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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 January 31, 2003
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) (Zip Code)
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
As of March 6, 2003 there were 19,151,441 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 JANUARY 31, 2003
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of January 31, 2003 and
July 31, 2002 3
Consolidated Statements of Operations for the three and six
months ended January 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the six months ended
January 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Certifications 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
January July
(In thousands, except per share amounts) 31, 2003 31, 2002
ASSETS
Current assets:
Cash $ 11,827 $ 11,184
Accounts receivable, net 84,785 84,303
Notes receivable, trade 448 513
Inventories 151,696 131,932
Prepaid expenses 7,790 4,493
Deferred income taxes 4,612 4,612
Refundable income taxes 303 58
---------- ----------
Total current assets 261,461 237,095
Property & equipment, net 97,956 82,702
Other assets:
Notes receivable, trade, net 2,954 956
Goodwill 60,564 31,399
Intangibles, net 1,286 248
Other, net 2,184 2,057
---------- ----------
Total assets $ 426,405 $ 354,457
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit $ 137,501 $ 106,109
Current installments of long-term debt 1,595 1,658
Current installment of obligations under capital leases 923 1,037
Accounts payable 70,342 52,789
Accrued expenses 26,715 18,185
Financial instruments 7,099 5,620
---------- ----------
Total current liabilities 244,175 185,398
Long-term debt, excluding current installments 10,481 7,677
Obligations under capital leases, excluding current
installments 1,365 995
---------- ----------
Total liabilities 256,021 194,070
---------- ----------
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 19,135 at
January 31, 2003;
issued and outstanding 19,106 at July 31, 2002 191 191
Additional paid-in capital 80,135 79,711
Unallocated shares of ESOP (2,013) (2,094)
Retained earnings 92,071 82,579
---------- ----------
Total stockholders' equity 170,384 160,387
---------- ----------
Total liabilities and stockholders' equity $ 426,405 $ 354,457
========== ==========
See notes to consolidated financial statements.
3
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarter Ended Six Months Ended
January 31, January 31,
(In thousands, except per share
data) 2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 338,447 $ 285,461 $ 649,440 $ 565,776
Cost of sales 272,360 228,949 522,518 454,263
--------- --------- --------- ---------
Gross profit 66,087 56,512 126,922 111,513
Operating expenses 55,178 47,258 106,020 92,282
Restructuring and asset impairment charges -- 424 -- 424
Amortization of intangibles 66 13 104 77
--------- --------- --------- ---------
Total Operating expenses 55,244 47,695 106,124 92,783
--------- --------- --------- ---------
Operating income 10,843 8,817 20,798 18,730
--------- --------- --------- ---------
Other expense (income):
Interest expense 2,072 1,643 3,919 3,389
Change in fair value of financial
instruments (226) (1,358) 1,479 2,429
Other, net (183) (158) (420) (114)
--------- --------- --------- ---------
Total other expense 1,663 127 4,978 5,704
--------- --------- --------- ---------
Income before income taxes 9,180 8,690 15,820 13,026
Income taxes 3,672 3,476 6,328 5,210
--------- --------- --------- ---------
Net income $ 5,508 $ 5,214 $ 9,492 $ 7,816
========= ========= ========= =========
Per share data (basic):
Basic earnings per share $ 0.29 $ 0.28 $ 0.50 $ 0.42
========= ========= ========= =========
Weighted average shares of common stock 19,119 18,915 19,113 18,790
========= ========= ========= =========
Per share data (diluted):
Diluted earnings per share $ 0.28 $ 0.27 $ 0.49 $ 0.41
========= ========= ========= =========
Weighted average shares of common stock 19,526 19,371 19,471 19,217
========= ========= ======== =========
See notes to consolidated financial statements.
4
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
January 31,
----------------
(In thousands) 2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,492 $ 7,816
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,051 3,783
Change in fair value of financial instruments 1,479 2,429
(Gain) Loss on disposals of property and equipment (6) 296
Deferred income tax benefit -- (605)
Provision for doubtful accounts 1,699 1,045
Changes in assets and liabilities, net of effects of
acquired companies:
Accounts receivable 5,242 (10,280)
Inventory 2,934 (15,864)
Prepaid expenses (1,328) (307)
Refundable income taxes (246) (426)
Other assets (1,603) (1,348)
Notes receivable, trade (1,467) (182)
Accounts payable 2,658 14,083
Accrued expenses 1,331 5,842
--------------------
Net cash provided by operating activities 25,236 6,282
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of acquired businesses, net of cash
acquired (43,724) 65
Proceeds from sale of property and equipment 47 21
Capital expenditures (11,221) (20,437)
--------------------
Net cash used in investing activities (54,898) (20,351)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under note payable 31,392 31,961
Repayments of long-term debt (854) (20,411)
Principal payments of capital lease obligations (657) (543)
Proceeds from exercise of stock options 424 1,448
--------------------
Net cash provided by financing activities 30,305 12,455
--------------------
NET INCREASE (DECREASE) IN CASH 643 (1,614)
Cash at beginning of period 11,184 6,393
--------------------
Cash at end of period $ 11,827 $ 4,779
====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,798 $ 3,299
====================
Income taxes $ 3,911 $ 7,095
====================
In the six months ended January 31, 2003 and 2002, the Company incurred $0 and
$628, respectively, of capital lease obligations. In the six months ended
January 31, 2002 the fair value of common stock issued for the acquisition of
subsidiary was $4,250.
See notes to consolidated financial statements.
5
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2003 (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.
LIBOR was 1.35% as of January 31, 2003. 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 $0.2 million of income for the quarter ended January 31,
2003 on its interest rate swap agreements and related option agreements to
reflect the change in fair value of the financial instruments. For the six
months ended January 31, 2003 and 2002, the company recorded $1.5 million and
$2.4 million, respectively, of expense on its interest rate swap agreements and
related option agreements.
3. STOCK OPTION PLANS
At January 31, 2003, the Company had two stock option plans. As permitted by
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), as amended
by Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"),
"Accounting for Stock-Based Compensation," the Company accounts for those plans
under the recognition and measurement principles of Accounting Principles Board
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations.
No stock-based employee compensation costs has been reflected in net income, as
all options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provision of SFAS No. 123 and SFAS No. 148 to stock-based
employee compensation:
6
(in thousands, except per Quarter ended January 31, Six months ended January 31,
share data)
2003 2002 2003 2002
Net income - as reported $5,508 $5,214 $9,492 $7,816
------ ------ ------ ------
Deduct:
Total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects 917 745 1,687 1,336
------ ------ ------ ------
Net income - pro forma $4,591 $4,469 $7,805 $6,480
------ ------ ------ ------
Basic earnings per share
As reported $0.29 $0.28 $0.50 $0.42
------ ------ ------ ------
Pro forma $0.24 $0.24 $0.41 $0.34
------ ------ ------ ------
Diluted earnings per share
As reported $0.28 $0.27 $0.49 $0.41
------ ------ ------ ------
Pro forma $0.24 $0.23 $0.40 $0.34
------ ------ ------ ------
The effects of applying SFAS No. 123 and SFAS No. 148 in this pro forma
disclosure are not necessarily indicative of future amounts. The Company
estimates the fair value of each option as of the date of grant using the
Black-Scholes pricing model with the following weighted average assumptions used
for grants in 2003 and 2002:
Quarter ended January 31, Six months ended January 31,
2003 2002 2003 2002
---- ---- ---- ----
Expected volatility 62.0% 64.0% 62.0% 64.0%
Dividend yield 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate 3.3% 4.7% 3.3% 4.7%
Expected life 5 years 5 years 5 years 5 years
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". In the quarter ended January 31, 2003, the
Company granted approximately 34,000 shares under the 1996 Stock Option Plan and
approximately 457,496 under the 2002 Stock Incentive Plan.
The following table summarizes the stock option activity of the 1996 Stock
Option Plan since its inception through January 31, 2003:
Shares
- -----------------------------------------
Authorized 2,500,000
Granted 3,076,100
Cancelled 576,100
----------
Remaining authorized --
- -----------------------------------------
The following table summarizes the stock option activity of the 2002 Stock
Incentive Plan since its inception through January 31, 2003:
Shares
- -----------------------------------------
Authorized 1,400,000
Granted 457,496
Cancelled 0
----------
Remaining authorized 942,504
- -----------------------------------------
7
4. EARNINGS PER SHARE
Following is a reconciliation of the basic and diluted number of shares used in
computing earnings per share:
Quarter Ended Six Months Ended
January 31, January 31,
(In thousands) 2003 2002 2003 2002
---- ---- ---- ----
Basic weighted average shares
outstanding 19,119 18,915 19,113 18,790
Net effect of dilutive stock
options based upon the treasury
stock method 407 456 358 427
------ ------ ------ ------
Diluted weighted average shares
outstanding 19,526 19,371 19,471 19,217
====== ====== ====== ======
Employee stock options to purchase approximately 0.3 million and 0.4 million
shares in the quarters ended January 31, 2003 and January 31, 2002,
respectively, and 0.7 million shares and 0.2 million shares in the six months
ended January 31, 2003 and January 31, 2002, respectively, were outstanding, but
were not included in the computation of diluted earnings per share because the
exercise price of the stock options was greater than the average share price of
the common shares and, therefore, the effect would have been antidilutive.
5. ACQUISITIONS
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 $29.6 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. The Company has recorded goodwill of $13.5 million related to
this acquisition. Blooming Prairie Cooperative carries and distributes
approximately 15,000 products to more than 2,700 customers primarily in the
Midwest region of the United States. Blooming Prairie serves a wide variety of
retail formats including conventional supermarket chains, natural product
superstores, independent retail operators, cooperatives and buying clubs. The
acquisition of Blooming Prairie will help the Company to achieve its stated goal
of broadening its presence and increasing its penetration in the growing Midwest
market. Blooming Prairie's two strategically located distribution facilities in
Iowa and Minnesota will enable the company to broaden its market share in this
region cost effectively.
On December 31, 2002, the Company acquired by merger privately held Northeast
Cooperatives, a natural food distributor, headquartered in Brattleboro, Vermont,
which services customers in the Northeast and Midwest regions of the United
States, for cash consideration of $14.1 million. The acquisition was financed by
proceeds from the Company's line of credit. The operating results of Northeast
Cooperatives 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
$15.7 million related to this acquisition, reflecting the cost of the
acquisition and additional liabilities recorded. Northeast Cooperatives carries
and distributes over 14,000 products to approximately 2,800 customers primarily
in the Northeast region of the United States. Northeast Cooperatives serves a
wide variety of retail formats including conventional supermarket chains,
natural product superstores, independent retail operators, cooperatives,
institutions and buying clubs. The addition of Northeast Cooperatives will
provide the Company with an expanded customer base, new channels of distribution
and significant synergies as it consolidates the Northeast Cooperatives
operation into its expanded Chesterfield, New Hampshire distribution facility
during the summer of 2003.
The following presents the unaudited pro forma results assuming that the
acquisitions discussed above had occurred as of the beginning of fiscal 2002.
These pro forma results are not necessarily indicative of the results that will
occur in future periods.
8
(In thousands except per Quarter ended Six months ended
share data) January 31, January 31,
2003 2002 2003 2002
-------- -------- -------- --------
Pro forma Pro forma Pro forma Pro forma
Net sales $360,383 $346,556 $729,734 $684,849
Income before income taxes 8,373 8,594 15,091 12,183
-------- -------- -------- --------
Net income 5,024 5,156 9,055 7,310
======== ======== ======== ========
Basic earnings per common share:
Net income $ 0.26 $ 0.27 $ 0.47 $ 0.39
======== ======== ======== ========
Diluted earnings per share:
Net income $ 0.26 $ 0.27 $ 0.47 $ 0.38
======== ======== ======== ========
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 the "Other" caption in the
segment information. The "Other" caption also includes corporate expenses that
are not allocated to operating segments.
Following is business segment information for the periods indicated:
Distribution Other Eliminations Consolidated
------------ ----- ------------ ------------
Six Months Ended January 31, 2003
Net sales $626,243 $ 33,209 $ (10,012) $649,440
Operating income (loss) $ 23,916 $ (3,079) $ (39) $ 20,798
Depreciation and amortization $ 4,399 $ 652 $ -- $ 5,051
Capital expenditures $ 10,654 $ 567 $ -- $ 11,221
Total assets $572,769 $ 46,160 $(192,524) $426,405
Six Months Ended January 31, 2002
Net sales $544,451 $ 31,838 $ (10,513) $565,776
Operating income (loss) $ 19,971 $ (1,266) $ 25 $ 18,730
Depreciation and amortization $ 3,280 $ 503 -- $ 3,783
Capital expenditures $ 19,952 $ 485 $ -- $ 20,437
Total assets $456,601 $ 37,484 $(144,858) $349,227
7. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Emerging Issues Task Force issue No. 02-16 (EITF 0-2-16) "Accounting by a
Reseller for Cash Consideration Received," becomes effective for the Company
during the third quarter of fiscal 2003. This issue addresses the appropriate
accounting for cash consideration received from a vendor. The consensus reached
on this issue was that cash consideration received from a vendor is presumed to
be a reduction of the cost of sales and should be recorded as a reduction of
cost of goods sold unless the consideration is for either (1) payment for assets
or services and therefore revenue, or (2) a reimbursement of costs incurred to
sell the vendor's products and therefore, a reduction of advertising expense.
The Company's current accounting for funds received from vendors is consistent
with that proposed under EITF 02-16; therefore, this issue will not have a
material effect on the Company's consolidated financial statements.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantee, Including Guarantees of Indebtedness of Others."
Disclosures related to this interpretation are effective and the accounting
requirements are effective January 1, 2003. FIN 45 requires all guarantees and
indemnifications within its scope to be recorded at fair value as liabilities
and the disclosure of the maximum possible loss to the Company under these
guarantees and indemnifications. Management is still evaluating the impact of
the
9
recognition requirements of FIN 45, but does not believe that its adoption
will have a material impact on the Company's consolidated financial statements.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148
(SFAS 148), "Accounting for Stock-Based Compensation Costs--Transition and
Disclosure." This statement amends SFAS No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," and provides alternative methods of transition for an
entity that voluntarily changes to the fair value-based method of accounting for
stock-based compensation. It also requires additional disclosures about the
effects on reported net income of an entity's accounting policy with respect to
stock-based employee compensation. As discussed under the accounting for stock
options in Item 1, note 3 to the consolidated financial statements, the Company
accounts for stock-based compensation in accordance with Accounting Principles
Board No. 25, "Accounting for Stock Issued to Employees," and has adopted the
disclosure-only alternative of SFAS 123. The Company adopted the disclosure
provisions of SFAS 148 for fiscal 2003.
On January 17, 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an
interpretation of ARB 51." The primary objectives of FIN 46 are to provide
guidance on the identification and consolidate of variable interest entities, or
VIEs, which are entities for which control is achieved through means other than
through voting rights. The Company has completed an analysis of FIN 46 and has
determined that it does not have any VIEs.
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 were initiated after December 31, 2002.
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 and
organic products distributors, the expansion of existing distribution centers
and the continued growth of the natural and organic 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 three principal units: United Natural Foods, Inc. in the
Eastern Region, Mountain People's Warehouse, Inc., Rainbow Natural Foods, Inc.
and Blooming Prairie in the Western Region, 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 and organic products retail stores located in
Florida, Maryland and Massachusetts. 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 three 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 completed expansions of our facilities located
in Auburn, California, New Oxford, Pennsylvania, Los Angeles, California, and
the relocation of our Atlanta, Georgia facility. 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. Upon completion of the
expansion of our Chesterfield, New Hampshire facility in the summer of 2003, the
increased capacity of our distribution centers will be approximately 1,400,000
square feet greater than it was five years ago.
We continue to increase our leading market share of the growing natural and
organic 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
10
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
December 31, 2002, we acquired by merger Northeast Cooperatives, a distributor
of natural foods and products in the Eastern United States, headquartered in
Brattleboro, Vermont, and in business since 1973. The expansion of our
Chesterfield, New Hampshire distribution facility will enable us to service
existing and new customers, integrate our recent 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 expansion expenses are incurred, over the long term we expect to benefit
from the increased absorption of our expenses over a larger sales base.
Our net sales consist primarily of sales of natural and organic products to
retailers adjusted for customer incentives, 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 insurance reserves,
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 $84.8 million, net of allowance for doubtful accounts of
$6.8 million, and $84.3 million, net of allowance for doubtful accounts of $5.8
million, as of January 31, 2003 and July 31, 2002, respectively. Our notes
receivable balance was $3.4 million, net of allowance for doubtful accounts of
$0.7 million, and $1.5 million, net of allowance for doubtful accounts of $0.2
million, as of January 31, 2003 and July 31, 2002, respectively.
Valuation of goodwill and intangible assets
Intangible assets consist principally of goodwill, covenants not to compete and
customer supply agreements. Goodwill represents the excess purchase price over
fair value of net assets acquired in connection with purchase business
combinations. Covenants not to compete and customer supply agreements are
initially recorded at fair value, and are amortized using the straight-line
method over the lives of the respective agreements, generally three to five
years. We adopted the Financial Accounting Standards Board Statement of
Financial Accounting Standards 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 upon performance of our annual review
a material impairment charge will not be recorded.
Insurance reserves
It is the Company's policy to record the self-insured portion of its workers'
compensation and automobile liabilities based upon actuarial estimates of the
future cost of claims and related expenses that have been reported but not
settled, and that have been incurred but not yet reported. Any projection of
losses concerning workers' compensation and automobile liability is subject to a
considerable degree of variability. Among the causes of this variability are
unpredictable external factors affecting litigation trends, benefit level
changes and claim settlement patterns. If actual claims incurred are greater
than those anticipated, the Company's reserves may be insufficient and
additional costs could be recorded in the consolidated financial statements.
11
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 Six Months Ended
January 31, January 31,
---------------- ----------------
2003 2002 2003 2002
---------------- ----------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 80.5% 80.2% 80.5% 80.3%
------ ------ ------ ------
Gross profit 19.5% 19.8% 19.5% 19.7%
------ ------ ------ ------
Operating expenses 16.3% 16.6% 16.3% 16.3%
Restructuring and asset impairment charges -- .1% -- .1%
------ ------ ------ ------
Total operating expenses 16.3% 16.7% 16.3% 16.4%
------ ------ ------ ------
Operating income 3.2% 3.1% 3.2% 3.3%
------ ------ ------ ------
Other expense (income):
Interest expense 0.6% 0.6% 0.6% 0.6%
Change in fair value of financial
instruments -0.1% -0.5% 0.2% 0.4%
Other, net -0.1% -0.1% -0.1% 0.0%
------ ------ ------ ------
------ ------ ------ ------
Total other expense 0.5% 0.0% 0.8% 1.0%
------ ------ ------ ------
Income before income taxes 2.7% 3.0% 2.4% 2.3%
Income taxes 1.1% 1.2% 1.0% 0.9%
------ ------ ------ ------
Net income 1.6% 1.8% 1.5% 1.4%
====== ====== ====== ======
12
The following tables present, for the periods indicated, a reconciliation of
income and per share items excluding special items to income and per share items
including special items:
- ---------------------------------------------------------------------------------------------------
(In thousands, except per Quarter Ended January 31, 2003 Six Months Ended January 31, 2003
share data)
Per Per
Pretax Net of diluted Pretax Net of diluted
Income Tax share Income Tax share
Income, excluding special items: $ 9,023 $ 5,414 $0.28 $17,943 $10,766 $0.55
Less: special items
(income)/expense
Interest rate swap agreements
(change in value of financial
instruments) (226) (136) (0.01) 1,480 887 0.04
Costs related to loss of
major customer (included in
operating expenses) -- -- -- 574 345 0.02
Costs related to the
expansion of Chesterfield,
New Hampshire (included in
operating expenses) 69 42 0.00 69 42 0.00
- ---------------------------------------------------------------------------------------------------
Income, including special items: $ 9,180 $ 5,508 $0.28* $15,820 $ 9,492 $0.49
===================================================================================================
- ---------------------------------------------------------------------------------------------------
(In thousands, except per Quarter Ended January 31, 2002 Six Months Ended January 31, 2002
share data)
Per Per
Pretax Net of diluted Pretax Net of diluted
Income Tax share Income Tax share
Income, excluding special items: $ 8,667 $ 5,200 $0.27 $16,847 $10,108 $0.53
Less: special items
(income)/expense
Interest rate swap agreement
(change in value of financial
instruments) (1,358) (815) (0.04) 2,429 1,457 0.08
Costs related to relocating
Atlanta, Georgia distribution
center (included in operating
expenses) 1,335 801 0.04 1,392 835 0.04
- ---------------------------------------------------------------------------------------------------
Income, including special items: $ 8,690 $ 5,214 $0.27 $13,026 $ 7,816 $0.41
===================================================================================================
* Total reflects rounding
13
Quarter Ended January 31, 2003 Compared To Quarter Ended January 31, 2002
Net Sales.
Our net sales increased approximately 18.6%, or $52.9 million, to $338.4 million
for the quarter ended January 31, 2003 from $285.5 million for the quarter ended
January 31, 2002. This included growth in the independent and mass market
distribution channels of approximately 28% and 30%, respectively. Sales in the
supernatural distribution channel were unchanged compared to the same period
last year due primarily to the previously announced transition of the Company's
former second-largest customer, Wild Oats, Inc., to a new primary distributor.
Included in these increases was a full quarter of net sales from our Blooming
Prairie division, acquired on October 11, 2002, and one month of net sales from
Northeast Cooperatives, acquired on December 31, 2002. Sales growth for the
quarter, excluding the effect of acquisitions, was 2.3%. Sales growth was also
impacted by the transition of the Company's former second-largest customer, Wild
Oats, Inc., to a new primary distributor. Sales growth excluding the effect of
acquisitions and sales in each period to the Company's former second largest
customer, Wild Oats, Inc., was 17.4%. We believe sales growth for the quarter
ending April 30, 2003 will be in the 18% to 22% range.
Sales to our largest customer, Whole Foods Market, Inc. represented
approximately 25.5% of net sales for the quarter ended January 31, 2003. Whole
Foods Market, Inc. represented approximately 19.2% and Wild Oats, Inc.
represented approximately 14.4% of net sales for the quarter ended January 31,
2002. Whole Foods Market, Inc. has extended its current distribution arrangement
through August 31, 2004. 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
$25 million to $30 million in fiscal 2003.
Gross Profit.
Our gross profit increased approximately 16.9%, or $9.6 million, to $66.1
million for the quarter ended January 31, 2003 from $56.5 million for the
quarter ended January 31, 2002. Our gross profit as a percentage of net sales
decreased to 19.5% from 19.8% for the quarter ended January 31, 2002. Our
increase in gross profit as a result of losing the Wild Oats, Inc. business,
which as a large customer received volume discounts, was more than offset by
lower gross profit margins in our acquired businesses and a lower than expected
gross profit at our Hershey Import division. 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
19.0%, or $8.8 million, to $55.2 million for the quarter ended January 31, 2003
from $46.4 million for the quarter ended January 31, 2002. As a percentage of
net sales, operating expenses, excluding special charges, increased to 16.3% for
the quarter ended January 31, 2003 from 16.2% for the quarter ended January 31,
2002. Operating expenses, including special charges, increased approximately
15.8%, or 7.5 million, to $55.2 million from $47.7 million for the quarter ended
January 31, 2002. As a percentage of sales, operating expenses, including
special charges, decreased to 16.3% for the quarter ended January 31, 2003 from
16.7% for the quarter ended January 31, 2002.The increase in operating expenses
was due to lower productivity caused by the transition of the Wild Oats, Inc.
business and higher operating expense levels at our recent acquisitions,
Blooming Prairie and Northeast Cooperatives. We believe we will be able to
decrease operating expenses as a percentage of sales as we focus on increasing
market share to replace Wild Oats, Inc. sales and integrating Blooming Prairie
and Northeast Cooperatives into our Western and Eastern regions, respectively,
resulting in more efficient routing and warehouse operations. Transportation,
warehouse labor, fuel, and utilities costs continued to track at levels
consistent with past quarters as a percentage of sales, with total expenses as a
percentage of sales showing slight improvement over past quarters.
Operating expenses for the quarter ended January 31, 2003 included special
charges of $0.1 million related to the expansion of our Chesterfield, New
Hampshire facility. Operating expenses for the quarter ended January 31, 2002
included special charges of $0.4 million in restructuring and asset impairment
expense and $0.9 million in other moving costs related to the relocation of our
Atlanta, Georgia distribution facility. We believe 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 resulting from the
reduction of our Wild Oats, Inc. business and as we continue to integrate our
Blooming Prairie and Northeast Cooperatives acquisitions. We expect to incur
additional special charges as we increase our warehouse capacity.
14
Operating Income.
Operating income, excluding the special charges discussed above, increased $0.7
million to $10.9 million for the quarter ended January 31, 2003 from $10.2
million for the quarter ended January 31, 2002. As a percentage of sales,
operating income, excluding special charges, decreased to 3.2% for the quarter
ended January 31, 2003 compared to 3.6% for the quarter ended January 31, 2002.
Operating income, including special charges, increased $2.0 million to $10.8
million or 3.2% of sales for the quarter ended January 31, 2003 compared to $8.8
million or 3.1% of sales for the quarter January 31, 2002.
Other Expense (Income).
Other expense, excluding the change in fair value of financial instruments,
increased $0.4 million to $1.9 million for the quarter ended January 31, 2003
from $1.5 million for the quarter ended January 31, 2002. Interest expense for
the quarter ended January 31, 2003 was $2.1 million compared to $1.6 million for
the quarter ended January 31, 2002. This increase in interest expense was
attributable to higher debt levels due to the acquisitions of Blooming Prairie
and Northeast Cooperatives. Other expense, including the change in fair value of
financial instruments, increased $1.6 million to $1.7 million for the quarter
ended January 31, 2003 from $0.1 million for the quarter ended January 31, 2002.
This increase was primarily due to the decrease in non-cash income from our
interest rate swap agreements and related option agreements. The non-cash income
due to the change in fair value of financial instruments for the quarter ended
January 31, 2003 was $0.2 million compared to $1.4 million for the quarter ended
January 31, 2002. We will continue to recognize either income or expense
quarterly for the duration of the swap agreements 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
yield curves 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. Since our interest rate swap agreements fix our
effective rates at 6.5% and 6.3%, we have paid higher interest expense than had
we not entered into these agreements.
Income Taxes.
Our effective income tax rate was 40.0% for the quarters ended January 31, 2003
and 2002. 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
$0.2 million to $5.4 million, or $0.28 per diluted share, for the quarter ended
January 31, 2003, compared to $5.2 million, or $0.27 per diluted share, for the
quarter ended January 31, 2002. Net income, including special items, increased
$0.3 million to $5.5 million, or $0.28 per diluted share, for the quarter ended
January 31, 2003, compared to $5.2 million, or $0.27 per diluted share, for the
quarter ended January 31, 2002. We believe earnings per diluted share, excluding
any special items, to be in the range of $0.30 to $0.32 for the third quarter of
fiscal 2003, and to be in the range of $1.18 to $1.20 for all of fiscal 2003.
Six Months Ended January 31, 2003 compared to Six Months Ended January 31, 2002
Net Sales.
Our net sales increased approximately 14.8%, or $83.6 million, to $649.4 million
for the six months ended January 31, 2003 from $565.8 million for the six months
ended January 31, 2002. This increase was due primarily to 16 weeks of net sales
from Blooming Prairie, acquired on October 11, 2002 and one month of net sales
from Northeast Cooperatives, acquired on December 31, 2002. Sales to mass market
and independent customers increased approximately 26% and 20%, respectively.
Sales to the supernatural distribution channel grew approximately 2.8% compared
to the six months ended January 31, 2002. The lower growth rate for the
supernatural channel was due primarily to the previously announced transition of
the Company's former second-largest customer, Wild Oats, Inc., to a new primary
distributor. Sales to the supernatural distribution channel, excluding
acquisitions and sales to Wild Oats, Inc. in both periods, increased
approximately 30.3%. Sales to our largest customer, Whole Foods Market, Inc.
represented approximately 24.2% and 18.5%, respectively, of net sales for the
six months ended January 31, 2003 and January 31, 2002. The current contract
with Whole Foods Market, Inc., extends through August 31, 2004. Sales to our
former second-largest customer, Wild Oats, Inc., represented approximately 14.3%
of net sales for the six months ended January 31, 2002.
15
Gross Profit.
Our gross profit increased approximately 13.8%, or $15.4 million, to $126.9
million for the six months ended January 31, 2003 from $111.5 million for the
six months ended January 31, 2002. Our gross profit as a percentage of net sales
decreased to 19.5% for the six months ended January 31, 2003 from 19.7% for the
same period last year. Our increase in gross profit as a result of losing the
Wild Oats, Inc. business was more than offset by lower gross profit margins in
our acquired businesses and a lower than planned gross profit at our Hershey
Import division.
Operating Expenses.
Our total operating expenses, excluding special items, increased approximately
15.4%, or $14.1 million, to $105.5 million for the six months ended January 31,
2003 from $91.4 million for the six months ended January 31, 2002. As a
percentage of net sales, operating expenses, excluding special items, remained
unchanged at 16.2% for the six months ended January 31, 2003 and January 31,
2002, respectively. The increase in operating expenses was due to lower
productivity caused by the transition of the Wild Oats, Inc. business and higher
operating expense levels at our recent acquisitions, Blooming Prairie and
Northeast Cooperatives. Special charges are discussed in the following
paragraph. Operating expenses, including special items, increased approximately
14.4% or $13.3 million to $106.1 million for the six months ended January 31,
2003 from $92.8 million for the six months ended January 31, 2002. As a
percentage of sales operating expenses, including special charges, decreased to
16.3% for the six months ended January 31, 2003 from 16.4% for the six months
ended January 31, 2002.
Operating expenses for the six months ended January 31, 2003 included special
items of approximately $0.1 million of labor costs related to the expansion of
our Chesterfield, New Hampshire distribution facility. While we anticipate
short-term incremental costs of approximately $1.0 million, we expect to realize
transportation and warehouse savings once we are operational in the fourth
quarter of our fiscal year 2003. Special items for the six months ended January
31, 2002 included $1.4 million related to the relocation of our Atlanta, Georgia
facility. Approximately $0.4 million was related to asset impairment and
restructuring costs and $1.0 million of other transition costs.
Operating Income.
Operating income, excluding special items, increased $1.3 million to $21.4
million for the six months ended January 31, 2003 from $20.1 million for the six
months ended January 31, 2002. Operating income, including special items,
increased $2.1 million to $20.8 million for the six months ended January 31,
2003 from $18.7 million for the same period last year.
Other Expense (Income).
Other expense, excluding the change in fair value of financial instruments,
increased $0.2 million to $3.5 million for the six months ended January 31, 2003
from $3.3 million for the six months ended January 31, 2002. Interest expense
for the six months ended January 31, 2003 was $3.9 million compared to $3.4
million for the six months ended January 31, 2002. This increase in interest
expense was attributable to higher debt levels due to the acquisitions of
Blooming Prairie and Northeast Cooperatives. Other expense, including the change
in fair value of financial instruments, decreased $0.7 million to $5.0 million
for the six months ended January 31, 2003 from $5.7 million for the six months
ended January 31, 2002. This decrease was primarily due to the decrease in
non-cash expense from our interest rate swap agreements and related option
agreements compared. The non-cash expense due to the change in fair value of
financial instruments for the six months ended January 31, 2003 was $1.5 million
compared to $2.4 million for the six months ended January 31, 2002.
Income Taxes.
Our effective income tax rate was 40.0% for the six months ended January 31,
2003 and 2002. 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
$0.7 million to $10.8 million, or $0.55 per diluted share, for the six months
ended January 31, 2003, compared to $10.1 million, or $0.53 per diluted share,
in the six months ended January 31, 2002. Net income, including special items,
increased $1.7 million to $9.5 million, or $0.49 per diluted share, for the six
months ended January 31, 2003, compared to $7.8 million, or $0.41 per diluted
share, for the six months ended January 31, 2002.
16
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, at the New York Prime Rate
or 1.50% above the banks' London Interbank Offered Rate. As of January 31, 2003,
we had an unused availability of $6.1 million. On February 14, 2003 we executed
the fifth amendment to our loan and security agreement, which added to our
borrowing base the accounts receivable and inventory balances of our Hershey
Import subsidiary. This amendment eliminated the use of the temporary borrowing
base increase of $15.0 million, secured by real estate, provided by the fourth
amendment to our loan and security agreement. Additionally, we expect to procure
$30.0 million in additional long-term financing secured by our real estate
during the third quarter of our fiscal year 2003 which will increase
availability on our credit facility.
Net cash provided by operations was $25.2 million for the six months ended
January 31, 2003 and was the result of cash collected from customers net of cash
paid to vendors. Net cash provided by operations was $6.3 million for the six
months ended January 31, 2002 and was the result of cash collected from
customers net of cash paid to vendors. Days in inventory remained unchanged at
51 days for January 31, 2003 and January 31, 2002. Days sales outstanding at
January 31, 2003 was 25 days compared to 29 days at January 31, 2002.
Net cash used in investing activities was $55.0 million for the six months ended
January 31, 2003, and was due primarily to the purchase of substantially all the
assets of Blooming Prairie, the merger with privately held Northeast
Cooperatives, and the expansion of our Chesterfield, New Hampshire facility. Net
cash used in investing activities was $20.4 million for the same period last
year, and was due primarily to the development of our new Atlanta, Georgia and
Fontana, California facilities.
Net cash provided by financing activities was $30.3 million for the six months
ended January 31, 2003, due to increased borrowings on our line of credit and
our equipment financing lines, offset by repayment of long-term debt. Net cash
provided by financing activities was $12.5 million for the six months ended
January 31, 2002, 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 1.35% as of January 31, 2003. 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 and
organic products, supply shortages and general economic conditions.
17
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.
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 and organic
products, including our acquisition of substantially all of the assets of
Blooming Prairie Cooperative Warehouse on October 11, 2002 and the merger with
Northeast Cooperatives on December 31, 2002. Successful integration of mergers
is critical to our future operating and financial performance. Integration
requires, among other things:
maintaining the customer base,
the optimization of delivery routes,
coordination of administrative, distribution and
finance functions, and
the integration of management information systems and
personnel.
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
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. As of January 31, 2003, we had an unused
availability of $6.1 million under our secured credit facility of $150.0
million. Additionally, we expect to procure $30.0 million in additional
long-term financing secured by our real estate during the third quarter of our
fiscal year 2003 which will increase availability on our credit facility. 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
18
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 and organic 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 and organic
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 we have, may have substantially greater financial and other
resources than we do and may be better established in their markets than we are.
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. Whole Foods Market, Inc. accounted
for approximately 25.5% and 19.2%, of our net sales during the quarters ended
January 31, 2003 and January 31, 2002, respectively, and approximately 24.2% and
18.5% for the six months ended January 31, 2003 and January 31, 2002,
respectively. 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 and organic products industry, and the growth of
supernatural chains, may reduce our profit margins in the future as more
customers qualify for greater volume discounts.
Our industry is sensitive to economic downturns
The grocery industry is 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 collection of accounts
receivable,
difficulties with inventory control,
competitive pricing pressures, and
unplanned 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, Chair of the Board of Directors, Steven H. Townsend, Chief
Executive Officer, Rick D. Puckett, Chief Financial Officer, Kevin Michel,
President of the
19
Western Region, Daniel V. Atwood, Senior Vice President and Secretary, Richard
Antonelli, President of the Eastern Region, and other key management employees.
Loss of the services of any additional officers or any other key management
employee could have a material adverse affect 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 and organic products,
supply shortages,
general economic conditions,
changes in customer preferences and demands for natural and
organic 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.
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.
20
Union-organizing activities could cause labor relations difficulties
As of January 31, 2003, approximately 353 employees, representing approximately
10% of our approximately 3,500 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
(a) Evaluation of Disclosure Controls and Procedures. 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) as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"). Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, 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.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes to our internal controls or in other factors
that could significantly affect those internal controls.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company (the "Annual Meeting") held
on December 3, 2002, the stockholders of the Company considered and voted on
three proposals:
1. Election of Directors. The stockholders elected Michael S. Funk and
James P. Heffernan as Class III directors for the ensuing three years. The terms
of office as directors of Gordon D. Barker, Joseph M. Cianciolo, Gail A. Graham,
Kevin T. Michel, Steven H. Townsend and Thomas B. Simone continued after the
Annual Meeting. The stockholders voted in the following manner:
Name Votes "FOR" Votes "WITHHELD"
-------------------------------------------------------------------
Michael S. Funk 15,704,885 495,849
James P. Heffernan 15,704,885 495,849
2. Stock Option Plan. The stockholders approved the Company's 2002 Stock
Incentive Plan. The stockholders voted in the following manner: (i) 10,792,801
votes were cast "FOR" the proposal; (ii) 3,211,441 votes were cast "AGAINST" the
proposal; and (iii) 139,056 votes abstained.
3. Independent Auditor. The stockholders ratified the appointment of KPMG
LLP as the Company's independent auditor for the year ended July 31, 2003. The
stockholders voted in the following manner: (i) 15,798,958 votes were cast "FOR"
the proposal; (ii) 331,514 votes were cast "AGAINST" the proposal; and (iii)
70,262 votes abstained.
21
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 28
to Section 906 of the Sarbanes-Oxley Act of 2002 - CEO
- --------------------------------------------------------------------------------------------
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
99.2 to Section 906 of the Sarbanes-Oxley Act of 2002 - CFO 29
- --------------------------------------------------------------------------------------------
Asset Purchase Agreement between United Natural Foods, Inc. and
Blooming Prairie Cooperative Warehouse. The exhibits and schedules to
the Asset Purchase Agreement have been omitted in accordance with the
applicable rules of the Commission. The registrant agrees to furnish
to the Commission, upon request, a copy of each such exhibit and
99.3 schedule. 30
- --------------------------------------------------------------------------------------------
Amended and Restated Agreement and Plan of Merger among United Natural
Foods, Inc., NEC Acquisition Corp., Northeast Cooperatives, and
Northeast Cooperative, Inc. The exhibits and schedules to the Amended
and Restated Agreement and Plan of Merger have been omitted in
accordance with the applicable rules of the Commission. The
registrant agrees to furnish to the Commission, upon request, a copy
99.4 of each such exhibit and schedule. 67
- --------------------------------------------------------------------------------------------
Fifth Amendment to Loan and Security with Fleet Capital Corporation
99.5 dated February 14, 2003. 106
- --------------------------------------------------------------------------------------------
99.6 Joinder agreement between United Natural Trading Co., and United
Natural Foods, Inc., Mountain People's Warehouse Incorporated,
Nutrasource, Inc., Rainbow Natural Foods, Inc., Stow Mills, Inc.,
United Northeast LLC and United Natural Foods Pennsylvania, Inc. dated
February 14, 2003. 112
- --------------------------------------------------------------------------------------------
Reports on Form 8-K
Current Report on Form 8-K, filed with the Commission on December 3, 2002.
Current Report on Form 8-K, filed with the Commission on December 6, 2002.
Current Report on Form 8-K, filed with the Commission on January 3, 2003.
22
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/ Rick D. Puckett
-----------------------------
Rick D. Puckett
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 14, 2003
23
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, Steven H. Townsend, 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 officer 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 officer 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/ Steven H. Townsend
----------------------
Steven H. Townsend
Chief Executive Officer
March 14, 2003
24
Certification of Chief Financial Officer
I, Rick D. Puckett, 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 officer 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 officer 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/ Rick D. Puckett
-------------------
Rick D. Puckett
Chief Financial Officer
March 14, 2003
25