Back to GetFilings.com
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, 2000
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. |_|
The aggregate market value of the common stock held by non-affiliates of the
registrant was $215,351,709, based upon the closing price of the registrant's
common stock on the Nasdaq National Market on October 4, 2000. The number of
shares of the registrant's common stock, $0.01 par value, outstanding as of
October 4, 2000 was 18,327,805.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in December 2000 are incorporated herein by reference
into Part III of this report.
UNITED NATURAL FOODS, INC.
FORM 10-K
TABLE OF CONTENTS
Section Page
Part I
Item 1. Business 2
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 15
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 29
Part III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners and Management 29
Item 13. Certain Relationships and Related Transactions 30
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30
Signatures 31
2
PART I.
ITEM 1. BUSINESS
We are a leading national distributor of natural foods and related products in
the United States. We are the primary supplier to a majority of our customers,
offering more than 30,000 high-quality natural products consisting of groceries
and general merchandise, nutritional supplements, bulk and foodservice products,
personal care items, perishables and frozen foods. We serve more than 7,000
customers in 50 states, including independent natural products retailers, super
natural chains and conventional supermarkets, and are the primary distributor to
the two largest super natural chains, Whole Foods Markets, Inc. ("Whole Foods")
and Wild Oats Markets, Inc. ("Wild Oats"). In recent years our sales to existing
and new customers have increased through the acquisition of or merger with
natural products distributors, the expansion of existing distribution centers
and the continued growth of the natural products industry in general. Through
these efforts, we believe that we have been able to broaden our geographic
penetration, expand our customer base, enhance and diversify our product
selections and increase our market share. Through our subsidiary, the Natural
Retail Group, we also own and operate 11 retail natural products stores located
in the eastern United States.
Since 1985, we have completed 14 acquisitions of distributors and suppliers,
including Stow Mills Inc. ("Stow Mills"), Hershey Import Co., Inc. ("Hershey")
and Albert's Organics, Inc. ("Albert's"), and 11 acquisitions of retail stores,
significantly expanding our distribution network, product offering and customer
base. On October 31, 1997, we merged with Stow Mills, a regional natural
products distributor serving the Northeast and Midwest regions of the United
States. On February 11, 1998, we acquired the assets of Hershey Import Co.,
located in Rahway, New Jersey, a business specializing in the international
trading, roasting and packaging of nuts, seeds, dried fruits and snack items. On
September 30, 1998, we acquired substantially all of the outstanding stock of
Albert's, a wholesale distributor of organic produce. Our distribution
operations are divided into four principal distribution units: United Natural
Foods in the Eastern Region (previously Cornucopia Natural Foods, Inc. and Stow
Mills, Inc.), Mountain People's Warehouse, Inc. in the Western Region, Rainbow
Natural Foods in the Central Region and Alberts Organics in various markets in
the United States.
NATURAL PRODUCTS INDUSTRY
According to the August 2000 Natural Business Journal, a leading industry
publication, sales growth in 1999 of public retail and distribution companies
was 17.5%. We believe that this growth reflects a broadening of the natural
products consumer base which is being driven by several factors, including an
increasing awareness of the link between diet and health, healthier eating
patterns, increasing concern regarding food purity and safety and greater
environmental awareness.
According to the June 2000 Natural Foods Merchandiser, the natural products
industry grew 11% bringing retail sales in all market segments to more than $28
billion. Although the natural products industry sector remains fragmented,
natural products supermarkets continue to increase their market share of total
natural products sales as they expand into additional geographic markets and
acquire smaller independent competitors. In addition, conventional supermarkets
and mass market outlets have also continued to increase their emphasis on the
sale of natural products as the sector gains appeal. Moreover, as consumer
demand for natural products has grown, an increasing number of national,
regional and local natural products have become available as more suppliers and
producers have entered the market.
COMPETITIVE ADVANTAGES
We believe we benefit from a number of significant competitive advantages
including:
MARKET LEADER WITH A NATIONWIDE PRESENCE. We believe we are one of the few
distributors capable of serving local and regional customers as well as the
rapidly growing super natural chains. We believe we have significant advantages
over smaller, regional natural products distributors as a result of our ability
to: (i) integrate administrative and accounting functions; (ii) expand marketing
and customer service programs across the three regions; (iii) expand national
purchasing opportunities; (iv) consolidate systems applications between physical
locations and regions; and (v) reduce geographic overlap between regions.
LOW-COST OPERATOR. In addition to our volume purchasing opportunities, a
critical component of our position as a low-cost provider is our management of
warehouse and distribution costs. Our continuing growth has created the need for
expansion of existing facilities to achieve maximum operating efficiencies and
to assure adequate space for future needs. We have made considerable capital
expenditures and incurred considerable expenses in connection with the expansion
of our facilities including our Los Angeles and Auburn, California and New
Oxford, Pennsylvania locations. Upon completion of the New Oxford expansion
early next year, the increased capacity of our distribution centers will be
approximately 45% greater than it was 4 years ago. While operating margins may
be affected in periods in which these expenses are incurred, over the long term,
we expect to benefit from the increased absorption of our expenses over a larger
sales base.
EXPANDING BASE OF PREMIER CUSTOMER RELATIONSHIPS. We serve more than 7,000
customers in 50 states. We have developed long-standing customer relationships
that we believe are among the strongest in the industry. We have also been the
primary supplier to each of the industry's two largest super natural chains,
Whole Foods and Wild Oats, for more than ten years.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. Our management team
has extensive experience in the natural products industry and has been
successful in identifying, consummating and integrating multiple acquisitions.
Since 1985, we have successfully completed 14 acquisitions of distributors and
suppliers, including Stow Mills, Hershey and Albert's, and 11 acquisitions of
retail stores. In addition, our executive officers and directors, and their
affiliates, and the Employee Stock Ownership Trust ("ESOT") beneficially own in
the aggregate approximately 29% of the Company's Common Stock. Accordingly,
senior management and employees have significant incentive to continue to
generate strong growth in operating results in the future.
3
GROWTH STRATEGY
Our growth strategy is to maintain and enhance our position as a leading
national distributor to the natural products industry. Key elements of our
strategy include:
INCREASE MARKET SHARE OF THE GROWING NATURAL PRODUCTS INDUSTRY. Our strategy is
to continue to increase our leading market share of the growing natural products
industry by expanding our customer base, increasing our share of existing
customers' business and continuing to expand and further penetrate new
distribution territories.
EXPAND CUSTOMER BASE. We have expanded the number of customers served to more
than 7,000 as of July 31, 2000. We plan to continue to expand our coverage of
the highly fragmented natural products industry by cultivating new customer
relationships within the industry and by developing other channels of
distribution such as traditional supermarkets, mass market outlets, Internet
retailers, institutional foodservice providers, hotels and gourmet stores.
INCREASE MARKET SHARE OF EXISTING CUSTOMERS' BUSINESS. We seek to become the
primary supplier for a majority of our customers by offering the broadest
product offering in the industry at the most competitive prices. Since 1993, we
have expanded our product offering from approximately 14,000 to more than 30,000
SKUs as of July 31, 2000. Additionally, we have launched a number of private
label programs that present to us and our customers higher margins than many of
our existing product offerings. As a result we believe we have become the
primary distributor to the majority of our natural products customer base.
CONTINUE TO EXPAND AND PENETRATE INTO NEW CHANNELS OF DISTRIBUTION. Since 1993
we have increased the aggregate size of our distribution centers from
approximately 660,000 square feet to approximately 1,400,000 square feet and the
number of states served from 25 to 50. We will continue to selectively evaluate
opportunities to acquire (i) distributors to fill in existing markets and expand
into new markets and (ii) suppliers to expand margins through vertical
integration and brand differentiation. We currently have no agreements or
understandings with regard to any material acquisitions.
CONTINUE TO IMPROVE EFFICIENCY OF NATIONWIDE DISTRIBUTION NETWORK. We
continually seek to improve our operating results by integrating our nationwide
network utilizing the best practices within the industry and within each of the
regions that have formed the foundation of UNFI. This focus on achieving
improved economies of scale in purchasing, warehousing, transportation and
general and administrative functions has improved our operating margins, which
increased from 2.5% in fiscal 1994 to 3.6% (excluding restructuring costs) in
fiscal 1999. Our operating margin (excluding restructuring costs) in the fourth
quarter of fiscal 1999 was 0.0% due to computer and related issues arising from
the consolidation of operations in the Eastern Region which resulted in
increased operating expenses, a lower gross margin and lower sales than prior
quarters in the Eastern Region. As a result of these problems fiscal 2000 was a
rebuilding year for us. Our operating margins continued to suffer in the first
quarter (.23%) and the second quarter (.26%) (excluding non-recurring charges of
approximately $5.4 million) of fiscal 2000. Due to our effort to reduce
expenses, improve margin and increase sales our operating margin improved to
2.12% (excluding non-recurring charges of approximately $0.4 million) in the
third quarter and to 2.57% in the fourth quarter.
CONTINUE TO PROVIDE THE LEADING DISTRIBUTION SOLUTION. Our strategy is to
continue to provide the leading distribution solution to the natural products
industry through our national presence, regional responsiveness, high customer
service focus and breadth of product offering. We offer our customers a
selection of inventory management, merchandising, marketing, promotional and
event management services to increase sales and enhance customer satisfaction.
The marketing services, many of which are supplier-sponsored, include monthly
and seasonal flier programs, in-store signage and assistance in product display,
all in order to assist our customers in increasing their sales. We have also
recently introduced UNF Online, a customized e-commerce enabled Web hosting and
order fulfillment service for our retail customers.
PRODUCTS
Our extensive selection of high-quality natural products enables us to provide a
primary source of supply to a diverse base of customers whose product needs vary
significantly. We carry more than 30,000 high-quality natural 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, fresh produce and perishables, and frozen foods. Our
private label products address certain preferences of customers that are not
otherwise being met by other suppliers.
We evaluate more than 10,000 potential new products each year based on both
existing and anticipated trends in consumer preferences and buying patterns. Our
buyers regularly attend regional and national natural, organic, specialty,
ethnic and gourmet products shows to review the latest products that are likely
to be of interest to retailers and consumers. We also actively solicit
suggestions for new products from our customers. We make the majority of our new
product decisions at the regional level. We believe that our decentralized
purchasing practices allow our regional buyers to react quickly to changing
consumer preferences and to evaluate new products and new product categories
regionally. Additionally, many of the new products that we offer are marketed on
a regional basis or in our own retail stores prior to being offered nationally,
which enables us to evaluate local consumer reaction to the products without
incurring significant inventory risk.
SUPPLIERS
We purchase our products from approximately 1,800 suppliers. The majority of our
suppliers are based in the United States, but we source products from suppliers
throughout Europe, Asia, South America, Africa and Australia. We believe that
the reason natural products suppliers seek distribution of their products
through UNFI is because we provide access to a large and growing customer base,
distribute the majority of the suppliers' products and support their marketing
programs. Substantially all product categories that we distribute are available
from a number of suppliers and therefore we are not dependent on any single
source of supply for any product category. Our largest supplier, Hain Celestial
Group, Inc., accounted for approximately 9.9% of total purchases in fiscal 2000.
We are well positioned to respond to regional and local customer preferences for
natural products by decentralizing the majority of our purchasing decisions for
all products except bulk commodities. We believe that regional buyers are best
suited to identify and to respond to local demands and preferences. Although
each of our regions is responsible for placing its own orders and can select the
products that it believes will most appeal to its
4
customers, each region is required to participate in company-wide purchasing
programs that enable us to take advantage of our consolidated purchasing power.
For example, we have positioned ourselves as the largest purchaser of
organically grown bulk products in the natural products industry by centralizing
our purchase of nuts, seeds, grains, flours and dried foods.
Our purchasing staff cooperates closely with suppliers to provide new and
existing products. The suppliers assist in training our account and customer
service representatives in marketing new products, identifying industry trends
and coordinating advertising and other promotions.
We maintain a comprehensive quality assurance program. All of the products we
sell that are represented as "organic" are required to be certified as such by
an independent third-party agency. We maintain current certification affidavits
on all organic commodities and produce in order to verify the authenticity of
the product. All potential suppliers of organic products are required to provide
such third-party certification to us before they are approved as a supplier.
CUSTOMERS
We market our products to more than 7,000 customers located in 50 states. We
maintain long-standing customer relationships with independent natural products
retailers, including super natural chains, and have continued to emphasize our
relationships with new customers, such as conventional supermarkets, mass market
outlets, Internet retailers and gourmet stores, all of which are continually
increasing their natural product offerings. Among our wholesale customers are
leading super natural chains doing business as Whole Foods (including Bread and
Circus, Fresh Fields, and Nature's Heartland), Wild Oats, Nature's Fresh!
Northwest, Wild Harvest and conventional supermarket chains such as Wegman's,
Stop and Shop, Shaws/Star Market, Quality Food Centers (QFC), Hannaford,
Pathmark and Kroger. We believe that we are the primary supplier to the majority
of our customers. Whole Foods accounted for approximately 16% and 17% of the
Company's net sales in fiscal 2000 and 1999. Wild Oats accounted for
approximately 13% and 11% of our net sales in fiscal 2000 and 1999 respectively.
No other customer accounted for more than 10% of our net sales in fiscal 2000.
SALES
Our fill rates for the Fourth Quarter of 1999 and the first two quarters of
fiscal 2000 were negatively impacted by issues arising from the consolidation of
Eastern Region operations. Prior to that period we historically maintained an
average order fill rate that exceeded 95% (excluding products unavailable from
the supplier), which we believe is one of the highest order fill rates in the
natural products distribution industry. The fill rate has recovered in the
Eastern Region and was approximately 90% to 95% during the third and fourth
quarters of fiscal 2000 and the first quarter of fiscal 2001. We believe that
our high fill rates are attributable to our experienced purchasing department
and sophisticated warehousing, inventory control and distribution systems. We
offer next-day delivery service to a majority of our active customers and offer
multiple deliveries each week to our largest customers. We believe 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.
MARKETING
We have developed a variety of supplier-sponsored marketing services that cater
to a broad range of retail formats. These programs are designed to educate
consumers, profile suppliers and increase sales for retailers, the majority of
which do not have the resources necessary to conduct such marketing programs
independently.
We offer multiple monthly flier programs featuring the logo and address of the
participating retailer imprinted on a flier advertising approximately 200 sale
items which is distributed by the retailer to its customers. The color fliers
are designed by our in-house marketing department utilizing modern digital
photography and contain detailed product descriptions and pricing information.
Additionally, each flier generally includes detailed information on selected
suppliers, recipes, product features and a comparison of the characteristics of
a natural product with a similar mass market product. The monthly flier programs
are structured to pass through to the retailer the benefit of company negotiated
discounts and advertising allowances. The program also provides retailers with
posters, window banners and shelf tags to coincide with each month's promotions.
In addition to our monthly flier programs, we offer thematic custom 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. We also (i)
offer in-store signage and promotional materials, including shopping bags and
end-cap displays, (ii) provide assistance with planning and setting up product
displays and (iii) advise on pricing decisions to enable its customers to
respond to local competition.
We also recently introduced a new Business-to-Business (B2B) Internet service we
are offering to our retail customers. Marketed under the name UNF Online, this
affordable new program consists of a sophisticated, consumer friendly e-commerce
enabled Web site hosting and order fulfillment service. It is designed both to
increase sales for our retail customers by promoting in store events and
promotions, and to generate new e-commerce business through a third party order
fulfillment service. This e-commerce component features over 16,000 nutritional
supplement, personal care, and nonperishable grocery products, along with 24
hours a day, 7 days a week customer education and support.
DISTRIBUTION
We have carefully chosen the sites for our distribution centers to provide
direct access to our regional markets. This proximity allows us to reduce our
transportation costs compared to competitors that seek to service their
customers from locations that are often hundreds of miles away. We believe that
we incur lower inbound freight expense than our regional competitors because our
national presence allows us to buy full and partial truckloads of products.
Whenever necessary we can backhaul between our distribution centers and
satellite staging facilities using our own trucks. Many of our competitors must
employ outside consolidation services and pay higher carrier transportation fees
to move products from other regions. Additionally, we can redistribute
overstocks and inventory imbalances at one distribution center to another
distribution center to ensure products are sold prior to their expiration date.
Products are delivered to our distribution centers primarily by our leased fleet
of trucks, contract carriers and the suppliers themselves. We lease most of our
trucks from Ryder Truck Leasing, which in some cases maintains facilities on our
premises for the maintenance and service of these vehicles. Other trucks are
leased from regional firms that offer competitive services.
5
We ship 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.
TECHNOLOGY
We have made a significant investment in information and warehouse management
systems. We continually evaluate and upgrade our management information systems
based on the best practices in the distribution industry and at our regional
operations in order to make the systems more efficient, cost effective and
responsive to customer needs. 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 inbound products. These tags contain the expiration
date, locations, quantity, lot number and other information in bar code format.
Warehouse workers use hand-held radio frequency devices to process customer
orders by scanning the UPC bar code as the product is removed from its assigned
slot. Similarly, customer returns are processed by scanning the UPC bar codes.
We also employ a management information system that enables us to lower our
inbound transportation costs by making optimum use of our 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 11 retail
natural products stores located in Florida, Maryland, Massachusetts and New
York. Our retail strategy is to: i) selectively acquire existing stores that
meet our strict criteria in categories such as sales and profitability, growth
potential, merchandising and management; and ii) open new stores in areas with
favorable competitive climates and growth potential. Generally, we will not
purchase or open new stores that directly compete with primary retail customers
of our distribution business. We believe our retail stores have a number of
advantages over their competitors, including our financial strength and
marketing expertise, the purchasing power resulting from group purchasing by
stores within NRG and the breadth of their product selection. Our strategy for
future retail growth is to identify and acquire or open new up 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, delicatessen, and bakery products.
Acting as a distributor to our retail stores is an advantageous position for us
and includes the ability to: (i) control the purchases made by these stores;
(ii) expand the number of high-growth, high-margin product categories such as
produce and prepared foods within these stores; and (iii) keep current with the
retail marketplace which enables us to better serve our distribution customers.
Additionally, as the primary natural products distributor to our retail
locations, we expect to realize significant economies of scale and operating and
buying efficiencies. As an operator of retail stores, we also have the ability
to test market select products prior to offering them nationally. We can then
evaluate consumer reaction to the product without incurring significant
inventory risk. We are able to test new marketing and promotional programs
within our stores prior to offering them to a broader customer base. For
example, the recently introduced UNF Online customized Web hosting service was
beta tested in our retail stores before being offered broadly to our customers.
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. Our major national competitor is Tree of Life
Distribution, Inc. (a subsidiary of Koninklijke Wessanen N.V.) and our major
regional competitors are Nature's Best, Inc. in the western United States,
Northeast Cooperative in the eastern United States and Blooming Prairie
Cooperative Warehouse in the Midwestern states. We also compete with numerous
smaller regional and local distributors of ethnic, Kosher, gourmet and other
specialty foods. Additionally, we compete with national, regional and local
distributors of conventional groceries and, to a lesser extent, companies that
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 us 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 we
have and may be better established in their markets. There can be no assurance
that our current or potential competitors will not provide services comparable
or superior to those that we provide or adapt more quickly than we are able to
evolving industry trends or changing market requirements. It is also possible
that alliances among competitors may emerge and rapidly acquire significant
market share or that certain of our customers will increase distribution to
their own retail facilities. Increased competition may result in reduced gross
margins and loss of market share, any of which could materially adversely affect
our business, financial condition or results of operations.
We believe that distributors in the natural products industry primarily compete
on product quality and depth of inventory selection, price and quality of
customer service. Although we believe we currently compete effectively with
respect to each of these factors, there can be no assurance that we will be able
to maintain our competitive position against current and potential competitors.
Our retail stores compete against other natural products outlets, conventional
supermarkets and specialty stores. We believe that retailers of natural products
compete principally on product quality and selection, price, knowledge of
personnel and convenience of location.
EMPLOYEES
As of July 31, 2000 we had approximately 2,700 full- and part- time employees.
An aggregate of approximately 220 of the employees at our Seattle, Washington
and Rahway, New Jersey facilities are covered by a collective bargaining
agreement. We have never experienced a work stoppage by our unionized employees
and we believe that our employee relations are good.
6
ITEM 2. PROPERTIES
We maintain eleven distribution centers. These facilities consist of an
aggregate of approximately 1.4 million square feet of space, the largest
capacity of any distributor in the natural products industry. We are currently
expanding our New Oxford, Pennsylvania facility to approximately 250,000 square
feet, nearly twice the size of the existing building.
LOCATION SIZE LEASE EXPIRATION
(square feet)
Atlanta, Georgia 175,000 March 2001
Auburn, California 150,000 Owned
Auburn, California 100,000 September 2009
Auburn, Washington 204,800 March 2009
Bridgeport, New Jersey 35,700 Owned
Chesterfield, New Hampshire 126,500 Owned
Dayville, Connecticut 245,000 Owned
Denver, Colorado 180,800 July 2013
Kealeakua, Hawaii 16,300 October 2002
Vernon, California 34,500 Owned
New Oxford, Pennsylvania 127,000 Owned
Winterhaven, Florida 10,600 October 2001
We also rent facilities to operate 11 retail stores along the East Coast with
various lease expiration dates and a 38,000 square foot processing and
manufacturing facility in Rahway, New Jersey with a lease expiration date of
March 2002.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we are involved in routine litigation that arises in the
ordinary course of its business. There are no pending material legal proceedings
to which we are a party or to which our property 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, 2000.
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS OF THE REGISTRANT
The executive officers, key employees and directors of the Company and their
ages as of October 29, 2000 are listed below:
NAME AGE POSITION
Thomas B. Simone (1) (2) (3) 58 Chairman of the Board
Michael S. Funk (2) 46 Chief Executive Officer and Vice Chairman
of the Board
Richard S. Youngman 49 President and Assistant Secretary ;
Director
Kevin T. Michel 43 Vice President and Chief Financial
Officer; Treasurer; Director
Steven Townsend 47 President Eastern Region
Daniel V. Atwood 42 Vice President and Secretary, President of
NRG
Gordon Barker (1) (3) 54 Director, Chairman of the Compensation
Committee
Joseph M. Cianciolo (1) (3) 61 Director, Chairman of the Audit Committee
James P. Heffernan (1) 54 Director
(1) Member of the Audit Committee.
(2) Member of the Nominating Committee.
(3) Member of the Compensation Committee.
Thomas B. Simone has been Chairman of the Board since December 1999 and has
served on the Board of Directors since October 1996. Mr. Simone is a member of
the Audit, Nominating and Compensation committees. Mr. Simone has served as
President and Chief Executive Officer of Simone &
7
Associates, a healthcare and natural products investment and consulting company
since April 1994. From February 1991 until April 1994, Mr. Simone was President
of McKesson Drug Company. Mr. Simone also serves on the Board of Directors of
ECO-DENT International, Inc.
Michael S. Funk has served on the Board of Directors and as Vice Chairman of the
Board of Directors since February 1996. Mr. Funk has served as our Chief
Executive Officer since December 1999. Mr. Funk served as our President from
October 1996 to December 1999 and as Executive Vice President from February 1996
until October 1996. Since its inception in July 1976, Mr. Funk has been
President of Mountain People's Warehouse (Western region).
Richard S. Youngman has been the President and Assistant Secretary since
December 1999. He served as the Vice President of Business Development from
March to November of 1999. Mr. Youngman had previously served as President of
the Eastern Region from October 1997 until March 1999. Mr. Youngman was the
President and a director of Stow Mills and its predecessor company from 1979
until October 1997. Mr. Youngman has served on the Board of Directors since
December 1997.
Kevin T. Michel became the Chief Financial Officer and Treasurer in December of
1999. He served as the interim Chief Financial Officer and Treasurer from August
to November 1999 and was the Executive Vice President of the Western Region from
April through July 1999. Mr. Michel served as the President of the Central
Region from January 1998 until March 1999 and as Chief Financial Officer of
Mountain People's Warehouse from January 1995 until December 1997. Mr. Michel
has served on the Board of Directors since February 1996.
Steve Townsend was appointed to the position of President of the Eastern Region
on January 31, 2000. Mr. Townsend served as the Chief Financial Officer of UNFI
from 1996 to 1997. Prior to that, from 1983 to 1995, Mr. Townsend served in a
variety of executive operational, financial and administrative positions with
Cornucopia Natural Foods, the Company's predecessor.
Daniel V. Atwood has served as Secretary since January 1998 and as President of
NRG and Vice President since August 1995. Mr. Atwood was Vice
President--Marketing from January 1984 to August 1995. From 1979 to 1982, Mr.
Atwood was a Store Manager at Bread & Circus Supermarkets, a super natural
chain. Mr. Atwood served on the Board of Directors from August 1988 to December
1997.
Gordon D. Barker was elected as a Director in September 1999 to fill the seat
left vacant by Steven H. Townsend. He currently serves as the Chairman of the
Compensation Committee and as a member of the Audit Committee. Mr. Barker has
served as CEO of Snyder's Drugs since October 1999. From March 1968 to December
1996 Mr. Barker was employed at PayLess Drug Stores (subsequently renamed
ThriftyPayLess Drug Stores), where he rose from Pharmacist, through several
levels of management and ultimately became Chief Executive Officer and
President. Mr. Barker serves on the following Boards of Directors: Gart Sports
Company, Infinity Towers, NuMedics Inc., and Advanced Cosmetic Treatments, LLC.
Joseph M. Cianciolo was elected as a Director in September 1999 to fill the seat
left vacant by Barclay McFadden III. Mr. Cianciolo serves as Chairman of the
Audit Committee and as a member of the Compensation Committee. Mr. Cianciolo was
the Managing Partner of KPMG LLP, Providence, Rhode Island Office from June 1990
until June 1999. Prior to his appointment as managing partner, Mr. Cianciolo
served as the engagement partner from 1970 - 1999 for various manufacturing and
distribution companies, health, beauty and restaurant chains, and a manufacturer
of electronic devices.
James P. Heffernan was elected as a Director in March 2000 to fill the seat left
vacant by Norman A. Cloutier. Mr. Heffernan is currently a member of the Audit
Committee. Mr. Heffernan has served as a Trustee for the New York Racing
Association since 1998 and as a member of the Board of Directors and Chairman of
the Finance Committee of Columbia Gas System since 1993. Mr. Heffernan served as
President of WHR Management Corp. from 1987 to 1996 and Whitman Heffernan Rhein
& Co., Inc. from 1987 to 1996. Mr. Heffernan also served as the Chief Financial
Officer and Chief Operating Officer of Danielson Holding Corporation from 1990
to 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 1999 High Low
----------- ---- ---
First Quarter $29.500 $19.000
Second Quarter 29.250 22.500
Third Quarter 29.750 17.750
Fourth Quarter 29.250 17.250
Fiscal 2000 High Low
----------- ---- ---
First Quarter $19.625 $ 7.625
Second Quarter 15.188 7.000
Third Quarter 16.000 9.625
Fourth Quarter 16.688 12.375
On July 31, 2000 United Natural had 50 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.
We have never declared or paid any cash dividends on our capital stock. We
anticipate that all of our earnings in the foreseeable future will be retained
to finance the continued growth and development of our business and we have no
current intention to pay cash dividends. Our future dividend policy will depend
on 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. Our existing revolving line of
credit agreement prohibits the declaration or payment of cash
8
dividends to our stockholders without the written consent of the bank during the
term of the credit agreement and until all of our obligations under the credit
agreement have been met.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below under the caption
Consolidated Statement of Operations Data with respect to the fiscal years ended
July 31, 1997, 1998, 1999 and 2000, and under the caption Consolidated Balance
Sheet Data at July 31, 1997, 1998, 1999 and 2000, are derived from our
consolidated financial statements, which financial statements have been audited
by KPMG LLP, independent certified public accountants. The selected consolidated
financial data presented below under the caption Consolidated Statement of
Income Data with respect to the year ended July 31, 1996 and under the caption
Consolidated Balance Sheet Data at July 31, 1996 are derived from our unaudited
consolidated financial statements 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.
Consolidated Statement of Operations Data
(In thousands, except per share data) 1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $580,049 $634,825 $728,910 $856,998 $908,688
Cost of sales 462,506 507,547 578,575 680,301 734,673
Gross profit 117,543 127,278 150,335 176,697 174,015
Operating expenses 99,261 103,885 116,042 144,937 166,673
Merger and restructuring expenses -- -- 4,064 3,869 2,420
Amortization of intangibles 2,616 1,060 1,185 1,075 1,070
Total operating expenses 101,877 104,945 121,291 149,881 170,163
Operating Income 15,666 22,333 29,044 26,816 3,852
Other expense (income):
Interest expense 7,730 5,976 5,157 5,700 6,412
Other, net (411) (679) (778) (2,477) (527)
Total other expense 7,319 5,297 4,379 3,223 5,885
Income before income taxes and extraordinary item 8,347 17,036 24,665 23,593 (2,033)
Income taxes (benefit) 3,652 6,636 11,580 10,126 (802)
Extraordinary item, net of income tax benefit -- 933 -- -- --
Net income (loss) $ 4,695 $ 9,467 $ 13,085 $ 13,467 $ (1,231)
Per share data (Basic):
Income (loss) before extraordinary item $ 0.34 $ 0.64 $ 0.75 $ 0.74 $ (0.07)
Extraordinary item, net of income tax benefit -- 0.06 -- -- --
Net income (loss) $ 0.34 $ 0.58 $ 0.75 $ 0.74 $ (0.07)
Weighted average basic shares of common stock 13,688 16,367 17,467 18,196 18,264
Per share data (Diluted):
Income (loss) before extraordinary item $ 0.32 $ 0.63 $ 0.74 $ 0.73 $ (0.07)
Extraordinary item, net of income tax benefit -- 0.06 -- -- --
Net income (loss) per share $ 0.32 $ 0.57 $ 0.74 $ 0.73 $ (0.07)
Weighted average diluted shares of common stock 14,855 16,553 17,798 18,537 18,264
9
Consolidated Balance Sheet Data: (In
thousands) 1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Working capital $ 13,453 $ 53,101 $ 65,568 $ 73,825 $ 65,812
Total assets 152,343 164,561 212,242 237,901 270,234
Total long term debt and capital leases 34,108 21,647 25,845 25,791 28,529
Total stockholders' equity 23,440 73,916 104,386 118,581 117,954
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a leading national distributor of natural foods and related products in
the United States. In recent years, our sales to existing and new customers have
increased through the acquisition of or merger with natural products
distributors, the expansion of existing distribution centers and the continued
growth of the natural products industry in general. Through these efforts, we
believe that we have been able to broaden our geographic penetration, expand our
customer base, enhance and diversify our product selections and increase our
market share. Our distribution operations are divided into four principal units:
United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods,
Inc. and Stow Mills, Inc.), Mountain People's Warehouse, Inc. in the Western
Region, Rainbow Natural Foods, Inc. in the Central Region and Albert's Organics
in various markets in the United States. Through our subsidiary, the Natural
Retail Group, we also own and operate 11 retail natural products stores located
in the eastern United States. We believe our retail business serves as a natural
complement to our distribution business enabling us to develop new marketing
programs and improve customer service. Hershey Import Co., located in Rahway,
New Jersey, is a business that specializes in the international trading,
roasting and packaging of nuts, seeds, dried fruits and snack items.
We are continually integrating certain operating functions in order to improve
operating efficiencies, including: (i) integrating administrative and accounting
functions; (ii) expanding marketing and customer service programs across the
three regions; (iii) expanding national purchasing opportunities; (iv)
consolidating systems applications between physical locations and regions; and
(v) reducing geographic overlap between regions. In addition, our continued
growth has created the need for expansion of existing facilities to achieve
maximum operating efficiencies and to assure adequate space for future needs. We
have made considerable capital expenditures and incurred considerable expenses
in connection with the expansion of our facilities, including the expansion of
our Los Angeles and Auburn, California, and New Oxford, Pennsylvania locations.
Upon completion of the New Oxford expansion early next year, approximately 45%
of our distribution facility capacity will have been added over the past 4
years. While operating margins may be affected in periods in which these
expenses are incurred, over the long term, we expect to benefit from the
increased absorption of our expenses over a larger sales base.
We have incurred considerable expenses in connection with the planned
consolidation of operations in the Eastern Region, which was to have resulted in
the closure of our Chesterfield, New Hampshire facility. These expenses
consisted of the cost of moving inventory, as well as additional temporary
expenses for information technology, inventory management and redundant staffing
and transportation. Our operating results for the fourth quarter of fiscal 1999
and all of fiscal 2000 were negatively impacted by computer and related issues
arising from the consolidation of Eastern Region operations. The consolidation
resulted in increased operating expenses, a lower gross margin and lower sales
than prior quarters in the Eastern Region. Due to the continuing difficulties in
the consolidation, our management decided in December 1999 to keep our
Chesterfield facility open for the foreseeable future. Additionally, we closed
our Chicago facility during the third quarter of fiscal 2000. Most of our
existing Chicago volume is now serviced from our Aurora, Colorado facility. We
do not expect the closure of our Chicago facility to have material impact on our
results of operations of financial condition.
Our net sales consist primarily of sales of natural products to retailers
adjusted for customer volume discounts, returns and allowances. The principal
components of our cost of sales include the amount paid to manufacturers and
growers for product sold, plus the cost of transportation necessary to bring the
product to our distribution facilities. Operating expenses include salaries and
wages, employee benefits (including payments under our Employee Stock Ownership
Plan), warehousing and delivery, selling, occupancy, administrative,
depreciation and amortization expense. Other expenses (income) include interest
on outstanding indebtedness, interest income and miscellaneous income and
expenses. Our operating margin (excluding restructuring costs) in the fourth
quarter of fiscal 1999 was 0.0% due to computer and related issues arising from
the consolidation of operations in the Eastern Region which resulted in
increased operating expenses, a lower gross margin and lower sales than prior
quarters in the Eastern Region. As a result of these problems fiscal 2000 was a
rebuilding year for us. Our operating margins continued to suffer in the first
quarter (.23%) and the second quarter (.26%) (excluding non-recurring charges of
approximately $5.4 million) of fiscal 2000. Due to our effort to reduce
expenses, improve margin and increase sales our operating margin improved to
2.12% (excluding non-recurring charges of approximately $0.4 million) in the
third quarter and to 2.57% in the fourth quarter.
Recent Acquisitions
On September 30, 1998, we acquired substantially all of the outstanding stock of
Albert's Organics, Inc., a business specializing in the purchase, sale and
distribution of produce and other perishable items, for $12 million, including
$10.3 million of goodwill which we are amortizing over 40 years. Albert's had
sales of $47.8 million for the fiscal year ended December 31, 1997 and provides
us with additional expertise in the purchasing of produce and other perishable
items. Albert's also makes available to us a number of cross-selling
opportunities, which will be mutually beneficial to both businesses. The
acquisition of Albert's has been accounted for as a purchase and, accordingly,
all financial information has been included since the date of acquisition.
Our merger with Stow Mills in October 1997 has been accounted for as a pooling
of interests and, accordingly, all information included herein is reported as
though United Natural and Stow Mills had been combined for all periods reported.
10
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain income and
expense items expressed as a percentage of net sales:
Year Ended July 31,
-------------------------
2000 1999 1998
-------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 80.8% 79.4% 79.4%
-------------------------
Gross profit 19.2% 20.6% 20.6%
-------------------------
Operating expenses 18.3% 16.9% 15.9%
Merger and restructuring expenses 0.3% 0.5% 0.6%
Amortization of intangibles 0.1% 0.1% 0.2%
-------------------------
Total operating expenses 18.7% 17.5% 16.6%
-------------------------
Operating income 0.4% 3.1% 4.0%
-------------------------
Other expense (income):
Interest expense 0.7% 0.7% 0.7%
Other, net -0.1% -0.3% -0.1%
-------------------------
Total other expense (income) 0.6% 0.4% 0.6%
-------------------------
Income before income taxes -0.2% 2.8% 3.4%
Income taxes -0.1% 1.2% 1.6%
-------------------------
Net income -0.1% 1.6% 1.8%
=========================
TWELVE MONTHS ENDED JULY 31, 2000 COMPARED TO TWELVE MONTHS ENDED JULY 31, 1999
Net Sales.
Our net sales increased approximately 6.0%, or $51.7 million, to $908.7 million
for the year ended July 31, 2000 from $857.0 million for the year ended July 31,
1999. The overall increase in net sales was attributable to increased sales to
existing customers, the sale of new product offerings and sales to new
customers. This increase was partially offset by a decrease in net sales from
the Natural Retail Group due to the sale of four stores and the closing of one
store in April 1999. Excluding the Natural Retail Group's fiscal 1999 sales by
the sold and closed stores, sales increased approximately 7.0% for the year
ended July 31, 2000 over the comparable prior year period.
This growth rate is lower than in past years. The major factor contributing to
our lower growth rate was loss of volume in the Eastern Region to other
suppliers due to difficulties encountered in the consolidation effort. Another
contributing factor was the closure of our Chicago facility and the resulting
inability to fully service this region from our Aurora, CO and New Oxford, PA
facilities, which resulted in combined lost sales for our third and fourth
quarters of approximately $2 million.
Gross Profit.
Gross profit decreased approximately 1.5%, or $2.7 million, to $174.0 million
for the year ended July 31, 2000 from $176.7 million for the year ended July 31,
1999. Gross profit as a percentage of net sales decreased to 19.2% for the year
ended July 31, 2000 from 20.6% for the year ended July 31, 1999. The decrease in
gross profit as a percentage of net sales resulted primarily from ongoing
difficulties with the Eastern Region consolidation, as well as an increased
percentage of sales to existing customers under our volume discount program and
the divestiture of four retail stores, which have higher gross margins than our
distribution business. Difficulties in the Eastern Region which impacted our
margin include higher than normal levels of customer returns and allowances,
pricing errors, inventory shrink and higher inbound transportation costs for
expedited shipments.
Operating Expenses.
Total operating expenses increased approximately 13.5%, or $20.3 million, to
$170.2 million for year ended July 31, 2000 from $149.9 million for the year
ended July 31, 1999. Our operating expenses for the year ended July 31, 2000
were also impacted by approximately $2.4 million of restructuring and asset
impairment charges related to the write-off of certain Eastern Region fixed
assets and the closing of our Chicago facility. Excluding fiscal 2000
restructuring and asset impairment costs of $2.4 million and other special
charges of $3.0 million, and fiscal 1999 restructuring costs of $3.9 million,
total operating expenses for the years ended July 31, 2000 and 1999 would have
been $164.8 million or 18.1% of net sales, and $146.0 million or 17.0% of net
sales, respectively, resulting in an increase for the year ended July 31, 2000
of $18.8 million, or 12.9% over the comparable prior period.
As a percentage of net sales, operating expenses increased to 18.7% for the year
ended July 31, 2000 from 17.5% for the year ended July 31, 1999. The increase in
operating expenses as a percentage of net sales was primarily due to the
continuing difficulties in the Eastern Region, including redundant
transportation expenses, reduced labor productivity, and outside storage
expenses. An increase in the cost of fuel of approximately $2.2 million during
the year impacted all of our distribution centers. In addition, increased labor
expenses related to the tight labor market limited our ability to attract and
retain trained qualified employees in the Eastern Region particularly, but also
affected all of our distribution centers.
Operating Income.
11
Operating income decreased $22.9 million to $3.9 million for the year ended July
31, 2000 from $26.8 million for the year ended July 31, 1999. As a percentage of
net sales, operating income decreased to 0.4% in the year ended July 31, 2000
from 3.1% in the comparable 1999 period. Excluding the restructuring, asset
impairment and other special charges noted above, operating income for the year
ended July 31, 2000 and 1999 would have been $9.3 million, or 1.0% of net sales
and $30.7 million, or 3.6% of net sales, respectively, resulting in a decrease
for the year ended July 31, 2000 of $21.4 million versus the comparable prior
period.
Other (Income)/Expense.
The $2.7 million increase in other expense for the year ended July 31, 2000
compared to the year ended July 31, 1999 was attributable to a $1.4 million gain
on the sale of retail stores in 1999 and higher interest expense of
approximately $0.7 million in 2000, reflecting a higher level of debt for fiscal
2000.
Income Taxes.
Our effective income tax rates were 39.5% and 42.9% for the years ended July 31,
2000 and 1999, respectively. The effective rates for 2000 and 1999 were higher
than the federal statutory rate primarily due to state and local income taxes
and the settlement of an IRS audit for $0.3 million in 1999.
Net (Loss) Income.
As a result, net income decreased by $14.7 million to a net loss of ($1.2)
million, for the year ended July 31, 2000 from net income of $13.5 million in
the year ended July 31, 1999. Excluding the $2.4 million in restructuring costs
($1.4 million net of tax) and the $3.0 million in special charges ($1.8 million
net of tax) in fiscal 2000 and the $3.9 million in restructuring costs ($2.3
million, net of tax), the $1.4 million gain on the sale of four retail stores
($0.8 million, net of tax) and the $0.3 million IRS settlement in fiscal 1999,
net income would have been $2.0 million and $15.2 million, respectively,
resulting in a decrease for the year ended July 31, 2000 of $13.1 million over
the comparable prior period.
TWELVE MONTHS ENDED JULY 31, 1999 COMPARED TO TWELVE MONTHS ENDED JULY 31, 1998
Net Sales.
Our net sales increased approximately 17.6%, or $128.1 million, to $857.0
million for the year ended July 31, 1999 from $728.9 million for the year ended
July 31, 1998. The overall increase in net sales was attributable to increased
sales to existing customers, the sale of new product offerings and the newly
acquired Albert's Organics business. Excluding Albert's Organics, our most
recent acquisition, our net sales growth would have been 11.4% over the prior
year comparable period.
Gross Profit.
Gross profit increased approximately 17.5%, or $26.4 million, to $176.7 million
for the year ended July 31, 1999 from $150.3 million for the year ended July 31,
1998. Gross profit as a percentage of net sales was consistent at 20.6% for both
years.
Operating Expenses.
Total operating expenses increased approximately 23.6%, or $28.6 million, to
$149.9 million for year ended July 31, 1999 from $121.3 million for the year
ended July 31, 1998. As a percentage of net sales, operating expenses increased
to 17.5% for year ended July 31, 1999 from 16.6% for the year ended July 31,
1998. Excluding fiscal 1999 restructuring costs of $3.9 million and fiscal 1998
merger costs of $4.1 million, total operating expenses for the years ended July
31, 1999 and 1998 would have been $146.0 million, or 17.0% of net sales, and
$117.2 million, or 16.1% of net sales, respectively, resulting in an increase
for the year ended July 31, 1999 of $28.8 million, or 24.6%, over the comparable
prior period. The increase in operating expenses as a percentage of net sales,
excluding restructuring and merger costs, was primarily due to increased
information technology expenditures and additional business integration costs
for redundant staffing and training related to the migration of the business
from the Chesterfield, New Hampshire facility to the Dayville, Connecticut
facility.
Operating Income.
Operating income decreased $2.2 million to $26.8 million for the year ended July
31, 1999 from $29.0 million for the year ended July 31, 1998. As a percentage of
net sales, operating income decreased to 3.1% in the year ended July 31, 1999
from 4.0% in the comparable 1998 period. Excluding the restructuring and merger
costs noted above, operating income for the year ended July 31, 1999 and 1998
would have been $30.7 million, or 3.6% of net sales, and $33.1 million, or 4.5%
of net sales, respectively, resulting in a decrease for year ended July 31, 1999
of $2.4 million, or 7.3%, versus the comparable prior period.
Other (Income)/Expense.
The $1.2 million decrease in other expense in the year ended July 31, 1999
compared to the year ended July 31, 1998 was primarily attributable to the $1.4
million gain on the sale of four retail stores in April 1999, partially offset
by an increase in interest expense relating to the higher level of debt in
fiscal 1999 used to fund working capital investments and the Albert's
acquisition. This increase in interest expense was partially offset by a
decrease in our average interest rate on debt.
12
Income Taxes.
Our effective income tax rates were 42.9% and 46.9% for the years ended July 31,
1999 and 1998, respectively. The effective rate for 1999 was higher than the
federal statutory rate primarily due to state and local income taxes and the
settlement of an IRS audit for $0.3 million. The effective rate for 1998 was
higher than the federal statutory rate primarily due to state and local income
taxes and non-deductible merger expenses incurred in the first quarter of fiscal
1998, partially offset by Stow Mills being an S Corporation prior to the merger
and, as such, having no federal tax expense for the first fiscal quarter of
1998.
Net Income.
As a result of the foregoing, net income increased by $0.4 million to $13.5
million, or 1.6% of net sales, for the year ended July 31, 1999 from $13.1
million in the year ended July 31, 1998. Excluding the $3.9 million in
restructuring costs ($2.3 million, net of tax), the $1.4 million gain on the
sale of four retail stores ($0.8 million, net of tax) and the $0.3 million IRS
settlement in the third quarter of fiscal 1999, and the $4.1 million in merger
costs in fiscal 1998, net income would have been $15.2 million, or 1.8% of net
sales, and $17.1 million, or 2.4% of net sales, respectively, resulting in an
decrease for the year ended July 31, 1999 of $1.9 million, or 11.3%, over the
comparable prior period.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations and growth primarily from cash flows
from operations, borrowings under our credit facility, seller financing of
acquisitions, operating and capital leases, trade payables, bank indebtedness
and the sale of equity and debt securities. Primary uses of capital have been
acquisitions, expansion of plant and equipment and investment in accounts
receivable and inventory.
Net cash used by operations was $11.6 million for the year ended July 31, 2000.
Net cash provided by operations was $8.3 million and $4.5 million for the years
ended July 31, 1999 and 1998, respectively. Excluding merger expenses of $4.1
million, net cash provided by operations in fiscal 1998 would have been $8.6
million. Cash used in operations in fiscal 2000 related primarily to an increase
in accounts receivable and investments in inventory in the ordinary course of
business. Days sales outstanding at July 31, 2000 has increased to approximately
28 days from approximately 26 days at July 31, 1999. The increases in inventory
levels relate to supporting increased sales with wider product assortment
combined with our ability to capture purchasing efficiency opportunities in
excess of total carrying costs. These items were partially offset by an increase
in accounts payable. Cash provided by operations in fiscal 1999 and 1998 related
primarily to cash collected from customers net of cash paid to vendors,
partially offset by investments in accounts receivable in 1999 and inventory in
1998 in the ordinary course of business. Working capital at July 31, 2000 was
$65.8 million.
Net cash used in investing activities was $17.0 million, $6.9 million and $34.7
million for the years ended July 31, 2000, 1999 and 1998, respectively.
Investing activities in fiscal 2000 were primarily for capital expenditures.
Investing activities in fiscal 1999 and 1998 were primarily for the acquisition
of new businesses and investing activities for all three years included the
continued upgrade of existing management information systems. Net cash used in
investing activities in fiscal 1999 was partially offset by proceeds from the
sale of four retail stores in April 1999.
Cash provided by financing activities was $27.7 million, $0.1 million and $30.6
million for the years ended July 31, 2000, 1999 and 1998, respectively. We
increased borrowings on our line of credit by $26.9 million during fiscal 2000
that was partially offset by debt repayments of $3.8 million. We increased
borrowing on our line of credit by $4.5 million during fiscal 1999, which was
mostly offset by debt repayments totaling $4.3 million. Our primary financing
activities in fiscal 1998 were net proceeds of $17.2 million from the issuance
of common stock and proceeds of $14.4 million from long-term debt incurred. Net
borrowings on our line of credit during fiscal 1998 of $9.4 million were offset
by repayments of long-term debt totaling $9.5 million. In October 1998, we
entered into an interest rate swap agreement. The agreement provides for us to
pay interest for a five-year period at a fixed rate of 5% on a notional
principal amount of $60 million while receiving interest for the same period at
the LIBOR rate on the same notional principal amount. The swap has been entered
into as a hedge against LIBOR interest rate movements on current and anticipated
variable rate indebtedness totaling $60 million. The five-year term of the swap
agreement may be extended to seven years at the option of the counterparty.
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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments, and
is effective for fiscal quarters of fiscal years beginning after June 15, 2000.
We have implemented this standard and it did not have a material impact on our
financial statement presentation.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation". The interpretation clarifies certain matters concerning the
application of APB Opinion No. 25 and is generally effective beginning July 1,
2000. We have implemented this standard and it did not have a material impact on
our financial statement presentation.
13
Year 2000 Issues
The Year 2000 issue has not had any material impact on our operations and we do
not expect it to have any material impact on our operations.
Certain Factors That May Affect Future Results
This Annual Report on Form 10-K and the documents incorporated by reference in
this Annual Report on Form 10-K contain forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will," and "would," or similar
words. You should read statements that contain these words carefully because
they discuss future expectations, contain projections of futures results of
operations or of financial position or state other "forward-looking"
information. The important factors listed below as well as any cautionary
language in this Annual Report on Form 10-K, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations described in these forward-looking statements. You should
be aware that the occurrence of the events described in the risk factors below
and elsewhere in this Annual Report on Form 10-K could have an adverse effect on
our business, results of operations and financial position.
Any forward-looking statements in this Annual Report on Form 10-K and the
documents incorporated by reference in this Annual Report on Form 10-K are not
guarantees of futures performance, and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements,
possibly materially. We disclaim any duty to update any forward-looking
statements, all of which are expressly qualified by the statement in this
section.
Our business could be adversely affected if we are unable to integrate our
acquisitions and mergers
A significant portion of our historical growth has been achieved through
acquisitions of or mergers with other distributors of natural products. We
merged with Stow Mills in October 1997. The successful integration of this
merger is critical to our future operating and financial performance. The
integration will require, among other things:
o the optimization of delivery routes;
o coordination of administrative, distribution and finance functions;
and
o the integration of personnel.
The integration process has and could continue to divert the attention of
management and any further difficulties or problems encountered in the
transition process could continue to have a material adverse effect on our
business, financial condition or results of operations. In addition, the process
of combining the companies has and could continue to cause the interruption of,
or a loss of momentum in, the activities of the respective businesses, which
could have an adverse effect on their combined operations. There can be no
assurance that we will realize any of the anticipated benefits of the Stow Mills
merger.
We may have difficulty in managing our growth
The growth in the size of our business and operations has placed and is expected
to continue to place a significant strain on our management. Our future growth
is limited in part by the size and location of our distribution centers. There
can be no assurance that we will be able to successfully expand our existing
distribution facilities or open new distribution facilities in new or existing
markets to facilitate growth. In addition, our growth strategy to expand our
market presence includes possible additional acquisitions. To the extent our
future growth includes acquisitions, there can be no assurance that we will
successfully identify suitable acquisition candidates, consummate and integrate
such potential acquisitions or expand into new markets. Our ability to compete
effectively and to manage future growth, if any, will depend on our ability to
continue to implement and improve operational, financial and management
information systems on a timely basis and to expand, train, motivate and manage
our work force. There can be no assurance that our personnel, systems,
procedures and controls will be adequate to support our operations. Our
inability to manage our growth effectively could have a material adverse effect
on our business, financial condition or results of operations.
We have significant competition from a variety of sources
We operate in highly competitive markets, and our future success will be largely
dependent on our ability to provide quality products and services at competitive
prices. Our 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 mass market grocery
distributors will not increase their emphasis on natural products and more
directly compete with us or that new competitors will not enter the market.
These distributors may have been in business longer than us, may have
substantially greater financial and other resources than us and may be better
established in their markets. There can be no assurance that our current or
potential competitors will not provide services comparable or superior to those
provided by us or adapt more quickly than United Natural to evolving industry
trends or changing market requirements. It is also possible that alliances among
competitors may develop and rapidly acquire significant market share or that
certain of our customers will increase distribution to their own retail
facilities. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
our business, financial condition or results of operations. There can be no
assurance that we will be able to compete effectively against current and future
competitors.
We depend heavily on our principal customers
Our ability to maintain close, mutually beneficial relationships with our top
two customers, Whole Foods Market, Inc. and Wild Oats Markets, Inc., is
important to the ongoing growth and profitability of our business. Whole Foods
and Wild Oats accounted for approximately 16% and 13%, respectively, of our net
sales during the fiscal year ended July 31, 2000. As a result of this
concentration of our customer base, the loss or cancellation of business from
either of these customers, including from increased distribution to their own
facilities, could materially and adversely affect our business, financial
condition or results of operations. We sell products under purchase orders, and
we generally have no agreements with or commitments from our
14
customers for the purchase of products. No assurance can be given that our
customers will maintain or increase their sales volumes or orders for the
products supplied by us or that we will be able to maintain or add to our
existing customer base.
Our profit margins may decrease due to consolidation in the grocery industry
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 growth of super natural
chains may reduce our profit margins in the future as more customers qualify for
greater volume discounts.
Our industry is sensitive to economic downturns
The grocery industry is also sensitive to national and regional economic
conditions, and the demand for our products may be adversely affected from time
to time by economic downturns. In addition, our operating results are
particularly sensitive to, and may be materially adversely affected by:
o difficulties with the collectibility of accounts receivable,
o difficulties with inventory control,
o competitive pricing pressures, and
o unexpected increases in fuel or other transportation-related costs.
There can be no assurance that one or more of such factors will not materially
adversely affect our business, financial condition or results of operations.
We are dependent on a number of key executives
Management of our business is substantially dependent upon the services of
Michael S. Funk, Chief Executive Officer, Richard S. Youngman, President, Kevin
Michel, Chief Financial Officer, and other key management employees. Norman A.
Cloutier, our former Chairman of the Board and Chief Executive Officer, resigned
these positions on December 6, 1999. Loss of the services of any additional
officers or any other key management employee could have a material adverse
effect on our business, financial condition or results of operations.
Our operating results are subject to significant fluctuations
Our net sales and operating results may vary significantly from period to period
due to:
o changes in our operating expenses,
o management's ability to execute our business and growth strategies,
o personnel changes,
o demand for natural products,
o supply shortages,
o general economic conditions,
o changes in customer preferences and demands for natural products,
including levels of enthusiasm for health, fitness and environmental
issues,
o fluctuation of natural product prices due to competitive pressures,
o lack of an adequate supply of high-quality agricultural products due
to poor growing conditions, natural disasters or otherwise,
o volatility in prices of high-quality agricultural products resulting
from poor growing conditions, natural disasters or otherwise, and
o future acquisitions, particularly in periods immediately following
the consummation of such acquisition transactions while the
operations of the acquired businesses are being integrated into our
operations.
Due to the foregoing factors, we believe that period-to-period comparisons of
our operating results may not necessarily be meaningful and that such
comparisons cannot be relied upon as indicators of future performance.
We are subject to significant governmental regulation
Our business is highly regulated at the federal, state and local levels and our
products and distribution operations require various licenses, permits and
approvals. In particular:
15
o our products are subject to inspection by the U.S. Food and Drug
Administration,
o our warehouse and distribution facilities are subject to inspection
by the U.S. Department of Agriculture and state health authorities,
and
o our trucking operations are regulated by the U.S. Department of
Transportation and the U.S. Federal Highway Administration.
The loss or revocation of any existing licenses, permits or approvals or the
failure to obtain any additional licenses, permits or approvals in new
jurisdictions where we intend to do business could have a material adverse
effect on our business, financial condition or results of operations.
Our officers and directors and the employee stock ownership trust have
significant voting power.
As of September 30, 2000, our executive officers and directors, and their
affiliates, and the United Natural Foods Employee Stock Ownership Trust
beneficially owned in the aggregate approximately 29% of United Natural's common
stock. Accordingly, these stockholders, if acting together, may have the ability
to impact the election of our directors and determine the outcome of corporate
actions requiring stockholder approval, depending on how other stockholders may
vote. This concentration of ownership may have the effect of delaying, deferring
or preventing a change in control of United Natural.
Union-organizing activities could cause labor relations difficulties
As of July 31, 2000, approximately 220 employees, representing approximately 8%
of our approximately 2,700 employees, were union members. We have in the past
been the focus of union-organizing efforts. As we increase our employee base and
broaden our distribution operations to new geographic markets, our increased
visibility could result in increased or expanded union-organizing efforts.
Although we have not experienced a work stoppage to date, if additional
employees were to unionize, we could be subject to work stoppages and increases
in labor costs, either of which could materially adversely affect our business,
financial condition or results of operations.
Access to capital and the cost of that capital
In order to maintain our profit margins, we rely on strategic investment buying
initiatives, such as discounted bulk purchases, which require spending
significant amounts of working capital. In the event that capital market turmoil
significantly increased our cost of capital or the ability to borrow funds or
raise equity capital, we could suffer reduced profit margins and be unable to
grow our business organically or through acquisitions, which could have a
material adverse effect on our business, financial condition or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We do not believe that there is any material market risk exposure with respect
to derivative or other financial instruments that would require disclosure under
this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed below are filed as part of this Annual Report on
Form 10-K.
INDEX TO FINANCIAL STATEMENTS
United Natural Foods, Inc. and Subsidiaries: Page
Independent Auditors' Report 16
Consolidated Balance Sheets 17
Consolidated Statements of Operations 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
16
NDEPENDENT AUDITORS' REPORT
The Board of Directors
United Natural Foods, Inc.:
We have audited the accompanying consolidated balance sheets of United Natural
Foods, Inc. and Subsidiaries as of July 31, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended July 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999 and the results of
their operations and their cash flows for each of the years in the three-year
period ended July 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
Providence, Rhode Island
September 8, 2000
17
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
ASSETS JULY 31, JULY 31,
2000 1999
Current assets:
Cash and cash equivalents $ 1,943 $ 2,845
Accounts receivable, net of allowance of $3,302 and $2,297, respectively 69,474 60,612
Notes receivable, trade 456 1,096
Inventories 104,486 90,725
Prepaid expenses 6,085 5,660
Deferred income taxes 2,350 1,765
Refundable income taxes 4,401 3,939
---------------------------
Total current assets $ 189,195 166,642
Property & equipment, net 52,625 43,784
Notes receivable, trade, net 765 333
Goodwill, net of accumulated amortization of $2,680 and $1,853, respectively 26,624 26,250
Covenants not to compete, net of accumulated amortization of $317 and $365,
respectively 181 328
Other, net 844 564
---------------------------
Total assets $ 270,234 $ 237,901
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 68,007 $ 41,154
Current installments of long-term debt 2,770 3,682
Current installments of obligations under capital leases 1,036 833
Accounts payable 39,393 33,442
Accrued expenses 12,178 13,706
---------------------------
Total current liabilities 123,884 92,817
Long-term debt, excluding current installments 26,722 24,370
Deferred income taxes 367 712
Obligations under capital leases, excluding current installments 1,807 1,421
---------------------------
Total liabilities 152,280 119,320
---------------------------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 5,000 shares; none issued or outstanding -- --
Common stock, $.01 par value, authorized 50,000 shares;
issued and outstanding 18,283 at July 31, 2000
issued and outstanding 18,249 at July 31, 1999 183 182
Additional paid-in capital 68,180 67,740
Unallocated shares of Employee Stock Ownership Plan (2,421) (2,584)
Retained earnings 52,012 53,243
---------------------------
Total stockholders' equity 117,954 118,581
---------------------------
Total liabilities and stockholders' equity $ 270,234 $ 237,901
===========================
See notes to consolidated financial statements
18
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JULY 31,
(In thousands, except per share data) 2000 1999 1998
---- ---- ----
Net sales $ 908,688 $ 856,998 $ 728,910
Cost of sales 734,673 680,301 578,575
-------------------------------------
Gross profit 174,015 176,697 150,335
-------------------------------------
Operating expenses 166,673 144,937 116,042
Merger and restructuring expenses 2,420 3,869 4,064
Amortization of intangibles 1,070 1,075 1,185
-------------------------------------
Total operating expenses 170,163 149,881 121,291
-------------------------------------
Operating income 3,852 26,816 29,044
-------------------------------------
Other expense (income):
Interest expense 6,412 5,700 5,157
Other, net (527) (2,477) (778)
-------------------------------------
Total other expense 5,885 3,223 4,379
-------------------------------------
(Loss) income before income taxes (2,033) 23,593 24,665
Income (benefit) taxes (802) 10,126 11,580
-------------------------------------
Net (loss) income $ (1,231) $ 13,467 $ 13,085
=====================================
Per share data (basic):
Net (loss) income $ (0.07) $ 0.74 $ 0.75
=====================================
Weighted average basic shares of common stock 18,264 18,196 17,467
=====================================
Per share data (diluted):
Net (loss) income $ (0.07) $ 0.73 $ 0.74
=====================================
Weighted average diluted shares of common stock 18,264 18,537 17,798
=====================================
See notes to consolidated financial statements.
19
UNITED NATURAL FOODS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unallocate Total
Outstanding Common Additional Paid Shares of Retained Treasury Stockholders'
Number of Shares Stock in Capital ESOP Earnings Stock Equity
--------------------------------------------------------------------------------------------
(In thousands)
Balances at July 31, 1997 17,357 174 51,842 (2,910) 24,854 (44) 73,916
Allocation of shares to ESOP -- -- -- 163 -- -- 163
Transfer of undistributed
loss to additional
paid-in-capital -- -- (1,837) -- 1,837 -- --
Issuance of common stock, net 818 8 17,479 -- -- (265) 17,222
Retirement of treasury stock -- -- (44) -- -- 44 --
Net income -- -- -- -- 13,085 -- 13,085
-------------------------------------------------------------------------------------------
Balances at July 31, 1998 18,175 $ 182 $ 67,440 $ (2,747) $ 39,776 $ (265) $ 104,386
-------------------------------------------------------------------------------------------
Allocation of shares to ESOP -- -- -- 163 -- -- 163
Transfer of undistributed
loss to additional
paid-in-capital -- -- 19 -- -- -- 19
Issuance of common stock, net 74 -- 546 -- -- -- 546
Retirement of treasury stock -- -- (265) -- -- 265 --
Net income -- -- -- -- 13,467 -- 13,467
-------------------------------------------------------------------------------------------
Balances at July 31, 1999 18,249 $ 182 $ 67,740 $ 2,584 $ 53,243 $ -- $ 118,581
-------------------------------------------------------------------------------------------
Allocation of shares to ESOP -- -- -- 163 -- -- 163
Transfer of undistributed
loss to additional
paid-in-capital -- -- -- -- -- -- --
Issuance of common stock, net 34 1 440 -- -- -- 441
Retirement of treasury stock -- -- -- -- -- -- --
Net loss -- -- -- -- (1,231) -- (1,231)
-------------------------------------------------------------------------------------------
Balances at July 31, 1999 18,283 $ 183 $ 68,180 $ (2,421) $ 52,012 $ -- $ 117,954
===========================================================================================
See notes to consolidated financial statements.
20
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31,
(In thousands) 2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,231) $ 13,467 $ 13,085
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 7,601 9,205 6,068
Gain on sale of business -- (1,397) --
(Gain) loss on disposals of property & equipment 1,977 (195) 80
Deferred income tax (benefit) expense (930) (941) 184
Provision for doubtful accounts 1,992 1,995 2,462
Changes in assets and liabilities, net of acquired
companies:
Accounts receivable (10,854) (11,524) (5,911)
Inventory (13,761) (460) (14,111)
Prepaid expenses (425) (2,319) 1,175
Refundable income taxes (461) (3,889) (165)
Other assets (117) 771 1,085
Notes receivable, trade 208 445 (71)
Accounts payable 5,950 334 732
Accrued expenses (1,528) 2,805 307
Income taxes payable -- -- (377)
-----------------------------------
Net cash (used in) provided by operating activities (11,579) 8,297 4,543
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of subsidiaries, net of cash
acquired (1,200) (8,888) (20,029)
Proceeds from sale of business -- 7,086 --
Proceeds from disposals of property and equipment 57 1,477 545
Capital expenditures (15,870) (6,610) (15,209)
-----------------------------------
Net cash used in investing activities (17,013) (6,935) (34,693)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under note payable 26,854 4,546 9,386
Repayments on long-term debt (3,846) (4,337) (9,482)
Proceeds from long-term debt 5,287 -- 14,445
Principal payments of capital lease obligations (1,045) (683) (980)
Proceeds from issuance of common stock, net 440 564 17,222
-----------------------------------
Net cash provided by financing activities $ 27,690 $ 90 $ 30,591
-----------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (902) 1,452 441
Cash and cash equivalents at beginning of period 2,845 1,393 952
-----------------------------------
Cash and cash equivalents at end of period $ 1,943 $ 2,845 $ 1,393
===================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 5,746 5,540 4,897
===================================
Income taxes 795 15,273 11,938
===================================
In 2000, 1999 and 1998, the Company incurred capital lease obligations of
approximately $1,634, $1,686 and $316, respectively.
See notes to consolidated financial statements.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
(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) Cash Equivalents
Cash equivalents consist of highly liquid investment instruments with
original maturities of three months or less.
(d) Inventories
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method.
(e) 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.
(f) 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.
(g) Intangible Assets and Other Long-Lived 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 not exceeding forty years.
Covenants not to compete are initially recorded at fair value and are
amortized using the straight-line method over the lives of the respective
agreements, generally five years.
The Company evaluates impairment of long-lived 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 long-lived assets will be impacted if estimated future
cash flows are not achieved.
(h) 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. The Company had two
customers in 2000 and 1999, Whole Foods Market, Inc., and Wild Oats
Markets, Inc., which provided 10% or more of the Company's revenue. Total
net sales to Whole Foods and Wild Oats in 2000 were approximately $147
million and $121 million, respectively. Total net sales to Whole Foods and
Wild Oats in 1999 were approximately $143 million and $90 million,
respectively. Whole Foods was the only customer in 1998 that provided 10%
or more of the Company's revenue. Total net sales to Whole Foods were
approximately $120 million 1998.
(i) 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.
(j) Merger with Stow Mills
On October 31, 1997, the Company completed its merger with Stow Mills,
Inc. and Subsidiary and Hendrickson Partners ("Stow") wherein Stow became
a wholly owned subsidiary of the Company. Prior to this merger, Stow's
fiscal year ended December 31.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(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.
(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) Earnings Per Share
Basic earnings per share are calculated by dividing net (loss) income by
the weighted average number of common shares outstanding during the
period. Diluted earnings per share are calculated by adding the dilutive
potential common shares to the weighted average number of common shares
that were outstanding during the period. For purposes of the diluted
earnings per share calculation, outstanding stock options are considered
common stock equivalents, using the treasury stock method. All earnings
per share information included in these financial statements has been
restated to conform to the requirements of SFAS No. 128.
A reconciliation of the weighted average number of shares outstanding used
in the computation of the basic and diluted earnings per share for all
periods presented follows:
YEAR ENDED JULY 31,
(In thousands, except per share data) 2000 1999 1998
---- ---- ----
Basic weighted average shares outstanding 18,264 18,196 17,467
Net effect of dilutive stock options based upon
the treasury stock method -- 341 331
---------------------------
Diluted weighted average shares outstanding 18,264 18,537 17,798
===========================
(o) Pro Forma Additional Income Tax Expense (Unaudited)
Stow was organized as an S corporation for Federal income tax purposes
prior to the merger. Pro forma income tax expense reflects Federal income
tax applied to taxable income at a rate of 35% for Stow for all periods
prior to the effective date of the merger. Had Stow been taxed as a C
corporation prior to the merger, income tax expense for the fiscal year
ended July 31, 1998 would have increased $ 0.32 million, which would have
resulted in net income of $ 12.8 million. Basic earnings per share would
have been $ 0.73 and diluted earnings per share would have been $ 0.72.
(2) ACQUISITIONS
Fiscal 1999
On September 30, 1998, the Company acquired substantially all of the outstanding
stock of Albert's Organics, Inc. ("Albert's"), a wholesale distributor of
organic vegetables and fruits for $12.0 million, including $ 1.2 million
contingent payment that was made during fiscal 2000. Albert's had sales of $47.8
million (unaudited) for its most recent fiscal year ending December 31, 1997.
This acquisition was accounted for as a purchase with goodwill of approximately
$10.3 million being amortized on a straight-line basis over 40 years.
Fiscal 1998
During February 1998, the Company acquired substantially all the assets of
Hershey Import Co., Inc. ("Hershey"), an international trading, roasting and
packaging business of nuts, seeds, dried fruit and snack items, for
approximately $10.5 million. Hershey had sales of $20.8 million (unaudited) for
its most recent fiscal year ending June 30, 1997. This acquisition was accounted
for as a purchase with goodwill of approximately $6.3 million being amortized on
a straight-line basis over 40 years.
On October 31, 1997, the Company completed its merger with Stow wherein Stow
became a wholly owned subsidiary of the Company. The merger with Stow was
accounted for as a pooling of interests and, accordingly, all financial
information included is reported as though the companies had been combined for
all periods reported. The Company issued 4,978,280 shares in connection with the
merger, which represented approximately 29% of the Company's common stock after
the merger. Net sales for the quarter ended October 31, 1997 and the year ended
July 31 1997 for the Company excluding Stow were approximately $116.5 million
(unaudited) and $421.7 million, respectively. Net income for the quarter ended
October 31, 1997 and the year ended July 31, 1997 for the Company excluding Stow
was $1.2 million
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited) and $8.3 million, respectively. Net sales for the quarter ended
October 31, 1997 and the year ended July 31, 1997 for Stow were $56.9 million
(unaudited) and $213.1, respectively. Net (loss) income for the quarter ended
October 31, 1997 and the year ended July 31, 1997 for Stow was $(1.8) million
(unaudited) and $1.1 million, respectively.
(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 (loss) income would have been $(1.8) million,
$11.9 million and $12.1 million for 2000, 1999 and 1998, respectively, basic
(loss) earnings per share would have been $(0.10), $0.65 and $0.69 for 2000,
1999 and 1998, respectively, and diluted (loss) earnings per share would have
been $(0.10), $0.64 and $0.68 for 2000, 1999 and 1998, respectively. The
weighted average grant date fair value of options granted during 2000, 1999 and
1998 is shown below. The fair value of each option grant was estimated using the
Black-Sholes Option Pricing Model with the following weighted average
assumptions for 2000, 1999 and 1998: a dividend yield of 0.0%, a risk free
interest rate of 6.07% and an expected life of 8 years. The expected volatility
was 77.5%, 66.0% and 60.9% for 2000, 1999 and 1998, respectively. The effects of
applying SFAS No. 123 in this pro forma disclosure are not necessarily
indicative of future amounts.
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 stock options"). A total of 2,000,000 shares of
common stock may be issued upon the exercise of options granted under the 1996
Stock Option Plan.
The following table summarizes the stock option activity for the fiscal
years ended July 31, 2000, 1999 and 1998.
Shares Weighted Shares Weighted Shares Weighted
------ Average ------ Average ------ Average
Exercise Exercise Exercise
Price Price Price
----- ----- -----
Outstanding at beginning of year 985,259 $14.05 989,346 $13.02 654,500 $ 8.14
Granted 839,500 $ 9.38 80,000 $21.37 392,346 $21.47
Exercised (34,119) $ 9.64 (74,087) $ 7.38 (27,500) $ 9.64
Forfeited (212,500) $20.74 (10,000) $20.25 (30,000) $20.25
----------- --------- ---------
Outstanding at end of year 1,578,140 $10.76 985,259 $14.05 989,346 $13.02
=========== ========= =========
Options exercisable at year-end 604,113 $10.12 490,913 $ 9.32 392,107 $ 7.38
Weighted average fair value of
options granted during the year:
Exercise price equals stock price $7.38 $15.54 $14.92
Exercise price exceeds stock price -- -- $10.03
Stock price exceeds exercise price -- -- --
The 1,578,140 options outstanding at July 31, 2000 had exercise prices and
remaining contractual lives as follows:
Exercise Price Number Remaining
-------------- ------ Contractual
Life
-----------
$ 6.38 255,750 6 Years
$ 7.75 50,000 9 Years
$ 8.97 610,500 9 Years
$ 9.64 169,381 6 Years
$ 10.13 36,000 10 Years
$ 10.60 82,500 1 Year
$ 11.44 108,000 10 Years
$ 13.00 5,000 10 Years
$ 13.56 5,000 10 Years
$ 14.25 10,000 10 Years
$ 20.25 174,470 7 Years
$ 21.38 30,000 9 Years
$ 22.28 41,539 2 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 five subsequent
amendments effective March 1997, July 1997, October 1997, July 1999 and April
2000. In October 1997, the Company amended the agreement with its bank to
increase the amount of the facility from $50 million to $100 million, to
increase the limit on inventory
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
advances to $50 million and the advance rate to 60%, to establish a term loan of
$6.6 million and to increase the aggregate amount of real estate acquisition
loans and real estate term loans to $20 million. The agreement also provides for
the bank to syndicate the credit facility to other banks and lending
institutions. The credit facility was used to repay existing indebtedness of
Stow owing to the Company's bank at the date of the merger and is used for
general operating capital needs. Interest under the facility, except the portion
related to the mortgage commitments, accrues at the Company's option at the New
York Prime Rate (9.50% at July 31, 2000 and 8.25% at July 31, 1999) or 1.25%
above the bank's London Interbank Offered Rate ("LIBOR", 6.62% and 5.18% at July
31, 2000 and 1999, respectively), and the Company has the option to fix the rate
for all or a portion of the debt for a period up to 180 days. The Company opted
to pay 1.25% above LIBOR for substantially all of fiscal 2000. Interest on
approximately $5.9 million of the mortgage facility accrues at 7.36%, with the
remainder to accrue at 1.25% above the bank's LIBOR rate, although the Company
has the option to fix the variable portion for a period of five years at a rate
of 1.25% above the five-year U.S Treasury Note rate. At July 31, 2000 and 1999,
the weighted average interest rate on the line of credit was 7.87% and 6.23%,
respectively. The Company has pledged all of its assets as collateral for its
obligations under the credit agreement. As of July 31, 2000, the Company's
outstanding borrowings under the credit agreement totaled $88.4 million. The
credit agreement expires on July 31, 2002 and contains certain restrictive
covenants. The Company was not in compliance with one of its restrictive
covenants at July 31, 1999 and was granted a waiver of this covenant by the
bank. In connection with the amendment to the Company's credit agreement with
its bank as noted above, an Agency and Interlender Agreement was entered into by
the Company, its bank and two additional participating banks effective December
1, 1997. This agreement states, among other things, that the Company's primary
bank will participate in this credit facility with the other banks.
In October 1998, the Company entered into an interest rate swap agreement. The
agreement provides for the Company to pay interest for a five-year period at a
fixed rate of 5% on a notional principal amount of $60 million while receiving
interest for the same period at the LIBOR rate on the same notional principal
amount. The swap was entered into as a hedge against LIBOR interest rate
movements on current and anticipated variable rate indebtedness totaling $60
million. The five-year term of the swap agreement may be extended to seven years
at the option of the counterparty.
(5) LONG-TERM DEBT
Long-term debt consisted of the following: (dollars in thousands) July 31, July 31,
2000 1999
---- ----
Term loan for employee stock ownership plan, secured by stock of
the Company, due $14 monthly plus interest at 10%, balance due
May 1, 2015 $ 2,421 $ 2,584
Term loan payable to bank, secured by substantially all assets of
the Company, due $235 quarterly plus interest at 1.25% above
LIBOR, balance due July 31, 2002 4,015 4,955
Real estate term loan payable to bank, secured by land and
building, due $28 monthly plus interest at 7.36%, balance due
July 31, 2002 5,885 6,215
Term loan payable to bank, secured by substantially all assets of
the Company, with monthly principal payments of $50 through July
2002 and the remaining principal due on July 31, 2002, interest
at 7.71% 10,490 11,090
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 5.35% to 10% -- 1,578
Real estate term loans payable to bank and others, secured by
building And other assets, due monthly and maturing at various
dates from July 2002 through April 2015, at rates ranging from 5%
to 8.6% 6,681 1,630
------------------
29,492 28,052
Less: current installments 2,770 3,682
------------------
Long-term debt, excluding current installments $26,722 $24,370
==================
Certain debt agreements contain restrictive covenants. The Company was not in
compliance with one of its restrictive covenants at July 31, 1999 and was
granted a waiver of this covenant by the bank.
Aggregate maturities of long-term debt for the next five years and thereafter
are as follows at July 31, 2000:
Year (thousands)
2001 $ 2,770
2002 20,775
2003 861
2004 928
2005 828
Thereafter 3,330
-------
$29,492
=======
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(6) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at July 31, 2000 and 1999:
(dollars in thousands) Useful 2000 1999
Lives ---- ----
(Years)
-------
Land $ 1,741 $ 1,535
Building 20-40 33,912 26,797
Leasehold improvements 5-30 9,981 7,282
Warehouse equipment 5-20 20,479 19,177
Office equipment 3-10 8,531 6,629
Motor vehicles 3-5 5,877 5,468
Equipment under capital leases 5 3,984 3,758
Construction in progress 1,742 1,851
------- -------
86,247 72,497
Less accumulated depreciation
and amortization 33,622 28,713
--------------------
Net property and equipment. $52,625 $43,784
====================
(7) CAPITAL LEASES
The Company leases computer, office and warehouse equipment under capital leases
expiring in various years through 2005. 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, 2000 for each
of the next five fiscal years and in the aggregate are:
Year ended July 31 Amount
------------------ (In thousands)
2001 $ 1,211
2002 1,001
2003 714
2004 254
2005 and thereafter 5
Total minimum lease payments 3,185
-------
Less: Amount representing interest 342
-------
Present value of net minimum
lease payments 2,843
Less: current installments 1,036
-------
Capital lease obligations,
excluding current installments $ 1,807
=======
(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, 2000.
Rent and other lease expense for the years ended July 31, 2000, 1999 and 1998
totaled approximately $8.5 million, $7.2 million and $17.5 million,
respectively.
Future minimum annual fixed payments required under non-cancelable operating
leases having an original term of more than one year as of July 31, 2000 are as
follows:
Year (In thousands)
2001 $ 6,029
2002 5,263
2003 4,529
2004 4,049
2005 3,405
2006 and thereafter 13,369
--------
$ 36,644
========
Outstanding commitments as of July 31, 2000 for the purchase of inventory were
approximately $7.2 million. The Company had outstanding letters of credit of
approximately $3.8 million at July 31, 2000.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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) PROFIT SHARING / SALARY REDUCTION PLANS
The Company has several profit sharing/salary reduction plans, generally called
"401(k) Plans" ("the Plans"), covering various employee groups. Under these
types of Plans the employees may choose to reduce their compensation and have
these amounts contributed to the Plans on their behalf. In order to become a
participant in the Plans, employees must meet certain eligibility requirements
as described in the respective Plan's document. In addition to amounts
contributed to the Plans by employees, the Company makes contributions to the
Plans on behalf of the employees. The Company contributions to the Plans were
approximately $1.0 million, $1.0 million and $0.8 million for the years ended
July 31, 2000, 1999 and 1998, respectively.
(10) INCOME TAXES
Total Federal and state income tax (benefit) expense consists of the following:
(In thousands) Current Deferred Total
------- -------- -----
Fiscal year ended July 31, 2000:
U.S. Federal $ (141) $ 79 $ (62)
State and local 269 (1,009) (740)
-------- -------- --------
$ 128 $ (930) $ (802)
======== ======== ========
Fiscal year ended July 31, 1999:
U.S. Federal $ 9,447 $ (811) $ 8,636
State and local 1,619 (129) 1,490
-------- -------- --------
$ 11,066 $ (940) $ 10,126
======== ======== ========
Fiscal year ended July 31, 1998:
U.S. Federal $ 8,736 $ 173 $ 8,909
State and local 2,660 11 2,671
-------- -------- --------
$ 11,396 $ 184 $ 11,580
======== ======== ========
Total income tax (benefit) expense was different than the amounts computed using
the United States statutory income tax rate (35%) applied to income before
income taxes as a result of the following:
July 31, July 31, July 31,
(In thousands) 2000 1999 1998
---- ---- ----
Computed "expected" tax (benefit) expense $ (712) $ 8,258 $ 8,633
State and local income tax, net of Federal
income tax (expense) benefit (481) 968 1,736
Effect of entities not taxed for Federal
income tax -- -- 383
Merger related expenses 491
Non-deductible expenses 119 155 84
Non-deductible amortization 88 79 15
Other, net 184 666 238
-------- -------- --------
$ (802) $ 10,126 $ 11,580
======== ======== ========
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 2000 and
1999 are presented below:
(In thousands) 2000 1999
---- ----
Deferred tax assets:
Inventories, principally due to additional costs inventoried for tax
purposes 1,245 958
Compensation and benefit related 750 792
State net operating loss carryforward 617 --
Accounts receivable, principally due to allowances for uncollectible
accounts 304 382
Other 169 136
------- -------
Total gross deferred tax assets 3,085 2,268
Less valuation allowance -- --
Net deferred tax assets 3,085 2,268
------- -------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation 405 495
Reserve for LIFO inventory method 329 611
Intangible assets 285 21
Other 83 88
------- -------
Total deferred tax liabilities 1,102 1,215
------- -------
Net deferred tax assets $ 1,983 $ 1,053
======= =======
Current deferred income tax assets $ 2,350 $ 1,765
Non-current deferred income tax liabilities (367) (712)
------- -------
$ 1,983 $ 1,053
======= =======
At July 31, 2000, the Company had net operating loss carryforwards of
approximately $16 million for state income tax purposes that expire in years
2003 through 2020.
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 UNF 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 Trust
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 each of 2000, 1999 and 1998 contributions totaling
approximately $0.4 million were made to the Trust. Of these contributions,
approximately $0.3 million each year represented interest.
The ESOP shares were classified as follows:
July 31, July 31,
(In thousands) 2000 1999
---- ----
Allocated shares 814 726
Shares released for allocation 88 88
Shares distributed to employees (327) (261)
Unreleased shares 1,298 1,386
----- -----
Total ESOP shares 1,873 1,939
===== =====
The fair value of unreleased shares was approximately $18.5 million at July 31,
2000.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(12) BUSINESS SEGMENTS
The Company has several operating segments aggregated under the distribution
segment, which is the Company's only reportable segment. These operating
segments have similar products and services, customer types, distribution
methods and historical margins. The distribution segment is engaged in
independent national distribution of natural foods and related products in the
United States. Other operating segments include the retail segment, which
engages in the sale of natural foods and related products to the general public
through retail storefronts on the east coast of the United States, and a segment
engaging in trading, roasting and packaging of nuts, seeds, dried fruit and
snack items. These other operating segments do not meet the quantitative
thresholds for reportable segments and are therefore included in an "other"
caption in the segment information. The "other" caption also includes corporate
expenses that are not allocated to operating segments.
Following is business segment information for the periods indicated:
(dollars in thousands) Distribution Other Eliminations Consolidated
2000
- ----
Revenue 870,307 56,131 (17,750) 908,688
Operating Income 8,333 (4,549) 68 3,852
Amortization and Depreciation 6,431 1,170 -- 7,601
Capital Expenditures 15,190 680 -- 15,870
Assets 400,538 7,129 (137,433) 270,234
1999
- ----
Revenue 806,013 72,860 (21,875) 856,998
Operating Income 26,242 422 152 26,816
Amortization and Depreciation 7,819 1,386 -- 9,205
Capital Expenditures 7,354 942 -- 8,296
Assets 357,401 18,824 (138,324) 237,901
1998
- ----
Revenue 691,389 49,977 (12,456) 728,910
Operating Income 29,454 (544) 134 29,044
Amortization and Depreciation 4,931 1,137 -- 6,068
Capital Expenditures 14,107 1,417 -- 15,524
Assets 252,716 30,845 (71,319) 212,242
(13) RESTRUCTURING COSTS
In connection with the consolidation of operations in the Eastern Region and the
Central Region, the Company accrued restructuring expenses of $0.6 million and
$0.8 million for the years ended July 31, 2000 and 1999, respectively, and
recorded asset impairments and incremental depreciation of $1.8 million and $2.4
million for the years ended July 31, 2000 and 1999, respectively. Substantially
all of the retention and severance expenses had been paid as of July 31, 2000.
The incremental depreciation was to reduce the book value of the Chesterfield,
New Hampshire facility, which was being held for sale, to its estimated net
realizable value. Management decided in December 1999 to keep this facility open
for the foreseeable future. Depreciation of the remaining book value was resumed
in December 1999.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly operating results and share data. There were
no dividends paid or declared during 2000 and 1999 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.
(In thousands except per share data) First Second Third Fourth Full Year
- ------------------------------------------------------------------------------------------------------
2000
- ----
Net sales $ 218,455 $ 231,375 $ 229,205 $ 229,653 $ 908,688
Gross profit 40,452 42,171 45,305 46,087 174,015
Income before income taxes (1,697) (7,527) 2,940 4,251 (2,033)
Net income (loss) (1,018) (4,528) 1,765 2,550 (1,231)
Per common share income (loss)
Basic: $ (0.06) $ (0.25) $ 0.10 $ 0.14 $ (0.07)
Diluted: $ (0.06) $ (0.25) $ 0.10 $ 0.14 $ (0.07)
Weighted average basic
Shares outstanding 18,260 18,260 18,261 18,275 18,264
Weighted average diluted
Shares outstanding 18,260 18,260 18,562 18,651 18,264
(In thousands except per share data) First Second Third Fourth Full Year
- ------------------------------------------------------------------------------------------------------
Market Price
High $ 19 5/8 $ 15 3/16 $ 16 $16 11/16 $ 19 5/8
Low $ 7 5/8 $ 7 $ 9 5/8 $ 12 3/8 $ 7
1999
- ----
Net sales $ 199,889 $ 215,748 $ 226,892 $ 214,469 $ 856,998
Gross profit 42,614 46,208 47,939 39,936 176,697
Income before income taxes 8,163 8,405 9,350 (2,325) 23,593
Net income (loss) 4,779 4,916 5,119 (1,347) 13,467
Per common share income (loss)
Basic: $ 0.26 $ 0.27 $ 0.28 $ (0.07) $ 0.74
Diluted: $ 0.26 $ 0.27 $ 0.28 $ (0.07) $ 0.73
Weighted average basic
Shares outstanding 18,175 18,175 18,183 18,249 18,196
Weighted average diluted
Shares outstanding 18,537 18,538 18,512 18,249 18,537
Market Price
High $ 29 1/2 $ 29 1/4 $ 29 3/4 $ 29 1/4 $ 29 3/4
Low $ 19 $ 22 1/2 $ 17 3/4 $ 17 1/4 $ 17 1/4
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 and Directors 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 2000 (the "2000 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 2000 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 2000 Proxy Statement
under the caption "Stock Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by this reference.
30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption "Certain
Transactions" in the 2000 Proxy Statement and is incorporated herein by this
reference.
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 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. None.
31
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/ KEVIN T. MICHEL
-----------------------------
Kevin T. Michel
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: October 20, 2000
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/ THOMAS B. SIMONE Chairman of the Board October 20, 2000
- --------------------
Thomas B. Simone
/s/ MICHAEL S. FUNK Chief Executive Officer, Vice Chairman of the Board October 20, 2000
- ------------------- (Principal Executive Officer)
Michael S. Funk
/s/ GORDON D. BARKER Director October 20, 2000
- --------------------
Gordon D. Barker
/s/ JOSEPH M. CIANCIOLO Director October 20, 2000
- -----------------------
Joseph M. Cianciolo
/s/ JAMES P. HEFFERNAN Director October 20, 2000
- ----------------------
James P. Heffernan
/s/ KEVIN T. MICHEL Vice President and Chief Financial Officer; October 20, 2000
- ------------------- Treasurer; Director
Kevin T. Michel (Principal Financial and Accounting Officer)
/s/ RICHARD S. YOUNGMAN President and Assistant Secretary; Director October 20, 2000
- -----------------------
Richard S. Youngman
32
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* 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.
10.3* 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.
10.4* Trust Agreement between Norman A. Cloutier, Steven H. Townsend,
Daniel V. Atwood, Theodore Cloutier and Steven H. Townsend as
Trustee, dated November 1, 1988.
10.5* 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.
10.6*+# 1996 Stock Option Plan.
10.7*+ Employment Agreement between the Registrant, Mountain People's and
Michael S. Funk, dated February 20, 1996.
10.8*+ Non-competition Agreement between the Registrant and Norman A.
Cloutier, dated November 16, 1993.
10.9* Amended and Restated Loan and Security Agreement among the
Registrant, Mountain People's, Natural Retail Group, Inc.,
Rainbow, Nutrasource, Inc. and Fleet Capital Corporation, dated
February 20, 1996.
10.10* Purchase and Sale Agreement between the Registrant and O.M.
Killingly Investment Company, dated March 31, 1995.
10.11* Real Estate Term Note between the Registrant and Shawmut Capital
Corporation (now Fleet Capital Corporation), dated September 8,
1995.
10.12* Distribution Agreement between Mountain People's Wine
Distributing, Inc., and Mountain People's, dated August 23, 1994.
10.13* Lease, dated July 29, 1995, between Prem Mark, Inc. and the
Registrant.
10.14* Lease, dated July 12, 1990, between the Registrant and Sylvan and
Stanford Makover Joint Venture, as amended.
10.15* Lease, dated August 23, 1989, between the Registrant and Bradley
Spear and Seattle First National Bank, co-executors of the estate
of A.H. Spear.
10.16*+ 1996 Employee Stock Purchase Plan.
10.17*** First Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated March 1, 1997.
10.18**** Second Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated July 1, 1997.
10.19xx Third Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated October 31, 1997.
10.20**** Lease dated July 11, 1997 between AmberJack, Ltd. and the
Registrant.
33
Exhibit No. Description
10.21x+ Employment Agreement for Robert Cirulnick
10.22x+ Employment Agreement for Richard S. Youngman
10.23xxx Employment Transition Agreement and Release for Norman A. Cloutier
dated December 8, 1999
10.24 Employment Agreement for Steven H. Townsend dated December 6, 1999
10.25xx Third Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated October 31, 1997.
10.26xx Agency and Interlender Agreement between United Natural Foods,
Inc. and Fleet Capital Corporation, First Union National Bank and
Nationsbank, N.A., dated December 1, 1997.
10.27***** Fourth Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated July 31, 1999.
10.28***** Lease dated August, 1998 between Valley Centre I, L.L.C. and the
Registrant.
10.29xxxx Fifth Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated March 31, 2000
10.30 Lease dated December 31, 1996 between Dove Investments, Inc. and
the Registrant and Amendments
10.31 Purchase and Sale agreement between the Registrant and Dynamic
Builders, Inc., dated June 30, 1999, Amendments and attachment
10.32 Real estate Term Notes between the Registrant and City National
Bank dated April 28, 2000
21 Subsidiaries of the Registrant.
23 Consent of KPMG LLP.
27 Financial Data Schedule
Schedule II - Valuation and Qualifying Accounts and Report of
Independent Accountants thereon.
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-11349)
** Incorporated by reference to an Annex to the Registrant's Proxy
Statement dated October 15, 1997 with respect to the Special Meeting of
Stockholders dated October 30, 1997.
*** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1997.
**** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended July 31, 1997.
***** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended July 31, 1999.
x Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1998.
xx Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended October 31, 1997.
xxx Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 2000.
xxxx Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 2000.
+ Management contract or compensatory plan or arrangement filed in
response to Item 14(a)(3) of the instructions to Form 10-K.
# Incorporated by reference to the Registrant's Registration Statement on
Form S-8 dated February 3, 1999
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United Natural Foods, Inc.:
Under date of September 8, 2000, we reported on the consolidated balance sheets
of United Natural Foods, Inc. and subsidiaries as of July 31, 2000 and 1999 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended July 31, 2000, as
contained in the annual report on Form 10-K for the year 2000. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
Providence, Rhode Island
/s/ KPMG LLP
September 8, 2000 KPMG LLP
35
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions charged
Balance at to costs and Balance at end of
beginning of period expenses Deduction period
------------------------------------------------------------------------
Year ended July 31, 2000 $2,297 $1,992 $ 987 $3,302
Year ended July 31, 1999 $1,780 $1,995 $1,478 $2,297
Year ended July 31, 1998 $2,283 $2,462 $2,965 $1,780
36