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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for fiscal year ended July 31, 2002

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 $422,817,263, based upon the closing price of the registrant's
common stock on the Nasdaq National Market on October 1, 2002. The number of
shares of the registrant's common stock, $0.01 par value, outstanding as of
October 1, was 19,106,067.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on December 3, 2002 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 3

Item 2. Properties 9

Item 3. Legal Proceedings 9

Item 4. Submission of Matters to a Vote of Security Holders 9

Part II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 12

Item 6. Selected Financial Data 13

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14

Item 7A. Quantitative and Qualitative Disclosure About Market Risk 24

Item 8. Financial Statements and Supplementary Data 25

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 43

Part III

Item 10. Directors and Executive Officers of the Registrant 43

Item 11. Executive Compensation 43

Item 12. Security Ownership of Certain Beneficial Owners and Management 43

Item 13. Certain Relationships and Related Transactions 43

Part IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 43

Signatures 44

Certification 45


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PART I.

ITEM 1. BUSINESS

We are the leading national distributor of natural and organic foods and related
products in the United States. We are the primary distributor to a majority of
our customers and 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, produce, perishables and frozen foods, nutritional
supplements, bulk and food service products and personal care items. We serve
more than 10,000 customers including super natural chains, independent natural
products retailers, conventional supermarkets and buying clubs located across
the United States and we have been the primary distributor to the two largest
super natural chains, Whole Foods Market, Inc. ("Whole Foods Market") and Wild
Oats, Inc., ("Wild Oats") for more than 10 years. On June 19, 2002, we announced
that our contract as primary distributor to Wild Oats, Inc., would not be
renewed past its expiration date of August 31, 2002. However, we continue to
distribute to Wild Oats, Inc. and expect revenue from such distribution of
approximately $10 million to $15 million in fiscal 2003.

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 12
retail natural products stores located primarily in Florida. We believe our
retail business serves as a natural complement to our distribution business
because it enables us to develop new marketing programs and improve customer
service. In the fiscal year ended July 31, 2002 we generated total net sales of
$1.2 billion.

Since 1985, we have completed 11 acquisitions of distributors and suppliers,
including Hershey Import Co., Inc. ("Hershey") and Albert's Organics, Inc.
("Albert's"), and 11 acquisitions of retail stores, all of which have expanded
our distribution network, product offerings and customer base. On November 6,
2001, our Albert's division purchased the assets of privately held Boulder Fruit
Express, Inc. ("Boulder Fruit Express"), located in Louisville, Colorado.
Boulder Fruit Express provides high quality organic produce and perishables to a
market area that includes Colorado, New Mexico, Kansas, Nebraska and Iowa.
Boulder Fruit Express' high level of customer service complements our rapidly
growing Denver produce division. On October 11, 2002, we acquired substantially
all of the assets of Blooming Prairie Cooperative Warehouse ("Blooming
Prairie"), the largest volume distributor of natural foods and products in the
Midwest region of the United States. Prior to our acquisition of Blooming
Prairie, our distribution operations were divided into three principal units:
United Natural Foods in the Eastern Region, Mountain People's Warehouse, Inc.
and Rainbow Natural Foods, Inc. in the Western Region, and Albert's in various
markets in the United States. We have added a fourth principal unit to our
distribution operations with the acquisition of Blooming Prairie. On October 23,
2002, we signed an agreement to purchase Northeast Cooperatives, a distributor
of natural foods and products in the Eastern United States. Northeast
Cooperatives, headquartered in Brattleboro, Vermont, and in business since 1973,
had approximately $120 million in sales for the latest twelve months.
Consummation of the transaction is contingent upon customary closing conditions,
approval by the members of Northeast Cooperatives and approval from Northeast
Cooperatives' lenders.

NATURAL PRODUCTS INDUSTRY

Although most natural products are food products, including organic foods, the
natural products industry encompasses a number of other categories, including
nutritional, herbal and sports supplements, toiletries and personal care items,
naturally based cosmetics, natural/homeopathic medicines, pet products and
cleaning agents. According to the June 2002 Natural Foods Merchandiser, sales
revenues for all types of natural products exceeded $34 billion in 2001, an
increase of 7% compared to 2000. This increase in sales of natural and organic
products in retail and nonretail outlets was driven primarily by substantial
growth in the following categories: (i) sales of natural foods, especially
nutrition bars; (ii) food service, which includes deli and restaurant and juice
bars; (iii) other beverages, which includes shelf stable and refrigerated
juices, functional beverages and sports drinks, but excludes dairy, nondairy,
beer, wine, coffee and tea beverages; and (iv) snack foods. The fastest growing
categories in organic foods were food service, nutrition bars, snack foods,
nondairy beverages and packaged grocery. Other product categories driving
industry growth include the following: (i) sports supplements, which include
powders, pills and sports beverages; (ii) specialty supplements, including
Ayurvedic products, hormones and essential fatty acids; (iii) personal care
categories, including aromatherapy; (iv) house wares; and (v) pet products. Our
fastest growing product categories are frozen and refrigerated.

Organic produce also experienced strong growth in 2001 as sales totaled $2.2
billion, or 40%, of the $5.5 billion organic foods market. Among the reasons
cited by the Natural Foods Merchandiser for the growth were increased consumer
demand due primarily to the health benefits of fresh fruits and vegetables,
increasing availability of convenience items such as bagged salads and cut
vegetables, greater seasonal availability, expansion of produce departments in
both conventional and natural retailers, and an increasing number of acres under
certified organic production.


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Historically the interest in natural and organic products has been limited to
the higher end of the socioeconomic scale. However, the Natural Foods
Merchandiser recently noted that the consumer's desire for healthful natural
convenience foods has led to increased demand by more middle-class and lower
middle-class consumers for the core organic and natural lifestyle. The U.S.
economy has suffered a general economic downturn in recent fiscal years. As a
result of the economic downturn, the pace of consumer spending has likewise
faltered in most sectors of the economy. We believe that the recent economic
downturn has thus far not affected our growth but there can be no assurance that
we will not be affected by the economic downturn in the future.

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) expand marketing and customer service programs across regions; (ii)
expand national purchasing opportunities; (iii) consolidate systems applications
among physical locations and regions; (iv) integrate administrative and
accounting functions; and (v) reduce geographic overlap between regions. On
September 12, 2002, Quality Assurance International, Inc. ("QAI") announced that
we had earned organic certification, making us the first organic food
distribution network in the United States to gain certification coast-to-coast.
This certification comprises all of our distribution centers, including those of
our Albert's and Hershey divisions, except for our newly acquired Blooming
Prairie facilities, which are preparing to undergo the certification process.

LOW-COST DISTRIBUTOR. 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 ensure 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 facilities located in Auburn,
California, New Oxford, Pennsylvania and Vernon, California. In January 2002 we
began distribution from our new 310,000 square foot Atlanta, Georgia facility.
We are currently utilizing approximately 240,000 square feet and leasing the
remaining 70,000 square feet. The efficiencies created by consolidating our two
Atlanta, Georgia facilities into one have lowered our expenses relative to
sales. In March 2002 we began distribution to our southern California, southern
Nevada and Arizona customers from our new 200,000 square foot distribution
center in Fontana, California. The proximity of our new facility to these
customers enables us to provide improved service, while reducing transportation
expenses. In May 2002 we relocated our Hershey subsidiary from Rahway, New
Jersey to Edison, New Jersey in order to expand our shipping and receiving
capacity and to consolidate inventories currently being stored in outside
warehouses. At fiscal year end the increased capacity of our distribution
centers was approximately 1,000,000 square feet greater than it was five years
ago. We are currently expanding our Chesterfield, New Hampshire distribution
facility from its existing 117,000 square feet to 289,000 square feet. This will
enable us to service existing and new customers, provide more product diversity
and enable us to better balance products among our distribution centers in our
Eastern region. 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.

CUSTOMER RELATIONSHIPS. We serve more than 10,000 customers across the United
States. We have developed long-standing customer relationships, which 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 Market,
Inc. and Wild Oats, Inc. for more than ten years. Our distribution arrangement
with Whole Foods Market, Inc. has been extended through August 31, 2004. On June
19, 2002, we announced that our contract as primary distributor to Wild Oats,
Inc. would not be renewed past its expiration date of August 31, 2002. However,
we continue to distribute to Wild Oats, Inc. and expect revenue from such
distribution of approximately $10 million to $15 million in fiscal 2003.

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 11 acquisitions of distributors and
suppliers, including 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, beneficially own in the aggregate approximately
15.6% of our Common Stock. Accordingly, senior management and employees have
significant incentive to continue to generate strong growth in operating results
in the future.

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:


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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, particularly in the Midwest and Texas markets. To this
end, on October 11, 2002 we acquired substantially all the assets of Blooming
Prairie, the largest volume distributor of natural foods and products in the
Midwest region of the United States. The acquisition of Blooming Prairie's Iowa
City, Iowa and Mounds View, Minnesota distribution facilities has provided us
with an immediate physical base and growth platform with which to broaden our
presence in the fast growing Midwest market. On October 23, 2002, we signed an
agreement to purchase Northeast Cooperatives, a distributor of natural foods and
products in the Eastern United States. Northeast Cooperatives, headquartered in
Brattleboro, Vermont, and in business since 1973, had approximately $120 million
in sales for the latest twelve months. Consummation of the transaction is
contingent upon customary closing conditions, approval by the members of
Northeast Cooperatives and approval from Northeast Cooperatives' lenders.

EXPAND CUSTOMER BASE. We have expanded our number of customers served to more
than 10,000 as of July 31, 2002. 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 further developing other channels of
distribution such as traditional supermarkets, mass market outlets,
institutional food service providers, buying clubs, 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 offerings in the industry at the most competitive prices. Since 1993, we
have expanded our product offerings from approximately 14,000 to more than
30,000 SKUs as of July 31, 2002. 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 REGIONS OF DISTRIBUTION. As discussed
under "Competitive Advantages," we have made considerable capital expenditures
and incurred considerable expenses in connection with the expansion of our
facilities. We will continue to selectively evaluate opportunities to acquire
distributors to fulfill existing markets and expand into new markets. To this
end on October 11, 2002 we acquired substantially all the assets of Blooming
Prairie, the largest volume distributor of natural foods and products in the
Midwest region of the United States. On October 23, 2002, we signed an agreement
to purchase Northeast Cooperatives, a distributor of natural foods and products
in the Eastern United States. Northeast Cooperatives, headquartered in
Brattleboro, Vermont, and in business since 1973, had approximately $120 million
in sales for the latest twelve months. Consummation of the transaction is
contingent upon customary closing conditions, approval by the members of
Northeast Cooperatives and approval from Northeast Cooperatives' lenders.

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, which have formed our foundation. This focus on achieving improved
economies of scale in purchasing, warehousing, transportation and general and
administrative functions has improved our operating margin, which increased from
3.0% in fiscal 2001 to 3.6% for the fiscal year ended July 31, 2002 (excluding
special items).

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 offerings. 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 thematic flyer programs, in-store signage and assistance in product display.
In September 2002, we announced a strategic alliance with Living Naturally, LLC,
a leading provider of marketing promotion and electronic ordering systems to the
natural products industry. We plan to provide our customers access to Living
Naturally's suite of products at preferred prices and terms. These products
include an intelligent electronic ordering system and turnkey retailer website
services, which are expected to create new opportunities for our retailers to
increase their inventory turns, reduce their costs and enhance their profits.

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, produce, perishables and frozen, nutritional supplements,
bulk and food service products and personal care items. Our private label
products address certain preferences of customers, which are not otherwise being
met by other suppliers.


5


We evaluate approximately 3,000 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 which 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. Furthermore, by exchanging regional
product sales information between our regions, we are able to make more informed
and timely new product decisions in each region.

SUPPLIERS

We purchase our products from approximately 2000 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 the
reason natural products suppliers seek distribution of their products through us
is because we provide access to a large and growing customer base, distribute
the majority of the suppliers' products and offer many kinds of marketing
programs to our customers to help aggressively sell the suppliers' products.
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 7.5% of total purchases in fiscal 2002.

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 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. In addition, we have implemented a number of
national consumer flyer programs, which have resulted in incremental sales
growth for our customers and ourselves.

Our purchasing staff cooperates closely with suppliers to provide new and
existing products. The suppliers assist in training our 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, which 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. We recently became the first organic food distribution
network in the United States to gain organic certification coast-to-coast. This
certification comprises all of our distribution centers, including of our
Albert's and Hershey divisions, except for our newly acquired Blooming Prairie
facilities, which are preparing to undergo the certification process.

CUSTOMERS

We market our products to more than 10,000 customers across the United 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 and gourmet stores, all of which are
continually increasing their natural product offerings. Among our wholesale
customers for the fiscal year ended July 31, 2002 were leading super natural
chains: Whole Foods Market, Inc. (including Bread and Circus, Fresh Fields, and
Bread of Life), Wild Oats, Inc. (including Henry's), Nature's Fresh! Northwest,
Wild Harvest, Rainbow, Basha's, and conventional supermarket chains such as
Wegman's, Stop and Shop, Shaws/Star Market, Quality Food Centers (QFC),
Hannaford, Pathmark, Bilos, Lowe's and Publix. We believe that we are the
primary supplier to the majority of our customers. Whole Foods Market, Inc.
accounted for approximately 19% and 17% of our net sales in fiscal 2002 and
2001, respectively. Wild Oats, Inc. accounted for approximately 14% of our net
sales in both fiscal 2002 and 2001. Whole Foods Market, Inc. was a member of the
Blooming Prairie Cooperative Warehouse, which we recently acquired, and we
expect Whole Foods Market, Inc. to represent approximately 25% of our total
sales in fiscal 2003. No other customer accounted for more than 10% of our net
sales in fiscal 2002. On June 19, 2002, we announced that our contract as
primary distributor to Wild Oats, Inc., would not be renewed past its expiration
date of August 31, 2002. However, we continue to distribute to Wild Oats, Inc.
and expect revenue of approximately $10 million to $15 million from such
distribution in fiscal 2003.


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FILL RATES

Fill rates refer to the percentage of items ordered by customers that are
shipped, excluding manufacturers' out of stocks. Our average fill rate for
fiscal 2002 was approximately 96%, which we believe is the highest in the
industry. 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, which
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 flyer programs featuring the logo and address of the
participating retailer imprinted on a flyer advertising approximately 200 sale
items, which are sold by the retailer to its customers. The color flyers are
designed by our in-house marketing department utilizing modern digital
photography and contain detailed product descriptions and pricing information.
Additionally, each flyer 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 flyer 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, in order to maximize our national leverage and to utilize our rich
internal marketing resources to best effect, we have increased the number of
national marketing programs we offer, with favorable results for our suppliers,
our customers and ourselves.

In addition to our monthly flyer programs, we offer thematic custom and seasonal
consumer flyers which 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 our customers to
respond to local competition.

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 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 our trucks
from national leasing companies such as Ryder Truck Leasing and Penske Truck
Leasing, which in some cases maintain facilities on our premises for the
maintenance and service of these vehicles. Other trucks are leased from regional
firms that offer competitive services.

We ship certain orders for supplements or for items that are destined for areas
outside regular delivery routes through 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.


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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 functionality in radio
frequency inventory control, 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. 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

Our Natural Retail Group ("NRG") currently owns and operates 12 natural product
retail stores located in Florida, Maryland and Massachusetts. Our retail
operations are classified in the Other category for segment reporting purposes.
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. We opened our twelfth store,
SunSplash Market in Port Charlotte, Florida, during the first quarter of fiscal
year 2002.

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.

COMPETITION

The natural products distribution industry is highly competitive and 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
competitor is Nature's Best, Inc. in the Western United States. On October 11,
2002 we acquired substantially all the assets of Blooming Prairie, the largest
volume distributor of natural foods and products in the Midwest United States.
On October 23, 2002, we signed an agreement to purchase Northeast Cooperatives,
a distributor of natural foods and products in the Eastern United States.
Northeast Cooperatives, headquartered in Brattleboro, Vermont, and in business
since 1973, had approximately $120 million in sales for the latest twelve
months. Consummation of the transaction is contingent upon customary closing
conditions, approval by the members of Northeast Cooperatives and approval from
Northeast Cooperatives' lenders. 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.

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 and that we currently compete effectively with respect to each
of these factors. 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, customer service, knowledge of personnel and convenience of
location.

EMPLOYEES

As of July 31, 2002, we had approximately 3,000 full and part-time employees. An
aggregate of approximately 235 of the employees at our Auburn, Washington, and
Edison, New Jersey facilities are covered by a collective bargaining agreement.
These agreements expire in June of 2005 and February of 2003 respectively. We
have never experienced a work stoppage by our unionized employees and we believe
that our employee relations are good. On October 11, 2002 we acquired
substantially all the assets of Blooming Prairie, adding approximately 280
employees. Approximately 100 of these employees are covered by a collective
bargaining agreement. This agreement expires in June of 2003. The predecessor
company has never experienced a work stoppage by its unionized employees.


8


ITEM 2. PROPERTIES

We maintained twelve distribution centers at fiscal year end. These facilities
consisted of an aggregate of approximately 1.9 million square feet of space, the
largest capacity of any distributor in the natural products industry. We are
currently expanding our Chesterfield, New Hampshire distribution facility from
its existing 117,000 square feet to 289,000 square feet. On October 11, 2002, we
acquired substantially all the assets of Blooming Prairie, the largest volume
distributor of natural foods and products in the Midwest region of the United
States. The acquisition of Blooming Prairie's Iowa City, Iowa and Mounds View,
Minnesota distribution facilities increased our capacity by approximately
238,000 square feet and provides us with an immediate physical base and growth
platform to broaden our presence in the fast-growing Midwest market. Our total
distribution space will be approximately 2.3 million square feet upon completion
of the expansion of our Chesterfield, New Hampshire facility.

Set forth below for each of our distribution facilities is its location, its
current size (in square feet) and the date when our lease will expire for those
distribution facilities that we do not own.

LOCATION SIZE LEASE EXPIRATION
(Square feet)
Atlanta, Georgia 310,000 Owned
Auburn, California 150,000 Owned
Auburn, California 100,000 Owned
Auburn, Washington 204,800 March 2009
Bridgeport, New Jersey 35,700 Owned
Chesterfield, New Hampshire (1) 117,000 Owned
Dayville, Connecticut 245,000 Owned
Denver, Colorado 180,800 July 2013
Fontana, California 200,000 November 2011
Iowa City, Iowa 134,600 Owned
Kealeakua, Hawaii 16,300 December 2006
Mounds View, Minnesota 104,000 May 2007
Vernon, California 34,500 Owned
New Oxford, Pennsylvania 250,000 Owned
Winterhaven, Florida 10,600 September 2003
- --------------------------------------------------
Total 2,093,300

(1) We expect to complete the expansion of this facility to 289,000 square feet
during the summer of 2003.

We also rent facilities to operate twelve retail stores along the east coast
with various lease expiration dates and a 107,000 square foot processing and
manufacturing facility in Edison, New Jersey with lease expiration date of March
31, 2007.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we are involved in routine litigation that arises in the
ordinary course of our 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, 2002.


9


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 18, 2002 are listed below:

NAME AGE POSITION

Thomas B. Simone (1) (2) (3) 60 Chair of the Board, Chair of the
Nominating and Governance Committee
Michael S. Funk 48 Chief Executive Officer and Vice Chair of
the Board
Steven H. Townsend 49 President and Director
Todd E. Weintraub 39 Vice President, Chief Financial Officer
and Treasurer
Kevin T. Michel 45 President of Western Region, Assistant
Secretary and Director
Richard Antonelli 45 President of Eastern Region
Daniel V. Atwood 44 Senior Vice President and Secretary
Gordon D. Barker (1) (2) (3) 56 Director and Chair of the Compensation
Committee
Joseph M. Cianciolo (1) (2) (3) 63 Director and Chair of the Audit Committee
Gail A. Graham 51 Director
James P. Heffernan (1) (2) (3) 56 Director

(1) Member of the Audit Committee.
(2) Member of the Nominating and Governance Committee.
(3) Member of the Compensation Committee.

Thomas B. Simone has served as the Chair of the Board of Directors since
December 1999 and as a member of the Board of Directors since October 1996. Mr.
Simone is the Chair of the Nominating and Governance Committee and is a member
of the Audit Committee and the Compensation Committee. Mr. Simone has served as
President and Chief Executive Officer of Simone & Associates, a healthcare and
natural products investment and consulting company, since April 1994. Mr. Simone
also serves on the Board of Directors of ECO-DENT International, Inc. and
Spectrum Organic Products, Inc.

Michael S. Funk has served as Vice Chair of the Board of Directors since
February 1996 and as a member 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 our Executive
Vice President from February 1996 until October 1996. Since its inception in
July 1976 until April 2001, Mr. Funk served as President of Mountain People's
Warehouse.

Steven H. Townsend has served as a member of the Board of Directors since
December 2000, as our President since April 2001, and as President of our
Eastern Region from January 2000 to October 2002. Mr. Townsend served on the
Board of Directors of our predecessor company, Cornucopia Natural Foods, from
August 1988 until October 1996, as its Vice President of Finance and
Administration from July 1983 until May 1995, and as its Chief Financial Officer
from June 1995 until December 1997. Mr. Townsend was self-employed as a real
estate developer from January 1998 to November 1999.

Todd E. Weintraub has served as our Vice President, Treasurer and Chief
Financial Officer since April 2001. Mr. Weintraub served as our Corporate
Controller from July 2000 until April 2001. From December 1997 until July 2000,
Mr. Weintraub served as our Manager of Financial Reporting. From June 1995 until
December 1997, Mr. Weintraub served in certain financial reporting positions at
State Street Corporation and Allmerica Financial Corporation. Mr. Weintraub met
all requirements as a Certified Public Accountant and was also employed by KPMG
LLP from January 1990 until February 1994.

Kevin T. Michel has served as a member of the Board of Directors since February
1996 and as President of our Western Region since April 2001. Mr. Michel served
as our Chief Financial Officer and Treasurer from December 1999 until April
2001, as our interim Chief Financial Officer and Treasurer from August 1999
until November 1999, as Executive Vice President of our Western Region from
April 1999 until July 1999 and as President of our Central Region from January
1998 until March 1999. Mr. Michel served as Chief Financial Officer of Mountain
People's Warehouse from January 1995 until December 1997.


10


Richard Antonelli has served as President of our Eastern Region since September
2002. Mr. Antonelli served as president of Fairfield Farm Kitchens, a
Massachusetts-based custom food manufacturer from August of 2001 until August of
2002. Mr. Antonelli served as Director of Sales for United Natural Foods, and
its predecessor company, from 1985 through July 2001.

Daniel V. Atwood has served as our Senior Vice President since October 2002. He
served as our National Vice President of Marketing from April 2001 to October
2002 and as our Vice President and Secretary since January 1998. Mr. Atwood
served on the Board of Directors of our predecessor company, Cornucopia Natural
Foods from August 1988 to October 1996 and served on our Board of Directors from
November 1996 to December 1997. Mr. Atwood served as President of our Natural
Retail Group from August 1995 until March 2001.

Gordon D. Barker has served as a member of the Board of Directors since
September 1999. Mr. Barker serves as the Chair of the Compensation Committee and
as a member of the Audit Committee and the Nominating and Governance Committee.
Mr. Barker has served as Chief Executive Officer of Snyder's Drug Stores, Inc.
since October 1999. Mr. Barker was the principal of Barker Enterprises, an
investment and consultant firm from January 1997 until September 1999. From
March 1968 to December 1996, Mr. Barker was employed at PayLess Drug Stores,
Inc. (subsequently renamed ThriftyPayLess Drug Stores, Inc.), where he rose from
Pharmacist, through several levels of management and ultimately became Chief
Executive Officer and President. Mr. Barker also serves on the following Boards
of Directors: Gart Sports Company, NuMedics Inc., and Advanced Cosmetic
Treatments, LLC.

Joseph M. Cianciolo has served as a member of the Board of Directors since
September 1999. Mr. Cianciolo serves as Chair of the Audit Committee and as a
member of the Compensation Committee and the Nominating and Governance
Committee. Mr. Cianciolo served as the Managing Partner of KPMG LLP, Providence,
Rhode Island Office, from June 1990 until June 1999. Mr. Cianciolo also serves
on the Board of Directors of Speidel, Inc., and the Board of Trustees of
Providence College and is Trustee and Treasurer of the Board of Rhode Island
Hospital. Mr. Cianciolo also serves on the Board of Directors of the Rhode
Island Airport Corporation, a non-public corporation.

Gail A. Graham has served as a member of the Board of Directors since October
2002. Ms. Graham has served as the General Manager of Mississippi Market Natural
Foods Cooperative, a consumer owned and controlled cooperative in St. Paul,
Minnesota since October 1999. From August 1986 until October 1999, Ms. Graham
served as General Manager of Seward Co-op Grocery & Deli, one of the oldest
community-owned natural food stores in Minneapolis, Minnesota. Ms. Graham served
as Vice Chair of the Board of Directors of Blooming Prairie Cooperative
Warehouse from November 1994 to October 1998 and November 2000 to October 2002.
Ms. Graham was the Chair of the Board of Directors of Blooming Prairie
Cooperative Warehouse from November 1998 until October 2000. Ms. Graham resigned
from the Board of Directors of Blooming Prairie Cooperative Warehouse in October
2002, concurrent with her appointment to the Company's Board of Directors.

James P. Heffernan has served as a member of the Board of Directors since March
2000. Mr. Heffernan serves as a member of the Audit Committee, the Compensation
Committee and the Nominating and Governance Committee. Mr. Heffernan has served
as a Trustee for the New York Racing Association since November 1998. Mr.
Heffernan served as a member of the Board of Directors and Chair of the Finance
Committee of Columbia Gas System, Inc. from January 1993 until November 2000.


11


PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our Common Stock is traded on the Nasdaq National Market under the symbol
"UNFI." Our 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 our Common Stock on the Nasdaq National Market:

Fiscal 2001 High Low
----------- ---- ---
First Quarter $15.250 $ 9.563
Second Quarter 20.375 11.375
Third Quarter 19.500 10.875
Fourth Quarter 23.200 13.940

Fiscal 2002 High Low
----------- ---- ---
First Quarter $24.110 $15.640
Second Quarter 25.250 20.210
Third Quarter 26.380 21.340
Fourth Quarter 24.129 14.250

Fiscal 2003
-----------
First Quarter through
October 24, 2002 $24.670 $17.840

On July 31, 2002 we had 81 stockholders of record. The number of record holders
may not be representative of the number of beneficial holders because
depositories, brokers or other nominees hold many shares.

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 we are 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 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.


12


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, 1998, 1999, 2000, 2001 and 2002, and under the caption Consolidated
Balance Sheet Data at July 31, 1998, 1999, 2000, 2001 and 2002, are derived from
our consolidated financial statements, which have been audited by KPMG LLP,
independent certified public accountants. 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) 1998 1999 2000 2001 2002
---- ---- ---- ---- ----

Statement of Operations Data:

Net sales $728,910 $856,998 $908,688 $1,016,834 $1,175,393
Cost of sales 578,575 680,301 734,673 818,040 944,777

Gross profit 150,335 176,697 174,015 198,794 230,616
Operating expenses 116,042 144,937 166,673 167,325 190,047
Merger, restructuring and asset impairment
expenses 4,064 3,869 2,420 801 424
Amortization of intangibles 1,185 1,075 1,070 1,036 180

Total operating expenses 121,291 149,881 170,163 169,162 190,651

Operating Income 29,044 26,816 3,852 29,632 39,965
Other expense (income):
Interest expense 5,157 5,700 6,412 6,939 7,233
Other, net (778) (2,477) (527) 429 4,050
Total other expense 4,379 3,223 5,885 7,368 11,283

Income (loss) before income taxes 24,665 23,593 (2,033) 22,264 28,682
Income taxes (benefit) 11,580 10,126 (802) 8,906 11,473
Net income (loss) $ 13,085 $ 13,467 $ (1,231) $ 13,358 $ 17,209

Per share data (Basic):

Net income (loss) $ 0.75 $ 0.74 $ (0.07) $ 0.72 $ 0.91

Weighted average basic shares of common stock 17,467 18,196 18,264 18,482 18,933

Per share data (Diluted):

Net income (loss) per share $ 0.74 $ 0.73 $ (0.07) $ 0.71 $ 0.89

Weighted average diluted shares of common
stock 17,798 18,537 18,264 18,818 19,334


Consolidated Balance Sheet Data: (In thousands) 1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Working capital $ 65,568 $ 73,825 $ 65,812 $ 53,351 $ 51,697
Total assets 212,242 237,901 270,234 300,444 354,457
Total long term debt and capital leases 25,845 25,791 28,529 9,289 8,672
Total stockholders' equity 104,386 118,581 117,954 135,943 160,387



13


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Overview

We are the leading national distributor of natural and organic 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,
Mountain People's Warehouse, Inc. and Rainbow Natural Foods in the Western
Region, Blooming Prairie (since October 11, 2002) and Albert's in various
markets in the United States. Through our subsidiary, the Natural Retail Group,
we also own and operate 12 natural products retail stores located primarily in
Florida. 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. In addition, our Hershey subsidiary 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) expanding marketing and customer service
programs across the four regions; (ii) expanding national purchasing
opportunities; (iii) consolidating systems applications among physical locations
and regions; (iv) integrating administrative and accounting functions; 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 located in Auburn, California,
New Oxford, Pennsylvania and Los Angeles, California. In January 2002 we began
distribution from our new 310,000 square foot Atlanta, Georgia facility. We are
currently utilizing approximately 240,000 square feet and leasing out the
remaining 70,000 square feet. The efficiencies created by consolidating our two
Atlanta, Georgia, facilities into one have lowered our expenses relative to
sales. In March 2002 we began distribution to our southern California, southern
Nevada and Arizona customers from our new 200,000 square foot distribution
center in Fontana, California. The proximity of our new facility to these
customers enables us to provide improved service, while reducing transportation
expenses. In May 2002 we relocated our Hershey subsidiary from Rahway, New
Jersey to Edison, New Jersey in order to expand our shipping and receiving
capacity and to consolidate inventories currently being stored in outside
warehouses. At fiscal year end the increased capacity of our distribution
centers was approximately 1,000,000 square feet greater than it was five years
ago.

We recently began expansion of our Chesterfield, New Hampshire distribution
facility from its existing 117,000 square feet to 289,000 square feet. This will
enable us to service existing and new customers, provide more product diversity,
and enable us to better balance products among our distribution centers in our
Eastern Region. 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. In addition, we
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, particularly in the Midwest and Texas markets. To this
end, on October 11, 2002 we acquired substantially all the assets of Blooming
Prairie, the largest volume distributor of natural foods and products in the
Midwest region of the United States. The acquisition of Blooming Prairie's Iowa
City, Iowa and Mounds View, Minnesota distribution facilities has provided us
with an immediate physical base and growth platform with which to broaden our
presence in the fast growing Midwest market. On October 23, 2002, we signed an
agreement to purchase Northeast Cooperatives, a distributor of natural foods and
products in the Eastern United States. Northeast Cooperatives, headquartered in
Brattleboro, Vermont, and in business since 1973, had approximately $120 million
in sales for the latest twelve months. Consummation of the transaction is
contingent upon customary closing conditions, approval by the members of
Northeast Cooperatives and approval from Northeast Cooperatives' lenders.

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, insurance, administrative,
depreciation and amortization expense. Other expenses (income) include interest
on outstanding indebtedness, interest income, and the change in fair value of
financial instruments and miscellaneous income and expenses. Our operating
margin increased from 2.5% in fiscal 1994 to 3.6% for the fiscal year ended July
31, 2002 (excluding special items).

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. The U.S. Securities and Exchange Commission has defined critical
accounting policies as those that are both most important to the portrayal of
our financial condition and results and require our most difficult, complex or
subjective judgments or estimates. Based on this definition, we believe our
critical accounting policies include the policies of accounts receivable
valuation and the valuation of goodwill and intangible assets. For all financial
statement periods presented, there have been no material modifications to the
application of these critical accounting policies.


14


Allowance for doubtful accounts

We analyze customer creditworthiness, accounts receivable and notes receivable
balances, payment history, payment terms and historical bad debt levels when
evaluating the adequacy of our allowance for doubtful accounts. Our accounts
receivable balance was $84.3 million, net of allowance for doubtful accounts of
$5.8 million, and $81.6 million, net of allowance for doubtful accounts of $4.5
million, as of July 31, 2002 and 2001, respectively. Our notes receivable
balance was $1.5 million, net of allowance for doubtful accounts of $0.2
million, and $1.7 million, net of allowance for doubtful accounts of $0.5
million, as of July 31, 2002 and 2001, respectively.

Valuation of goodwill and intangible assets

Intangible assets consist principally of goodwill and covenants not to compete.
Goodwill represents the excess purchase price over fair value of net assets
acquired in connection with purchase business combinations. 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. In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142 ("SFAS" No. 142), "Goodwill and Other
Intangible Assets". SFAS No. 142 requires that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually (or more
frequently if impairment indicators arise). We adopted SFAS No. 142 on August 1,
2001. We completed our transition goodwill impairment test during the quarter
ended January 31, 2002 and there were no indicators of goodwill impairment for
any of our reporting units. We tested each of our reporting units for an
indicator of goodwill impairment by comparing the net present value of projected
cash flows to the carrying value of the reporting unit as of July 31, 2001. We
used discount rates determined by our management to be commensurate with the
level of risk in our current business model and projected cash flows for 5 to 8
years. We completed a second goodwill impairment test during the quarter ended
July 31, 2002 and there were no indicators of goodwill impairment for any of our
reporting divisions. There can be no assurance that at our next annual review a
material impairment charge will not be recorded. We ceased to amortize goodwill
when we adopted SFAS No. 142. Net intangible assets and goodwill amounted to
$31.7 million as of July 31, 2002. We recorded additional goodwill of $3.9
million during the year ended July 31, 2002 as a result of our acquisition of
Boulder Fruit Express. We had recorded approximately $0.9 million of goodwill
amortization for the year ended July 31, 2001. We expect to record additional
goodwill and intangible assets, in the first quarter of fiscal 2003, relating to
our Blooming Prairie acquisition, of approximately $15.0 million.


15


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,
U.S. GAAP basis Excluding Special Items
------------------------- -------------------------
2002 2001 2000 2002 2001 2000
------------------------- -------------------------

Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 80.4% 80.4% 80.8% 80.4% 80.4% 80.8%
------------------------- -------------------------
Gross profit 19.6% 19.6% 19.2% 19.6% 19.6% 19.2%
------------------------- -------------------------

Operating expenses 16.2% 16.5% 18.3% 16.0% 16.4% 18.0%
Merger, restructuring and asset
impairment expenses 0.0% 0.1% 0.3% 0.0% 0.0% 0.0%
Amortization of intangibles 0.0% 0.1% 0.1% 0.0% 0.1% 0.1%
------------------------- -------------------------
Total operating expenses 16.2% 16.6% 18.7% 16.0% 16.5% 18.1%
------------------------- -------------------------

Operating income 3.4% 2.9% 0.4% 3.6% 3.0% 1.1%
------------------------- -------------------------

Other expense (income):
Interest expense 0.6% 0.7% 0.7% 0.6% 0.7% 0.7%
Change in value of financial
instruments 0.4% 0.1% 0.0% 0.0% 0.0% 0.0%
Other, net 0.0% -0.1% -0.1% 0.0% -0.1% -0.1%
------------------------- -------------------------
Total other expense 1.0% 0.7% 0.6% 0.6% 0.6% 0.6%
------------------------- -------------------------

Income (loss) before income taxes 2.4% 2.2% -0.2% 3.0% 2.4% 0.5%

Income taxes (benefit) 1.0% 0.9% -0.1% 1.2% 0.9% 0.2%
------------------------- -------------------------

Net income (loss) 1.5% 1.3% -0.1% 1.8% 1.5% 0.3%
========================= =========================


YEAR ENDED JULY 31, 2002 COMPARED TO YEAR ENDED JULY 31, 2001

Net Sales.

Our net sales increased approximately 15.6%, or $158.6 million, to $1.18 billion
for the year ended July 31, 2002 from $1.02 billion for the year ended July 31,
2001. The increase was primarily due to growth in the supernatural and mass
market distribution channels of approximately 25% and 19%, respectively. Also
included in net sales for fiscal 2002 were sales for Boulder Fruit Express, an
organic produce and perishables distributor we acquired in November 2001, and
sales for a Florida retail store we opened in October 2001. Sales growth
excluding the acquisition and the new store sales would have been 14.4%. Sales
to our two largest customers, Whole Foods Market, Inc. and Wild Oats, Inc.
represented approximately 19% and 14%, respectively, of net sales for the year
ended July 31, 2002. Whole Foods Market, Inc. represented approximately 17% and
Wild Oats, Inc. represented approximately 14% of net sales for the year ended
July 31, 2001. Whole Foods Market, Inc. agreed to extend our current
distribution arrangement through August 31, 2004. In addition, Whole Foods
Market, Inc. is a member of Blooming Prairie Cooperative Warehouse, which we
recently acquired, and we expect Whole Foods Market, Inc. to represent
approximately 25% of our total sales in fiscal 2003. On June 19, 2002, we
announced that our contract as primary distributor to Wild Oats, Inc. would not
be renewed past its expiration date of August 31, 2002. However, we continue to
distribute to Wild Oats, Inc. and expect revenue of approximately $10 million to
$15 million in fiscal 2003.

Gross Profit.

Our gross profit increased approximately 16.0%, or $31.8 million, to $230.6
million for the year ended July 31, 2002 from $198.8 million for the year ended
July 31, 2001. Our gross profit as a percentage of net sales was 19.6% for the
years ended July 31, 2002 and July 31, 2001. We expect our gross margin as a
percentage of sales to be in the range of 20.0% to 20.5% for the fiscal year
2003 as our business with Wild Oats, Inc., a low gross margin customer, declines
because we will be a secondary, rather than a primary, distributor to them.


16


Operating Expenses.

Our total operating expenses, excluding special items, increased approximately
12.1%, or $20.3 million, to $188.3 million for the year ended July 31, 2002 from
$168.0 million for the year ended July 31, 2001. As a percentage of net sales,
operating expenses, excluding special charges, decreased to 16.0% for the year
ended July 31, 2002 from 16.5% for the year ended July 31, 2001. Special items
are discussed in the following paragraph. The lower operating expenses as a
percentage of net sales were due primarily to increased efficiencies in our
transportation departments as a result of more efficient routing and
successfully leveraging our fixed expenses against a higher sales base. We also
experienced improved labor productivity due primarily to a more favorable labor
market nationwide and a higher retention rate of experienced warehouse and
transportation employees. We experienced significant increases in workers'
compensation and commercial automobile insurance premiums. The insurance premium
market is somewhat volatile, and whether there is improvement or deterioration
in future quarters is largely dependent on our ability to control our automobile
and workers' compensation losses, which are retained risks. We have reduced our
operating expenses, excluding special charges, to 16% of sales by continuing to
realize operating efficiencies and expanding our sales base. We expect operating
expenses as a percentage of sales to be in the mid-16% range for the fiscal year
2003 due to absorption of fixed costs over a lower sales base as our Wild Oats,
Inc. business is reduced. We expect to incur additional special charges as we
increase our warehouse capacity.

Special Items.

Special items for the year ended July 31, 2002 included a non-cash charge
related to the change in fair value of financial instruments (interest rate
swaps and related option agreements), relocation, asset impairment and redundant
rent expense related to moving our Atlanta, Georgia distribution facility,
incremental costs such as labor, utilities and rent related to the startup of
our southern California distribution facility and labor, utilities, rent and
severance related to relocating Hershey Import. Special items for the year ended
July 31, 2001 consisted of a non-cash charge related to the change in financial
instruments, costs related to the expansion of our New Oxford, Pennsylvania
distribution facility and asset impairment charges, primarily goodwill,
associated with closing an unprofitable retail store. Operating expenses,
including special items, increased approximately 12.7%, or $21.5 million, to
$190.7 million from $169.2 million for the year ended July 31, 2001. As a
percentage of sales, operating expenses, including special items, decreased to
16.2% for the year ended July 31, 2002 from 16.6% for the year ended July 31,
2001.

Operating Income.

Operating income, excluding the special items, increased $11.5 million to $42.4
million for the year ended July 31, 2002 from $30.8 million for the year ended
July 31, 2001. As a percentage of sales, operating income, excluding special
items, increased to 3.6% for the year ended July 31, 2002 compared to 3.0% for
the year ended July 31, 2001. Operating income, including special items,
increased $10.3 million to $40.0 million or 3.4% of sales for the year ended
July 31, 2002 from $29.6 million or 2.9% of sales for the year ended July 31,
2001.

Other (Income)/Expense.

Other expense, excluding the change in fair value of financial instruments,
increased $0.9 million to $7.0 million for the year ended July 31, 2002 from
$6.1 million for the year ended July 31, 2001. This increase was primarily due
to higher interest expense caused by a higher borrowing base, partially offset
by lower interest rates. Other expense, including the change in fair value of
financial instruments, increased $3.9 million to $11.3 million for the year
ended July 31, 2002 from $7.4 million for the year ended July 31, 2001. This
increase was primarily due to the decrease in fair value on our interest rate
swap agreements and related option agreements resulting from unfavorable changes
in yield curves used to determine the change in fair value. We will continue to
recognize either income or expense quarterly for the duration of the swap
agreement until either October 2003 or 2005 for the swap agreement entered into
in October 1998, and either August 2005 or 2007 for the swap agreement entered
into in August 2001, depending on whether the agreements are extended by the
counter party. The recognition of income or expense in any given quarter, and
the magnitude of that item, is dependent on interest rates and the remaining
term of the contracts. Upon expiration of any such contract, the cumulative
earnings impact from the changes in fair value of the instruments will be zero.

Income Taxes.

Our effective income tax rate was 40.0% for the years ended July 31, 2002 and
2001. The effective rates were higher than the federal statutory rate primarily
due to state and local income taxes.


17


Net Income.

As a result of the foregoing, net income, excluding special items, increased
$6.4 million to $21.2 million, or $1.10 per diluted share, for the year ended
July 31, 2002, compared to $14.8 million, or $0.79 per diluted share, for the
year ended July 31, 2001. Net income, including special items, increased $3.9
million to $17.2 million, or $0.89 per diluted share, for the year ended July
31, 2002 compared to $13.4 million, or $0.71 per diluted share, for the year
ended July 31, 2001. We expect earnings per diluted share, excluding any special
items, in the range of $1.18 - $1.20 for all of fiscal 2003 and in the $0.26 -
$0.28 range for the quarter ended October 31, 2002.

The following table details the amounts and effects of the special items
discussed on the preceding page:

- --------------------------------------------------------------------------------
Year Ended July 31, 2002 Pretax Per diluted
(In thousands, except per share data) Income Net of Tax share
------ ---------- -----

Income, excluding special items: $35,409 $21,245 $1.10

Less: Special Items
Change in value of financial instruments 4,331 2,599 0.13
Relocation and startup costs (included
in operating expenses) 1,972 1,183 0.06
Asset impairment charges 424 254 0.01
- --------------------------------------------------------------------------------
U.S. GAAP Income, including special
items: $28,682 $17,209 $0.89
================================================================================


- -------------------------------------------------------------------------------
Year Ended July 31, 2001 Pretax Per diluted
(In thousands, except per share data) Income Net of Tax share
------ ---------- -----

Income, excluding special items: $24,746 $14,848 $0.79

Less: Special Items
Change in value of financial instruments 1,290 774 0.04
Expansion costs (operating expenses) 391 235 0.01
Restructuring and asset impairment
charges 801 481 0.03
- --------------------------------------------------------------------------------
U.S. GAAP Income, including special
items: $22,264 $13,358 $0.71
================================================================================

YEAR ENDED JULY 31, 2001 COMPARED TO YEAR ENDED JULY 31, 2000

Net Sales.

Our net sales increased approximately 11.9%, or $108.1 million, to $1.0 billion
for the year ended July 31, 2001 from $908.7 million for the year ended July 31,
2000. This increase was primarily due to increased sales throughout all
divisions and distribution channels including super naturals, independents and
mass market. We also experienced market share gains during fiscal year 2001 by
selling to a greater number of new customers. Sales to our two largest
customers, Whole Foods Market, Inc. and Wild Oats, Inc. represented
approximately 17% and 14%, respectively, of net sales for the year ended July
31, 2001. Whole Foods Market, Inc. represented approximately 16% and Wild Oats,
Inc. represented approximately 13%, of net sales for the year ended July 31,
2000.
Gross Profit.

Gross profit increased approximately 14.2%, or $24.8 million, to $198.8 million
for the year ended July 31, 2001 from $174.0 million for the year ended July 31,
2000. Gross profit as a percentage of net sales increased to 19.6% for the year
ended July 31, 2001 from 19.2% for the year ended July 31, 2000. The increase in
gross profit resulted primarily from our recovery in our Eastern Region as
customer returns and allowances, inventory shrink, pricing errors and inbound
transportation costs decreased significantly. This increase was partially offset
by inventory loss at an outside storage location, as well as reduced margins in
our Albert's division. Additionally, the gain in our gross profit was further
offset by a change in our channel mix as the percentage of our sales to super
naturals, which are at lower gross margins, increased.


18


Operating Expenses.

Our total operating expenses, excluding special charges, increased approximately
1.9%, or $3.2 million, to $168.0 million for the year ended July 31, 2001 from
$164.8 million for the year ended July 31, 2000. As a percentage of net sales,
operating expenses, excluding special charges, decreased to 16.5% for the year
ended July 31, 2001 from 18.1% for the year ended July 31, 2000. The reduction
in operating expenses as a percentage of net sales was due primarily to
increased labor productivity in our distribution centers, increased efficiencies
in our transportation departments as a result of better routing and successfully
leveraging our fixed expenses against a higher sales base. The improved labor
productivity was due primarily to a more favorable labor market nationwide and
higher retention rate of experienced warehouse employees. The improved
transportation routing resulted in fewer miles traveled by our fleet, and
corresponding reductions in expenses.

Operating expenses for the year ended July 31, 2001 included special charges of
$0.8 million related to the expansion of our New Oxford, Pennsylvania
distribution facility, and $0.4 million of asset impairment charges, primarily
goodwill, associated with the closing of an unprofitable retail store. Our
operating expenses for the year ended July 31, 2000 were impacted by several
special charges. These charges included approximately $3.0 million of executive
severance costs and the write-off of current assets in the Eastern Region and
Chicago and 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. Operating expenses, including special charges,
decreased approximately 0.6% or $1.1 million, to $169.1 million for the year
ended July 31, 2001 from $170.2 million for the year ended July 31, 2000. As a
percentage of sales, operating expenses, including special charges, decreased to
16.6% for the year ended July 31, 2001 from 18.7% for the twelve months ended
July 31, 2000.

Operating Income.

Operating income, excluding the special charges discussed above, increased $21.1
million to $30.8 million for the year ended July 31, 2001 compared to $9.7
million for the year ended July 31, 2000. As a percentage of sales, operating
income, excluding special charges, increased to 3.0% for the year ended July 31,
2001 compared to 1.1% for the year ended July 31, 2000. Operating income,
including special charges, increased $25.8 million to $29.6 million for the year
ended July 31, 2001 compared to $3.9 million for the comparable prior period.

Other (Income)/Expense.

The $1.5 million increase in other expense for the year ended July 31, 2001
compared to the year ended July 31, 2000 was attributable to slightly higher
debt levels and non-cash expense related to an interest rate swap that were
partially offset by lower interest rates. Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities" requires recognition in the financial statements of the
change in fair value during the year of certain interest rate protection
contracts and other derivatives. We recorded FAS 133 expense of $1.3 million on
our interest rate swap agreement resulting from the significant decline in
interest rates during the year. We will continue to recognize this income or
expense for the duration of the swap contract until either October 2003 or 2005,
depending on whether the contract is extended. We entered into a second interest
rate swap agreement effective August 2001, with a termination date of either
August 2005 or August 2007. Whether we recognize income or expense in any given
quarter, and the magnitude of that item, is dependent on interest rates and the
remaining term of the contract. Upon expiration of the swap contract, the
cumulative earnings impact will be zero.

Income Taxes.

Our effective income tax rates (benefit) were 40% and (39.5%) for the years
ended July 31, 2001 and 2000, respectively. The effective rates for 2001 and
2000 were higher than the federal statutory rate primarily due to state and
local income taxes.

Net (Loss) Income.

As a result, net income was $13.4 million for the year ended July 31, 2001,
compared to a net loss of ($1.2) million in the year ended July 31, 2000, an
increase of $14.6 million. Excluding the $1.3 million SFAS No. 133 expense ($0.8
million, net of tax), the $0.8 million special charge related to the expansion
of our New Oxford distribution center ($0.5 million, net of tax), and $0.4
million of asset impairment related primarily to the closing of an unprofitable
retail store ($0.2 million, net of tax) in fiscal 2001 and $3.0 million in other
special charges ($1.8 million, net of tax) and $2.4 million in restructuring
costs ($1.4 million net of tax) in fiscal 2000, net income would have been $14.8
million and $2.0 million in 2001 and 2000 respectively, resulting in an increase
of approximately $12.6 million for the year ended July 31, 2001.


19


LIQUIDITY AND CAPITAL RESOURCES

We finance operations and growth primarily with 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. In September 2001, we entered into an agreement to
increase our secured revolving credit facility to $150 million from $100 million
at an interest rate of LIBOR plus 1.50%, maturing on June 30, 2005. This
additional access to capital will provide for working capital requirements in
the normal course of business and the opportunity to grow our business
organically or through acquisitions. As of July 31, 2002, our borrowing base,
based on accounts receivable and inventory levels, was $113.0 million with
remaining availability of $19.7 million. As of October 11, 2002, the date of
acquisition of Blooming Prairie, our borrowing base was $136.5 million with an
availability of $22.4 million and included availability from the Blooming
Prairie acquisition of approximately $10.8 million.

Net cash provided by operations was $11.0 million for the year ended July 31,
2002 and was the result of cash collected from customers net of cash paid to
vendors, partially offset by investments in inventory. 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, as well as the opening of our
Fontana, California facility. Days in inventory decreased to 48 days at July 31,
2002 from 49 days at July 31, 2001. Days sales outstanding at July 31, 2002 was
28 days compared to 29 days at July 31, 2001. Net cash provided by operations
was $22.0 million for the year ended July 31, 2001 and was due to cash collected
from customers, net of cash paid to vendors, exceeding our investments in
accounts receivable and inventory. On June 19, 2002, we announced that our
contract as primary distributor to Wild Oats, Inc., would not be renewed past
its expiration date of August 31, 2002. However, we continue to distribute to
Wild Oats, Inc. and expect revenue of approximately $10 million to $15 million
in fiscal 2003. Working capital at July 31, 2002 was $51.7 million.

Net cash used in investing activities was $27.8 million for the year ended July
31, 2002 and was due primarily to capital expenditures for the purchase of our
new Atlanta, Georgia facility and equipment purchases for our Fontana,
California facility, compared to $18.2 million for the same period last year
that was due primarily to the purchase of our secondary facility in Auburn,
California, the expansion of our New Oxford, Pennsylvania distribution facility
and payments for the purchase of Palm Harbor Natural Foods.

Net cash provided by financing activities was $21.5 million for the year ended
July 31, 2002 due to increased borrowings on our line of credit and our
equipment financing lines, offset by repayment of long-term debt as a result of
the establishment of our $150 million secured revolving credit facility. Net
cash provided by financing activities was $0.7 million for the year ended July
31, 2001 due to proceeds from the exercise of stock options, mostly offset by
repayment of long-term debt.

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 at LIBOR plus
1.50%, thereby fixing the Company's effective rate at 6.50%. The five-year term
of the swap agreement may be extended to seven years at the option of the
counter party, which prohibits accounting for the swap as an effective hedge
under SFAS No.133, "Accounting for Derivative Instruments and Hedging
Activities." We entered into an additional interest rate swap agreement
effective August 1, 2001. The additional agreement provides for us to pay
interest for a four-year period at a fixed rate of 4.81% on a notional principal
amount of $30 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 $30 million at LIBOR plus 1.50%, thereby fixing our
effective rate on the notional amount at 6.31%. If LIBOR exceeds 6.0% in a given
period the agreement is suspended for that period. LIBOR was 1.81% as of July
31, 2002. The four-year term of the swap agreement may be extended to six years
at the option of the counter party, which prohibits accounting for the swap as
an effective hedge under SFAS No. 133.

IMPACT OF INFLATION

Historically, we have been able to pass along inflation-related increases.
Consequently, inflation has not had a material impact upon the results of our
operations or profitability.

SEASONALITY

Generally, we do not experience any material seasonality. However, our sales and
operating results may vary significantly from quarter to quarter due to factors
such as changes in our operating expenses, management's ability to execute our
operating and growth strategies, personnel changes, demand for natural products,
supply shortages and general economic conditions.


20


RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

In June 2002, the Financial Accounting Standards Board issued SFAS No 146,
"Accounting for Costs Associated with Exit or Disposal Activities." This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged.

In April 2002, the Financial Accounting Standards Board issued SFAS No 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". The provisions related to the rescission of
Statement 4 shall be applied in financial years beginning after May 15, 2002.
The provisions of the Statement related to Statement 13 were effective for
transactions occurring after May 15, 2002. All other provisions of Statement 145
were effective for financial statements issued on or after May 15, 2002. The
adoption of this Statement is not expected to have a material impact on our
consolidated financial position or results of operations.

In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets", which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement is effective for fiscal years beginning after
December 15, 2001. The adoption of this Statement is not expected to have a
material impact on our consolidated financial position or results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
Statement is effective for fiscal years beginning after June 15, 2002. The
adoption of this Statement is not expected to have a material impact on our
consolidated financial position or results of 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 future 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 future 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.
Successful integration of mergers is critical to our future operating and
financial performance. Integration requires, among other things:

the optimization of delivery routes,

coordination of administrative, distribution and finance functions,

the integration of management information systems and personnel and

maintaining customer base.


21


The integration process has and could divert the attention of management and any
difficulties or problems encountered in the transition process could have a
material adverse effect on our business, financial condition or results of
operations. In addition, the process of combining companies has and could 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. We
may also lose key employees of the acquired company. There can be no assurance
that we will realize any of the anticipated benefits of mergers.

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 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 Foods 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 customer

Our current distribution arrangement with our top customer, Whole Foods Market,
Inc., is effective through August 31, 2004. On June 19, 2002, we announced that
our contract as primary distributor to Wild Oats, Inc., would not be renewed
past its expiration date of August 31, 2002. However, we continue to distribute
to Wild Oats, Inc. and expect revenue of approximately $10 million to $15
million from such distribution in fiscal 2003. Whole Foods Market, Inc. and Wild
Oats, Inc. accounted for approximately 19% and 14%, respectively, of our net
sales during the fiscal year ended July 31, 2002. On October 11, 2002 we
acquired substantially all of the assets of Blooming Prairie, the largest volume
distributor of natural foods and products in the Midwest region of the United
States. Whole Foods Market, Inc. is a member of Blooming Prairie and we expect
Whole Foods Market, Inc. to represent approximately 25% of our total sales in
fiscal 2003. As a result of this concentration of our customer base, the loss or
cancellation of business from Whole Foods Market, Inc. 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 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.


22


Our operations are 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:

difficulties with the collectibility of accounts receivable,

difficulties with inventory control,

competitive pricing pressures, and

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, Steven Townsend, President, Todd
Weintraub, Chief Financial Officer, Kevin T. Michel, President of our Western
Region, Dan Atwood, Senior Vice President and Secretary, Rick Antonelli, Eastern
Region President and other key management employees. Loss of the services of any
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:

changes in our operating expenses,

management's ability to execute our business and growth strategies,

personnel changes,

demand for natural products,

supply shortages,

general economic conditions,

changes in customer preferences and demands for natural products,
including levels of enthusiasm for health, fitness and environmental
issues,

fluctuation of natural product prices due to competitive pressures,

lack of an adequate supply of high-quality agricultural products due to
poor growing conditions, natural disasters or otherwise,

volatility in prices of high-quality agricultural products resulting from
poor growing conditions, natural disasters or otherwise, and

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.


23


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:

our products are subject to inspection by the U.S. Food and Drug
Administration,

our warehouse and distribution facilities are subject to inspection by the
U.S. Department of Agriculture and state health authorities, and

The U.S. Department of Transportation and the U.S. Federal Highway
Administration regulate our trucking operations.

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.

Union-organizing activities could cause labor relations difficulties

As of July 31, 2002, approximately 235 employees, representing approximately 8%
of our approximately 3,000 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. On October 11, 2002 we acquired
substantially all the assets of Blooming Prairie, adding approximately 280
employees. Approximately 100 of these employees are covered by a collective
bargaining agreement. This agreement expires in June of 2003.

Our financial condition could be diminished based on access to capital and the
cost of that capital

In September 2001 we entered into an agreement to increase our secured revolving
credit facility to $150 million from $100 million at an interest rate of LIBOR
plus 1.5% maturing on June 30, 2005. The proceeds were used to refinance our
existing credit facility, several fixed term mortgage loans, and an equipment
loan. This additional access to capital will provide for working capital
requirements in the normal course of business and the opportunity to grow our
business organically or through acquisitions. As of July 31, 2002, our borrowing
base, based on accounts receivable and inventory levels, was $113.0 million with
remaining availability of $19.7 million. As of October 11, 2002, the date of
acquisition of Blooming Prairie, our borrowing base was $136.5 million with an
availability of $22.4 million and included availability from the Blooming
Prairie acquisition of approximately $10.8 million.

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 increases our cost of capital or limits our 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.


24


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 26

Consolidated Balance Sheets 27

Consolidated Statements of Operations 28

Consolidated Statements of Stockholders' Equity 29

Consolidated Statements of Cash Flows 30

Notes to Consolidated Financial Statements 31


25


INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
United Natural Foods, Inc.:

We have audited the accompanying consolidated balance sheets of United Natural
Foods, Inc. and Subsidiaries as of July 31, 2002 and 2001 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, 2002. 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, 2002 and 2001 and the results of
their operations and their cash flows for each of the years in the three-year
period ended July 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.


/s/ KPMG LLP

KPMG LLP

Providence, Rhode Island
September 4, 2002


26


UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)



JULY 31, 2002 JULY 31, 2001
------------- -------------

ASSETS
- ------
Current assets:
Cash and cash equivalents $ 11,184 $ 6,393
Accounts receivable, net of allowance of $5,767 and $4,540, respectively 84,303 81,559
Notes receivable, trade 513 685
Inventories 131,932 110,653
Prepaid expenses 4,493 5,394
Deferred income taxes 4,612 3,513
Refundable income taxes 58 366
---------------------------
Total current assets $ 237,095 $ 208,563

Property & equipment, net 82,702 62,186
Notes receivable, trade, net 956 1,050
Goodwill 31,399 27,500
Covenants not to compete, net of accumulated amortization of $222 and $250,
respectively 248 180
Deferred taxes 800 276
Other, net 1,257 689
---------------------------
Total assets $ 354,457 $ 300,444
===========================

LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable $ 106,109 $ 68,056
Current installments of long-term debt 1,658 19,625
Current installments of obligations under capital leases 1,037 1,120
Accounts payable 52,789 53,169
Accrued expenses 18,185 11,952
Financial instruments 5,620 1,290
---------------------------
Total current liabilities $ 185,398 $ 155,212

Long-term debt, excluding current installments 7,677 7,805
Obligations under capital leases, excluding current installments 995 1,484
---------------------------
Total liabilities $ 194,070 $ 164,501
---------------------------

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 19,106 at July 31, 2002
issued and outstanding 18,653 at July 31, 2001 191 187
Additional paid-in capital 79,711 72,644
Unallocated shares of Employee Stock Ownership Plan (2,094) (2,258)
Retained earnings 82,579 65,370
---------------------------
Total stockholders' equity 160,387 135,943
---------------------------

Total liabilities and stockholders' equity $ 354,457 $ 300,444
===========================


See notes to consolidated financial statements.


27


UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



YEAR ENDED JULY 31,
-------------------

(In thousands, except per share data) 2002 2001 2000
---- ---- ----


Net sales $ 1,175,393 $ 1,016,834 $ 908,688
Cost of sales 944,777 818,040 734,673
---------------------------------------
Gross profit 230,616 198,794 174,015
---------------------------------------

Operating expenses 190,047 167,325 166,673
Merger, restructuring and asset impairment expenses 424 801 2,420
Amortization of intangibles 180 1,036 1,070
---------------------------------------
Total operating expenses 190,651 169,162 170,163
---------------------------------------

Operating income 39,965 29,632 3,852
---------------------------------------

Other expense (income):
Interest expense 7,233 6,939 6,412
Change in value of financial instruments 4,331 1,290 --
Other, net (281) (861) (527)
---------------------------------------
Total other expense 11,283 7,368 5,885
---------------------------------------

Income (loss) before income taxes (benefit) 28,682 22,264 (2,033)
Income taxes (benefit) 11,473 8,906 (802)
---------------------------------------
Net income (loss) $ 17,209 $ 13,358 $ (1,231)
=======================================

Basic per share data:
Net income (loss) $ 0.91 $ 0.72 $ (0.07)
=======================================

Weighted average basic shares of common stock 18,933 18,482 18,264
=======================================

Diluted per share data:
Net income (loss) $ 0.89 $ 0.71 $ (0.07)
=========== =========== =========

Weighted average diluted shares of common stock 19,334 18,818 18,264
=======================================


See notes to consolidated financial statements.


28


UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY



Outstanding Unallocated Total
Number of Common Additional Paid Shares of Retained Stockholders'
Shares Stock in Capital ESOP Earnings Equity
----------------------------------------------------------------------------------------
(In thousands)

Balances at July 31, 1999 18,249 $182 $67,740 $(2,584) $53,243 $118,581

Allocation of shares to ESOP -- -- -- 163 -- 163

Issuance of common stock, net 34 1 328 -- -- 329

Tax effect of exercises of
stock options -- -- 112 -- -- 112

Net (loss) -- -- -- -- (1,231) (1,231)
----------------------------------------------------------------------------------------
Balances at July 31, 2000 18,283 $183 $68,180 $(2,421) $52,012 $117,954
----------------------------------------------------------------------------------------

Allocation of shares to ESOP -- -- -- 163 -- 163

Issuance of common stock, net 370 4 3,505 -- -- 3,509

Tax effect of exercises of
stock options -- -- 959 -- -- 959

Net income -- -- -- -- 13,358 13,358
----------------------------------------------------------------------------------------
Balances at July 31, 2001 18,653 $187 $72,644 $(2,258) $65,370 $135,943
----------------------------------------------------------------------------------------

Allocation of shares to ESOP -- -- -- 164 -- 164

Issuance of common stock, net 254 2 2,405 -- -- 2,407

Tax effect of exercises of
stock options -- -- 415 -- -- 415

Issuance of common stock in
connection with acquisition 199 2 4,247 4,249

Net income -- -- -- -- 17,209 17,209
----------------------------------------------------------------------------------------
Balances at July 31, 2002 19,106 $191 $79,711 $(2,094) $82,579 $160,387
========================================================================================


See notes to consolidated financial statements.


29


UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



YEAR ENDED JULY 31,
(In thousands) 2002 2001 2000
---- ---- ----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 17,209 $ 13,358 $ (1,231)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,206 7,908 7,601
Change in fair value of financial instruments 4,331 1,290 --
Loss on impairment of intangible asset -- 255 --
Loss on disposals of property & equipment 307 640 1,977
Deferred income tax expense (1,099) (1,529) (930)
Provision for doubtful accounts 1,806 2,903 1,992
Changes in assets and liabilities, net of acquired companies:
Accounts receivable (3,867) (14,887) (10,854)
Inventory (21,091) (5,719) (13,761)
Prepaid expenses 921 713 (425)
Refundable income taxes 308 4,035 (461)
Other assets (928) 42 (117)
Notes receivable, trade 266 (514) 208
Accounts payable (692) 13,725 5,950
Accrued expenses 5,346 (234) (1,528)
------------------------------------
Net cash provided by (used in) operating activities 11,023 21,986 (11,579)
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of subsidiaries, net of cash acquired (16) (2,393) (1,200)
Proceeds from disposals of property and equipment 33 46 57
Capital expenditures (27,789) (15,891) (15,870)
------------------------------------
Net cash used in investing activities (27,772) (18,238) (17,013)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under note payable 38,053 49 26,854
Repayments on long-term debt (21,062) (2,742) (3,846)
Proceeds from long-term debt 2,967 89 5,287
Principal payments of capital lease obligations (1,240) (1,162) (1,045)
Proceeds from exercise of stock options 2,822 4,468 440
------------------------------------
Net cash provided by financing activities 21,540 702 27,690
------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,791 4,450 (902)
Cash and cash equivalents at beginning of period 6,393 1,943 2,845
------------------------------------
Cash and cash equivalents at end of period $ 11,184 $ 6,393 $ 1,943
====================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,089 $ 6,822 $ 5,746
====================================
Income taxes, net of refunds $ 12,883 $ 5,709 $ 795
====================================


In 2002, 2001 and 2000, the Company incurred capital lease obligations of
approximately $ 667, $923, and $1,634, respectively. The fair value of common
stock issued for an acquisition of a subsidiary was $4,249.

See notes to consolidated financial statements.


30


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 and organic 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 using
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.
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.

In assessing potential impairment of goodwill, the Company has determined
the implied fair value of each of its reporting units using a discounted
cash flow analysis and compared such values to the respective reporting
units' carrying amounts. SFAS 142 requires goodwill to be tested annually
and between annual tests if events occur or circumstances change that
would more likely than not reduce the fair value of a reporting unit below
its carrying amount. The Company has elected to perform its annual tests
for indications of goodwill impairment as of July 31 of each year. As of
July 31, 2002, the Company's annual assessment of each of its reporting
units indicated that goodwill was not impaired.

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.


31


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


(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 2002, 2001 and 2000, Whole Foods Market, Inc. and Wild Oats,
Inc., which provided 10% or more of the Company's revenue. Total net sales
to Whole Foods Market, Inc. and Wild Oats, Inc. in 2002 were approximately
$224.6 and $162.8, respectively. Total sales to Whole Foods Market, Inc.
and Wild Oats, Inc. in 2001 were approximately $169.0 million and $147.0
million, respectively. Total net sales to Whole Foods Market, Inc. and
Wild Oats, Inc. in 2000 were approximately $147 million and $121 million,
respectively. On June 19, 2002, the Company announced that its contract as
primary distributor to Wild Oats, Inc., would not be renewed past its
expiration date of August 31, 2002. However, the Company continues to
distribute to Wild Oats, Inc. in fiscal 2003.

(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 are 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) 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 accounting principles generally accepted in the United
States of America. Actual results could differ from those estimates.

(k) 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.

(l) Employee Benefit and Stock Option 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.


32


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


(m) Earnings Per Share

Basic earnings per share are calculated by dividing net 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. 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) 2002 2001 2000
---- ---- ----

Basic weighted average shares outstanding 18,933 18,482 18,264
Net effect of dilutive stock options based upon
the treasury stock method 401 336 --
-----------------------
Diluted weighted average shares outstanding 19,334 18,818 18,264
-----------------------
Antidilutive potential common shares excluded from
the computation above 601 -- 1,578
=======================


(n) Financial Instruments

In October 1998, the Company entered into an interest rate swap agreement
that provides for it 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. This swap has been entered into as a hedge against LIBOR
interest rate movements on current and anticipated variable rate
indebtedness totaling $60 million at LIBOR plus 1.50%, thereby fixing the
Company's effective rate at 6.50%. The five-year term of the swap
agreement may be extended to seven years at the option of the counter
party, which prohibits accounting for the swap as an effective hedge under
Statement of Financial Accounting Standards No. 133 ("SFAS" No. 133),
"Accounting for Derivative Instruments and Hedging Activities." The
Company entered into an additional interest rate swap agreement effective
August 1, 2001. The additional agreement provides for the Company to pay
interest for a four-year period at a fixed rate of 4.81% on a notional
principal amount of $30 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 $30 million at
LIBOR plus 1.50%, thereby fixing the Company's effective rate on the
notional amount at 6.31%. If LIBOR exceeds 6.0% in a given period the
agreement is suspended for that period. The four-year term of the swap
agreement may be extended to six years at the option of the counter party,
which prohibits accounting for the swap as an effective hedge under SFAS
No. 133.

(2) ACQUISITION

On November 6, 2001, the Company's wholly owned subsidiary, Albert's Organics,
Inc., purchased the assets of Boulder Fruit Express, a distributor of high
quality organic produce and perishables. In connection with the acquisition of
Boulder Fruit Express, the Company issued 199,436 of common stock with a fair
value of approximately $4.3 million and paid cash of approximately $0.8 million.
This acquisition was accounted for as a purchase resulting in recording of
goodwill of approximately $3.9 million. Operating results of Boulder Fruit
Express have been included in our consolidated financial statements beginning
with the acquisition date. Pro formas have not been included as the acquisition
was not deemed to be significant.

(3) STOCK OPTION PLAN

The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Under SFAS No. 123, companies can
elect to account for stock-based compensation using a fair value based method or
continue to measure compensation expense using the intrinsic value method. The
Company has elected to continue to apply APB No. 25 accounting treatment for
stock-based compensation. If the fair value method of accounting had been used,
net income (loss) would have been $14.4 million, $11.6 million and $(1.8)
million for 2002, 2001 and 2000, respectively, basic earnings (loss) per share
would have been $0.76, $0.63 and $(0.10) for 2002, 2001 and 2000, respectively,
and diluted earnings (loss) per share would have been $0.75, $0.62 and $(0.10)
for 2002, 2001 and 2000, respectively. The weighted average grant date fair
value of options granted during 2002, 2001 and 2000 is shown on the following
page. The fair value of each option grant was estimated using the Black-Sholes
Option Pricing Model with the following weighted average assumptions for 2002,
2001 and 2000: dividend yields of 0.0% for all years, risk free interest rates
of 4.7%, 5.1% and 6.1% respectively and expected lives of 5 years for fiscal
2002 and 8 years for fiscal years 2001 and 2000. The expected volatility was
64.0%, 76.8% and 77.5% for 2002, 2001 and 2000, 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 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 2,500,000 shares of common stock may
be issued upon the exercise of options granted under the 1996 Stock Option Plan.


33


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


The following table summarizes the stock option activity for the fiscal years
ended July 31, 2002, 2001 and 2000:



2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----


Outstanding at beginning of year 1,418,884 $12.26 1,578,140 $10.76 985,259 $14.05
Granted 594,000 $22.78 486,750 $15.38 839,500 $ 9.38
Exercised (253,076) $ 9.51 (369,881) $ 9.48 (34,119) $ 9.64
Forfeited (67,000) $15.78 (276,125) $12.93 (212,500) $20.74
--------- --------- ---------
Outstanding at end of year 1,692,808 $16.22 1,418,884 $12.26 1,578,140 $10.76
========= ========= =========

Options exercisable at year-end 617,246 $11.68 600,509 $10.09 604,113 $10.12
Weighted average fair value of
options granted during the year:
Exercise price equals stock price $13.20 $11.91 $7.38
Exercise price exceeds stock price -- -- --
Stock price exceeds exercise price -- -- --


The following table summarizes the stock option activity of the 1996 Stock
Option Plan since its inception through July 31, 2002:

Shares
------
Authorized 2,500,000
Granted 3,017,096
Cancelled 565,625
---------
Remaining authorized 48,529
=========

The 1,692,808 options outstanding at July 31, 2002 had exercise prices and
remaining contractual lives as follows:



Weighted Average Weighted Weighted
Remaining Average Average
Range of Exercise Shares Contractual Life Exercise Shares Exercise
Prices Outstanding (years) Price Exercisable Price
------ ----------- ------- ----- ----------- -----

$ 6.38 - $ 8.97 352,500 5.8 $ 7.83 243,250 $ 7.44
$ 9.64 - $14.25 248,875 7.1 $11.25 215,438 $10.99
$15.50 - $22.80 1,091,433 8.1 $20.06 158,558 $19.12



34


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


(4) GOODWILL AND INTANGIBLE ASSETS: ADOPTION OF STATEMENT 142

In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires that companies no
longer amortize goodwill, but instead test goodwill for impairment at least
annually (or more frequently if impairment indicators arise). The Company
adopted SFAS No. 142 on August 1, 2001. The Company completed the required
transitional and annual goodwill impairment tests for each of its identified
reporting units during the quarters ended January 31 and July 31, 2002. Based on
the results of these tests, there was no indication of goodwill impairment. The
Company has also reassessed the useful lives and carrying values of other
intangibles, and will continue to amortize these assets over their remaining
useful lives.

The following table details the pro forma disclosures in accordance with SFAS
No. 142. As of July 31, 2001, the Company had goodwill of $30.9 million less
accumulated amortization of $3.4 million. The Company recorded additional
goodwill in its Distribution operating segment of $3.9 million during the year
ended July 31, 2002 as a result of its acquisition of Boulder Fruit Express.
Total goodwill as of July 31, 2002 was $31.4 million. Goodwill for the
Distribution operating segment totaled $18.4 as of July 31, 2002.

Year Ended July 31,
(In thousands, except per share data) 2002 2001 2000
-------- -------- -------

Operating income (loss):
Distribution segment $ 43,899 $ 30,974 $ 8,333
Other segment (3,978) (1,339) (4,549)
Eliminations 44 (3) 68
-------- -------- -------
Total reported operating income 39,965 29,632 3,852
-------- -------- -------

Add back: Distribution goodwill
amortization -- 480 454
Add back: Other goodwill amortization -- 405 384
-------- -------- -------
Add back: Total goodwill amortization -- 885 838
-------- -------- -------

Adjusted distribution operating income 43,899 31,454 8,787
Adjusted other operating (loss) (3,978) (934) (4,165)
Eliminations operating income (loss) 44 (3) 68
-------- -------- -------
Adjusted total operating income $ 39,965 $ 30,517 $ 4,690
======== ======== =======

Net income:
Reported net income (loss) $ 17,209 $ 13,358 $(1,231)
Add back: goodwill amortization,
net of tax -- 625 591
-------- -------- -------
Adjusted net income (loss) $ 17,209 $ 13,983 $ (640)
======== ======== =======

Basic earnings per share:
Reported net income (loss) $ 0.91 $ 0.72 $ (0.07)
Goodwill amortization, net of tax -- 0.03 0.03
-------- -------- -------
Adjusted net income (loss) $ 0.91 $ 0.75 $ (0.04)
======== ======== =======

Diluted earnings per share:
Reported net income (loss) $ 0.89 $ 0.71 $ (0.07)
Goodwill amortization, net of tax -- 0.03 0.03
-------- -------- -------
Adjusted net income (loss) $ 0.89 $ 0.74 $ (0.04)
======== ======== =======


35


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


Other intangibles consist of covenants not to compete with the weighted average
amortization period of four and a half years. The Company had other intangibles
less related accumulated amortization of $0.5 million and $0.2 million at July
31, 2002, respectively, and $0.5 million and $0.3 million at July 31, 2001,
respectively. Amortization expense was $0.1 million for 2002, 2001 and 2000.
Estimated amortization expense for the next four fiscal years is as follows:

Year In thousands
2003 $ 95
2004 63
2005 40
2006 10
Thereafter --
-----
$ 248
=====

(5) PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at July 31, 2002 and 2001:

Estimated
Useful
Lives
(Dollars in thousands) (Years) 2002 2001
------- ---- ----
Land $ 4,816 $ 3,824
Buildings 20-40 45,852 38,279
Building Improvements 20-40 12,386 6,939
Leasehold improvements 5-30 11,216 7,174
Warehouse equipment 5-20 26,558 21,360
Office equipment 3-10 12,235 9,870
Motor vehicles 3-5 6,489 6,164
Equipment under capital leases 5 5,644 5,581
Construction in progress 1,707 1,278
-------------------
126,903 100,469
Less accumulated depreciation
and amortization 44,201 38,283
-------------------
Net property and equipment. $ 82,702 $ 62,186
===================

(6) NOTES PAYABLE

The Company entered into a new line of credit with its bank effective September
4, 2001. The agreement increased the amount of the credit facility to $150
million from $100 million. Interest accrues, at the Company's option, at the New
York Prime Rate (4.75% at July 31, 2002 and 6.75% at July 31, 2001) or 1.50%
above the banks' London Interbank Offered Rate ("LIBOR" 1.81% and 3.78% at July
31, 2002 and 2001, respectively) and the Company has the option to fix the rate
for all or a portion of the debt in increments of 30 days. The Company opted to
pay 1.50% above LIBOR for substantially all of fiscal 2002. At July 31, 2002 and
2001, the weighted average interest rate on the line of credit was 3.38% and
5.06%, respectively. As of July 31, 2002, the Company's outstanding borrowings
under the credit agreement totaled $113.0 million, which included $6.9 million
in letters of credit, with an availability of $19.7 million. The credit
agreement contains certain restrictive covenants. The Company was in compliance
with all restrictive covenants at July 31, 2002. The agreement also provides for
the primary bank to syndicate the credit facility to other banks and lending
institutions. The Company has pledged all of its assets as collateral for its
obligations under the credit agreement. The borrowing base is based on accounts
receivable and inventory levels. The proceeds received from the new credit
facility were used to refinance the Company's existing credit facility
consisting of a revolving loan balance of $61.8 million and fixed rate mortgages
of $18.3 million. An additional fixed rate mortgage of $1.5 million has been
paid in full. The agreement has had two subsequent amendments. The Company
amended the agreement with its bank to define the term "Capital Expenditures" to
exclude the purchase of its new building located in Atlanta, Georgia in June
2002. The Company amended the agreement with its bank, in September 2002, to
waive the negative covenants in order to purchase Blooming Prairie.


36


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


(7) LONG-TERM DEBT



July 31, July 31,
Long-term debt consisted of the following: (dollars in thousands) 2002 2001
---- ----


Real estate term loans payable to bank and others, secured by
building and other assets, due monthly and maturing at various dates
from August 2002 through April 2015, at rates ranging from 7.50 % to 8.60 % $ 2,867 4,679

Equipment financing loans payable to bank, secured by assets, due
monthly and maturing at various dates from March 2006 through July
2007, at rates ranging from 6.49% to 7.23% 2,844 -

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 2,094 2,258

Term loans payable to bank, secured by assets, due monthly and
maturing at various dates from October 2003 through June 2005, at
rates ranging from 8.85% to 11.57% 1,530 1,973

Term loan payable to bank, secured by substantially all assets of the
Company, due $235 quarterly plus interest at 1.25% above LIBOR,
balance repaid in September 2001 -- 3,075

Real estate term loan payable to bank, secured by land and building,
due $28 monthly plus interest at 7.36%, balance repaid in September
2001 -- 5,555

Term loan payable to bank, secured by substantially all assets of the
Company, with monthly principal payments of $50, balance repaid
in September 2001 -- 9,890
------------------
9,335 27,430
Less: current installments 1,658 19,625
------------------
Long-term debt, excluding current installments $ 7,677 $ 7,805
==================


Certain debt agreements contain restrictive covenants. The Company was in
compliance with all of its restrictive covenants at July 31, 2002.

Aggregate maturities of long-term debt for the next five years and thereafter
are as follows at July 31, 2002:

Year (In thousands)

2003 $ 1,658
2004 1,714
2005 1,691
2006 1,024
2007 645
Thereafter 2,603
-------
$ 9,335
=======

(8) FINANCIAL INSTRUMENTS

In October 1998, the Company entered into an interest rate swap agreement that
provides for it 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. This swap has
been entered into as a hedge against LIBOR interest rate movements on current
and anticipated variable rate indebtedness totaling $60 million at LIBOR plus
1.50%, thereby fixing the effective rate at 6.50%. The five-year term of the
swap agreement may be extended to seven years at the option of the counter
party, which prohibits accounting for the swap as an effective hedge under
Statement of Financial Accounting Standards No. 133 ("SFAS" No. 133),
"Accounting for Derivative Instruments and Hedging Activities." The Company
entered into an additional interest rate swap agreement effective August 1,
2001. The additional agreement provides for the Company to pay interest for a
four-year period at a fixed rate of 4.81% on a notional principal amount of $30
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 $30 million at LIBOR plus 1.50%, thereby fixing the
effective rate on the notional amount at 6.31%. If LIBOR exceeds 6.0% in a given
period the agreement is suspended for that period. The four-year term of the
swap agreement may be extended to six years at the option of the counter party,
which prohibits accounting for the swap as an effective hedge under SFAS No.
133. As of July 31, 2002 the fair value of the financial instruments totaled
$(5.6) million. During fiscal 2002, the Company recorded other expenses of $4.3
million to reflect the change in fair market value.


37


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


(9) CAPITAL LEASES

The Company leases computer, office and warehouse equipment under capital leases
expiring in various years through 2007. 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
shorter of their related lease terms or their estimated productive lives. Total
capital leased assets for fiscal year 2002 and 2001 were $5,644, and $5,581,
respectively, less accumulated depreciation of $3,453 and $2,898, respectively.

Minimum future lease payments under capital leases as of July 31, 2002 for each
of the next five fiscal years and in the aggregate are:

Year ended July 31 (In thousands)
2003 $ 1,161
2004 680
2005 316
2006 77
2007 3
-------
Total minimum lease payments 2,237
Less: Amount representing interest 205
-------
Present value of net minimum
lease payments 2,032
Less: current installments 1,037
-------
Capital lease obligations,
excluding current installments $ 995
=======

(10) 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.

Rent and other lease expense for the years ended July 31, 2002, 2001 and 2000
totaled approximately $14.3 million, $9.7 million and $8.5 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, 2002 are as
follows:

Year (In thousands)
2003 $ 10,759
2004 10,004
2005 8,832
2006 6,831
2007 5,543
2008 and thereafter 18,157
--------
$ 60,126
========

Outstanding commitments as of July 31, 2002 for the purchase of inventory were
approximately $4.3 million. The Company had outstanding letters of credit of
approximately $6.9 million at July 31, 2002.

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.

(11) 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 $1.3 million, $1.3 million and $1.0 million for the years ended
July 31, 2002, 2001 and 2000, respectively.


38


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


(12) EMPLOYEE STOCK OWNERSHIP PLAN

The Company adopted the UNFI 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 2002, 2001 and 2000 contributions totaling
approximately $0.4 million were made to the Trust. Of these contributions,
approximately $0.2 million represented interest in 2002 and 2001 and
approximately $0.3 million represented interest in 2000.

The ESOP shares were classified as follows:

July 31, July 31,
(In thousands) 2002 2001
---- ----
Allocated shares 990 902
Shares released for allocation 88 88
Shares distributed to employees (443) (376)
Unreleased shares 1,122 1,210
----- -----
Total ESOP shares 1,757 1,824
===== =====

The fair value of unreleased shares was approximately $20.7 million at July 31,
2002.

(13) INCOME TAXES

Total federal and state income tax (benefit) expense from continuing operations
consists of the following:

(In thousands) Current Deferred Total
------- -------- -----
Fiscal year ended July 31, 2002:
U.S. Federal $11,560 $(2,083) $ 9,477
State and local 1,537 459 1,996
------- ------- -------
$13,097 $(1,624) $11,473
======= ======= =======
Fiscal year ended July 31, 2001:
U.S. Federal $ 9,212 $(1,399) $ 7,813
State and local 1,499 (406) 1,093
------- ------- -------
$10,711 $(1,805) $ 8,906
======= ======= =======
Fiscal year ended July 31, 2000:
U.S. Federal $ (141) $ 79 $ (62)
State and local 269 (1,009) (740)
------- ------- -------
$ 128 $ (930) $ (802)
======= ======= =======

Total income tax expense (benefit) 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) 2002 2001 2000
---- ---- ----
Computed "expected" tax expense (benefit) $10,039 $7,792 $(712)
State and local income tax, net of Federal
income tax (expense) benefit 1,307 710 (481)
Non-deductible expenses 177 137 119
Non-deductible amortization -- 94 88
Increase in valuation allowance 642 -- --
Other, net (692) 173 184
------- ------ -----
$11,473 $8,906 $(802)
======= ====== =====


39


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


Total income tax expense (benefit) for the years ended July 31, 2002, 2001, and
2000 was allocated as follows:

July 31, July 31, July 31,
(In thousands) 2002 2001 2000
---- ---- ----
Statement of operations $11,473 $8,906 $(802)
Stockholders' equity, for compensation
expense for tax purposes in excess of
amounts recognized for financial
statement purposes $ (415) $ (959) $(112)
------- ------ -----
$11,058 $7,947 $(914)
======= ====== =====

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, 2002 and
2001 are presented below:

(In thousands) 2002 2001
---- ----
Deferred tax assets:
Change in financial instruments $2,186 --
Inventories, principally due to additional costs
inventoried for tax purposes 1,546 1,315
Compensation and benefit related 707 886
State net operating loss carryforward 778 682
Accounts receivable, principally due to allowances for
uncollectible accounts 1,067 545
Reserve for LIFO inventory 55 45
Accrued expenses 1,464 750
Other 246 237
------ ------
Total gross deferred tax assets 8,049 4,460
------ ------
Less valuation allowance 642 --
------ ------
Net deferred tax assets 7,407 4,460
------ ------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation 920 33
Reserve for LIFO inventory method -- --
Intangible assets 1,009 564
Other 66 74
------ ------
Total deferred tax liabilities 1,995 671
------ ------
Net deferred income taxes $5,412 $3,789
====== ======

Current deferred income tax assets $4,612 $3,513
Non-current deferred income tax assets 800 276
------ ------
Net deferred income taxes $5,412 $3,789
====== ======

At July 31, 2002, the Company had net operating loss carryforwards of
approximately $20 million for state income tax purposes that expire in years
2003 through 2022.

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, with the exception of
certain state operating loss carryforwards, federal and state tax purposes
appears more likely than not.

(14) BUSINESS SEGMENTS

The Company has several operating divisions aggregated under the distribution
segment, which is the Company's only reportable segment. These operating
divisions have similar products and services, customer types, distribution
methods and historical margins. The distribution segment is engaged in 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.


40


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


Following is business segment information for the periods indicated:



(In thousands) Distribution Other Eliminations Consolidated
------------ ----- ------------ ------------

2002
- ----
Revenue $1,133,678 $62,918 $(21,203) $1,175,393
Operating Income 43,899 (3,978) 44 39,965
Amortization and Depreciation 7,097 1,109 -- 8,206
Capital Expenditures 25,465 2,324 -- 27,789
Assets 459,997 42,984 (148,524) 354,457

2001
- ----
Revenue 977,199 58,464 (18,829) 1,016,834
Operating Income 30,974 (1,339) (3) 29,632
Amortization and Depreciation 6,625 1,283 -- 7,908
Capital Expenditures 14,457 1,434 -- 15,891
Assets 440,187 1,266 (141,009) 300,444

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


(15) QUARTERLY FINANCIAL DATA (UNAUDITED)

Following is a summary of quarterly operating results and share data. There were
no dividends paid or declared during 2002 and 2001 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
- ---------------------------------------------------------------------------------------------
2002
- ----

Net sales $280,315 $285,461 $300,362 $309,255 $1,175,393
Gross profit 55,001 56,512 58,314 60,789 230,616
Income before income taxes 4,336 8,690 8,798 6,858 28,682
Net income 2,602 5,214 5,279 4,114 17,209
Per common share income
Basic: $ 0.14 $ 0.28 $ 0.28 $ 0.22 $ 0.91
Diluted: $ 0.14 $ 0.27 $ 0.27 $ 0.21 $ 0.89
Weighted average basic
Shares outstanding 18,665 18,915 19,049 19,106 18,933
Weighted average diluted
Shares outstanding 19,060 19,371 19,493 19,423 19,334

Market Price
High $ 24.11 $ 25.25 $ 26.38 $ 24.13 $ 26.38
Low $ 15.64 $ 20.21 $ 21.34 $ 14.25 $ 14.25



41


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




(In thousands except per share data) First Second Third Fourth Full Year
- ---------------------------------------------------------------------------------------------
2001
- ----

Net sales $244,141 $244,422 $258,536 $269,735 $1,016,834
Gross profit 48,051 47,790 49,683 53,270 198,794
Income before income taxes 5,442 4,345 5,470 7,007 22,264
Net income 3,265 2,607 3,282 4,204 13,358

Per common share income
Basic: $ 0.18 $ 0.14 $ 0.18 $ 0.23 $ 0.72
Diluted: $ 0.18 $ 0.14 $ 0.17 $ 0.22 $ 0.71
Weighted average basic
Shares outstanding 18,320 18,414 18,580 18,616 18,482
Weighted average diluted
Shares outstanding 18,633 18,784 18,839 19,027 18,818

Market Price
High $ 15.25 $ 20.38 $ 19.50 $ 23.20 $ 23.20
Low $ 9.56 $ 11.38 $ 10.88 $ 13.94 $ 9.56


(16) SUBSEQUENT EVENTS (UNAUDITED)

The Company amended the credit agreement with its bank on September 26, 2002 to
waive the negative covenants in order to purchase Blooming Prairie. The Company
acquired substantially all the assets of Blooming Prairie, the largest volume
distributor of natural foods and products in the Midwest region, on October 11,
2002 for approximately $30.0 million. Blooming Prairie, headquartered in Iowa
City, IA and in business since 1974, had approximately $130 million in sales for
its most recent fiscal year ended June 30, 2002. On October 23, 2002, the
Company signed an agreement to purchase Northeast Cooperatives, a distributor of
natural foods and products in the Eastern United States. Northeast Cooperatives,
headquartered in Brattleboro, Vermont, and in business since 1973, had
approximately $120 million in sales for the latest twelve months. Consummation
of the transaction is contingent upon customary closing conditions, approval by
the members of Northeast Cooperatives and approval from Northeast Cooperatives'
lenders.


42


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

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 2002 (the "2002 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 2002 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 2002 Proxy Statement
under the caption "Stock Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is contained under the caption "Certain
Relationships and Related Transactions" in the 2002 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.

Schedules other than those listed above have been omitted since they are either
not required or the information required is included in the consolidated
financial statements on the 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.


43


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/ TODD WEINTRAUB
-----------------------------
Todd Weintraub
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

Dated: October 25, 2002

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 Chair of the Board October 25, 2002
- --------------------
Thomas B. Simone


/s/ MICHAEL S. FUNK Chief Executive Officer and October 25, 2002
- ------------------- Vice Chair of the Board
Michael S. Funk (Principal Executive Officer)


/s/ STEVEN TOWNSEND President, and Director October 25, 2002
- -------------------
Steven Townsend


/s/ TODD WEINTRAUB Vice President, Chief Financial October 25, 2002
- ------------------ Officer and Treasurer (Principal
Todd Weintraub Financial and Accounting Officer)


/s/ KEVIN T. MICHEL President of Western Region, October 25, 2002
- ------------------- Assistant Secretary and Director
Kevin T. Michel


/s/ GORDON D. BARKER Director October 25, 2002
- --------------------
Gordon D. Barker


/s/ JOSEPH M. CIANCIOLO Director October 25, 2002
- -----------------------
Joseph M. Cianciolo


/s/ JAMES P. HEFFERNAN Director October 25, 2002
- ----------------------
James P. Heffernan


GAIL A. GRAHAM Director October 25, 2002
- ------------------
Gail A. Graham


44


CERTIFICATION

Each of the undersigned, in his capacity as the Chief Executive Officer
and Chief Financial Officer of United Natural Foods, Inc., as the case may be,
provides the following certifications required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Chief Executive Officer

I, Michael S. Funk, hereby certify that:

1. I have reviewed this annual report on Form 10-K of United Natural
Foods, Inc., a Delaware corporation (the "Company");

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

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

/s/ Michael S. Funk
-------------------------
Michael S. Funk
Chief Executive Officer

October 25, 2002

Explanatory Note Regarding Certification. Representations 4, 5 and 6 consistent
with the Transition Provisions of Securities and Exchange Commission Release No.
34-46427 have been omitted from this Certification for the Annual Report on Form
10-K since this Annual Report on Form 10-K covers a period ending before the
Effective Date of such Release.

Certification of Chief Financial Officer

I, Todd Weintraub, hereby certify that:

1. I have reviewed this annual report on Form 10-K of United Natural
Foods, Inc., a Delaware corporation (the "Company");

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

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

/s/ Todd Weintraub
-------------------------
Todd Weintraub
Chief Financial Officer

October 25, 2002


45


Explanatory Note Regarding Certification. Representations 4, 5 and 6 consistent
with the Transition Provisions of Securities and Exchange Commission Release No.
34-46427 have been omitted from this Certification for the Annual Report on Form
10-K since this Annual Report on Form 10-K covers a period ending before the
Effective Date of such Release.


46


EXHIBIT INDEX

Exhibit No. Description
- ----------- -----------

3.1 (1) Amended and Restated Certificate of Incorporation of the
Registrant.

3.2 (2) Amendment to Amended and Restated Certificate of Incorporation
of the Registrant.

3.3 * Amended and Restated By-Laws of the Registrant.

4.1 (1) Specimen Certificate for shares of Common Stock, $.01 par
value, of the Registrant.

4.2 (4) Certificate of Designation of Preferences and Rights of Series
A Preferred Stock of the Registrant.

4.3 (4) Rights Agreement between the Registrant and Continental Stock
Transfer and Trust Company.

10.1 (1) 1996 Employee Stock Purchase Plan.

10.2 (1) Amended and Restated Employee Stock Ownership Plan.

10.3 (1) Employee Stock Ownership Trust 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.

10.4 (1) 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.

10.5 (1) Trust Agreement among Norman A. Cloutier, Steven H. Townsend,
Daniel V. Atwood, Theodore Cloutier and Steven H. Townsend as
Trustee, dated November 1, 1988.

10.6 (1) Guaranty Agreement between the Registrant and Steven H.
Townsend as Trustee for Norman A. Cloutier, Steven H. Townsend,
Daniel V. Atwood and Theodore Cloutier, dated November 1, 1988.

10.7 (5) Amended and Restated 1996 Stock Option Plan.

10.8 (5) Amendment No. 1 to Amended and Restated 1996 Stock Option Plan.

10.9 (5) Amendment No. 2 to Amended and Restated 1996 Stock Option Plan.

10.11* Loan and Security Agreement with Fleet Capital Corporation
dated August 31, 2001.

10.12 (15) First Amendment to Loan and Security with Fleet Capital
Corporation dated April 16, 2002.

10.13* Second Amendment to Loan and Security with Fleet Capital
Corporation dated September 26, 2002.

10.18 (11) Real estate Term Notes between the Registrant and City National
Bank, dated April 28, 2000.

10.19* Lease between the Registrant and Two Seventy M Edison, a New
Jersey general partnership, dated
April 1, 2002.

10.20 (1) Distribution Agreement between Mountain People's Wine
Distributing, Inc., and Mountain People's, dated August 23,
1994.

10.23 (1) Lease between the Registrant and Bradley Spear and Seattle
First National Bank, co-executors of the estate of A.H. Spear,
dated August 23, 1989.

10.24 (11) Lease between Dove Investments, Inc. and the Registrant, dated
December 31, 1996.

10.25 (9) Lease between Valley Centre I, L.L.C. and the Registrant, dated
August, 1998.

10.26 (7) Lease between AmberJack, Ltd. and the Registrant, dated July
11, 1997.


47


Exhibit No. Description
- ----------- -----------
10.27 (13) Lease between M.D. Hodges Enterprises, Inc. and the Registrant,
dated June 6, 2001.

10.28 (13) Lease between Metropolitan Life Insurance Company and the
Registrant, dated July 31, 2001.

10.29 (14) Employment Transition Agreement and Release for Norman A.
Cloutier, dated December 8, 1999.

10.30 (11) Purchase and Sale agreement between the Registrant and Dynamic
Builders, Inc., dated June 30, 1999, Amendments and attachment.

21 Subsidiaries of the Registrant.

23 Consent of KPMG LLP.

Schedule II - Valuation and Qualifying Accounts and Report of
Independent Accountants thereon.

* Filed herewith
(1) Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (File No. 333-11349).
(2) Incorporated by reference to the Registrant's Definitive Proxy Statement
for the fiscal year ended July 31, 1998.
(4) Incorporated by reference to the Registration Current Report on Form 8-K
filed on March 2, 2000.
(5) Incorporated by reference to the Registrant's Definitive Proxy Statement
for the fiscal year ended July 31, 2000.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 30, 1997.
(7) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1997.
(8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended October 31, 1997.
(9) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1999.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 30, 2000.
(11) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 2000.
(12) Incorporated by reference to the Registrant's Definitive Proxy Statement
for the fiscal year ended July 31, 1997.
(13) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 2001.
(14) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended January 31, 2000.
(15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended April 30, 2002.


48


INDEPENDENT AUDITORS' REPORT

The Board of Directors
United Natural Foods, Inc.:


Under date of September 4, 2002, we reported on the consolidated balance sheets
of United Natural Foods, Inc. and subsidiaries as of July 31, 2002 and 2001 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, 2002, as
contained in the annual report on Form 10-K for the year 2002. 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.

/s/ KPMG LLP
KPMG LLP


Providence, Rhode Island
September 4, 2002

49


SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS



Additions
Balance at charged to
beginning of costs Balance at
period and expenses Deductions end of period
-------------------------------------------------------------------


Year ended July 31, 2002 $ 5,041 $ 1,806 $ 855 $ 5,992

Year ended July 31, 2001 $ 3,871 $ 2,903 $ 1,732 $ 5,041

Year ended July 31, 2000 $ 2,794 $ 1,992 $ 916 $ 3,871



50