-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cprz5Ma49kayADlXQbysWwO1JfKS2DfwrvsWKhQen2fW5uB3aSnWC22C07j+7F6h PBwSogYEc50NyaNGJtXXKw== 0000927016-98-001682.txt : 19980430 0000927016-98-001682.hdr.sgml : 19980430 ACCESSION NUMBER: 0000927016-98-001682 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19980428 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED NATURAL FOODS INC CENTRAL INDEX KEY: 0001020859 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 050376157 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-51167 FILM NUMBER: 98602585 BUSINESS ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 BUSINESS PHONE: 8607792800 MAIL ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 S-3 1 FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1998 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- 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 NUMBER) 260 LAKE ROAD DAYVILLE, CONNECTICUT 06241 (860) 779-2800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------- NORMAN A. CLOUTIER CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER UNITED NATURAL FOODS, INC. 260 LAKE ROAD DAYVILLE, CONNECTICUT 06241 (860) 779-2800 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: PAUL V. ROGERS, ESQ. LAURA C. HODGES TAYLOR, P.C. HALE AND DORR LLP GOODWIN, PROCTER & HOAR LLP 60 STATE STREET EXCHANGE PLACE BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02109 TELEPHONE: (617) 526-6000 TELEPHONE: (617) 570-1000 TELECOPY: (617) 526-5000 TELECOPY: (617) 523-1231 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date hereof. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED TITLE OF EACH CLASS OF MAXIMUM MAXIMUM SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE - -------------------------------------------------------------------------------------------- Common Stock, $.01 par value per share....... 4,887,500 shares $28.44 $139,000,500 $41,006
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes 637,500 shares which the Underwriters have the option to purchase from certain Selling Stockholders to cover over-allotments, if any. See "Underwriting." (2) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, and based on the average of the high and low sales prices per share of the Common Stock on the Nasdaq National Market on April 23, 1998. -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED APRIL 28, 1998 PROSPECTUS , 1998 4,250,000 SHARES LOGO COMMON STOCK Of the 4,250,000 shares of Common Stock offered hereby, 1,001,270 shares are being sold by United Natural Foods, Inc. ("United Natural" or the "Company") and 3,248,730 shares are being sold by the Selling Stockholders. See "Principal and Selling Stockholders." The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. The Common Stock is traded on the Nasdaq National Market under the symbol "UNFI." On April 24, 1998, the last reported sale price of the Common Stock was $27 3/4 per share. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO THE DISCOUNTS AND TO THE THE SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS - -------------------------------------------------------------------------------- Per Share........................ $ $ $ $ Total(3)......................... $ $ $ $ - --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting" for indemnification arrangements with the Underwriters. (2) Before deducting expenses, estimated at $400,000, which will be paid by the Company. (3) Certain Selling Stockholders have granted to the Underwriters a 30-day option to purchase up to an aggregate of 637,500 additional shares at the Price to the Public, less Underwriting Discounts and Commissions, solely to cover over-allotments, if any. If the option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of the share certificates will be made in New York, New York on or about , 1998. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SALOMON SMITH BARNEY WHEAT FIRST UNION [Graphic consists of three photographs: (i) an employee of the Company using a hand-held radio frequency device to scan the UPC bar code on products; (ii) the Company's distribution center in Dayville, Connecticut; and (iii) one of the Company's 18-wheel delivery trucks.] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." ------------ IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Company's Consolidated Financial Statements and the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. Unless the context otherwise requires, references herein to "the Company" refer to United Natural Foods, Inc. and its wholly owned subsidiaries. Prior to July 31, 1996, the Company's fiscal year ended on October 31 of each year. The Company has changed its fiscal year end to July 31. References herein to "fiscal 1993," "fiscal 1994" and "fiscal 1995" refer to the Company's fiscal years ended October 31, 1993, 1994 and 1995, respectively. THE COMPANY United Natural Foods, Inc. ("United Natural" or the "Company") is the leading independent national distributor of natural foods and related products in the United States. The Company is the primary supplier to the majority of its customers, offering more than 26,000 high-quality natural products consisting of groceries and general merchandise, nutritional supplements, bulk and foodservice products, personal care items, perishables and frozen goods. The Company serves more than 6,500 customers in 46 states, including independent natural products retailers, natural products supermarket ("super natural") chains and conventional supermarkets, and is the primary distributor to the two largest super natural chains, Whole Foods Market, Inc. ("Whole Foods") and Wild Oats Markets, Inc. ("Wild Oats"). The Company also owns and operates 16 retail natural products stores which complement its distribution business. The Company's strategy is to continue to capitalize on its leading market position and strong industry trends to enhance its position as the leading independent national distributor to the natural products industry. For the twelve months ended January 31, 1998, the Company generated net sales and operating income of $679.6 million and $23.3 million, respectively, representing compound annual growth rates of 21.6% and 34.4%, respectively, from the twelve months ended October 31, 1994. The Company believes it is well positioned to offer high-quality, efficient service on a national scale to the rapidly growing natural products industry. According to The Natural Foods Merchandiser, growth in the natural products industry has accelerated from a 15% annual increase in sales in 1992 to a 25% annual increase in 1996. The industry achieved a compound annual growth rate of 21% from 1992 to 1996, growing from $5.3 billion to $11.5 billion. The Company believes that this growth reflects a broadening of the natural products consumer base which is being driven by several factors, including an increasing awareness of the link between diet and health, healthier eating patterns, increasing concern regarding food purity and safety and greater environmental awareness. COMPETITIVE ADVANTAGES The Company believes it benefits from a number of significant competitive advantages which include: . MARKET LEADER WITH A NATIONWIDE PRESENCE. As a result of its nationwide presence, the Company believes it is one of the few distributors capable of serving both local and regional customers as well as the rapidly growing super natural chains. The Company believes it has significant advantages over smaller, regional natural products distributors as a result of its ability to: (i) derive significant economies of scale in operating and distribution expenses; (ii) benefit from increased purchasing power and breadth of product offering; (iii) make significant investments in advanced technology and equipment, which will enhance productivity and customer service; and (iv) provide superior customer service on a national scale. 3 . LOW-COST OPERATOR. The Company believes that it is well positioned to provide value added distribution services to its customers at attractive prices while also providing superior customer service. In addition to its volume purchasing power advantage, a critical component of the Company's position as a low-cost provider is its effective management of warehouse and distribution costs, primarily as a result of utilizing larger distribution centers within each of its geographic regions and integrating its facilities through its nationwide interregional logistics network. . EXPANDING BASE OF PREMIER CUSTOMER RELATIONSHIPS. The Company has developed long-standing customer relationships that it believes are among the strongest in the industry. For example, the Company has been the primary supplier to each of the industry's two largest super natural chains, Whole Foods and Wild Oats, for more than ten years. . EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. The Company's management team has extensive experience in the natural products industry and has been successful in identifying, consummating and integrating multiple acquisitions. Since 1985, the Company has successfully completed 13 acquisitions of distributors and suppliers, including the merger with Stow Mills, Inc. ("Stow Mills") and the recent acquisition of Hershey Import Co., Inc. ("Hershey"), and 11 acquisitions of retail stores. In addition, after giving effect to this offering, the Company's executive officers and directors, and their affiliates, and the Company's Employee Stock Ownership Trust ("ESOT") will beneficially own in the aggregate approximately 57.7% of the Company's Common Stock. GROWTH STRATEGY The Company's growth strategy is to maintain and enhance its position as the leading independent national distributor to the natural products industry. Key elements of the Company's strategy include: . INCREASE MARKET SHARE OF THE RAPIDLY GROWING NATURAL PRODUCTS INDUSTRY. The Company's strategy is to continue to increase its leading market share of the rapidly growing natural products industry by significantly expanding its customer base, increasing its share of existing customers' business and continuing to expand and further penetrate new distribution territories. The Company will continue to selectively evaluate opportunities to acquire (i) distributors to fill in existing markets and expand into new markets and (ii) suppliers to expand margins through vertical integration and brand differentiation. The Company currently has no agreements or understandings with regard to any such acquisitions. . CONTINUE TO IMPROVE EFFICIENCY OF NATIONWIDE DISTRIBUTION NETWORK. The Company continually seeks to improve its operating results by integrating its nationwide network utilizing the best practices within the distribution industry and within each of the regions that have formed the foundation of the Company. As a result, the Company has significantly improved its operating margin, which increased from 2.5% in fiscal 1994 to 4.6% in the quarter ended January 31, 1998. . CAPITALIZE ON THE BENEFITS OF THE STOW MILLS MERGER. With the Stow Mills merger in October 1997, the Company significantly expanded its customer base, distribution capacity and product offering. The merger is expected to generate significant benefits, including: (i) increased market share and distribution capacity, particularly in the Midwest; (ii) improved purchasing power; (iii) enhanced product offerings; (iv) improved distribution logistics and operating efficiencies; and (v) significant opportunities for the reduction of redundant selling, general and administrative expenses. . CONTINUE TO PROVIDE THE LEADING DISTRIBUTION SOLUTION. The Company's strategy is to continue to provide the leading distribution solution to the natural products industry through its national scale, regional responsiveness, high customer service focus and breadth of product offering. 4 RECENT ACQUISITIONS On October 31, 1997, the Company merged with Stow Mills, a regional natural products distributor serving the Northeast and Midwest regions of the United States. Stow Mills distributes a line of over 12,000 natural products, including groceries, vitamins and nutritional supplements, refrigerated foods, frozen foods, bulk foods and personal care items, to approximately 3,000 customers in 20 states. Stow Mills had net sales of approximately $213.1 million for the fiscal year ended July 31, 1997. The merger with Stow Mills has been accounted for as a pooling of interests and, accordingly, all information included herein is reported as though United Natural and Stow Mills had been combined for all periods reported. On February 11, 1998, the Company acquired Hershey, a business specializing in the international trading, roasting and packaging of nuts, seeds, dried fruits and snack items, for approximately $7.5 million. Hershey supplies over 300 products to leading supermarkets and wholesalers primarily in the eastern United States and has recently expanded its offerings to include consumer products under its Express Snacks and Woodfield Farms brands as well as private label packages for its retail supermarket accounts. Hershey had sales of approximately $20.8 million for the fiscal year ended June 30, 1997. Hershey provides the Company with direct access to foreign suppliers as well as expertise in international commodity markets. The acquisition of Hershey has been accounted for as a purchase and, accordingly, all financial information will be included with the Company's information from the date of acquisition. THE OFFERING Common Stock offered by the Company.............. 1,001,270 shares Common Stock offered by the Selling Stockhold- ers............................................. 3,248,730 shares Total............................................ 4,250,000 shares ------ Common Stock to be outstanding after the offer- ing............................................. 18,357,975 shares(1)(2) Use of proceeds.................................. The Company intends to use the net proceeds from this offering to repay short-term indebtedness. Nasdaq National Market symbol.................... UNFI
- -------------------- (1) Includes 2,063,004 shares of Common Stock held in trust by the Company's ESOT as of March 31, 1998. See Note 11 of Notes to the Company's Consolidated Financial Statements. (2) Based on the number of shares of Common Stock outstanding as of March 31, 1998. Excludes an aggregate of 1,001,846 shares of Common Stock issuable upon the exercise of outstanding options as of March 31, 1998. ------------ The Company was incorporated in Rhode Island in 1978 and reincorporated in Delaware in 1994. The Company's executive offices are located at 260 Lake Road, Dayville, Connecticut 06241, and its telephone number is (860) 779-2800. Cape Cod Natural Foods, Cascade Baking Company, Express Snacks, The Granary, Guardian, Mother Earth Market, Natural Food Systems, Natural Sea, NATUREWORKS!, Nature's Finest Foods, Railway Market, SunSplash Market, Village Market Natural Grocer and Woodfield Farms are trademarks of United Natural Foods, Inc. Woodstock Orchards, Stow Mills, Woodstock Farms, Woodstock and Beautiful Foods for Beautiful People are trademarks of Stow Mills, Inc., a wholly owned subsidiary of United Natural Foods, Inc. All other trademarks or trade names referred to in this Prospectus are the property of their respective owners. 5 SUMMARY CONSOLIDATED FINANCIAL DATA(1) The summary actual and adjusted financial data set forth below should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto, "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," all of which are included elsewhere in this Prospectus.
TWELVE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED OCTOBER 31, JULY 31, JANUARY 31, -------------------------- ------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998(2) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DA- TA: Net sales............... $290,990 $359,881 $458,849 $ 580,049 $ 634,825 $306,575 $351,359 Gross profit............ 60,232 74,542 95,092 117,543 127,278 62,039 70,497 Operating income........ 5,244 8,924 11,311 15,666 22,333 9,361 10,351 Net income.............. 1,174 2,737 2,817 4,695 9,467 2,650 3,572 Net income per share (basic)(3)............. 0.09 0.20 0.21 0.34 0.58 0.17 0.21 Weighted average basic shares of common stock(3)............... 13,691 13,691 13,691 13,688 16,367 15,394 17,357 Net income per share (diluted)(3)........... 0.09 0.18 0.19 0.32 0.57 0.16 0.20 Weighted average diluted shares of common stock(3)............... 13,691 14,804 14,858 14,855 16,553 16,125 17,654
AS OF JANUARY 31, 1998 ----------------------- ACTUAL AS ADJUSTED(4) (IN THOUSANDS) BALANCE SHEET DATA: Working capital......................................... $ 57,408 $ 83,508 Total assets............................................ 180,337 180,337 Total debt and capital leases........................... 63,096 36,996 Total stockholders' equity.............................. 77,569 103,669
- -------------------- (1) In February 1996 and October 1997, the Company merged with Mountain People's Warehouse Incorporated ("Mountain People's") and Stow Mills, respectively, in transactions accounted for as poolings of interests. All financial information in this Prospectus has been restated to include the results of operations of Mountain People's and Stow Mills for all periods presented. See Note 2 of Notes to the Company's Consolidated Financial Statements. (2) The six months ended January 31, 1998 includes merger expenses of $4,064. Excluding these expenses, operating income, net income, net income per basic share and net income per diluted share would have been $14,415, $7,636, $0.44 and $0.43, respectively. (3) All per share and share data have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128. See Note 1 of Notes to the Company's Consolidated Financial Statements. (4) Adjusted to give effect to the sale by the Company of 1,001,270 shares of Common Stock offered hereby (at an assumed public offering price of $27 3/4 per share) and the application of the net proceeds therefrom. See "Use of Proceeds." 6 RISK FACTORS This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward- looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those indicated by such forward-looking statements as a result of certain of the risk factors set forth below and elsewhere in this Prospectus. In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Common Stock offered by this Prospectus. INTEGRATION OF ACQUISITIONS AND MERGERS; MANAGEMENT OF GROWTH A significant portion of the Company's historical growth has been achieved through acquisitions of or mergers with other distributors of natural products. The Company merged with Stow Mills in October 1997. The successful and timely integration of this merger is critical to the future operating and financial performance of the Company. The Company believes that the integration of Stow Mills will not be substantially completed until mid calendar 1999. The integration will require, among other things, coordination of administrative, distribution and finance functions, the integration of personnel and expansion of information and warehouse management systems among the Company's regional operations. The integration process could divert the attention of management, and any difficulties or problems encountered in the transition process could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, the process of combining the 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. There can be no assurance that the Company will retain key employees of Stow Mills or that the Company will realize any of the other anticipated benefits of the Stow Mills merger. See "Business--Technology." The growth in the size of the Company's business and operations has placed and is expected to continue to place a significant strain on the Company's management. The Company's future growth is limited in part by the size and location of its distribution centers. There can be no assurance that the Company will be able to successfully expand its existing distribution facilities or open new distribution facilities in new or existing markets to facilitate growth. In addition, the Company's growth strategy to expand its market presence includes possible additional acquisitions. To the extent the Company's future growth includes acquisitions, there can be no assurance that the Company will successfully identify suitable acquisition candidates, consummate and integrate such potential acquisitions or expand into new markets. The Company's ability to compete effectively and to manage future growth, if any, will depend on its ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage its work force. There can be no assurance that the Company's personnel, systems, procedures and controls will be adequate to support the Company's operations. The inability of the Company to manage its growth effectively could have a material adverse effect on its business, financial condition or results of operations. COMPETITION The Company operates in highly competitive markets, and its future success will be largely dependent on its ability to provide quality products and services at competitive prices. The Company's competition comes from a variety of sources, including other distributors of natural products as well as specialty grocery and mass market grocery distributors. There can be no assurance that mass market grocery distributors will not increase their emphasis on natural products and more directly compete with the Company or that new competitors will not enter the market. These distributors may have been in business longer than the Company, may have substantially greater financial and other resources than the Company and may be better established in their markets. There can be no assurance that the Company's current or potential competitors will not provide services comparable or superior to those provided by the Company or adapt more quickly than the Company to evolving industry trends 7 or changing market requirements. It is also possible that alliances among competitors may develop and rapidly acquire significant market share or that certain of the Company's 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 the Company's business, financial condition or results of operations. There can be no assurance that the Company will be able to compete effectively against current and future competitors. See "Business-- Competition." DEPENDENCE ON PRINCIPAL CUSTOMERS The ability of the Company to maintain close, mutually beneficial relationships with its top two customers, Whole Foods and Wild Oats, is important to the ongoing growth and profitability of its business. Whole Foods, the Company's largest customer, accounted for approximately 14% of the Company's net sales during the fiscal year ended July 31, 1997. As a result of this concentration of the Company's customer base, the loss or cancellation of business from either of these customers, including from increased distribution to their own facilities, could materially and adversely affect the Company's business, financial condition or results of operations. The Company's sales are made pursuant to purchase orders and therefore the Company generally has no agreements with or commitments from its customers for the purchase of products. No assurance can be given that the Company's customers will maintain or increase their sales volumes or orders for the products supplied by the Company or that the Company will be able to maintain or add to its existing customer base. See "Business--Customers." LOW MARGIN BUSINESS; ECONOMIC SENSITIVITY The grocery distribution industry generally is characterized by relatively high volume with relatively low profit margins. The continuing consolidation of retailers in the natural products industry and the emergence of super natural chains may have an adverse effect on the Company's profit margins in the future as more customers qualify for greater volume discounts offered by the Company. The grocery industry is also sensitive to national and regional economic conditions, and the demand for products supplied by the Company may be adversely affected from time to time by economic downturns. In addition, the Company's operating results are particularly sensitive to, and may be materially adversely affected by, difficulties with the collectibility of accounts receivable, 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 the Company's business, financial condition or results of operations. DEPENDENCE ON KEY PERSONNEL Management of the Company's business is substantially dependent on the services of Norman A. Cloutier, the Company's Chairman of the Board and Chief Executive Officer, Robert T. Cirulnick, the Company's Chief Financial Officer, and other key management employees. Loss of the services of such officers or any other key management employee could have a material adverse effect on the Company's business, financial condition or results of operations. FLUCTUATIONS IN OPERATING RESULTS The Company's net sales and operating results may vary significantly from period to period due to factors such as changes in the Company's operating expenses, management's ability to execute the Company's business and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. Both the Company's distribution and retail businesses are dependent upon consumer preferences and demands for natural products, including levels of enthusiasm for health, fitness and environmental issues. Furthermore, the future operating performance of the Company is directly influenced by natural product prices, which can be volatile and fluctuate according to competitive pressures. A lack of an adequate supply of high-quality agricultural products or volatility in prices resulting from poor growing conditions, natural disasters or 8 otherwise, could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, there can be no assurance that any future acquisitions by the Company will not have an adverse effect on the Company's business, financial condition or results of operations, particularly in periods immediately following the consummation of such transactions, while the operations of the acquired businesses are being integrated into the Company's operations. Due to the foregoing factors, the Company believes that period-to-period comparisons of its operating results may not necessarily be meaningful and that such comparisons cannot be relied upon as indicators of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." GOVERNMENTAL REGULATION The Company's business is highly regulated at the federal, state and local levels and its products and distribution operations require various licenses, permits and approvals. In particular, the Company's products are subject to inspection by the U.S. Food and Drug Administration, its warehouse and distribution facilities are subject to inspection by the U.S. Department of Agriculture and state health authorities, and its trucking operations are regulated by the U.S. Department of Transportation and the U.S. Federal Highway Administration. The loss or revocation of any existing licenses, permits or approvals or the failure to obtain any additional licenses, permits or approvals in new jurisdictions where the Company intends to do business could have a material adverse effect on the Company's business, financial condition or results of operations. CONTROL BY OFFICERS, DIRECTORS AND ESOT Upon completion of this offering, the Company's executive officers and directors, and their affiliates, and the ESOT will beneficially own in the aggregate approximately 57.7% of the Company's Common Stock. Accordingly, these stockholders, if acting together, would have the ability to elect the Company's directors and may have the ability to determine the outcome of corporate actions requiring stockholder approval, irrespective of how other stockholders of the Company may vote. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company. See "Management" and "Principal and Selling Stockholders." LABOR RELATIONS As of March 31, 1998, approximately 90 employees, representing approximately 4% of the Company's 2,230 employees, were union members. The Company is currently, and has in the past been, the focus of union-organizing efforts. As the Company increases its employee base and broadens its distribution operations to new geographic markets, its increased visibility could result in increased or expanded union-organizing efforts. Although the Company has not experienced a work stoppage to date, if additional employees of the Company were to unionize, the Company could be subject to work stoppages and increases in labor costs, either of which could materially adversely affect the Company's business, financial condition or results of operations. See "Business--Employees." POSSIBLE VOLATILITY OF STOCK PRICE; NO DIVIDENDS The market performance of the Common Stock could be subject to significant fluctuation in response to variations in results of operations and various other factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of the Common Stock. The Company has never paid any cash dividends and does not anticipate paying cash dividends in the foreseeable future. The Company's existing revolving line of credit agreement prohibits the declaration or payment of cash dividends to the Company's stockholders without the written consent of the bank during the term of the credit agreement and until all obligations of the Company under the credit agreement have been met. See "Price Range of Common Stock and Dividend Policy." 9 ANTITAKEOVER PROVISIONS The Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate of Incorporation") requires that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing, and requires reasonable advance notice by a stockholder of a proposal or director nomination which such stockholder desires to present at any annual or special meeting of stockholders. Special meetings of stockholders may be called only by the Chairman of the Board, the Chief Executive Officer or, if none, the President of the Company or by the Board of Directors. The Restated Certificate of Incorporation provides for a classified Board of Directors, and members of the Board of Directors may be removed only for cause upon the affirmative vote of holders of at least two- thirds of the shares of capital stock of the Company entitled to vote. In addition, shares of the Company's Preferred Stock may be issued in the future without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of any holders of Preferred Stock that may be issued in the future. The Company has no present plans to issue any shares of Preferred Stock. These provisions, and other provisions of the Restated Certificate of Incorporation, may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. 10 USE OF PROCEEDS The net proceeds to be received by the Company from this offering are estimated to be approximately $26.1 million after deducting estimated underwriting discounts and commissions and offering expenses and assuming a public offering price of $27 3/4 per share. The Company intends to use such proceeds to repay certain short-term indebtedness. The indebtedness to be repaid consists of approximately $26.1 million due to Fleet Capital Corporation, as agent, under a credit agreement that expires on July 31, 2002. Interest under the facility accrues at the Company's option at the New York Prime Rate or 1.00% over LIBOR. At April 24, 1998, the 30-day LIBOR was 5.66% and the New York Prime Rate was 8.5%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. See "Principal and Selling Stockholders." PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company's Common Stock is traded on the Nasdaq National Market under the symbol "UNFI." The Company's Common Stock began trading on the Nasdaq National Market on November 1, 1996. The following table sets forth for the periods indicated the high and low sale prices per share of the Company's Common Stock on the Nasdaq National Market:
HIGH LOW FISCAL 1997 Second Quarter (from November 1, 1996)..................... $17 1/2 $12 1/2 Third Quarter.............................................. 17 13 Fourth Quarter............................................. 24 3/8 15 FISCAL 1998 First Quarter.............................................. $26 3/4 $19 1/4 Second Quarter............................................. 27 1/8 19 3/4 Third Quarter (through April 24, 1998)..................... 30 11/16 23 3/4
On April 24, 1998, the last reported sale price of the Company's Common Stock on the Nasdaq National Market was $27 3/4 per share. As of April 24, 1998, there were 52 stockholders of record of the Company's Common Stock. The Company has never declared or paid any cash dividends on its capital stock. The Company anticipates that all of its earnings in the foreseeable future will be retained to finance the continued growth and development of its business and has no current intention to pay cash dividends. The Company's future dividend policy will depend on its earnings, capital requirements and financial condition, requirements of the financing agreements to which it is then a party and other factors considered relevant by the Board of Directors. The Company's existing revolving line of credit agreement prohibits the declaration or payment of cash dividends to its stockholders without the written consent of the bank during the term of the credit agreement and until all obligations of the Company under the credit agreement have been met. 11 CAPITALIZATION The following table sets forth the capitalization of the Company at January 31, 1998 (i) on an actual basis and (ii) as adjusted to reflect the issuance and sale by the Company of 1,001,270 shares of Common Stock offered hereby at an assumed public offering price of $27 3/4 per share, after deducting the estimated underwriting discounts and commissions and offering expenses and application of the net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
AS OF JANUARY 31, 1998 -------------------------- ACTUAL AS ADJUSTED (IN THOUSANDS) Total debt (including current portion): Bank debt.......................................... $ 55,163 $ 29,063 Other debt......................................... 7,933 7,933 ----------- ----------- Total debt...................................... 63,096 36,996 ----------- ----------- Stockholders' equity: Preferred stock, $0.01 par value; 5,000 shares au- thorized; no shares issued or outstanding................... -- -- Common Stock, $0.01 par value; 25,000 shares authorized; 17,357 shares issued and outstanding (actual); 18,358 shares issued and outstanding (as adjusted)(1)...................................... 174 184 Additional paid-in capital......................... 50,007 76,097 Unallocated shares of employee stock ownership plan.............................................. (2,829) (2,829) Retained earnings.................................. 30,261 30,261 Treasury stock, 20 shares at cost.................. (44) (44) ----------- ----------- Total stockholders' equity...................... 77,569 103,669 ----------- ----------- Total capitalization............................ $ 140,665 $ 140,665 =========== ===========
- --------------------- (1) Excludes an aggregate of 901,846 shares of Common Stock reserved for issuance upon the exercise of options outstanding as of January 31, 1998. See Note 3 of Notes to the Company's Consolidated Financial Statements. 12 SELECTED CONSOLIDATED FINANCIAL DATA(1) The following table sets forth selected consolidated financial data of the Company for the periods indicated. Effective November 1, 1995, the Company elected to change its fiscal year end from October 31 to July 31.
NINE MONTHS ENDED TWELVE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED OCTOBER 31, JULY 31, JULY 31, JANUARY 31, ---------------------------- ------------------ -------------------- ------------------ 1993 1994 1995 1995 1996 1996 1997 1997 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Net sales............... $290,990 $359,881 $458,849 $318,642 $439,842 $ 580,049 $ 634,825 $306,575 $351,359 Cost of sales........... 230,758 285,339 363,757 251,381 350,130 462,506 507,547 244,536 280,862 -------- -------- -------- -------- -------- --------- --------- -------- -------- Gross profit........... 60,232 74,542 95,092 67,261 89,712 117,543 127,278 62,039 70,497 Operating expenses...... 54,789 65,080 81,355 57,154 75,059 99,261 103,885 52,148 55,577 Merger expenses......... -- -- -- -- -- -- -- -- 4,064 Amortization of intangibles............ 199 538 2,426 602 793 2,616 1,060 530 505 -------- -------- -------- -------- -------- --------- --------- -------- -------- Total operating ex- penses................ 54,988 65,618 83,781 57,756 75,852 101,877 104,945 52,678 60,146 -------- -------- -------- -------- -------- --------- --------- -------- -------- Operating income....... 5,244 8,924 11,311 9,505 13,860 15,666 22,333 9,361 10,351 Interest expense........ 2,663 4,391 5,969 4,127 5,887 7,730 5,976 3,508 2,273 Other, net.............. (210) (226) (428) (377) (360) (411) (679) (301) (349) -------- -------- -------- -------- -------- --------- --------- -------- -------- Total other expense.... 2,453 4,165 5,541 3,750 5,527 7,319 5,297 3,207 1,924 -------- -------- -------- -------- -------- --------- --------- -------- -------- Income before income taxes and extraordi- nary item............. 2,791 4,759 5,770 5,755 8,333 8,347 17,036 6,154 8,427 Income taxes............ 1,617 2,022 2,953 2,185 2,883 3,652 6,636 2,571 4,855 Income before extraordinary item..... 1,174 2,737 2,817 3,570 5,450 4,695 10,400 3,583 3,572 Extraordinary item...... -- -- -- -- -- -- 933 933 -- -------- -------- -------- -------- -------- --------- --------- -------- -------- Net income............. $ 1,174 $ 2,737 $ 2,817 $ 3,570 $ 5,450 $ 4,695 $ 9,467 $ 2,650 $ 3,572 ======== ======== ======== ======== ======== ========= ========= ======== ======== PER SHARE DATA (BA- SIC)(2): Income before extraordi- nary item.............. $ 0.09 $ 0.20 $ 0.21 $ 0.26 $ 0.40 $ 0.34 $ 0.64 $ 0.23 $ 0.21 Extraordinary item...... -- -- -- -- -- -- 0.06 0.06 -- -------- -------- -------- -------- -------- --------- --------- -------- -------- Net income............. $ 0.09 $ 0.20 $ 0.21 $ 0.26 $ 0.40 $ 0.34 $ 0.58 $ 0.17 $ 0.21 ======== ======== ======== ======== ======== ========= ========= ======== ======== Weighted average basic shares of common stock.................. 13,691 13,691 13,691 13,691 13,687 13,688 16,367 15,394 17,357 ======== ======== ======== ======== ======== ========= ========= ======== ======== PER SHARE DATA (DILUT- ED)(2): Income before extraordi- nary item.............. $ 0.09 $ 0.18 $ 0.19 $ 0.24 $ 0.37 $ 0.32 $ 0.63 $ 0.22 $ 0.20 Extraordinary item...... -- -- -- -- -- -- 0.06 0.06 -- -------- -------- -------- -------- -------- --------- --------- -------- -------- Net income............. $ 0.09 $ 0.18 $ 0.19 $ 0.24 $ 0.37 $ 0.32 $ 0.57 $ 0.16 $ 0.20 ======== ======== ======== ======== ======== ========= ========= ======== ======== Weighted average diluted shares of common stock.................. 13,691 14,804 14,858 14,858 14,853 14,855 16,553 16,125 17,654 ======== ======== ======== ======== ======== ========= ========= ======== ========
AS OF AS OF OCTOBER 31, AS OF JULY 31, JANUARY 31, -------------------------- ----------------- ----------- 1993 1994 1995 1996 1997 1998 BALANCE SHEET DATA (IN THOUSANDS): Working capital......... $ 22,044 $ 24,713 $ 26,983 $ 13,453 $ 53,101 $ 57,408 Total assets............ 81,960 91,442 134,508 152,343 164,561 180,337 Total long term debt and capital leases.......... 35,024 34,327 48,890 34,108 21,647 22,916 Total stockholders' equity.................. 8,894 14,266 17,117 23,440 73,916 77,569
13 - --------------------- (1) Selected consolidated financial data for the year ended October 31, 1995, nine months ended July 31, 1996 and year ended July 31, 1997 were derived from financial statements of the Company which were audited by KPMG Peat Marwick LLP, independent certified public accountants, whose report appears elsewhere herein. Selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere herein. Selected consolidated financial data for the years ended October 31, 1993 and 1994, nine months ended July 31, 1995, twelve months ended July 31, 1996 and six months ended January 31, 1997 and 1998 were derived from unaudited financial statements of the Company. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations have been included in such unaudited financial statements. Such results may not be indicative of the results expected for a full year. The Stow Mills merger has been accounted for as a pooling of interests and therefore the financial data of the Company are presented as if United Natural and Stow Mills had been combined for all periods presented. Stow Mills' results of operations for its fiscal years ended December 31, 1993, 1994 and 1995, its nine months ended September 29, 1995 and September 27, 1996, its twelve months ended September 29, 1996 and July 31, 1997 and its six months ended January 31, 1997 and 1998 have been combined with United Natural's results of operations for the respective periods indicated herein. Stow Mills' financial position as of December 31, 1993, 1994 and 1995, September 27, 1996, July 31, 1997 and January 31, 1998 has been combined with United Natural's financial position for the respective periods indicated herein. (2) All per share and share data have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128. See Note 1 of Notes to the Company's Consolidated Financial Statements. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW United Natural Foods, Inc. is the leading independent national distributor of natural foods and related products in the United States. In recent years, the Company has increased sales to existing and new customers through the acquisition of or merger with natural products distributors, the opening of distribution centers in new geographic areas, the expansion of existing distribution centers and the continued growth of the natural products industry in general. Through these efforts, management believes that the Company has been able to broaden its geographic penetration, expand its customer base, enhance and diversify its product selections and increase its market share. The Company's distribution operations are divided into three principal regions: Cornucopia Natural Foods, Inc. ("Cornucopia") and Stow Mills in the Eastern Region, Rainbow Natural Foods, Inc. ("Rainbow") in the Central Region and Mountain People's Warehouse Incorporated ("Mountain People's") in the Western Region. Through its Natural Retail Group ("NRG"), the Company also owns and operates 16 retail natural products stores located in the eastern United States. The Company's retail strategy for NRG is to selectively acquire existing natural products stores that meet the Company's strict criteria in areas such as sales growth, profitability, growth potential and store management. Management believes the Company's retail business serves as a natural complement to its distribution business. The Company is continually integrating certain operating functions in order to improve operating efficiencies, including: (i) integrating administrative and accounting functions; (ii) expanding marketing and customer service programs across the three regions; (iii) expanding national purchasing opportunities; (iv) consolidating systems applications between physical locations and regions; and (v) reducing geographic overlap between regions. In addition, the Company's continued growth has created the need for expansion of existing facilities to achieve maximum operating efficiencies and to assure adequate space for future needs. While operating margins may be affected in periods in which expenses are incurred, over the long term, the Company expects to benefit from the increased absorption of its expenses over a larger sales base. In recent years, the Company has made considerable expenditures in connection with the expansion of its facilities, including the expansion of its distribution center and headquarters in Dayville, Connecticut, the relocation of its Denver, Colorado distribution center and the expansion of refrigerated and frozen space at its Auburn, California and Atlanta, Georgia facilities. The Company's net sales consist primarily of sales of natural products to retailers adjusted for customer volume discounts, returns and allowances and, to a lesser extent, sales from its natural products stores. The principal components of the Company's cost of sales include the amount paid to manufacturers and growers for product sold, plus the cost of transportation necessary to bring the product to the Company's distribution facilities. Operating expenses include salaries and wages, employee benefits (including payments under the Company's Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, administrative, depreciation, merger expenses and amortization expense. Other expenses include interest payments on outstanding indebtedness, miscellaneous expenses, interest income and miscellaneous income. RECENT ACQUISITIONS The mergers of the Company with Mountain People's and Stow Mills have each been accounted for as a pooling of interests and, accordingly, all information included herein is reported as though United Natural, Mountain People's and Stow Mills had been combined for all periods reported. On May 22, 1995, prior to its merger with United Natural, Mountain People's acquired Nutrasource, Inc. ("Nutrasource"), and on July 29, 1995 the Company acquired Rainbow. The acquisitions of Nutrasource and Rainbow were each accounted for under the purchase method of accounting and, accordingly, all financial information for Nutrasource and Rainbow has been included since the respective dates of acquisition. The acquisition of Hershey will also be accounted for under the purchase method of accounting but, as the acquisition was not consummated until after January 31, 1998, financial information for Hershey will be included in all 15 periods after the date of acquisition. The excess of the purchase price over the net assets acquired in each of these acquisitions has been recorded as goodwill and is being amortized by the Company over various useful lives, not exceeding 40 years. RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales:
NINE MONTHS TWELVE MONTHS SIX MONTHS ENDED JULY 31, ENDED JULY 31, ENDED JANUARY 31, ---------------- ---------------- ----------------- 1995 1996 1996 1997 1997 1998 Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales........... 78.9 79.6 79.7 80.0 79.8 79.9 ------- ------- ------- ------- -------- -------- Gross profit.......... 21.1 20.4 20.3 20.0 20.2 20.1 ------- ------- ------- ------- -------- -------- Operating expenses...... 17.9 17.0 17.1 16.3 17.0 15.8 Merger expenses......... -- -- -- -- -- 1.2 Amortization of intangi- bles................... 0.2 0.2 0.5 0.2 0.2 0.1 ------- ------- ------- ------- -------- -------- Total operating ex- penses................ 18.1 17.2 17.6 16.5 17.2 17.1 ------- ------- ------- ------- -------- -------- Operating income....... 3.0 3.2 2.7 3.5 3.0 3.0 ------- ------- ------- ------- -------- -------- Other expense (income): Interest expense...... 1.3 1.4 1.4 0.9 1.1 0.7 Other, net............ (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) ------- ------- ------- ------- -------- -------- Total other expense, net.................. 1.2 1.3 1.3 0.8 1.0 0.6 ------- ------- ------- ------- -------- -------- Income before income taxes and extraordi- nary item............. 1.8 1.9 1.4 2.7 2.0 2.4 Income taxes........... 0.7 0.7 0.6 1.0 0.8 1.4 ------- ------- ------- ------- -------- -------- Income before extraor- dinary item........... 1.1 1.2 0.8 1.7 1.2 1.0 Extraordinary item--loss on early extinguishment of debt, net of income tax benefit............ -- -- -- 0.2 0.3 -- ------- ------- ------- ------- -------- -------- Net income............. 1.1% 1.2% 0.8% 1.5% 0.9% 1.0% ======= ======= ======= ======= ======== ========
SIX MONTHS ENDED JANUARY 31, 1998 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1997 Net Sales. The Company's net sales increased approximately 14.6%, or $44.8 million, to $351.4 million for the six months ended January 31, 1998 from $306.6 million for the six months ended January 31, 1997. The overall increase in net sales was primarily attributable to increased sales to existing customers, sales to new accounts in existing geographic areas and the introduction of new products not previously offered by the Company. Gross Profit. The Company's gross profit increased approximately 13.6%, or $8.5 million, to $70.5 million for the six months ended January 31, 1998 from $62.0 million for the six months ended January 31, 1997. The Company's gross profit as a percentage of net sales decreased to 20.1% for the six months ended January 31, 1998 from 20.2% for the six months ended January 31, 1997. The decrease in gross profit as a percentage of net sales resulted partially from the comparatively lower gross margin contribution from Stow Mills' operations in the first quarter of fiscal 1998. Also, as in prior periods, increased sales to existing customers under the Company's volume discount program resulted in a further reduction in gross margin. These factors were partially offset by purchasing efficiencies gained with the integration of Stow Mills in the second quarter of fiscal 1998. Operating Expenses. The Company's total operating expenses increased approximately 14.2%, or $7.4 million, to $60.1 million for the six months ended January 31, 1998 from $52.7 million for the six months ended January 31, 1997. As a percentage of net sales, operating expenses decreased to 17.1% for the six months ended January 31, 1998 from 17.2% for the six months ended January 31, 1997. Excluding merger costs of $4.1 million, 16 the Company's total operating expenses for the six months ended January 31, 1998 would have been $56.0 million, or 16.0% of net sales, representing an increase of $3.3 million, or 6.5%, over the comparable prior period. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the Company's ability to leverage its overhead and realize synergies from recent acquisitions. Additionally, because of the October 31, 1997 effective date of the Stow Mills merger, resulting operational efficiencies were not realized in the first quarter of fiscal 1998. Excluding merger costs of $4.1 million, operating expenses for the six months ended January 31, 1998 and 1997 would have been $56.1 million, or 16.0% of net sales, and $52.7 million, or 17.2% of net sales, respectively. Operating Income. Operating income increased $1.0 million, or approximately 10.6%, to $10.4 million for the six months ended January 31, 1998 from $9.4 million for the six months ended January 31, 1997. As a percentage of net sales, operating income was 3.0% in each of the six months ended January 31, 1998 and 1997. Excluding the merger costs noted above, operating income for the six months ended January 31, 1998 would have been $14.4 million (representing an increase of 54.0% over the prior period), or 4.1% of net sales. Other (Income)/Expense. The $1.3 million decrease in other expense in the six months ended January 31, 1998 compared to the six months ended January 31, 1997 was primarily attributable to the reduction in interest expense relating to the repayment of Stow Mills' debt with proceeds from the Company's credit facility, which bears interest at a lower rate. In addition, the proceeds from the Company's initial public offering were used to repay debt. Income Taxes. The Company's effective income tax rates were 57.6% and 41.8% for the six months ended January 31, 1998 and 1997, respectively. The effective rates were higher than the federal statutory rate primarily due to nondeductible merger costs incurred during the first quarter of fiscal 1998 and state and local income taxes, partially offset by the fact that Stow Mills was an S Corporation prior to the merger and, as such, had no federal tax expense. Net Income. As a result of the foregoing, the Company's net income increased by $0.9 million to $3.6 million for the six months ended January 31, 1998 from $2.7 million in the six months ended January 31, 1997. Excluding the $4.1 million (net of taxes) in merger costs in fiscal 1998 and $0.9 million extraordinary item (net of taxes) related to the early extinguishment of debt in fiscal 1997, net income would have been $7.6 million (representing an increase of 113.1% over the prior period), or 2.2% of net sales, and $3.6 million, or 1.2% of net sales, for the six months ended January 31, 1998 and 1997, respectively. TWELVE MONTHS ENDED JULY 31, 1997 COMPARED TO TWELVE MONTHS ENDED JULY 31, 1996 Net Sales. The Company's net sales increased approximately 9.4%, or $54.8 million, to $634.8 million for the twelve months ended July 31, 1997 from $580.0 million for the twelve months ended July 31, 1996. Net sales for Stow Mills during the period increased at a lower rate than net sales for the Company's other regions. The increase in net sales was primarily attributable to increased sales by the Company to its existing customers, sales to new customers, increased sales attributable to the introduction of new products not formerly offered by the Company and increased market penetration in existing geographic territories. Gross Profit. The Company's gross profit increased approximately 8.3%, or $9.8 million, to $127.3 million for the twelve months ended July 31, 1997 from $117.5 million for the twelve months ended July 31, 1996. The Company's gross profit as a percentage of net sales decreased to 20.0% for the twelve months ended July 31, 1997 from 20.3% for the twelve months ended July 31, 1996. The decrease in gross profit as a percentage of net sales resulted primarily from increased sales to existing customers that earned greater discounts under the Company's volume discount program. 17 Operating Expenses. The Company's total operating expenses increased approximately 3.0%, or $3.0 million, to $104.9 million for the twelve months ended July 31, 1997 from $101.9 million for the twelve months ended July 31, 1996. However, as a percentage of net sales, operating expenses decreased to 16.5% for the twelve months ended July 31, 1997 from 17.6% for the twelve months ended July 31, 1996. Operating expenses for the twelve months ended July 31, 1996 included $1.6 million representing the write-down of intangible assets, $0.5 million for costs associated with the merger with Mountain People's and $1.1 million for costs associated with the grant of stock options under the Company's 1996 Stock Option Plan. Excluding this charge, the Company's total operating expenses for the twelve months ended July 31, 1996 would have been $98.8 million, or 17.0% of net sales. The decrease in total operating expenses as a percentage of net sales was attributable to the Company's absorption of fixed expenses and overhead over a larger sales base. Operating Income. Operating income increased $6.6 million, or approximately 42.6%, to $22.3 million for the twelve months ended July 31, 1997 from $15.7 million for the twelve months ended July 31, 1996. As a percentage of net sales, operating income increased to 3.5% for the twelve months ended July 31, 1997 from 2.7% for the twelve months ended July 31, 1996. Excluding the charges discussed above, operating income for the twelve months ended July 31, 1996 would have been $18.8 million, or 3.2% of net sales. Other (Income)/Expense. Total other expense, net, decreased by $2.0 million, or approximately 27.6%, to $5.3 million for the twelve months ended July 31, 1997 from $7.3 million for the twelve months ended July 31, 1996. The decrease was primarily attributable to lower interest payments for the twelve months ended July 31, 1997 resulting from the use of the proceeds of the Company's initial public offering to repay debt. As a result, interest expense decreased to $6.0 million for the twelve months ended July 31, 1997 from $7.7 million for the twelve months ended July 31, 1996. Income Taxes. The Company's effective income tax rate was 39.0% and 43.8% for the twelve months ended July 31, 1997 and 1996, respectively. Stow Mills was taxed as an S Corporation prior to the merger with the Company. Had Stow Mills been a C corporation, the Company's effective tax rates would have been 41.3% and 49.6% for the twelve months ended July 31, 1997 and 1996, respectively. The effective rates were higher than the federal statutory rate primarily due to nondeductible amortization, especially the write-off of the intangible assets in the twelve months ended July 31, 1996, as well as the impact of state and local income taxes. Net Income. As a result of the foregoing, the Company's income before extraordinary item for the twelve months ended July 31, 1997 was $10.4 million. In November 1996, the Company completed its initial public offering of stock, the net proceeds of which were used to repay debt. In connection with the Company's early repayment of debt from the proceeds of its initial public offering, the Company recorded an extraordinary loss of $1.6 million ($0.9 million net of taxes) for the twelve months ended July 31, 1997. Net income for the twelve months ended July 31, 1997 was $9.5 million. Net income for the twelve months ended July 31, 1996 was $4.7 million. Net income for the year included a charge of $1.3 million net of taxes. NINE MONTHS ENDED JULY 31, 1996 COMPARED TO NINE MONTHS ENDED JULY 31, 1995 Net Sales. The Company's net sales increased 38.0%, or $121.2 million, to $439.8 million for the nine months ended July 31, 1996 from $318.6 million for the nine months ended July 31, 1995. The increase in net sales was primarily due to additional sales of $74.5 million attributable to Nutrasource and Rainbow, whose operations were included for the entire nine-month period in 1996. Sales of $6.5 million were attributable to two months of operations of Nutrasource during the comparable 1995 period. The remainder of the increase was also attributable to increased sales by the Company to existing customers, including net sales attributable to new products offered by the Company and net sales to new customers in existing geographic distribution areas as well as new geographic areas not formerly served by the Company. Gross Profit. The Company's gross profit increased 33.4%, or $22.4 million, to $89.7 million for the nine months ended July 31, 1996 from $67.3 million for the nine months ended July 31, 1995. The Company's gross 18 profit as a percentage of net sales decreased to 20.4% for the nine months ended July 31, 1996 from 21.1% for the nine months ended July 31, 1995. The decrease in the gross profit as a percentage of net sales was primarily due to the lower-margin business of the Company's recently acquired distributors and to the increase in net sales during fiscal 1996 attributable to super natural chains, which tend to buy in larger quantities and to qualify for greater volume discounts. Operating Expenses. The Company's total operating expenses increased 31.3%, or $18.1 million, to $75.9 million for the nine months ended July 31, 1996 from $57.8 million for the nine months ended July 31, 1995. As a percentage of net sales, operating expenses decreased to 17.2% for the nine months ended July 31, 1996 from 18.1% for the nine months ended July 31, 1995. Total operating expenses for the nine months ended July 31, 1996 included a non-cash charge of $1.1 million related to the grant of options under the Company's 1996 Stock Option Plan and a charge of $0.5 million representing costs associated with the Mountain People's merger. Excluding the charges discussed above, the Company's total operating expenses would have been $74.4 million, or 16.9% of net sales, for the nine months ended July 31, 1996. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the Company's increased absorption of overhead and fixed expenses over a larger sales base. In addition, the Company achieved increased operating efficiencies through the implementation of new information and warehouse management systems in its Connecticut and Georgia facilities. Operating Income. Operating income increased $4.4 million, or 45.8%, to $13.9 million for the nine months ended July 31, 1996 from $9.5 million for the nine months ended July 31, 1995. As a percentage of net sales, operating income increased to 3.2% for the nine months ended July 31, 1996 from 3.0% in the nine months ended July 31, 1995. Excluding the charges discussed above, operating income would have been $15.4 million, or 3.5% of net sales, for the nine months ended July 31, 1996. Other Income/(Expense). The $1.8 million increase in interest expense for the nine months ended July 31, 1996 compared to the nine months ended July 31, 1995 was primarily attributable to the indebtedness incurred in connection with the purchase of the Company's Connecticut facility in August 1995 and the acquisitions of Nutrasource and Rainbow, along with an increase in borrowings under the Company's revolving lines of credit to fund increasing inventory and accounts receivable balances related to the Company's increased operating volume. Income Taxes. The Company's effective income tax rates were 34.6% and 38.0% for the nine months ended July 31, 1996 and 1995, respectively. Stow Mills was taxed as an S Corporation prior to the merger with the Company. Had Stow Mills been a C corporation, the Company's effective tax rates would have been 40.6% and 40.0% for the nine months ended July 31, 1996 and 1995, respectively. The effective rates were higher than the federal statutory rate due to nondeductible costs associated with the merger with Mountain People's and state and local income taxes. Net Income. As a result of the foregoing, the Company's net income increased by 52.7%, or $1.9 million, to $5.5 million for the nine months ended July 31, 1996 from $3.6 million for the nine months ended July 31, 1995. Excluding the $1.1 million of charges (net of taxes) related to the granting of options under the 1996 Stock Option Plan and the costs associated with the Mountain People's merger, net income would have been $7.1 million, or 1.6% of net sales, for the nine months ended July 31, 1996. LIQUIDITY AND CAPITAL RESOURCES The Company historically has financed its operations and growth primarily from cash flows from operations, borrowings under its credit facility, seller financing of acquisitions, operating and capital leases, trade payables, bank indebtedness and the sale of debt and equity securities. Primary uses of capital have been acquisitions, expansion of plant and equipment and investment in accounts receivable and inventory. 19 Net cash (used in) provided by operations was $(5.5) million, $1.9 million and $(0.5) million for the six months ended January 31, 1998, the year ended July 31, 1997 and the nine months ended July 31, 1996, respectively. The Company's increase in cash used in operations for the six months ended January 31, 1998 related to increased investments in accounts receivable and inventory and a decrease in accounts payable, all in the ordinary course of business. The recent increases in inventory levels relate to supporting increased sales with wider product assortment combined with the Company's ability to capture purchasing efficiency opportunities in excess of total carrying costs. The decrease in accounts payable is the result of accelerating payments to capture early payment discounts in excess of the Company's cost of capital. Excluding the merger expenses, net cash used in operations for the first six months of 1998 would have been $1.4 million. The Company's working capital at January 31, 1998 was $57.4 million. Net cash used in investing activities was $4.5 million, $3.8 million and $8.6 million for the six months ended January 31, 1998, the year ended July 31, 1997 and the nine months ended July 31, 1996, respectively. Investing activities included primarily capital expenditures related to the purchase of material handling equipment and the continued upgrade of existing management information systems. During the nine months ended July 31, 1996, the Company also used capital to purchase and expand its Connecticut distribution facility. The Company's capital expenditures were primarily funded from senior bank indebtedness, including term loans. Cash provided by financing activities was $12.5 million, $2.0 million and $9.3 million for the six months ended January 31, 1998, the year ended July 31, 1997 and the nine months ended July 31, 1996, respectively. During fiscal 1997, the Company issued 2.9 million shares of its common stock in its initial public offering, which resulted in net proceeds to the Company of $35.5 million. The proceeds were used to repay indebtedness of the Company. The Company also utilized proceeds from long-term debt of $8.6 million, $12.5 million and $6.5 million for the six months ended January 31, 1998, the year ended July 31, 1997 and the nine months ended July 31, 1996, respectively. In October 1997, the Company amended its credit agreement with its bank to increase the amount of the facility from $50 million to $100 million, to increase the limit on inventory advances to $50 million and the advance rate to 60%, to establish a term loan of $6.6 million and to increase the aggregate amount of real estate acquisition loans and real estate term loans to $20 million. The agreement also provides for the bank to syndicate the credit facility to other banks and lending institutions. The credit facility was used to repay existing indebtedness of Stow Mills owing to the Company's bank and will be used for general operating capital needs. Interest under the facility, except the portion related to the mortgage commitments, accrues at the Company's option at the New York Prime Rate or 1.00% above the bank's London Interbank Offered Rate (LIBOR), and the Company has the option to fix the rate for all or a portion of the debt for a period up to 180 days. Interest on the mortgage facility will accrue at 1.25% above the bank's LIBOR rate, although the Company has the option to fix the rate for a period of five years at a rate of 1.25% above the five-year rate for U.S. Treasury Notes. The Company has pledged all of its assets as collateral for its obligations under the credit agreement. As of January 31, 1998, the Company's outstanding borrowings under the credit agreement totaled $38.6 million. The credit agreement expires on July 31, 2002. The Company expects to spend approximately $25 million over the next five years in capital expenditures to fund the expansion of existing facilities, upgrade information systems and technology and update its material handling equipment. Included in this amount are $3 to $5 million in capital expenditures in the 1998 and 1999 calendar years for the Company's Year 2000 upgrade and new warehouse management system, including new hardware and installation. Management believes that the Company will have adequate capital resources and liquidity to meet its borrowing obligations, fund all required capital expenditures and pursue its business strategy, with the exception of any major acquisitions which may be made by the Company, through fiscal 2000. The Company's capital resources and liquidity are expected to be provided by cash flow from operations and borrowings under the credit facility and capital and operating leases. All of the net proceeds from this offering will be used to repay certain of the Company's outstanding indebtedness. See "Use of Proceeds." 20 IMPACT OF INFLATION Historically, the Company has been able to pass along inflation-related increases. Consequently, inflation has not had a material impact upon the results of the Company's operations or profitability. SEASONALITY Generally, the Company does not experience any material seasonality. However, the Company's sales and operating results may vary significantly from quarter to quarter due to factors such as changes in the Company's operating expenses, management's ability to execute the Company's operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of Information about Capital Structure." This statement establishes standards for disclosing information about an entity's capital structure. This statement is effective for periods ending after December 15, 1997. The Company is in compliance with this standard. The Financial Accounting Standards Board recently issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. This statement is effective for fiscal years beginning after December 15, 1997 and requires reclassification of financial statements for earlier periods provided for comparative purposes. The Company will comply with the required presentation in fiscal 1999. The Financial Accounting Standards Board recently issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting operating segments of publicly traded business enterprises in annual and interim financial statements and requires that those enterprises report selected information about operating segments. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business," but retains the requirement to report information about major customers. This statement also amends SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries." SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997 and requires that comparative information for earlier years be restated. The Company has not yet determined what impact, if any, this standard will have on its financial statement presentation. The Financial Accounting Standards Board recently issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes disclosure requirements for pensions and other postretirement benefits, and is effective for fiscal years beginning after December 15, 1997. This statement does not apply to the Company as the Company does not currently sponsor any defined benefit plans. YEAR 2000 ISSUES The Company's financial accounting systems are Year 2000 compliant. The Company's Eastern Region and its Chicago facility are not currently Year 2000 compliant. The Company is currently reviewing its operational business systems to ensure Year 2000 compliance and to enhance its business systems functionality to achieve operating efficiencies and customer service improvements. The Company plans to purchase packaged software to address Year 2000 issues when available. The Company expects to incur $3 to $5 million in expenditures in the 1998 and 1999 calendar years for its Year 2000 upgrade and new warehouse management systems, including new hardware and installation. However, there can be no assurance that the systems of other companies on which the Company's systems rely also will be timely converted or that any such failure to convert by another company would not have a material adverse effect on the Company's business, financial condition or results of operations. 21 BUSINESS United Natural Foods, Inc. is the leading independent national distributor of natural foods and related products in the United States. The Company is the primary supplier to a majority of its customers, offering more than 26,000 high-quality natural products consisting of groceries and general merchandise, nutritional supplements, bulk and foodservice products, personal care items, perishables and frozen foods. The Company serves more than 6,500 customers in 46 states, including independent natural products retailers, super natural chains and conventional supermarkets, and is the primary distributor to the two largest super natural chains, Whole Foods and Wild Oats. The Company also owns and operates 16 retail natural products stores which complement its distribution business. The Company's strategy is to continue to capitalize on its leading market position and strong industry trends to enhance its position as the leading independent national distributor to the natural products industry. For the twelve months ended January 31, 1998, the Company generated net sales and operating income of $679.6 million and $23.3 million, respectively, representing compound annual growth rates of 21.6% and 34.4%, respectively, from the twelve months ended October 31, 1994. The Company has achieved its market leadership position through a strategy consisting of both strong internal growth and acquisitions. Since 1985, the Company has successfully completed 13 acquisitions of distributors and suppliers, including Stow Mills and Hershey, and 11 acquisitions of retail stores, significantly expanding the Company's distribution network, product offering and customer base. On October 31, 1997, the Company merged with Stow Mills, a regional natural products distributor serving the Northeast and Midwest regions of the United States. The Company believes that the Stow Mills merger will generate significant benefits, including: (i) increased market share and distribution capacity, particularly in the Midwest; (ii) improved purchasing power; (iii) enhanced product offerings; (iv) improved distribution logistics and operating efficiencies; and (v) significant opportunities for the reduction of selling, general and administrative expenses. On February 11, 1998, the Company acquired the assets of Hershey, a business specializing in the international trading, roasting and packaging of nuts, seeds, dried fruits and snack items. In managing its growth strategy, the Company has successfully captured the benefits of its national scale, while utilizing a regional approach to managing its business, taking advantage of the strong customer loyalty developed by its regional divisions which have formed the foundation of the Company. As a result of its national expansion, the Company has organized its operations into three geographic regions: Cornucopia and Stow Mills in the Eastern Region, Rainbow in the Central Region and Mountain People's in the Western Region. The Company believes that this combination of national distribution economies combined with a regional operating focus has been the cornerstone of its successful operating strategy. NATURAL PRODUCTS INDUSTRY According to The Natural Foods Merchandiser, a leading industry publication, growth in the natural products industry has accelerated from a 15% annual increase in sales in 1992 to a 25% annual increase in 1996. The industry achieved a compound annual growth rate of 21% from 1992 to 1996, growing from $5.3 billion to $11.5 billion. The Company believes that this growth reflects a broadening of the natural products consumer base which is being driven by several factors, including an increasing awareness of the link between diet and health, healthier eating patterns, increasing concern regarding food purity and safety and greater environmental awareness. According to The Natural Foods Merchandiser, the natural products retailing sector is highly fragmented, with over 6,700 independent natural products retailers in operation in 1996 and continuing to grow annually. Although the natural products industry sector remains fragmented, natural products supermarkets continue to increase their market share of total natural products sales as they expand into additional geographic markets and acquire smaller independent competitors. In addition, conventional supermarkets and mass market outlets have also begun to increase their emphasis on the sale of natural products as the sector gains appeal. Moreover, as consumer demand for natural products has grown, an increasing number of national, regional and local natural products have become available as more suppliers and producers have entered the market. 22 COMPETITIVE ADVANTAGES The Company believes it benefits from a number of significant competitive advantages which include: . MARKET LEADER WITH A NATIONWIDE PRESENCE. As a result of its nationwide presence, the Company believes it is one of the few distributors capable of serving both local and regional customers as well as the rapidly growing super natural chains. The Company believes it has significant advantages over smaller, regional natural products distributors as a result of its ability to: (i) derive significant economies of scale in operating and distribution expenses; (ii) benefit from increased purchasing power and breadth of product offering; (iii) make significant investments in advanced technology and equipment, which will enhance productivity and customer service; and (iv) provide superior customer service on a national scale. . LOW-COST OPERATOR. The Company believes that it is well positioned to provide value added distribution services to its customers at attractive prices while also providing superior customer service. In addition to its volume purchasing power advantage, a critical component of the Company's position as a low-cost provider is its effective management of warehouse and distribution costs, primarily as a result of utilizing larger distribution centers within each of its geographic regions and integrating its facilities through its nationwide interregional logistics network. In addition, the Company has made significant investment in transportation equipment and information technology to enable it to more efficiently serve its customers. . EXPANDING BASE OF PREMIER CUSTOMER RELATIONSHIPS. The Company serves more than 6,500 customers in 46 states. The Company has developed long-standing customer relationships that it believes are among the strongest in the industry. The Company has also been the primary supplier to each of the industry's two largest super natural chains, Whole Foods and Wild Oats, for more than ten years. . EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. The Company's management team has extensive experience in the natural products industry and has been successful in identifying, consummating and integrating multiple acquisitions. Since 1985, the Company has successfully completed 13 acquisitions of distributors and suppliers, including Stow Mills and Hershey, and 11 acquisitions of retail stores. In addition, after giving effect to this offering, the Company's executive officers and directors, and their affiliates, and the ESOT will beneficially own in the aggregate approximately 57.7% of the Company's Common Stock. Accordingly, the Company's senior management and employees have significant incentive to continue to generate strong growth in operating results in the future. GROWTH STRATEGY The Company's growth strategy is to maintain and enhance its position as the leading independent national distributor to the natural products industry. Key elements of the Company's strategy include: . INCREASE MARKET SHARE OF THE RAPIDLY GROWING NATURAL PRODUCTS INDUSTRY. The Company's strategy is to continue to increase its leading market share of the rapidly growing natural products industry by significantly expanding its customer base, increasing its share of existing customers' business and continuing to expand and further penetrate new distribution territories. Expand Existing Customer Base. The Company has expanded substantially the number of customers served to more than 6,500 as of January 31, 1998. The Company plans to continue to expand its coverage of the highly fragmented natural products industry by cultivating new customer relationships within the industry as well as in developing channels of business such as traditional supermarkets, mass market outlets, Internet retailers, institutional foodservice providers, hotels and gourmet stores. Increase Its Share of Existing Customers' Distribution Needs. The Company seeks to become the primary supplier for a majority of its customers' needs by offering the broadest product offering in the industry at the most competitive prices. Since 1993, the Company has significantly expanded its product offering from approximately 14,000 products to more than 26,000 as of January 31, 1998. In addition, the Company has launched a number of highly successful private label programs, which offer both the Company and its customers higher margins than many of the Company's existing product 23 offerings. As a result, the Company believes it has become the primary distributor to the majority of its natural products customer base. Continue to Expand and Penetrate Into New Distribution Territories. Since 1993, the Company has increased the aggregate size of its distribution centers from approximately 660,000 square feet to approximately 1,250,000 square feet and the number of states served from 25 to 46. The Company will continue to selectively evaluate opportunities to acquire (i) distributors to fill in existing markets and expand into new markets and (ii) suppliers to expand margins through vertical integration and brand differentiation. The Company currently has no agreements or understandings with regard to any such acquisitions. . CONTINUE TO IMPROVE EFFICIENCY OF NATIONWIDE DISTRIBUTION NETWORK. The Company continually seeks to improve its operating results by integrating its nationwide network utilizing the best practices within the industry and within each of the regions that have formed the foundation of the Company. This focus on achieving improved economies of scale in purchasing, warehousing, transportation and general and administrative functions has resulted in significant improvements in operating margins, which increased from 2.5% in fiscal 1994 to 4.6% in the quarter ended January 31, 1998. Management believes that there are significant additional opportunities for margin improvement from its best practices programs. . CAPITALIZE ON THE BENEFITS OF THE STOW MILLS MERGER. With the Stow Mills merger in October 1997, the Company significantly expanded its customer base, distribution capacity and product offering. The merger is expected to generate significant benefits, including: (i) increased market share and distribution capacity, particularly in the Midwest; (ii) improved purchasing power; (iii) enhanced product offerings; (iv) improved distribution logistics and operating efficiencies; and (v) significant opportunities for the reduction of redundant selling, general and administrative expenses. As a result, management expects the Stow Mills merger to offer significant opportunities for future sales growth together with opportunities for further margin improvement. . CONTINUE TO PROVIDE THE LEADING DISTRIBUTION SOLUTION. The Company's strategy is to continue to provide the leading distribution solution to the natural products industry through its national scale, regional responsiveness, high customer service focus and breadth of product offering. The Company offers its customers a selection of inventory management, merchandising, marketing, promotional and event management services to increase customer sales and enhance customer satisfaction and a broad range of marketing services, many of which are supplier-sponsored, including monthly and seasonal flier programs, in-store signage and assistance in product display, all in order to assist its customers in increasing sales. PRODUCTS The Company's extensive selection of high-quality natural products enables it to provide a primary source of supply to a diverse base of customers whose product needs vary significantly. The Company distributes more than 26,000 high-quality natural products, consisting of national brand, regional brand, private label and master distribution products in six product categories consisting of grocery and general merchandise, nutritional supplements, bulk and foodservice products, personal care items, perishables and frozen foods. The Company's private label products address certain preferences of customers that are not otherwise being met by other suppliers. The Company evaluates more than 10,000 potential new products each year based on existing and anticipated trends in consumer preferences and buying patterns. Since 1992, the Company has introduced an average of 350 new products each month, while discontinuing approximately 150 less successful products. The Company's buyers regularly attend regional natural, organic, specialty, ethnic and gourmet products shows to review the latest product introductions that are likely to be of interest to retailers and consumers. The Company also actively solicits suggestions for new products from its customers. The Company makes the majority of its new product decisions at the regional level. The Company believes that its decentralized purchasing practices allow its regional purchasers to react quickly to changing consumer preferences and to evaluate new products 24 and new product categories regionally. In addition, many of the new products offered by the Company are marketed on a regional basis or in the Company's own retail stores prior to being offered nationally, which enables the Company to evaluate local consumer reaction to the products without incurring significant inventory risk. SUPPLIERS The Company purchases its products from approximately 1,800 active suppliers. Although the majority of the Company's suppliers are based in the United States, the Company regularly sources products from vendors throughout Europe, Asia, South America, Africa and Australia. Management believes that natural products suppliers seek distribution of their products through the Company because it provides access to a large and growing customer base, distributes the majority of the suppliers' products and supports the suppliers' marketing programs. Substantially all product categories distributed by the Company are available from a number of suppliers and the Company is not dependent on any single source of supply for any product category. The Company's largest supplier accounted for approximately 3.8% of total purchases in calendar 1997. The Company has positioned itself to respond to regional and local customer preferences for natural products by decentralizing the majority of its purchasing decisions for all products except bulk commodities. The Company believes that regional buyers are best suited to identify and to respond to local demands and preferences. Although each of the Company's regions is responsible for placing its own orders and can select the products that it believes will most appeal to its customers, each region is required to participate in Company-wide purchasing programs that enable it to take advantage of the Company's consolidated purchasing power. For example, the Company has positioned itself as the largest purchaser of organically grown bulk products in the natural products industry by centralizing its purchase of nuts, seeds, grains, flours and dried foods. The Company's purchasing staff cooperates closely with suppliers to provide new and existing products. The suppliers assist in training the Company's account and customer service representatives in marketing new products, identifying industry trends and coordinating advertising and other promotions. The Company maintains a comprehensive quality control assurance program. All products sold by the Company and represented as "organic" are required to be certified as such by an independent third-party agency. The Company maintains current certification affidavits on all organic commodities and produce in order to verify the authenticity of the product. All potential vendors of organic products are required to provide such third-party certification before they are approved as a supplier to the Company. In addition, the Company has secured the services of counsel specializing in Food and Drug Administration ("FDA") matters to audit all labels, packaging, ingredient lists and product claims relating to products offered by the Company to ensure that all products meet current FDA requirements. The Company believes that it is the only natural products distributor which has performed such an audit to date. CUSTOMERS The Company markets its products to more than 6,500 customers located in 46 states. The Company maintains long-standing customer relationships with independent natural products retailers, including super natural chains, and has continued to emphasize its relationships with new customers, such as conventional supermarkets, Internet retailers and other mass market outlets, as well as gourmet stores, all of which are continually increasing their natural product offerings. Among the Company's wholesale customers are leading super natural chains doing business as Whole Foods Market, Wild Oats Markets, Nature's Fresh, Northwest!, Nature's Heartland and Wild Harvest and conventional supermarket chains such as Carr's, City Market, Harris Teeter, King Soopers, Kroger, Path Mark, Quality Food Centers (QFC), Shaws, Star Market and Stop and Shop. Management believes that the Company is the primary supplier to the majority of its customers. Whole Foods accounted for approximately 14% of the Company's net sales in fiscal 1997. No other customer accounted for more than 10% of the Company's net sales in fiscal 1997. 25 The following table sets forth the types of customers served by the Company and the approximate percentage of its net sales generated by each category for calendar 1996 and 1997.
PERCENTAGE OF NET SALES -------------- 1996 1997 TYPE OF CUSTOMER Independent Natural Products Stores........................ 53.8% 55.5% Super Natural Chains....................................... 31.5 31.1 Conventional Supermarkets.................................. 9.3 8.9 Miscellaneous/Other........................................ 5.4 4.5 ------ ------ 100.0% 100.0% ====== ======
SALES The Company maintains an order fill rate that exceeds 95% (excluding products unavailable from the supplier), which the Company believes is one of the highest order fill rates in the natural products distribution industry. The Company believes that its high fill rates can be attributed to its experienced purchasing department and sophisticated warehousing, inventory control and distribution systems. The Company offers next-day delivery service to a majority of its active customers and offers multiple deliveries each week to its largest customers. The Company believes that customer loyalty is dependent upon outstanding customer service to ensure accurate fulfillment of orders, timely product delivery, low prices and a high level of product marketing support. MARKETING The Company has developed a variety of supplier-sponsored marketing services that cater to a broad range of retail formats. These programs are designed to educate consumers, profile suppliers and increase sales for retailers, the majority of which do not have the resources necessary to conduct such marketing programs independently. The Company offers a monthly flier program featuring the logo and address of the participating retailer imprinted on a flier advertising approximately 200 sale items which is distributed by the retailer to its customers. The color fliers are designed by the Company's in-house marketing department utilizing modern digital photography and contain detailed product descriptions and pricing information. In addition, each flier generally includes detailed information on selected vendors, recipes, product features and a comparison of the characteristics of a natural product with a similar mass market product. The monthly flier program is structured to pass through to the retailer the benefit of company negotiated discounts and advertising allowances. The program also provides retailers with posters, window banners and shelf tags to coincide with each month's promotions. In addition to its monthly flier program, the Company offers thematic custom and seasonal consumer fliers that are used to promote items associated with a particular cause or season, such as environmentally sensitive products for Earth Day or foods and gifts particularly popular during the holiday season. The Company also (i) offers in-store signage and promotional materials, including shopping bags and end-cap displays, (ii) provides assistance with planning and setting up product displays and (iii) advises on pricing decisions to enable its customers to respond to local competition. DISTRIBUTION The Company maintains nine distribution centers located in Atlanta, Georgia; Auburn, California; Chesterfield, New Hampshire; Chicago, Illinois; Dayville, Connecticut; Denver, Colorado; Kealeakua, Hawaii; New Oxford, Pennsylvania; and Seattle, Washington. These facilities consist of an aggregate of more than 26 1,200,000 square feet of space, the largest capacity of any distributor in the natural products industry. The Company has recently expanded its Connecticut headquarters from 165,000 to 245,000 square feet and leased a new facility in Colorado which, at 180,800 square feet, is twice the size of its former facility. The Company intends to replace its 40,000 square foot auxiliary storage facility in Sacramento, California with a 75,000 square foot storage facility located adjacent to its Auburn, California distribution center.
SIZE LEASE LOCATION (IN SQUARE FEET) EXPIRATION Atlanta, Georgia............................... 175,000 March 1999 Auburn, California............................. 150,000 Owned Chesterfield, New Hampshire.................... 126,500 Owned Chicago, Illinois.............................. 80,000 December 2000 Dayville, Connecticut.......................... 245,000 Owned Denver, Colorado............................... 180,800 July 2013 Kealeakua, Hawaii.............................. 16,300 October 2002 New Oxford, Pennsylvania....................... 127,000 May 2003 Seattle, Washington............................ 100,000 February 2001
The Company has carefully chosen the sites for its distribution centers to provide direct access to its regional markets. This proximity allows the Company to reduce its transportation costs compared to competitors that seek to service their customers from locations that are often hundreds of miles away. The Company believes that it incurs lower inbound freight expense than its regional competitors because its national presence allows it to buy full and partial truckloads of products which, if necessary, it can backhaul using the Company's own trucks between its distribution centers and satellite staging facilities. Many of the Company's competitors must employ outside consolidation services and pay higher carrier transportation fees to move products from other regions. In addition, overstocks and inventory imbalances at one distribution center may be redistributed by the Company to another distribution center where products may be sold prior to their expiration date. Products are delivered to the Company's distribution centers primarily by its leased fleet of trucks, contract carriers and the suppliers themselves. The Company leases most of its trucks from Ryder Truck Leasing, which maintains facilities on some of the Company's premises for the maintenance and service of these vehicles, and a lesser number of its trucks from regional firms that offer competitive services. The Company ships orders for supplements or for items that are destined for areas outside regular delivery routes through the United Parcel Service and other independent carriers. Deliveries to areas outside the continental United States are shipped by ocean-going containers on a weekly basis. TECHNOLOGY The Company has made a significant investment in information and warehouse management systems. The Company continually evaluates and upgrades its management information systems based on the best practices in the distribution industry and at its regional operations in order to make the systems more efficient, cost effective and responsive to customer needs. These systems include radio frequency-based inventory control, paperless receiving, engineered labor standards, computer-assisted order processing and slot locator/retrieval assignment systems. At the receiving docks, warehouse workers attach computer-generated, preprinted locator tags to inbound products. These tags contain the expiration date, locations, quantity, lot number and other information in bar code format. To process customer orders, warehouse workers use hand-held radio frequency devices to scan the UPC bar code as a product is removed from its assigned slot. Similarly, customer returns are processed by scanning the UPC bar codes. The Company also employs a management information system that enables it to lower its inbound transportation costs by making optimum use of its own fleet of trucks or by consolidating deliveries into full truckloads. Orders from multiple suppliers and multiple distribution centers are consolidated into single truckloads for efficient use of available vehicle capacity and return-haul trips. 27 The Company has recently begun installation of an Oracle-based Warehouse Management Systems (WMS) software package at its Dayville and Atlanta facilities. The Company expects to realize continued customer service improvements as a result of this investment and anticipates that the WMS will be operational in six of its distribution centers by the end of calendar 1999. RETAIL OPERATIONS The Company's Natural Retail Group currently owns and operates 16 retail natural products stores located in Connecticut, Florida, Maryland, Massachusetts and New York. The Company's retail strategy is to selectively acquire existing stores that meet the Company's strict criteria in categories such as sales and profitability, growth potential, merchandising and management. Generally, the Company will not purchase stores that directly compete with primary retail customers of its distribution business. The Company believes its retail stores have a number of advantages over their competitors, including the financial strength and marketing expertise provided by the Company, the purchasing power resulting from group purchasing by stores within NRG and the breadth of their product selection. The Company's strategy for future retail growth is to identify and acquire additional retail stores as opportunities arise and to focus on increased sales of higher margin nutritional supplements while maintaining emphasis on the sale of organic produce and delicatessen and bakery products and consumer education. As both a distributor to its retail stores and a retailer, a number of advantages are made available to the Company, including the ability to: (i) control the purchases made by these stores; (ii) expand the number of high- growth, high-margin product categories such as produce and prepared foods within these stores; and (iii) keep current with the retail marketplace which allows it to better serve its distribution customers. In addition, as the primary natural products distributor to its retail locations, the Company expects to realize significant economies of scale and operating and buying efficiencies. As an operator of retail stores, the Company also has the ability to test market select products prior to offering them nationally, which allows the Company to evaluate consumer reaction to the product without incurring significant inventory risk. The Company is able to test new marketing and promotional programs within its stores prior to offering them to a broader customer base. COMPETITION The natural products distribution industry is highly competitive. The industry has been characterized in recent years by significant consolidation and the emergence of large competitors. The Company's major national competitor is Tree of Life Distribution, Inc. (a subsidiary of Koninklijke Bolswessanen N.V.) and its major regional competitors are Nature's Best, Inc. in the western United States, Northeast Cooperative in the eastern United States and Blooming Prairie Cooperative Warehouse in the Midwestern states. The Company also competes with numerous smaller regional and local distributors of ethnic, Kosher, gourmet and other specialty foods. In addition, the Company competes with national, regional and local distributors of conventional groceries and, to a lesser extent, companies that distribute to their own retail facilities. There can be no assurance that distributors of conventional groceries will not increase their emphasis on natural products and more directly compete with the Company or that new competitors will not enter the market. Many of these distributors may have been in business longer, may have substantially greater financial and other resources than the Company and may be better established in their markets. There can be no assurance that the Company's current or potential competitors will not provide services comparable or superior to those provided by the Company or adapt more quickly than the Company to evolving industry trends or changing market requirements. It is also possible that alliances among competitors may emerge and rapidly acquire significant market share or that certain of the Company's 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 the Company's business, financial condition or results of operations. The Company believes that distributors in the natural products industry compete principally on product quality and depth of inventory selection, price and quality of customer service. Although the Company believes it currently competes effectively with respect to each of these factors, there can be no assurance that the Company will be able to maintain its competitive position against current and potential competitors. 28 The Company's retail stores compete against other natural products outlets, conventional supermarkets and specialty stores. The Company believes that retailers of natural products compete principally on product quality and selection, price, knowledge of personnel and convenience of location. EMPLOYEES As of March 31, 1998, United Natural had approximately 2,230 full- and part- time employees. The Company is currently, and has in the past been, the focus of union-organizing efforts. An aggregate of approximately 90 of the employees at the Company's Seattle, Washington and Rahway, New Jersey facilities are covered by a collective bargaining agreement. United Natural has never experienced a work stoppage by its unionized employees. United Natural believes that its relationship with its employees is good. 29 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company and their ages as of March 31, 1998 are as follows:
NAME AGE POSITION Norman A. Cloutier(1)(2)..... 44 Chairman of the Board and Chief Executive Officer Michael S. Funk(2)........... 43 Vice Chairman of the Board, President of the Company and President of the Company's Western Region Robert T. Cirulnick.......... 42 Chief Financial Officer Richard S. Youngman.......... 46 President of the Company's Eastern Region and Director of the Company Daniel V. Atwood............. 40 President of NRG, Vice President, Assistant Treasurer and Assistant Secretary Kevin T. Michel.............. 40 President of the Company's Central Region and Director of the Company Barclay McFadden, III........ 47 Director Thomas B. Simone(1)(3)....... 58 Director Steven H. Townsend........... 44 Director Richard J. Williams(1)(3).... 37 Director
- --------------------- (1) Member of the Audit Committee. (2) Member of the Nominating Committee. (3) Member of the Compensation Committee. Norman A. Cloutier founded the Company in 1978. Mr. Cloutier has been Chairman of the Board and Chief Executive Officer of the Company since its inception. Mr. Cloutier served as President of the Company from its inception until October 1996. Mr. Cloutier previously operated a natural products retail store in Coventry, Rhode Island from 1977 to 1978. Michael S. Funk has been Vice Chairman of the Board of the Company since February 1996 and President of the Company since October 1996. Mr. Funk served as Executive Vice President of the Company from February 1996 until October 1996. Since its inception in July 1976, Mr. Funk has been President of Mountain People's (currently the Company's Western Region). Mr. Funk has served on the Board of Directors since February 1996. Robert T. Cirulnick has been Chief Financial Officer of the Company since February 1998. Mr. Cirulnick served in various financial capacities with PepsiCo, Inc. from September 1985 through January 1998, including Vice President, Controller of Frito-Lay, Inc., a subsidiary of PepsiCo, from August 1994 to February 1995. Mr. Cirulnick was the Chief Financial Officer and Director of Finance and Administration for Smith's Food Group, a joint venture company between PepsiCo and General Mills from May 1993 through August 1994. Mr. Cirulnick was a Certified Public Accountant with KPMG Peat Marwick LLP from June 1980 to September 1985, where he served in various audit and tax capacities. Richard S. Youngman was the President and a director of Stow Mills and its predecessor company from 1979 until October 1997. In October 1997, Mr. Youngman became Chief Executive Officer of Stow Mills and President of the Company's Eastern Region. Mr. Youngman has served on the Board of Directors since December 1997. Daniel V. Atwood has been President of NRG and Vice President of the Company since August 1995. Mr. Atwood was Vice President--Marketing of the Company from January 1984 to August 1995. From 1979 to 1982, Mr. Atwood was a Store Manager at Bread & Circus Supermarkets, a super natural chain. Mr. Atwood served on the Board of Directors from August 1988 to December 1997. 30 Kevin T. Michel has been President of the Company's Central Region since January 1998. Mr. Michel served as Chief Financial Officer of Mountain People's from January 1995 until December 1997. From January 1992 until January 1995, Mr. Michel held several different accounting and finance positions at Mountain People's. From March 1991 until December 1991, Mr. Michel was the sole proprietor of a restaurant. Mr. Michel has served on the Board of Directors since February 1996. Barclay McFadden, III was the Chief Executive Officer and a director of Stow Mills and its predecessor company from 1976 until October 1997. Mr. McFadden serves on the Board of Directors of First Vermont Bank and a number of charitable organizations. Mr. McFadden has served on the Board of Directors since December 1997. Thomas B. Simone has served on the Board of Directors since October 1996. Since April 1994, Mr. Simone has served as President and Chief Executive Officer of Simone & Associates, a healthcare and natural products investment and consulting company. From February 1991 to April 1994, Mr. Simone was President of McKesson Drug Company. Mr. Simone also serves on the Board of Directors of ECO-DENT International, Inc. and IBV Technologies, Inc. Steven H. Townsend served as Vice President--Finance and Administration of the Company from 1983 to February 1998 and Chief Financial Officer of the Company from August 1988 to February 1998. From 1980 to 1983, Mr. Townsend was Director of Finance for the Town of Mansfield, Connecticut. Mr. Townsend has served on the Board of Directors since August 1988. Richard J. Williams has been a Managing Director of Triumph Capital Group, Inc. since March 1990. Mr. Williams has served on the Board of Directors since November 1993. Mr. Williams also serves on the Board of Directors of Outsource International, Inc. 31 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of March 31, 1998, and as adjusted to reflect the sale of the shares of Common Stock offered hereby, by (i) each person or entity known to the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each of the Company's directors, (iii) the Chief Executive Officer and the three other most highly compensated executive officers during the fiscal year ended July 31, 1997, (iv) all directors and executive officers as a group and (v) each of the other Selling Stockholders.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING(1) SHARES AFTER OFFERING(1)(2) --------------------- BEING -------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED(3) NUMBER PERCENTAGE 5% STOCKHOLDERS Norman A. Cloutier(4)... 3,369,466 19.2% 250,000 3,119,466 16.8% c/o United Natural Foods, Inc. 260 Lake Road Dayville, CT 06241 Michael S. Funk(5)...... 3,009,216 17.2% 250,000 2,759,216 15.0% c/o Mountain People's Warehouse Incorporated 12745 Earhart Avenue Auburn, CA 95602 Funk Family 1992 Revoca- 2,916,100 16.8% 250,000 2,666,100 14.5% ble Living Trust(6).... c/o Michael S. Funk Mountain People's Ware- house Incorporated 12745 Earhart Avenue Auburn, CA 95602 Richard S. Youngman..... 2,448,468 14.1% 250,000 2,198,468 12.0% c/o Stow Mills, Inc. Stow Drive Chesterfield, NH 03443 Employee Stock Ownership 2,063,004 11.9% -- 2,063,004 11.2% Trust(7)............... Robert G. Huckins, Trustee 15342 Sky High Road Escondido, CA 92025 Barclay McFadden, III... 2,025,576 11.7% 1,577,009 448,567 2.4% c/o United Natural Foods, Inc. 260 Lake Road Dayville, CT 06241 OTHER DIRECTORS AND EX- ECUTIVE OFFICERS Steven H. Townsend(8)... 147,496 * -- 147,496 * Daniel V. Atwood(9)..... 76,900 * -- 76,900 * Kevin T. Michel......... -- -- -- -- -- Thomas B. Simone........ -- -- -- -- -- Richard J. Wil- 488,730 2.8% 488,730 -- -- liams(10).............. All executive officers 11,565,852 65.2% 2,815,739 8,750,113 46.7% and directors, as a group (10 per- sons)(11).............. OTHER SELLING STOCKHOLD- ERS Triumph--Connecticut 488,730 2.8% 488,730 -- -- Limited Partnership.... Barclay McFadden Family 406,722 2.3% 406,722 -- -- Trust.................. James S. McDonald, Trustee Barclay McFadden IV 1995 5,423 * 5,423 -- -- Trust.................. Peter B. Loring, Trustee George Stillman McFadden 5,423 * 5,423 -- -- Trust.................. Peter B. Loring, Trustee Thomas Morrison Carnegie 5,423 * 5,423 -- -- McFadden Trust......... Peter B. Loring, Trustee Jonathan Jacobowitz..... 27,115 * 10,000 17,115 *
32 - --------------------- * Less than 1% (1) The number of shares beneficially owned by each stockholder is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days after March 31, 1998 through the exercise of any stock option or other right. The inclusion herein of such shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares such power with his or her spouse) with respect to all shares of capital stock listed as owned by such person or entity. (2) Assumes no exercise of the Underwriters' over-allotment option. (3) In the event that the over-allotment option is exercised in full, the Funk Family 1992 Revocable Living Trust (the "Funk Family Trust") and Messrs. Youngman and McFadden will each offer to sell an additional 212,500 shares to the Underwriters. As a result of such exercise, the Funk Family Trust and Messrs. Youngman and McFadden will thereafter beneficially own 2,453,600 (or 13.4%), 1,985,968 (or 10.8%) and 236,067 (or 1.3%), respectively, of the shares outstanding after this offering. (4) Includes 167,375 shares issuable within the 60-day period following March 31, 1998 pursuant to the exercise of stock options. Does not include 31,938 shares held by the ESOT and allocated to Mr. Cloutier under the Employee Stock Ownership Plan ("ESOP"). (5) Includes 2,916,100 shares held by the Funk Family Trust, of which Michael and Judith Funk are the Co-Trustees. Includes 93,116 shares issuable within the 60-day period following March 31, 1998 pursuant to the exercise of stock options. Does not include 1,335 shares held by the ESOT and allocated to Mr. Funk under the ESOP. (6) Michael S. Funk and his wife Judith A. Funk are Co-Trustees of the Funk Family Trust and share investment and voting control of the shares held by the trust. (7) ESOP participants are entitled to direct Robert G. Huckins, the trustee of the ESOT (the "Trustee"), as to how to vote shares allocated to their ESOP accounts under the ESOP. In accordance with the provisions of the ESOP, the Trustee is directed to vote unallocated shares of Common Stock, and allocated shares for which no voting direction has been received, in the same proportion as participants have directed the Trustee to vote their allocated shares of Common Stock. (8) Includes 58,000 shares transferred to Marjolaine M. Townsend, wife of Mr. Townsend. Includes 89,496 shares issuable within the 60-day period following March 31, 1998 pursuant to the exercise of stock options. Does not include 22,437 shares held by the ESOT and allocated to Mr. Townsend under the ESOP. (9) Includes 44,000 shares issuable within the 60-day period following March 31, 1998 pursuant to the exercise of stock options. Does not include 21,803 shares held by the ESOT and allocated to Mr. Atwood under the ESOP. (10) Consists of the 488,730 shares held by Triumph-Connecticut Limited Partnership, of which Mr. Williams is a general partner of the general partner. Mr. Williams disclaims beneficial ownership of these shares except to the extent of his proportionate pecuniary interest therein. (11) Includes 393,987 shares issuable within the 60-day period following March 31, 1998 pursuant to the exercise of stock options. 33 UNDERWRITING Subject to certain conditions contained in the Underwriting Agreement, a syndicate of underwriters named below (the "Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation, Smith Barney Inc. and Wheat First Union, a division of Wheat First Securities, Inc., are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company and the Selling Stockholders an aggregate of 4,250,000 shares of Common Stock. The number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below:
NUMBER OF UNDERWRITERS SHARES Donaldson, Lufkin & Jenrette Securities Corporation.................. Smith Barney Inc..................................................... Wheat First Securities, Inc. ........................................ --------- Total.............................................................. 4,250,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the shares of Common Stock offered hereby are subject to approval of certain legal matters by their counsel and to certain other conditions. If any of the shares of Common Stock offered hereby are purchased by the Underwriters pursuant to the Underwriting Agreement, the Underwriters are obligated to purchase all such shares (other than those covered by the over-allotment option described below). The Company and the Selling Stockholders have been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public initially at the price to the public set forth on the cover page of this Prospectus and to certain dealers (including the Underwriters) at such price, less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. Certain Selling Stockholders have granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase from time to time, in whole or in part, up to an aggregate of 637,500 additional shares of Common Stock at the public offering price less underwriting discounts and commissions, solely to cover over-allotments. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of option shares pro rata in accordance with such Underwriter's initial commitment as indicated in the preceding table. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Company, its officers and directors and certain other stockholders will agree not to (i) pledge, offer, sell, contract to sell, sell any options or contracts to purchase, purchase any options or contracts to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, other than the exercise of options exercisable for the purchase of Common Stock, or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise) for a period of 90 days after the date of this Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, provided that the Company may grant options and issue Common Stock upon the exercise of options under its option plans. In addition, during such period, the Company will also agree not to file any registration statement with respect to, and each of its executive officers, directors and certain stockholders of the Company will agree not to make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock without Donaldson, Lufkin & Jenrette Securities Corporation's prior written consent. 34 Other than in the United States, no action has been taken by the Company, the Selling Stockholders or the Underwriters that would permit a public offering of the shares of Common Stock offered hereby in any jurisdiction where action for that purpose is required. The shares of Common Stock offered hereby may not be offered or sold, directly or indirectly, nor may this Prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares of Common Stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons into whose possession this Prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering of the Common Stock and the distribution of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of Common Stock offered hereby in any jurisdiction in which such an offer or a solicitation is unlawful. In general, the rules of the Securities and Exchange Commission (the "Commission") prohibit the Underwriters (and selling group members) from making a market in the Common Stock during the "cooling off" period immediately preceding the commencement of sales in this offering. The Commission has, however, adopted exemptions from these rules that permit passive market making under certain conditions. The Underwriters and dealers may engage in passive market making transaction in the Common Stock in accordance with Rule 103 of Regulation M promulgated by the Commission. In general, a passive market maker may not bid for or purchase the Common Stock at a price that exceeds the highest independent bid. In addition, the net daily purchases made by any passive market maker generally may not exceed 30% of its average daily trading volume in the Common Stock during a specified two-month prior period, or 200 shares, whichever is greater. A passive market maker must identify passive market making bids on the Nasdaq electronic inter- dealer reporting systems. Passive market making may stabilize or maintain the market price of the Common Stock above independent market levels. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time. In connection with this offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect, the price of the Common Stock. Specifically, the Underwriters may overallot this offering, creating a syndicate short position. The Underwriters may bid for and purchase shares of Common Stock in the open market to cover syndicate short positions or to stabilize the price of the Common Stock. These activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities and may end these activities at any time. In connection with the merger of United Natural and Stow Mills in October 1997, advisory services were rendered to United Natural by Smith Barney Inc. and to Stow Mills by Salomon Brothers Inc. Smith Barney Inc. and Salomon Brothers Inc received customary financial advisory fees from United Natural and Stow Mills, respectively, for such services. Smith Barney Inc. and Salomon Brothers Inc are separately registered broker/dealers which, since late November 1997, have been under the common control of Salomon Smith Barney Holdings Inc. LEGAL MATTERS The validity of the shares of Common Stock offered by the Company hereby will be passed upon for the Company by Hale and Dorr llp, Boston, Massachusetts, and for the Underwriters by Goodwin, Procter & Hoar llp, Boston, Massachusetts. EXPERTS The consolidated financial statements of United Natural Foods, Inc. as of July 31, 1996 and 1997 and for the year ended October 31, 1995, for the nine months ended July 31, 1996 and for the year ended July 31, 1997 and the related consolidated financial statement schedule have been included and incorporated by reference in this Registration Statement, respectively, in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, which reports are included and incorporated by reference herein, respectively, and given upon the authority of said firm as experts in accounting and auditing. 35 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act, and in accordance with the Exchange Act files reports, proxy statements and other information with the Commission. The Company has filed a registration statement on Form S-3 (the "Registration Statement") under the Securities Act with the Commission with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, does not contain all the information set forth in the Registration Statement and reference is made to the Registration Statement and the exhibits thereto for further information with respect to the Company and the Common Stock. Such reports, proxy statements, Registration Statement and exhibits and other information omitted from this Prospectus can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commission's Regional Offices located at Seven World Trade Center, Suite 1300, New York, N.Y. 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661- 2511. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Such reports, proxy statements and other information concerning the Company can be inspected at the Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C. 20006. In addition, the Company is required to file electronic versions of these documents with the Commission through the Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1997, the Company's Proxy Statement dated November 25, 1997 for the Company's 1997 Annual Meeting of Stockholders, the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 1997, including the amendment thereto on Form 10-Q/A filed with the Commission on January 6, 1998, the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1998, the Company's Current Reports on Form 8-K dated November 12, 1997, February 10, 1998 and April 28, 1998 and the description of the Company's capital stock contained in its Registration Statement on Form 8-A filed on October 11, 1996 are incorporated by reference in this Prospectus. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering made hereby shall be deemed to be incorporated by reference into this Prospectus and to be made a part hereof from the respective dates of filing of such documents. Any statement in any document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of the Registration Statement and this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of the Registration Statement or this Prospectus. Copies of the above documents (other than exhibits to such documents unless such exhibits are specifically incorporated by reference in such documents) may be obtained upon written or oral request without charge from the Company, 260 Lake Road, Dayville, Connecticut 06241, Attention: Robert T. Cirulnick, telephone (860) 779-2800. 36 UNITED NATURAL FOODS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE UNITED NATURAL FOODS, INC. AND SUBSIDIARIES: Independent Auditors' Report........................................... F-2 Consolidated Balance Sheets............................................ F-3 Consolidated Statements of Income...................................... F-4 Consolidated Statements of Stockholders' Equity........................ F-5 Consolidated Statements of Cash Flows.................................. F-6 Notes to Consolidated Financial Statements............................. F-8
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors United Natural Foods, Inc.: We have audited the accompanying consolidated balance sheets of United Natural Foods, Inc. and subsidiaries as of July 31, 1996 and 1997 and the related consolidated statements of income, stockholders' equity and cash flows for the year ended October 31, 1995, for the nine months ended July 31, 1996, and for the year ended July 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Natural Foods, Inc. and subsidiaries as of July 31, 1996 and 1997 and the results of their operations and their cash flows for the year ended October 31, 1995, for the nine months ended July 31, 1996, and for the year ended July 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Providence, Rhode Island April 15, 1998 F-2 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 JULY 31, 1997 JANUARY 31, 1998 ------------- ------------- ---------------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Current assets: Cash and cash equivalents....... $ 749 $ 952 $ 3,458 Accounts receivable, net of allowance of $1,411 and $2,283 for 1996 and 1997, respectively................... 40,042 42,952 49,581 Notes receivable, trade......... 360 866 908 Inventories..................... 63,761 71,509 78,035 Prepaid expenses................ 2,133 4,110 3,568 Deferred income taxes........... 796 1,032 1,032 -------- -------- -------- Total current assets........ 107,841 121,421 136,582 -------- -------- -------- Property and equipment, net....... 33,218 32,412 32,723 -------- -------- -------- Other assets: Notes receivable, trade, net.... 1,068 995 1,274 Goodwill, net of accumulated amortization of $556 and $791 for 1996 and 1997, respectively................... 8,096 7,579 8,453 Covenants not to compete, net of accumulated amortization of $711 and $1,552 for 1996 and 1997, respectively............. 1,117 592 512 Other, net...................... 1,003 1,562 793 -------- -------- -------- Total assets................ $152,343 $164,561 $180,337 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQ- UITY Current liabilities: Notes payable................... $ 50,251 $ 27,222 $ 38,603 Current installments of long- term debt...................... 5,102 3,016 1,426 Current installments of obligations under capital leases......................... 526 681 151 Accounts payable................ 30,013 30,536 31,962 Accrued expenses................ 8,192 6,488 6,613 Income taxes payable............ 304 377 419 -------- -------- -------- Total current liabilities... 94,388 68,320 79,174 Long-term debt, excluding current installments..................... 27,374 20,411 21,803 Notes payable to Stow officers/stockholders............ 5,483 -- -- Deferred income taxes............. 407 678 678 Obligations under capital leases, excluding current installments... 1,251 1,236 1,113 -------- -------- -------- Total liabilities........... 128,903 90,645 102,768 -------- -------- -------- Stockholders' equity: Preferred stock, $.01 par value: authorized 5,000 shares; none issued or outstanding .... -- -- -- Common stock, $.01 par value: authorized 25,000 shares; issued 13,691 and outstanding 13,671 in 1996; issued 17,377 and outstanding 17,357 in 1997;................ 137 174 174 Additional paid-in capital...... 6,592 51,842 50,007 Stock warrants.................. 3,200 -- -- Unallocated shares of Employee Stock Ownership Plan (ESOP).... (3,074) (2,910) (2,829) Retained earnings............... 16,629 24,854 30,261 Treasury stock, 20 shares at cost........................... (44) (44) (44) -------- -------- -------- Total stockholders' equity.. 23,440 73,916 77,569 -------- -------- -------- Total liabilities and stockholders' equity....... $152,343 $164,561 $180,337 ======== ======== ========
See notes to consolidated financial statements. F-3 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JANUARY 31, NINE YEAR ENDED MONTHS ENDED YEAR ENDED OCTOBER 31, JULY 31, JULY 31, 1995 1996 1997 1997 1998 ----------- ------------ ---------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales............... $458,849 $439,842 $634,825 $306,575 $351,359 Cost of sales........... 363,757 350,130 507,547 244,536 280,862 -------- -------- -------- -------- -------- Gross profit........... 95,092 89,712 127,278 62,039 70,497 -------- -------- -------- -------- -------- Operating expenses...... 81,355 75,059 103,885 52,148 55,577 Merger expenses......... -- -- -- -- 4,064 Amortization of intangibles............ 2,426 793 1,060 530 505 -------- -------- -------- -------- -------- Total operating expenses.............. 83,781 75,852 104,945 52,678 60,146 -------- -------- -------- -------- -------- Operating income....... 11,311 13,860 22,333 9,361 10,351 -------- -------- -------- -------- -------- Other expense (income): Interest expense....... 5,462 5,524 5,481 3,268 2,273 Interest expense on notes payable to Stow officers/stockholders.. 507 363 495 240 - Other, net............. (428) (360) (679) (301) (349) -------- -------- -------- -------- -------- Total other expense.... 5,541 5,527 5,297 3,207 1,924 -------- -------- -------- -------- -------- Income before income taxes and extraordinary item.... 5,770 8,333 17,036 6,154 8,427 Income taxes............ 2,953 2,883 6,636 2,571 4,855 -------- -------- -------- -------- -------- Income before extraordinary item.... 2,817 5,450 10,400 3,583 3,572 Extraordinary item--loss on early extinguishment of debt, net of income tax benefit of $662 -- -- 933 933 -- -------- -------- -------- -------- -------- Net income............. $ 2,817 $ 5,450 $ 9,467 $ 2,650 $ 3,572 ======== ======== ======== ======== ======== Pro forma additional income tax expense (Unaudited)............ 75 499 401 6 320 -------- -------- -------- -------- -------- Pro forma income before extraordinary item (Unaudited)............ $ 2,742 $ 4,951 $ 9,999 $ 3,577 $ 3,252 ======== ======== ======== ======== ======== Per share data (Basic): Income before extraordinary item..... $ 0.21 $ 0.40 $ 0.64 $ 0.23 $ 0.21 Extraordinary item, net of income tax benefit.. -- -- 0.06 0.06 -- -------- -------- -------- -------- -------- Net income............. $ 0.21 $ 0.40 $ 0.58 $ 0.17 $ 0.21 ======== ======== ======== ======== ======== Pro forma income before extraordinary item (Unaudited)............ $ 0.20 $ 0.36 $ 0.61 $ 0.23 $ 0.19 ======== ======== ======== ======== ======== Weighted average basic shares of common stock.................. 13,691 13,687 16,367 15,394 17,357 ======== ======== ======== ======== ======== Per share data (Diluted): Income before extraordinary item..... $ 0.19 $ 0.37 $ 0.63 $ 0.22 $ 0.20 Extraordinary item, net of income tax benefit.. -- -- 0.06 0.06 -- -------- -------- -------- -------- -------- Net income............. $ 0.19 $ 0.37 $ 0.57 $ 0.16 $ 0.20 ======== ======== ======== ======== ======== Pro forma income before extraordinary item (Unaudited)............ $ 0.18 $ 0.33 $ 0.60 $ 0.22 $ 0.18 ======== ======== ======== ======== ======== Weighted average diluted shares of common stock.................. 14,858 14,853 16,553 16,125 17,654 ======== ======== ======== ======== ========
See notes to consolidated financial statements. F-4 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNALLOCATED OUTSTANDING ADDITIONAL SHARES OF TOTAL NUMBER COMMON PAID-IN STOCK EMPLOYEE STOCK RETAINED TREASURY STOCKHOLDERS' OF SHARES STOCK CAPITAL WARRANTS OWNERSHIP PLAN EARNINGS STOCK EQUITY ----------- ------ ---------- -------- -------------- -------- -------- ------------- (IN THOUSANDS) Balances at October 31, 1994.................... 13,691 $137 $ 4,285 $3,200 $(3,359) $10,001 $-- $14,264 Allocation of shares to ESOP................... -- -- -- -- 163 -- -- 163 Distributions to Stow officers/stockholders.. -- -- -- -- -- (127) -- (127) Transfer of undistributed earnings of S Corporation to additional paid-in capital................ -- -- 87 -- -- (87) -- -- Net income.............. -- -- -- -- -- 2,817 -- 2,817 ------ ---- ------- ------ ------- ------- ---- ------- Balances at October 31, 1995.................... 13,691 137 4,372 3,200 (3,196) 12,604 -- 17,117 Allocation of shares to ESOP................... -- -- -- -- 122 -- -- 122 Purchase of treasury stock.................. (20) -- -- -- -- -- (44) (44) Stock options .......... -- -- 1,056 -- -- -- -- 1,056 Distributions to Stow officers/stockholders.. -- -- -- -- -- (261) -- (261) Transfer of undistributed earnings of S Corporation to additional paid-in capital................ -- -- 1,164 -- -- (1,164) -- -- Net income.............. -- -- -- -- -- 5,450 -- 5,450 ------ ---- ------- ------ ------- ------- ---- ------- Balances at July 31, 1996.................... 13,671 137 6,592 3,200 (3,074) 16,629 (44) 23,440 Issuance of common stock.................. 2,900 29 35,481 -- -- -- -- 35,510 Exercise of stock warrants............... 786 8 3,192 (3,200) -- -- -- -- Allocation of shares to ESOP................... -- -- -- -- 164 -- -- 164 Distributions to Stow officers/stockholders.. -- -- -- -- -- (611) -- (611) Capital contribution.... 6,043 -- -- -- 6,043 Effect of change in year end.................... -- -- -- -- -- (97) -- (97) Transfer of undistributed earnings of S Corporation to additional paid-in capital................ -- -- 534 -- -- (534) -- -- Net income.............. -- -- -- -- -- 9,467 -- 9,467 ------ ---- ------- ------ ------- ------- ---- ------- Balances at July 31, 1997.................... 17,357 174 51,842 -- (2,910) 24,854 (44) 73,916 Allocation of shares to ESOP (Unaudited)....... -- -- -- -- 81 -- -- 81 Transfer of undistributed loss of S Corporation to additional paid-in capital (Unaudited).... -- -- (1,835) -- -- 1,835 -- -- Net income (Unaudited).. -- -- -- -- -- 3,572 -- 3,572 ------ ---- ------- ------ ------- ------- ---- ------- Balances at January 31, 1998 (Unaudited)........ 17,357 $174 $50,007 $ -- $(2,829) $30,261 $(44) $77,569 ====== ==== ======= ====== ======= ======= ==== =======
See notes to consolidated financial statements. F-5 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JANUARY 31, NINE YEAR ENDED MONTHS ENDED YEAR ENDED OCTOBER 31, 1995 JULY 31, 1996 JULY 31, 1997 1997 1998 ---------------- ------------- ------------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.............. $ 2,817 $5,450 $ 9,467 $ 2,650 $ 3,572 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Extraordinary loss on early extinguishment of debt, net of tax benefit............... -- -- 933 933 -- Depreciation, amortization and write-off of intangible assets..... 5,640 4,052 5,609 2,996 2,957 Loss (gain) on disposals of property and equipment......... (32) 34 9 6 (1) Accretion of original issue discount........ 530 459 153 153 -- Compensation expense related to stock options............... -- 1,056 -- -- -- Deferred income taxes.. 330 (270) (5) (101) -- Provision for doubtful accounts.............. 763 647 2,112 1,529 704 Changes in assets and liabilities, net of acquired companies: Accounts receivable.... (7,383) (4,073) (3,782) (6,898) (7,954) Inventory.............. (12,029) (8,181) (7,748) (4,858) (6,015) Prepaid expenses....... (240) (761) (1,977) 33 542 Refundable income taxes................. -- -- -- (306) -- Other assets........... 1,990 362 (1,299) (207) 97 Notes receivable, trade................. (265) (204) (434) 38 (321) Accounts payable....... 6,493 (1,694) 523 5,491 1,075 Accrued expenses....... 614 2,418 (1,704) (1,883) 379 Income taxes payable... (247) 195 73 358 (552) ------- ------ ------- -------- ------- Net cash provided (used in) by operating activities............ (1,019) (510) 1,930 (66) (5,517) ------- ------ ------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchases of subsidiaries, net of cash acquired.......... (8,673) (900) -- -- (2,698) Proceeds from disposals of property and equipment.............. 161 53 111 72 259 Capital expenditures.... (10,348) (7,791) (3,875) (2,461) (2,022) ------- ------ ------- -------- ------- Net cash used in investing activities... (18,860) (8,638) (3,764) (2,389) (4,461) ------- ------ ------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings under note payable................ 15,305 9,429 (23,029) (17,033) 11,381 Repayments of long-term debt................... (2,861) (5,954) (22,276) (16,162) (6,798) Proceeds from long-term debt................... 9,604 6,490 12,529 805 8,584 Principal payments of capital lease obligations............ (252) (388) (646) (251) (683) Payment of financing costs.................. (321) -- -- -- -- Proceeds from issuance of common stock, net... -- -- 35,510 35,510 -- Purchase of treasury stock.................. -- (44) -- -- -- Net borrowings on notes payable to Stow officers/stockholders.. (1,574) 25 560 561 -- Cash distributions paid to Stow officers/stockholders.. (127) (277) (611) (445) -- ------- ------ ------- -------- ------- Net cash provided by financing activities... 19,774 9,281 2,037 2,985 12,484 ------- ------ ------- -------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS....... (105) 133 203 530 2,506 Cash and cash equivalents at beginning of period.... 721 616 749 1,282 952 ------- ------ ------- -------- ------- Cash and cash equivalents at end of period................. $ 616 $ 749 $ 952 $ 1,812 $ 3,458 ======= ====== ======= ======== =======
F-6 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................................. $4,834 $ 4,073 $5,895 $3,406 $ 2,298 ====== ======= ====== ====== ======= Income taxes............................. $2,919 $ 2,544 $5,534 $2,503 $ 4,612 ====== ======= ====== ====== =======
Supplemental schedule of non-cash investing and financing activities: In 1995, the Company purchased substantially all of the assets of one retail store and one wholesale distributor, and the capital stock of another wholesale distributor for $6,725. In conjunction with these acquisitions, liabilities were assumed as follows: Fair value of assets acquired: $21,315 Cash paid: 6,725 ------- Liabilities assumed and debt issued: $14,590 =======
In 1996 and 1997, the Company incurred capital lease obligations of approximately $582 and $786, respectively. See notes to consolidated financial statements. F-7 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 31, 1996 AND 1997 (INFORMATION AS OF JANUARY 31, 1998 AND FOR THE SIX MONTHS THEN ENDED IS UNAUDITED) (1) SIGNIFICANT ACCOUNTING POLICIES (A) NATURE OF BUSINESS United Natural Foods, Inc. and Subsidiaries (the Company) is a distributor and retailer of natural products. The Company sells its products throughout the United States. For purposes of segment reporting, the Company considers its operations to be within a single industry. (B) BASIS OF CONSOLIDATION The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. (C) CASH EQUIVALENTS Cash equivalents at January 31, 1998 consist of highly liquid investment instruments with original maturities of three months or less. (D) INVENTORIES Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out (FIFO) method. (E) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments at the inception of the lease. Depreciation and amortization are principally provided under the straight-line method over the estimated useful lives. (F) INCOME TAXES The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (G) INTANGIBLE ASSETS Intangible assets consist principally of goodwill and covenants not to compete. Goodwill represents the excess purchase price over fair value of net assets acquired in connection with purchase business combinations and is being amortized on the straight-line method not exceeding forty years. Covenants not to compete are stated at cost and are amortized using the straight-line method over the lives of the respective agreements, generally five years. The Company evaluates impairment of intangible assets annually, or more frequently if events or changes in circumstances indicate that carrying amounts may no longer be recoverable. Impairment losses are determined F-8 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) based upon the excess of carrying amounts over expected future cash flows (undiscounted) of the underlying business. The assessment of the recoverability of intangible assets will be impacted if estimated future cash flows are not achieved. In fiscal 1995, the Company wrote off approximately $1.6 million in intangible assets, primarily goodwill, upon evaluating impairment of the underlying business of certain of its retail operations. The impairment was indicated by projected cash flow losses caused by increased competition at one location and a change in demographics for the other affected location. This amount is included in "Amortization of Intangibles" in the 1995 Consolidated Statement of Income. (H) REVENUE RECOGNITION AND TRADE RECEIVABLES The Company records revenue upon shipment of products. Revenues are recorded net of applicable sales discounts. The Company's sales are with customers located throughout the United States. The Company had one customer in 1997, Whole Foods Market, Inc. that provided 10% or more of the Company's revenue, and no such customers in 1996 or 1995. Total sales to this customer were approximately $89 million in 1997. (I) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments including cash, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying value of notes receivable, long-term debt and capital lease obligations approximate fair value based on the instruments' interest rate, terms, maturity date, and collateral, if any, in comparison to the Company's incremental borrowing rate for similar financial instruments. (J) CHANGE IN FISCAL YEAR Effective November 1, 1995, the Company elected to change its fiscal year end from October 31 to July 31. The consolidated statements of income and cash flows for the nine months ended July 31, 1996 are not necessarily indicative of results that would be expected for a full year. On October 31, 1997, a subsidiary of the Company completed its merger with Stow Mills, Inc. and Subsidiary and Hendrickson Partners ("Stow"), wherein Stow became a wholly-owned subsidiary of the Company. Prior to this merger, Stow's fiscal year ended December 31. In recording this merger, Stow's combined financial statements for the fiscal year ended December 31, 1996 have been restated to the nine months ended September 27, 1996. As permitted by the rules and regulations of the Securities and Exchange Commission, Stow's nine months ended September 27, 1996 and fiscal year ended December 31, 1995 have been combined with the Company's nine months ended July 31, 1996 and fiscal year ended October 31, 1995, respectively. As a result, Stow's two-month period ended September 27, 1996, has been included in the consolidated financial statements in both the year ended July 31, 1997 and the nine months ended July 31, 1996. Stow's unaudited results of operations for this two-month period included net sales, operating income and net income of approximately $31.0 million, $0.5 million and $0.1 million, respectively. Stow did not pay any dividends during this two-month period. The consolidated statements of stockholders' equity include an adjustment in 1997 to reduce the Company's retained earnings for the net income of Stow for this two-month period. (K) ACCOUNTING CHANGES Effective November 1, 1995, the Company changed its method of accounting for certain inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. Due to a number of recent F-9 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) acquisitions, the Company's subsidiaries were accounting for inventories on varying methods (LIFO, FIFO) and using different calculation methodologies for LIFO. In order to conform all the Company's inventories to the same valuation method and to enhance the comparability of the Company's financial results with other publicly traded entities, the conforming change to FIFO was made, which was deemed preferable for these reasons. This change has been applied retroactively and financial statements of prior periods have been restated. (L) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (M) NOTES RECEIVABLE, TRADE The Company issues notes receivable, trade to certain customers under two basic circumstances, inventory purchases for initial store openings and overdue accounts receivable. Initial store opening notes are generally receivable over a period not to exceed twelve months. The overdue accounts receivable notes may extend for periods greater than one year. All notes are issued at a market interest rate and contain certain guarantees and collateral assignments in favor of the Company. (N) EMPLOYEE BENEFIT PLANS The Company sponsors various defined contribution plans that cover substantially all employees. Pursuant to certain stock incentive plans, the Company has granted stock options to key employees and to non-employee directors. The Company accounts for stock option grants using the intrinsic value based method. (O) EARNINGS PER SHARE During fiscal 1998, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Under the provisions of SFAS No. 128, basic earnings per share replaces primary earnings per share and the dilutive effect of stock options are excluded from the calculation. Fully diluted earnings per share are replaced by diluted earnings per share, and included the dilutive effect of stock options using the treasury stock method. All earnings per share information included in these financial statements has been restated to conform to the requirements of SFAS No. 128. For purposes of the diluted earnings per share calculation, outstanding stock options and stock warrants are considered common stock equivalents, using the treasury stock method. The number of shares used in all calculations has been adjusted to reflect a fifty-five-for-one stock split effective August 30, 1996. A reconciliation of the weighted average number of shares outstanding used in the computation of the basic and diluted earnings per share for the year ended October 31, 1995, nine months ended July 31, 1996, the year ended July 31, 1997 and the six months ended January 31, 1998 is as follows:
NINE MONTHS SIX MONTHS SIX MONTHS YEAR ENDED ENDED YEAR ENDED ENDED ENDED OCTOBER 31, JULY 31, JULY 31, JANUARY 31, JANUARY 31, 1995 1996 1997 1997 1998 ----------- ----------- ---------- ----------- ----------- (in thousands) Weighted average basic shares of common stock 13,691 13,687 16,367 15,394 17,357 Effect of dilutive stock options 1,167 1,166 186 731 297 ------ ------ ------ ------ ------ Weighted average diluted shares of common stock 14,858 14,853 16,553 16,125 17,654 ====== ====== ====== ====== ======
F-10 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In November 1996, the Company completed a public offering of its common stock. Proceeds from the sale of 2.9 million shares were used to repay outstanding bank indebtedness. Assuming the aforementioned sale of common stock and repayment of debt occurred effective August 1, 1996, unaudited supplementary income before extraordinary item per basic common and diluted common share for the year ended July 31, 1997 would have been $0.62 based upon 17.4 million and 17.5 million weighted average basic common and diluted common shares, respectively. (P) PRO FORMA ADDITIONAL INCOME TAX EXPENSE (UNAUDITED) Stow was organized as an S corporation for Federal income tax purposes prior to the merger. Pro forma income tax expense reflects Federal income tax applied to taxable income at a rate of 35% for Stow for all periods prior to the effective date of the merger. (2) ACQUISITIONS SUBSEQUENT EVENTS During February 1998, the Company acquired substantially all the assets of Hershey Import Co., Inc. ("Hershey"), a business specializing in the international trading, roasting and packaging of nuts, seeds, dried fruit and snack items, for approximately $7.5 million. Hershey had sales of $20.8 million for its most recent fiscal year ending June 30, 1997. On October 31, 1997, a subsidiary of the Company completed its merger with Stow wherein Stow became a wholly-owned subsidiary of the Company. The merger with Stow was accounted for as a pooling of interests and, accordingly, all financial information included is reported as though the companies had been combined for all periods presented. The Company issued 4,978,280 shares, which represented 29% of the Company's Common Stock after the merger in exchange for all of the outstanding common stock of Stow. Net sales for the year ended October 31, 1995, nine months ended July 31, 1996, year ended July 31, 1997, and quarter ended October 31, 1997 for the Company excluding Stow were approximately $283.3 million, $286.4 million, $421.7 million and $118.8 million (unaudited), respectively. Net income for the year ended October 31, 1995, nine months ended July 31, 1996, year ended July 31, 1997, and quarter ended October 31, 1997 for the Company excluding Stow was approximately $2.6 million, $4.0 million, $8.3 million and $1.4 million (unaudited), respectively. Net sales for the year ended October 31, 1995, nine months ended July 31, 1996, year ended July 31, 1997, and quarter ended October 31, 1997 for Stow were approximately $175.5 million, $153.4 million, $213.1 million and $56.9 million (unaudited), respectively. Net income (loss) for the year ended October 31, 1995, nine months ended July 31, 1996, year ended July 31, 1997, and quarter ended October 31, 1997 for Stow was approximately $.2 million, $1.4 million, $1.1 million and ($1.7) million (unaudited), respectively. FISCAL 1996 In February 1996, Cornucopia Natural Foods, Inc. (CNF) (predecessor company) and Mountain People's Warehouse, Inc. (MPW) merged in a business combination accounted for as a pooling of interests and CNF changed its name to United Natural Foods, Inc. CNF issued 3,213,100 shares, which represented approximately 37% of the common stock of CNF after the merger, in exchange for all of the outstanding common stock of MPW. The financial statements for all periods presented reflect the merger. Net sales for fiscal 1995 and the quarter ended January 31, 1996 for CNF were $145.6 million and $48.7 million (unaudited), respectively. Net income for fiscal 1995 and the quarter ended January 31, 1996 for CNF was $0.9 million and $1.0 million (unaudited), respectively. Net sales for fiscal 1995 and the quarter ended January 31, 1996 for MPW were $137.7 million and $43.6 million (unaudited), respectively. Net income for fiscal 1995 and the quarter ended January 31, 1996 for MPW $1.7 million and $0.1 million (unaudited), respectively. F-11 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FISCAL 1995 During fiscal 1995, the Company acquired substantially all of the assets of one natural products retailer, SunSplash Market, Inc. (in April 1995), one wholesale distributor, Prem Mark, Inc. (the predecessor business to Rainbow Natural Foods, Inc.) (in July 1995) and the capital stock of another wholesale distributor, Nutrasource, Inc. (in May 1995), in business combinations accounted for as purchases. The results of operations of these acquisitions have been included in the accompanying financial statements since the dates of the acquisitions. The total cash paid and debt issued for these acquisitions was approximately $12.5 million, which exceeded the fair value of the net assets acquired by approximately $6.3 million. This excess of purchase price over the net assets acquired has been recorded as goodwill, and is being amortized over thirty years. In connection with these acquisitions, the Company executed covenants not to compete and consulting agreements totaling approximately $0.5 million to be amortized using the straight-line method over the lives of the respective agreements, generally five years. (3) STOCK OPTION PLAN The Company implemented Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation," during fiscal 1997. While SFAS No. 123 established financial accounting and reporting standards for stock-based employee compensation plans using a fair value method of accounting, it allows companies to continue to measure compensation using the intrinsic value method of accounting as prescribed in APB Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees." The Company will continue to use its present APB No. 25 accounting treatment for stock-based compensation. If the fair value method of accounting had been used, net income would have been $3.8 million and $9.3 million for 1996 and 1997, respectively, basic earnings per share would have been $0.28 and $0.57 for 1996 and 1997, respectively, and diluted earnings per share would have been $0.26 and $0.56 for 1996 and 1997, respectively. The weighted average grant date fair value of options granted during 1996 and 1997 was $6.47 and $5.84 per option, respectively. The fair value of each option grant was estimated using the Black-Sholes Option Pricing Model with the following weighted average assumptions for 1997 and 1996: a dividend yield of 0.0%, an expected volatility of 46.5%, a risk free interest rate of 6.07% and an expected life of 8 years. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. On July 29, 1996, the Board of Directors adopted, and on July 31, 1996 the stockholders approved, the 1996 Stock Option Plan which provides for grants of stock options to employees, officers, directors and others. These options are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code or options not intended to qualify as incentive stock options ("non-statutory stock options"). A total of 1,375,000 shares of common stock may be issued upon the exercise of options granted under the 1996 Stock Option Plan. In 1996, as consideration for their services on the Company's Board of Directors, four employee-directors were awarded non-statutory stock options to purchase an aggregate of 324,500 shares of common stock under the Company's 1996 Stock Option Plan at an exercise price of $6.38 per share, which vested immediately. In addition, one non-employee director was awarded a non- statutory stock option to purchase 16,500 shares of common stock under the 1996 Stock Option Plan at an exercise price of $9.64 per share which vests after three years. Incentive stock options to purchase an aggregate of 297,000 shares of common stock were also granted to several employees at not less than the fair value at the date of grant, with vesting at various rates generally over the next five years. Compensation expense of approximately $1.1 million was charged to operations in fiscal 1996 related to the employee-director stock options. F-12 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes the stock option activity for the six months ended January 31, 1998, fiscal 1997 and fiscal 1996.
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------- ---------------- 1996 Outstanding at beginning of year.................... -- -- Granted............................................. 638,000 $ 8.11 Exercised........................................... -- -- Canceled............................................ -- -- ------- ------ Outstanding at end of year.......................... 638,000 $ 8.11 ======= ====== Options exercisable at year end..................... 353,739 $ 6.61 ======= ====== 1997 Outstanding at beginning of year.................... 638,000 $ 8.11 Granted............................................. 16,500 $ 9.64 Exercised........................................... -- -- Canceled............................................ -- -- ------- ------ Outstanding at end of year.......................... 654,500 $ 8.14 ======= ====== Options exercisable at year end..................... 382,978 $ 6.80 ======= ====== 1998 (UNAUDITED) Outstanding at beginning of period.................. 654,500 $ 8.14 Granted............................................. 247,346 $20.59 Exercised........................................... -- -- Canceled............................................ -- -- ------- ------ Outstanding at end of period........................ 901,846 $11.56 ======= ====== Options exercisable at period end................... 393,987 $ 7.17 ======= ======
The option to purchase 901,846 shares of common stock outstanding at January 31, 1998 had exercise prices and remaining contractual lives as follows:
REMAINING EXERCISE PRICE SHARES CONTRACTUAL LIFE $6.38....................................... 324,500 9 Years $9.64....................................... 247,500 9 Years $10.60...................................... 82,500 4 Years (Unaudited) $20.25.......................... 205,807 10 Years (Unaudited) $22.28.......................... 41,539 5 Years
(4) NOTES PAYABLE The Company entered into a line of credit and term loan agreement (see note 5) with a bank effective February 20, 1996. The agreement has had three subsequent amendments effective March 1997, July 1997 and October 1997. In October 1997, the Company amended the agreement with its bank to increase the amount of the facility from $50 million to $100 million, to increase the limit on inventory advances to $50 million and the advance rate to 60%, to establish a term loan of $6.6 million and to increase the aggregate amount of real estate F-13 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) acquisition loans and real estate term loans to $20 million. The agreement also provides for the bank to syndicate the credit facility to other banks and lending institutions. The credit facility was used to repay existing indebtedness of Stow owing to the Company's bank at the date of the merger and is used for general operating capital needs. Interest under the facility, except the portion related to the mortgage commitments, accrues at the Company's option at the New York Prime Rate (8.25% and 8.50% at July 31, 1996 and 1997, respectively) or 1.00% above the bank's London Interbank Offered Rate (LIBOR), and the Company has the option to fix the rate for all or a portion of the debt for a period up to 180 days. Interest on the mortgage facility will accrue at 1.25% above the bank's LIBOR rate, although the Company has the option to fix the rate for a period of five years at a rate of 1.25% above the five-year U.S Treasury Note rate. At July 31, 1996 and 1997, the weighted average interest rate on the line of credit was 7.84% and 6.98%, respectively. The Company has pledged all of its assets as collateral for its obligations under the credit agreement. As of July 31, 1997, the Company's outstanding borrowings under the credit agreement totaled $6.3 million. The credit agreement expires on July 31, 2002 and contains certain restrictive covenants. The Company was in compliance with its restrictive covenants at July 31, 1997. In connection with the amendment to the Company's credit agreement with its bank as noted above, an Agency and Interlender Agreement was entered into by the Company, its bank and two additional participating banks effective December 1, 1997. This agreement states, among other things, that the Company's primary bank will participate in this credit facility with the other banks. At July 31, 1996, Stow had a revolving line of credit with a bank to borrow up to $25 million due June 30, 1999. The line was increased, per the terms of the agreement, to $28 million at July 1, 1997. Borrowings under the line were limited to qualified accounts receivable and inventory, as defined. The maximum borrowing base available at July 31, 1997 was approximately $24 million which was limited by the letters of credit of approximately $0.7 million. The Company had approximately $2.4 million available under the line on July 31, 1997. This line of credit bore interest at the bank's prime rate (8.50% at July 31, 1997), or the London Interbank Offered Rate (5.6875% at July 31, 1997) plus 150 to 200 basis points or some combination thereof, as defined, and was secured by substantially all of the assets of Stow. At July 31, 1996 and 1997, the weighted average interest rate on the line of credit was 7.93% and 7.98%, respectively. Under the terms of the line of credit, the Company was required to, among other things, maintain certain financial covenants, as defined. In addition, the agreement contained certain restrictions on the sale or disposition of Company assets. At July 31, 1996 and 1997, the Company was either in compliance with such covenants or such events of noncompliance were waived by the bank. This line of credit was repaid in full and canceled as of October 31, 1997. Notes payable to Stow officers/stockholders totaling $5.5 million at July 31, 1996 were due on demand and carried interest at 8.25%. The noteholders waived rights to collect these notes through December 31, 1997, and accordingly, that portion of the notes has been classified as long-term in the accompanying combined balance sheets. These long-term notes were subordinated to all bank debt. The total outstanding balance of the notes was contributed to capital as of June 30, 1997. (5) LONG-TERM DEBT Long-term debt consisted of the following: (dollars in thousands)
JULY 31, JULY 31, 1996 1997 -------- -------- Note payable to limited partnership, secured, with inter- est ranging from 8% to 12% per annum payable quarterly, repaid in November 1996................................. $4,744 -- Term loan for employee stock ownership plan, secured by stock of the Company, due $14 monthly plus interest at 10%, balance due May 1, 2015............................ 3,074 $2,910
F-14 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, JULY 31, 1996 1997 -------- -------- Real estate term loan payable to bank, secured by land and building, refinanced in July 1997................... 5,775 25 Term loan payable to former owners of acquired business, secured by substantially all assets of subsidiary, re- paid in November 1996................................... 2,785 -- Term loan payable to bank, secured by substantially all assets of the Company, with monthly principal payments of $50 through July 2002 and the remaining principal due on July 31, 2002, interest at bank's prime plus 0.25% or at 2.25% above the LIBOR rate........................... 4,702 12,000 Installment notes secured by equipment, payable in monthly installments through 2002 at interest rates ranging from 7.43% to 11.82%............................ 1,958 2,320 Other notes payable to former owners of acquired busi- nesses and former stockholders of subsidiaries, maturing at various dates through February 2002 at interest rates ranging from 6% to 10%.................................. 3,165 528 Notes payable to bank, secured by automobiles, including interest ranging from 6.25% to 7.25%, primarily due over three years............................................. 54 34 Note payable to bank, secured by mortgage, payable in monthly installments through 2001 of $6, carrying inter- est at bank's prime plus 0.5%........................... 301 263 Note payable to bank, secured by mortgage, payable in monthly installments of $39, carrying interest at bank's prime plus 0.75%, due October 2017...................... 4,397 4,336 Note payable to agency, secured by land and building, payable in monthly installments of $3, carrying interest at 8.25%, due October 2001.............................. 120 102 Note payable to agency, secured by land and building, payable in monthly installments of $1, carrying interest at 12%, due March 2001.................................. 27 23 Note payable to agency, secured by land and building, payable in monthly installments of $2, carrying interest at 10.57%, due September 2007........................... 146 141 Term note payable to bank, secured by substantially all assets of Stow, payable in monthly installments of $44, carrying interest at bank's prime plus 0.5%, due Decem- ber 1998................................................ 1,228 745 ------- ------- 32,476 23,427 Less: current installments............................... 5,102 3,016 ------- ------- Long-term debt, excluding current installments........... $27,374 $20,411 ======= =======
The Company entered into a Note and Warrant Purchase Agreement (the Agreement) with a limited partnership (the Purchaser) on November 17, 1993. Under the Agreement, the Company issued to the Purchaser a Senior Note in the principal amount of $6.5 million and a Common Stock Purchase Warrant for 1,166,660 shares of the common stock of the Company. The Senior Note was repaid in full in November 1996 upon receipt of the proceeds from the initial public offering. The loss on the early retirement of debt has been reflected as an extraordinary item of $933, net of the income tax benefit of $662. This loss represents the charge off of the remaining original issue discount at the date of repayment. The Purchaser exercised stock warrants to purchase 785,730 shares of common stock during fiscal 1997 at a price of $.01 per share, with the remaining stock warrants repurchased by the Company. Interest on the Senior Note ranged from 8% to 12% per annum. Certain debt agreements contain restrictive covenants. At July 31, 1997, the Company was either in compliance with such covenants or such events of noncompliance were waived by the counterparty. F-15 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Aggregate maturities of long-term debt for the next five years and thereafter are as follows at July 31, 1997:
(DOLLARS IN THOUSANDS) 1998.................. $ 3,016 1999.................. 1,814 2000.................. 1,403 2001.................. 1,209 2002.................. 9,930 Thereafter............ 6,055 ------- $23,427 =======
(6) PROPERTY AND EQUIPMENT Property and equipment consisted of the following at July 31, 1996 and 1997:
ESTIMATED USEFUL LIVES (YEARS) 1996 1997 ------------- ----------- ----------- (DOLLARS IN THOUSANDS) Land................................. $ 1,070 $ 1,070 Building............................. 20-40 18,441 18,642 Leasehold improvements............... 5-30 4,776 5,894 Warehouse equipment.................. 5-20 10,363 10,625 Office equipment..................... 3-10 6,945 7,439 Motor vehicles....................... 3-5 4,691 5,217 Equipment under capital leases....... 5 2,344 3,299 Construction in progress............. 337 196 ----------- ----------- 48,967 52,382 Less accumulated depreciation and amortization........................ 15,749 19,970 ----------- ----------- Net property and equipment......... $ 33,218 $ 32,412 =========== ===========
(7) CAPITAL LEASES The Company leases computer, office and warehouse equipment under capital leases expiring in various years through 2002. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are depreciated over the lower of their related lease terms or their estimated productive lives. Minimum future lease payments under capital leases as of July 31, 1997 for each of the next five fiscal years and in the aggregate are:
YEAR ENDED JULY 31 AMOUNT (IN THOUSANDS) 1998...................... $ 813 1999...................... 616 2000...................... 498 2001...................... 146 2002 and thereafter....... 120 ------ Total minimum lease payments............... 2,193 Less: Amount representing interest................. 276 ------ Present value of net minimum lease payments............... 1,917 Less: current installments............. 681 ------ Capital lease obligations, excluding current installments... $1,236 ======
F-16 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (8) COMMITMENTS AND CONTINGENCIES The Company leases various facilities under operating lease agreements with varying terms. Most of the leases contain renewal options and purchase options at several specific dates throughout the terms of the leases. The Company also leases equipment under master lease agreements. Payment under these agreements will continue for a period of four years. The equipment lease agreements contain covenants concerning the maintenance of certain financial ratios. The Company was in compliance with its covenants at July 31, 1997. Future minimum annual fixed payments required under non-cancelable operating leases having an original term of more than one year as of July 31, 1997 are as follows:
(IN THOUSANDS) 1998.......................... $ 4,228 1999.......................... 3,676 2000.......................... 3,036 2001.......................... 1,988 2002.......................... 1,821 ------- $14,749 =======
Rent and other lease expense for the year ended October 31, 1995, the nine months ended July 31, 1996 and the year ended July 31, 1997 totaled approximately $5.8 million, $5.2 million and $7.1 million, respectively. Outstanding commitments as of July 31, 1997 for the purchase of inventory were approximately $9.5 million. The Company had outstanding letters of credit of approximately $1.1 million at July 31, 1997. The Company may from time to time be involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. (9) SALARY REDUCTION/PROFIT SHARING PLANS The Company has several salary reduction/profit sharing plans, generally called "401(k) Plans" (the Plans), covering various employee groups. Under these types of Plans the employees may choose to reduce their compensation and have these amounts contributed to the Plans on their behalf. In order to become a participant in the Plans, employees must meet certain eligibility requirements as described in the respective Plan's document. In addition to amounts contributed to the Plans by employees, the Company makes contributions to the Plans on behalf of the employees. The Company contributions to the Plans were approximately $0.4 million, $0.4 million and $0.6 million for the year ended October 31, 1995, for the nine months ended July 31, 1996 and for the year ended July 31, 1997, respectively. F-17 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (10) INCOME TAXES Total Federal and state income tax expense consists of the following:
CURRENT DEFERRED TOTAL ------- -------- ------ (IN THOUSANDS) Fiscal year ended October 31, 1995: U.S. Federal..................................... $2,079 $ 302 $2,381 State and local.................................. 544 28 572 ------ ----- ------ $2,623 $ 330 $2,953 ====== ===== ====== Nine months ended July 31, 1996: U.S. Federal..................................... $2,428 $(255) $2,173 State and local.................................. 725 (15) 710 ------ ----- ------ $3,153 $(270) $2,883 ====== ===== ====== Fiscal year ended July 31, 1997: From continuing operations U.S. Federal................................... $4,839 $ 19 $4,858 State and local................................ 1,802 (24) 1,778 ------ ----- ------ 6,641 (5) 6,636 ------ ----- ------ Extraordinary item U.S. Federal................................... (542) -- (542) State and local................................ (120) -- (120) ------ ----- ------ (662) -- (662) ------ ----- ------ $5,979 $ (5) $5,974 ====== ===== ======
Total income tax expense was different than the amounts computed using the United States statutory income tax rate (approximately 34% for 1995 and 1996 and 35% for fiscal 1997) applied to income before income taxes and extraordinary item as a result of the following:
YEAR ENDED NINE MONTHS ENDED YEAR ENDED OCTOBER 31, JULY 31, JULY 31, 1995 1996 1997 ----------- ----------------- ---------- (IN THOUSANDS) Computed "expected" tax expense... $1,964 $2,849 $5,405 State and local income tax, net of Federal income tax benefit....... 377 467 1,078 Effect of entities not taxed for Federal income tax............... (75) (499) (401) Merger related expenses........... -- 156 -- Non-deductible expenses........... 20 70 42 Non-deductible amortization....... 479 5 16 Other, net........................ 188 (165) (166) ------ ------ ------ $2,953 $2,883 $5,974 ====== ====== ======
F-18 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets and deferred tax liabilities at July 31, 1996 and 1997 are presented below:
1996 1997 ------- ------- (IN THOUSANDS) Deferred tax assets: Inventories, principally due to additional costs inven- toried for tax purposes................................ $ 421 $ 460 Rents deducted for book purposes in excess of tax....... 28 22 Financing costs......................................... 25 25 Intangible assets....................................... 221 301 Deferred compensation................................... 401 411 Accrued vacation........................................ 59 77 Accounts receivable, principally due to allowances for uncollectible accounts................................. 281 202 Other................................................... 165 -- ------ ------- Total gross deferred tax assets....................... 1,601 1,498 Less valuation allowance.................................. -- -- ------ ------- Net deferred tax assets............................... 1,601 1,498 ------ ------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation........................................... 537 571 Reserve for LIFO inventory method....................... 675 523 Other................................................... -- 50 ------ ------- Total deferred tax liabilities........................ 1,212 1,144 ------ ------- Net deferred tax assets................................... $ 389 $ 354 ====== ======= Current deferred income tax assets........................ $ 796 $ 1,032 Non-current deferred income tax liabilities............... (407) (678) ------ ------- $ 389 $ 354 ====== =======
In assessing the recoverability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to the fact that the Company has sufficient taxable income in the federal carryback period and anticipates sufficient future taxable income over the periods which the deferred tax assets are deductible, the ultimate realization of deferred tax assets for Federal and state tax purposes appears more likely than not. (11) EMPLOYEE STOCK OWNERSHIP PLAN The Company adopted the CNF Employee Stock Ownership Plan (the Plan) for the purpose of acquiring outstanding shares of the Company for the benefit of eligible employees. The Plan was effective as of November 1, 1988 and has received notice of qualification by the Internal Revenue Service. In connection with the adoption of the Plan, a Trust was established to hold the shares acquired. On November 1, 1988, the Trust purchased 40% of the outstanding Common Stock of the Company at a price of $4,080,000. The trustees funded this purchase by issuing promissory notes to the initial stockholders, with the ESOT shares pledged as collateral. These notes bear interest at 10% and are payable through May 2015. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans," in F-19 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) November 1993. The statement provides guidance on employers' accounting for ESOPs and is required to be applied to shares purchased by ESOPs after December 31, 1992, that have not been committed to be released as of the beginning of the year of adoption. In accordance with SOP 93-6, the Company elected not to adopt the guidance in SOP 93-6 for the shares held by the ESOP, all of which were purchased prior to December 31, 1992. The debt of the ESOP is recorded as debt and the shares pledged as collateral are reported as unearned ESOP shares in the Supplemental Consolidated Balance Sheets. During 1995, 1996 and 1997 contributions totaling approximately $0.5 million, $0.4 million and $0.5 million, respectively, were made to the Trust. Of these contributions, approximately $0.3 million, $0.2 million and $0.3 million, respectively, represented interest. The ESOP shares were classified as follows:
JULY 31, JULY 31, 1996 1997 -------- -------- (IN THOUSANDS) Allocated shares........................................... 484 550 Shares released for allocation............................. 66 88 Shares distributed to employees............................ (20) (88) Unreleased shares.......................................... 1,650 1,562 ----- ----- Total ESOP shares........................................ 2,180 2,112 ===== =====
The fair value of unreleased shares was approximately $37.5 million at July 31, 1997. Employees have the option of putting their shares back to the Company upon leaving employment. This option will remain available until the shares held by the Trust are registered. (12) STOCK SPLIT In connection with the Company's initial public offering of shares of common stock, on August 30, 1996, the Board of Directors adopted, and the stockholders approved, an amendment to the Company's certificate of incorporation increasing the number of authorized shares of common stock from 0.2 million to 25.0 million and stating the par value of such shares as $0.01, and the Company effected a fifty-five-for-one split of its issued and outstanding common stock. All share, option and warrant and per share data presented in the accompanying consolidated financial statements have been restated to reflect the increased number of authorized and outstanding shares of common stock. F-20 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (13) QUARTERLY FINANCIAL DATA (UNAUDITED) Following is a summary of quarterly operating results and share data. Quarterly information shown below has been adjusted from amounts reported on any Form 10-Q previously filed by the Company to reflect the acquisition of Stow. There were no dividends paid or declared by the Company during fiscal year 1996, the twelve months ended 1997 and the six months ended January 31, 1998 and the Company anticipates that it will continue to retain earnings for use in its business and not pay cash dividends in the foreseeable future. The comparable fiscal year 1996 information has been created by combining actual fiscal 1996 results with the fourth quarter results for fiscal 1995.
FIRST SECOND THIRD FOURTH FULL YEAR -------- -------- -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 Net sales................... $140,207 $142,560 $149,053 $148,229 $580,049 Gross profit................ 27,831 29,334 30,287 30,091 117,543 Income before income taxes.. 14 2,659 3,323 2,351 8,347 Net income (loss)........... (755) 1,940 2,054 1,456 4,695 Per common share Income (Loss) Basic..................... $ (0.06) $ 0.14 $ 0.15 $ 0.11 $ 0.34 Diluted................... $ (0.05) $ 0.13 $ 0.14 $ 0.10 $ 0.32 Weighted average basic shares outstanding......... 13,691 13,691 13,691 13,678 13,687 Weighted average diluted shares outstanding......... 14,858 14,858 14,858 14,844 14,855 1997 Net sales................... $146,659 $160,409 $158,890 $168,867 $634,825 Gross profit................ 29,649 32,396 31,647 33,586 127,278 Income before income taxes and extraordinary item..... 2,346 3,814 5,446 5,430 17,036 Extraordinary item.......... -- 933 -- -- 933 Net income.................. 1,292 1,364 3,377 3,434 9,467 Per common share Income before extraordinary item Basic..................... $ 0.09 $ 0.13 $ 0.19 $ 0.20 $ 0.64 Diluted................... $ 0.09 $ 0.13 $ 0.19 $ 0.20 $ 0.63 Weighted average basic shares outstanding......... 13,671 17,116 17,357 17,357 16,367 Weighted average diluted shares outstanding......... 14,976 17,274 17,539 17,601 16,553
SIX FIRST SECOND MONTHS 1998 -------- -------- -------- Net sales....................................... $173,383 $177,976 $351,359 Gross profit.................................... 34,189 36,308 70,497 Income before income taxes...................... 1,293 7,134 8,427 Net income(loss)................................ (628) 4,200 3,572 Per common share Income (loss) Basic........................................ $ (0.04) $ 0.24 $ 0.21 Diluted...................................... $ (0.04) $ 0.24 $ 0.20 Weighted average basic shares outstanding....... 17,357 17,357 17,357 Weighted average diluted shares outstanding..... 17,649 17,659 17,654
F-21 [Graphic consists of three photographs: (i) an assortment of marketing materials, including catalogs and flyers; (ii) a customer reading the label of a natural product; and (iii) a mother and child at the check-out counter in one of the Company's retail stores.] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CRE- ATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ---------------- TABLE OF CONTENTS
PAGE Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 Use of Proceeds.......................................................... 11 Price Range of Common Stock and Dividend Policy.......................... 11 Capitalization........................................................... 12 Selected Consolidated Financial Data..................................... 13 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 15 Business................................................................. 22 Management............................................................... 30 Principal and Selling Stockholders....................................... 32 Underwriting............................................................. 34 Legal Matters............................................................ 35 Experts.................................................................. 35 Available Information.................................................... 36 Incorporation of Certain Documents by Reference.......................... 36 Index to Consolidated Financial Statements............................... F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4,250,000 SHARES LOGO COMMON STOCK ---------------- PROSPECTUS ---------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SALOMON SMITH BARNEY WHEAT FIRST UNION , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses, all of which will be borne by the Registrant, in connection with the sale and distribution of the securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates except for the Securities and Exchange Commission registration fee and the NASD and Nasdaq fees. SEC Registration Fee.................................................. $ 41,006 NASD Filing Fee....................................................... 14,401 Nasdaq Listing Fee.................................................... 17,500 Blue Sky Fees and Expenses............................................ 10,000 Transfer Agent and Registrar Fees..................................... 10,000 Accounting Fees and Expenses.......................................... 50,000 Legal Fees and Expenses............................................... 100,000 Printing and Mailing Expenses......................................... 100,000 Miscellaneous......................................................... 57,093 -------- Total............................................................... $400,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article EIGHTH of the Registrant's Amended and Restated Certificate of Incorporation (the "Restated Certificate of Incorporation") provides that no director of the Registrant shall be personally liable for any monetary damages for any breach of fiduciary duty as a director, except to the extent that the Delaware General Corporation Law prohibits the elimination or limitation of liability of directors for breach of fiduciary duty. Article NINTH of the Registrant's Restated Certificate of Incorporation provides that a director or officer of the Registrant (a) shall be indemnified by the Registrant against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred in connection with any litigation or other legal proceeding (other than an action by or in the right of the Registrant) brought against him by virtue of his position as a director or officer of the Registrant if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Registrant, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful and (b) shall be indemnified by the Registrant against all expenses (including attorneys' fees) and amounts paid in settlement incurred in connection with any action by or in the right of the Registrant brought against him by virtue of his position as a director or officer of the Registrant if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Registrant, except that no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the Registrant, unless a court determines that, despite such adjudication but in view of all of the circumstances, he is entitled to indemnification of such expenses. Notwithstanding the foregoing, to the extent that a director or officer has been successful, on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, he is required to be indemnified by the Registrant against all expenses (including attorneys' fees) incurred in connection therewith. Expenses shall be advanced to a director or officer at his request, provided that he undertakes to repay the amount advanced if it is ultimately determined that he is not entitled to indemnification for such expenses. Indemnification is required to be made unless the Registrant determines that the applicable standard of conduct required for indemnification has not been met. In the event of a determination by the Registrant that the director or officer did not meet the applicable standard of conduct required for indemnification, or if the Registrant fails to make an indemnification payment within 60 days after such payment is claimed by such person, such person is permitted to petition the court to make an independent determination as to whether such II-1 person is entitled to indemnification. As a condition precedent to the right of indemnification, the director or officer must give the Registrant notice of the action for which indemnity is sought and the Registrant has the right to participate in such action or assume the defense thereof. Article NINTH of the Registrant's Restated Certificate of Incorporation further provides that the indemnification provided therein is not exclusive, and provides that in the event that the Delaware General Corporation Law is amended to expand the indemnification permitted to directors or officers the Registrant must indemnify those persons to the fullest extent permitted by such law as so amended. Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against amounts paid and expenses incurred in connection with an action or proceeding to which he is or is threatened to be made a party by reason of such position, if such person shall have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal proceeding, if such person had no reasonable cause to believe his conduct was unlawful; provided that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the adjudicating court determines that such indemnification is proper under the circumstances. Under Section 8 of the Underwriting Agreement, the Underwriters are obligated, under certain circumstances, to indemnify directors and officers of the Registrant against certain liabilities, including liabilities under the Securities Act. Reference is made to the form of Underwriting Agreement filed as Exhibit 1 hereto. ITEM 16. EXHIBITS
EHIBITX NO. DESCRIPTION *1 Form of Underwriting Agreement. **4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of the Registrant. *5 Opinion of Hale and Dorr LLP with respect to the validity of the securities being offered. 23.1 Consent of Hale and Dorr LLP (included in Exhibit 5). 23.2 Consent of KPMG Peat Marwick LLP, independent auditors. 24 Power of Attorney (included on page II-4).
- --------------------- * To be filed by amendment. ** Incorporated herein by reference to the Registrant's Registration Statement on Form S-1 (File No.333-11349). ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions contained in the Restated Certificate of Incorporation and Amended and Restated By-Laws of the Registrant and the laws of the State of Delaware, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by II-2 the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Dayville, State of Connecticut, on this 28th day of April, 1998. United Natural Foods, Inc. /s/ Norman A. Cloutier By: _________________________________ Norman A. Cloutier Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY AND SIGNATURES We, the undersigned officers and directors of United Natural Foods, Inc., hereby severally constitute and appoint Norman A. Cloutier, Robert T. Cirulnick and Paul V. Rogers, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Registration Statement on Form S-3 filed herewith and any and all pre-effective and post-effective amendments to said Registration Statement, and any subsequent Registration Statement for the same offering which may be filed under Rule 462(b) and generally to do all such things in our names and on our behalf in our capacities as officers and directors to enable United Natural Foods, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Registration Statement and any and all amendments thereto or to any subsequent Registration Statement for the same offering which may be filed under Rule 462(b). II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Norman A. Cloutier Chairman of the April 28, 1998 - ------------------------------------- Board and Chief NORMAN A. CLOUTIER Executive Officer /s/ Michael S. Funk Vice Chairman of the April 28, 1998 - ------------------------------------- Board and President MICHAEL S. FUNK /s/ Robert T. Cirulnick Chief Financial April 28, 1998 - ------------------------------------- Officer (Principal ROBERT T. CIRULNICK Financial and Accounting Officer) /s/ Barclay McFadden, III Director April 28, 1998 - ------------------------------------- BARCLAY MCFADDEN, III /s/ Kevin T. Michel Director April 28, 1998 - ------------------------------------- KEVIN T. MICHEL /s/ Thomas B. Simone Director April 28, 1998 - ------------------------------------- THOMAS B. SIMONE /s/ Steven H. Townsend Director April 28, 1998 - ------------------------------------- STEVEN H. TOWNSEND /s/ Richard J. Williams Director April 28, 1998 - ------------------------------------- RICHARD J. WILLIAMS /s/ Richard S. Youngman Director April 28, 1998 - ------------------------------------- RICHARD S. YOUNGMAN II-5 EXHIBIT INDEX
EHIBITX NO. DESCRIPTION *1 Form of Underwriting Agreement. **4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of the Registrant. *5 Opinion of Hale and Dorr LLP with respect to the validity of the securities being offered. 23.1 Consent of Hale and Dorr LLP (included in Exhibit 5). 23.2 Consent of KPMG Peat Marwick LLP, independent auditors. 24 Power of Attorney (included on page II-4).
- --------------------- * To be filed by amendment. ** Incorporated herein by reference to the Registrant's Registration Statement on Form S-1 (File No.333-11349). EX-23.2 2 CONSENT OF KPMG PEAT MARWICK LLP ACCOUNTANTS' CONSENT The Board of Directors United Natural Foods, Inc.: We consent to the use of our report dated April 15, 1998 relating to the consolidated balance sheets of United Natural Foods, Inc. and subsidiaries as of July 31, 1996 and 1997 and the related consolidated statements of income, stockholders' equity and cash flows for the year ended October 31, 1995, for the nine months ended July 31, 1996, and for the year ended July 31, 1997, included in this Registration Statement on Form S-3. We consent to the use of our report on the related financial statement schedule incorporated herein by reference. We consent to the reference to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in this Registration Statement on Form S-3. KPMG Peat Marwick LLP Providence, Rhode Island April 27, 1998 -----END PRIVACY-ENHANCED MESSAGE-----