be made using the Company’s available cash resources and line of credit availability. The repurchase program may be suspended or discontinu

umed conversion of zero coupon convertible subordinated debentures.
nses‖, and $0.3 million and $1.2 million was included in ―Cost of goods sold and occupancy costs‖ in the Consolidated Statements of Operations in fiscal y

e five years from the date of grant and options granted in fiscal years 2005 and 2004 expire seven years from date of grant. Certain options granted during




ense related to nonvested stock options was approximately $25.2 million as of the end of fiscal year 2006, related to approximately 1.5 million shares. We
ensation charge totaling approximately $17.4 million related to this acceleration, which was determined by measuring the intrinsic value on the date of the




ion Securities (―LEAPS‖) and four-year historical volatility for fiscal year 2006. The Company determined the use of implied volatility versus historical vo
compensation expense relative to our team member stock options is measured based on the intrinsic value of the stock option at date of grant.
and $3.8 million lower, respectively, than if we had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per
0 percent of market value or restricted shares at 85 percent of market value on the purchase date. Participants are required to hold restricted shares for two




acted by the timing of new store openings. The Company believes that the following information reflects all normal recurring adjustments necessary for a f
 to this accelerated vesting of options. The Company’s effective tax rate for the fourth quarter and fiscal year 2005 was higher than its historical rate prima
ated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. While we believe that our
materially impacted by the decisions and expenses related to pending or future proceedings.
n if the Company is not the surviving corporation or the sale of all or substantially all of the Company’s assets. The benefits to be received by the executive




nd of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that




cer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework
em 8 of this Report on Form 10-K.




ual Meeting of Shareholders to be held March 5, 2007 to be filed with the Commission pursuant to Regulation 14A.
ned on our Web site is not incorporated by reference into this Report on Form 10-K.




tion required by this item is incorporated herein by reference from the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders.
 he United States, helping lead the industry to nationwide acceptance over the last 25 years. We opened our first store in Texas in 1980 and, as of Septemb




he fair value of any available-for-sale security below cost that is deemed to be other-than-temporary or for a period greater than two fiscal quarters results i




carrying value, or LIFO reserve, was approximately $13.2 million and $10.7 million at September 24, 2006 and September 25, 2005, respectively. Costs fo
mpact the ending inventory valuation at cost as well as the resulting gross margins. Cost was determined using the item cost method for approximately 46%




ul lives may include renewal periods at the Company’s option if exercise of the option is determined to be reasonably assured at the inception of the lease.

 beginning with the date the Company takes possession of the leased space for construction and other purposes. We record tenant improvement allowances

ompared to our carrying value for the purpose of identifying impairment. Our annual impairment review requires extensive use of accounting judgment and

ing-related and other identifiable intangible assets.

y the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carryi
sumptions. While we believe that our assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occur




le advertising costs are recognized as a reduction of cost of goods sold when the related merchandise is sold.

em in the Consolidated Statements of Operations.

red. Relocation costs, which consist of moving costs, remaining lease payments, accelerated depreciation costs, asset impairment costs, other costs associat

 pproves the grant and all key terms have been determined. The exercise prices of our stock option grants are the closing price on the grant date. Stock opti




 k option at date of grant.
he expected term team members will retain their vested stock options before exercising them, the estimated volatility of the Company’s common stock pric
  the United Kingdom, in order to prevent past option grants from having an impact on future results. The Company intends to keep its broad-based stock o
ect gross tax savings resulting from tax deductions in excess of expense reflected in its financial statements, including pro forma amounts, as a financing ca
  to the tax effects of share-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statement of Cash Flows of th

 tes in the period that includes the enactment date. Significant accounting judgment is required in determining the provision for income taxes and related ac
ins on marketable securities of approximately $0.1 million. At September 25, 2005, accumulated other comprehensive income consisted of foreign currenc




mortization, allowance for doubtful accounts, inventory valuation, long-term investments, team member benefit plans, team member health insurance plan




antify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is m
ir value and does not change existing guidance as to whether or not an instrument is carried at fair value. The provisions of SFAS No. 157 are effective for
measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. Su




customer and may include, but are not limited to, sales taxes, use taxes, value-added taxes, and some excise taxes. The EITF concluded that the presentatio
ective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, suc

on, salaries and relocation allowances for displaced Team Members and other costs totaling approximately $3.4 million, and a $1.0 million special donatio
years 2006, 2005 and 2004, respectively. As of November 2, 2006, we had signed leases for 88 stores under development.



d Kingdom. This transaction was accounted for using the purchase method and, accordingly, the purchase price has been allocated to tangible and identifia

mated fair values at the date of the acquisition. Total costs in excess of tangible and intangible assets acquired of approximately $1.1 million have been rec




on during fiscal years 2006 and 2005, respectively, consisting primarily of liquor licenses. There was no impairment of goodwill or indefinite-lived intang
mponents of intangible assets were as follows (in thousands):
nts. All outstanding amounts borrowed under this agreement bear interest at our option of either the defined base rate or the LIBOR rate plus a premium. C
urchased. The debentures may be redeemed at the option of the holder on March 2, 2008 or March 2, 2013 at the issue price plus accrued original discount




proximately 51% and 2%, respectively, of BookPeople, Inc., a retailer of books and periodicals that is unaffiliated with the Company, which leases retail s
by approximately $4.1 million due to the expiration of capital loss carryforwards for which no benefit was realized. We have provided a valuation allowan
 tion of the Board of Directors. The continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or st
ect the effect of the stock split. All shares reserved for issuance pursuant to the Company’s stock option and stock purchase plans were automatically increa

e had no shares of Company common stock in treasury.
gram may be suspended or discontinued at any time without prior notice.
ed Statements of Operations in fiscal year 2006 and fiscal year 2005, respectively. The related total tax benefit was approximately $2.7 million and $4.5 m

grant. Certain options granted during fiscal year 2005 were granted fully vested. Our Company has, in connection with certain of our business combination




approximately 1.5 million shares. We anticipate this expense to be recognized over a weighted average period of approximately two years.
g 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. Th




f implied volatility versus historical volatility represents a more accurate calculation of option fair value. In fiscal year 2005, expected volatility was calcul
k option at date of grant.
No. 25. Basic and diluted earnings per share for fiscal year 2006 are $0.03 lower than if we had continued to account for share-based compensation under A
uired to hold restricted shares for two years before selling them. In fiscal year 2006, we recognized approximately $0.6 million of share-based compensatio




ecurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily
as higher than its historical rate primarily due to the non-deductible portion of the expense recognized for the accelerated vesting of stock options. In the fo
sumptions. While we believe that our assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occur

enefits to be received by the executive officer whose employment is terminated after a Triggering Event occurs include receipt of his or her annual salary t




Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processin




n criteria established in the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadwa




Annual Meeting of Shareholders.
e in Texas in 1980 and, as of September 24, 2006, have expanded our operations both by opening new stores and acquiring existing stores from third partie




eater than two fiscal quarters results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis of the secu




ember 25, 2005, respectively. Costs for remaining inventories are determined by the first-in, first-out (―FIFO‖) method.
em cost method for approximately 46% of inventories in fiscal years 2006 and 2005. This method involves counting each item in inventory, assigning costs




y assured at the inception of the lease. We provide depreciation of buildings over the estimated useful lives (generally 20 to 30 years) using the straight-line

ecord tenant improvement allowances and rent holidays as deferred rent liabilities and amortize the deferred rent over the terms of the lease to rent. We rec

nsive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairme




 are reported at the lower of the carrying amount or fair value less costs to sell. When the Company commits to relocate a location, a charge to write down
e significantly affected if future occurrences and claims differ from these assumptions and historical trends.




 impairment costs, other costs associated with replaced facilities and other related expenses, are expensed as incurred.

 ing price on the grant date. Stock option grant terms and conditions are communicated to team members within a relatively short period of time. Our Boar




 of the Company’s common stock price over the expected term, and the number of options that will be forfeited prior to the completion of their vesting requ
ntends to keep its broad-based stock option program in place, but also intends to limit the number of shares granted in any one year so that annual earnings
g pro forma amounts, as a financing cash flow.
olidated Statement of Cash Flows of the tax effects of share-based compensation awards that are outstanding upon adoption of SFAS No. 123R.

 vision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations w
ve income consisted of foreign currency translation adjustment gains of approximately $4.4 million.




s, team member health insurance plans, workers’ compensation liabilities, share-based compensation, store closure reserves, income taxes and contingenci




esults in quantifying an error that is material in light of relevant quantitative and qualitative factors. The requirements of SAB No. 108 are effective for fisc
 ons of SFAS No. 157 are effective for the specified fair value measures for financial statements issued for fiscal years beginning after November 15, 2007
o be taken, in an income tax return. Subsequent recognition, derecognition, and measurement is based on management’s best judgment given the facts, circ




he EITF concluded that the presentation of these taxes on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an acco
 a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognize

on, and a $1.0 million special donation from the Company to the American Red Cross, net of accrued estimated insurance proceeds totaling approximately
been allocated to tangible and identifiable intangible assets acquired based on their estimated fair values at the date of acquisition. Total costs in excess of

proximately $1.1 million have been recorded as goodwill. Select Fish results of operations are included in our consolidated income statements beginning O




 of goodwill or indefinite-lived intangible assets during fiscal years 2006, 2005 or 2004.
 or the LIBOR rate plus a premium. Commitment fees of 0.15% of the undrawn amount are payable under this agreement. At September 24, 2006 and Sep
ue price plus accrued original discount to the date of redemption. Subject to certain limitations, at our option, we may elect to pay this purchase price in cas




ith the Company, which leases retail space in Austin, Texas from the Company. The lease provides for an aggregate annual minimum rent of approximatel
We have provided a valuation allowance of approximately $13.3 million for deferred tax assets associated with international operating loss carryforwards a
hich the dividends are paid (cash or stock) depend on many factors, including the results of operations and the financial condition of the Company. Subject
rchase plans were automatically increased by the same proportion. In addition, shares subject to outstanding options or other rights to acquire the Company
pproximately $2.7 million and $4.5 million in fiscal year 2006 and fiscal year 2005, respectively. Our Company maintains several share-based incentive pl

th certain of our business combinations, assumed the stock option plans of the acquired companies. All options outstanding under our Company’s previous




proximately two years.
 had the acceleration not occurred. The calculation of this charge required that management make estimates and assumptions concerning future team memb




ar 2005, expected volatility was calculated using the daily historical volatility over the last seven years. Expected life is calculated in two tranches based on

 for share-based compensation under APB No. 25. Had we previously recognized compensation costs as prescribed by SFAS No. 123, previously reported
.6 million of share-based compensation expense related to team member stock purchase plan discounts. We issued approximately 51,000, 40,000 and 32,0




ults for any quarter are not necessarily indicative of results for any future period.
ated vesting of stock options. In the fourth quarter of fiscal year 2006, the Company recorded additional $3.0 million non-cash share-based compensation
e significantly affected if future occurrences and claims differ from these assumptions and historical trends.

de receipt of his or her annual salary through the one-year period following the date of the termination of employment and the immediate vesting of any ou




es are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports




nsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded that its internal control over financ
uiring existing stores from third parties to 186 stores: 177 stores in 31 U.S. states and the District of Columbia; three stores in Canada; and six stores in the




rnings and a new cost basis of the security is established. Cost basis is established and maintained utilizing the specific identification method.




each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances) of each item and recording the




y 20 to 30 years) using the straight-line method. Costs related to a projected site determined to be unsatisfactory and general site selection costs that cannot

r the terms of the lease to rent. We record rent liabilities for contingent percentage of sales lease provisions when we determine that it is probable that the

ch as reviewing goodwill for impairment at a different organizational level, could produce significantly different results.




ate a location, a charge to write down the related assets to their estimated net recoverable value is included in the ―Pre-opening and relocation costs‖ line i
atively short period of time. Our Board of Directors generally approves one primary stock option grant annually with a grant date that occurs during a tradi




to the completion of their vesting requirements. The related share-based compensation expense is recognized on a straight-line basis over the vesting perio
n any one year so that annual earnings per share dilution from equity-based compensation expense will not exceed 10%.

option of SFAS No. 123R.

ere are transactions and calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the IRS
eserves, income taxes and contingencies.




s of SAB No. 108 are effective for fiscal years ending after November 15, 2006. We are currently evaluating the effect, if any, that the adoption of SAB N
 s beginning after November 15, 2007. We are currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on our consolidated fin
 t’s best judgment given the facts, circumstances and information available at the reporting date. FIN 48 is effective for fiscal years beginning after Decemb




luded from revenues) basis is an accounting policy decision that should be disclosed. For any such taxes that are reported on a gross basis, a company shou
counting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization, or

rance proceeds totaling approximately $2.6 million. In fiscal year 2005, approximately $13.4 million of net natural disaster costs is included in ―Direct sto
f acquisition. Total costs in excess of tangible and intangible assets acquired of approximately $30.5 million have been recorded as goodwill. Fresh & Wil

dated income statements beginning October 27, 2003.
ment. At September 24, 2006 and September 25, 2005 no amounts were drawn under the agreement. The amount available to the Company under the agree
 elect to pay this purchase price in cash, shares of common stock or any combination thereof. The debentures may also be redeemed in cash at the option o




annual minimum rent of approximately $0.4 million which the Company received in rental income in fiscal years 2006, 2005 and 2004.
national operating loss carryforwards and domestic capital loss carryforwards for which management has determined it is more likely than not that the defe
ial condition of the Company. Subject to these qualifications, the Company currently expects to pay dividends on a quarterly basis.
or other rights to acquire the Company’s stock and the exercise price for such shares were adjusted proportionately.
ntains several share-based incentive plans.

anding under our Company’s previous plans and plans assumed in business combinations continue to be governed by the terms and conditions of those gra
mptions concerning future team member turnover. In the fourth quarter of fiscal year 2006 the Company recognized an additional $3.0 million share-based




 is calculated in two tranches based on weighted average percentage of unexpired options and exercise-after-vesting information over the last five years, in

by SFAS No. 123, previously reported net income, basic earnings per share and diluted earnings per share would have changed to the pro forma amounts sh
pproximately 51,000, 40,000 and 32,000 shares under this plan in fiscal years 2006, 2005 and 2004, respectively. At September 24, 2006, September 25, 2




n non-cash share-based compensation charge to adjust the estimate related to accelerated vesting for actual experience.
nt and the immediate vesting of any outstanding stock options granted to such executive officer.




closed by the Company in the reports that it files or submits under the Exchange Act.




ed that its internal control over financial reporting was effective as of September 24, 2006.
 stores in Canada; and six stores in the United Kingdom.




ic identification method.




ances) of each item and recording the actual cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic invento




general site selection costs that cannot be identified with a specific store location are charged to operations currently. The Company recognizes a liability f

 determine that it is probable that the specified levels will be reached during the fiscal year.




e-opening and relocation costs‖ line item in the Consolidated Statements of Operations.
 a grant date that occurs during a trading window. Our Company offers a team member stock purchase plan to all full-time team members with a minimum




raight-line basis over the vesting period. Application of alternative assumptions could produce significantly different estimates of the fair value of share-ba




dic audits and examinations by the IRS and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual results co
ct, if any, that the adoption of SAB No. 108 will have on our consolidated financial statements.
157 will have on our consolidated financial statements.
or fiscal years beginning after December 15, 2006. Early adoption is permitted as of the beginning of an enterprise’s fiscal year, provided the enterprise ha




orted on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements. The Company’s policy is to exclud
ange in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by

isaster costs is included in ―Direct store expenses‖ in the Consolidated Statements of Operations, approximately $1.0 million is included in ―General and a
en recorded as goodwill. Fresh & Wild results of operations are included in our consolidated income statements for the period beginning February 1, 2004
 ilable to the Company under the agreement was effectively reduced to $88.4 million by outstanding letters of credit totaling approximately $11.6 million a
so be redeemed in cash at the option of the holder if there is a change in control at the issue price plus accrued original discount to the date of redemption.




06, 2005 and 2004.
it is more likely than not that the deferred tax asset will not be realized. Management believes that it is more likely than not that we will fully realize the re
uarterly basis.
the terms and conditions of those grants. The market value of the stock is determined as the closing stock price at the grant date. At September 24, 2006, S
an additional $3.0 million share-based compensation charge related to this acceleration to adjust for actual experience. Additional adjustments in future pe




nformation over the last five years, in fiscal year 2006. During fiscal year 2005, expected life was calculated in five salary tranches based on weighted ave

e changed to the pro forma amounts shown below (in thousands, except per share amounts):
September 24, 2006, September 25, 2005 and September 26, 2004 approximately 369,000, 420,000, and 460,000 shares of our common stock, respectivel
accurate reporting of periodic inventory balances and enables management to more precisely man




The Company recognizes a liability for the fair value of a conditional asset retire
 -time team members with a minimum of 400 hours of




estimates of the fair value of share-based compensation and consequently, the related amounts recogni




mates are reasonable, actual results could differ from these estimates.
 fiscal year, provided the enterprise has not yet issued financial statements, including financial stat




nts. The Company’s policy is to exclude all such taxes from revenue. The provisions of EITF 06-3 are effecti
 nge in accounting estimate affected by a change in accounting principle. The provisions of SFAS No. 1

0 million is included in ―General and administrative expenses,‖ and approximately $2.1 million is included in ―C
he period beginning February 1, 2004 through September 26, 2004 and all subsequent periods. John Mackey and W
otaling approximately $11.6 million at September 25, 2005. On November 7, 2005, we amended our credit facility to
al discount to the date of redemption. The Company may redeem the debentures for cash, in whole or in
an not that we will fully realize the remaining domestic deferred tax assets in the form of f
e grant date. At September 24, 2006, September 25, 2005 and September 26, 2004 approximately 6.5 milli
e. Additional adjustments in future periods may be necessary as actual results could differ from these es




salary tranches based on weighted average exercise-after-vesting informatio
ares of our common stock, respectively, were available for future issuance.
                                              Wholefoods Market
                                           Income Statement ($000)
                PERIOD ENDING                           Sep 24, 2006    Sep 25, 2005    Sep 26, 2004
Net Sales                                              5,607,376.00    4,701,289.00    3,864,950.00
COGS                                                   3,647,734.00    3,052,184.00    2,523,816.00
Selling General and Administrative                     1,484,410.00    1,285,613.00    1,004,089.00
Depreciation and Amortization                            156,223.00      133,759.00      115,157.00
Income from Continuing Operations                        319,009.00      229,733.00      221,888.00
Total Other Income/Expenses Net                           20,736.00        9,623.00        6,456.00
Earnings Before Interest And Taxes                       339,745.00      239,356.00      228,344.00
Interest Expense                                              32.00        2,223.00        7,249.00
Income Before Tax                                        339,713.00      237,133.00      221,095.00
Income Tax Expense                                       135,885.00      100,782.00       88,438.00
Net Income                                               203,828.00      136,351.00      132,657.00

Dividends                                                   358,075
Add To Retained Earnigs                                 (154,247.00)

                                              Wholefoods Market
                                           Income Statement ($000)
PERIOD ENDING                                          Sep 24, 2006    Sep 25, 2005    Sep 26, 2004
                      Assets
Current Assets                                              623,981         672,529         485,572
Net Fixed Assets                                          1,419,015       1,216,767       1,062,144
Total Assets                                              2,042,996       1,889,296       1,547,716
                    Liabilities
Current Liabilities                                         509,770         418,383         334,950
Long Term Debt                                              129,083         105,237         244,111
Total Liabilities                                           638,853         523,620         579,061
                Stockholders' Equity
Common stock and paid-in surplus                          1,054,883         879,377         537,160
Retained Earnings                                           349,260         486,299         431,495
Total Stockholder Equity                                  1,404,143       1,365,676         968,655
Total Stockholder Equity and Total Liabilities            2,042,996       1,889,296       1,547,716
                                                        TRUE            TRUE            TRUE
2006 analysis

   Cash flow from assets      =       Cash flow to creditors   +     Cash flow to stockholders   True

   Cash flow from assets      =    Cash flow from operations   -       Net capital spending        -

  Cash flow from operations   =               EBIT             +           Depreciation            -

    Net capital spending      =       End net fixed assets     -       Beg net fixed assets       +

      Change in NWC           =            End NWC             -            Beg NWC

    Cash flow to creditors    =              Interest          -        Net new borrowing


  Cash flow to stockholders   =            Dividends           -          Net new equity
                                                                          $192,714.00




2006 Current Assets               2005 Current Assets              2004 Current Assets
Change in NWC

    Taxes

 Depreciation
 Cash flow from assets      =     Cash flow to creditors    +   Cash flow to stockholders True
       141,547.00                      (23,814.00)                     165,361.00
 Cash flow from assets      =   Cash flow from operations   -     Net capital spending      -
       141,547.00                      360,083.00                      358,471.00
Cash flow from operations   =              EBIT             +         Depreciation          -
       360,083.00                      339,745.00                      156,223.00
  Net capital spending      =     End net fixed assets      -     Beg net fixed assets      +
       358,471.00                    1,419,015.00                    1,216,767.00
    Change in NWC           =           End NWC             -           Beg NWC
      (139,935.00)                     114,211.00                      254,146.00
  Cash flow to creditors    =            Interest           -      Net new borrowing
       (23,814.00)                        32.00                         23,846.00
Cash flow to stockholders   =           Dividends           -       Net new equity          +
       165,361.00                     $358,075.00                      $38,467.00
       Change in NWC
        (139,935.00)
           Taxes
         135,885.00
        Depreciation
         156,223.00




Reduction in Retained Earnings
                   (154,247.00)
              Assumptions (in millions):
Name:                                Dole Cola Inc.
Year                                           2006
Sales                                         $600
COGS                                       $300.00
Depreciation Expense                       $150.00
Interest Paid                               $30.00
Tax Rate                                        34%
Dividends                                   $30.00
End Fixed Assets                           $750.00
Beg Fixed Assets                           $500.00
Beg CA                                   $2,130.00
Beg CL                                   $1,620.00
End CA                                   $2,260.00
End CL                                   $1,710.00

                  Dole Cola Inc.
           Income Statement (in mils.)
             For the Year Ended 2006
Sales
COGS
Depreciation Expense
Earnings Before Interest and Tax
Interest Paid
Taxable Income
Taxes
Net Income

Dividends
Addition to Retained Earnings

Question 1
Question 2
Change in Fixed Assets =
                                                                Cash flow from assets            =
                                                      6                                          =
                                                                Cash flow from assets            =
                                                      4                                          =
                                                                  Operating cash flow            =
                                                      3                                          =
.                                                                Net capital spending            =
                                                      2                                          =
                                                                   Change in NWC                 =
                                                      1                                          =
                                                          Cash flow to creditors (bondholders)   =
                                                      7                                          =
                                                          Cash flow to stockholders (owners)     =
                                                      5                                          =
  Cash flow to creditors (bondholders)      +           Cash flow to stockholders (owners)
                                            +
          Operating cash flow               -                  Net capital spending                 -
                                            -                                                       -
Earnings before interest and taxes (EBIT)   +                     Depreciation                      -
                                            +                                                       -
         Ending net fixed assets            -               Beginning net fixed assets              +
                                            -                                                       +
              Ending NWC                    -                    Beginning NWC
                                            -
              Interest paid                 -   Net new borrowing (end long-term debt - beg LTD)
                                            -
                                                Net new equity raised (end Common stock & Paid-in
             Dividends paid                 -
                                                             surplus - beg CS & PIS)
                                            -
Change in net working capital (NWC)


              Taxes


           Depreciation
                        Assumptions (in millions):
Name:                              Dole Cola Inc.
Year                                                                  2003
Sales                                                                $600
COGS                                                              $300.00
Depreciation Expense                                              $150.00
Interest Paid                                                      $30.00
Tax Rate                                                              34%
Dividends                                                          $30.00
End Fixed Assets                                                  $750.00
Beg Fixed Assets                                                  $500.00
Beg CA                                                          $2,130.00
Beg CL                                                          $1,620.00
End CA                                                          $2,260.00
End CL                                                          $1,710.00

                              Dole Cola Inc.
                       Income Statement (in mils.)
                         For the Year Ended 2003
Sales                                                                $600
COGS                                                              $300.00
Gross Profit                                                      $300.00
Depreciation Expense                                              $150.00
Earnings Before Interest and Tax                                  $150.00
Interest Paid                                                      $30.00
Taxable Income                                                    $120.00
Taxes                                                              $41.00
Net Income                                                         $79.00

Dividends                                                          $30.00
Addition to Retained Earnings                                      $49.00

Question 1                          Operating cash flow + $259
                                    Because depreciation is a non cash
                                    expense and interest goes into a
                                    different calculation, it is cash to
Question 2                          bondholders
Change in Fixed Assets =                                             $250.00
                                                                                   Cash flow from assets   =
                                                                               6         (181.00)          =
                                                                                   Cash flow from assets   =
                                                                               4         (181.00)          =
                                                                                    Operating cash flow    =
                                                                               3         259.00            =
.                                                                                  Net capital spending    =
                                                                               2         400.00            =
                                                                                    Change in NWC          =
                                                                               1          40.00            =
     Cash flow to creditors
                                =
        (bondholders)
7          (211.00)             =
    Cash flow to stockholders
                                =
            (owners)
5            30.00              =
   Cash flow to creditors
                               + Cash flow to stockholders (owners)                       True!
      (bondholders)
         (211.00)              +               30.00
                                                                               Change in net working capital
    Operating cash flow        -        Net capital spending              -
                                                                                         (NWC)
          259.00               -              400.00                      -               40.00
Earnings before interest and
                               +            Depreciation                  -               Taxes
       taxes (EBIT)
          150.00               +              150.00                       -              41.00
  Ending net fixed assets      -     Beginning net fixed assets           +            Depreciation
          750.00               -              500.00                      +              150.00
       Ending NWC              -         Beginning NWC                True
          550.00               -              510.00
                   Net new borrowing (end long-term
 Interest paid   -                                  Not True
                           debt - beg LTD)
    30.00        -             (241.00)
                      Net new equity raised (end
Dividends paid   - Common stock & Paid-in surplus - True
                            beg CS & PIS)
    30.00        -               0.00
True


True


True
                                             8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - STP 2.1 (T)


                                  Assumptions                                                        Rasputin Corporation
Name:                                           Rasputin Corporation                                   Income Statement
Year 1                                                    12/31/2009                               For The Year Ended 2010
Year 2                                                    12/31/2010              Sales                                      As
Tax Rate                                                         34%              Cost of goods sold
Statements                                      Income Statement                  Depreciation
                                                Balance Sheet                     Earnings before interest and tax
Requirements:                                                                     Interest
Prepare an Income Statement for 2010            Done                              Taxable income
Prepare an Balance Sheet for 2009 and 2010      Done                              Taxes
Calculate cash flows from assets for 2010                       0.00     0.00     Net Income
Calculate cash flows to creditors 2010                          0.00
Calculate cash flows to stockholders 2010                       0.00              Dividends
Account Name                                                    2009   2010       Addition to retained earnings
Sales                                                         $3,790 $3,990
Cost of goods sold                                             2,043    2,137
Depreciation                                                     975    1,018
Interest                                                         225      267
Dividends                                                        200      225
Current assets                                                 2,140    2,346
Net fixed assets                                               6,770    7,087
Current liabilities                                              994    1,126
Long-term debt                                                 2,869    2,956




                                                                Page 231 of 256
                                      8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - STP 2.1 (T)


                                      Rasputin Corporation
                                          Balance Sheet
                             December 31, 2009 and December 31, 2010
                   Assets                                 Liabilities and Owners' Equity
                      2009   2010                                                          2009   2010
Current assets                      Current liabilities
Net fixed assets                    Long-term debt
                                    Total Liabilities
                                    Change in Common Stock and Paid-in surplus
                                    Change in Retained Earnings
                                    Total Owners' Equity
Total Assets                        Total Liabilities and Owners' Equity


                                                                                                          Cash flow from assets      =


                                                                                                          Cash flow from assets      =

                                                                                                         Cash flow from operations   =

                                                                                                           Net capital spending      =

                                                                                                             Change in NWC           =

                                                                                                           Cash flow to creditors    =

                                                                                                         Cash flow to stockholders   =




                                                            Page 232 of 256
          8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - STP 2.1 (T)




  Cash flow to creditors    +   Cash flow to stockholders True


Cash flow from operations   -     Net capital spending    - Change in NWC

          EBIT              +         Depreciation        -         Taxes

  End net fixed assets      -      Beg net fixed assets   +      Depreciation

       End NWC              -          Beg NWC

         Interest           -      Net new borrowing

       Dividends            -        Net new equity




                                Page 233 of 256
                                             8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - STP 2.1 (an)


                                  Assumptions                                                         Rasputin Corporation
Name:                                           Rasputin Corporation                                    Income Statement
Year 1                                                    12/31/2009                                For The Year Ended 2010
Year 2                                                    12/31/2010               Sales                                      $3,990.00   Ass
Tax Rate                                                         34%               Cost of goods sold                          2,137.00
Statements                                      Income Statement                   Depreciation                                1,018.00
                                                Balance Sheet                      Earnings before interest and tax              835.00
Requirements:                                                                      Interest                                      267.00
Prepare an Income Statement for 2010            Done                               Taxable income                                568.00
Prepare an Balance Sheet for 2009 and 2010      Done                               Taxes                                         193.00
Calculate cash flows from assets for 2010                     251.00   251.00      Net Income                                  $375.00
Calculate cash flows to creditors 2010                        180.00
Calculate cash flows to stockholders 2010                      71.00               Dividends                                   $225.00
Account Name                                                    2009   2010        Addition to retained earnings               $150.00
Sales                                                         $3,790 $3,990
Cost of goods sold                                             2,043     2,137
Depreciation                                                     975     1,018
Interest                                                         225       267
Dividends                                                        200       225
Current assets                                                 2,140     2,346
Net fixed assets                                               6,770     7,087
Current liabilities                                              994     1,126
Long-term debt                                                 2,869     2,956




                                                                 Page 234 of 256
                                            8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - STP 2.1 (an)


                                             Rasputin Corporation
                                                Balance Sheet
                                   December 31, 2009 and December 31, 2010
                 Assets                                         Liabilities and Owners' Equity
                    2009           2010                                                           2009       2010
Current assets    $2,140.00   $2,346.00   Current liabilities                                    $994.00  $1,126.00
Net fixed assets   6,770.00    7,087.00   Long-term debt                                         2,869.00  2,956.00
                                          Total Liabilities                                      3,863.00  4,082.00
                                          Change in Common Stock and Paid-in surplus                         154.00
                                          Change in Retained Earnings                                        150.00
                                          Total Owners' Equity                                   5,047.00 $5,351.00
Total Assets     $8,910.00    $9,433.00   Total Liabilities and Owners' Equity              $8,910.00       $9,433.00


                                                                                                                         Cash flow from assets      =
                                                                                                                                251.00
                                                                                                                         Cash flow from assets      =
                                                                                                                                 251.00
                                                                                                                        Cash flow from operations   =
                                                                                                                                1,660.00
                                                                                                                          Net capital spending      =
                                                                                                                                1,335.00
                                                                                                                            Change in NWC           =
                                                                                                                                  74.00
                                                                                                                          Cash flow to creditors    =
                                                                                                                                 180.00
                                                                                                                        Cash flow to stockholders   =
                                                                                                                                  71.00




                                                                  Page 235 of 256
          8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - STP 2.1 (an)




  Cash flow to creditors    +   Cash flow to stockholders True
         180.00                          71.00
Cash flow from operations   -     Net capital spending    - Change in NWC
        1,660.00                       1,335.00                 74.00
           EBIT             +         Depreciation        -     Taxes
         835.00                        1,018.00                193.00
  End net fixed assets      -     Beg net fixed assets    +  Depreciation
        7,087.00                       6,770.00               1,018.00
        End NWC             -          Beg NWC
        1,220.00                       1,146.00
         Interest           -      Net new borrowing
         267.00                          87.00
        Dividends           -       Net new equity
        $225.00                         $154.00




                                Page 236 of 256
      8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - Critical Thinking (T)


2.1
2.2
2.6
2.8
2.9




                              Page 237 of 256
                       8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - Critical Thinking (an)




    Liquid assets can be converted to cash quickly so that bills can be paid or profitable assets
    can be purchased, however, cash earns a small return. On the other hand, illiquid assets
    such as buildings or business segments tend to earn a higher return, although they are
    harder to turn to cash and may loose some value if it is required that one sell quickly. In the
    2007-2010 financial crisis, banks held many bad loans which stop providing cash flows and
    when the panic set in, banks could not sell assets to get cash or borrow money to get cash,
2.1 so they ran out of cash or "liquidity".

    Because accountants use accrual accounting. Revenues are recorded when earned and
    expenses are recorded when incurred or when the expense is matched to the revenue it
    helped to create. Although revenues and expenses are recorded, there may not be a
    contemporaneous cash flow associated with it. In particular, the depreciation expense is a
    large non-cash expense (caused by the matching principal) that, in finance, must be added
2.2 back into the accounting income in order to estimate cash flows.
    It depends. If a firm is growing quickly and buying many profitable assets, the cash flow from
    assets could be negative - in essence, the cash to creditors and stockholders would be
    negative (cash comes in from equity and debt so business can buy assets), which means that
    they are investing cash in the business because they think that the firm will be profitable in
    the future. On the other hand, if the firm continues to have earning losses, this may not be a
2.6 good sign.
    A negative NWC could mean that the firm is managing its inventory or receivables more
    efficiently - they sold old inventory or they collected more Accounts Receivables than they
    recorded new ones. A negative NCS could mean that the firm has sold more assets than it
2.8 has purchased.



                                               Page 238 of 256
                      8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - Critical Thinking (an)


    Sure, if the new equity issued is greater than the dividends paid, or the new debt issued is
2.9 greater than the interest paid.




                                              Page 239 of 256
                        8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - Problem 1 (T)


                A                       B             C                  D                         E
 1                     Assumptions
 2   Name                   A Inc.
 3   CA
 4   NFA
 5   CL
 6   LTD
 7
 8                       Solve for:
 9   Shareholders' Equity =
10   NWC =
11
12                                                 A Inc.
13                                             Balance Sheet
14                        Assets                                    Liabilities + Owners' Equity
15   CA                                                   CL
16   NFA                                                  LTD
17                                                        Owners Equity
18   Total Assets                                         Total Liabilities + Owners' Equity




                                            Page 240 of 256
                       8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - Problem 1 (an)


                A                      B               C                  D                        E
 1                     Assumptions
 2   Name                   A Inc.
 3   CA                                     2,170.00
 4   NFA                                    9,300.00
 5   CL                                     1,350.00
 6   LTD                                    3,980.00
 7
 8                       Solve for:
 9   Shareholders' Equity =
10   NWC =
11
12                                                  A Inc.
13                                              Balance Sheet
14                        Assets                                     Liabilities + Owners' Equity
15   CA                      $              2,170.00       CL                                 $ 1,350.00
16   NFA                                    9,300.00       LTD                                $ 3,980.00
17                                                         Owners Equity                          6,140.00
18   Total Assets              $           11,470.00       Total Liabilities + Owners' Equity $ 11,470.00




                                             Page 241 of 256
                     8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - Problem 2 & 3 & 4 (T)


                  Assumptions
Name                   Lifeline Inc.
Sales
Costs
Depreciation Expense
Interest Expense
Tax Rate
Dividends
Shares of common
stock outstanding
                                                                        Lifeline Inc.
                                                                     Income Statement
                                                                 For The Year Ended 20xx
                                               Sales
                                               Costs
                                               Depreciation Expense
                                               EBIT
                                               Interest Expense
                                               Taxable Income
                                               Tax
                                               Net Income

                                               Dividends
                                               Addition to Retained Earnings
                                               EPS
                                               DPS




                                             Page 242 of 256
                   8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - Problem 2 & 3 & 4 (an)


                  Assumptions
Name                   Lifeline Inc.
Sales                                585,000.00
Costs                                273,000.00
Depreciation Expense                  71,000.00
Interest Expense                      38,000.00
Tax Rate                                    35%
Dividends                             36,000.00
Shares of common
stock outstanding                     40,000.00
                                                                           Lifeline Inc.
                                                                        Income Statement
                                                                    For The Year Ended 20xx
                                                  Sales                                       585,000.00
                                                  Costs                                       273,000.00
                                                  Depreciation Expense                         71,000.00
                                                  EBIT                                        241,000.00
                                                  Interest Expense                             38,000.00
                                                  Taxable Income                              203,000.00
                                                  Tax                                          71,050.00
                                                  Net Income                                  131,950.00

                                                  Dividends                                    36,000.00
                                                  Addition to Retained Earnings                95,950.00
                                                  EPS                                            3.29875
                                                  DPS                                                 0.9




                                             Page 243 of 256
                Assumptions
Taxable Income                 275,000.00

                            Tax Rate Table
LOOKUP COLUMN          Income To               Tax Rate
                 -                      50,000            15.00%
              50,001                    75,000            25.00%
              75,001                   100,000            34.00%
             100,001                   335,000            39.00%
             335,001                10,000,000            34.00%
          10,000,001                15,000,000            35.00%
          15,000,001                18,333,333            38.00%
          18,333,334     +                                35.00%

                                                                                Taxable Income
                                                                                  Calculate tax fo
                                                                   $50,000*15.00%
                                                                   ($75,000-$50,000)*25.00%
                                                                   ($100,000-$75,000)*34.00%
                                                                   ($275,000-$100,000)*39.00%


                                                                   Average Tax Rate =
                                                                   Marginal Tax Rate for next doll
Cumulative Tax From Previous Bracket

                                           7,500
                                          13,750
                                          22,250
                                         113,900
                                       3,400,000
                                       5,150,000
                                       6,416,667

             Taxable Income = $275,000.00
               Calculate tax for entire year
$50,000*15.00%
($75,000-$50,000)*25.00%
($100,000-$75,000)*34.00%
($275,000-$100,000)*39.00%


Average Tax Rate =
Marginal Tax Rate for next dollar =
         0   15.00%
   50,000    25.00%      7,500
   75,000    34.00%     13,750
  100,000    39.00%     22,250
  335,000    34.00%    113,900
10,000,000   35.00%   3,400,000
15,000,000   38.00%   5,150,000
18,333,333   35.00%   6,416,667
                Assumptions
Taxable Income                 275,000.00

                            Tax Rate Table
LOOKUP COLUMN          Income To               Tax Rate
                 -                      50,000            15.00%
              50,001                    75,000            25.00%
              75,001                   100,000            34.00%
             100,001                   335,000            39.00%
             335,001                10,000,000            34.00%
          10,000,001                15,000,000            35.00%
          15,000,001                18,333,333            38.00%
          18,333,334     +                                35.00%

                                                                                Taxable Income
                                                                                  Calculate tax fo
                                                                   $50,000*15.00%
                                                                   ($75,000-$50,000)*25.00%
                                                                   ($100,000-$75,000)*34.00%
                                                                   ($275,000-$100,000)*39.00%


                                                                   Average Tax Rate =
                                                                   Marginal Tax Rate for next doll
Cumulative Tax From Previous Bracket

                                           7,500
                                          13,750
                                          22,250
                                         113,900
                                       3,400,000
                                       5,150,000
                                       6,416,667

             Taxable Income = $275,000.00
               Calculate tax for entire year
$50,000*15.00%                                      7,500.00
($75,000-$50,000)*25.00%                            6,250.00
($100,000-$75,000)*34.00%                           8,500.00
($275,000-$100,000)*39.00%                         68,250.00
                                                   90,500.00   90500

Average Tax Rate =                                  0.32909
Marginal Tax Rate for next dollar =                 0.39000
                  0   15.00%
             50,000   25.00%     7,500
             75,000   34.00%    13,750
            100,000   39.00%    22,250
            335,000   34.00%   113,900
            #######   35.00%   #######
90,500.00   #######   38.00%   #######
            #######   35.00%   #######
                        8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - Problem 9 (T)


                                    Assumptions
Name                                                  Rotweiler Obedience School
Date 1                                                12/31/2009
Date 2                                                12/31/2010
Statement                                             Balance Sheet
                                                      Income Statement
Accounts:                                             Net Fixed Assets
                                                      Depreciation Expense
Balance Sheet Net Fixed Assets, December 31, 2009
Balance Sheet Net Fixed Assets, December 31, 2010
2010 Income Statement Depreciation Expense


Net Capital Spending for 2010




                                            Page 250 of 256
                       8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls - Problem 9 (an)


                                   Assumptions
Name                                                  Rotweiler Obedience School
Date 1                                                12/31/2009
Date 2                                                12/31/2010
Statement                                             Balance Sheet
                                                      Income Statement
Accounts:                                             Net Fixed Assets
                                                      Depreciation Expense
Balance Sheet Net Fixed Assets, December 31, 2009     1,725,000.00
Balance Sheet Net Fixed Assets, December 31, 2010     2,040,000.00
2010 Income Statement Depreciation Expense            321,000.00


Net Capital Spending for 2010                         636,000.00




                                            Page 251 of 256
                                                   8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls -Problem 21 (T)


                                  A                                             B                    C       D                   E                  F      G
 1                                               Assumptions                                                                Titan Football Manufacturing
 2   Name:                                                         Titan Football Manufacturing                                  Income Statement
 3   Year 1                                                                           12/31/2009                             For The Year Ended 2010
 4   Year 2                                                                           12/31/2010                 Sales
 5   Tax Rate                                                                                35%                 Cost of goods sold
 6   Statements                                                    Income Statement                              Depreciation expense
 7                                                                 Balance Sheet                                 Earnings before interest and tax
 8   Account Name                                                                           2009     2010        Interest expense
 9   Sales                                                                                         $19,780       Taxable income
10   Cost of goods sold                                                                             13,980       Taxes
11   Depreciation expense                                                                            2,370       Net Income
12   Interest expense                                                                                  345
13   Dividends paid                                                                                    550       Dividends
14   Current assets                                                                       2,940      3,280       Addition to retained earnings
15   Net fixed assets                                                                    13,800     16,340
16   Current liabilities                                                                  2,070      2,160
17   Long-term debt
18                                              Requirements:
19   Net Income for 2010
20   Operating Cash Flow for 2010
21   Calculate cash flows from assets for 2010
22   Why?
     If no new debt was issued during the year, what is the cash
23   flow to creditors 2010?
24   Calculate cash flows to stockholders 2010
25   New Equity
26   Explain the negative and positive signs
27




                                                                           Page 252 of 256
                                     8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls -Problem 21 (T)


     H               I               J               K               L                 M                  N            O
 1        Cash flow from assets      =     Cash flow to creditors    +   Cash flow to stockholders True
 2
 3        Cash flow from assets      =   Cash flow from operations   -        Net capital spending        -     Change in NWC
 4
 5       Cash flow from operations   =             EBIT              +        Depreciation expense        -          Taxes
 6
 7         Net capital spending      =     End net fixed assets      -        Beg net fixed assets        +   Depreciation expense
 8
 9           Change in NWC           =          End NWC              -             Beg NWC
10
11         Cash flow to creditors    =       Interest expense        -         Net new borrowing
12
13       Cash flow to stockholders   =          Dividends            -           Net new equity
14
15
16
17
18
19
20
21
22

23
24
25
26
27




                                                            Page 253 of 256
                                                   8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls -Problem 21 (an)


                                  A                                              B                    C        D                   E                  F         G
 1                                               Assumptions                                                                  Titan Football Manufacturing
 2   Name:                                                         Titan Football Manufacturing                                    Income Statement
 3   Year 1                                                                           12/31/2009                               For The Year Ended 2010
 4   Year 2                                                                           12/31/2010                   Sales                                     $19,780.00
 5   Tax Rate                                                                                35%                   Cost of goods sold                         13,980.00
 6   Statements                                                    Income Statement                                Depreciation expense                        2,370.00
 7                                                                 Balance Sheet                                   Earnings before interest and tax            3,430.00
 8   Account Name                                                                           2009      2010         Interest expense                              345.00
 9   Sales                                                                                          $19,780        Taxable income                              3,085.00
10   Cost of goods sold                                                                              13,980        Taxes                                       1,080.00
11   Depreciation expense                                                                             2,370        Net Income                                 $2,005.00
12   Interest expense                                                                                   345
13   Dividends paid                                                                                     550        Dividends                                   $550.00
14   Current assets                                                                        2,940      3,280        Addition to retained earnings              $1,455.00
15   Net fixed assets                                                                     13,800     16,340
16   Current liabilities                                                                   2,070      2,160
17   Long-term debt
18                                               Requirements:
19   Net Income for 2010                                                                $2,005.00
20   Operating Cash Flow for 2010                                                        4,720.00
21   Calculate cash flows from assets for 2010                                           (440.00)

                                                                   Because the firm thinks that it has found
                                                                    profitable assets to purchase and so it
                                                                   has purchased $4,910 worth. In addition,
                                                                         the NWC capital has gone up
                                                                       significantly. Both of these asset
                                                                    increases has used up and exceeded
22 Why?                                                                     the operating cash flow.
     If no new debt was issued during the year, what is the cash
23 flow to creditors 2010?                                                                345.00
24 Calculate cash flows to stockholders 2010                                 (785.00)
25 New Equity                                                                1,335.00




                                                                            Page 254 of 256
                                             8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls -Problem 21 (an)


                                A                                       B                     C        D   E   F   G

                                                          The firm is still paying $345 to creditors
                                                           for past debt, but has issued $1,335 of
                                                            new equity to augment the Cash Flow
                                                          From Operations of $4,720 -- all with the
26 Explain the negative and positive signs                   end result of purchasing new assets

                                                              The firm had positive earnings in an
                                                               accounting sense (NI > 0) and had
                                                           positive cash flow from operations. The
                                                            firm invested $250 in new net working
                                                           capital and $4,910 in new fixed assets.
                                                               The firm had to raise $440 from its
                                                                stakeholders to support this new
                                                              investment. It accomplished this by
                                                          raising $1,335 in the form of new equity.
                                                              After paying out $550 in the form of
                                                           dividends to shareholders and $345 in
                                                             the form of interest to creditors, $440
                                                          was left to just meet the firm’s cash flow
27                                                                    needs for investment.




                                                                   Page 255 of 256
                                     8ddee7db-9e3c-406a-86ae-6135d6c1baa9.xls -Problem 21 (an)


     H               I               J               K               L                 M                  N            O
 1        Cash flow from assets      =     Cash flow to creditors    +   Cash flow to stockholders True
 2
 3        Cash flow from assets      =   Cash flow from operations   -        Net capital spending        -     Change in NWC
 4               (440.00)
 5       Cash flow from operations   =             EBIT              +        Depreciation expense        -          Taxes
 6               4,720.00
 7         Net capital spending      =     End net fixed assets      -        Beg net fixed assets        +   Depreciation expense
 8               4,910.00
 9           Change in NWC           =          End NWC              -             Beg NWC
10                250.00
11         Cash flow to creditors    =       Interest expense        -         Net new borrowing
12                345.00
13       Cash flow to stockholders   =          Dividends            -           Net new equity
14               (785.00)                        $550.00
15
16
17
18
19
20
21




22

23
24
25




                                                            Page 256 of 256

				
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