================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-21531
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)
Registrant's Telephone Number, Including Area Code: (860) 779-2800
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 |_|
As of December 3, 2002 there were 19,111,067 shares of the Registrant's Common
Stock, $0.01 par value per share, outstanding.
================================================================================
UNITED NATURAL FOODS, INC.
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2002
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 2002 and
July 31, 2002 3
Consolidated Statements of Operations for the quarters ended
October 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the quarters ended
October 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Item 4. Controls and Procedures 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 31, July 31,
(In thousands, except per share amounts) 2002 2002
ASSETS
Current assets:
Cash $ 4,399 $ 11,184
Accounts receivable, net 86,418 84,303
Notes receivable, trade 474 513
Inventories 150,386 131,932
Prepaid expenses 6,144 4,493
Deferred income taxes 4,612 4,612
Refundable income taxes -- 58
--------- ---------
Total current assets 252,433 237,095
Property & equipment, net 92,415 82,702
Other assets:
Notes receivable, trade, net 1,365 956
Goodwill 45,049 31,399
Covenants not to compete, net 221 248
Deferred taxes 800 800
Other, net 1,453 1,257
--------- ---------
Total assets $ 393,736 $ 354,457
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit $ 118,186 $ 106,109
Current installments of long-term debt 1,593 1,658
Current installment of obligations under capital leases 783 1,037
Accounts payable 67,566 52,789
Accrued expenses 20,225 18,185
Financial instruments 7,326 5,620
Income taxes payable 1,838 --
--------- ---------
Total current liabilities 217,517 185,398
Long-term debt, excluding current installments 10,867 7,677
Obligations under capital leases, excluding current
installments 936 995
--------- ---------
Total liabilities 229,320 194,070
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 5,000 shares,
none issued and outstanding -- --
Common stock, $.01 par value, authorized 50,000 shares,
issued and outstanding 19,110 at October 31, 2002;
issued and outstanding 19,106 at July 31, 2002 191 191
Additional paid-in capital 79,716 79,711
Unallocated shares of ESOP (2,054) (2,094)
Retained earnings 86,563 82,579
--------- ---------
Total stockholders' equity 164,416 160,387
--------- ---------
Total liabilities and stockholders' equity $ 393,736 $ 354,457
========= =========
See notes to consolidated financial statements.
3
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarter Ended
October 31,
-----------
(In thousands, except per share data) 2002 2001
---- ----
Net sales $ 310,993 $280,315
Cost of sales 250,157 225,314
--------- --------
Gross profit 60,836 55,001
Operating expenses 50,843 45,024
Amortization of intangibles 38 64
Operating expenses 50,881 45,088
--------- --------
Operating income 9,955 9,913
--------- --------
Other expense (income):
Interest expense 1,847 1,746
Change in fair value of financial
instruments 1,706 3,787
Other, net (238) 44
--------- --------
Total other expense 3,315 5,577
--------- --------
Income before income taxes 6,640 4,336
Income taxes 2,656 1,734
--------- --------
Net income $ 3,984 $ 2,602
========= ========
Per share data (basic):
Net income $ 0.21 $ 0.14
========= ========
Weighted average shares of common stock 19,106 18,665
========= ========
Per share data (diluted):
Net income $ 0.20 $ 0.14
========= ========
Weighted average shares of common stock 19,434 19,060
========= ========
See notes to consolidated financial statements.
4
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Quarter Ended
October 31,
-----------
(In thousands) 2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,984 $ 2,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,370 1,814
Change in fair value of financial instruments 1,706 3,787
Gain (loss) on disposals of property and equipment 9 (3)
Deferred income tax benefit -- (287)
Provision for doubtful accounts 1,060 513
Changes in assets and liabilities:
Accountsreceivable (227) (9,487)
Inventory (4,111) (14,208)
Prepaidexpenses (1,404) (643)
Refundableincometaxes 58 366
Otherassets 758 (727)
Notesreceivable,trade 95 141
Accountspayable 9,303 19,532
Accruedexpenses 750 6,038
Incometaxespayable 1,805 2,006
--------------------
Net cash provided by operating activities 16,156 11,444
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of acquired businesses, net of cash acquired (29,960) --
Proceeds from sale of property and equipment 33 16
Capital expenditures (4,313) (4,360)
--------------------
Net cash used in investing activities (34,240) (4,344)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under note payable 12,077 12,184
Repayments of long-term debt (470) (20,188)
Principal payments of capital lease obligations (312) (299)
Proceeds from exercise of stock options 4 119
--------------------
Net cash provided by (used in) financing activities 11,299 (8,184)
--------------------
NET DECREASE IN CASH (6,785) (1,084)
Cash at beginning of period 11,184 6,393
--------------------
Cash at end of period $ 4,399 $ 5,309
====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,823 $ 1,629
====================
Income taxes $ 819 $ 196
====================
In the quarter ended October 31, 2002 and 2001, the Company incurred $0 and
$628, respectively, of capital lease obligations.
See notes to consolidated financial statements.
5
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
United Natural Foods, Inc. (the "Company") and its wholly owned subsidiaries.
The Company is a distributor and retailer of natural and organic foods and
related products and sells its products throughout the United States.
The financial statements have been prepared pursuant to rules and regulations of
the Securities and Exchange Commission for interim financial information,
including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally required in
complete financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. In our opinion, these financial statements include all adjustments
necessary for a fair presentation of the results of operations for the interim
periods presented. The results of operations for interim periods, however, may
not be indicative of the results that may be expected for a full year.
2. INTEREST RATE SWAP AGREEMENTS
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
variable rate indebtedness totaling $60 million at LIBOR plus 1.50%, thereby
fixing its 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 it 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 variable rate indebtedness totaling $30 million at LIBOR plus 1.50%,
thereby fixing its 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.
The Company recorded $1.7 million and $3.8 million of expense for the quarters
ended October 31, 2002 and October 31, 2001, respectively, on its interest rate
swap agreements and related option agreements to reflect the change in fair
value of the financial instruments.
3. STOCK OPTION PLANS
The Company has adopted Statement of Financial Accounting Standards No. 123,
("SFAS 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 Accounting Principles
Board No. 25, "Accounting for Stock Issued to Employees". If the fair value
method of accounting had been used for the periods ended October 31, 2002 and
October 31, 2001, net income would have been $3.2 million and $2.0 million,
respectively, basic earnings per share would have been $0.17 and $0.11,
respectively, and diluted earnings per share would have been $0.17 and $0.11,
respectively. The fair value of each option grant was estimated using the
Black-Sholes Option Pricing Model with the following weighted average
assumptions for the periods ended October 31, 2002 and October 31, 2001:
dividend yields of 0.0% for both periods, risk free interest rates of 3.3% and
4.7%, respectively, and expected lives of five years for both periods. The
expected volatility was 63.0% and 64.0%, respectively. The effects of applying
SFAS No. 123 in this pro forma disclosure are not necessarily indicative of
future amounts.
6
The Board of Directors adopted and the stockholders approved the 2002 Stock
Incentive Plan of the Company, which provides for grants of stock options to
employees, officers, directors and others, on October 2, 2002 and December 3,
2002, respectively. These options are intended to either qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code or
be "non-statutory stock options". A total of 1,400,000 shares of common stock
may be issued upon the exercise of options granted under the 2002 Stock Option
Plan. In the quarter ended October 31, 2002, the Company granted 25,000 shares
under the 1996 Stock Option Plan. On December 3, 2002, the Company granted
approximately 490,000 under the 2002 Stock Incentive Plan.
4. EARNINGS PER SHARE
Following is a reconciliation of the basic and diluted number of shares used in
computing earnings per share:
Quarter Ended
October 31,
-----------
(In thousands) 2002 2001
---- ----
Basic weighted average shares outstanding 19,106 18,665
Net effect of dilutive stock options based
upon the treasury stock method 328 395
------ ------
Diluted weighted average shares outstanding 19,434 19,060
====== ======
Antidilutive stock options were 0 and 150 for the quarters ended October 31,
2002 and 2001, respectively.
5. ACQUISITION
On October 11, 2002, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of Blooming Prairie Cooperative
("Blooming Prairie"), a distributor of natural foods and related products in the
Midwest region of the United States, for cash consideration of $30 million. The
acquisition was financed by proceeds from the Company's line of credit. The
operating results of Blooming Prairie have been included in the accompanying
condensed consolidated financial statements of the Company beginning with the
acquisition date. Based on a preliminary purchase price allocation, the Company
has recorded goodwill of $13.7 million related to this acquisition.
6. BUSINESS SEGMENTS
The Company has several operating segments aggregated under the distribution
segment, which is the Company's only reportable segment. These operating
segments have similar products and services, customer types, distribution
methods and historical margins. The distribution segment is engaged in national
distribution of natural foods, produce 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 engaged
in importing, 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.
7
Following is business segment information for the periods indicated:
Distribution Other Eliminations Consolidated
------------ ----- ------------ ------------
Quarter Ended October 31, 2002
Net sales $299,087 $ 16,890 $ (4,984) $310,993
Operating income (loss) $ 11,415 $ (1,411) $ (49) $ 9,955
Depreciation and amortization $ 2,046 $ 324 $ -- $ 2,370
Capital expenditures $ 3,914 $ 399 $ -- $ 4,313
Total assets $525,210 $ 46,841 $(178,315) $393,736
Quarter Ended October 31, 2001
Net sales $269,992 $ 15,501 $ (5,178) $280,315
Operating income (loss) $ 10,423 $ (506) $ (4) $ 9,913
Depreciation and amortization $ 1,571 $ 243 $ -- $ 1,814
Capital expenditures $ 3,994 $ 366 $ -- $ 4,360
Total assets $466,034 $ 2,187 $(141,328) $326,893
Item 2. 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, Inc in the Eastern
Region, Mountain People's Warehouse, Inc. and Rainbow Natural Foods, Inc in the
Western Region, Blooming Prairie in the Midwest and Albert's Organics 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 Import 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 and relocation 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, Los Angeles, California, and the
relocation of our Atlanta, Georgia facility. At the end of fiscal year 2002, the
increased capacity of our distribution centers was approximately 1,000,000
square feet greater than it was five years ago.
We are in the process of 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, integrate our pending
acquisition of Northeast Cooperatives into existing facilities, 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
8
markets. To this end, 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. 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 $125 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 by December 14, 2002.
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, the change in fair value of
financial instruments and miscellaneous income and expenses.
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.
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 $86.4 million, net of allowance for doubtful accounts of
$6.5 million, and $84.3 million, net of allowance for doubtful accounts of $5.8
million, as of October 31, 2002 and July 31, 2002, respectively. Our notes
receivable balance was $1.8 million, net of allowance for doubtful accounts of
$0.7 million, and $1.5 million, net of allowance of $0.2 million, as of October
31, 2002 and July 31, 2002, 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. We adopted the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets" on August 1, 2001. Goodwill is no longer amortized and is
tested annually for impairment. There can be no assurance that at our annual
review a material impairment charge will not be recorded.
9
Results of Operations
The following table presents, for the periods indicated, certain income and
expense items expressed as a percentage of net sales:
Quarter Ended
October 31,
------------------
2002 2001
------------------
Net sales 100.0% 100.0%
Cost of sales 80.4% 80.4%
------------------
Gross profit 19.6% 19.6%
------------------
Operating expenses 16.3% 16.1%
------------------
Total operating expenses 16.4% 16.1%
------------------
Operating income 3.2% 3.5%
------------------
Other expense (income):
Interest expense 0.6% 0.6%
Change in value of financial instruments 0.5% 1.4%
Other, net (0.1)% 0.0%
------------------
Total other expense 1.1% 2.0%
------------------
Income before income taxes 2.1% 1.5%
Income taxes 0.9% 0.6%
------------------
Net income 1.3% 0.9%
==================
The following table presents, for the periods indicated, a reconciliation of
income and per share items including special items to income and per share items
excluding special items:
- --------------------------------------------------------------------------------
Quarter Ended October 31, 2002 Pretax Per diluted
(in thousands, except per share data) Income Net of Tax share
Income, excluding special items: $8,920 $5,352 $0.28
Less: special items
Interest rate swap agreements (change in
value of financial instruments) 1,706 1,023 0.05
Costs related to loss of major customer
(included in operating expenses) 574 345 0.02
- --------------------------------------------------------------------------------
Income, including special items: $6,640 $3,984 $0.20
================================================================================
- --------------------------------------------------------------------------------
Quarter Ended October 31, 2001 Pretax Per diluted
(in thousands, except per share data) Income Net of Tax share
Income, excluding special items: $8,180 $4,908 $0.26
Less: special items
Interest rate swap agreement (change in
value of financial instruments) 3,787 2,272 0.12
Costs related to relocating distribution
center (included in operating expenses) 57 34 --
- --------------------------------------------------------------------------------
Income, including special items: $4,336 $2,602 $0.14
================================================================================
10
Quarter Ended October 31, 2002 Compared To Quarter Ended October 31, 2001
Net Sales.
Our net sales increased approximately 10.9%, or $30.7 million, to $311.0 million
for the quarter ended October 31, 2002 from $280.3 million for the quarter ended
October 31, 2001. This increase was due primarily to growth in the independent
and mass-market distribution channels of approximately 11.8% and 21.4%,
respectively. The supernatural distribution channel increased approximately
5.5%. Included in these increases are sales from the Blooming Prairie division,
acquired on October 11, 2002, and Boulder Fruit Express, acquired on November 7,
2001. Sales growth for the quarter, excluding the effect of acquisitions, was
6.5%. Sales growth was also impacted by the transition of the Company's
second-largest customer, Wild Oats, Inc., to a new primary distributor. Sales
growth excluding these acquisitions and the impact of this transition was 16.5%.
Sales to our two largest customers, Whole Foods Market, Inc. and Wild Oats,
Inc., represented approximately 22.8% and 6.1%, respectively, of net sales for
the quarter ended October 31, 2002. Whole Foods Market, Inc. represented
approximately 17.7% and Wild Oats, Inc. represented approximately 14.3% of net
sales for the quarter ended October 31, 2001. Whole Foods Market, Inc. has
extended its 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. Our contract as
primary distributor to Wild Oats, Inc. was not renewed past its expiration date
of August 31, 2002. However, we continue to distribute to Wild Oats, Inc. and
expect revenue of approximately $12 million to $20 million in fiscal 2003. We
believe sales growth for the quarter ending January 31, 2003 will be in the 9%
to 12% range. We believe sales growth excluding acquisitions and the effects of
losing Wild Oats to a new primary distributor will be in the mid-teens.
Gross Profit.
Our gross profit increased approximately 10.6%, or $5.8 million, to $60.8
million for the quarter ended October 31, 2002 from $55.0 million for the
quarter ended October 31, 2001. Our gross profit as a percentage of net sales
was 19.6% for the quarters ended October 31, 2002 and October 31, 2001. We
expect our gross margin as a percentage of sales to be in the mid- to high 19%
range for the remainder of fiscal 2003.
Operating Expenses.
Our total operating expenses, excluding special charges, increased approximately
11.7%, or $5.3 million, to $50.3 million for the quarter ended October 31, 2002
from $45.0 million for the quarter ended October 31, 2001. As a percentage of
net sales, operating expenses, excluding special charges, increased to 16.2% for
the quarter ended October 31, 2002 from 16.1% for the quarter ended October 31,
2001. The increase in operating expenses was due primarily to lower productivity
and higher than expected operating expenses since relocating the operations at
our Hershey Import division during our last fiscal quarter. We also experienced
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. Operating expenses for the quarter ended October 31, 2002
11
included special charges of $0.6 million related to the transition of our second
largest customer to a new primary distributor and consisted primarily of
severance and expenses related to the transfer of private label inventory.
Operating expenses for the quarter ended October 31, 2001 included special
charges of $0.1 million related to the relocation of our Atlanta, Georgia
distribution facility. Operating expenses, including special charges, increased
approximately 12.8%, or $5.8 million, to $50.9 million from $45.1 million for
the quarter ended October 31, 2001. As a percentage of sales, operating
expenses, including special charges, increased to 16.4% for the quarter ended
October 31, 2002 from 16.1% for the quarter ended October 31, 2001. We expect
operating expenses as a percentage of sales to be in the low to 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 and we integrate our Blooming
Prairie acquisition. We expect to incur additional special charges as we
increase our warehouse capacity.
Operating Income.
Operating income, excluding the special charges discussed above, increased $0.5
million to $10.5 million for the quarter ended October 31, 2002 from $10.0
million for the quarter ended October 31, 2001. As a percentage of sales,
operating income, excluding special charges, decreased to 3.4% for the quarter
ended October 31, 2002 compared to 3.6% for the quarter ended October 31, 2001.
Operating income, including special charges, was $10.0 million for the quarter
ended October 31, 2002 and $9.9 million for the quarter October 31, 2001.
Other Expense (Income).
Other expense, excluding the change in fair value of financial instruments,
decreased $0.2 million to $1.6 million for the quarter ended October 31, 2002
from $1.8 million for the quarter ended October 31, 2001. Interest expense for
the quarter ended October 31, 2002 was $1.8 million compared to $1.7 million for
the quarter ended October 31, 2001. This increase in interest expense is due to
higher debt levels substantially offset by lower interest rates. Other expense,
including the change in fair value of financial instruments, decreased $2.3
million to $3.3 million for the quarter ended October 31, 2002 from $5.6 million
for the quarter ended October 31, 2001. This decrease was primarily due to the
decrease in the change in fair value on our interest rate swap agreements and
related option agreements. 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 quarters ended October 31, 2002
and 2001. The effective rates were higher than the federal statutory rate
primarily due to state and local income taxes.
Net Income.
As a result of the foregoing, net income, excluding special items, increased
$0.5 million to $5.4 million, or $0.28 per diluted share, for the quarter ended
October 31, 2002, compared to $4.9 million, or $0.26 per diluted share, for the
quarter ended October 31, 2001. Net income, including special charges, increased
$1.4 million to $4.0 million, or $0.20 per diluted share, for the quarter ended
October 31, 2002, compared to $2.6 million, or $0.14 per diluted share, for the
quarter ended October 31, 2001. We expect earnings per diluted share, excluding
any special items, to be in the range of $0.26 to $0.28 for the second quarter
of fiscal 2003, and to be in the range of $1.18 to $1.20 for all of fiscal 2003.
12
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. Our secured revolving credit facility is $150
million. Interest accrues, at the Company's option, either at the New York Prime
Rate or 1.50% above the banks' London Interbank Offered Rate. On October 23,
2002, we arranged for a temporary borrowing base increase of $15.0 million
secured by real estate which increased our net borrowing base to $150 million
with an unused availability of $25.1 million. Additionally, we expect to procure
$30.0 million in additional long-term financing secured by our real estate
during our second quarter.
Net cash provided by operations was $16.2 million for the quarter ended October
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. Days in inventory increased to
52 days at October 31, 2002 from 48 days at October 31, 2001. Days sales
outstanding at October 31, 2002 was 29 days compared to 31 days at October 31,
2001. Net cash provided by operations was $11.4 million for the quarter ended
October 31, 2001 and was due to cash collected from customers, net of cash paid
to vendors, exceeding our investments in accounts receivable and inventory.
Working capital at October 31, 2002 was $35.0 million.
Net cash used in investing activities was $34.2 million for the quarter ended
October 31, 2002, and was due primarily to the purchase of substantially all the
assets of Blooming Prairie, headquartered in Iowa City, Iowa, and the initial
costs of the expansion of our Chesterfield, New Hampshire facility. Net cash
used in investing activities was $4.3 million for the same period last year, and
was due primarily to the development of our new Atlanta and Los Angeles
facilities.
Net cash provided by financing activities was $11.3 million for the quarter
ended October 31, 2002, due to increased borrowings on our line of credit and
our equipment financing lines, offset by repayment of long-term debt. Net cash
used in financing activities was $8.2 million for the quarter ended October 31,
2001, due to increased borrowings on our line of credit offset by repayment of
long-term debt as a result of the establishment of our $150 million secured
revolving credit facility.
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 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 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.
13
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.
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.
Certain Factors That May Affect Future Results
This Form 10-Q and the documents incorporated by reference in this Form 10-Q
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 Form 10-Q,
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 Form 10-Q could
have an adverse effect on our business, results of operations and financial
position.
Any forward-looking statements in this Form 10-Q and the documents incorporated
by reference in this Form 10-Q 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.
14
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,
including our acquisition of substantially all of the assets of Blooming Prairie
Cooperative Warehouse on October 11, 2002. 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.
The integration process could divert the attention of management and any
difficulties or problems encountered in the transition process could have a
material adverse effect on our business, financial condition or results of
operations. In addition, the process of combining companies 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.
Access to capital and the cost of that capital
On October 23, 2002, we arranged for a temporary borrowing base increase of
$15.0 million secured by real estate which increased our net borrowing base to
$150 million with an unused availability of $25.1 million. Additionally, we
expect to procure $30.0 million in additional long-term financing secured by our
real estate during our second quarter. Future low cash availability levels could
restrict our ability to expand our business. 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.
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 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.
15
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 mass-market grocery 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 us, to evolving industry trends
or changing market conditions. It is also possible that alliances among
competitors may develop or that certain of our customers will increase
distribution to their own retail facilities. Increased competition may result in
price reductions, reduced gross margins and loss of market share, any of which
could materially adversely affect our business, financial condition or results
of operations. There can be no assurance that we will be able to compete
effectively against current and future competitors.
We depend heavily on our principal customers
Our 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 $12 million to $20 million
from such distribution in fiscal 2003. Whole Foods Market, Inc. and Wild Oats,
Inc. accounted for approximately 22.8% and 6.1%, respectively, of our net sales
during the quarter ended October 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.
16
Our industry is sensitive to economic downturns
The grocery industry is 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 H. Townsend, President, Todd
Weintraub, Chief Financial Officer, Kevin Michel, President of the Western
Region, Daniel V. Atwood, Senior Vice President and Secretary, Richard
Antonelli, Eastern Region President and other key management employees. We
announced on December 3, 2002, that Steven H. Townsend has been appointed to the
position of President and Chief Executive Officer effective January 1, 2003.
Michael S. Funk, currently United Natural Foods' Chief Executive Officer and
Vice Chair of the Board, has been elected Chair of the Board of Directors. Loss
of the services of any additional officers or any other key management employee
could have a material adverse effect on our business, financial condition or
results of operations.
Our operating results are subject to significant fluctuations
Our net sales and operating results may vary significantly from period to period
as a result of:
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.
17
Due to the foregoing factors, we believe that period-to-period comparisons of
our operating results may not necessarily be meaningful, and that such
comparisons cannot be relied upon as indicators of future performance.
We are subject to significant governmental regulation
Our business is highly regulated at the federal, state and local levels and our
products and distribution operations require various licenses, permits and
approvals. In particular:
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 October 31, 2002, approximately 381 employees, representing approximately
13% of our approximately 2,950 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We do not believe that there is any material market risk exposure with respect
to derivative or other financial instruments that would require disclosure under
this item.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of
the Securities Exchange Act of 1934, as amended). Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely reporting material
information required to be included in our periodic reports filed with the
Securities and Exchange Commission. In addition, we reviewed our internal
controls, and there have been no significant changes in our internal controls or
in other factors that could significantly affect those internal controls
subsequent to the date we carried out our last evaluation.
18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
- -----------------------------------------------------------------------
Exhibit No. Description Page
- -----------------------------------------------------------------------
99.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 - CEO
- -----------------------------------------------------------------------
99.2 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 - CFO
- -----------------------------------------------------------------------
99.3 Third Amendment to Loan and Security with
Fleet Capital Corporation dated October
17, 2002.
- -----------------------------------------------------------------------
99.4 Fourth Amendment to Loan and Security
with Fleet Capital Corporation dated
October 23, 2002.
- -----------------------------------------------------------------------
99.5 Employment Agreement between Steven H.
Townsend and United Natural Foods, Inc.
- -----------------------------------------------------------------------
Reports on Form 8-K
Current Report on Form 8-K, filed with the Commission on August 7, 2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED NATURAL FOODS, INC.
/s/ Todd Weintraub
-----------------------------
Todd Weintraub
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: December 13, 2002
20
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 quarterly report on Form 10-Q of United
Natural Foods, Inc., a Delaware corporation (the "Company").
2. Based on my knowledge, this quarterly 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
quarterly report.
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly
report.
4. The Company's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as amended) for the Company
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Company's auditors
and the audit committee of the Company's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls.
21
6. The Company's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ Michael S. Funk
--------------------------
Michael S. Funk
Chief Executive Officer
December 13, 2002
22
Certification of Chief Financial Officer
I, Todd Weintraub, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of United
Natural Foods, Inc., a Delaware corporation (the "Company").
2. Based on my knowledge, this quarterly 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
quarterly report.
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly
report.
4. The Company's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as amended) for the Company
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Company's auditors
and the audit committee of the Company's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls.
6. The Company's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ Todd Weintraub
-----------------------
Todd Weintraub
Chief Financial Officer
December 13, 2002
23