For The Period Ended January 16, 2005

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IzhmpU9Dh0FQjorBQpS7cR9SoQeKLILVGjbR7JeijIO+wpHGPVG8yF5+GvIyYcO3 s5ufMerdYfuUEaETvaeoPA== 0001193125-05-040849.txt : 20050302 0001193125-05-040849.hdr.sgml : 20050302 20050302164825 ACCESSION NUMBER: 0001193125-05-040849 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050116 FILED AS OF DATE: 20050302 DATE AS OF CHANGE: 20050302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WHOLE FOODS MARKET INC CENTRAL INDEX KEY: 0000865436 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 741989366 STATE OF INCORPORATION: TX FISCAL YEAR END: 0929 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19797 FILM NUMBER: 05654891 BUSINESS ADDRESS: STREET 1: 601 N LAMAR BLVD STREET 2: STE 300 CITY: AUSTIN STATE: TX ZIP: 78703 BUSINESS PHONE: 5124774455 MAIL ADDRESS: STREET 1: 601 N LAMAR BLVD STREET 2: STE 300 CITY: AUSTIN STATE: TX ZIP: 78703 10-Q 1 d10q.htm FOR THE PERIOD ENDED JANUARY 16, 2005 For The Period Ended January 16, 2005

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended January 16, 2005; or

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to .

Commission File Number: 0-19797

WHOLE FOODS MARKET, INC.

(Exact name of registrant as specified in its charter)


Texas		74-1989366
(State of incorporation)		(IRS employer identification no.)

550 Bowie Street

Austin, Texas 78703

(Address of principal executive offices)

Registrant’s telephone number, including area code:

512-477-4455

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

The number of shares of the registrant’s common stock, no par value, outstanding as of January 16, 2005 was 64,282,683 shares.

Whole Foods Market, Inc.

Form 10-Q

Table of Contents


		Page Number
Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets, January 16, 2005 and September 26, 2004 (unaudited)		3

Consolidated Statements of Operations (unaudited), for the sixteen weeks ended January 16, 2005 and January 18, 2004		4

Consolidated Statements of Cash Flows (unaudited), for the sixteen weeks ended January 16, 2005 and January 18, 2004		5

Notes to Consolidated Financial Statements (unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3. Quantitative and Qualitative Disclosures About Market Risk		16

Item 4. Controls and Procedures		16

Part II. Other Information

Item 1. Legal Proceedings		17

Item 6. Exhibits		17

Signature		18

Part 1. Financial Information

Item 1. Financial Statements

Whole Foods Market, Inc.

Consolidated Balance Sheets

January 16, 2005 and September 26, 2004 (unaudited)

(In thousands)


Assets
	2005		2004
			*(Restated,* *see Note 2)*
Current assets:
Cash and cash equivalents	$	228,112	$	198,377
Restricted cash		33,212		23,160
Trade accounts receivable		61,880		64,972
Merchandise inventories		165,209		152,912
Deferred income taxes		29,974		29,974
Prepaid expenses and other current assets		30,479		16,702

Total current assets		548,866		486,097
Property and equipment, net of accumulated depreciation and amortization		918,739		873,397
Goodwill		112,503		112,186
Intangible assets, net of accumulated amortization		23,628		24,831
Deferred income taxes		6,136		4,193
Other assets		6,050		20,302

Total assets	$	1,615,922	$	1,521,006

Liabilities and Shareholders’ Equity
	2005		2004
Current liabilities:
Current installments of long-term debt and capital lease obligations	$	5,972	$	5,973
Trade accounts payable		95,060		90,751
Accrued payroll, bonus and other benefits due team members		113,645		100,536
Dividends payable		12,200		9,361
Other accrued expenses		141,310		128,329

Total current liabilities		368,187		334,950
Long-term debt and capital lease obligations, less current installments		95,330		164,770
Deferred rent liability		72,926		70,067
Other long-term liabilities		1,581		1,581

Total liabilities		538,024		571,368

Shareholders’ equity:
Common stock, no par value, 150,000 shares authorized, 64,791 and 62,771 shares issued, 64,283 and 62,407 shares outstanding in 2005 and 2004, respectively		627,573		535,107
Accumulated other comprehensive income		3,932		2,053
Retained earnings		446,393		412,478

Total shareholders’ equity		1,077,898		949,638

Commitments and contingencies

Total liabilities and shareholders’ equity	$	1,615,922	$	1,521,006

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

Whole Foods Market, Inc.

Consolidated Statements of Operations (unaudited)

(In thousands, except per share amounts)


	Sixteen weeks ended
	January 16, 2005			January 18, 2004
				*(Restated,* *see Note 2)*
Sales	$	1,368,328		$	1,118,148
Cost of goods sold and occupancy costs		895,486			733,721

Gross profit		472,842			384,427
Direct store expenses		348,380			282,596
General and administrative expenses		40,401			35,869
Pre-opening and relocation costs		6,599			4,073

Operating income		77,462			61,889
Other income (expense):
Interest expense		(1,708	)		(2,478	)
Investment and other income		1,194			1,464

Income before income taxes		76,948			60,875
Provision for income taxes		30,778			24,350

Net income	$	46,170		$	36,525

Basic earnings per share	$	0.74		$	0.61

Weighted average shares outstanding		62,794			60,309

Diluted earnings per share	$	0.69		$	0.57

Weighted average shares outstanding, diluted basis		69,013			66,634

Dividends per share	$	0.19		$	0.15

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

Whole Foods Market, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)


	Sixteen weeks ended
	January 16, 2005			January 18, 2004
Cash flows from operating activities:
Net income	$	46,170		$	36,525
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		39,344			32,882
Tax benefit related to exercise of employee stock options		9,199			6,666
Deferred rent		3,804			3,031
Interest accretion on long-term debt		2,269			2,314
Loss on disposal of fixed assets		515			529
Deferred income tax benefit		(1,943	)		(1,478	)
Other		1,800			1,485
Net change in current assets and liabilities:
Trade accounts receivable		2,775			(8,708	)
Merchandise inventories		(13,297	)		(14,758	)
Prepaid expense and other current assets		1,082			(1,723	)
Trade accounts payable		4,309			3,451
Accrued payroll, bonus and other benefits due team members		13,109			13,862
Other accrued expenses		12,452			10,330

Net cash provided by operating activities		121,588			84,408

Cash flows from investing activities:
Development costs of new store locations		(55,663	)		(35,211	)
Other property, plant and equipment expenditures		(29,403	)		(33,929	)
Payments for purchase of acquired entities, net of cash acquired		—			(3,172	)
Increase in restricted cash		(10,052	)		(17,859	)
Other investing activities		—			1,766

Net cash used in investing activities		(95,118	)		(88,405	)

Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		(84	)		(5	)
Issuance of common stock		12,765			11,932
Dividends paid		(9,416	)		(9,079	)

Net cash provided by financing activities		3,265			2,848

Net change in cash and cash equivalents		29,735			(1,149	)
Cash and cash equivalents at beginning of period		198,377			165,779

Cash and cash equivalents at end of period	$	228,112		$	164,630

Supplemental disclosures of cash flow information:
Interest paid	$	364		$	503
Federal and state income taxes paid	$	13,070		$	19,403

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

Whole Foods Market, Inc.

Notes to Consolidated Financial Statements (unaudited)

January 16, 2005

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements of Whole Foods Market, Inc. (“Whole Foods Market,” “Company,” or “We”) have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis, the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 26, 2004. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. Our fiscal year ends on the last Sunday in September. The first fiscal quarter is sixteen weeks, the second and third quarters each are twelve weeks and the fourth quarter is twelve or thirteen weeks. We operate in one reportable segment, natural and organic food supermarkets. Where appropriate, we have reclassified prior year financial statements to conform to current year presentation.

(2) Restatement of Financial Statements

The Company completed a review of its historical lease accounting methods to determine whether these methods were in accordance with the views expressed by the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) on February 7, 2005 in a letter to the American Institute of Certified Public Accountants and other recent interpretations regarding certain operating lease accounting issues and their application under GAAP. As a result of its review, the Company determined that its historical methods of accounting for rent holidays and tenant improvement allowances, and of determining lives used in the calculation of depreciation of leasehold improvements and straight-line rent determination for certain leased properties, were not in accordance with GAAP.

The Company historically had recognized rent holiday periods and scheduled rent increases on a straight-line basis over the lease term beginning with the commencement date of the lease which is typically the store opening date. The Company has determined that the lease term should commence on the date the Company takes possession of the leased space, which is generally six months prior to a store’s opening date. Additionally, the Company has determined that rent expense should be recorded on a straight-line basis over lease periods that are consistent with periods over which depreciation is recorded. Historically, the life used for rent expense purposes in some instances was shorter than the life used for depreciation purposes. Excluding tax impacts, the Company has recorded adjustments to “Other accrued expenses,” “Deferred rent liabilities,” “Property and equipment” and “Retained earnings” on the consolidated balance sheets and to “Direct store expenses,” “Cost of goods sold and occupancy costs” and “Pre-opening and relocation costs” on the consolidated statements of operations to correct historical accounting methods.

The Company historically accounted for tenant improvement allowances as reductions to the related leasehold improvement assets on the consolidated balance sheets and as capital expenditures in investing activities on the consolidated statements of cash flows. Management determined these allowances should be reclassified to deferred rent liabilities on the consolidated balance sheets and as a component of operating activities on the consolidated statements of cash flows. Additionally, this change results in a reclassification of the deferred rent amortization from “Direct store expenses” to “Cost of goods sold and occupancy costs” on the consolidated statements of operations.

On March 1, 2005, we filed a Current Report on Form 8-K with the SEC announcing our determination that our previously issued financial statements contained in our 2004 Form 10-K will be restated. The financial statements accompanying this report have not been reviewed by an independent public accountant under Rule 10-01(d) of Regulation S-X. We expect that our independent registered public accounting firm, Ernst & Young LLP, will complete the quarterly review required by Rule 10-01(d) of Regulation S-X following the issuance of restated financial statements contained in our 2004 Form 10-K/A.

The Company has restated its consolidated balance sheet as of September 26, 2004 and its consolidated statement of operations for the sixteen weeks ended January 18, 2004 to correct for the misstatements discussed above. Following is a summary of the effects of these accounting corrections on the consolidated statement of operations for the sixteen weeks ended January 18, 2004 (in thousands):


	Previously Reported		Adjustments			Restated
Cost of goods sold and occupancy costs	$	733,003	$	718		$	733,721
Direct store expenses		281,896		700			282,596
Pre-opening and reclocation costs		1,796		2,277			4,073
Operating income		65,584		(3,695	)		61,889
Income before income taxes		64,570		(3,695	)		60,875
Provision for income taxes		25,828		(1,478	)		24,350
Net income	$	38,742	$	(2,217	)	$	36,525
Basic earnings per share	$	0.64	$	(0.03	)	$	0.61
Diluted earnings per share	$	0.60	$	(0.03	)	$	0.57

Following is a summary of the effects of these accounting corrections on the consolidated balance sheet as of September 26, 2004 (in thousands):


	Previously Reported		Adjustments			Restated
Deferred income taxes	$	28,894	$	1,080		$	29,974
Total current assets		485,017		1,080			486,097
Deferred income taxes		—		4,193			4,193
Property and equipment, net		877,457		(4,060	)		873,397
Total assets		1,519,793		1,213			1,521,006
Other accrued expenses		124,641		3,688			128,329
Total current liabilities		331,262		3,688			334,950
Deferred rent liabilities		13,566		56,501			70,067
Deferred income taxes		20,175		(20,175	)		—
Total liabilities		531,354		40,014			571,368
Retained earnings		451,279		(38,801	)		412,478
Total shareholders’ equity		988,439		(38,801	)		949,638
Total liabilities and shareholders’ equity	$	1,519,793	$	1,213		$	1,521,006

These accounting corrections had no effect on net cash provided by operating activities on the consolidated statement of cash flows for the sixteen weeks ended January 18, 2004.

(3) Summary of Significant Accounting Policies

Property and Equipment

Property and equipment is stated at cost, net of accumulated depreciation and amortization. We provide depreciation of equipment over the estimated useful lives (generally three to 15 years) using the straight-line method. We provide amortization of leasehold improvements on the straight-line method over the shorter of the estimated useful lives 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 at the Company’s option if exercise of the option is determined to be reasonably 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 method. Costs related to a projected site determined to be unsatisfactory and general site selection costs that cannot be identified with a specific store location are charged to operations currently. Repair and maintenance costs are expensed as incurred. Interest costs on significant projects constructed or developed for the Company’s own use are capitalized as a separate component of the asset. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in earnings.

Operating Leases

The Company leases stores, distribution centers, bakehouses and administrative facilities under operating leases. Store lease agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for percentage of sales in excess of specified levels. Most of our lease agreements include renewal periods at the Company’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 takes possession of the leased space. We record tenant improvement allowances and rent holidays as deferred rent liabilities on the consolidated balance sheets and amortize the deferred rent over the terms of the lease to rent expense on the consolidated statements of operations. We record rent liabilities on the consolidated balance sheets for contingent percentage of sales lease provisions when we determine that it is probable that the specified levels will be reached during the fiscal year.

(4) Goodwill and Other Intangible Assets

Goodwill and indefinite-lived intangible assets are reviewed for impairment annually, or more frequently if impairment indicators arise. We allocate goodwill to one reporting unit for goodwill impairment testing. During the first quarter of fiscal year 2005, we acquired contract-based indefinite lived intangible assets totaling approximately $0.8 million in a non-cash transaction. During the first quarter of fiscal year 2004, we acquired goodwill totaling approximately $1.2 million in connection with the acquisition of Select Fish. There were no impairments of goodwill or indefinite-lived intangible assets during the sixteen week period ended January 16, 2005.

We amortize our acquired identifiable intangible assets on a straight-line basis over the life of the related agreement, currently one to 26 years for contract-based intangible assets and one to five years for marketing-related and other identifiable intangible assets. During the first quarter of fiscal year 2005, we reclassified approximately $1.1 million of contact-based intangible assets to common stock as the result of bondholders voluntarily converting approximately 44% of our zero coupon convertible debentures. During the first quarter of fiscal year 2004, we acquired intangible assets totaling approximately $0.2 million in connection with the Select Fish acquisition. Amortization associated with intangible assets totaled approximately $0.9 million for the sixteen weeks ended January 16, 2005 and January 18, 2004. The components of intangible assets were as follows (in thousands):


	January 16, 2005					September 26, 2004
	Gross carrying amount		Accumulated amortization			Gross carrying amount		Accumulated amortization
Non-amortizing contract-based	$	754	$	—		$	—	$	—
Amortizing contract-based	$	34,519	$	(12,601	)	$	36,088	$	(12,467	)
Amortizing marketing-related and other	$	3,599	$	(2,643	)	$	3,599	$	(2,389	)

Amortization associated with the net carrying amount of intangible assets at January 16, 2005 is estimated to be $2.3 million for the remainder of fiscal year 2005, $2.3 million in fiscal year 2006, $1.5 million in fiscal year 2007, $1.4 million in fiscal year 2008, $1.4 million in fiscal year 2009 and $1.3 million in fiscal year 2010.

(4) Long-Term Debt

During the first quarter of fiscal year 2005, approximately 137,000 of the Company’s zero coupon convertible debentures were converted at the option of the holders to approximately 1.5 million shares of Company common stock. The zero coupon convertible subordinated debentures had a carrying amount of approximately $89.4 million and $158.8 million at January 16, 2005 and September 26, 2004, respectively.

(5) Comprehensive Income

Our comprehensive income was comprised of net income, unrealized gains and losses on marketable securities and foreign currency translation adjustment, net of income taxes. Comprehensive income, net of related tax effects, was as follows (in thousands):


	Sixteen weeks ended
	January 16, 2005			January 18, 2004
				*(Restated)*
Net income	$	46,170		$	36,525
Unrealized gains (losses), net		(426	)		46
Reclassification adjustments for losses included in net income, net		946			88
Foreign currency translation adjustment, net		1,359			514

Comprehensive income	$	48,049		$	37,173

During the first quarter of fiscal year 2005, we recognized a loss totaling approximately $1.5 million for other-than-temporary impairment of our investments in short-term corporate bond funds due to a sustained decline in market value. During the first quarter of fiscal year 2004, we sold all of our investments in unrestricted and restricted common shares of Gaiam, Inc. for approximately $1.8 million, resulting in a loss of approximately $0.5 million. These losses have been included in “Investment and other income” in the consolidated statements of operations.

(6) 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 computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of common shares deemed outstanding from the assumed exercise of stock options and the assumed conversion of zero coupon convertible subordinated debentures. A reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations follows (in thousands):


	Sixteen weeks ended
	January 16, 2005		January 18, 2004
			*(Restated)*
Net income (numerator for basic earnings per share)	$	46,170	$	36,525
Interest on 5% zero coupon convertible subordinated debentures, net of income taxes		1,393		1,422

Adjusted net income (numerator for diluted earnings per share)	$	47,563	$	37,947

Weighted average common shares outstanding (denominator for basic earnings per share)		62,794		60,309
Potential common shares outstanding:
Assumed conversion of 5% zero coupon convertible subordinated debentures		3,076		3,283
Assumed exercise of stock options		3,143		3,042

Weighted average common shares outstanding and potential additional common shares outstanding (denominator for diluted earnings per share)		69,013		66,634

Basic earnings per share	$	0.74	$	0.61

Diluted earnings per share	$	0.69	$	0.57

The computations of diluted earnings per share for the sixteen week periods ended January 16, 2005 and January 18, 2004 include all common stock equivalents.

(7) Dividends

On November 10, 2004, the Company announced that its Board of Directors approved a 27% increase in the Company’s quarterly dividend. During the first quarter of fiscal year 2005, the Company declared a cash dividend of $0.19 per share, for a total of approximately $12.2 million, to be paid January 17, 2005 to shareholders of record as of January 7, 2005. During the first quarter of fiscal year 2004, the Company declared a cash dividend of $0.15 per share. The Company paid dividends totaling approximately $9.4 million and $9.1 million during the first quarters of fiscal years 2005 and 2004, respectively. The Company will pay future dividends at the discretion of our Board of Directors. The continuation of these payments and the amount of such dividends depend on many factors, including the results of operations and the financial condition of the Company. Subject to such factors and a determination that cash dividends continue to be in the best interest of our shareholders, the current intention of our Board of Directors is to pay a quarterly dividend on an ongoing basis.

(8) Stock-Based Compensation

The Company follows Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for stock option grants. APB No. 25 provides that the compensation expense relative to our team member stock options is measured based on the intrinsic value of the stock option at the date of the grant. As required by Statement of Financial Accounting Standards (“SFAS”) No. 123 and SFAS No. 148, we have determined pro forma net income and pro forma net income per common share as if compensation costs had been determined based on the fair value of the options granted to team members and then recognized ratably over the vesting period. The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes multiple option pricing model. Had we recognized compensation costs as prescribed by SFAS No. 123, net income, basic earnings per share and diluted earnings per share would have changed to the pro forma amounts shown below (in thousands, except per share data):


	Sixteen weeks ended
	January 16, 2005			January 18, 2004
				*(Restated)*
Reported net income	$	46,170		$	36,525
Pro forma expense, net of income taxes		(9,425	)		(6,235	)

Pro forma net income	$	36,745		$	30,290

Basic earnings per share:
Reported	$	0.74		$	0.61
Pro forma adjustment		(0.15	)		(0.10	)

Pro forma basic earnings per share	$	0.59		$	0.51

Diluted earnings per share:
Reported	$	0.69		$	0.57
Pro forma adjustment		(0.13	)		(0.09	)

Pro forma diluted earnings per share	$	0.56		$	0.48

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience. The above pro forma results are not indicative of future results under the requirements of the newly issued share-based payment standard.

(9) Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123(R), “Share-Based Payment”, which requires all companies to recognize an expense for share-based payments, including stock options, based on the fair value of the equity instrument. FASB Statement No. 123(R) is effective for interim or annual periods beginning after June 15, 2005. The provisions of FASB Statement No. 123(R) will be effective for the Company’s fourth quarter of fiscal year 2005 beginning July 4, 2005. The Company is evaluating the impact of adoption of the provisions of FASB Statement No. 123(R). The Company currently expects to apply the provisions of this statement utilizing the modified prospective method. The Company’s intention, absent certain modifications to FASB Statement No. 123(R) prior to its effective date, is to accelerate the vesting of all outstanding, unvested stock options, excluding options held by the Board of Directors and the members of the Executive Team, sometime prior to July 4, 2005. This accelerated vesting of certain options would create a one-time, mostly non-cash charge in the third quarter of this fiscal year totaling approximately $10 million, consisting of the estimated increase in value to the option holders caused by the acceleration plus accrual of certain payroll taxes that will be due upon exercise of the options. The actual amount of the expense would vary based on the closing stock price at the date of the acceleration. The Company currently estimates equity-based compensation expense for the fourth quarter of fiscal year 2005 will be approximately $500,000, related primarily to grants to the Executive Team and the Board of Directors since the Company will not accelerate those options under its intended strategy.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Whole Foods Market, Inc. owns and operates the largest chain of natural and organic foods supermarkets. Our Company mission is to promote vitality and well-being for all individuals by supplying the highest quality, most wholesome foods available. Through our growth, we have had a large and positive impact on the natural and organic foods movement throughout the United States, helping lead the industry to nationwide acceptance. We opened our first store in Texas in 1980 and, as of January 16, 2005, have expanded our operations both by opening new stores and acquiring existing stores from third parties to 166 stores: 157 stores in 28 U.S. states and the District of Columbia; two stores in Canada; and seven stores in the United Kingdom. We operate in one reportable segment, natural and organic foods supermarkets.

Our results of operations have been and may continue to be materially affected by the timing and number of new store openings. Stores typically open within 12 to 24 months after entering the store development pipeline. New stores generally become profitable during their first year of operation, although some new stores may incur operating losses for the first several years of operation.

The Company reports its results of operations on a fifty-two or fifty-three week fiscal year ending on the last Sunday in September. The first fiscal quarter is sixteen weeks, the second and third quarters each are twelve weeks and the fourth quarter is twelve or thirteen weeks.

Restatement of Financial Statements

The Company completed a review of its historical lease accounting methods to determine whether these methods were in accordance with the views expressed by the Office of the Chief Accountant of the SEC on February 7, 2005 in a letter to the American Institute of Certified Public Accountants and other recent interpretations regarding certain operating lease accounting issues and their application under GAAP. As a result of its review, the Company determined that its historical methods of accounting for rent holidays and tenant improvement allowances, and of determining lives used in the calculation of depreciation of leasehold improvements and straight-line rent determination for certain leased properties, were not in accordance with GAAP.

The Company has restated its consolidated balance sheet as of September 26, 2004 and its consolidated statement of operations for the sixteen weeks ended January 18, 2004 to correct for the misstatements discussed above. See note 2 to the consolidated financial statements for summaries of the effects of these accounting corrections on the consolidated statements of operations and cash flows for the sixteen weeks ended January 18, 2004 and the consolidated balance sheet as of September 26, 2004. The accompanying Management’s Discussion and Analysis incorporates the effects of these corrections.

The Company will also restate its consolidated financial statements for fiscal years 2004, 2003 and 2002 on Form 10-K/A as soon as is practicable.

Executive Summary

Sales for the first quarter of fiscal year 2005 increased 22% to $1.37 billion over $1.12 billion in the prior year, driven by 15% weighted average square footage growth and comparable store sales growth of 11.4%. Identical store sales, which excludes one relocated store and two major store expansions, increased 10.7% for the quarter.

Net income for the first quarter increased 26% to $46.2 million over $36.5 million in the prior year, and diluted earnings per share increased 21% to $0.69 over $0.57 in the prior year.

Cash flows from operating activities for the quarter increased 44% to $121.6 million over $84.4 million in the prior year.

Our capital expenditures for the quarter totaled $85.1 million, including $55.7 million for new stores. During the first quarter, we opened three new stores in Hingham Massachusetts; Redwood City, California and Sarasota, Florida, ending the quarter with 166 stores totaling approximately 5.3 million square feet.

Cash and cash equivalents, including restricted cash, were approximately $261 million at the end of the first quarter of fiscal year 2005, and total long-term debt was approximately $101 million. During the first quarter, approximately 137,000 of the Company’s zero coupon convertible debentures were voluntarily converted by bondholders to approximately 1.5 million shares of common stock, resulting in a decrease in the balance of zero coupon convertible debentures from approximately $159 million at the end of fiscal year 2004 to approximately $89 million at the end of the first quarter of fiscal year 2005.

The Company paid dividends totaling approximately $9.4 million during the first quarter of fiscal year 2005. The Company announced a 27% increase in the Company’s quarterly dividend to $0.19 per share on November 10, 2004.

Results of Operations

The following table sets forth the Company’s income statements data expressed as a percentage of sales:


	Sixteen weeks ended
	January 16, 2005		January 18, 2004
			*(Restated)*
Sales	100.0	%	100.0	%
Cost of goods sold and occupancy costs	65.4		65.6

Gross profit	34.6		34.4
Direct store expenses	25.5		25.3
General and administrative expenses	3.0		3.2
Pre-opening and relocation costs	0.5		0.4

Operating income	5.7		5.5
Other income (expense):
Interest expense	(0.1	)	(0.2	)
Investment and other income (expense)	0.1		0.1

Income before income taxes	5.6		5.4
Provision for income taxes	2.2		2.2

Net income	3.4	%	3.5	%

Figures may not add due to rounding.

Sales increased approximately 22% sixteen weeks ended January 16, 2005 over the same period of the prior fiscal year. This increase was driven by comparable store sales growth of approximately 11.4% and weighted average year-over-year square footage growth of approximately 15%. Sales of a store are deemed to be comparable commencing in the fifty-third full week after the store was opened or acquired. Sales in identical stores, which exclude relocated stores and major store expansions, increased approximately 10.7% for the sixteen weeks ended January 16, 2005. Our new stores continue to perform above our projections, with the three new stores opened this fiscal year producing average weekly sales of approximately $595,000 year to date. The Company believes its comparable store sales growth and the ability to open successful stores in diverse markets are due to the broad appeal of our stores, natural and organic products entering the mainstream consciousness, improvements in overall store execution and the growing awareness of our brand.

Gross profit consists of sales less cost of goods sold and occupancy costs plus contribution from non-retail distribution and food preparation operations. The Company’s gross profit as a percentage of sales for the sixteen weeks ended January 16, 2005 was approximately 34.6%, compared to approximately 34.4% for the same period of the prior fiscal year. Our gross

profit may increase or decrease slightly depending on the mix of sales from new stores or the impact of weather or a host of other factors, including inflation. While we always have initiatives in place to drive better purchasing, we usually pass those savings on to our customers as lower prices. Gross profit margins tend to be lower for new stores and increase as stores mature, reflecting lower shrink as volumes increase, as well as increasing experience levels and operational efficiencies of the store teams.

Direct store expenses as a percentage of sales were approximately 25.5% for the sixteen weeks ended January 16, 2005 compared to approximately 25.3% for the same period of the prior fiscal year. Direct store expenses as a percentage of sales tend to be higher for new stores and decrease as stores mature, reflecting increasing operational productivity of the store teams.

General and administrative expenses as a percentage of sales were approximately 3.0% and 3.2% for the sixteen weeks ended January 16, 2005 and January 18, 2004, respectively. This decrease reflects a continued strong focus on leveraging general and administrative expenses at both regional and national levels.

Pre-opening costs include rent expense incurred during construction of new stores and other costs related to new store openings, including costs associated with hiring and training personnel, supplies and other miscellaneous costs. Rent expense is generally incurred for six months prior to a store’s opening date. Other pre-opening costs are incurred primarily in the 30 days prior to a new store opening. Relocation costs consist of moving costs, remaining lease payments, accelerated depreciation costs and other costs associated with replaced stores or facilities. Pre-opening and relocation costs were approximately $6.6 million and $4.1 million in the first quarter of fiscal years 2005 and 2004, respectively. The Company opened three new stores and one new store in the first quarter of fiscal years 2005 and 2004, respectively.

Net interest expense for the sixteen weeks ended January 16, 2005 totaled approximately $1.7 million compared to approximately $2.5 million for the same period of the prior fiscal year. These decreases were primarily due to an increase in capitalized interest associated with new store development. Capitalized interest for the sixteen weeks ended January 16, 2005 totaled approximately $1.0 million compared to approximately $0.4 million for the same period of the prior fiscal year. Investment and other income for the sixteen weeks ended January 16, 2005 totaled approximately $1.2 million compared to approximately $1.5 million for the same period of the prior fiscal year. During the first quarter of fiscal year 2005, we recognized a loss totaling approximately $1.5 million for other-than-temporary impairment of our investments in short-term corporate bond funds due to a sustained decline in market value. During the first quarter of fiscal year 2004, we sold all of our investments in unrestricted and restricted common shares of Gaiam, Inc. for approximately $1.8 million, resulting in a loss of approximately $0.5 million.

Liquidity and Capital Resources and Changes in Financial Condition

We generated cash flows from operating activities of approximately $121.6 million sixteen weeks ended January 16, 2005 compared to approximately $84.4 million in the same period of the prior fiscal year. Cash flows from operating activities resulted primarily from our net income plus non-cash expenses, income tax benefits resulting from the exercise of team member stock options and changes in operating working capital.

We have a $100 million revolving line of credit available through October 1, 2009. At January 16, 2005, no amounts were drawn and the amount available was effectively reduced to approximately $94.0 million by approximately $6.0 million in outstanding letters of credit. At September 26, 2004, no amounts were drawn and the amount available was effectively reduced to approximately $96.5 million by approximately $3.5 million in outstanding letters of credit.

We have outstanding zero coupon convertible subordinated debentures which had a carrying amount of approximately $89.4 million and $158.8 million at January 16, 2005 and September 26, 2004, respectively. During the first quarter of fiscal year 2005, approximately 137,000 of the Company’s zero coupon convertible debentures were converted at the option of the holders to approximately 1.5 million shares of common stock

We also had outstanding at January 16, 2005 and September 26, 2004 approximately $11.4 million of senior unsecured notes that bear interest at 7.29% payable quarterly. Principal on the senior notes is payable in annual installments of approximately $5.7 million through May 16, 2006.

Proceeds from the exercise of stock options for the sixteen week period ended January 16, 2005 and January 18, 2004 totaled approximately $12.8 million and $11.9 million, respectively, related to the exercise of approximately 0.4 million and 0.5 million stock options, respectively.

The following table shows payments due by period on contractual obligations as of January 16, 2005 (in thousands):


	Total		Less than 1 Year		1-5 Years		After 5 Years
Convertible debt	$	89,434	$	—	$	89,434	$	—
Senior notes		11,429		5,714		5,715		—
Capital lease obligations (including interest)		582		286		296		—
Operating lease obligations		2,288,649		112,867		527,867		1,647,915

Although the timing of any potential redemption is uncertain, the above table assumes convertible debentures will be redeemed at the option of the holder on March 2, 2008. The following table shows expirations per period on commercial commitments as of January 16, 2005 (in thousands):

Total

Less than 1
Year

1-5

Years

After 5
Years

Credit facilities

100,000

—

100,000

—

We periodically make other commitments and become subject to other contractual obligations that we believe to be routine in nature and incidental to the operation of the business. Management believes that such routine commitments and contractual obligations do not have a material impact on our business, financial condition or results of operations.

The Company paid dividends totaling approximately $9.4 million and $9.1 million during the first quarters of fiscal years 2005 and 2004, respectively. The Company announced a 27% increase in the Company’s quarterly dividend to $0.19 per share on November 10, 2004. The Company will pay future dividends at the discretion 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 stock) depend on many factors, including the results of operations and the financial condition of the Company. Subject to these qualifications, the Company currently expects to pay dividends on a quarterly basis.

Net cash provided by financing activities was approximately $3.3 million for the sixteen weeks ended January 16, 2005 compared to approximately $2.8 million for the same period of the prior fiscal year.

Our principal historical capital requirements have been the funding of the development or acquisition of new stores and acquisition of property and equipment for existing stores. The required cash investment for new stores varies depending on the size of the new store, geographic location, degree of work performed by the landlord and complexity of site development issues. During the first quarter of fiscal year 2004, we acquired certain assets of Select Fish LLC, which owned and operated a seafood processing and distribution facility located in Seattle, Washington, in exchange for approximately $3 million in cash plus the assumption of certain liabilities.

Net cash used in investing activities was approximately $95.1 million for the sixteen weeks ended January 16, 2005 compared to approximately $88.4 million for the same period of the prior fiscal year. Absent any significant cash acquisition, we expect planned expansion and other anticipated working capital and capital expenditure requirements will be funded by cash generated from operations. We continually evaluate the need to establish other sources of working capital and will seek those considered appropriate based upon the Company’s needs and market conditions.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Actual results may differ from these estimates. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances.

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended September 26, 2004. We believe that the following accounting policies are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

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, general liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. While we believe that our assumptions are appropriate, the estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.

Inventory Valuation

We value our inventories at the lower of cost or market. Cost was determined using the last-in, first-out (“LIFO”) method for approximately 95.1% and 94.2% of inventories at January 16, 2005 and September 26, 2004, respectively. Under the LIFO method, the cost assigned 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 used to value ending inventory. The excess of estimated current costs over LIFO carrying value, or LIFO reserve, was approximately $12.2 million and $11.2 million at January 16, 2005 and September 26, 2004, respectively. Costs for the balance of inventories are determined by the first-in, first-out (“FIFO”) method.

Cost was determined using the retail method for approximately 50% of inventories at January 16, 2005 and September 26, 2004. Under the retail method, the valuation of inventories at cost and the resulting gross margins are determined by applying 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 certain management judgments and estimates, including shrinkage, which could impact the ending inventory valuation at cost as well as the resulting gross margins. Cost was determined using the item cost method for approximately 50% of inventories at January 16, 2005 and September 26, 2004. This method involves counting 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 actual cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory and purchasing levels when compared to the retail method of accounting. We believe we have the appropriate inventory valuation controls in place to minimize the risk that inventory values would be materially misstated.

Goodwill and Intangible Assets

We review goodwill for impairment on a reporting unit level annually, or more frequently if impairment indicators arise. We allocate goodwill to one reporting unit for goodwill impairment testing. We determine fair value utilizing both a market value method and discounted projected future cash flows compared to our carrying value for the purpose of identifying impairment. Our evaluation of goodwill and intangible assets with indefinite useful lives for impairment requires extensive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different results.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123(R), “Share-Based Payment,” which requires all companies to recognize an expense for share-based payments, including stock options, based on the fair value of the equity instrument. FASB Statement No. 123(R) is effective for interim or annual periods beginning after June 15, 2005. The provisions of FASB Statement No. 123(R) will be effective for the Company’s fourth quarter of fiscal year 2005 beginning July 4, 2005. The Company is evaluating the impact of adoption of the provisions of FASB Statement No. 123(R). The Company currently expects to apply the provisions of this statement utilizing the modified prospective method. The Company’s intention, absent certain modifications to FASB Statement No. 123(R) prior to its effective date, is to accelerate the vesting of all outstanding, unvested stock options, excluding options held by the Board of Directors and the members of the Executive Team, sometime prior to July 4, 2005. This accelerated vesting of certain options would create a one-time, mostly non-cash charge in the third quarter of this fiscal year totaling approximately $10 million, consisting of the estimated increase in value to the option holders caused by the acceleration plus accrual of certain payroll taxes that will be due upon exercise of the options. The actual amount of the expense would vary based on the closing stock price at the date of the acceleration.

Absent certain modifications to FASB Statement No. 123(R) prior to its effective date, the Company’s also intends to keep its broad-based stock option program in place, but going forward would limit the number of shares granted in any one year so that net income dilution from equity-based compensation expense in future years will not exceed 10%. The Company currently estimates equity-based compensation expense for the fourth quarter of fiscal year 2005 will be approximately $500,000, related primarily to grants to the Executive Team and the Board of Directors since the Company will not accelerate those options under its intended strategy. The Company believes this strategy is best aligned with its stakeholder philosophy because it limits future earnings dilution from options while at the same time retains the broad-based stock option plan which it believes is important to Team Member morale and to its unique corporate culture and its success.

Risk Factors

We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward-looking statements that we make from time to time in filings with the Securities and Exchange Commission, news releases, reports, proxy statements, registration statements and other written communications, as well as oral forward-looking statements made from time to time by representatives of our Company. These risks and uncertainties include, but are not limited to, those listed in the Company’s Annual Report on Form 10-K for the year ended September 26, 2004. These risks and uncertainties and additional risks and uncertainties not presently known to us or that we currently deem immaterial may cause our business, financial condition, operating results and cash flows to be materially adversely affected. Except for the historical information contained herein, the matters discussed in this analysis are forward looking statements that involve risks and uncertainties, including but not limited to general business conditions, the timely development and opening of new stores, the impact of competition, and other factors which are often beyond the control of the Company. The Company does not undertake any obligation to update forward-looking statements except as required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Except as discussed below, there have been no material changes in the Company’s market risk exposures from those reported in our Annual Report on Form 10-K for the year ended September 26, 2004.

Market Risk

Item 4. Controls and Procedures

Management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter. Based on that evaluation, management, the Chief Executive Officer and the Chief Financial Officer of the Company have concluded that there were no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

On February 24, 2005, management of the Company discussed with the Audit Committee of the Board of Directors of the Company (the “Audit Committee”) the views expressed by the Office of the Chief Accountant of the SEC on February 7, 2005 regarding certain operating lease accounting issues and their application under GAAP. At such meeting, management advised the Audit Committee that it had made a preliminary determination, similar to recent determinations by many other publicly-held retail and restaurant companies, that its current methods of accounting for rent holidays and tenant improvement allowances, and of determining lives used in the calculation of depreciation of leasehold improvements and straight-line rent determination for certain leased properties, were not consistent with the views expressed by the SEC staff letter and other recent interpretations.

Because the Company’s Quarterly Report on Form 10-Q for the first quarter of fiscal 2005 was due on February 25, 2005, management recommended filing a Form 12b-25 with the SEC for a five-day extension on the due date of the 10-Q in order to give management time to incorporate the correct accounting for these items into the 10-Q and to give the Audit Committee and the Company’s independent registered public accounting firm time to review the filing. The Audit Committee concurred with this recommendation. On February 25, 2005, the Company filed the Form 12b-25 and a Current Report on Form 8-K to report the filing extension.

On March 1, 2005, management and the Audit Committee, in consultation with the Company’s independent registered public accounting firm, discussed the above-described operating lease accounting issues, and the Audit Committee concurred with management’s assessment that the Company’s accounting for these items was incorrect and that the Company’s previously issued audited consolidated financial statements for fiscal 2002, 2003 and 2004 and the unaudited comparative 2003 and 2004 quarterly information should be restated.

Restatement of previously issued financial statements to reflect the correction of misstatement is a strong indicator of the existence of a material weakness in internal control over financial reporting as defined in the Public Company Accounting

Oversight Board’s Auditing Standard No. 2, “An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements.” In light of the determination that previously issued financial statements should be restated, management concluded that a material weakness existed in the Company’s internal control over financial reporting and disclosed this matter to the Audit Committee and to the Company’s independent registered public accounting firm.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has performed an evaluation of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, which included the matters discussed above, the Chief Executive Officer and Chief Financial Officer of the Company concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this Report.

The Company has remediated the material weakness in internal control over financial reporting by evaluating its lease accounting methods, and correcting its methods of accounting for rent holidays and tenant improvement allowances, and of determining lives used in the calculation of depreciation of leasehold improvements and straight-line rent determination for certain leased properties.

Section 404 of the Sarbanes-Oxley Act requires the Company’s management to provide an assessment of the effectiveness of the Company’s internal control over financial reporting as of the end of fiscal year 2005. The Company is in the process of performing the system and process documentation, evaluation and testing necessary to make its assessment. The Company has not completed this process or its assessment. In the process of evaluation and testing, the Company may identify deficiencies that will require remediation.

Part II. Other Information

Item 1. Legal Proceedings

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company’s management does not expect that the outcome in the current proceedings, individually or collectively, will have a material adverse effect on the Company’s financial condition, operating results or cash flows.

Item 6. Exhibits


Exhibit 10.1		Agreement for Distribution of Products by and between Whole Foods Market Distribution, Inc. and United Natural Foods, Inc. (Portions of this agreement have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission)

Exhibit 31.1		Certification of Chief Executive Officer Pursuant to 17 CFR 240.13a – 14(a)

Exhibit 31.2		Certification of Chief Financial Officer Pursuant to 17 CFR 240.13a – 14(a)

Exhibit 32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

Exhibit 32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Whole Foods Market, Inc.

Registrant


Date: March 2, 2005	By:	/s/ Glenda Flanagan
		Glenda Flanagan
		Executive Vice President and
		Chief Financial Officer
		(Duly authorized officer and principal financial officer)

EX-10.1 2 dex101.htm AGREEMENT FOR DISTRIBUTION OF PRODUCTS Agreement For Distribution Of Products

Exhibit 10.1

NOTE: A request for confidential treatment has been made with respect to the portions of the following document that are marked with [*CONFIDENTIAL*]. The redacted portions have been filed separately with the SEC.

AGREEMENT FOR DISTRIBUTION OF PRODUCTS

This Agreement for Distribution of Products is entered into to be effective as of January 1, 2005 (the “Effective Date”), by and between Whole Foods Market Distribution, Inc., a Delaware corporation having an address at 550 Bowie Street, Austin, Texas 78703 (“WFM”) and United Natural Foods, Inc. and its subsidiaries and affiliates having an address at 260 Lake Road, Dayville, Connecticut 06241 (collectively “UNFI”).

RECITALS

A. WFM and its affiliates (the “WFM Affiliates”) operate certain retail supermarket stores, bakeries and other facilities in the United States which are primarily engaged in the sale of natural and organic products (the “WFM Stores”).

B. The parties desire to enter into an agreement pursuant to which UNFI shall sell and distribute to WFM facilities, including WFM Stores, WFM bakeries, WFM distribution centers and other WFM facilities (together the “WFM Facilities”) the goods and services specified below on the terms set forth below.

NOW THEREFORE, the parties agree as follows:

1. Term. Subject to earlier termination as set forth herein, this Agreement shall commence on January 1, 2005 (the “Effective Date”) and expire on December 31, 2007.

2. Distribution

(a) UNFI shall be the Primary Distributor to WFM for the following types of products (the “Product Categories”): (i) natural foods/grocery items, (ii) organic packaged grocery products, (iii) frozen products (including certain grocery and meats), (iv) branded bulk products, (v) vitamins, supplements, body care and other health and beauty aid products, (vi) dairy products and (vii) selected specialty items (but excluding produce, mercantile and other categories not specifically identified above). The foregoing products, along with any other products provided hereunder, are hereinafter defined individually as a “Product” and collectively as the “Products”). Produce, non-branded bulk items and alcoholic beverages are not included in the Products for purposes of this Agreement.

(b) For purposes of this Agreement, “Primary” shall mean that: (i) WFM Facilities in all regions other than in [*CONFIDENTIAL*], shall purchase a majority of the products they purchase in the Product Categories from UNFI, and (ii) WFM shall purchase a minimum of $[*CONFIDENTIAL*] million in Products (inclusive of orders for Products that are out of stock, hereinafter occasionally defined as “OOS Products”) during each 12-month period of the Term, commencing as of the Effective Date.

3. Pricing, Adjustments, Minimum Orders, Fuel Adjustments

(a) During the Term, UNFI Base Pricing not including freight charges from UNFI distribution centers to WFM Facilities (the “Freight Up Charge”) for Products (other than produce, wine, non-branded bulk products and products purchased through Select Nutrition Distributors, Inc.) will be priced based upon UNFI’s “Cost” plus a percentage as set forth as follows: [*CONFIDENTIAL*]. Pricing shall be set based on [*CONFIDENTIAL*].

(b) If WFM maintains a higher Cost plus percentage than is applicable, UNFI agrees to rebate the difference based on the actual amount charged and the actual earned by WFM based on its volume in a manner consistent with the parties’ past pricing adjustments.

(d) UNFI will look to put on-line new facilities in both [*CONFIDENTIAL*] and in [*CONFIDENTIAL*] during the next 18 months depending on site and economic viability. In addition, UNFI will look at the feasibility of [*CONFIDENTIAL*]. These initiatives will be done in conjunction with WFM.

(e) [*CONFIDENTIAL*] Products on promotion will be priced at [*CONFIDENTIAL*]. WFM will work with UNFI and vendors to improve the pre-order process. In addition, [*CONFIDENTIAL*]. These Products will be priced at [*CONFIDENTIAL*].

(f) Drop Charge for Less than Minimum Orders. WFM and UNFI anticipate that the average minimum dollar amount per order taking into account all WFM Facilities shall be approximately $[*CONFIDENTIAL*]. If any WFM Facility places an order for Products and the total aggregate dollar amount of all Products included in the delivery is less than $[*CONFIDENTIAL*], UNFI shall charge an additional $[*CONFIDENTIAL*] drop charge for the order. This drop charge for orders that are less than $[*CONFIDENTIAL*] shall not apply to any orders placed by any new WFM Facility within the first [*CONFIDENTIAL*] days of such WFM Facility’s opening date. For WFM Facilities that frequently fall below the $[*CONFIDENTIAL*] level, UNFI shall notify WFM of the issue and propose a reduction in the number of regularly scheduled deliveries to such WFM Facilities. After receipt of the UNFI’s notice and proposal, WFM will reduce the number of deliveries to such WFM Facilities, unless the cause for such orders being below the $[*CONFIDENTIAL*] level is due to size of the WFM Facility or backroom issues. Nothing in the two preceding sentences shall affect UNFI’s right to charge and WFM’s obligation to pay the above-referenced drop charge.

(g) In the event diesel fuel cost weekly average is in excess of $[*CONFIDENTIAL*] per gallon during any three month period during the Term (the “Base Fuel Price”), UNFI shall be entitled to charge WFM an energy surcharge as defined below for Products delivered during the following three month period. The energy surcharge shall be calculated by taking [*CONFIDENTIAL*]. In the event that the weekly average price for diesel fuel exceeds $[*CONFIDENTIAL*] per gallon, the parties agree to negotiate in good faith the allocation of cost between them in excess of the $[*CONFIDENTIAL*] threshold. UNFI and WFM shall develop billing procedures to implement this provision. If the parties cannot agree on an adjustment, [*CONFIDENTIAL*]. Should the price fall below $[*CONFIDENTIAL*] per gallon, UNFI will provide a fuel adjustment credit to WFM calculated the same as above.

(h) Cross-Dock Billing. UNFI will, from time to time, and based on UNFI space availability, ship pallets and shipper displays on a cross-dock basis (as opposed to “bill to, ship to”) for WFM at a rate of $[*CONFIDENTIAL*] per pallet.

(i) Payment Terms. WFM shall send a wire transfer every [*CONFIDENTIAL*] as payment for all acceptable invoices received by WFM the preceding [*CONFIDENTIAL*]. A finance charge of [*CONFIDENTIAL*] per month shall be assessed on any delinquent balance.

4. Placement of Personnel and Transfer of Pricing Information

(a) UNFI shall provide, at its cost, a [*CONFIDENTIAL*] at WFM Headquarters in Austin, Texas. In addition, UNFI will provide [*CONFIDENTIAL*].

(b) WFM agrees to assume responsibility for disseminating product pricing information to the regions, stores and departments based on a mutually agreed upon transition schedule. This is presently work being done by UNFI but now that UNFI is electronically transmitting the 889 and 879 files, WFM has all the information necessary to disseminate this information.

(c) In addition, UNFI agrees that it will accept electronic files from WFM on its National and Regional Promotions in a file lay-out acceptable to both parties based on a mutually agreed upon transition schedule. The goal is to streamline and have consistent formats for mutually agreed data related to promotions.

5. Promotional and Marketing Funds. UNFI will provide assistance to WFM in the solicitation of vendor funding for new, remodeled stores and acquired stores at levels requested by WFM.

6. Out of Stock Performance Criteria

(a) UNFI and WFM will work together to create an approved product list (“APL”) beginning with the Northeast Region of WFM. An evaluation of this program will be made with the parties Joint OOS Committee.

(b) UNFI agrees, on a local regional DC by DC basis, to maintain minimum fill rates of [*CONFIDENTIAL*]% for WFM Facility orders which means that the UNFI portion of OOS Product’s should not exceed [*CONFIDENTIAL*]%. In the event that UNFI OOS Product’s exceed [*CONFIDENTIAL*]% for more than [*CONFIDENTIAL*] consecutive weeks, UNFI shall pay WFM a credit (the “OOS Credit”) equal to [*CONFIDENTIAL*]. UNFI shall pay the affected WFM Region(s) the OOS Product Credit every week until such time as UNFI fill rates for the applicable DC equal or exceed [*CONFIDENTIAL*]% for a week. UNFI shall issue a weekly check to each affected WFM Region for its prorated share of such OOS Product Credit.

7. Audits WFM and its designated agents shall have the right to perform the following audits of UNFI’s compliance with the terms of the Agreement. [*CONFIDENTIAL*]. The parties anticipate that this will involve the review of [*CONFIDENTIAL*].

(a) Financial – WFM sales, cost, promotions, performance metrics and discounts;

(b) Freight - freight costs, rates, transportation costs;

8. Private Label. UNFI will purchase and carry Private Label Products requested by WFM subject to space and slot availability pursuant to the terms set forth on Exhibit B. “Private Label Products” shall mean those products that WFM offers from time to time in WFM Facilities under WFM proprietary labels.

9. Termination

(a) WFM may terminate this Agreement immediately upon written notice to UNFI (unless otherwise provided below) for cause if:

(i) UNFI fails to make any payment, credit, rebate or other remittance of monetary consideration provided for herein on the date due, other than as to payments regarding which UNFI has given WFM notice of good faith dispute, and fails to remedy any delinquent payment, credit, rebate or other remittance within fifteen business days after notice thereof from WFM;

(ii) UNFI breaches any non-monetary obligations under the Agreement not specifically referenced above in this Section, and fails to cure such breach after 30 days’ prior written notice of breach;

(iii) Regulatory violations by UNFI where the violations or the corrective action required materially and adversely affect the continued ability of UNFI to perform all or any material portion of the Agreement; or

(iv) [*CONFIDENTIAL*].

(b) UNFI may terminate the Agreement immediately for cause upon written notice to WFM if:

(i) WFM fails to make any payment, credit, rebate or other remittance of monetary consideration provided for herein on the date due, other than payments regarding which WFM has given UNFI notice of a good faith dispute, and fails to remedy any delinquent payment within five business days after notice thereof from UNFI (which failure to cure shall be an event of default), or if such breach occurs more than twice in any given calendar year;

(ii) WFM fails to purchase $[*CONFIDENTIAL*] of Products in any calendar year during the Term other than where such failure is caused by a Force Majeure event or WFM’s failure is due to UNFI or manufacturer OOS Products; or

(iii) WFM materially breaches any non-monetary obligations under the Agreement not specifically referenced above in this Section, and fails to cure such breach after 30 days’ prior written notice of breach.

10. Facilities; Delivery Standards.

(a) Standards for Facilities. UNFI represents, warrants and covenants that all UNFI distribution centers will be maintained and operated in all material respects in accordance with all applicable laws, in compliance with industry standards and with UNFI warehousing and delivery standards, which will be available for review upon request by WFM. WFM may inspect the physical plant and inventory of any distribution center during normal business hours upon reasonable advance notice to the designated UNFI personnel, but shall not impair or impede the business operations of the center. UNFI shall give at least 60 days notice of its intent to move service for any WFM Store from one facility to another facility. The proposed move shall not result in any increase in cost to WFM, and the parties will have had the opportunity to prepare and implement a plan for a transition to any new distribution facility.

(b) Departure Windows. Unless otherwise provided in this Agreement, UNFI agrees to maintain the existing departure windows for scheduled departures from distribution centers for delivery to WFM Facilities. If changes are required by municipal, residential or property owners on delivery hours, parking of trucks, delivery routes, curfews, noise ordinances, lease covenants, neighborhood covenants and/or operating hours, then WFM and UNFI will work together to make the scheduling changes necessary to comply with such restrictions.

(c) Code Date Policy; Inventory Management. Products shall be distributed to WFM Facilities in compliance with the Code Date Policy attached as Exhibit D related to the minimum number of days prior to expiration of the final code date, for perishable Products, under which such Products will be accepted upon delivery to WFM Facilities. Product delivered with less than the minimum code date shall be deemed out-of-stock for purposes of this Agreement. UNFI agrees to deliver all Products on a “first-in, first-out” inventory management basis, to ensure proper inventory turns and maximize available Product Code Dates.

(d) Quality Standards. Products will be delivered palletized and shrink-wrapped and meet WFM’s quality standards and be free from damage including but not limited to temperature damage and be free from evidence of rodents or insects. The parties will develop a mutually agreeable pallet and tote exchange program. In the event that any product is recalled or withdrawn (the “Recalled Product”), UNFI or its designee will pick up the Recalled Product in order to remove any Recalled Product from WFM Facilities and shall dispose of or return any Recalled Products as required. In addition to the foregoing responsibilities, UNFI shall use its best reasonable efforts to cooperate with WFM in removing the Recalled Product and replenishing WFM Facilities with replacement products.

(e) Store Receiving. All product shipments by UNFI to WFM Facilities shall be evidenced by an invoice and signed by both parties. Shipments of product shall be acknowledged as received by execution by store personnel of the delivered invoice a copy of which shall be left with the WFM Facility.

(f) Passage of Title and Risk of Loss. Title and risk of loss shall pass upon delivery to WFM Facilities when delivered by UNFI fleet or by independent carrier.

11. Indemnification

(a) UNFI Indemnity. UNFI shall indemnify, defend and hold harmless WFM and its parent and affiliates, together with their stockholders, general and limited partners, members, managers, directors, officers, employees, agents, representatives, successors and assigns from and against any and all demands, claims, liabilities, losses, costs, expenses (including but not limited to reasonable attorney fees), injuries and damages of any kind (together “Claims”) incurred or suffered by or asserted against any of them, arising out of or relating to (i) any actual or alleged violation by UNFI of any federal, state or local law, including any statute, ordinance, administrative order, rule or regulation; (ii) any negligence or willful misconduct on the part of UNFI or any of its employees or agents; (iii) any breach of any term of this Agreement; and/or (iv) the employment, presence or activities of any UNFI applicant, employee or contractor on any premises of WFM or any WFM Affiliates for any purpose related to this Agreement, including but not limited to all personal injury, wage and hour, wrongful termination, harassment, discrimination, workers compensation or disability claims or demands.

(b) WFM Indemnity. WFM shall indemnify, defend and hold harmless UNFI and its parent and affiliates, together with their stockholders, general and limited partners, members, managers, directors, officers, employees, agents, representatives, successors and assigns from and against any and all Claims incurred or suffered by or asserted against any of them, arising out of or relating to (i) any actual or alleged violation by WFM of any federal, state or local law, including any statute, ordinance, administrative order, rule or regulation; (ii) any negligence or willful misconduct on the part of WFM or any of its employees or agents; (iii) any breach of any term of this Agreement; and/or (iv) the employment, presence or activities of any WFM applicant, employee or contractor on any premises of UNFI for any purpose related to this Agreement, including but not limited to all personal injury, wage and hour, wrongful termination, harassment, discrimination, workers compensation or disability claims or demands.

(c) Third Person Claims. Promptly after a party has received notice of or has actual knowledge of any Claim against it covered by a third party or the commencement of any action or proceeding by a third person with respect to any such Claim, such party (sometimes referred to as the “Indemnitee”) shall give the other party (sometimes referred to as the “Indemnitor”) written notice of such claim or commencement of such action or proceeding; provided, however, that the failure to give such notice will not affect the right to indemnification hereunder with respect to such Claim, action or proceeding, except to the extent that the other party has been actually prejudiced as a result of such failure. If the Indemnitor has notified the Indemnitee within thirty (30) days from the receipt of the foregoing notice that it wishes to defend against the Claim, unless there exists a potential conflict of interest between the parties, then the Indemnitor shall have the right to assume and control the defense of the Claim by appropriate proceedings with counsel reasonably acceptable to the Indemnitee. The Indemnitee may participate in the defense, at its sole expense, of any such Claim for which the Indemnitor shall have assumed the defense pursuant to the preceding sentence, provided, however, that counsel for the Indemnitor shall act as lead counsel in all matters pertaining to the defense or settlement of such Claims, suit or proceeding other than Claims that in the Indemnitee’s reasonable judgment could have a material and adverse effect on Indemnitee’s business apart from the payment of money damages. The Indemnitee shall be entitled to indemnification for the reasonable fees and expenses of its counsel for any period during which the Indemnitor has not assumed the defense of any claim. The Indemnitor may not settle any Claim without obtaining a release for the benefit of the Indemnitee, unless the consent of the Indemnitee is obtained.

(d) Product Liability. UNFI acknowledges that it generally obtains indemnification agreements from the various manufacturers, vendors or distributors of products it purchases and sells. UNFI agrees to indemnify and hold harmless WFM for any liability arising from any product (other than private label products below) sold to WFM by UNFI, without regard to any negligence by UNFI related to such product, except where the loss is determined to have arisen out of the negligence of WFM. UNFI’s obligation to indemnify WFM for any liability arising from any such products

sold to WFM shall exist regardless of the existence or nonexistence of any such indemnification agreements from product manufacturers. Indemnification under this section does not extend to claims arising out of any WFM private label products, except where the liability or loss is attributable to the negligence or intentional acts or omissions of UNFI. Except as otherwise provided hereinabove, all demands, claims, liabilities, losses, costs, injuries and damages of any kind related to private label products are the responsibility of WFM.

(e) Insurance. At all times during the Term and for a one year period after its termination or expiration, UNFI and WFM agree that all material properties and risks of such party shall at all times be covered by valid and currently effective insurance policies or binders of insurance or programs of self-insurance in such types and amounts as are consistent with customary practices and standards of the industry, but in no event less than the amounts set forth on Exhibit C. Each of UNFI’s insurance policies shall, at UNFI’s sole expense, name “Whole Foods Market Distribution, Inc., a Delaware corporation, together with its parent and affiliates” as additional insureds to the extent of the respective parties’ obligations herein. Each of WFM’s insurance policies shall, at WFM’s sole expense, name United Natural Foods, Inc. together with its parent, affiliates,” as additional insureds to the extent of the respective parties’ obligations herein. Certificates of insurance evidencing the renewal of insurance shall be exchanged by the parties from time to time. The certificates of insurance shall provide that: (a) such insurance shall not be materially modified or cancelled unless the other party has been given at least thirty (30) days’ advance written notice thereof; and (b) such certificates shall be renewed annually or as policy renewals occur. None of the required coverage amounts shall be construed as a limitation on a party’s potential liability.

12. Compliance with Laws.

(a) General. Each party covenants and agrees during the Term it will fully comply with all applicable laws, ordinances, regulations, licenses and permits of or issued by any federal, state or local government entity, agency or instrumentality applicable to its responsibilities hereunder. Each party agrees that it shall comply with all certification procedures and regulations. Each party shall promptly notify the other party after it becomes aware of any material adverse proposed law, regulation or order that, to its knowledge, may or does conflict with the parties’ obligations under this Agreement. The parties will then use reasonable efforts to promptly decide whether a change may be made to the terms of this Agreement to eliminate any such conflict or impracticability.

(b) Organic Documentation. In connection with any organic products, UNFI shall take all such actions as required by any federally recognized certifying organization (or as required by law) in order for such products to be certified as organic, including, without limitation, the maintenance of any required documentation and the taking of all reasonably necessary precautions to prevent product compromise. UNFI shall provide all documentation relating to the foregoing to WFM at WFM’s request. WFM acknowledges that UNFI’s facilities in Iowa City and Indiana are in the process of obtaining such certifications and UNFI agrees to use its commercially reasonable efforts to expedite such certifications.

13. Representations and Warranties of UNFI. UNFI represents and warrants to WFM as follows, and such representations and warranties shall survive the Effective Date:

(a) Sufficient Personnel to Perform Obligations. UNFI represents that it has sufficient personnel with adequate training and expertise to perform its obligations as contemplated hereunder in the time frames contemplated herein.

(b) National Organic Standards. UNFI represents and warrants that it has adequate processes and systems in place, and has adequately educated its personnel, and that it will fully comply with all federal, state and local regulations relating to handling and labeling of organic products, including but not limited to the National Organic Standards as promulgated by the U.S. Department of Agriculture and as such applies to UNFI as a handler or processor of organic foods. UNFI acknowledges that WFM has placed substantial reliance on UNFI to handle various foods for human consumption so as to not invalidate any “organic” designation of such foods. UNFI agrees to use its commercially reasonable efforts to expedite such certifications.

(c) Computer Systems. UNFI has proper security safeguards in place to ensure the confidentiality of all of WFM’s data as contained in UNFI’s computer systems. All such systems will perform without material defect or error in compliance with the performance standards set forth in this Agreement. UNFI has a disaster recovery program in place to ensure that, in the event of a catastrophic destruction of any portion of UNFI’s computer systems, wherever located, UNFI will be able to recover all necessary data to continue to perform its obligations hereunder in substantially the time frames contemplated herein.

(d) Facilities’ Condition and Capacity. All of the distribution centers servicing WFM will be maintained and operated in accordance with UNFI warehousing and delivery standards. Such facilities have the operational systems required to support the obligations of UNFI as set forth in this Agreement, and all such facilities have adequate capacity to order, store and deliver products in accordance with the terms of this Agreement and in the amounts contemplated by WFM. All the distribution centers shall have sufficient security measures in place prior to receipt of products for WFM to ensure that such products are not tampered with or adulterated in any manner, and that all such products shall be maintained at temperatures and other storage conditions necessary to preserve the freshness and integrity of the Products.

(e) Information Provided to Auditors. All information that shall be provided by UNFI to WFM and/or its designated auditors shall be provided in the format in which such information is maintained in the normal course of UNFI’s business, and to UNFI’s knowledge, all such information shall be true and correct in all material respects, except as otherwise disclosed to WFM and/or its designated auditors at the time of disclosure.

14. Representations and Warranties of WFM. WFM represents and warrants to UNFI as follows, and such representations and warranties shall survive the Effective Date:

(a) Sufficient Personnel to Perform Obligations. WFM represents that it has sufficient personnel with adequate training and expertise to perform its obligations as contemplated hereunder in the time frames contemplated herein.

(b) Computer Systems. WFM has proper security safeguards in place to ensure the confidentiality of all of UNFI’s data as contained in WFM’s computer systems. All such systems will perform without material defect or error in compliance with the performance standards set forth in this Agreement. WFM has a disaster recovery program in place to ensure that, in the event of a catastrophic destruction of any portion of WFM’s computer systems, wherever located, WFM will be able to recover all necessary data to continue to perform its obligations hereunder in substantially the time frames contemplated herein.

15. Miscellaneous

(a) Binding Effect. This Agreement is a binding obligation between the parties hereto for the sale by UNFI and purchase by WFM for the products referenced at the prices and other terms set out in or referenced herein, and may be enforced by either party in accordance with its terms. This Agreement supersedes all previous agreements between the parties.

(b) Force Majeure. “Force Majeure” events shall be events beyond the reasonable control of a party (and not through the fault or negligence of such party) that make timely performance of an obligation not possible. Force Majeure events are those that are not reasonably foreseeable with the exercise of reasonable care, nor avoidable through the payment of nonmaterial additional sums. In addition, Force Majeure events are not due to the negligence, inattention, misconduct or inexperience of the party affected. In the event of a Force Majeure, the party so affected shall give prompt written notice to the other party of the cause and shall take whatever reasonable steps are necessary to relieve the effect of such cause as rapidly as possible.

(c) Governing Law; Forum and Jurisdiction; Waiver of Punitive and Similar Types of Damages. The relationship of the parties hereto and all claims arising out of or related to that relationship, including, but not limited to, the construction and interpretation of any written agreements, including this Agreement, shall be governed by the substantive laws of the State of Delaware (without regard to conflicts of law principles). The parties agree and consent to the jurisdiction of the state and federal courts located in Chicago, Illinois and acknowledge that such courts are proper and convenient forums for the resolution of any actions between the parties with respect to

the subject matter of this Agreement, and agree that, in such case, these courts shall be the sole and exclusive forums for the resolution of any actions between the parties with respect to the subject matter hereof. The parties hereby waive any right and all right to a jury trial under any applicable law. The parties also waive any and all right to punitive, incidental or consequential damages, except to the extent such damages are included in any award for which indemnification is sought pursuant to the terms of this Agreement or an action is brought for breach of provisions relating to confidential information. Each party herein shall be responsible for their own attorneys’ fees, costs and expenses.

(d) Confidentiality. The parties to this Agreement shall maintain as confidential the specific terms hereof (“Confidential Information”), and shall not disclose such terms to any third party (other than to its own outside legal, accounting, insurance or financial advisors as necessary) without the other party’s prior written consent. “Confidential Information” about a party learned under this Agreement shall not be used during or after the term of this Agreement except in connection with the party’s obligations hereunder, and without limiting the foregoing, such information as to WFM may not be used by UNFI in connection with the marketing, distribution or sale of UNFI’s products other than to WFM. The term “Confidential Information” shall include computer software, source code, object code, hardware configurations and all other information relating to a party, its business and prospects, learned by the other party or disclosed by such party from time to time to the other party in any manner, whether orally, visually or in tangible form (including, without limitation, documents, devices and computer readable media) and all copies, improvements, derivatives and designs thereof, created by either party whether owned by or licensed to such party. The term “Confidential Information” shall also be deemed to include all notes, analyses, compilations, studies, interpretations or other documents prepared by a party that contain, reflect or are based upon the information furnished to such party by the other party pursuant hereto. Confidential Information shall not include any information that:

(i) was in a party’s possession prior to disclosure by the other party hereunder, provided such information is not known by such party to be subject to another confidentiality agreement with or secrecy obligation to the other party;

(ii) was generally known in the grocery industry at the time of disclosure to a party hereunder, or becomes so generally known after such disclosure, through no act of such party;

(iii) has come into the possession of a party from a third party who is not known by such party to be under any obligation to the other party to maintain the confidentiality of such information; or

(iv) was independently developed by a party without the use of any Confidential Information of the other party, to the extent that such independent development is reasonably established by such first party to the other party.

Notwithstanding the foregoing, nothing herein shall prevent the filing of a copy of this Agreement as an exhibit to any filing required by a regulatory agency having jurisdiction over either party, provided that a party required to file a copy hereof shall notify the other party of the filing and request and use its best efforts to obtain confidential treatment of all financial terms of this Agreement prior to the filing thereof. In addition, either party may disclose the terms of this Agreement pursuant to a valid subpoena, provided such party gives the other party reasonable prior notice of the service of any subpoena to permit the other party to seek a protective order, and seeks confidential treatment of all financial terms hereof.

The parties acknowledge and agree that the non-breaching party’s remedy at law is inadequate in the event of any breach or threatened breach by the other party of its agreements set forth in this Section. In the event of such breach or threatened breach, in addition to any other remedy which may be available to the non-breaching party, the non-breaching party shall be entitled to seek, without posting a bond, preliminary or permanent injunctive and/or other equitable relief restraining the breaching party, or any of its agents or employees, from breaching or acting in any manner inconsistent with the conduct or performance required by this Section.

(e) Amendment; Assignment. This Agreement may not be amended or modified except by an instrument in writing signed by an authorized officer of each party. It is agreed that neither party shall transfer or assign this Agreement or any part hereof or any right arising hereunder, by operation of law or otherwise, to a third party without the prior written consent of the other party, which shall not be unreasonably withheld or delayed. Any purported assignment without consent shall be void and of no force or effect or, at the other party’s option, shall terminate this Agreement. Subject to the foregoing, this Agreement shall be binding on the respective parties and their permitted successors and assigns. Notwithstanding anything to the contrary stated above, both parties may assign this Agreement to any direct or indirect affiliate without obtaining the consent of the other party; provided, however, that the assignor shall continue to be liable for any failure by the assignee to perform.

(f) Entire Agreement; Survival. All exhibits to this Agreement are incorporated by reference herein. This Agreement (and any documents referred to herein or therein) represents the entire agreement and understanding of the parties with respect to the matters set forth herein, and there are no representations, warranties or conditions or agreements (other than implementing invoices, purchase orders and the like necessary to implement this Agreement) not contained herein (or in any documents not referred to herein) that constitute any part hereof or that are being relied upon by any party hereunder. Notwithstanding any termination of this Agreement, all claims arising prior to such termination for any breach of or for any amount due under this Agreement (excluding any such claims that have been satisfied, waived or released prior to such termination) under this Agreement, shall survive such termination, and in addition, the following sections shall survive any such termination: Sections 7 through 15.

(g) Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way.

(h) Publicity. Subsection 15(d) notwithstanding, both parties shall agree on a joint initial press release on the entering into of this Agreement; provided, however, that either party may issue releases as deemed necessary by their respective securities counsel under applicable laws governing the release of information.

(i) Notices. Any notices to be given by either party to the other shall be in writing by personal delivery or by mail, registered or certified, postage prepaid with return receipt requested, or by facsimile (only with receipt confirmed). Notices shall be addressed to the parties at the addresses set forth below or to such other address as shall have been so notified to the other party in accordance with this Section. Notices to UNFI shall be addressed to: Steven Townsend, UNFI, 260 Lake Road, Dayville, CT 06241, FAX: 860-779-0746, with a copy, which shall not constitute notice, to E. Colby Cameron, Esq., Cameron & Mittleman LLP, 56 Exchange Terrace, Providence, RI 02903, FAX: 401-331-5787. Notices to WFM shall be addressed to: VP Purchasing, Whole Foods Market Distribution, Inc., 550 Bowie Street, Austin, Texas 78703 with a copy to WFM’s General Counsel at the same address.

(j) No Third Party Beneficiaries. Nothing in this Agreement, whether expressed or implied, is intended to confer on any person other than the parties to this Agreement or their respective successors or permitted assigns, any rights, remedies, obligations or liabilities.

(k) Independent Contractors. In all matters relating to this Agreement both parties shall be acting solely as independent contractors and shall be solely responsible for the acts of their respective employees, contractors and agents. Employees, agents or contractors of one party shall not be considered employees, agents or contractors of the other party. Nothing contained in this Agreement shall be deemed or construed to create a partnership or joint venture, to create the relationship of an employer-employee or principal-agent, or to otherwise create any liability for or obligation of either party whatsoever with respect to the indebtedness, liabilities, and obligations of the other party. Neither UNFI nor any employee or representative of UNFI shall at any time wear a “Whole Foods Market” (Registered Trademark) uniform or in any way hold himself out to be an employee of WFM or any WFM Affiliate. The parties specifically agrees that this Agreement shall not be deemed to grant or imply that either party or any employee of either party is authorized to sign, contract, deal, or otherwise act in the name of or on behalf of the other party.

(l) Titles and Headings; Counterparts; Facsimile Signature. The titles and headings to Sections herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. This Agreement may be executed in one or more counterparts, all of which will be considered one and the same agreement, and will become a binding agreement when one or more

counterparts have been signed by each party and delivered to the other party. Electronic or facsimile signatures shall be deemed original signatures for purposes of execution of this document. This Agreement, including its attachments, supersedes all prior agreements between UNFI and WFM or any WFM Affiliate and is the only agreement between WFM and UNFI, either oral or in writing, relating to the matters set forth herein.

(m) Negotiation of Agreement, Each party and its counsel have cooperated in the drafting and preparation of this Agreement and the documents referred to herein, and any drafts relating thereto shall be deemed the work product of the parties and may not be construed against any party by reason of its preparation. Any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against the party that drafted it is of no application and is hereby expressly waived.

[Signature Page to Follow]

WHEREAS, the parties hereto have entered into this Agreement as of the Effective Date.


Whole Foods Market Distribution, Inc., a Delaware corporation

By:
Name Printed:
Title:

UNITED NATURAL FOODS, INC.

By:
Name Printed:
Title:

List of Exhibits:

1. Exhibit A – UNFI Freight Delivery Charge Schedule

2. Exhibit B – Private Label Points

3. Exhibit C – Minimum Insurance Requirements

4. Exhibit D – Code Date Policy

[Signature Page to UNFI/WFMDI Agreement]

Exhibit A

Freight Delivery Charge Schedule

[*CONFIDENTIAL*]

Exhibit B

WFM Private Label Points

[*CONFIDENTIAL*]

Exhibit C

Minimum Insurance Requirements


Policy		Minimum Amount
Comprehensive General Liability and Contractual Liability		$[CONFIDENTIAL] per occurrence/$[CONFIDENTIAL] aggregate
Product Liability		$[CONFIDENTIAL] per occurrence
Automobile (combined bodily injury/property damage		$[CONFIDENTIAL] per occurrence
Umbrella (Excess) Insurance		$[CONFIDENTIAL] per occurrence
Worker’s Compensation		Statutory

Exhibit D

Code Date Policy

[*CONFIDENTIAL*]

EX-31.1 3 dex311.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to 17 CFR 240.13a – 14(a)

I, John P. Mackey, certify that:

1.	I have reviewed this report on Form 10-Q of Whole Foods Market, Inc.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosures controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosures controls and procedures, as of the end of the period covered by this report on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: March 2, 2005	By:	/s/ John P. Mackey
		John P. Mackey
		Chief Executive Officer

EX-31.2 4 dex312.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to17 CFR 240.13a – 14(a)

I, Glenda Flanagan, certify that:

1.	I have reviewed this report on Form 10-Q of Whole Foods Market, Inc.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) for the registrant and have:

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: March 2, 2005	By:	/s/ Glenda Flanagan
		Glenda Flanagan
		Chief Financial Officer

EX-32.1 5 dex321.htm SECTION 906 CEO CERTIFICATION Section 906 CEO Certification

Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

In connection with the Quarterly Report of Whole Foods Market, Inc. (the “Company”) on Form 10-Q for the period ending January 16, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John P. Mackey, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, that:

(1)

The Report fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John P. Mackey

John P. Mackey

Chief Executive Officer

March 2, 2005

This certification accompanies this report pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002 be deemed to be filed by the Company pursuant to Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2 6 dex322.htm SECTION 906 CFO CERTIFICATION Section 906 CFO Certification

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

In connection with the Quarterly Report of Whole Foods Market, Inc. (the “Company”) on Form 10-Q for the period ending January 16, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Glenda Flanagan, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, that:

(1)

The Report fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Glenda Flanagan

Glenda Flanagan

Chief Financial Officer

March 2, 2005

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