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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for fiscal year ended July 31, 1997
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: 000-1020859
UNITED NATURAL FOODS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 05-0376157
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
260 Lake Road
Dayville, CT 06241
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (860) 779-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
(Cover page 1 of 2)
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $112,720,391, based upon the closing price of the registrant's
common stock on the Nasdaq National Market on September 5, 1997. The number of
shares of the registrant's common stock, $0.01 par value, outstanding as of
October 24, 1997 was 12,378,425.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in December 1997 are incorporated herein by reference
into Part III of this report.
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(Cover page 2 of 2)
UNITED NATURAL FOODS, INC.
FORM 10-K
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business 1
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Executive Officers of the Registrant 15
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 28
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 47
Part III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and Management 47
Item 13. Certain Relationships and Related Transactions 47
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 48
Signatures 49
Part I
Item 1.
Business
United Natural Foods, Inc. (the "Company" or "United Natural") is one of
only two national distributors of natural foods and related products in the
United States. The Company currently serves more than 5,800 customers located in
43 states, including independent natural products stores, natural products
supermarket chains and conventional supermarkets. The Company distributes more
than 25,000 high-quality, national, regional and private label natural products
in six categories consisting of groceries and general merchandise, nutritional
supplements, bulk and foodservice products, personal care items, perishables and
frozen foods. United Natural's distribution operations are divided into three
principal regions: Cornucopia Natural Foods, Inc. ("Cornucopia") in the eastern
United States, Mountain People's Warehouse, Inc. ("Mountain People's") in the
western United States and Rainbow Natural Foods, Inc. ("Rainbow") in the Rocky
Mountains and Plains regions. The Company operates five strategically located
distribution centers and two satellite staging facilities within these regions
to better serve its customers and realize operating efficiencies. The Company
also owns and operates nine retail natural products stores located in the
eastern United States that management believes complement its distribution
business.
On June 23, 1997, the Company announced that it had entered into an
agreement with Stow Mills, Inc. ("Stow") with respect to a merger in which the
two companies will be combined. Pursuant to such agreement, a subsidiary of the
Company will be merged with and into Stow, with Stow continuing as the surviving
corporation, which will be a wholly-owned subsidiary of the Company. The merger
is conditioned, among other things, on the approval by the stockholders of the
Company of the issuance of up to an aggregate of 5,000,000 shares of the
Company's Common Stock, $.01 par value per share, in order to effect the
proposed merger with Stow. The Company has scheduled a special meeting of
stockholders to be held on October 30, 1997 to approve the proposed issuance to
effect the merger. The principal stockholders of the Company have agreed to vote
all shares of Common Stock over which they exercise voting control
(approximately 58% of the outstanding shares) for the approval of the issuance
proposal. Consequently, the affirmative vote of the principal Company
stockholders will be sufficient to approve and adopt the issuance proposal. It
is presently expected that the proposed merger will be consummated on October
31, 1997.
Stow is a distributor of natural foods and related products in New England,
New York State and the Mid-Atlantic and Mid-West regions of the United States.
Stow currently distributes its products to more than 3,100 customers located in
30 states and the District of Columbia, including independent natural products
stores, natural products supermarket chains and conventional supermarkets. Stow
currently distributes approximately 12,000 natural products, including
groceries, vitamins and nutritional supplements, refrigerated foods, frozen
foods, bulk foods, and body care, health and beauty aids. Stow operates three
strategically located distribution facilities.
1
Natural Products Industry
Natural foods and related products are minimally processed, environmentally
friendly, largely or completely free from artificial ingredients, preservatives
and other non-naturally occurring chemicals and in general as close to their
natural state as possible. Although most natural products are food products,
including organic foods, the natural products industry encompasses a number of
other categories, including nutritional and herbal supplements, toiletries and
personal care items, naturally based cosmetics, natural/homeopathic medicines
and naturally based cleaning agents.
The natural products distribution business involves the sourcing,
purchasing, warehousing, marketing and transportation of natural products from
suppliers to retailers. As the number of suppliers of and retail outlets for
natural products has continued to increase, the role of the distributor has
become increasingly important. Suppliers of natural products rely on
distributors to reach a fragmented customer base and to provide information on
consumer preferences at the retail level. At the same time, retailers are
placing increasing pressure on distributors for more frequent deliveries,
greater product selection, higher fill rates, more information on product
movement and additional specialized programs such as financing, merchandising
assistance, marketing support and assistance in consumer education. The Company
believes that in order to be successful in this market a distributor must have
access to capital to invest in systems, technology and warehouse enhancements,
broad product knowledge and the ability to provide value added services designed
to enable customers to become more efficient and profitable. Management believes
that the Company is well-positioned to meet the increasing needs of both its
suppliers and customers.
Business Strategy
The Company's objective is to better meet the changing needs of both
suppliers and retailers and to be the leading national distributor of natural
products. The key elements of the Company's business strategy include:
National Presence. With five distribution centers strategically located in
California, Colorado, Connecticut, Georgia and Washington and two satellite
staging facilities in Florida and Pennsylvania, the Company is well
positioned to provide distribution services to natural products retailers
and suppliers located across the United States. As a result, the Company is
able to (i) provide next-day delivery service to a majority of its active
customers, (ii) make multiple deliveries each week to its largest
customers, (iii) coordinate its inventory management with regional
purchasing patterns and (iv) achieve significant operating efficiencies.
Integration of Recent Acquisitions. United Natural recently made three
strategic acquisitions and is currently in the process of integrating these
operations to increase the Company's overall efficiency by: (i) eliminating
geographic overlaps in distribution, (ii) integrating administrative,
finance and accounting functions, (iii) expanding marketing and customer
service programs and (iv) upgrading information systems. To preserve its
regional
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focus, the Company intends to keep the majority of the purchasing, pricing,
sales and marketing decisions at the regional level.
Purchasing Power and Supplier Relationships. As a result of its size of
operations, national presence and access to retailers within the highly
fragmented natural products sector, the Company is able to supply a
superior selection of natural products at more competitive prices and on
better terms, including supplier-sponsored marketing dollars, than many of
its smaller, regional competitors. These prices and marketing support are
then passed on to the Company's retail customers, thereby enhancing the
Company's reputation as a low-cost supplier that offers extensive marketing
programs. In addition, in order to increase its appeal to a number of
suppliers and to receive better pricing, the Company has recently
centralized the purchasing of specific products. For example, the Company
has positioned itself as the largest purchaser of bulk products in the
natural products industry by centralizing its purchase of nuts, seeds,
grains, flours and dried foods.
Diverse, High-Quality Product Line. The Company distributes a mix of more
than 25,000 national, regional and private label natural products, which
products are continually evaluated, updated and expanded to satisfy the
needs of its diverse customer base. The Company believes that its product
selections meet or exceed its regional competitors' selection in every
market that it serves. In addition, the Company offers a selection of
private label products chosen to address customer preferences that are not
otherwise being met by other suppliers.
Regional Responsiveness. By decentralizing the majority of its purchasing,
pricing, sales and marketing decisions at the regional level, the Company
is able to respond to regional and local customer preferences, while taking
advantage of the economies of scale associated with the Company's national
operations. Each of the Company's three regional operations (Cornucopia,
Rainbow and Mountain People's) has extensive knowledge of the local and
regional taste preferences in a particular marketplace and has the ability
to provide products to accommodate local trends. In addition, the Company
is able to customize services, respond quickly with pricing decisions to
meet local competition and rapidly accommodate customer requirements, as
necessary.
Customer Service and Marketing Programs. In addition to providing its
customers with delivery services which include next-day and more frequent
deliveries and high order fill rates (excluding products unavailable from
the supplier), the Company offers its customers a selection of inventory
management, merchandising, marketing, promotional and event management
services to increase customer sales and enhance customer satisfaction. The
Company attributes its high fill rates and timely deliveries to its
experienced purchasing department and sophisticated warehousing, inventory
control and distribution systems. The Company offers its customers a broad
range of marketing services, many of which are supplier-sponsored,
including monthly and seasonal flier programs, in-store signage and
assistance in product display, all in order to assist its customers in
increasing sales.
Infrastructure and Management. The Company recently made a significant
investment in designing its proprietary, sophisticated information and
warehouse management systems and
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recently expanded its Connecticut distribution facility from 165,000 to
245,000 square feet to achieve additional operating efficiencies and cost
reductions. The Company's warehouse management systems incorporate an
efficient method of storing, locating and rotating incoming and outgoing
merchandise. The Company is planning on installing its information systems
and expanding its distribution capacity in its Colorado and California
facilities. The Company continually evaluates and upgrades its management
information systems based on the best practices at its regional operations
in order to make the systems more efficient, cost effective and responsive
to customer needs.
Growth Strategy
Key elements of the Company's growth strategy include:
Expand Customer Base. While continuing to focus on maintaining
relationships with its existing natural products retail customers, the
Company's goal is to expand its customer base to keep up with increasing
demand for natural products. The Company is continually cultivating
relationships with new customers for natural products, such as natural
products supermarket chains, as well as conventional supermarkets, other
mass market outlets, institutional foodservice providers, hotels and
gourmet stores which are increasing their natural product offerings.
Increase Sales To Existing Customers. The Company believes that a
significant opportunity exists to increase its sales penetration of its
existing retail customer base by (i) expanding the Company's role as the
primary supplier to the majority of its customers, (ii) expanding the
number of products and product categories offered and (iii) providing
pricing incentives and marketing support to generate higher sales levels by
its customers.
Expand Market Presence. The Company intends to expand its market
penetration of existing and new markets by increasing the distribution
capacity of its existing facilities and by building new distribution
facilities. In addition, while the Company has no agreements or
understandings with regard to acquisitions at this time (other than the
Agreement and Plan of Reorganization between United Natural and Stow), it
will continue to selectively evaluate opportunities to acquire local
distributors to fill in existing markets and regional distributors to
expand into new markets.
Products
Current Products
The Company's extensive selection of high-quality natural products enables
it to provide a primary source of supply to a diverse base of customers whose
product needs vary significantly. The Company distributes over 25,000 products,
consisting of national brand, regional brand, private label and master
distribution products in six product categories consisting of grocery and
general merchandise, nutritional supplements, bulk and foodservice products,
personal care items, perishables and frozen foods.
4
National Brands. National brand products are recognized and
distributed throughout the United States and typically possess
features, including taste and packaging, that are recognizable and
appeal to a large and diverse customer base. The Company has secured
the distribution rights to more than 1,000 brands of nationally known
products.
Regional Brands. Regional brand products are recognized by and
distributed in selected areas of the country to satisfy the demands of
consumers in specific geographic regions. In addition, the short shelf
life of many regional brands makes national distribution
impracticable. The Company's decentralized purchasing practices enable
regional buyers familiar with consumer demand to offer products that
have a particular appeal to consumers in that region. The Company
distributes over 800 regional brands to its customers.
Private Label Products. The Company also offers private label products to
address certain preferences of customers that are not otherwise being met by
other suppliers. The Company's private label program is designed to take
advantage of market opportunities created by a lack of supply of a type of
product. The Company currently offers the following private label products:
--Clear Spring waters
--Farmer's Pride eggs
--Guardian vitamins and supplements
--Natural Sea fish products
--Organic Baby infant foods
--Gourmet Artisan pasta and oils
Master Distribution Products. Master distribution products are products
that are available exclusively through the Company as master distributor which
enables smaller manufacturers to more efficiently access the market. All
competing distributors must purchase such products from the Company. The Company
has the master distribution rights for the following brands:
--Purdey's nutritionally enhanced beverages
--Rudi's Bakery specialty breads
--Wolfgang Puck frozen pizzas and entrees
New Products
The Company evaluates more than 10,000 potential new products each year
based on existing and anticipated trends in consumer preferences and buying
patterns. The Company's buyers regularly attend regional natural, organic,
specialty, ethnic and gourmet products shows to review the latest product
introductions that are likely to be of interest to retailers and consumers. The
Company also actively solicits suggestions for new products from its customers.
For example, each month the Company distributes postage-paid postcards to its
customers to encourage them to provide suggestions. The Company makes the
majority of its new product decisions at the regional level. The Company
believes that its decentralized purchasing practices allow its regional
purchasers to react quickly to changing consumer preferences and to evaluate
5
new products and new product categories regionally. In addition, many of the new
products offered by the Company are marketed on a regional basis or in the
Company's own retail stores prior to being offered nationally, which enables the
Company to evaluate local consumer reaction to the products without incurring
significant inventory risk.
Customers
The Company markets its products to more than 5,800 customers located in 43
states. The Company maintains long-standing customer relationships with
independent natural products stores and has continued to emphasize its
relationships with new customers, including natural products supermarket chains,
as well as conventional supermarkets and other mass market outlets,
institutional foodservice providers, hotels and gourmet stores, all of which are
continually increasing their natural product offerings. Management believes that
the Company is the primary supplier to the majority of its customers. No
customer accounted for more than 10% of the Company's net sales in the fiscal
year ended July 31, 1997. Among the Company's wholesale customers are leading
natural products supermarket operators doing business as Alfalfa's, Fresh Fields
Markets, Nature's Fresh, Northwest!, Whole Foods Market and Wild Oats Markets,
and conventional supermarket chains such as Carr's, City Market, Genuardis,
Harris Teeter, King Soopers, Kroger, Quality Food Centers (QFC) and Hannaford
Brothers.
Customer Service
The Company believes that customer loyalty is dependent upon outstanding
customer service to ensure accurate fulfillment of orders, timely product
delivery, low prices and a high level of product marketing support.
Sales
The Company maintains an order fill rate (excluding products unavailable
from the supplier) which the Company believes is one of the highest order fill
rates in the natural products distribution industry. The Company believes that
its high fill rates can be attributed to its experienced purchasing department
and sophisticated warehousing, inventory control and distribution systems. The
Company offers next-day delivery service to a majority of its active customers
and offers multiple deliveries each week to its largest customers.
The Company's staff of account representatives cultivates partnership
relationships with the Company's customers by emphasizing communication and
responsiveness. The primary function of the account representatives is to help
customers grow their businesses, thereby increasing the Company's own sales.
Each account representative is assigned stores in a designated geographic area
and is responsible for assisting the retailer in inventory management,
merchandising, marketing, promotional and event management and store openings.
The Company's staff of customer service representatives regularly contacts
customers by telephone to ensure that customer needs are met quickly and
efficiently. In addition to processing orders, the customer service
representatives respond to customer inquiries concerning the Company's services
and product availability. While the customer service representatives contact all
customers, the majority of the Company's sales volume is ordered electronically.
The Company distributes shelf
6
identification tags which can be scanned to facilitate this electronic ordering
by the customer. The Company's account representatives and customer service
representatives regularly exchange information to facilitate better knowledge
of, and more effective response to, customer needs.
To assist customers in making purchasing decisions, each of the Company's
regions produces a quarterly catalog containing a description of all products
that are currently in stock. Each product description includes the vendor's
name, product number, price per unit, price per case, suggested retail price and
UPC bar code. The quarterly catalog also contains a variety of information on
product ordering, delivery options and vendor advertising. In addition, each
region produces a monthly specials catalog with its latest pricing promotions
and new products.
In addition, the Company's senior executives attend major specialty food
trade shows and personally meet with numerous retailers each year to solicit
their comments. The Company's commitment to service is further reflected in the
focus groups conducted annually by the Company's senior executives with a
representative sampling of the Company's customers which allows customers to
evaluate the Company's services, products and programs.
7
Marketing
The Company has developed a variety of marketing services, many of which
are supplier-sponsored, that cater to a broad range of retail formats in which
retailers may participate for a nominal fee. These programs are designed to
increase sales and are attractive to retailers who often do not have the
resources necessary to conduct such marketing programs independently.
The Company offers a monthly flier program featuring the logo and address
of the participating retailer imprinted on a flier advertising sale items which
is distributed by the retailer to its customers. The color fliers are designed
by the Company's in-house marketing department utilizing modern digital
photography and contain detailed product descriptions and pricing information.
In addition, each flier generally includes detailed information on selected
vendors, recipes, product features and a comparison of the characteristics of a
natural product with a similar mass market product. The monthly flier program is
structured to pass through to the retailer the benefit of lower costs on certain
products, allowing stores to earn an improved profit margin on sale items as a
result of the Company's ability to negotiate favorable terms with the suppliers
of these items. The program also provides retailers with posters and window
banners to coincide with each month's promotions.
In addition to its monthly flier program, the Company offers thematic and
seasonal consumer fliers that are used to promote items associated with a
particular cause or season, such as environmentally sensitive products for Earth
Day or foods and gifts particularly popular during the holiday season. The
Company also (i) offers in-store signage and promotional materials, including
shopping bags and end-cap displays, (ii) provides assistance with planning and
setting up product displays and (iii) advises on pricing decisions to enable its
customers to respond to local competition.
Suppliers
The Company purchases its products from approximately 1,500 active
suppliers, many of which have had relationships with the Company for more than
ten years. Management believes that natural products suppliers seek distribution
of their products through the Company because it distributes the majority of the
supplier's products, provides access to a large and growing customer base and
supports the supplier's marketing programs. Substantially all product categories
distributed by the Company are available from a number of suppliers and the
Company is not dependent on any single source of supply for any product
category. The Company's largest supplier accounted for approximately 4.4% of
total purchases in fiscal 1997.
The Company has positioned itself to respond to regional and local customer
preferences for natural products by decentralizing the majority of its
purchasing decisions for all products except bulk commodities. The Company
believes that regional buyers are best suited to identify and to respond to
local demands and preferences. Although each of the Company's regions is
responsible for placing its own orders and can select the products that it
believes will most appeal to its customers, each region is required to
participate in Company-wide purchasing programs that enable it to take advantage
of the Company's consolidated purchasing power. For example,
8
the Company has positioned itself as the largest purchaser of bulk products in
the natural products industry by centralizing its purchase of nuts, seeds,
grains, flours and dried foods.
The Company's purchasing staff cooperates closely with suppliers to provide
new and existing products. The suppliers assist in training the Company's
account and customer service representatives in marketing new products,
identifying industry trends and coordinating advertising and other promotions.
The Company maintains a comprehensive quality control assurance program.
All products sold by the Company and represented as "organic" are required to be
certified as such by an independent third-party agency. The Company maintains
current certification affidavits on all organic commodities and produce in order
to verify the authenticity of the product. All potential vendors of organic
products are required to provide such third-party certification before they are
approved as a supplier to the Company. In addition, the Company has secured the
services of the Food and Drug Administration ("FDA") counsel to audit all
labels, packaging, ingredient lists and product claims relating to products
offered by the Company to ensure that all products meet current FDA
requirements. The Company believes that it is the only natural products
distributor which has performed such an audit to date.
Distribution
The Company maintains five distribution centers located in Auburn,
California; Denver, Colorado; Dayville, Connecticut; Atlanta, Georgia; and
Seattle, Washington. The Company has recently expanded its Connecticut
headquarters from 165,000 to 245,000 square feet and significantly expanded its
capacity to store frozen foods. The Company has signed a lease for a new
facility in Colorado which, at 180,800 square feet, will be twice the size of
its current facility and which is expected to be operational in early 1998. The
Company intends to replace its 40,000 square foot auxiliary storage facility in
Sacramento, California with an 80,000 square foot storage facility located
adjacent to its Auburn, California distribution center, which is expected to be
substantially complete by summer 1998. In addition, the Company operates
satellite staging facilities in the Philadelphia, Pennsylvania and greater
Jacksonville, Florida areas. These satellite facilities serve as transfer points
for products, trucks and drivers and ensure faster service to markets located
more than five hours driving distance from the Georgia and Connecticut
distribution centers.
The five distribution centers, two satellite staging facilities and one
auxiliary storage facility have a total of approximately 805,000 square feet of
space. Each distribution center contains dry, refrigerated and frozen storage
areas as well as office space. In total, the Company's facilities encompass
approximately 652,200 square feet of dry storage space, 40,700 square feet of
refrigerated space and 44,700 square feet of frozen storage space, with the
remainder used as office space for the Company's regional purchasing, sales and
administrative operations.
The Company has carefully chosen the sites for its distribution centers to
provide direct access to its regional markets. This proximity allows the Company
to reduce its transportation costs compared to competitors that seek to service
their customers from locations that are often hundreds of miles away. The
Company believes that it incurs lower inbound freight expense than
9
its regional competitors because its national presence allows it to buy full and
partial truckloads of products which, if necessary, it can backhaul using the
Company's own trucks between its distribution centers and satellite staging
facilities. Many of the Company's competitors must employ outside consolidation
services and pay higher carrier transportation fees to move products from other
regions. In addition, overstocks and inventory inbalances at one distribution
center may be redistributed by the Company to another distribution center where
products may be sold prior to their expiration date.
Products are delivered to the Company's distribution centers primarily by
its leased fleet of trucks, contract carriers and the suppliers themselves. The
Company leases most of its trucks from Ryder Truck Leasing, which maintains
facilities on some of the Company's premises for the maintenance and service of
these vehicles, and a lesser number of its trucks from regional firms that offer
competitive services.
The Company ships orders for supplements or for items that are destined for
areas outside regular delivery routes through the United Parcel Service and
other independent carriers. Deliveries to areas outside the continental United
States are shipped by ocean-going containers on a weekly basis.
Systems
The Company has made a significant investment in designing its proprietary
information and warehouse management systems. The Company continually evaluates
and upgrades its management information systems based on the best practices at
its regional operations in order to make the systems more efficient, cost
effective and responsive to customer needs. The Company has installed its
warehouse management systems at its Connecticut and Georgia facilities. These
systems include radio frequency-based inventory control, paperless receiving,
engineered labor standards, computer-assisted order processing and slot
locator/retrieval assignment systems. At the receiving docks, warehouse workers
attach computer-generated, preprinted locator tags to all inbound products.
These tags contain the expiration date, location, quantity, lot number and other
information in bar code format. To process customer orders, warehouse workers
use hand-held radio frequency devices to scan the UPC bar code as a product is
removed from its assigned slot. Similarly, customer returns are processed by
scanning the UPC bar codes. The Company also employs a management information
system that enables it to lower its inbound transportation costs by making
optimum use of its own fleet of trucks or by consolidating deliveries into full
truckloads. Orders from multiple suppliers and multiple distribution centers are
consolidated into single truckloads for efficient use of available vehicle
capacity and return-haul trips.
Retail Operations
The Company's Natural Retail Group ("NRG") currently owns and operates nine
retail natural food stores located in Connecticut, Florida, Maryland,
Massachusetts and New York. The Company's retail strategy is to selectively
acquire existing stores that meet the Company's strict criteria in categories
such as sales and profitability, growth potential, merchandising and management.
Generally, the Company will not purchase stores that directly compete with
primary retail customers of its distribution business. The Company believes its
retail stores have
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a number of advantages over their competitors, including the financial strength
and marketing expertise provided by the Company, the purchasing power resulting
from group purchasing by stores within NRG and the breadth of their product
selection. The Company's strategy for future retail growth is to identify and
acquire additional retail stores as opportunities arise and to focus on
increased sales of higher margin nutritional supplements while maintaining
emphasis on the sale of organic produce and delicatessen and bakery products and
consumer education.
The Company's retail stores offer products in each of the six categories
offered by the Company's distribution business as well as produce, meat,
poultry, fresh seafoods, baked goods and other prepared foods. These additional
product offerings range between 20% to 40% of the total sales of a typical NRG
store. NRG focuses its marketing efforts on consumer education and store
promotion. NRG provides consumer education through informational brochures,
promotional flyers, seminars, workshops, cooking classes and product samplings.
In its image advertising, NRG emphasizes its knowledgeable and courteous staff,
broad selection of natural products, environmental stewardship and frequent
price promotions.
The name and location of each of NRG's stores and their approximate square
feet and lease expiration dates are as follows:
Store/Location Date of Acquisition Square Feet Lease Expiration
- ---------------------- ------------------- ----------- ----------------
Health Hut.................. April 1993 4,100 May 2000
Valley Stream, NY
Cheese and Stuff............ May 1993 10,000 March 2005
Hartford, CT
Food for Thought............ July 1993 12,000 November 2005
Norwalk, CT
Village Market.............. November 1993 5,875 May 2001
Pikesville, MD
Natureworks................. January 1994 8,500 December 2001
Melbourne, FL
Railway Market.............. April 1994 5,000 March 1999
Easton, MD
Cape Cod Natural Foods...... July 1994 4,500 December 2002
Centerville, MA
SunSplash Market............ April 1995 5,750 July 1999
Naples, FL
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Nature's Finest Foods August 1997 15,000 November 2003
St. Petersburg, FL
As both a distributor to its retail stores and a retailer, a number of
advantages are made available to the Company, including the ability to: (i)
control the purchases made by these stores; (ii) expand the distribution of and
marketing for its private label products within these stores; (iii) expand the
number of high-growth, high-margin product categories such as produce and
prepared foods within these stores; and (iv) keep current with the retail
marketplace which allows it to better serve its distribution customers. In
addition, as the primary natural products distributor to its retail locations,
the Company expects to realize significant economies of scale and operating and
buying efficiencies. As an operator of retail stores, the Company also has the
ability to test market select products prior to offering them nationally, which
allows the Company to evaluate consumer reaction to the product without
incurring significant inventory risk. The Company is able to test new marketing
and promotional programs within its stores prior to offering them to a broader
customer base.
Competition
The natural products distribution industry is highly competitive. The
industry has been characterized in recent years by significant consolidation and
the emergence of large competitors. The Company also competes with numerous
smaller regional, local and specialty distributors of natural products. In
addition, the Company competes with national, regional and local distributors of
conventional groceries and, to a lesser extent, companies which distribute to
their own retail facilities. There can be no assurance that distributors of
conventional groceries will not increase their emphasis on natural products and
more directly compete with the Company or that new competitors will not enter
the market. Many of these distributors may have been in business longer, may
have substantially greater financial and other resources than the Company and
may be better established in their markets. There can be no assurance that the
Company's current or potential competitors will not provide services comparable
or superior to those provided by the Company or adapt more quickly than the
Company to evolving industry trends or changing market requirements. It is also
possible that alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, financial condition or results of
operations.
The Company believes that distributors in the natural products industry
compete principally on product quality and depth of inventory selection, price
and quality of customer service. Although the Company believes it currently
competes effectively with respect to each of these factors, there can be no
assurance that the Company will be able to maintain its competitive position
against current and potential competitors.
The Company's retail stores compete against other natural products outlets,
conventional supermarkets and specialty stores. The Company believes that
retailers of natural products compete principally on product quality and
selection, price, knowledge of personnel and convenience of location.
12
Regulation
The Company's operations and products are subject to regulation by state
and local health departments, the U.S. Department of Agriculture and the Food
and Drug Administration, which generally impose standards for product quality
and sanitation. The Company's facilities generally are inspected at least once a
year by state or federal authorities. The Company's trucking operations are also
subject to regulation by the U.S. Department of Transportation and the U.S.
Federal Highway Administration.
Federal, state and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, generally are not directly
applicable to the Company. Certain of the Company's distribution facilities have
above-ground storage tanks for diesel fuel and other petroleum products, which
are subject to laws regulating such storage tanks.
The Company believes that it is in compliance in all material respects with
all applicable government regulations.
Employees
As of July 31, 1997, the Company had approximately 1,200 full-time
employees, including approximately 80 in finance and administration, 102 in
sales and marketing, 81 in customer service, 263 in the retail stores and 674 in
operations. Approximately 75 of these employees are covered by a collective
bargaining agreement with Teamsters Local 117, Seattle, Washington which will
expire in July 2000. The Company has never experienced a work stoppage by its
unionized employees. The Company believes that its relationships with its
employees are good.
Item 2.
Properties
The Company owns its corporate offices and distribution center in Dayville,
Connecticut which was recently expanded from 165,000 to 245,000 square feet.
The Company leases its remaining distribution centers, two satellite
staging areas and one auxiliary storage facility. Each distribution center
contains dry, refrigerated and frozen storage areas and office space for the
purchasing, sales and administrative operations of the facility. The following
chart provides information on the approximate square footage of each of the
Company's distribution centers and staging facilities and the expiration date of
the lease for the facility (other than Dayville, Connecticut, which is owned by
the Company):
Size (in Lease
Location square feet) Expiration
-------- ------------ ----------
Atlanta, Georgia.............. 175,000 March 1999
13
Size (in Lease
Location square feet) Expiration
-------- ------------ ----------
Auburn, California............ 150,000 May 2008
Dayville, Connecticut......... 245,000 Not Applicable
Denver, Colorado.............. 91,000 July 2000
Seattle, Washington........... 100,000 February 2001
Jacksonville, Florida......... 3,000 December 1996 (renewal
negotiations ongoing)
Philadelphia, Pennsylvania.... 2,800 December 1996 (renewal
negotiations ongoing)
Sacramento, California........ 40,000 October 1996 (negotiating
purchase of distribution center)
The Company has signed a lease for a new facility in Denver which, at
180,800 square feet, will be twice the size of its current facility. The new
Denver facility is expected to be operational in early 1998. The Company intends
to replace its 40,000 square foot auxiliary storage facility in Sacramento,
California with an 80,000 square foot storage facility located adjacent to its
Auburn, California distribution center. Construction of the new leased space is
expected to be substantially complete by summer 1998. The Company believes that
it will be able to continue to expand or replace its facilities as and when
needed to accommodate the Company's future growth.
Equipment and machinery owned by the Company and used in its operations
consist primarily of electronic data processing and material handling equipment,
racking, coolers and freezers. The Company leases a majority of its trucks and
trailers under master lease agreements with Ryder Truck Leasing. Ryder is
responsible for all truck maintenance costs.
Item 3.
Legal Proceedings
From time to time, the Company is involved in routine litigation which
arises in the ordinary course of its business. There are no pending material
legal proceedings to which the Company is a party or to which the property of
the Company is subject.
Item 4.
Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year ended July 31, 1997.
14
Executive Officers of the Registrant
The executive officers of United Natural and their ages as of September 30, 1997
are as follows:
Name Age Position
- ---- --- --------
Norman A. Cloutier 43 Chairman of the Board and Chief Executive Officer
Michael S. Funk 43 Vice Chairman of the Board and President
Steven H. Townsend 44 Chief Financial Officer, Director, Treasurer and
Secretary
Daniel V. Atwood 39 President of NRG, Vice President, Assistant
Treasurer, Assistant Secretary and Director of
United Natural
Andrea R. Hendricks 37 Director of Purchasing of Mountain People's and
Director of United Natural
Kevin T. Michel 39 Chief Financial Officer of Mountain People's and
Director of United Natural
Norman A. Cloutier founded United Natural in 1978. Mr. Cloutier has
been Chairman of the Board and Chief Executive Officer of United Natural since
its inception. Mr. Cloutier served as President of United Natural from its
inception until October 1996. Mr. Cloutier previously operated a natural
products retail store in Coventry, Rhode Island from 1977 to 1978.
Michael S. Funk has been Vice Chairman of the Board of United
Natural since February 1996 and President of United Natural since October 1996.
Mr. Funk served as Executive Vice President of United Natural from February 1996
until October 1996. Since its inception in July 1976, Mr. Funk has been
President of Mountain People's. Mr. Funk has served on the Board of Directors
since February 1996.
Steven H. Townsend has been Vice President - Finance and Administration
of United Natural since 1983 and Chief Financial Officer of United Natural since
August 1988. From 1980 to 1983, Mr. Townsend was Director of Finance for the
Town of Mansfield, Connecticut. From
15
1976 to 1980, Mr. Townsend was an Accounting Supervisor at Harris Corporation, a
manufacturer of printing presses and related products. Mr. Townsend has served
on the Board of Directors since August 1988.
Daniel V. Atwood has been President of NRG and Vice President of
United Natural since August 1995. Mr. Atwood was Vice President - Marketing of
United Natural from January 1984 to August 1995. From 1979 to 1982, Mr. Atwood
was a Store Manager at Bread & Circus Supermarkets, a chain of independent
natural products stores. Mr. Atwood has served on the Board of Directors since
August 1988.
Andrea R. Hendricks has been Director of Purchasing for Mountain
People's since January 1990. Ms. Hendricks oversees the purchasing, pricing and
promotional departments for United Natural's western region. Ms. Hendricks has
served on the Board of Directors since February 1996.
Kevin T. Michel had been the Chief Financial Officer of Mountain
People's since January 1995. From January 1992 until January 1995, Mr. Michel
held several different accounting and finance positions at Mountain People's.
From March 1991 until December 1991, Mr. Michel was the sole proprietor of a
restaurant. Mr. Michel has served on the Board of Directors since February 1996.
Part II
Item 5.
Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "UNFI."
The United Natural Common Stock began trading on the Nasdaq National
Market on November 1, 1996. The following table sets forth for the periods
indicated the high and low sale prices per share of United Natural Common Stock
on the Nasdaq National Market:
Fiscal 1997 High Low
----------- ---- ---
Second Quarter $17.500 $12.375
Third Quarter 17.000 13.000
Fourth Quarter 24.375 15.000
On September 5, 1997, United Natural had 30 stockholders of record. The
number of record holders may not be representative of the number of beneficial
holders because many shares are held by depositories, brokers or other nominees.
16
The Company has never declared or paid any cash dividends on its capital
stock. The Company anticipates that all of its earnings in the foreseeable
future will be retained to finance the continued growth and development of its
business and has no current intention to pay cash dividends. The Company's
future dividend policy will depend on the Company's earnings, capital
requirements and financial condition, requirements of the financing agreements
to which the Company is then a party and other factors considered relevant by
the Board of Directors. The Company's existing revolving line of credit
agreement prohibits the declaration or payment of cash dividends to the
Company's stockholders without the written consent of the bank during the term
of the credit agreement and until all obligations of the Company under the
credit agreement have been met.
17
Item 6.
Selected Financial Data
The selected consolidated financial data presented below under the
caption Consolidated Statement of Income Data with respect to the fiscal years
ended October 31, 1994 and 1995, the nine months ended July 31, 1996, and the
fiscal year ended July 31, 1997, under the caption Consolidated Balance Sheet
Data at October 31, 1994 and 1995 and July 31, 1996 and 1997, are derived from
the consolidated financial statements of the Company, which financial statements
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The selected consolidated financial data presented below under the
caption Consolidated Statement of Income Data with respect to the fiscal year
ended October 31, 1993 and the nine months ended July 31, 1995, and under the
caption Consolidated Balance Sheet Data at October 31, 1993, are derived from
the unaudited consolidated financial statements of the Company that have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for such
periods. The historical results are not necessarily indicative of results to be
expected for any future period. The following selected consolidated financial
data should be read in conjunction with and are qualified by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K
Nine Months Ended Year Ended
Year Ended October 31, July 31, July 31,
---------------------- -------- --------
1993 1994 1995 1995 1996 1997
---- ---- ---- ---- ---- ----
(in thousands, except per share data)
Consolidated Statement of Income Data:
Net sales ................................................ $153,636 $200,616 $283,323 $188,502 $286,448 $421,698
Cost of sales ............................................ 121,148 156,498 223,482 147,706 226,482 334,584
-------- -------- -------- -------- -------- --------
Gross profit ............................................. 32,488 44,118 59,841 40,796 59,966 87,114
Operating expenses ....................................... 27,176 36,195 48,653 32,740 48,565(2) 67,633
Amortization of intangibles .............................. 199 538 2,426(1) 603 792 1,060
-------- -------- -------- -------- -------- --------
Total operating expenses ................................. 27,375 36,733 51,079 33,343 49,357 68,693
-------- -------- -------- -------- -------- --------
Operating income ......................................... 5,113 7,385 8,762 7,453 10,609 18,421
-------- -------- -------- -------- -------- --------
Interest expense ......................................... 1,078 2,275 3,403 2,184 3,943 3,081
Other, net ............................................... 137 122 (173) (124) (137) (331)
-------- -------- -------- -------- -------- --------
Total other expense ...................................... 1,215 2,397 3,230 2,060 3,806 2,750
-------- -------- -------- -------- -------- --------
Income before income taxes and extraordinary item ........ 3,898 4,988 5,532 5,393 6,803 15,671
Income taxes ............................................. 1,579 1,971 2,929 2,161 2,778 6,416
-------- -------- -------- -------- -------- --------
Income before extraordinary item ......................... 2,319 3,017 2,603 3,232 4,025 9,255
Extraordinary item (4) ................................... -- -- -- -- -- 933
-------- -------- -------- -------- -------- --------
Net income ............................................... $ 2,319 $ 3,017 $ 2,603 $ 3,232 $ 4,025 $ 8,322
======== ======== ======== ======== ======== ========
Income per share of common stock before extraordinary item $ 0.26 $ 0.30 $ 0.26 $ 0.32 $ 0.40 $ 0.79
======== ======== ======== ======== ======== ========
Extraordinary item (4) ................................... -- -- -- -- -- $ 0.08
======== ======== ======== ======== ======== ========
Net income per share of common stock ..................... $ 0.26 $ 0.30 $ 0.26 $ 0.32 $ 0.40 $ 0.71
======== ======== ======== ======== ======== ========
Weighted average shares of common stock and common stock
equivalents (3) .......................................... 8,982 10,094 10,148 10,148 10,144 11,698
======== ======== ======== ======== ======== ========
October 31, July 31,
------------------------------ --------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(in thousands)
Consolidated Balance Sheet Data:
Working capital ................................................. $ 3,895 $ 10,180 $ 8,583 $ 10,087 $ 48,883
Total assets .................................................... 37,006 48,476 88,822 98,744 110,985
Long-term debt and capital leases, excluding current installments 8,169 10,627 21,878 23,019 16,553
Stockholders' equity ............................................ 4,258 10,257 13,022 18,182 62,177
(1) Operating income for fiscal 1995 includes a non-recurring expense of $1.6
million related to the write-off of intangible assets. Excluding the $1.6
million non-recurring expense, operating income would have been $10.4
million in fiscal 1995.
(2) Operating income for the nine months ended July 31, 1996 includes a
non-recurring expense of $1.0 million related to the grant of options under
the Company's 1996 Stock Option Plan and a non-recurring expense of $0.5
million representing costs associated with the
18
Mountain People's merger. Excluding the $1.5 million of non-recurring
expenses, operating income would have been $12.1 million in the nine months
ended July 31, 1996.
(3) For all years and periods prior to fiscal year ended July 31, 1997, does
not reflect the repurchase by the Company, upon the repayment of the
outstanding indebtedness under the Senior Note issued to Triumph -
Connecticut Limited Partnership ("Triumph"), of 380,930 shares of Common
Stock issuable upon the exercise of the Triumph Warrant.
(4) Extraordinary item for fiscal 1997 relates to the loss on early retirement
of debt, net of income tax benefit of approximately $.7 million, which
resulted from the repayment of debt with proceeds from the Company's
initial public offering in November 1996.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion of United Natural's financial condition and
results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto, as well as with the
selected financial data.
This Annual Report on Form 10-K contains forward-looking statements
that are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Any statements contained herein (including
without limitation statements to the effect that United Natural or its
management "believes," "expects," "anticipates," "plans" and similar
expressions) that are not statements of historical fact should be considered
forward-looking statements. United Natural cautions that a number of important
factors could cause its actual results to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, United Natural,
including those factors set forth under "Certain Factors That May Affect Future
Results."
Overview
- --------
United Natural is one of only two national distributors of natural
foods and related products in the United States. The Company currently
distributes more than 25,000 natural products to more than 5,800 customers
located in 43 states. United Natural's distribution operations are divided into
three principal regions: Cornucopia in the eastern United States; Mountain
People's in the western United States; and Rainbow in the Rocky Mountains and
Plains regions. Through its subsidiary, the Natural Retail Group, Inc. (NRG),
the Company also owns and operates nine retail natural products stores located
in the eastern United States.
In recent years, the Company has increased sales to existing and new
customers through the acquisition of or merger with natural product
distributors, the opening of distribution centers in new geographic areas, the
expansion of existing distribution centers, and the continued growth of the
natural products industry in general. Through these efforts, management believes
that the Company has been able to broaden its geographic penetration, expand its
customer base, enhance and diversify its product selections and increase its
market share.
The Company currently is in the process of integrating certain
operating functions of its acquisitions in order to improve operating
efficiencies. It is accomplishing this through (i) integrating administrative,
finance and accounting functions in the three regions, (ii) expanding marketing
and customer service programs across the three regions, (iii) expanding national
purchasing opportunities, (iv) consolidating system applications between
physical locations and regions, and (v) eliminating geographic overlap between
regions. In addition, the Company's
19
continued growth has created the need for expansion of existing facilities to
achieve maximum operating efficiencies and to assure adequate space for future
needs. While operating margins may be affected in periods in which expenses are
incurred, over the long-term, the Company expects to benefit from the increased
absorption of its expenses over a larger sales base.
In recent years, the Company has made considerable expenditures in
connection with the expansion of its facilities, including the expansion of its
distribution center and headquarters in Connecticut and the expansion of
refrigerated and frozen space at its Auburn and Atlanta facilities. The Company
recently announced that it has signed a multi-year lease for a new 180,800 sq.
foot distribution center in Aurora, Colorado that is expected to open in early
1998. In addition, the Company expects to replace its auxiliary storage facility
in Sacramento, California with a larger facility adjacent to its Auburn,
California distribution center. This project should be completed by summer 1998.
The Company's retail strategy for NRG is to selectively acquire
existing natural products stores that meet the Company's strict criteria in
areas such as sales growth, profitability, growth potential and management.
Management believes the Company's retail business serves as a natural complement
to its distribution business.
The Company's net sales consist primarily of sales of natural products
to retailers adjusted for customer volume discounts, returns and allowances and
to a lesser extent, sales to its natural product stores. The principal
components of the Company's cost of sales include the amount paid to
manufacturers and growers for product sold, plus the cost of transportation
necessary to move the product to the Company's distribution facilities.
Operating expenses include salaries and wages, employee benefits (including
payments under the Company's Employee Stock Ownership Plan), warehousing and
delivery, selling, occupancy, administrative, depreciation and amortization
expense. Other expenses include interest payments on outstanding indebtedness,
miscellaneous expenses, interest income and miscellaneous income.
Recent Acquisitions
On June 23, 1997, the Company announced that it had entered into an
agreement with Stow with respect to a merger in which the two companies will be
combined in a transaction which will be accounted for as a pooling of interests.
It is expected that the Company will issue up to 5,000,000 shares of its Common
Stock in order to effect the proposed merger. The Company expects that the
proposed merger will be consummated on October 31, 1997. See "Business."
On February 20, 1996, a subsidiary of the Company merged with and into
Mountain People's, whereupon Mountain People's became a wholly owned subsidiary
of the Company. The merger with Mountain People's was accounted for as a pooling
of interests and, accordingly, all financial information included is reported as
though the companies had been combined in all periods reported.
On May 22, 1995, prior to its merger with United Natural, Mountain
People's acquired Nutrasource, Inc. (Nutrasource), a distributor of natural
products in the Pacific Northwest region. On July 29, 1995, the Company acquired
Rainbow, a distributor of natural products in the Rocky
20
Mountains and Plains regions. The acquisitions of Nutrasource and Rainbow were
accounted for under the purchase method of accounting and, accordingly, all
financial information for Nutrasource and Rainbow has been included since the
respective dates of acquisition. The excess of the purchase price over the net
assets acquired in each of these acquisitions has been recorded as goodwill and
is being amortized by the Company over 30 years.
United Natural's fiscal years ended October 31, 1994 and 1995 are
referred to herein as "fiscal 1994" and "fiscal 1995," respectively. United
Natural has changed its fiscal year end to July 31.
Results of Operations
The following table presents, for the periods indicated, certain income
and expense items expressed both in dollars and as a percentage of net sales:
Twelve Months Ended July 31, Nine Months Ended July 31,
---------------------------- --------------------------
1997 1996 1996 1995
---- ---- ---- ----
Net sales $421,697,941 100.0% $ 381,270,375 100.0% $ 286,448,399 100.0% $ 188,501,456
Cost of sales 334,583,617 79.4% 302,257,965 79.3% 226,481,766 79.1% 147,706,348
----------------------------------------------------------------------------------------------
Gross profit 87,114,324 20.6% 79,012,410 20.7% 59,966,633 20.9% 40,795,108
----------------------------------------------------------------------------------------------
Operating expenses 67,633,123 16.0% 64,479,189 16.9% 48,564,649 17.0% 32,739,675
Amortization of intangibles 1,060,442 0.3% 2,615,560 0.7% 792,615 0.2% 602,672
----------------------------------------------------------------------------------------------
Total operating expenses 68,693,565 16.3% 67,094,749 17.6% 49,357,264 17.2% 33,342,347
----------------------------------------------------------------------------------------------
Operating income 18,420,759 4.3% 11,917,661 3.1% 10,609,369 3.7% 7,452,761
----------------------------------------------------------------------------------------------
Other expense (income):
Interest expense 3,081,440 0.7% 5,161,485 1.4% 3,942,820 1.4% 2,184,345
Other, net (331,983) -0.1% (185,702) -0.1% (136,869) -0.1% (124,477)
----------------------------------------------------------------------------------------------
Total other expense 2,749,457 0.6% 4,975,783 1.3% 3,805,951 1.3% 2,059,868
----------------------------------------------------------------------------------------------
Income before income taxes
and extraordinary item 15,671,302 3.7% 6,941,878 1.8% 6,803,418 2.4% 5,392,893
Income taxes 6,416,070 1.5% 3,547,110 0.9% 2,778,121 1.0% 2,159,865
----------------------------------------------------------------------------------------------
Income before extraordinary item 9,255,232 2.2% 3,394,768 0.9% 4,025,297 1.4% 3,233,028
Extraordinary item - loss on early
extinguishment of debt, net of
income tax benefit of $661,822 932,929 0.2% - - - - -
----------------------------------------------------------------------------------------------
Net income $8,322,303 2.0% $3,394,768 0.9% $4,025,297 1.4% $3,233,028
==============================================================================================
Twelve Months Ended July 31, 1997 Compared to Twelve Months Ended July 31, 1996
Net Sales. The Company's net sales increased approximately 10.6%, or
$40.4 million, to $421.7 million for the twelve months ended July 31, 1997 from
$381.3 million for the twelve months ended July 31, 1996. The increase in net
sales was primarily attributable to increased sales by the Company to its
existing customers, sales to new customers, increased sales attributable to the
introduction of new products not formerly offered by the Company, and increased
market penetration in existing geographic territories. The Company believes that
sales were negatively impacted by winter storms in the Northwest region during
the second quarter of
21
fiscal 1997.
Gross Profit. The Company's gross profit increased approximately 10.3%,
or $8.1 million, to $87.1 million for the twelve months ended July 31, 1997 from
$79.0 million for the twelve months ended July 31, 1996. The Company's gross
profit as a percentage of net sales decreased to 20.6% for the twelve months
ended July 31, 1997 from 20.7% for the twelve months ended July 31, 1996. The
decrease in gross profit as a percentage of net sales resulted primarily from
increased sales to existing customers who earned greater discounts under the
Company's volume discount program.
Operating Expenses. The Company's total operating expenses increased
approximately 2.4 %, or $1.6 million, to $68.7 million for the twelve months
ended July 31, 1997 from $67.1 million for the twelve months ended July 31,
1996. However, as a percentage of net sales, operating expenses decreased to
16.3% for the twelve months ended July 31, 1997 from 17.6% for the twelve months
ended July 31, 1996. The decrease in total operating expenses as a percentage of
net sales was attributable to the Company's absorption of fixed expenses and
overhead over a larger sales base.
Operating expenses for the twelve months ended July 31, 1996 included
total non-recurring charges of $3.2 million. These non-recurring charges
included $1.6 million representing the write-down of intangible assets, $0.5
million for costs associated with the merger with Mountain People's and $1.1
million for costs associated with the grant of stock options under the Company's
1996 Stock Option Plan. Excluding these non-recurring charges, the Company's
total operating expenses for the twelve months ended July 31, 1996 would have
been $ 63.9 million, or 16.8% of net sales.
The Company's amortization of intangibles decreased $1.6 million, or
approximately 59.5%, to $1.0 million for the twelve months ended July 31, 1997
from $2.6 million for the twelve months ended July 31, 1996. The Company
incurred a non-recurring charge of $1.6 million in the twelve months ended July
31, 1996 associated with the write-down of intangible assets.
Operating Income. Operating income increased $6.5 million, or
approximately 54.6 %, to $18.4 million for the twelve months ended July 31, 1997
from $11.9 million for the twelve months ended July 31, 1996. As a percentage of
net sales, operating income increased to 4.3% for the twelve months ended July
31, 1997 from 3.1% for the twelve months ended July 31, 1996.
During the twelve months ended July 31, 1996, the Company incurred $3.2
million in non-recurring charges as discussed above. Excluding these
non-recurring charges, operating income for the twelve months ended July 31,
1996 would have been $15.1 million, or 4.0% of net sales.
Other (Income)/Expense. Total other expense, net, decreased by $2.3
million, or approximately 44.7%, to $2.7 million for the twelve months ended
July 31, 1997 from $5.0 million for the twelve months ended July 31, 1996. The
decrease was primarily attributable to
22
lower interest payments for the twelve months ended July 31, 1997 resulting from
the use of the proceeds of the Company's initial public offering to re-pay debt.
As a result, interest expense decreased to $3.1 million for the twelve months
ended July 31, 1997 from $5.2 million for the twelve months ended July 31, 1996.
Income Taxes. The Company's effective income tax rate was 40.9% and
51.1% for the twelve months ended July 31, 1997 and 1996, respectively. The
effective rates were higher than the federal statutory rate primarily due to
nondeductible amortization, especially the write-off of the intangible assets in
the twelve months ended July 31, 1996, as well as the impact of state and local
income taxes.
Net Income. As a result of the foregoing, the Company's income before
extraordinary item for the twelve months ended July 31, 1997 was $9.3 million,
or $0.79 per share. In November 1996, the Company completed its initial public
offering of stock, the net proceeds of which were used to retire debt. In
connection with the Company's early retirement of debt from the proceeds of its
initial public offering, the Company recorded an extraordinary loss of $1.6
million ($0.9 million net of taxes) in fiscal 1997. Net income for the twelve
months ended July 31, 1997 was $8.3 million, or $0.71 per share.
Net income for the twelve months ended July 31, 1996 was $3.4 million,
or $0.33 per share. Net income for the year included non-recurring charges of
$3.2 million ($1.3 million net of taxes) as discussed above. Excluding these
non-recurring charges, net income for the twelve months ended July 31, 1996
would have been $4.7 million, or $0.46 per share.
Nine Months Ended July 31, 1996 Compared to Nine Months Ended July 31, 1995
Net Sales. The Company's net sales increased 51.9%, or $97.9 million,
to $286.4 million in the nine months ended July 31, 1996 from $188.5 million in
the nine months ended July 31, 1995. The increase in net sales was primarily due
to additional sales of $74.5 million attributable to Nutrasource and Rainbow,
whose operations were included for the entire nine-month period in 1996. Sales
of $6.5 million were attributable to two months of operations of Nutrasource
during the comparable 1995 period. The increase was also attributable to
increased sales by the Company to existing customers, including net sales
attributable to new products offered by the Company and net sales to new
customers in existing geographic distribution areas as well as new geographic
areas not formerly served by the Company.
Gross Profit. The Company's gross profit increased 47.0%, or $19.2
million, to $60.0 million in the nine months ended July 31, 1996 from $40.8
million in the nine months ended July 31, 1995. The Company's gross profit as a
percentage of net sales decreased to 20.9% for the nine months ended July 31,
1996 from 21.6% in the nine months ended July 31, 1995. The decrease in the
gross profit as a percentage of net sales was primarily due to the lower-margin
business of the Company's recently acquired distributors and to an increase in
net sales during fiscal 1996 attributable to natural product supermarket chains.
These chains tend to buy in larger quantities and thus qualify for greater
volume discounts.
23
Operating Expenses. The Company's total operating expense increased
48.3%, or $16.1 million, to $49.4 million in the nine months ended July 31, 1996
from $33.3 million in the nine months ended July 31, 1995. As a percentage of
net sales, operating expenses decreased to 17.2% in the nine months ended July
31, 1996 from 17.7% in the nine months ended July 31, 1995. Total operating
expenses in the nine months ended July 31, 1996 included a non-cash expense of
$1.0 million related to the grant of options under the Company's 1996 Stock
Option Plan and a non-recurring expense of $0.5 million representing costs
associated with the Mountain People's merger. Excluding the $1.5 million of
non-recurring expenses, the Company's total operating expenses would have been
$47.8 million, or 16.7% of net sales, for the nine months ended July 31, 1996.
The decrease in total operating expenses as a percentage of net sales was
primarily attributable to the Company's increased absorption of overhead and
fixed expenses over a larger sales base. In addition, the Company achieved
increased operating efficiencies through the implementation of new information
and warehouse management systems in its Connecticut and Georgia facilities.
The Company's amortization of intangible assets increased 31.5%, or
$0.2 million, to $0.8 million in the nine months ended July 31, 1996 from $0.6
million in the nine months ended July 31, 1995. This increase was primarily
attributable to the inclusion of amortization expense for Nutrasource and
Rainbow for the entire nine months ended July 31, 1996, compared with the
inclusion of two months of amortization expense for Nutrasource for the nine
months ended July 31, 1995.
Operating Income. Operating income increased $3.1 million, or 42.3%, to
$10.6 million in the nine months ended July 31, 1996 from $7.5 million in the
nine months ended July 31, 1995. As a percentage of net sales, operating income
declined to 3.7% in the nine months ended July 31, 1996 from 3.9% in the nine
months ended July 31, 1995. Excluding the $1.5 million of non-recurring expenses
discussed above, operating income would have been $12.1 million, or 4.2% of net
sales, in the nine months ended July 31, 1996.
Other (Income)/Expense. The $1.8 million increase in interest expense
in the nine months ended July 31, 1996 compared to the nine months ended July
31, 1995 was primarily attributable to the indebtedness incurred in connection
with the purchase of the Company's Connecticut facility in August 1995 and the
acquisitions of Nutrasource and Rainbow, along with an increase in borrowings
under the Company's revolving line of credit to fund increasing inventory and
accounts receivable balances related to the Company's increased sales.
Income Taxes. The Company's effective income tax rates were 40.8% and
40.1% for the nine months ended July 31, 1996 and 1995, respectively. The
effective rates were higher than the federal statutory rate due to nondeductible
costs associated with the merger with Mountain People's, non-deductible
amortization and state and local income taxes.
Net Income. As a result of the foregoing, the Company's net income
increased by 24.5%, or $0.8 million, to $4.0 million in the nine months ended
July 31, 1996 from $3.2 million in the nine months ended July 31, 1995.
Excluding the $1.5 million ($0.9 million net of taxes) non-recurring expenses
discussed above, net income would have been $4.9 million, or 1.7% of net sales,
in the nine months ended July 31, 1996.
24
Liquidity and Capital Resources
The Company historically has financed its operations and growth
primarily from cash flows from operations, borrowings under its credit facility,
seller financing of acquisitions, operating and capital leases, trade payables,
bank indebtedness and the sale of equity securities. Primary uses of capital
have been acquisitions, expansion of plant and equipment and investment in
accounts receivables and inventory.
Net cash provided by operations was $0.5 million for the twelve months
ended July 31, 1997 and $1.5 million for the nine months ended July 31, 1996.
Net income increased in fiscal 1997 as compared with fiscal 1996 although cash
provided by operating activities decreased. The decrease in cash generated from
operations was primarily attributable to increases in accounts receivable and
inventory that resulted from the expansion of product lines and the continued
growth of the Company's business. The Company's working capital at July 31, 1997
was $48.9 million.
Net cash used in investing activities was $3.3 million for the twelve
months ended July 31, 1997 and $7.0 million for the nine months ended July 31,
1996. Investing activities were primarily related to capital expenditures
necessary to fund the expansion of its Connecticut distribution facility, the
related purchase of material handling equipment, tractors and trailers and
continued upgrade of existing management information systems. The capital
expenditures were primarily funded from senior bank indebtedness, including term
loans, and capital and operating leases.
Net cash provided by financing activities was $2.8 million for the
twelve months ended July 31, 1997 and $5.3 million for the nine months ended
July 31, 1996. During fiscal 1997, the Company issued 2.9 million shares of its
common stock in its initial public offering which resulted in net proceeds of
$35.5 million. The proceeds were used to pay down debt of the Company. During
fiscal 1996, approximately $5.3 million in long-term debt was repaid from cash
provided from operations and with the cash proceeds from the re-financing of the
Company's senior bank facility.
On February 20, 1996, the Company entered into a credit agreement with
its bank to provide a $50 million facility for working capital, term loans and a
mortgage for its Connecticut facility. In March 1997, the Company amended its
$50 million credit agreement to allow borrowings up to $10 million for
acquisitions, and changed the interest rate under the credit facility to either
the New York Prime Rate or 1.00% above the bank's London Interbank Offered Rate
(LIBOR). The Company has the option to fix the rate for all or a portion of the
debt for a period of up to 180 days. Interest on the mortgage facility will
accrue at a rate of 1.25% above the bank's LIBOR rate, although the Company has
the option to fix the rate for a period of five years at 1.25% above the
five-year U.S. Treasury Note rate. The Company has pledged all of its assets as
collateral for the obligations under the credit agreement. As of July 31, 1997,
the Company's outstanding borrowings under the credit agreement totaled $6.3
million. The credit agreement expires on July 31, 2002.
25
The Company expects to spend approximately $10 million over the next
five years in capital expenditures to fund the expansion of existing facilities,
upgrade information systems and technology and to update its material handling
equipment. Management believes that it will have adequate capital resources and
liquidity to meets its debt obligations and to fund its planned capital
expenditures and operate its business for the foreseeable future.
Impact of Inflation
Historically, the Company has been able to pass along inflation-related
increases. Consequently, inflation has not had a material impact upon the
results of the Company's operations or profitability.
Seasonality
Generally, the Company does not experience any material seasonality.
However, the Company's sales and operating results may vary significantly from
quarter to quarter due to factors such as changes in the Company's operating
expenses, management's ability to execute the Company's operating and growth
strategies, personnel changes, demand for natural products, supply shortages and
general economic conditions.
New Accounting Standards
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," during fiscal 1997. While
SFAS No. 123 established financial accounting and reporting standards for stock-
based employee compensation plans using a fair value method of accounting, it
allows companies to continue to measure compensation using the intrinsic value
method of accounting as prescribed in APB Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees." The Company will continue to use its
present APB No. 25 accounting treatment for stock-based compensation. The
adoption of SFAS No. 123 did not have a material impact on the Company's
financial condition, results of operations or cash flows.
In February 1997, the Financial Accounting Standards Board released
SFAS No. 128, "Earnings per Share." This Statement establishes standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. The Statement replaces the
presentation of primary EPS with a presentation of basic EPS. The Statement also
requires a dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. The effect of the adoption
of SFAS
26
No. 128 will not have a material impact on the Company's financial condition,
results of operations or cash flows.
The Financial Accounting Standards Board recently issued SFAS No. 129,
"Disclosure of Information about Capital Structure." This statement establishes
standards for disclosing information about an entity's capital structure. This
statement is effective for periods ending after December 15, 1997. The effect of
the adoption of SFAS No. 129 will not have a material impact on the Company's
financial condition, results of operations or cash flows.
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This statement is effective for fiscal
years beginning after December 15, 1997 and requires reclassification of
financial statements for earlier periods provided for comparative purposes. The
effect of the adoption of SFAS No. 130 will not have material impact on the
Company's financial condition, results of operations or cash flows.
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business," but
retains the requirement to report information about major customers. This
statement also amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries." This statement is effective for financial statements for periods
beginning after December 15, 1997 and requires that comparative information for
earlier years be restated. The effect of the adoption of SFAS No. 131 will not
have a material impact on the Company's financial condition, results of
operations or cash flows.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-looking statements
made in this Annual Report on Form 10-K and presented elsewhere by management
from time to time. Any statements contained herein (including without
limitations statements to the effect that United Natural or its management
"believes," "expects," "anticipates," "plans" and similar expressions) that are
not statements of historical fact should be considered forward-looking
statements.
A number of uncertainties exist that could affect United Natural's
future operating results, including, without limitation, continued demand for
current products offered by United Natural, the success of United Natural's
acquisition strategy, competitive pressures, general economic conditions, the
success of new product introductions and government regulation.
A significant portion of United Natural's historical growth has been
achieved through acquisitions of or mergers with other distributors of natural
products. United Natural recently
27
acquired or merged with three large regional distributors of natural products,
and, if the merger with Stow is consummated, will merge with another large
regional distributor. The successful and timely integration of these
acquisitions and mergers is critical to future operating and financial
performance of United Natural. While the integration of these acquisitions and
mergers with United Natural's existing operations has begun, United Natural
believes that the integration will not be substantially completed until the end
of calendar 1998. The integration will require, among other things, coordination
of administrative, sales and marketing, distribution, and accounting and finance
functions and expansion of information and warehouse management systems among
United Natural's regional operations. The integration process could divert the
attention of management, and any difficulties or problems encountered in the
transition process could have a material adverse effect on United Natural's
business, financial condition or results of operations. In addition, the process
of combining the companies could cause the interruption of, or loss of momentum
in, the activities of the respective businesses, which could have an adverse
effect on their combined operations.
United Natural is currently experiencing a period of growth which could
place a significant strain on its management and other resources. United
Natural's business has grown significantly in size and complexity over the past
several years. The growth in the size of United Natural's business and
operations has placed and is expected to continue to place a significant strain
on United Natural's management. United Natural's future growth is limited in
part by the size and location of its distribution centers. There can be no
assurance that United Natural will be able to successfully expand its existing
distribution facilities or open new distribution facilities in new or existing
markets to facilitate growth. In addition, United Natural's growth strategy to
expand its market presence includes possible additional acquisitions. To the
extent United Natural's future growth includes acquisitions, there can be no
assurance that it will successfully identify suitable acquisition candidates,
consummate and integrate such potential acquisitions or expand into new markets.
United Natural operates in highly competitive markets, and its future
success will be largely dependent on its ability to provide quality products and
services at competitive prices. United Natural's competition comes from a
variety of sources, including other distributors of natural products as well as
specialty grocery and mass market grocery distributors. There can be no
assurance that the mass market grocery distributors will not increase their
emphasis on natural products and more directly compete with United Natural or
that new competitors will not enter the market.
The grocery distribution industry generally is characterized by relatively
high volume with relatively low profit margins. The continuing consolidation of
retailers in the natural products industry and the emergence of natural products
supermarket chains may have an adverse effect on United Natural's profit margins
in the future as more customers qualify for greater volume discounts offered by
United Natural. The grocery industry is also sensitive to national and regional
economic conditions, and the demand for product supply may be adversely affected
from time to time by economic downturns.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
28
Item 8.
Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
United Natural Foods, Inc. and Subsidiaries:
Independent Auditors' Report........................................ 30
Consolidated Balance Sheets......................................... 31
Consolidated Statements of Income................................... 32
Consolidated Statements of Stockholders' Equity..................... 33
Consolidated Statements of Cash Flows............................... 34
Notes to Consolidated Financial Statements.......................... 36
29
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United Natural Foods, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of United
Natural Foods, Inc. and Subsidiaries as of July 31, 1996 and 1997 and the
related consolidated statements of income, stockholders' equity and cash flows
for the year ended October 31, 1995, for the nine months ended July 31, 1996,
and for the year ended July 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Natural Foods, Inc. and Subsidiaries as of July 31, 1996 and 1997 and the
results of their operations and their cash flows for the year ended October 31,
1995, for the nine months ended July 31, 1996, and for the year ended July 31,
1997 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Providence, Rhode Island
September 5, 1997
30
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, July 31,
1996 1997
---- ----
ASSETS
Current assets:
Cash .......................................................................................... $ 51,255 $ 16,477
Accounts receivable, net of allowance for doubtful accounts of $1,277,755 in 1996 and
$2,149,628 in 1997 .......................................................................... 25,657,156 30,019,556
Notes receivable, trade ....................................................................... 360,137 866,160
Inventories ................................................................................... 38,667,548 45,030,476
Prepaid expenses .............................................................................. 1,691,548 3,496,385
Deferred income taxes (note 10) ............................................................... 796,216 1,031,767
Total current assets ........................................................................ 67,223,860 80,460,821
------------- -------------
Property and equipment, net (note 6) ............................................................. 20,603,663 20,379,327
------------- -------------
Other assets:
Notes receivable, trade, net .................................................................. 1,067,697 995,398
Goodwill, net of accumulated amortization of $556,345 in 1996 and $790,684 in 1997 (note 2) .. 8,096,395 7,579,408
Covenants not to compete, net of accumulated amortization of $711,737 in 1996 and
$1,552,306 in 1997 (note 2) ................................................................. 1,117,234 591,665
Deferred acquisition related expenses ......................................................... - 217,856
-------------
Other, net .................................................................................... 635,290 760,879
------------- -------------
10,916,616 10,145,206
------------- -------------
Total assets ................................................................................ $ 98,744,139 $ 110,985,354
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (note 4) ........................................................................ $ 30,112,868 $ 6,277,300
Current installments of long-term debt (note 5) ............................................... 4,086,795 2,247,281
Current installments of obligations under capital leases (note 7) ............................. 357,404 499,984
Accounts payable .............................................................................. 17,139,406 17,994,561
Accrued expenses .............................................................................. 4,978,331 3,991,025
Income taxes payable .......................................................................... 303,513 377,322
Other ......................................................................................... 158,149 190,667
------------- -------------
Total current liabilities ................................................................... 57,136,466 31,578,140
Long-term debt, excluding current installments (note 5) .......................................... 22,170,855 15,569,665
Deferred income taxes (note 10) .................................................................. 407,346 677,560
Obligations under capital leases, excluding current installments (note 7) ........................ 847,918 983,432
------------- -------------
Total liabilities ........................................................................... 80,562,585 48,808,797
------------- -------------
Stockholders' equity (note 12):
Common stock, $.01 par value, authorized 25,000,000 shares;
issued 8,713,100 shares and outstanding 8,692,695 shares in 1996, issued 12,398,830 shares
and outstanding 12,378,425 shares in 1997 ................................................... 87,131 123,988
Additional paid-in capital .................................................................... 1,383,511 40,056,154
Stock warrants (note 5) ....................................................................... 3,200,000 -
Unallocated shares of employee stock ownership plan (note 11) ................................. (3,073,600) (2,910,400)
Retained earnings ............................................................................. 16,628,966 24,951,269
Treasury stock, 20,405 shares at cost ......................................................... (44,454) (44,454)
------------- -------------
Total stockholders' equity .................................................................. 18,181,554 62,176,557
------------- -------------
Commitments (notes 8 and 9)
Total liabilities and stockholders' equity .................................................. $ 98,744,139 $ 110,985,354
============= =============
See accompanying notes to consolidated financial statements.
31
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine
Year ended months ended Year ended
October 31, July 31, July 31,
1995 1996 1997
----- ----- ----
Net sales ....................................................... $ 283,323,435 $ 286,448,399 $ 421,697,941
Cost of sales ................................................... 223,482,549 226,481,766 334,583,617
------------- ------------- -------------
Gross profit ........................................ 59,840,886 59,966,633 87,114,324
------------- ------------- -------------
Operating expenses .............................................. 48,653,214 48,564,649 67,633,123
Amortization of intangibles (note 1(f)) ......................... 2,425,618 792,615 1,060,442
------------- ------------- -------------
Total operating expenses ............................ 51,078,832 49,357,264 68,693,565
------------- ------------- -------------
Operating income .................................... 8,762,054 10,609,369 18,420,759
------------- ------------- -------------
Other expense (income):
Interest expense .......................................... 3,403,009 3,942,820 3,081,440
Other, net ................................................ (173,312) (136,869) (331,983)
------------- ------------- -------------
Total other expense ................................. 3,229,697 3,805,951 2,749,457
------------- ------------- -------------
Income before income taxes and
extraordinary item .............................. 5,532,357 6,803,418 15,671,302
Income taxes (note 10) .......................................... 2,929,856 2,778,121 6,416,070
------------- ------------- -------------
Income before extraordinary item ..................... 2,602,501 4,025,297 9,255,232
------------- ------------- -------------
Extraordinary item - loss on early retirement
of debt, net of income tax benefit $661,822 ........ -- -- 932,929
------------- ------------- -------------
Net income ......................................... $ 2,602,501 $ 4,025,297 $ 8,322,303
============= ============= =============
Income per share of common stock before
extraordinary item ................................. $ 0.26 $ 0.40 $ 0.79
============= ============= =============
Extraordinary item .............................................. $ -- $ -- $ 0.08
============= ============= =============
Net income per share of common stock ............................ $ 0.26 $ 0.40 $ 0.71
============= ============= =============
Weighted average common and common equivalent shares ............ 10,148,374 10,143,809 11,697,587
============= ============= =============
See accompanying notes to consolidated financial statements.
32
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unallocated
Outstanding Additional Shares of
Number Common Paid-in Stock Employee Stock Retained
of Shares Stock Capital Warrants Ownership Plan Earnings
--------- ----- ------- -------- -------------- --------
Balances October 31, 1994..... 8,713,100 $87,131 $327,411 $3,200,000 $(3,359,200) $10,001,168
Allocation of shares of
ESOP..................... -- -- -- -- 163,200 --
Net income................. -- -- -- -- -- 2,602,501
---------- --------- --------- --------- ------------ ------------
Balances October 31, 1995..... 8,713,100 87,131 327,411 3,200,000 (3,196,000) 12,603,669
Allocation of shares to
ESOP..................... -- -- -- -- 122,400 --
Purchase of treasury
stock.................... (20,405) -- -- -- -- --
Stock options (note 3)..... -- -- 1,056,100 -- -- --
Net income................. -- -- -- -- -- 4,025,297
---------- --------- --------- --------- ------------ ------------
Balances July 31, 1996........ 8,692,695 87,131 1,383,511 3,200,000 (3,073,600) 16,628,966
Issuance of common stock
(note 1(n)).............. 2,900,000 29,000 35,480,500 -- -- --
Exercise of stock warrants 785,730 7,857 3,192,143 (3,200,000)
Allocation of shares of
ESOP..................... -- -- -- -- 163,200 --
Net income................. -- -- -- -- -- 8,322,303
---------- --------- --------- --------- ------------ ------------
Balances July 31, 1997........ 12,378,425 $ 123,988 $ 40,056,154 -- $(2,910,400) $ 24,951,269
========== ========== ============ ========= ============ ============
Total
Treasury Stockholders'
Stock Equity
----- ------
Balances October 31, 1994..... -- $10,256,510
Allocation of shares of
ESOP..................... -- 163,200
Net income................. -- 2,602,501
--------- ------------
Balances October 31, 1995..... -- 13,022,211
Allocation of shares to
ESOP..................... -- 122,400
Purchase of treasury
stock.................... $ (44,454) (44,454)
Stock options (note 3)..... -- 1,056,100
Net income................. -- 4,025,297
--------- ------------
Balances July 31, 1996........ (44,454) 18,181,554
Issuance of common stock
(note 1(n)).............. -- 35,509,500
Exercise of stock warrants --
Allocation of shares of
ESOP..................... -- 163,200
Net income................. -- 8,322,303
--------- ------------
Balances July 31, 1997........ $ (44,454) $ 62,176,557
========= ============
See accompanying notes to consolidated financial statements.
33
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Nine months Year ended
October 31, ended July 31, July 31,
1995 1996 1997
---- ---- ----
Cash flows from operating activities:
Net income................................................................. $ 2,602,501 $ 4,025,297 $ 8,322,303
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Extraordinary loss on early extinguishment of debt, net of tax.......... -- -- 932,929
Depreciation, amortization and write-off of intangibles................. 4,273,244 3,012,061 4,416,661
Loss (gain) on disposals of property and equipment...................... (123,583) 24,441 8,930
Accretion of original issue discount.................................... 530,004 458,541 152,847
Compensation expense related to stock options........................... -- 1,056,100 --
Deferred income taxes................................................... 330,158 (270,254) (4,520)
Provision for doubtful accounts......................................... 762,764 646,828 2,112,015
Increase in accounts receivable......................................... (5,544,515) (1,997,444) (6,474,415)
Increase in inventory................................................... (9,989,327) (3,203,177) (6,362,928)
Increase in prepaid expenses............................................ (228,391) (708,539) (1,804,837)
Decrease (increase) in other assets..................................... 2,025,426 300,253 (375,853)
Increase in notes receivable, trade..................................... (265,113) (203,630) (433,724)
Increase (decrease) in accounts payable................................. 4,488,652 (2,871,234) 855,155
Increase (decrease) in accrued expenses................................. 503,467 1,080,891 (954,789)
Increase (decrease) in income taxes payable............................. (220,989) 195,332 73,809
----------- ----------- -----------
Net cash provided by (used in) operating activities............... (855,702) 1,545,466 463,583
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from disposals of property and equipment.......................... 147,666 43,021 95,028
Capital expenditures....................................................... (9,934,590) (7,091,280) (3,350,378)
Payments for purchases of subsidiaries, net of cash acquired............... (8,672,834) -- --
----------- ----------- -----------
Net cash used in investing activities............................. (18,459,758) (7,048,259) (3,255,350)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under note payable............................. 12,388,997 4,922,460 (23,835,568)
Repayments of long-term debt............................................... (2,046,824) (5,349,788) (20,969,524)
Proceeds from long-term debt............................................... 9,604,443 6,184,986 12,528,820
Principal payments of capital lease obligations............................ (251,632) (387,947) (476,239)
Payment of financing costs................................................. (321,044) -- --
Proceeds from issuance of common stock, net................................ -- -- 35,509,500
Purchase of treasury stock................................................. -- (44,454) --
----------- ----------- -----------
Net cash provided by financing activities......................... 19,373,940 5,325,257 2,756,989
----------- ----------- -----------
Net increase (decrease) in cash............................................... 58,480 (177,536) (34,778)
Cash at beginning of period................................................... 170,311 228,791 51,255
----------- ----------- -----------
Cash at end of period......................................................... $ 228,791 $ 51,255 $ 16,477
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................................ $ 2,638,000 $ 2,120,000 $ 3,299,475
=========== =========== ===========
Income taxes............................................................ $ 2,838,000 $ 2,467,000 $ 5,319,860
=========== =========== ===========
34
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Supplemental schedule of non-cash investing and financing activities:
In 1995, the Company purchased substantially all of the assets of
one retail store, substantially all of the assets of one wholesale
distributor and the capital stock of another wholesale distributor for
$6,725,000. In conjunction with the acquisitions, liabilities were assumed
as follows:
Fair value of assets acquired...................... $21,315,000
Cash paid.......................................... 6,725,000
-----------
Liabilities assumed and debt issued.......... $14,590,000
===========
In 1996 and 1997, the Company incurred capital lease obligations of
approximately $582,000 and $786,000 respectively for equipment.
See accompanying notes to consolidated financial statements.
35
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996 AND 1997
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
United Natural Foods, Inc. and Subsidiaries (the Company) is a
distributor and retailer of natural products. The Company sells its products
throughout the United States. For purposes of segment reporting, the Company
considers its operations to be within a single industry.
(b) Basis of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
(c) Inventories
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method.
(d) Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the present value of minimum lease payments at the inception of the
lease. Depreciation and amortization are principally provided under the
straight-line method over the estimated useful lives.
(e) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(f) Intangible Assets
Intangible assets consist principally of goodwill and covenants not to
compete. Goodwill represents the excess purchase price over fair value of net
assets acquired in connection with purchase business combinations and is being
amortized on the straight line method over thirty years. Covenants not to
compete are stated at cost and are amortized using the straight-line method over
the lives of the respective agreements, generally five years.
The Company evaluates impairment of intangible assets annually, or more
frequently if events or changes in circumstances indicate that carrying amounts
may no longer be recoverable. Impairment losses are determined based upon the
excess of carrying amounts over expected future cash flows (undiscounted) of the
underlying business. The assessment of the recoverability of intangible assets
will be impacted if estimated future cash flows are not achieved.
36
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In fiscal 1995, the Company wrote off approximately $1,564,000 in
intangible assets, primarily goodwill, upon evaluating impairment of the
underlying business of certain of its retail operations. The impairment was
indicated by projected cash flow losses caused by increased competition at one
location and a change in demographics for the other affected location. This
amount is included in "Amortization of Intangibles" in the 1995 Consolidated
Statement of Income.
(g) Revenue Recognition and Trade Receivables
The Company records revenue upon shipment of products. Revenues are
recorded net of applicable sales discounts. The Company's sales are with
customers located throughout the United States.
(h) Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including
cash, accounts receivable, accounts payable, and accrued expenses approximate
fair value due to the short term nature of these instruments. The carrying value
of notes receivable, long term debt and capital lease obligations approximate
fair value based on the instruments' interest rate, terms, maturity date, and
collateral, if any, in comparison to the Company's incremental borrowing rate
for similar financial instruments.
(i) Change in Fiscal Year
Effective November 1, 1995, the Company elected to change its fiscal year
end from October 31 to July 31.
(j) Accounting Changes
Effective November 1, 1995, the Company changed its method of accounting
for certain inventories from the last-in, first-out (LIFO) method to the
first-in, first-out (FIFO) method. Due to a number of recent acquisitions, the
Company's subsidiaries were accounting for inventories on varying methods (LIFO,
FIFO) and using different calculation methodologies for LIFO. In order to
conform all the Company's inventories to the same valuation method and to
enhance the comparability of the Company's financial results with other publicly
traded entities, the conforming change to FIFO was made, which was deemed
preferable for these reasons. This change has been applied retroactively and
financial statements of prior periods have been restated.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(l) Notes Receivable, Trade
The Company issues notes receivable, trade to certain customers under two
basic circumstances, inventory purchases for initial store openings and overdue
accounts receivable. Initial store opening notes are generally receivable over a
period not to exceed twelve months. The overdue accounts receivable notes may
extend for periods greater than one year. All notes are issued at a market
interest rate and contain certain guarantees and collateral assignments in favor
of the Company.
37
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(m) Employee Benefit Plans
The Company sponsors various defined contribution plans that cover
substantially all employees. Pursuant to certain stock incentive plans, the
Company has granted stock options to key employees and to non-employee
directors. The Company accounts for stock option grants using the intrinsic
value based method.
(n) Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period and
common stock equivalents. For purposes of this calculation, outstanding stock
options and stock warrants are considered common stock equivalents and totaled
approximately 1.8 million shares for all periods presented (approximately 1.4
million incremental shares under the treasury stock method). Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common and
common equivalent shares issued during the twelve month period prior to the date
of the initial filing of the Company's registration statement relating to its
initial public offering have been included in the calculation, using the
treasury stock method, as if they were outstanding for all periods presented.
Fair market value for the purpose of this calculation was the assumed initial
public offering price. The number of shares used in all calculations has been
adjusted to reflect a fifty-five-for-one stock split effective August 30, 1996.
In November 1996, the Company completed a public offering of its common
stock. Proceeds from the sale of 2.9 million shares were used to repay
outstanding bank indebtedness. Assuming the aforementioned sale of common stock
and repayment of debt occurred effective August 1, 1996, supplementary income
before extraordinary item per common and common share equivalent for the year
ended July 31, 1997 would have been $0.76 based upon 12,670,732 weighted average
common and common equivalent shares.
(2) ACQUISITIONS
Subsequent event
In June 1997, the Company entered into an Agreement and Plan of
Reorganization with Stow Mills, Inc. of Chesterfield, New Hampshire, which
distributes natural products. This business combination transaction will be
accounted for as a pooling of interests. The Company expects the transaction to
be closed during the first quarter of 1998.
Fiscal 1996
In February 1996, Cornucopia Natural Foods, Inc. (CNF) and Mountain
People's Warehouse, Inc. (MPW) merged in a business combination accounted for as
a pooling of interests. CNF issued 3,213,100 shares, which represented
approximately 37% of the common stock of CNF after the merger, in exchange for
all of the outstanding common stock of MPW. The combined entity changed its name
to United Natural Foods, Inc. The financial statements for all periods presented
reflect the merger. Net sales for fiscal 1995 and the quarter ended January 31,
1996 for CNF were $145.6 million and $48.7 million (unaudited), respectively.
Net income for fiscal 1995 and the quarter ended January 31, 1996 for CNF was
$0.9 million and $1.0 million (unaudited), respectively. Net sales for fiscal
1995 and the quarter ended January 31, 1996 for MPW were $137.7 million and
$43.6 million (unaudited), respectively. Net income for fiscal 1995 and the
quarter ended January 31, 1996 for MPW $1.7 million and $0.1 million
(unaudited), respectively.
Fiscal 1995
During fiscal 1995, the Company acquired substantially all of the assets
of one natural products retailer, SunSplash Market, Inc. (in April 1995), one
wholesale distributor, Prem Mark, Inc. (the predecessor business to
38
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rainbow Natural Foods, Inc.) (in July 1995) and the capital stock of another
wholesale distributor, Nutrasource, Inc. (in May 1995) in business combinations
accounted for as purchases. The results of operations of these acquisitions have
been included in the accompanying financial statements since the dates of the
acquisitions. The total cash paid and debt issued for these acquisitions was
approximately $12,470,000, which exceeded the fair value of the net assets
acquired by approximately $6,329,000. This excess of purchase price over the net
assets acquired has been recorded as goodwill, and is being amortized over
thirty years.
In connection with these acquisitions, the Company executed covenants
not to compete and consulting agreements totaling $505,000 to be amortized using
the straight-line method over the lives of the respective agreements, generally
five years.
(3) STOCK OPTION PLAN
The Company implemented Statement of Financial Accounting Standards
No. 123, "Accounting for Stock- Based Compensation," during fiscal 1997. While
SFAS No. 123 established financial accounting and reporting standards for
stock-based employee compensation plans using a fair value method of accounting,
it allows companies to continue to measure compensation using the intrinsic
value method of accounting as prescribed in APB Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees." The Company will continue to use its
present APB No. 25 accounting treatment for stock-based compensation. If the
fair value method of accounting had been used, net income would have been $2.4
million and $8.1 million for 1996 and 1997, respectively, and earnings per share
would have been $0.24 and $0.70 for 1996 and 1997, respectively. The weighted
average grant date fair value of options granted during 1996 and 1997 was $6.47
and $5.84 per option, respectively. The fair value of each option grant was
estimated using the Black-Sholes Option Pricing Model with the following
weighted average assumptions for 1996 and 1997: a dividend yield of 0.0%, an
expected volatility of 46.5%, a risk free interest rate of 6.07% and an expected
life of 8 years.
On July 29, 1996, the Board of Directors adopted, and on July 31, 1996 the
stockholders approved, the 1996 Stock Option Plan which provides for grants of
stock options to employees, officers, directors and others. These options are
intended to qualify as incentive stock options within the meaning of Section 422
of the Internal Revenue Code or options not intended to qualify as incentive
stock options ("non-statutory options"). A total of 1,375,000 shares of common
stock may be issued upon the exercise of options granted under the 1996 Stock
Option Plan.
In 1996, as consideration for their services on the Company's Board of
Directors, four employee-directors were awarded a total of 324,500 non-statutory
stock options under the Company's 1996 Stock Option Plan at an exercise price of
$6.38 per share which vested immediately. In addition, one non-employee director
was awarded a total of 16,500 non-statutory stock options under the 1996 Stock
Option Plan at an exercise price of $9.64 per share which vest after three
years. Incentive stock options to purchase an aggregate of 297,000 shares of
common stock were also granted to several employees at not less than the fair
value at the date of grant, with vesting at various rates generally over the
next five years. Compensation expense of $1,056,100 was charged to operations in
fiscal 1996 related to the employee-director stock options.
The following table summarizes the stock option activity for fiscal 1996
and 1997.
39
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1996 1997
---- ----
Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding at beginning of year - - 638,000 $8.11
Granted 638,000 $8.11 16,500 $9.64
Exercised - - - -
Canceled - - - -
------- -------
Outstanding at end of year 638,000 $8.11 654,500 $8.14
======= ===== ======= =====
Options exercisable at year end 434,500 $7.18
======= =====
The 654,500 outstanding stock options at July 31, 1997 had a range of exercise
prices from $6.38 to $10.60 per share. The weighted average remaining years of
contractual life for these outstanding stock options is 9 years.
(4) NOTES PAYABLE
The Company entered into a line of credit and term loan agreement (see
note 5) with a bank effective February 20, 1996. The agreement has had two
subsequent amendments effective March 1, 1997 and July 1, 1997. The line of
credit agreement permits the Company to borrow up to a maximum of $50,000,000.
The term loan agreement provides for the Company to borrow up to $13,000,000 to
finance real estate acquisitions as well as $10,000,000 to finance acquisitions.
The amount of borrowing is based upon the sum of 90% of eligible accounts
receivable and 55% of eligible inventory. Interest on the loans is at New York
prime interest rate or 1.00% above the LIBOR rate.
The Company has the option to fix the rate for all or a portion of the debt for
a period of up to 180 days. Interest on the mortgage facility will accrue at
1.25% above the bank's LIBOR rate, and the Company has the option to fix the
rate for a period of five years at 1.25% above the five-year U.S. Treasury Note
rate. The bank's prime rate was 8.25% and 8.50% at July 31, 1996 and 1997,
respectively. The line of credit agreement, which terminates July 2002, is
secured by all assets of the Company and contains certain restrictive covenants.
The Company was in compliance with its restrictive covenants at July 31, 1997.
(5) LONG-TERM DEBT
Long-term debt consisted of the following:
July 31, July 31,
1996 1997
---- ----
Note payable to limited partnership, secured, with interest ranging from
8% to 12% per annum payable quarterly, maturing October 1998.......................... $ 4,744,545 -
Term loan for employee stock ownership plan, secured by stock of the
Company, due $13,600 monthly plus interest at 10%, balance due
May 1, 2015........................................................................... 3,073,600 $2,910,400
Real estate term loan payable to bank, secured by land and building,
refinanced in July 1997............................................................... 5,775,000 25,000
Term loan payable to former owners of acquired business, secured by
substantially all assets of subsidiary, repayment made in November 1996............... 2,785,409 -
40
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Term loan payable to bank, secured by substantially all assets of the
Company, with monthly principal payments of $50,000 through July
2002 and the remaining principal due on July 31, 2002, interest at bank's
prime plus 0.25% or at 2.25% above the LIBOR rate..................................... 4,702,381 12,000,000
Installment notes secured by equipment, payable in monthly installments
through 2002 at interest rates ranging from 7.43% to 11.82%........................... 1,958,257 2,319,553
Other notes payable to former owners of acquired businesses and former
stockholders of subsidiaries, maturing at various dates through
February 2002 at interest rates ranging from 6% to 10%................................ 3,164,835 527,679
Notes payable to bank, secured by automobiles, including interest
ranging from 6.25% to 7.25%, primarily due over three years........................... 53,623 34,314
------ ------
26,257,650 17,816,946
Less: current installments............................................................... 4,086,795 2,247,281
------------ ------------
Long-term debt, excluding current installments........................................... $22,170,855 $ 15,569,665
=========== ============
The Company entered into a Note and Warrant Purchase Agreement (the Agreement)
with a limited partnership (the Purchaser) on November 17, 1993. Under the
Agreement, the Company issued to the Purchaser a Senior Note in the principal
amount of $6,500,000 and a Common Stock Purchase Warrant for 1,166,660 shares of
the common stock of the Company. The Senior Note was repaid in full in November
1996 upon receipt of the proceeds from the initial public offering. The loss on
the early retirement of debt has been reflected as an extraordinary item of
$932,929, net of the income tax benefit of $661,822. This loss represents the
charge off of the remaining original issue discount at the date of repayment.
The Purchaser exercised stock warrants to purchase 785,730 shares of common
stock during fiscal 1997 at a price of $.01 per share, with the remaining stock
warrants repurchased by the Company. Interest on the Senior Note ranged from 8%
to 12% per annum.
Aggregate maturities of long-term debt for the next five years and
thereafter are as follows at July 31, 1997:
1998............ $ 2,247,281
1999............ 1,439,660
2000............ 1,233,060
2001............ 1,025,435
2002............ 9,777,110
Thereafter...... 2,094,400
-----------
$17,816,946
===========
(6) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at July 31, 1996 and
1997:
41
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimated
Useful
Lives (Years) 1996 1997
------------- ---- ----
Land....................................................... $ 266,870 $ 266,870
Building................................................... 40 9,477,204 9,600,602
Leasehold improvements..................................... 5-10 3,380,199 4,440,907
Warehouse equipment........................................ 5-10 5,454,745 5,360,479
Office equipment........................................... 3-5 4,075,772 4,657,930
Motor vehicles............................................. 3 4,669,065 5,195,933
Equipment under capital leases............................. 5 1,769,139 2,532,031
Construction in progress................................... 337,507 196,392
----------- -----------
29,430,501 32,251,144
Less accumulated depreciation and amortization............. 8,826,838 11,871,817
----------- -----------
Net property and equipment........................... $20,603,663 $20,379,327
=========== ===========
(7) CAPITAL LEASES
The Company leases computer, office and warehouse equipment under capital
leases expiring in various years through 2002. The assets and liabilities under
capital leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the assets. The assets are depreciated over
the lower of their related lease terms or their estimated productive lives.
Minimum future lease payments under capital leases as of July 31, 1997 for
each of the next five fiscal years and in the aggregate are:
Year ended July 31 Amount
- ------------------ --------
1998....................................................................... $ 601,193
1999....................................................................... 472,868
2000....................................................................... 423,112
2001....................................................................... 71,292
2002 and thereafter........................................................ 120,262
-----------
Total minimum lease payments......................................... 1,688,727
Less: Amount representing interest......................................... 205,311
-----------
Present value of net minimum lease payments.......................... 1,483,416
Less: current installments................................................. 499,984
-----------
Capital lease obligations, excluding current installments............ $ 983,432
===========
(8) COMMITMENTS AND CONTINGENCIES
The Company leases various facilities under operating lease agreements
with varying terms. Most of the leases contain renewal options and purchase
options at several specific dates throughout the terms of the leases.
The Company also leases equipment under master lease agreements. Payment
under these agreements will continue for a period of four years. The equipment
lease agreements contain covenants concerning the maintenance of certain
financial ratios. The Company was in compliance with its covenants at July 31,
1997.
Future minimum annual fixed payments required under non-cancelable
operating leases having an original term of more than one year as of July 31,
1997 are as follows:
42
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998............ $ 3,459,526
1999............ 3,249,833
2000............ 2,617,024
2001............ 1,570,894
2002............ 1,072,295
------------
$ 11,969,572
============
Rent and other lease expense for the year ended October 31, 1995 totaled
approximately $5,441,000. Rent and other lease expense for the nine months ended
July 31, 1996 and the year ended July 31, 1997 totaled approximately $4,667,000
and $6,321,000, respectively.
Outstanding commitments as of July 31, 1997 for the purchase of inventory
were approximately $9,523,000. The Company had outstanding letters of credit of
approximately $352,000 at July 31, 1997 which were necessary in order to secure
business with certain foreign vendors.
The Company may from time to time be involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
(9) SALARY REDUCTION/PROFIT SHARING PLANS
The Company has several salary reduction/profit sharing plans, generally
called "401(k) Plans" (the Plan), covering various employee groups. Under this
type of Plan the employees may choose to reduce their compensation and have
these amounts contributed to the Plan on their behalf. In order to become a
participant in the Plan, the employee must meet certain eligibility requirements
as described in the Plan document. In addition to amounts contributed to the
Plan by employees, the Company makes contributions to the Plan on behalf of the
employees. The Company contributions to the Plan were $279,354, $290,991 and
$359,275 for the year ended October 31, 1995, for the nine months ended July 31,
1996 and the year ended July 31, 1997, respectively.
(10) INCOME TAXES
Total Federal and state income tax expense consists of the following:
Current Deferred Total
----------- ------------ ---------
Fiscal year ended October 31, 1995:
U.S. Federal............................ $2,079,758 $ 302,052 $2,381,810
State and local......................... 519,940 28,106 548,046
---------- --------- ----------
$2,599,698 $ 330,158 $2,929,856
========== ========= ==========
Nine months ended July 31, 1996:
U.S. Federal............................ $2,427,429 $(254,587) $2,172,842
State and local......................... 620,946 (15,667) 605,279
---------- --------- ----------
$3,048,375 $(270,254) $2,778,121
========== ========= ==========
Fiscal year ended July 31, 1997:
From continuing operations
U.S. Federal............................ $4,838,809 $18,979 $4,857,788
State and local......................... 1,581,781 (23,499) 1,558,282
---------- --------- ----------
6,420,590 (4,520) 6,416,070
---------- --------- ----------
43
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Extraordinary item
U.S. Federal............................ (542,215) -- (542,215)
State and local......................... (119,607) -- (119,607)
--------- -- ---------
(661,822) -- (661,822)
--------- -- ---------
$5,758,768 $(4,520) $5,754,248
========== ======== ==========
Total income tax expense was different than the amounts computed
using the United States statutory income tax rate (35% for Fiscal 1997) applied
to income before income taxes as a result of the following:
October 31, July 31, July 31,
1995 1996 1997
---- ---- ----
Computed "expected" tax expense................................... $1,881,001 $2,313,162 $4,926,793
State and local income tax, net of Federal income tax
benefit........................................................ 361,710 399,484 935,139
Merger related expenses........................................... -- 155,743 --
Non-deductible expenses........................................... 20,240 69,871 42,140
Non-deductible amortization....................................... 478,623 4,714 15,666
Other, net........................................................ 188,282 (164,853) (165,490)
---------- ---------- ----------
$2,929,856 $2,778,121 $5,754,248
========== ========== ==========
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets and deferred tax liabilities at July 31,
1996 and 1997 are presented below:
1996 1997
----- ----
Deferred tax assets:
Inventories, principally due to additional costs inventoried for tax
purposes................................................................... $ 421,099 $460,184
Rents deducted for book purposes in excess of tax.................................. 27,732 22,133
Financing costs.................................................................... 24,662 25,272
Intangible assets.................................................................. 221,242 300,636
Deferred compensation.............................................................. 400,896 410,823
Accrued vacation................................................................... 59,048 77,336
Accounts receivable, principally due to allowances for uncollectible
accounts........................................................................ 280,693 201,574
Other.............................................................................. 165,141 --
---------- ---------
Total gross deferred tax assets.............................................. 1,600,513 1,497,958
Less valuation allowance................................................................. -- --
---------- ---------
Net deferred tax assets...................................................... 1,600,513 1,497,958
---------- ---------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation................ 536,295 571,195
Reserve for LIFO inventory method.................................................. 675,348 522,712
Other.............................................................................. -- 49,844
---------- ---------
Total deferred tax liabilities............................................... 1,211,643 1,143,751
--------- ---------
Net deferred tax assets.................................................................. $388,870 $354,207
========= ========
Current deferred income tax assets....................................................... $ 796,216 $1,031,767
Non-current deferred income tax liabilities.............................................. (407,346) (677,560)
--------- ---------
$ 388,870 $354,207
========= ========
44
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In assessing the recoverability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Due to the fact that the Company has
sufficient taxable income in the federal carryback period and anticipates
sufficient future taxable income over the periods which the deferred tax assets
are deductible, the ultimate realization of deferred tax assets for Federal and
state tax purposes appears more likely than not.
(11) EMPLOYEE STOCK OWNERSHIP PLAN
The Company adopted the Cornucopia Natural Foods, Inc. (predecessor
company) Employee Stock Ownership Plan (the Plan) for the purpose of acquiring
outstanding shares of the Company for the benefit of eligible employees. The
Plan was effective as of November 1, 1988 and has received notice of
qualification by the Internal Revenue Service.
In connection with the adoption of the Plan, a Trust was established to
hold the shares acquired. On November 1, 1988, the Trust purchased 40% of the
outstanding Common Stock of the Company at a price of $4,080,000. The trustees
funded this purchase by issuing promissory notes to the initial stockholders,
with the ESOT shares pledged as collateral. These notes bear interest at 10% and
are payable through May 2015. As the debt is repaid, shares are released from
collateral and allocated to active employees, based on the proportion of debt
service paid in the year.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans," in November 1993. The statement
provides guidance on employers' accounting for ESOPs and is required to be
applied to shares purchased by ESOPs after December 31, 1992, that have not been
committed to be released as of the beginning of the year of adoption. In
accordance with SOP 93-6, the Company elected not to adopt the guidance in SOP
93-6 for the shares held by the ESOP, all of which were purchased prior to
December 31, 1992. The debt of the ESOP is recorded as debt and the shares
pledged as collateral are reported as unearned ESOP shares in the Consolidated
Balance Sheets. During 1995, 1996 and 1997 contributions totaling approximately
$492,000, $358,000 and $463,000, respectively, were made to the Trust. Of these
contributions, approximately $328,000, $235,000 and $300,000, respectively,
represented interest.
The ESOP shares were classified as follows:
July 31, July 31,
1996 1997
---- ----
Allocated shares......................... 484,000 550,000
Shares released for allocation........... 66,000 88,000
Shares distributed to employees.......... (20,405) (20,405)
Unreleased shares........................ 1,650,000 1,562,000
--------- ---------
Total ESOP shares.................. 2,179,595 2,179,595
========= =========
The fair value of unreleased shares was approximately $37,488,000 at July
31, 1997. Employees have the option of putting their shares back to the Company
upon leaving employment. This option will remain available until the shares held
by the Trust are registered.
(12) STOCK SPLIT
In connection with the Company's initial public offering of shares of
common stock, on August 30, 1996, the Board of Directors adopted, and the
stockholders approved, an amendment to the Company's certificate of
incorporation increasing the number of authorized shares of common stock from
200,000 to 25,000,000 and stating the par value of such shares as $0.01, and the
Company effected a fifty-five-for-one split of its issued and outstanding common
stock. All share, option and warrant and per share data presented in the
accompanying
45
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consolidated financial statements have been restated to reflect the increased
number of authorized and outstanding shares of common stock.
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly operating results and share data. Quarterly
information shown below does not vary from amounts reported on any Form 10-Q
previously filed by the Company. There were no dividends paid or declared during
1996 and 1997, and the Company anticipates that it will continue to retain
earnings for use in its business and not pay cash dividends in the foreseeable
future. The comparable fiscal year 1996 information has been created by
combining actual fiscal 1996 results with the fourth quarter results for fiscal
1995.
First Second Third Fourth Full Year
- ------------------------------------------------------------------------------------------------------------------------------------
1997
- ---
Net sales $99,500,710 $103,405,227 $108,132,374 $110,659,630 $421,697,941
Gross profit 20,591,933 21,425,693 22,399,006 22,697,692 87,114,324
Income before income taxes
and extraordinary item 2,448,117 3,691,870 4,918,188 4,613,127 15,671,302
Extraordinary item - 932,929 - - 932,929
Net income 1,387,036 1,250,541 2,881,952 2,802,774 8,322,303
Per common share
Income before
extraordinary item $ 0.14 $ 0.20 $ 0.23 $ 0.22 $ 0.79
Market Price
High 17 1/2 17 24 3/8 24 3/8
Low 12 1/2 13 15 12 1/2
Weighted average shares
outstanding 10,114,228 12,411,226 12,411,226 12,748,733 11,697,587
1996
- ----
Net sales $94,821,978 $ 92,283,081 $ 96,432,295 $ 97,733,021 $381,270,375
Gross profit 19,045,778 19,344,448 20,218,680 20,403,504 79,012,410
Income before income taxes 138,462 1,807,008 2,779,175 2,217,233 6,941,878
Net income (loss) (630,527) 1,109,060 1,552,023 1,364,212 3,394,768
Per common share
Income $ (0.06) $ 0.11 $ 0.15 $ 0.13 $ 0.33
Weighted average shares
outstanding 10,134,693 10,134,693 10,134,693 10,138,172 10,145,823
46
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
Not applicable.
Part III
Item 10.
Directors and Executive Officers of the Registrant
The information required by this item is contained in part under the
caption "Executive Officers of the Registrant" in PART I hereof, and the
remainder is contained in the Company's Proxy Statement for its Annual Meeting
of Stockholders to be held in December 1997 (the "1997 Proxy Statement") under
the captions "PROPOSAL 1 ELECTION OF DIRECTORS" and "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE" and is incorporated herein by this reference.
Officers are elected on an annual basis and serve at the discretion of the
Board of Directors.
Item 11.
Executive Compensation
The information required by this item is contained under the captions
"Director Compensation," "Compensation of Executive Officers" and "Compensation
Committee Interlocks and Insider Participation" in the 1997 Proxy Statement and
is incorporated herein by this reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained in the 1997 Proxy
Statement under the caption "Stock Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by this reference.
Item 13.
Certain Relationships and Related Transactions
The information required by this item is contained under the caption
"Certain Transactions" in the 1997 Proxy Statement and is incorporated herein by
this reference.
47
PART IV
Item 14.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of this Form 10-K
--------------------------------------------
1. Financial Statements. The Financial Statements listed in
--------------------
the Index to Financial Statements in Item 8 hereof are filed as
part of this Annual Report on Form 10-K.
2. Financial Statement Schedules. Schedule II Valuation and
-----------------------------
Qualifying Accounts
All other schedules are omitted, since the required information
is not present or is not present in amounts sufficient to require
submission of the schedule or because the information required is
included in the consolidated financial statements and notes
thereto.
Independent Auditor's Report on Financial Statement Schedule.
3. Exhibits. The Exhibits listed in the Exhibit Index
--------
immediately preceding such Exhibits are filed as part of this
Annual Report on Form 10-K.
(b) Reports on Form 8-K.
-------------------
On July 9, 1997, the Company filed a Current Report on Form 8-K
dated June 23, 1997 announcing under Item 5 (Other Events) that
the Company had executed an agreement with Stow Mills, Inc. with
respect to a merger in which the two companies will be combined.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
UNITED NATURAL FOODS, INC.
/s/ Steven H. Townsend
-----------------------------
Steven H. Townsend
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: October 29, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ NORMAN A. CLOUTIER Chairman of the Board and Chief Executive Officer October 29, 1997
- ---------------------- (Principal Executive Officer)
Norman A. Cloutier
/s/ MICHAEL S. FUNK Vice Chairman of the Board and President October 29, 1997
- -------------------
Michael S. Funk
/s/ STEVEN H. TOWNSEND Chief Financial Officer, Treasurer, Secretary and Director October 29, 1997
- ---------------------- (Principal Financial and Accounting Officer)
Steven H. Townsend
/s/ DANIEL V. ATWOOD Director October 29, 1997
- --------------------
Daniel V. Atwood
/s/ ANDREA R. HENDRICKS Director October 29, 1997
- -----------------------
Andrea R. Hendricks
/s/ KEVIN T. MICHEL Director October 29, 1997
- -------------------
Kevin T. Michel
/s/ RICHARD J. WILLIAMS Director October 29, 1997
- -----------------------
Richard J. Williams
/s/ THOMAS B. SIMONE Director October 29, 1997
- --------------------
Thomas B. Simone
49
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2 ** Agreement and Plan of Reorganization by and among the Registrant,
Gem Acquisition Corp., Stow Mills, Inc., Barclay McFadden and
Richard S. Youngman, dated as of June 23, 1997, and amended and
restated as of August 8, 1997.
3.1 * Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 * Amended and Restated By-Laws of the Registrant.
4 * Specimen Certificate for shares of Common Stock, $.01 par value,
of the Registrant.
10.1 * Amended and Restated Employee Stock Ownership Plan.
10.2 * Employee Stock Ownership Trust, as amended.
10.3 * ESOT Loan Agreement among Norman A. Cloutier, Steven H. Townsend,
Daniel V. Atwood, Theodore Cloutier and the Employee Stock
Ownership Plan and Trust, dated November 1, 1988, as amended.
10.4 * Stock Pledge Agreement between the Employee Stock Ownership Trust
and Steven H. Townsend, Trustee for Norman A. Cloutier, Steven H.
Townsend, Daniel V. Atwood and Theodore Cloutier, dated November
1, 1988, as amended.
10.5 * Trust Agreement between Norman A. Cloutier, Steven H. Townsend,
Daniel V. Atwood, Theodore Cloutier and Steven H. Townsend as
Trustee, dated November 1, 1988.
10.6 * Guaranty Agreement between the Registrant and Steven H.
Townsend as Trustee for Norman A. Cloutier, Steven H. Townsend,
Daniel V. Atwood and Theodore Cloutier, dated November 1, 1988.
10.7 *+ 1996 Stock Option Plan.
10.8 * Stock Acquisition Agreement and Plan of Merger among the
Registrant, MPW Acquisition Corporation, Michael S. Funk and
Judith A. Funk, individually and as trustees of the Funk Family
1992 Revocable Living Trust, and Mountain People's Warehouse
Incorporated (Mountain People's"), dated December 8, 1995.
10.9 * Asset Purchase Agreement between the Registrant and PREM MARK,
Inc., d/b/a Rainbow Natural Foods Distributing ("Rainbow"), dated
July 27, 1995.
10.10 * Stock Purchase Agreement, dated May 22, 1995, between Mountain
People's and Nutrasource, Inc. ("Nutrasource").