-----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, TkypDMd0+vdc0UKU6clgPLPeyM3WUuVcu+g04Agsu4VegqqtSfWyjOAZPjkrM3Vs zEw7Cezcj0KJMrZQZ8YZfg== 0000927016-97-002768.txt : 19971030 0000927016-97-002768.hdr.sgml : 19971030 ACCESSION NUMBER: 0000927016-97-002768 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971029 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: 10-K SEC ACT: SEC FILE NUMBER: 000-21531 FILM NUMBER: 97703165 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 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for fiscal year ended July 31, 1997 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________. Commission File Number: 000-1020859 UNITED NATURAL FOODS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 05-0376157 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 260 Lake Road Dayville, CT 06241 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (860) 779-2800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] (Cover page 1 of 2) The aggregate market value of the voting stock held by non-affiliates of the registrant was $112,720,391, based upon the closing price of the registrant's common stock on the Nasdaq National Market on September 5, 1997. The number of shares of the registrant's common stock, $0.01 par value, outstanding as of October 24, 1997 was 12,378,425. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held in December 1997 are incorporated herein by reference into Part III of this report. =============================================================================== (Cover page 2 of 2) UNITED NATURAL FOODS, INC. FORM 10-K TABLE OF CONTENTS
Page ---- Part I Item 1. Business 1 Item 2. Properties 13 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Executive Officers of the Registrant 15 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 16 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 28 Item 8. Financial Statements and Supplementary Data 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 47 Part III Item 10. Directors and Executive Officers of the Registrant 47 Item 11. Executive Compensation 47 Item 12. Security Ownership of Certain Beneficial Owners and Management 47 Item 13. Certain Relationships and Related Transactions 47 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 48 Signatures 49
Part I Item 1. Business United Natural Foods, Inc. (the "Company" or "United Natural") is one of only two national distributors of natural foods and related products in the United States. The Company currently serves more than 5,800 customers located in 43 states, including independent natural products stores, natural products supermarket chains and conventional supermarkets. The Company distributes more than 25,000 high-quality, national, regional and private label natural products in six categories consisting of groceries and general merchandise, nutritional supplements, bulk and foodservice products, personal care items, perishables and frozen foods. United Natural's distribution operations are divided into three principal regions: Cornucopia Natural Foods, Inc. ("Cornucopia") in the eastern United States, Mountain People's Warehouse, Inc. ("Mountain People's") in the western United States and Rainbow Natural Foods, Inc. ("Rainbow") in the Rocky Mountains and Plains regions. The Company operates five strategically located distribution centers and two satellite staging facilities within these regions to better serve its customers and realize operating efficiencies. The Company also owns and operates nine retail natural products stores located in the eastern United States that management believes complement its distribution business. On June 23, 1997, the Company announced that it had entered into an agreement with Stow Mills, Inc. ("Stow") with respect to a merger in which the two companies will be combined. Pursuant to such agreement, a subsidiary of the Company will be merged with and into Stow, with Stow continuing as the surviving corporation, which will be a wholly-owned subsidiary of the Company. The merger is conditioned, among other things, on the approval by the stockholders of the Company of the issuance of up to an aggregate of 5,000,000 shares of the Company's Common Stock, $.01 par value per share, in order to effect the proposed merger with Stow. The Company has scheduled a special meeting of stockholders to be held on October 30, 1997 to approve the proposed issuance to effect the merger. The principal stockholders of the Company have agreed to vote all shares of Common Stock over which they exercise voting control (approximately 58% of the outstanding shares) for the approval of the issuance proposal. Consequently, the affirmative vote of the principal Company stockholders will be sufficient to approve and adopt the issuance proposal. It is presently expected that the proposed merger will be consummated on October 31, 1997. Stow is a distributor of natural foods and related products in New England, New York State and the Mid-Atlantic and Mid-West regions of the United States. Stow currently distributes its products to more than 3,100 customers located in 30 states and the District of Columbia, including independent natural products stores, natural products supermarket chains and conventional supermarkets. Stow currently distributes approximately 12,000 natural products, including groceries, vitamins and nutritional supplements, refrigerated foods, frozen foods, bulk foods, and body care, health and beauty aids. Stow operates three strategically located distribution facilities. 1 Natural Products Industry Natural foods and related products are minimally processed, environmentally friendly, largely or completely free from artificial ingredients, preservatives and other non-naturally occurring chemicals and in general as close to their natural state as possible. Although most natural products are food products, including organic foods, the natural products industry encompasses a number of other categories, including nutritional and herbal supplements, toiletries and personal care items, naturally based cosmetics, natural/homeopathic medicines and naturally based cleaning agents. The natural products distribution business involves the sourcing, purchasing, warehousing, marketing and transportation of natural products from suppliers to retailers. As the number of suppliers of and retail outlets for natural products has continued to increase, the role of the distributor has become increasingly important. Suppliers of natural products rely on distributors to reach a fragmented customer base and to provide information on consumer preferences at the retail level. At the same time, retailers are placing increasing pressure on distributors for more frequent deliveries, greater product selection, higher fill rates, more information on product movement and additional specialized programs such as financing, merchandising assistance, marketing support and assistance in consumer education. The Company believes that in order to be successful in this market a distributor must have access to capital to invest in systems, technology and warehouse enhancements, broad product knowledge and the ability to provide value added services designed to enable customers to become more efficient and profitable. Management believes that the Company is well-positioned to meet the increasing needs of both its suppliers and customers. Business Strategy The Company's objective is to better meet the changing needs of both suppliers and retailers and to be the leading national distributor of natural products. The key elements of the Company's business strategy include: National Presence. With five distribution centers strategically located in California, Colorado, Connecticut, Georgia and Washington and two satellite staging facilities in Florida and Pennsylvania, the Company is well positioned to provide distribution services to natural products retailers and suppliers located across the United States. As a result, the Company is able to (i) provide next-day delivery service to a majority of its active customers, (ii) make multiple deliveries each week to its largest customers, (iii) coordinate its inventory management with regional purchasing patterns and (iv) achieve significant operating efficiencies. Integration of Recent Acquisitions. United Natural recently made three strategic acquisitions and is currently in the process of integrating these operations to increase the Company's overall efficiency by: (i) eliminating geographic overlaps in distribution, (ii) integrating administrative, finance and accounting functions, (iii) expanding marketing and customer service programs and (iv) upgrading information systems. To preserve its regional 2 focus, the Company intends to keep the majority of the purchasing, pricing, sales and marketing decisions at the regional level. Purchasing Power and Supplier Relationships. As a result of its size of operations, national presence and access to retailers within the highly fragmented natural products sector, the Company is able to supply a superior selection of natural products at more competitive prices and on better terms, including supplier-sponsored marketing dollars, than many of its smaller, regional competitors. These prices and marketing support are then passed on to the Company's retail customers, thereby enhancing the Company's reputation as a low-cost supplier that offers extensive marketing programs. In addition, in order to increase its appeal to a number of suppliers and to receive better pricing, the Company has recently centralized the purchasing of specific products. For example, the Company has positioned itself as the largest purchaser of bulk products in the natural products industry by centralizing its purchase of nuts, seeds, grains, flours and dried foods. Diverse, High-Quality Product Line. The Company distributes a mix of more than 25,000 national, regional and private label natural products, which products are continually evaluated, updated and expanded to satisfy the needs of its diverse customer base. The Company believes that its product selections meet or exceed its regional competitors' selection in every market that it serves. In addition, the Company offers a selection of private label products chosen to address customer preferences that are not otherwise being met by other suppliers. Regional Responsiveness. By decentralizing the majority of its purchasing, pricing, sales and marketing decisions at the regional level, the Company is able to respond to regional and local customer preferences, while taking advantage of the economies of scale associated with the Company's national operations. Each of the Company's three regional operations (Cornucopia, Rainbow and Mountain People's) has extensive knowledge of the local and regional taste preferences in a particular marketplace and has the ability to provide products to accommodate local trends. In addition, the Company is able to customize services, respond quickly with pricing decisions to meet local competition and rapidly accommodate customer requirements, as necessary. Customer Service and Marketing Programs. In addition to providing its customers with delivery services which include next-day and more frequent deliveries and high order fill rates (excluding products unavailable from the supplier), 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. The Company attributes its high fill rates and timely deliveries to its experienced purchasing department and sophisticated warehousing, inventory control and distribution systems. The Company offers its customers 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. Infrastructure and Management. The Company recently made a significant investment in designing its proprietary, sophisticated information and warehouse management systems and 3 recently expanded its Connecticut distribution facility from 165,000 to 245,000 square feet to achieve additional operating efficiencies and cost reductions. The Company's warehouse management systems incorporate an efficient method of storing, locating and rotating incoming and outgoing merchandise. The Company is planning on installing its information systems and expanding its distribution capacity in its Colorado and California facilities. The Company continually evaluates and upgrades its management information systems based on the best practices at its regional operations in order to make the systems more efficient, cost effective and responsive to customer needs. Growth Strategy Key elements of the Company's growth strategy include: Expand Customer Base. While continuing to focus on maintaining relationships with its existing natural products retail customers, the Company's goal is to expand its customer base to keep up with increasing demand for natural products. The Company is continually cultivating relationships with new customers for natural products, such as natural products supermarket chains, as well as conventional supermarkets, other mass market outlets, institutional foodservice providers, hotels and gourmet stores which are increasing their natural product offerings. Increase Sales To Existing Customers. The Company believes that a significant opportunity exists to increase its sales penetration of its existing retail customer base by (i) expanding the Company's role as the primary supplier to the majority of its customers, (ii) expanding the number of products and product categories offered and (iii) providing pricing incentives and marketing support to generate higher sales levels by its customers. Expand Market Presence. The Company intends to expand its market penetration of existing and new markets by increasing the distribution capacity of its existing facilities and by building new distribution facilities. In addition, while the Company has no agreements or understandings with regard to acquisitions at this time (other than the Agreement and Plan of Reorganization between United Natural and Stow), it will continue to selectively evaluate opportunities to acquire local distributors to fill in existing markets and regional distributors to expand into new markets. Products Current 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 over 25,000 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. 4 National Brands. National brand products are recognized and distributed throughout the United States and typically possess features, including taste and packaging, that are recognizable and appeal to a large and diverse customer base. The Company has secured the distribution rights to more than 1,000 brands of nationally known products. Regional Brands. Regional brand products are recognized by and distributed in selected areas of the country to satisfy the demands of consumers in specific geographic regions. In addition, the short shelf life of many regional brands makes national distribution impracticable. The Company's decentralized purchasing practices enable regional buyers familiar with consumer demand to offer products that have a particular appeal to consumers in that region. The Company distributes over 800 regional brands to its customers. Private Label Products. The Company also offers private label products to address certain preferences of customers that are not otherwise being met by other suppliers. The Company's private label program is designed to take advantage of market opportunities created by a lack of supply of a type of product. The Company currently offers the following private label products: --Clear Spring waters --Farmer's Pride eggs --Guardian vitamins and supplements --Natural Sea fish products --Organic Baby infant foods --Gourmet Artisan pasta and oils Master Distribution Products. Master distribution products are products that are available exclusively through the Company as master distributor which enables smaller manufacturers to more efficiently access the market. All competing distributors must purchase such products from the Company. The Company has the master distribution rights for the following brands: --Purdey's nutritionally enhanced beverages --Rudi's Bakery specialty breads --Wolfgang Puck frozen pizzas and entrees New Products The Company evaluates more than 10,000 potential new products each year based on existing and anticipated trends in consumer preferences and buying patterns. 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. For example, each month the Company distributes postage-paid postcards to its customers to encourage them to provide suggestions. 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 5 new products 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. Customers The Company markets its products to more than 5,800 customers located in 43 states. The Company maintains long-standing customer relationships with independent natural products stores and has continued to emphasize its relationships with new customers, including natural products supermarket chains, as well as conventional supermarkets and other mass market outlets, institutional foodservice providers, hotels and gourmet stores, all of which are continually increasing their natural product offerings. Management believes that the Company is the primary supplier to the majority of its customers. No customer accounted for more than 10% of the Company's net sales in the fiscal year ended July 31, 1997. Among the Company's wholesale customers are leading natural products supermarket operators doing business as Alfalfa's, Fresh Fields Markets, Nature's Fresh, Northwest!, Whole Foods Market and Wild Oats Markets, and conventional supermarket chains such as Carr's, City Market, Genuardis, Harris Teeter, King Soopers, Kroger, Quality Food Centers (QFC) and Hannaford Brothers. Customer Service 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. Sales The Company maintains an order fill rate (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's staff of account representatives cultivates partnership relationships with the Company's customers by emphasizing communication and responsiveness. The primary function of the account representatives is to help customers grow their businesses, thereby increasing the Company's own sales. Each account representative is assigned stores in a designated geographic area and is responsible for assisting the retailer in inventory management, merchandising, marketing, promotional and event management and store openings. The Company's staff of customer service representatives regularly contacts customers by telephone to ensure that customer needs are met quickly and efficiently. In addition to processing orders, the customer service representatives respond to customer inquiries concerning the Company's services and product availability. While the customer service representatives contact all customers, the majority of the Company's sales volume is ordered electronically. The Company distributes shelf 6 identification tags which can be scanned to facilitate this electronic ordering by the customer. The Company's account representatives and customer service representatives regularly exchange information to facilitate better knowledge of, and more effective response to, customer needs. To assist customers in making purchasing decisions, each of the Company's regions produces a quarterly catalog containing a description of all products that are currently in stock. Each product description includes the vendor's name, product number, price per unit, price per case, suggested retail price and UPC bar code. The quarterly catalog also contains a variety of information on product ordering, delivery options and vendor advertising. In addition, each region produces a monthly specials catalog with its latest pricing promotions and new products. In addition, the Company's senior executives attend major specialty food trade shows and personally meet with numerous retailers each year to solicit their comments. The Company's commitment to service is further reflected in the focus groups conducted annually by the Company's senior executives with a representative sampling of the Company's customers which allows customers to evaluate the Company's services, products and programs. 7 Marketing The Company has developed a variety of marketing services, many of which are supplier-sponsored, that cater to a broad range of retail formats in which retailers may participate for a nominal fee. These programs are designed to increase sales and are attractive to retailers who often 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 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 lower costs on certain products, allowing stores to earn an improved profit margin on sale items as a result of the Company's ability to negotiate favorable terms with the suppliers of these items. The program also provides retailers with posters and window banners to coincide with each month's promotions. In addition to its monthly flier program, the Company offers thematic 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. Suppliers The Company purchases its products from approximately 1,500 active suppliers, many of which have had relationships with the Company for more than ten years. Management believes that natural products suppliers seek distribution of their products through the Company because it distributes the majority of the supplier's products, provides access to a large and growing customer base and supports the supplier's 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 4.4% of total purchases in fiscal 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, 8 the Company has positioned itself as the largest purchaser of 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 the Food and Drug Administration ("FDA") counsel 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. Distribution The Company maintains five distribution centers located in Auburn, California; Denver, Colorado; Dayville, Connecticut; Atlanta, Georgia; and Seattle, Washington. The Company has recently expanded its Connecticut headquarters from 165,000 to 245,000 square feet and significantly expanded its capacity to store frozen foods. The Company has signed a lease for a new facility in Colorado which, at 180,800 square feet, will be twice the size of its current facility and which is expected to be operational in early 1998. The Company intends to replace its 40,000 square foot auxiliary storage facility in Sacramento, California with an 80,000 square foot storage facility located adjacent to its Auburn, California distribution center, which is expected to be substantially complete by summer 1998. In addition, the Company operates satellite staging facilities in the Philadelphia, Pennsylvania and greater Jacksonville, Florida areas. These satellite facilities serve as transfer points for products, trucks and drivers and ensure faster service to markets located more than five hours driving distance from the Georgia and Connecticut distribution centers. The five distribution centers, two satellite staging facilities and one auxiliary storage facility have a total of approximately 805,000 square feet of space. Each distribution center contains dry, refrigerated and frozen storage areas as well as office space. In total, the Company's facilities encompass approximately 652,200 square feet of dry storage space, 40,700 square feet of refrigerated space and 44,700 square feet of frozen storage space, with the remainder used as office space for the Company's regional purchasing, sales and administrative operations. 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 9 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 inbalances 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. Systems The Company has made a significant investment in designing its proprietary information and warehouse management systems. The Company continually evaluates and upgrades its management information systems based on the best practices at its regional operations in order to make the systems more efficient, cost effective and responsive to customer needs. The Company has installed its warehouse management systems at its Connecticut and Georgia facilities. 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 all inbound products. These tags contain the expiration date, location, 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. Retail Operations The Company's Natural Retail Group ("NRG") currently owns and operates nine retail natural food 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 10 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. The Company's retail stores offer products in each of the six categories offered by the Company's distribution business as well as produce, meat, poultry, fresh seafoods, baked goods and other prepared foods. These additional product offerings range between 20% to 40% of the total sales of a typical NRG store. NRG focuses its marketing efforts on consumer education and store promotion. NRG provides consumer education through informational brochures, promotional flyers, seminars, workshops, cooking classes and product samplings. In its image advertising, NRG emphasizes its knowledgeable and courteous staff, broad selection of natural products, environmental stewardship and frequent price promotions. The name and location of each of NRG's stores and their approximate square feet and lease expiration dates are as follows:
Store/Location Date of Acquisition Square Feet Lease Expiration - ---------------------- ------------------- ----------- ---------------- Health Hut.................. April 1993 4,100 May 2000 Valley Stream, NY Cheese and Stuff............ May 1993 10,000 March 2005 Hartford, CT Food for Thought............ July 1993 12,000 November 2005 Norwalk, CT Village Market.............. November 1993 5,875 May 2001 Pikesville, MD Natureworks................. January 1994 8,500 December 2001 Melbourne, FL Railway Market.............. April 1994 5,000 March 1999 Easton, MD Cape Cod Natural Foods...... July 1994 4,500 December 2002 Centerville, MA SunSplash Market............ April 1995 5,750 July 1999 Naples, FL
11 Nature's Finest Foods August 1997 15,000 November 2003 St. Petersburg, FL
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 distribution of and marketing for its private label products within these stores; (iii) expand the number of high-growth, high-margin product categories such as produce and prepared foods within these stores; and (iv) 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 also competes with numerous smaller regional, local and specialty distributors of natural products. In addition, the Company competes with national, regional and local distributors of conventional groceries and, to a lesser extent, companies which 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. 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. 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. 12 Regulation The Company's operations and products are subject to regulation by state and local health departments, the U.S. Department of Agriculture and the Food and Drug Administration, which generally impose standards for product quality and sanitation. The Company's facilities generally are inspected at least once a year by state or federal authorities. The Company's trucking operations are also subject to regulation by the U.S. Department of Transportation and the U.S. Federal Highway Administration. Federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, generally are not directly applicable to the Company. Certain of the Company's distribution facilities have above-ground storage tanks for diesel fuel and other petroleum products, which are subject to laws regulating such storage tanks. The Company believes that it is in compliance in all material respects with all applicable government regulations. Employees As of July 31, 1997, the Company had approximately 1,200 full-time employees, including approximately 80 in finance and administration, 102 in sales and marketing, 81 in customer service, 263 in the retail stores and 674 in operations. Approximately 75 of these employees are covered by a collective bargaining agreement with Teamsters Local 117, Seattle, Washington which will expire in July 2000. The Company has never experienced a work stoppage by its unionized employees. The Company believes that its relationships with its employees are good. Item 2. Properties The Company owns its corporate offices and distribution center in Dayville, Connecticut which was recently expanded from 165,000 to 245,000 square feet. The Company leases its remaining distribution centers, two satellite staging areas and one auxiliary storage facility. Each distribution center contains dry, refrigerated and frozen storage areas and office space for the purchasing, sales and administrative operations of the facility. The following chart provides information on the approximate square footage of each of the Company's distribution centers and staging facilities and the expiration date of the lease for the facility (other than Dayville, Connecticut, which is owned by the Company):
Size (in Lease Location square feet) Expiration -------- ------------ ---------- Atlanta, Georgia.............. 175,000 March 1999
13
Size (in Lease Location square feet) Expiration -------- ------------ ---------- Auburn, California............ 150,000 May 2008 Dayville, Connecticut......... 245,000 Not Applicable Denver, Colorado.............. 91,000 July 2000 Seattle, Washington........... 100,000 February 2001 Jacksonville, Florida......... 3,000 December 1996 (renewal negotiations ongoing) Philadelphia, Pennsylvania.... 2,800 December 1996 (renewal negotiations ongoing) Sacramento, California........ 40,000 October 1996 (negotiating purchase of distribution center)
The Company has signed a lease for a new facility in Denver which, at 180,800 square feet, will be twice the size of its current facility. The new Denver facility is expected to be operational in early 1998. The Company intends to replace its 40,000 square foot auxiliary storage facility in Sacramento, California with an 80,000 square foot storage facility located adjacent to its Auburn, California distribution center. Construction of the new leased space is expected to be substantially complete by summer 1998. The Company believes that it will be able to continue to expand or replace its facilities as and when needed to accommodate the Company's future growth. Equipment and machinery owned by the Company and used in its operations consist primarily of electronic data processing and material handling equipment, racking, coolers and freezers. The Company leases a majority of its trucks and trailers under master lease agreements with Ryder Truck Leasing. Ryder is responsible for all truck maintenance costs. Item 3. Legal Proceedings From time to time, the Company is involved in routine litigation which arises in the ordinary course of its business. There are no pending material legal proceedings to which the Company is a party or to which the property of the Company is subject. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of the security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended July 31, 1997. 14 Executive Officers of the Registrant The executive officers of United Natural and their ages as of September 30, 1997 are as follows:
Name Age Position - ---- --- -------- Norman A. Cloutier 43 Chairman of the Board and Chief Executive Officer Michael S. Funk 43 Vice Chairman of the Board and President Steven H. Townsend 44 Chief Financial Officer, Director, Treasurer and Secretary Daniel V. Atwood 39 President of NRG, Vice President, Assistant Treasurer, Assistant Secretary and Director of United Natural Andrea R. Hendricks 37 Director of Purchasing of Mountain People's and Director of United Natural Kevin T. Michel 39 Chief Financial Officer of Mountain People's and Director of United Natural
Norman A. Cloutier founded United Natural in 1978. Mr. Cloutier has been Chairman of the Board and Chief Executive Officer of United Natural since its inception. Mr. Cloutier served as President of United Natural 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 United Natural since February 1996 and President of United Natural since October 1996. Mr. Funk served as Executive Vice President of United Natural from February 1996 until October 1996. Since its inception in July 1976, Mr. Funk has been President of Mountain People's. Mr. Funk has served on the Board of Directors since February 1996. Steven H. Townsend has been Vice President - Finance and Administration of United Natural since 1983 and Chief Financial Officer of United Natural since August 1988. From 1980 to 1983, Mr. Townsend was Director of Finance for the Town of Mansfield, Connecticut. From 15 1976 to 1980, Mr. Townsend was an Accounting Supervisor at Harris Corporation, a manufacturer of printing presses and related products. Mr. Townsend has served on the Board of Directors since August 1988. Daniel V. Atwood has been President of NRG and Vice President of United Natural since August 1995. Mr. Atwood was Vice President - Marketing of United Natural from January 1984 to August 1995. From 1979 to 1982, Mr. Atwood was a Store Manager at Bread & Circus Supermarkets, a chain of independent natural products stores. Mr. Atwood has served on the Board of Directors since August 1988. Andrea R. Hendricks has been Director of Purchasing for Mountain People's since January 1990. Ms. Hendricks oversees the purchasing, pricing and promotional departments for United Natural's western region. Ms. Hendricks has served on the Board of Directors since February 1996. Kevin T. Michel had been the Chief Financial Officer of Mountain People's since January 1995. 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. Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is traded on the Nasdaq National Market under the symbol "UNFI." The United Natural Common Stock began trading on the Nasdaq National Market on November 1, 1996. The following table sets forth for the periods indicated the high and low sale prices per share of United Natural Common Stock on the Nasdaq National Market:
Fiscal 1997 High Low ----------- ---- --- Second Quarter $17.500 $12.375 Third Quarter 17.000 13.000 Fourth Quarter 24.375 15.000
On September 5, 1997, United Natural had 30 stockholders of record. The number of record holders may not be representative of the number of beneficial holders because many shares are held by depositories, brokers or other nominees. 16 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 the Company's earnings, capital requirements and financial condition, requirements of the financing agreements to which the Company is then a party and other factors considered relevant by the Board of Directors. 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. 17 Item 6. Selected Financial Data The selected consolidated financial data presented below under the caption Consolidated Statement of Income Data with respect to the fiscal years ended October 31, 1994 and 1995, the nine months ended July 31, 1996, and the fiscal year ended July 31, 1997, under the caption Consolidated Balance Sheet Data at October 31, 1994 and 1995 and July 31, 1996 and 1997, are derived from the consolidated financial statements of the Company, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected consolidated financial data presented below under the caption Consolidated Statement of Income Data with respect to the fiscal year ended October 31, 1993 and the nine months ended July 31, 1995, and under the caption Consolidated Balance Sheet Data at October 31, 1993, are derived from the unaudited consolidated financial statements of the Company that have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. The historical results are not necessarily indicative of results to be expected for any future period. The following selected consolidated financial data should be read in conjunction with and are qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K
Nine Months Ended Year Ended Year Ended October 31, July 31, July 31, ---------------------- -------- -------- 1993 1994 1995 1995 1996 1997 ---- ---- ---- ---- ---- ---- (in thousands, except per share data) Consolidated Statement of Income Data: Net sales ................................................ $153,636 $200,616 $283,323 $188,502 $286,448 $421,698 Cost of sales ............................................ 121,148 156,498 223,482 147,706 226,482 334,584 -------- -------- -------- -------- -------- -------- Gross profit ............................................. 32,488 44,118 59,841 40,796 59,966 87,114 Operating expenses ....................................... 27,176 36,195 48,653 32,740 48,565(2) 67,633 Amortization of intangibles .............................. 199 538 2,426(1) 603 792 1,060 -------- -------- -------- -------- -------- -------- Total operating expenses ................................. 27,375 36,733 51,079 33,343 49,357 68,693 -------- -------- -------- -------- -------- -------- Operating income ......................................... 5,113 7,385 8,762 7,453 10,609 18,421 -------- -------- -------- -------- -------- -------- Interest expense ......................................... 1,078 2,275 3,403 2,184 3,943 3,081 Other, net ............................................... 137 122 (173) (124) (137) (331) -------- -------- -------- -------- -------- -------- Total other expense ...................................... 1,215 2,397 3,230 2,060 3,806 2,750 -------- -------- -------- -------- -------- -------- Income before income taxes and extraordinary item ........ 3,898 4,988 5,532 5,393 6,803 15,671 Income taxes ............................................. 1,579 1,971 2,929 2,161 2,778 6,416 -------- -------- -------- -------- -------- -------- Income before extraordinary item ......................... 2,319 3,017 2,603 3,232 4,025 9,255 Extraordinary item (4) ................................... -- -- -- -- -- 933 -------- -------- -------- -------- -------- -------- Net income ............................................... $ 2,319 $ 3,017 $ 2,603 $ 3,232 $ 4,025 $ 8,322 ======== ======== ======== ======== ======== ======== Income per share of common stock before extraordinary item $ 0.26 $ 0.30 $ 0.26 $ 0.32 $ 0.40 $ 0.79 ======== ======== ======== ======== ======== ======== Extraordinary item (4) ................................... -- -- -- -- -- $ 0.08 ======== ======== ======== ======== ======== ======== Net income per share of common stock ..................... $ 0.26 $ 0.30 $ 0.26 $ 0.32 $ 0.40 $ 0.71 ======== ======== ======== ======== ======== ======== Weighted average shares of common stock and common stock equivalents (3) .......................................... 8,982 10,094 10,148 10,148 10,144 11,698 ======== ======== ======== ======== ======== ========
October 31, July 31, ------------------------------ -------------------- 1993 1994 1995 1996 1997 ------ ------ ------ ------ ------ (in thousands) Consolidated Balance Sheet Data: Working capital ................................................. $ 3,895 $ 10,180 $ 8,583 $ 10,087 $ 48,883 Total assets .................................................... 37,006 48,476 88,822 98,744 110,985 Long-term debt and capital leases, excluding current installments 8,169 10,627 21,878 23,019 16,553 Stockholders' equity ............................................ 4,258 10,257 13,022 18,182 62,177
(1) Operating income for fiscal 1995 includes a non-recurring expense of $1.6 million related to the write-off of intangible assets. Excluding the $1.6 million non-recurring expense, operating income would have been $10.4 million in fiscal 1995. (2) Operating income for the nine months ended July 31, 1996 includes a non-recurring expense of $1.0 million related to the grant of options under the Company's 1996 Stock Option Plan and a non-recurring expense of $0.5 million representing costs associated with the 18 Mountain People's merger. Excluding the $1.5 million of non-recurring expenses, operating income would have been $12.1 million in the nine months ended July 31, 1996. (3) For all years and periods prior to fiscal year ended July 31, 1997, does not reflect the repurchase by the Company, upon the repayment of the outstanding indebtedness under the Senior Note issued to Triumph - Connecticut Limited Partnership ("Triumph"), of 380,930 shares of Common Stock issuable upon the exercise of the Triumph Warrant. (4) Extraordinary item for fiscal 1997 relates to the loss on early retirement of debt, net of income tax benefit of approximately $.7 million, which resulted from the repayment of debt with proceeds from the Company's initial public offering in November 1996. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of United Natural's financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and notes thereto, as well as with the selected financial data. This Annual Report on Form 10-K contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained herein (including without limitation statements to the effect that United Natural or its management "believes," "expects," "anticipates," "plans" and similar expressions) that are not statements of historical fact should be considered forward-looking statements. United Natural cautions that a number of important factors could cause its actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, United Natural, including those factors set forth under "Certain Factors That May Affect Future Results." Overview - -------- United Natural is one of only two national distributors of natural foods and related products in the United States. The Company currently distributes more than 25,000 natural products to more than 5,800 customers located in 43 states. United Natural's distribution operations are divided into three principal regions: Cornucopia in the eastern United States; Mountain People's in the western United States; and Rainbow in the Rocky Mountains and Plains regions. Through its subsidiary, the Natural Retail Group, Inc. (NRG), the Company also owns and operates nine retail natural products stores located in the eastern United States. In recent years, the Company has increased sales to existing and new customers through the acquisition of or merger with natural product 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 currently is in the process of integrating certain operating functions of its acquisitions in order to improve operating efficiencies. It is accomplishing this through (i) integrating administrative, finance and accounting functions in the three regions, (ii) expanding marketing and customer service programs across the three regions, (iii) expanding national purchasing opportunities, (iv) consolidating system applications between physical locations and regions, and (v) eliminating geographic overlap between regions. In addition, the Company's 19 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 Connecticut and the expansion of refrigerated and frozen space at its Auburn and Atlanta facilities. The Company recently announced that it has signed a multi-year lease for a new 180,800 sq. foot distribution center in Aurora, Colorado that is expected to open in early 1998. In addition, the Company expects to replace its auxiliary storage facility in Sacramento, California with a larger facility adjacent to its Auburn, California distribution center. This project should be completed by summer 1998. 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 management. Management believes the Company's retail business serves as a natural complement to its distribution business. 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 to its natural product 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 move 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 and amortization expense. Other expenses include interest payments on outstanding indebtedness, miscellaneous expenses, interest income and miscellaneous income. Recent Acquisitions On June 23, 1997, the Company announced that it had entered into an agreement with Stow with respect to a merger in which the two companies will be combined in a transaction which will be accounted for as a pooling of interests. It is expected that the Company will issue up to 5,000,000 shares of its Common Stock in order to effect the proposed merger. The Company expects that the proposed merger will be consummated on October 31, 1997. See "Business." On February 20, 1996, a subsidiary of the Company merged with and into Mountain People's, whereupon Mountain People's became a wholly owned subsidiary of the Company. The merger with Mountain People's was accounted for as a pooling of interests and, accordingly, all financial information included is reported as though the companies had been combined in all periods reported. On May 22, 1995, prior to its merger with United Natural, Mountain People's acquired Nutrasource, Inc. (Nutrasource), a distributor of natural products in the Pacific Northwest region. On July 29, 1995, the Company acquired Rainbow, a distributor of natural products in the Rocky 20 Mountains and Plains regions. The acquisitions of Nutrasource and Rainbow were 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 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 30 years. United Natural's fiscal years ended October 31, 1994 and 1995 are referred to herein as "fiscal 1994" and "fiscal 1995," respectively. United Natural has changed its fiscal year end to July 31. Results of Operations The following table presents, for the periods indicated, certain income and expense items expressed both in dollars and as a percentage of net sales:
Twelve Months Ended July 31, Nine Months Ended July 31, ---------------------------- -------------------------- 1997 1996 1996 1995 ---- ---- ---- ---- Net sales $421,697,941 100.0% $ 381,270,375 100.0% $ 286,448,399 100.0% $ 188,501,456 Cost of sales 334,583,617 79.4% 302,257,965 79.3% 226,481,766 79.1% 147,706,348 ---------------------------------------------------------------------------------------------- Gross profit 87,114,324 20.6% 79,012,410 20.7% 59,966,633 20.9% 40,795,108 ---------------------------------------------------------------------------------------------- Operating expenses 67,633,123 16.0% 64,479,189 16.9% 48,564,649 17.0% 32,739,675 Amortization of intangibles 1,060,442 0.3% 2,615,560 0.7% 792,615 0.2% 602,672 ---------------------------------------------------------------------------------------------- Total operating expenses 68,693,565 16.3% 67,094,749 17.6% 49,357,264 17.2% 33,342,347 ---------------------------------------------------------------------------------------------- Operating income 18,420,759 4.3% 11,917,661 3.1% 10,609,369 3.7% 7,452,761 ---------------------------------------------------------------------------------------------- Other expense (income): Interest expense 3,081,440 0.7% 5,161,485 1.4% 3,942,820 1.4% 2,184,345 Other, net (331,983) -0.1% (185,702) -0.1% (136,869) -0.1% (124,477) ---------------------------------------------------------------------------------------------- Total other expense 2,749,457 0.6% 4,975,783 1.3% 3,805,951 1.3% 2,059,868 ---------------------------------------------------------------------------------------------- Income before income taxes and extraordinary item 15,671,302 3.7% 6,941,878 1.8% 6,803,418 2.4% 5,392,893 Income taxes 6,416,070 1.5% 3,547,110 0.9% 2,778,121 1.0% 2,159,865 ---------------------------------------------------------------------------------------------- Income before extraordinary item 9,255,232 2.2% 3,394,768 0.9% 4,025,297 1.4% 3,233,028 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $661,822 932,929 0.2% - - - - - ---------------------------------------------------------------------------------------------- Net income $8,322,303 2.0% $3,394,768 0.9% $4,025,297 1.4% $3,233,028 ==============================================================================================
Twelve Months Ended July 31, 1997 Compared to Twelve Months Ended July 31, 1996 Net Sales. The Company's net sales increased approximately 10.6%, or $40.4 million, to $421.7 million for the twelve months ended July 31, 1997 from $381.3 million for the twelve months ended July 31, 1996. 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. The Company believes that sales were negatively impacted by winter storms in the Northwest region during the second quarter of 21 fiscal 1997. Gross Profit. The Company's gross profit increased approximately 10.3%, or $8.1 million, to $87.1 million for the twelve months ended July 31, 1997 from $79.0 million for the twelve months ended July 31, 1996. The Company's gross profit as a percentage of net sales decreased to 20.6% for the twelve months ended July 31, 1997 from 20.7% 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 who earned greater discounts under the Company's volume discount program. Operating Expenses. The Company's total operating expenses increased approximately 2.4 %, or $1.6 million, to $68.7 million for the twelve months ended July 31, 1997 from $67.1 million for the twelve months ended July 31, 1996. However, as a percentage of net sales, operating expenses decreased to 16.3% for the twelve months ended July 31, 1997 from 17.6% for the twelve months ended July 31, 1996. 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 expenses for the twelve months ended July 31, 1996 included total non-recurring charges of $3.2 million. These non-recurring charges 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 these non-recurring charges, the Company's total operating expenses for the twelve months ended July 31, 1996 would have been $ 63.9 million, or 16.8% of net sales. The Company's amortization of intangibles decreased $1.6 million, or approximately 59.5%, to $1.0 million for the twelve months ended July 31, 1997 from $2.6 million for the twelve months ended July 31, 1996. The Company incurred a non-recurring charge of $1.6 million in the twelve months ended July 31, 1996 associated with the write-down of intangible assets. Operating Income. Operating income increased $6.5 million, or approximately 54.6 %, to $18.4 million for the twelve months ended July 31, 1997 from $11.9 million for the twelve months ended July 31, 1996. As a percentage of net sales, operating income increased to 4.3% for the twelve months ended July 31, 1997 from 3.1% for the twelve months ended July 31, 1996. During the twelve months ended July 31, 1996, the Company incurred $3.2 million in non-recurring charges as discussed above. Excluding these non-recurring charges, operating income for the twelve months ended July 31, 1996 would have been $15.1 million, or 4.0% of net sales. Other (Income)/Expense. Total other expense, net, decreased by $2.3 million, or approximately 44.7%, to $2.7 million for the twelve months ended July 31, 1997 from $5.0 million for the twelve months ended July 31, 1996. The decrease was primarily attributable to 22 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 re-pay debt. As a result, interest expense decreased to $3.1 million for the twelve months ended July 31, 1997 from $5.2 million for the twelve months ended July 31, 1996. Income Taxes. The Company's effective income tax rate was 40.9% and 51.1% 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 $9.3 million, or $0.79 per share. In November 1996, the Company completed its initial public offering of stock, the net proceeds of which were used to retire debt. In connection with the Company's early retirement 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) in fiscal 1997. Net income for the twelve months ended July 31, 1997 was $8.3 million, or $0.71 per share. Net income for the twelve months ended July 31, 1996 was $3.4 million, or $0.33 per share. Net income for the year included non-recurring charges of $3.2 million ($1.3 million net of taxes) as discussed above. Excluding these non-recurring charges, net income for the twelve months ended July 31, 1996 would have been $4.7 million, or $0.46 per share. Nine Months Ended July 31, 1996 Compared to Nine Months Ended July 31, 1995 Net Sales. The Company's net sales increased 51.9%, or $97.9 million, to $286.4 million in the nine months ended July 31, 1996 from $188.5 million in 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 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 47.0%, or $19.2 million, to $60.0 million in the nine months ended July 31, 1996 from $40.8 million in the nine months ended July 31, 1995. The Company's gross profit as a percentage of net sales decreased to 20.9% for the nine months ended July 31, 1996 from 21.6% in 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 an increase in net sales during fiscal 1996 attributable to natural product supermarket chains. These chains tend to buy in larger quantities and thus qualify for greater volume discounts. 23 Operating Expenses. The Company's total operating expense increased 48.3%, or $16.1 million, to $49.4 million in the nine months ended July 31, 1996 from $33.3 million in the nine months ended July 31, 1995. As a percentage of net sales, operating expenses decreased to 17.2% in the nine months ended July 31, 1996 from 17.7% in the nine months ended July 31, 1995. Total operating expenses in the nine months ended July 31, 1996 included a non-cash expense of $1.0 million related to the grant of options under the Company's 1996 Stock Option Plan and a non-recurring expense of $0.5 million representing costs associated with the Mountain People's merger. Excluding the $1.5 million of non-recurring expenses, the Company's total operating expenses would have been $47.8 million, or 16.7% 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. The Company's amortization of intangible assets increased 31.5%, or $0.2 million, to $0.8 million in the nine months ended July 31, 1996 from $0.6 million in the nine months ended July 31, 1995. This increase was primarily attributable to the inclusion of amortization expense for Nutrasource and Rainbow for the entire nine months ended July 31, 1996, compared with the inclusion of two months of amortization expense for Nutrasource for the nine months ended July 31, 1995. Operating Income. Operating income increased $3.1 million, or 42.3%, to $10.6 million in the nine months ended July 31, 1996 from $7.5 million in the nine months ended July 31, 1995. As a percentage of net sales, operating income declined to 3.7% in the nine months ended July 31, 1996 from 3.9% in the nine months ended July 31, 1995. Excluding the $1.5 million of non-recurring expenses discussed above, operating income would have been $12.1 million, or 4.2% of net sales, in the nine months ended July 31, 1996. Other (Income)/Expense. The $1.8 million increase in interest expense in 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 line of credit to fund increasing inventory and accounts receivable balances related to the Company's increased sales. Income Taxes. The Company's effective income tax rates were 40.8% and 40.1% 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, non-deductible amortization and state and local income taxes. Net Income. As a result of the foregoing, the Company's net income increased by 24.5%, or $0.8 million, to $4.0 million in the nine months ended July 31, 1996 from $3.2 million in the nine months ended July 31, 1995. Excluding the $1.5 million ($0.9 million net of taxes) non-recurring expenses discussed above, net income would have been $4.9 million, or 1.7% of net sales, in the nine months ended July 31, 1996. 24 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 equity securities. Primary uses of capital have been acquisitions, expansion of plant and equipment and investment in accounts receivables and inventory. Net cash provided by operations was $0.5 million for the twelve months ended July 31, 1997 and $1.5 million for the nine months ended July 31, 1996. Net income increased in fiscal 1997 as compared with fiscal 1996 although cash provided by operating activities decreased. The decrease in cash generated from operations was primarily attributable to increases in accounts receivable and inventory that resulted from the expansion of product lines and the continued growth of the Company's business. The Company's working capital at July 31, 1997 was $48.9 million. Net cash used in investing activities was $3.3 million for the twelve months ended July 31, 1997 and $7.0 million for the nine months ended July 31, 1996. Investing activities were primarily related to capital expenditures necessary to fund the expansion of its Connecticut distribution facility, the related purchase of material handling equipment, tractors and trailers and continued upgrade of existing management information systems. The capital expenditures were primarily funded from senior bank indebtedness, including term loans, and capital and operating leases. Net cash provided by financing activities was $2.8 million for the twelve months ended July 31, 1997 and $5.3 million for the nine months ended July 31, 1996. During fiscal 1997, the Company issued 2.9 million shares of its common stock in its initial public offering which resulted in net proceeds of $35.5 million. The proceeds were used to pay down debt of the Company. During fiscal 1996, approximately $5.3 million in long-term debt was repaid from cash provided from operations and with the cash proceeds from the re-financing of the Company's senior bank facility. On February 20, 1996, the Company entered into a credit agreement with its bank to provide a $50 million facility for working capital, term loans and a mortgage for its Connecticut facility. In March 1997, the Company amended its $50 million credit agreement to allow borrowings up to $10 million for acquisitions, and changed the interest rate under the credit facility to either the New York Prime Rate or 1.00% above the bank's London Interbank Offered Rate (LIBOR). The Company has the option to fix the rate for all or a portion of the debt for a period of up to 180 days. Interest on the mortgage facility will accrue at a rate of 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 1.25% above the five-year U.S. Treasury Note rate. The Company has pledged all of its assets as collateral for the 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. 25 The Company expects to spend approximately $10 million over the next five years in capital expenditures to fund the expansion of existing facilities, upgrade information systems and technology and to update its material handling equipment. Management believes that it will have adequate capital resources and liquidity to meets its debt obligations and to fund its planned capital expenditures and operate its business for the foreseeable future. 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. New Accounting Standards The Company adopted Statement of Financial Accounting Standards (SFAS) 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. The adoption of SFAS No. 123 did not have a material impact on the Company's financial condition, results of operations or cash flows. In February 1997, the Financial Accounting Standards Board released SFAS No. 128, "Earnings per Share." This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. The Statement replaces the presentation of primary EPS with a presentation of basic EPS. The Statement also requires a dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The effect of the adoption of SFAS 26 No. 128 will not have a material impact on the Company's financial condition, results of operations or cash flows. The Financial Accounting Standards Board recently issued 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 effect of the adoption of SFAS No. 129 will not have a material impact on the Company's financial condition, results of operations or cash flows. 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 effect of the adoption of SFAS No. 130 will not have material impact on the Company's financial condition, results of operations or cash flows. The Financial Accounting Standards Board recently issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. 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." This statement is effective for financial statements for periods beginning after December 15, 1997 and requires that comparative information for earlier years be restated. The effect of the adoption of SFAS No. 131 will not have a material impact on the Company's financial condition, results of operations or cash flows. Certain Factors That May Affect Future Results The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time. Any statements contained herein (including without limitations statements to the effect that United Natural or its management "believes," "expects," "anticipates," "plans" and similar expressions) that are not statements of historical fact should be considered forward-looking statements. A number of uncertainties exist that could affect United Natural's future operating results, including, without limitation, continued demand for current products offered by United Natural, the success of United Natural's acquisition strategy, competitive pressures, general economic conditions, the success of new product introductions and government regulation. A significant portion of United Natural's historical growth has been achieved through acquisitions of or mergers with other distributors of natural products. United Natural recently 27 acquired or merged with three large regional distributors of natural products, and, if the merger with Stow is consummated, will merge with another large regional distributor. The successful and timely integration of these acquisitions and mergers is critical to future operating and financial performance of United Natural. While the integration of these acquisitions and mergers with United Natural's existing operations has begun, United Natural believes that the integration will not be substantially completed until the end of calendar 1998. The integration will require, among other things, coordination of administrative, sales and marketing, distribution, and accounting and finance functions and expansion of information and warehouse management systems among United Natural'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 United Natural's business, financial condition or results of operations. In addition, the process of combining the companies could cause the interruption of, or loss of momentum in, the activities of the respective businesses, which could have an adverse effect on their combined operations. United Natural is currently experiencing a period of growth which could place a significant strain on its management and other resources. United Natural's business has grown significantly in size and complexity over the past several years. The growth in the size of United Natural's business and operations has placed and is expected to continue to place a significant strain on United Natural's management. United Natural's future growth is limited in part by the size and location of its distribution centers. There can be no assurance that United Natural 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, United Natural's growth strategy to expand its market presence includes possible additional acquisitions. To the extent United Natural's future growth includes acquisitions, there can be no assurance that it will successfully identify suitable acquisition candidates, consummate and integrate such potential acquisitions or expand into new markets. United Natural 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. United Natural'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 the mass market grocery distributors will not increase their emphasis on natural products and more directly compete with United Natural or that new competitors will not enter the market. 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 natural products supermarket chains may have an adverse effect on United Natural's profit margins in the future as more customers qualify for greater volume discounts offered by United Natural. The grocery industry is also sensitive to national and regional economic conditions, and the demand for product supply may be adversely affected from time to time by economic downturns. Item 7A. Quantitative and Qualitative Disclosure About Market Risk. Not applicable. 28 Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS
Page ---- United Natural Foods, Inc. and Subsidiaries: Independent Auditors' Report........................................ 30 Consolidated Balance Sheets......................................... 31 Consolidated Statements of Income................................... 32 Consolidated Statements of Stockholders' Equity..................... 33 Consolidated Statements of Cash Flows............................... 34 Notes to Consolidated Financial Statements.......................... 36
29 INDEPENDENT AUDITORS' REPORT The Board of Directors United Natural Foods, Inc. and Subsidiaries: 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. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Providence, Rhode Island September 5, 1997 30 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
July 31, July 31, 1996 1997 ---- ---- ASSETS Current assets: Cash .......................................................................................... $ 51,255 $ 16,477 Accounts receivable, net of allowance for doubtful accounts of $1,277,755 in 1996 and $2,149,628 in 1997 .......................................................................... 25,657,156 30,019,556 Notes receivable, trade ....................................................................... 360,137 866,160 Inventories ................................................................................... 38,667,548 45,030,476 Prepaid expenses .............................................................................. 1,691,548 3,496,385 Deferred income taxes (note 10) ............................................................... 796,216 1,031,767 Total current assets ........................................................................ 67,223,860 80,460,821 ------------- ------------- Property and equipment, net (note 6) ............................................................. 20,603,663 20,379,327 ------------- ------------- Other assets: Notes receivable, trade, net .................................................................. 1,067,697 995,398 Goodwill, net of accumulated amortization of $556,345 in 1996 and $790,684 in 1997 (note 2) .. 8,096,395 7,579,408 Covenants not to compete, net of accumulated amortization of $711,737 in 1996 and $1,552,306 in 1997 (note 2) ................................................................. 1,117,234 591,665 Deferred acquisition related expenses ......................................................... - 217,856 ------------- Other, net .................................................................................... 635,290 760,879 ------------- ------------- 10,916,616 10,145,206 ------------- ------------- Total assets ................................................................................ $ 98,744,139 $ 110,985,354 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable (note 4) ........................................................................ $ 30,112,868 $ 6,277,300 Current installments of long-term debt (note 5) ............................................... 4,086,795 2,247,281 Current installments of obligations under capital leases (note 7) ............................. 357,404 499,984 Accounts payable .............................................................................. 17,139,406 17,994,561 Accrued expenses .............................................................................. 4,978,331 3,991,025 Income taxes payable .......................................................................... 303,513 377,322 Other ......................................................................................... 158,149 190,667 ------------- ------------- Total current liabilities ................................................................... 57,136,466 31,578,140 Long-term debt, excluding current installments (note 5) .......................................... 22,170,855 15,569,665 Deferred income taxes (note 10) .................................................................. 407,346 677,560 Obligations under capital leases, excluding current installments (note 7) ........................ 847,918 983,432 ------------- ------------- Total liabilities ........................................................................... 80,562,585 48,808,797 ------------- ------------- Stockholders' equity (note 12): Common stock, $.01 par value, authorized 25,000,000 shares; issued 8,713,100 shares and outstanding 8,692,695 shares in 1996, issued 12,398,830 shares and outstanding 12,378,425 shares in 1997 ................................................... 87,131 123,988 Additional paid-in capital .................................................................... 1,383,511 40,056,154 Stock warrants (note 5) ....................................................................... 3,200,000 - Unallocated shares of employee stock ownership plan (note 11) ................................. (3,073,600) (2,910,400) Retained earnings ............................................................................. 16,628,966 24,951,269 Treasury stock, 20,405 shares at cost ......................................................... (44,454) (44,454) ------------- ------------- Total stockholders' equity .................................................................. 18,181,554 62,176,557 ------------- ------------- Commitments (notes 8 and 9) Total liabilities and stockholders' equity .................................................. $ 98,744,139 $ 110,985,354 ============= =============
See accompanying notes to consolidated financial statements. 31 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Nine Year ended months ended Year ended October 31, July 31, July 31, 1995 1996 1997 ----- ----- ---- Net sales ....................................................... $ 283,323,435 $ 286,448,399 $ 421,697,941 Cost of sales ................................................... 223,482,549 226,481,766 334,583,617 ------------- ------------- ------------- Gross profit ........................................ 59,840,886 59,966,633 87,114,324 ------------- ------------- ------------- Operating expenses .............................................. 48,653,214 48,564,649 67,633,123 Amortization of intangibles (note 1(f)) ......................... 2,425,618 792,615 1,060,442 ------------- ------------- ------------- Total operating expenses ............................ 51,078,832 49,357,264 68,693,565 ------------- ------------- ------------- Operating income .................................... 8,762,054 10,609,369 18,420,759 ------------- ------------- ------------- Other expense (income): Interest expense .......................................... 3,403,009 3,942,820 3,081,440 Other, net ................................................ (173,312) (136,869) (331,983) ------------- ------------- ------------- Total other expense ................................. 3,229,697 3,805,951 2,749,457 ------------- ------------- ------------- Income before income taxes and extraordinary item .............................. 5,532,357 6,803,418 15,671,302 Income taxes (note 10) .......................................... 2,929,856 2,778,121 6,416,070 ------------- ------------- ------------- Income before extraordinary item ..................... 2,602,501 4,025,297 9,255,232 ------------- ------------- ------------- Extraordinary item - loss on early retirement of debt, net of income tax benefit $661,822 ........ -- -- 932,929 ------------- ------------- ------------- Net income ......................................... $ 2,602,501 $ 4,025,297 $ 8,322,303 ============= ============= ============= Income per share of common stock before extraordinary item ................................. $ 0.26 $ 0.40 $ 0.79 ============= ============= ============= Extraordinary item .............................................. $ -- $ -- $ 0.08 ============= ============= ============= Net income per share of common stock ............................ $ 0.26 $ 0.40 $ 0.71 ============= ============= ============= Weighted average common and common equivalent shares ............ 10,148,374 10,143,809 11,697,587 ============= ============= =============
See accompanying notes to consolidated financial statements. 32 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unallocated Outstanding Additional Shares of Number Common Paid-in Stock Employee Stock Retained of Shares Stock Capital Warrants Ownership Plan Earnings --------- ----- ------- -------- -------------- -------- Balances October 31, 1994..... 8,713,100 $87,131 $327,411 $3,200,000 $(3,359,200) $10,001,168 Allocation of shares of ESOP..................... -- -- -- -- 163,200 -- Net income................. -- -- -- -- -- 2,602,501 ---------- --------- --------- --------- ------------ ------------ Balances October 31, 1995..... 8,713,100 87,131 327,411 3,200,000 (3,196,000) 12,603,669 Allocation of shares to ESOP..................... -- -- -- -- 122,400 -- Purchase of treasury stock.................... (20,405) -- -- -- -- -- Stock options (note 3)..... -- -- 1,056,100 -- -- -- Net income................. -- -- -- -- -- 4,025,297 ---------- --------- --------- --------- ------------ ------------ Balances July 31, 1996........ 8,692,695 87,131 1,383,511 3,200,000 (3,073,600) 16,628,966 Issuance of common stock (note 1(n)).............. 2,900,000 29,000 35,480,500 -- -- -- Exercise of stock warrants 785,730 7,857 3,192,143 (3,200,000) Allocation of shares of ESOP..................... -- -- -- -- 163,200 -- Net income................. -- -- -- -- -- 8,322,303 ---------- --------- --------- --------- ------------ ------------ Balances July 31, 1997........ 12,378,425 $ 123,988 $ 40,056,154 -- $(2,910,400) $ 24,951,269 ========== ========== ============ ========= ============ ============ Total Treasury Stockholders' Stock Equity ----- ------ Balances October 31, 1994..... -- $10,256,510 Allocation of shares of ESOP..................... -- 163,200 Net income................. -- 2,602,501 --------- ------------ Balances October 31, 1995..... -- 13,022,211 Allocation of shares to ESOP..................... -- 122,400 Purchase of treasury stock.................... $ (44,454) (44,454) Stock options (note 3)..... -- 1,056,100 Net income................. -- 4,025,297 --------- ------------ Balances July 31, 1996........ (44,454) 18,181,554 Issuance of common stock (note 1(n)).............. -- 35,509,500 Exercise of stock warrants -- Allocation of shares of ESOP..................... -- 163,200 Net income................. -- 8,322,303 --------- ------------ Balances July 31, 1997........ $ (44,454) $ 62,176,557 ========= ============
See accompanying notes to consolidated financial statements. 33 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Nine months Year ended October 31, ended July 31, July 31, 1995 1996 1997 ---- ---- ---- Cash flows from operating activities: Net income................................................................. $ 2,602,501 $ 4,025,297 $ 8,322,303 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Extraordinary loss on early extinguishment of debt, net of tax.......... -- -- 932,929 Depreciation, amortization and write-off of intangibles................. 4,273,244 3,012,061 4,416,661 Loss (gain) on disposals of property and equipment...................... (123,583) 24,441 8,930 Accretion of original issue discount.................................... 530,004 458,541 152,847 Compensation expense related to stock options........................... -- 1,056,100 -- Deferred income taxes................................................... 330,158 (270,254) (4,520) Provision for doubtful accounts......................................... 762,764 646,828 2,112,015 Increase in accounts receivable......................................... (5,544,515) (1,997,444) (6,474,415) Increase in inventory................................................... (9,989,327) (3,203,177) (6,362,928) Increase in prepaid expenses............................................ (228,391) (708,539) (1,804,837) Decrease (increase) in other assets..................................... 2,025,426 300,253 (375,853) Increase in notes receivable, trade..................................... (265,113) (203,630) (433,724) Increase (decrease) in accounts payable................................. 4,488,652 (2,871,234) 855,155 Increase (decrease) in accrued expenses................................. 503,467 1,080,891 (954,789) Increase (decrease) in income taxes payable............................. (220,989) 195,332 73,809 ----------- ----------- ----------- Net cash provided by (used in) operating activities............... (855,702) 1,545,466 463,583 ----------- ----------- ----------- Cash flows from investing activities: Proceeds from disposals of property and equipment.......................... 147,666 43,021 95,028 Capital expenditures....................................................... (9,934,590) (7,091,280) (3,350,378) Payments for purchases of subsidiaries, net of cash acquired............... (8,672,834) -- -- ----------- ----------- ----------- Net cash used in investing activities............................. (18,459,758) (7,048,259) (3,255,350) ----------- ----------- ----------- Cash flows from financing activities: Net borrowings (repayments) under note payable............................. 12,388,997 4,922,460 (23,835,568) Repayments of long-term debt............................................... (2,046,824) (5,349,788) (20,969,524) Proceeds from long-term debt............................................... 9,604,443 6,184,986 12,528,820 Principal payments of capital lease obligations............................ (251,632) (387,947) (476,239) Payment of financing costs................................................. (321,044) -- -- Proceeds from issuance of common stock, net................................ -- -- 35,509,500 Purchase of treasury stock................................................. -- (44,454) -- ----------- ----------- ----------- Net cash provided by financing activities......................... 19,373,940 5,325,257 2,756,989 ----------- ----------- ----------- Net increase (decrease) in cash............................................... 58,480 (177,536) (34,778) Cash at beginning of period................................................... 170,311 228,791 51,255 ----------- ----------- ----------- Cash at end of period......................................................... $ 228,791 $ 51,255 $ 16,477 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................................................................ $ 2,638,000 $ 2,120,000 $ 3,299,475 =========== =========== =========== Income taxes............................................................ $ 2,838,000 $ 2,467,000 $ 5,319,860 =========== =========== ===========
34 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued) Supplemental schedule of non-cash investing and financing activities: In 1995, the Company purchased substantially all of the assets of one retail store, substantially all of the assets of one wholesale distributor and the capital stock of another wholesale distributor for $6,725,000. In conjunction with the acquisitions, liabilities were assumed as follows: Fair value of assets acquired...................... $21,315,000 Cash paid.......................................... 6,725,000 ----------- Liabilities assumed and debt issued.......... $14,590,000 ===========
In 1996 and 1997, the Company incurred capital lease obligations of approximately $582,000 and $786,000 respectively for equipment. See accompanying notes to consolidated financial statements. 35 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 31, 1996 AND 1997 (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) Inventories Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out (FIFO) method. (d) 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. (e) 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. (f) 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 over thirty 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 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. 36 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In fiscal 1995, the Company wrote off approximately $1,564,000 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. (g) 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. (h) 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. (i) Change in Fiscal Year Effective November 1, 1995, the Company elected to change its fiscal year end from October 31 to July 31. (j) 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 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. (k) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (l) Notes Receivable, Trade The Company issues notes receivable, trade to certain customers under two basic circumstances, inventory purchases for initial store openings and overdue accounts receivable. Initial store opening notes are generally receivable over a period not to exceed twelve months. The overdue accounts receivable notes may extend for periods greater than one year. All notes are issued at a market interest rate and contain certain guarantees and collateral assignments in favor of the Company. 37 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (m) Employee Benefit Plans The Company sponsors various defined contribution plans that cover substantially all employees. Pursuant to certain stock incentive plans, the Company has granted stock options to key employees and to non-employee directors. The Company accounts for stock option grants using the intrinsic value based method. (n) Net Income Per Share Net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period and common stock equivalents. For purposes of this calculation, outstanding stock options and stock warrants are considered common stock equivalents and totaled approximately 1.8 million shares for all periods presented (approximately 1.4 million incremental shares under the treasury stock method). Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common and common equivalent shares issued during the twelve month period prior to the date of the initial filing of the Company's registration statement relating to its initial public offering have been included in the calculation, using the treasury stock method, as if they were outstanding for all periods presented. Fair market value for the purpose of this calculation was the assumed initial public offering price. The number of shares used in all calculations has been adjusted to reflect a fifty-five-for-one stock split effective August 30, 1996. 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, supplementary income before extraordinary item per common and common share equivalent for the year ended July 31, 1997 would have been $0.76 based upon 12,670,732 weighted average common and common equivalent shares. (2) ACQUISITIONS Subsequent event In June 1997, the Company entered into an Agreement and Plan of Reorganization with Stow Mills, Inc. of Chesterfield, New Hampshire, which distributes natural products. This business combination transaction will be accounted for as a pooling of interests. The Company expects the transaction to be closed during the first quarter of 1998. Fiscal 1996 In February 1996, Cornucopia Natural Foods, Inc. (CNF) and Mountain People's Warehouse, Inc. (MPW) merged in a business combination accounted for as a pooling of interests. 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 combined entity changed its name to United Natural Foods, Inc. 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. 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 38 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 $12,470,000, which exceeded the fair value of the net assets acquired by approximately $6,329,000. 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 $505,000 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 $2.4 million and $8.1 million for 1996 and 1997, respectively, and earnings per share would have been $0.24 and $0.70 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 1996 and 1997: 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. 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 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 a total of 324,500 non-statutory stock options 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 total of 16,500 non-statutory stock options under the 1996 Stock Option Plan at an exercise price of $9.64 per share which vest 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 $1,056,100 was charged to operations in fiscal 1996 related to the employee-director stock options. The following table summarizes the stock option activity for fiscal 1996 and 1997. 39 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1996 1997 ---- ---- Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- Outstanding at beginning of year - - 638,000 $8.11 Granted 638,000 $8.11 16,500 $9.64 Exercised - - - - Canceled - - - - ------- ------- Outstanding at end of year 638,000 $8.11 654,500 $8.14 ======= ===== ======= ===== Options exercisable at year end 434,500 $7.18 ======= =====
The 654,500 outstanding stock options at July 31, 1997 had a range of exercise prices from $6.38 to $10.60 per share. The weighted average remaining years of contractual life for these outstanding stock options is 9 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 two subsequent amendments effective March 1, 1997 and July 1, 1997. The line of credit agreement permits the Company to borrow up to a maximum of $50,000,000. The term loan agreement provides for the Company to borrow up to $13,000,000 to finance real estate acquisitions as well as $10,000,000 to finance acquisitions. The amount of borrowing is based upon the sum of 90% of eligible accounts receivable and 55% of eligible inventory. Interest on the loans is at New York prime interest rate or 1.00% above the LIBOR rate. The Company has the option to fix the rate for all or a portion of the debt for a period of up to 180 days. Interest on the mortgage facility will accrue at 1.25% above the bank's LIBOR rate, and the Company has the option to fix the rate for a period of five years at 1.25% above the five-year U.S. Treasury Note rate. The bank's prime rate was 8.25% and 8.50% at July 31, 1996 and 1997, respectively. The line of credit agreement, which terminates July 2002, is secured by all assets of the Company and contains certain restrictive covenants. The Company was in compliance with its restrictive covenants at July 31, 1997. (5) LONG-TERM DEBT Long-term debt consisted of the following:
July 31, July 31, 1996 1997 ---- ---- Note payable to limited partnership, secured, with interest ranging from 8% to 12% per annum payable quarterly, maturing October 1998.......................... $ 4,744,545 - Term loan for employee stock ownership plan, secured by stock of the Company, due $13,600 monthly plus interest at 10%, balance due May 1, 2015........................................................................... 3,073,600 $2,910,400 Real estate term loan payable to bank, secured by land and building, refinanced in July 1997............................................................... 5,775,000 25,000 Term loan payable to former owners of acquired business, secured by substantially all assets of subsidiary, repayment made in November 1996............... 2,785,409 -
40 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Term loan payable to bank, secured by substantially all assets of the Company, with monthly principal payments of $50,000 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..................................... 4,702,381 12,000,000 Installment notes secured by equipment, payable in monthly installments through 2002 at interest rates ranging from 7.43% to 11.82%........................... 1,958,257 2,319,553 Other notes payable to former owners of acquired businesses and former stockholders of subsidiaries, maturing at various dates through February 2002 at interest rates ranging from 6% to 10%................................ 3,164,835 527,679 Notes payable to bank, secured by automobiles, including interest ranging from 6.25% to 7.25%, primarily due over three years........................... 53,623 34,314 ------ ------ 26,257,650 17,816,946 Less: current installments............................................................... 4,086,795 2,247,281 ------------ ------------ Long-term debt, excluding current installments........................................... $22,170,855 $ 15,569,665 =========== ============
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 $6,500,000 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 $932,929, net of the income tax benefit of $661,822. 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. Aggregate maturities of long-term debt for the next five years and thereafter are as follows at July 31, 1997: 1998............ $ 2,247,281 1999............ 1,439,660 2000............ 1,233,060 2001............ 1,025,435 2002............ 9,777,110 Thereafter...... 2,094,400 ----------- $17,816,946 ===========
(6) PROPERTY AND EQUIPMENT Property and equipment consisted of the following at July 31, 1996 and 1997: 41 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimated Useful Lives (Years) 1996 1997 ------------- ---- ---- Land....................................................... $ 266,870 $ 266,870 Building................................................... 40 9,477,204 9,600,602 Leasehold improvements..................................... 5-10 3,380,199 4,440,907 Warehouse equipment........................................ 5-10 5,454,745 5,360,479 Office equipment........................................... 3-5 4,075,772 4,657,930 Motor vehicles............................................. 3 4,669,065 5,195,933 Equipment under capital leases............................. 5 1,769,139 2,532,031 Construction in progress................................... 337,507 196,392 ----------- ----------- 29,430,501 32,251,144 Less accumulated depreciation and amortization............. 8,826,838 11,871,817 ----------- ----------- Net property and equipment........................... $20,603,663 $20,379,327 =========== ===========
(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 - ------------------ -------- 1998....................................................................... $ 601,193 1999....................................................................... 472,868 2000....................................................................... 423,112 2001....................................................................... 71,292 2002 and thereafter........................................................ 120,262 ----------- Total minimum lease payments......................................... 1,688,727 Less: Amount representing interest......................................... 205,311 ----------- Present value of net minimum lease payments.......................... 1,483,416 Less: current installments................................................. 499,984 ----------- Capital lease obligations, excluding current installments............ $ 983,432 ===========
(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: 42 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1998............ $ 3,459,526 1999............ 3,249,833 2000............ 2,617,024 2001............ 1,570,894 2002............ 1,072,295 ------------ $ 11,969,572 ============
Rent and other lease expense for the year ended October 31, 1995 totaled approximately $5,441,000. Rent and other lease expense for the nine months ended July 31, 1996 and the year ended July 31, 1997 totaled approximately $4,667,000 and $6,321,000, respectively. Outstanding commitments as of July 31, 1997 for the purchase of inventory were approximately $9,523,000. The Company had outstanding letters of credit of approximately $352,000 at July 31, 1997 which were necessary in order to secure business with certain foreign vendors. 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 Plan), covering various employee groups. Under this type of Plan the employees may choose to reduce their compensation and have these amounts contributed to the Plan on their behalf. In order to become a participant in the Plan, the employee must meet certain eligibility requirements as described in the Plan document. In addition to amounts contributed to the Plan by employees, the Company makes contributions to the Plan on behalf of the employees. The Company contributions to the Plan were $279,354, $290,991 and $359,275 for the year ended October 31, 1995, for the nine months ended July 31, 1996 and the year ended July 31, 1997, respectively. (10) INCOME TAXES Total Federal and state income tax expense consists of the following:
Current Deferred Total ----------- ------------ --------- Fiscal year ended October 31, 1995: U.S. Federal............................ $2,079,758 $ 302,052 $2,381,810 State and local......................... 519,940 28,106 548,046 ---------- --------- ---------- $2,599,698 $ 330,158 $2,929,856 ========== ========= ========== Nine months ended July 31, 1996: U.S. Federal............................ $2,427,429 $(254,587) $2,172,842 State and local......................... 620,946 (15,667) 605,279 ---------- --------- ---------- $3,048,375 $(270,254) $2,778,121 ========== ========= ========== Fiscal year ended July 31, 1997: From continuing operations U.S. Federal............................ $4,838,809 $18,979 $4,857,788 State and local......................... 1,581,781 (23,499) 1,558,282 ---------- --------- ---------- 6,420,590 (4,520) 6,416,070 ---------- --------- ----------
43 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Extraordinary item U.S. Federal............................ (542,215) -- (542,215) State and local......................... (119,607) -- (119,607) --------- -- --------- (661,822) -- (661,822) --------- -- --------- $5,758,768 $(4,520) $5,754,248 ========== ======== ==========
Total income tax expense was different than the amounts computed using the United States statutory income tax rate (35% for Fiscal 1997) applied to income before income taxes as a result of the following:
October 31, July 31, July 31, 1995 1996 1997 ---- ---- ---- Computed "expected" tax expense................................... $1,881,001 $2,313,162 $4,926,793 State and local income tax, net of Federal income tax benefit........................................................ 361,710 399,484 935,139 Merger related expenses........................................... -- 155,743 -- Non-deductible expenses........................................... 20,240 69,871 42,140 Non-deductible amortization....................................... 478,623 4,714 15,666 Other, net........................................................ 188,282 (164,853) (165,490) ---------- ---------- ---------- $2,929,856 $2,778,121 $5,754,248 ========== ========== ==========
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 ----- ---- Deferred tax assets: Inventories, principally due to additional costs inventoried for tax purposes................................................................... $ 421,099 $460,184 Rents deducted for book purposes in excess of tax.................................. 27,732 22,133 Financing costs.................................................................... 24,662 25,272 Intangible assets.................................................................. 221,242 300,636 Deferred compensation.............................................................. 400,896 410,823 Accrued vacation................................................................... 59,048 77,336 Accounts receivable, principally due to allowances for uncollectible accounts........................................................................ 280,693 201,574 Other.............................................................................. 165,141 -- ---------- --------- Total gross deferred tax assets.............................................. 1,600,513 1,497,958 Less valuation allowance................................................................. -- -- ---------- --------- Net deferred tax assets...................................................... 1,600,513 1,497,958 ---------- --------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation................ 536,295 571,195 Reserve for LIFO inventory method.................................................. 675,348 522,712 Other.............................................................................. -- 49,844 ---------- --------- Total deferred tax liabilities............................................... 1,211,643 1,143,751 --------- --------- Net deferred tax assets.................................................................. $388,870 $354,207 ========= ======== Current deferred income tax assets....................................................... $ 796,216 $1,031,767 Non-current deferred income tax liabilities.............................................. (407,346) (677,560) --------- --------- $ 388,870 $354,207 ========= ========
44 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 Cornucopia Natural Foods, Inc. (predecessor company) 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 November 1993. The statement provides guidance on employers' accounting for ESOPs and is required to be applied to shares purchased by ESOPs after December 31, 1992, that have not been committed to be released as of the beginning of the year of adoption. In accordance with SOP 93-6, the Company elected not to adopt the guidance in SOP 93-6 for the shares held by the ESOP, all of which were purchased prior to December 31, 1992. The debt of the ESOP is recorded as debt and the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. During 1995, 1996 and 1997 contributions totaling approximately $492,000, $358,000 and $463,000, respectively, were made to the Trust. Of these contributions, approximately $328,000, $235,000 and $300,000, respectively, represented interest. The ESOP shares were classified as follows:
July 31, July 31, 1996 1997 ---- ---- Allocated shares......................... 484,000 550,000 Shares released for allocation........... 66,000 88,000 Shares distributed to employees.......... (20,405) (20,405) Unreleased shares........................ 1,650,000 1,562,000 --------- --------- Total ESOP shares.................. 2,179,595 2,179,595 ========= =========
The fair value of unreleased shares was approximately $37,488,000 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 200,000 to 25,000,000 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 45 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) consolidated financial statements have been restated to reflect the increased number of authorized and outstanding shares of common stock. (13) QUARTERLY FINANCIAL DATA (UNAUDITED) Following is a summary of quarterly operating results and share data. Quarterly information shown below does not vary from amounts reported on any Form 10-Q previously filed by the Company. There were no dividends paid or declared during 1996 and 1997, 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 - ------------------------------------------------------------------------------------------------------------------------------------ 1997 - --- Net sales $99,500,710 $103,405,227 $108,132,374 $110,659,630 $421,697,941 Gross profit 20,591,933 21,425,693 22,399,006 22,697,692 87,114,324 Income before income taxes and extraordinary item 2,448,117 3,691,870 4,918,188 4,613,127 15,671,302 Extraordinary item - 932,929 - - 932,929 Net income 1,387,036 1,250,541 2,881,952 2,802,774 8,322,303 Per common share Income before extraordinary item $ 0.14 $ 0.20 $ 0.23 $ 0.22 $ 0.79 Market Price High 17 1/2 17 24 3/8 24 3/8 Low 12 1/2 13 15 12 1/2 Weighted average shares outstanding 10,114,228 12,411,226 12,411,226 12,748,733 11,697,587 1996 - ---- Net sales $94,821,978 $ 92,283,081 $ 96,432,295 $ 97,733,021 $381,270,375 Gross profit 19,045,778 19,344,448 20,218,680 20,403,504 79,012,410 Income before income taxes 138,462 1,807,008 2,779,175 2,217,233 6,941,878 Net income (loss) (630,527) 1,109,060 1,552,023 1,364,212 3,394,768 Per common share Income $ (0.06) $ 0.11 $ 0.15 $ 0.13 $ 0.33 Weighted average shares outstanding 10,134,693 10,134,693 10,134,693 10,138,172 10,145,823
46 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. Part III Item 10. Directors and Executive Officers of the Registrant The information required by this item is contained in part under the caption "Executive Officers of the Registrant" in PART I hereof, and the remainder is contained in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held in December 1997 (the "1997 Proxy Statement") under the captions "PROPOSAL 1 ELECTION OF DIRECTORS" and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" and is incorporated herein by this reference. Officers are elected on an annual basis and serve at the discretion of the Board of Directors. Item 11. Executive Compensation The information required by this item is contained under the captions "Director Compensation," "Compensation of Executive Officers" and "Compensation Committee Interlocks and Insider Participation" in the 1997 Proxy Statement and is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is contained in the 1997 Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners and Management" and is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions The information required by this item is contained under the caption "Certain Transactions" in the 1997 Proxy Statement and is incorporated herein by this reference. 47 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as a part of this Form 10-K -------------------------------------------- 1. Financial Statements. The Financial Statements listed in -------------------- the Index to Financial Statements in Item 8 hereof are filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedules. Schedule II Valuation and ----------------------------- Qualifying Accounts All other schedules are omitted, since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements and notes thereto. Independent Auditor's Report on Financial Statement Schedule. 3. Exhibits. The Exhibits listed in the Exhibit Index -------- immediately preceding such Exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K. ------------------- On July 9, 1997, the Company filed a Current Report on Form 8-K dated June 23, 1997 announcing under Item 5 (Other Events) that the Company had executed an agreement with Stow Mills, Inc. with respect to a merger in which the two companies will be combined. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED NATURAL FOODS, INC. /s/ Steven H. Townsend ----------------------------- Steven H. Townsend Chief Financial Officer (Principal Financial and Accounting Officer) Dated: October 29, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ NORMAN A. CLOUTIER Chairman of the Board and Chief Executive Officer October 29, 1997 - ---------------------- (Principal Executive Officer) Norman A. Cloutier /s/ MICHAEL S. FUNK Vice Chairman of the Board and President October 29, 1997 - ------------------- Michael S. Funk /s/ STEVEN H. TOWNSEND Chief Financial Officer, Treasurer, Secretary and Director October 29, 1997 - ---------------------- (Principal Financial and Accounting Officer) Steven H. Townsend /s/ DANIEL V. ATWOOD Director October 29, 1997 - -------------------- Daniel V. Atwood /s/ ANDREA R. HENDRICKS Director October 29, 1997 - ----------------------- Andrea R. Hendricks /s/ KEVIN T. MICHEL Director October 29, 1997 - ------------------- Kevin T. Michel /s/ RICHARD J. WILLIAMS Director October 29, 1997 - ----------------------- Richard J. Williams /s/ THOMAS B. SIMONE Director October 29, 1997 - -------------------- Thomas B. Simone
49 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 2 ** Agreement and Plan of Reorganization by and among the Registrant, Gem Acquisition Corp., Stow Mills, Inc., Barclay McFadden and Richard S. Youngman, dated as of June 23, 1997, and amended and restated as of August 8, 1997. 3.1 * Amended and Restated Certificate of Incorporation of the Registrant. 3.2 * Amended and Restated By-Laws of the Registrant. 4 * Specimen Certificate for shares of Common Stock, $.01 par value, of the Registrant. 10.1 * Amended and Restated Employee Stock Ownership Plan. 10.2 * Employee Stock Ownership Trust, as amended. 10.3 * ESOT Loan Agreement among Norman A. Cloutier, Steven H. Townsend, Daniel V. Atwood, Theodore Cloutier and the Employee Stock Ownership Plan and Trust, dated November 1, 1988, as amended. 10.4 * Stock Pledge Agreement between the Employee Stock Ownership Trust and Steven H. Townsend, Trustee for Norman A. Cloutier, Steven H. Townsend, Daniel V. Atwood and Theodore Cloutier, dated November 1, 1988, as amended. 10.5 * Trust Agreement between Norman A. Cloutier, Steven H. Townsend, Daniel V. Atwood, Theodore Cloutier and Steven H. Townsend as Trustee, dated November 1, 1988. 10.6 * Guaranty Agreement between the Registrant and Steven H. Townsend as Trustee for Norman A. Cloutier, Steven H. Townsend, Daniel V. Atwood and Theodore Cloutier, dated November 1, 1988. 10.7 *+ 1996 Stock Option Plan. 10.8 * Stock Acquisition Agreement and Plan of Merger among the Registrant, MPW Acquisition Corporation, Michael S. Funk and Judith A. Funk, individually and as trustees of the Funk Family 1992 Revocable Living Trust, and Mountain People's Warehouse Incorporated (Mountain People's"), dated December 8, 1995. 10.9 * Asset Purchase Agreement between the Registrant and PREM MARK, Inc., d/b/a Rainbow Natural Foods Distributing ("Rainbow"), dated July 27, 1995. 10.10 * Stock Purchase Agreement, dated May 22, 1995, between Mountain People's and Nutrasource, Inc. ("Nutrasource"). EX-10.27 2 SECOND AMENDMENT TO LOAN AGREEMENT EXHIBIT 10.27 UNITED NATURAL FOODS, INC. 260 LAKE ROAD DAYVILLE, CONNECTICUT 06241 As of July 1, 1997 FLEET CAPITAL CORPORATION 200 Glastonbury Boulevard Glastonbury, Connecticut 06033 Re: Second Amendment to Amended and Restated Loan Agreement ------------------------------------------------------- Ladies and Gentlemen: Reference is made to the Amended and Restated Loan and Security Agreement dated February 20, 1996 as amended by a First Amendment thereto dated as of March 1, 1997 ("Loan Agreement") and all promissory notes, mortgages, guaranties, agreements, documents and instruments entered into by United Natural Foods, Inc., Mountain People's Warehouse Incorporated, Natural Retail Group, Inc., Rainbow Natural Foods, Inc., and Nutrasource, Inc. (collectively, the "Borrowers") and any other person or obligor pursuant thereto (collectively, the "Loan Documents") with or for the benefit of Fleet Capital Corporation ("Lender"). Except as otherwise defined herein, capitalized terms used herein shall have the meanings given them in the Loan Agreement. This Second Amendment to Loan Agreement is referred to as the "Second Amendment". Background. The Borrowers have requested that the ---------- Lender agree to amend the Loan Agreement to make certain modifications and amendments to the covenants set forth in Section 8 thereof. Subject to the satisfaction of the terms and conditions hereof, Lender and Borrowers have agreed that the Loan Agreement shall be amended as follows: Amendments to the Loan Agreement. -------------------------------- Section 8.2.1 of the Loan Agreement is deleted in its entirety and the following provision is inserted in place thereof: "8.2.1 Mergers; Consolidations; Acquisitions. Merge or consolidate or ------------------------------------- permit any Subsidiary or New Subsidiary of Borrowers to merge or consolidate, with any Person (except for mergers or consolidations among the Borrowers or mergers or consolidations of Subsidiaries or New Subsidiaries with a Borrower or Borrowers); nor acquire or permit any of its Subsidiaries to acquire all or any substantial part of the Properties or stock or securities of any Person except that Borrowers may purchase businesses in the lines of business conducted by the Borrowers which Borrowers have determined, in their reasonable business judgment, would enhance the business. operations, prospects and condition (financial or otherwise) of the Borrowers. Whether or not the Borrowers utilize Acquisition Loans pursuant to Section 1.4 hereof in connection with such acquisition, the Borrowers agree to furnish to the Lender notice and copies of any letter of intent or other memorandum of understanding and purchase documents for any acquisition they may contemplate and allow Lender and its representatives reasonable access to financial information and the assets and properties to be acquired which will, upon consummation of the acquisition, become Collateral for the Obligations. If any such acquisition is structured as the acquisition of stock or other securities of a Person to be acquired or Borrowers create a Subsidiary to make the acquisition, Borrowers shall cause such entity to enter into a guaranty of the Obligations and to grant to Lender a security interest in its assets to secure such guaranty reasonably satisfactory to the Lender. The Lender agrees to enter into confidentiality agreements with the Persons that Borrower may acquire on terms mutually agreeable to Lender and such Person." Section 8.2.2 of the Loan Agreement is amended to add the following clause to the end of the first sentence therein: "and Borrowers may make loans or other advances of money between and among the Borrowers in the ordinary course of business." Subsection 8.2.3 of the Loan Agreement is deleted in its entirety and the following is inserted in place thereof: "8.2.3 Total Indebtedness. Create, assume, suffer to exist, or permit ------------------ any Subsidiary of Borrowers to create, incur or suffer to exists, any Indebtedness except: (i) Obligations owing to Lender; (ii) obligations to pay Rentals permitted by Subsection 8.2.13; and (iii) Indebtedness (inclusive of the Obligations but excluding the obligations under paragraph (ii) above and the Indebtedness evidenced by the ESOP Notes) which does not result in aggregate Indebtedness for the Borrowers and their Subsidiaries taken as a whole, exceeding five times the Tangible Net Worth of the Borrowers and their Subsidiaries taken as a whole, provided that at all times each Borrower shall remain Solvent and such other Indebtedness shall not be secured by a Lien (other than Permitted Purchase Money Indebtedness secured by Liens permitted under subsection 8.2.5(iv)). Section 8.2.6 is hereby deleted in its entirety and the following is inserted in place thereof: "8.2.6 Subordinated Debt. Issue or enter into any agreement to issue ---------------- Subordinated Debt except upon terms and provisions relating to the maturity and repayment thereof and terms relating to the subordination of payment thereof to the Obligations, in each case reasonably acceptable to the Lender. Section 8.2.8 is hereby deleted in its entirety. Section 8.2.16 is hereby amended to delete the following from clause (a) thereof "New Subsidiaries in connection with the opening of retail stores" and by inserting the following in lieu thereof "Borrowers and their Subsidiaries". Section 8.2.18 is hereby deleted in its entirety and the following is inserted in place thereof: "8.2.18 Subsidiaries. Hereafter create any Subsidiary except as ------------ provided in subsections 1.4 or 8.2.1 hereof." Section 8.2.21 is hereby deleted in its entirety. Representations and Warranties. ------------------------------ To induce Lender to enter into this Second Amendment, each Borrower warrants, represents and covenants to Lender that: (a) Organization and Qualification. Each Borrower is a corporation ------------------------------ duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Each Borrower is duly qualified or is authorized to do business and is in good standing as a foreign corporation or limited liability company in all states and jurisdictions in which the failure of such Borrower to be so qualified would have a material adverse effect on the financial condition, business or properties of the Borrower. (b) Corporate Power and Authority. Each Borrower is duly authorized ----------------------------- and empowered to enter into, execute, deliver and perform this Second Amendment and this Second Amendment has been duly authorized by all necessary corporate action and does not and will not (i) require any consent or approval of the shareholders or members of a Borrower; (ii) contravene any Borrower's charter, by-laws or operating agreement; (iii) violate, or cause Borrower to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to any Borrower; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Borrower is a party or by which Borrower's Properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than Permitted Liens) upon or with respect to any of the Properties now owned or hereafter acquired by Borrower. (c) Legally Enforceable Agreement. This Second Amendment is a legal, ----------------------------- valid and binding obligation of each Borrower, enforceable against each Borrower in accordance with its respective terms. (d) No Material Adverse Change. Since the date of the last financial -------------------------- statements provided by the Borrower to the Lender, there has been no material adverse change in the condition, financial or otherwise, of any Borrower as shown on the Consolidated balance sheet as of such date and no change in the aggregate value of Equipment and real property owned by Borrowers, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. (e) Continuous Nature of Representations and Warranties. Each --------------------------------------------------- representation and warranty contained in the Loan Agreement and the other Loan Documents remains accurate, complete and not misleading in any material respect on the date of this Second Amendment, except for representations and warranties that explicitly relate to an earlier date and changes in the nature of any Borrower's business or operations that would render the information in any exhibit attached thereto either inaccurate, incomplete or misleading, so long as such changes were disclosed in the Form S-1 Registration Statement of UNF as filed with the Securities and Exchange Commission on September 4, 1996, as amended, or Lender has consented to such changes or such changes are expressly permitted by the Loan Agreement. Conditions Precedent. -------------------- Notwithstanding any other provision of this Second Amendment or any of the other Loan Documents, and without affecting in any manner the rights of Lender under the other sections of this Second Amendment, this Second Amendment shall not be effective as to Lender unless and until each of the following conditions has been and continues to be satisfied: (a) Documentation. Lender shall have received, in form and substance ------------- satisfactory to Lender and its counsel, a duly executed copy of this Second Amendment with such additional documents, instruments and certificates as Lender and its counsel shall require in connection therewith, all in form and substance satisfactory to Lender and its counsel. (b) No Default. No Default or Event of Default shall exist except as ---------- previously disclosed to and consented to by Lender. (c) No Litigation. Except as previously disclosed to and consented to ------------- by Lender, no action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of the Loan Agreement or this Second Amendment or the consummation of the transactions contemplated thereby or hereby. Acknowledgment of Obligations. ----------------------------- Each Borrower hereby (1) reaffirms and ratifies all of the promises, agreements, covenants and obligations to Lender under or in respect of the Loan Agreement and other Loan Documents as amended hereby and (2) acknowledges that it is unconditionally liable for the punctual and full payment of all Obligations, including, without limitation, all charges, fees, expenses and costs (including reasonable attorneys' fees and expenses) under the Loan Documents, as amended hereby, and that it has no defenses, counterclaims or setoffs with respect to full, complete and timely payment and performance of all Obligations. Confirmation of Liens. --------------------- Each Borrower acknowledges, confirms and agrees that the Loan Documents, as amended hereby, are effective to grant to Lender duly perfected, valid and enforceable first priority security interests and liens in the Collateral described therein and that the locations for such Collateral specified in the Loan Documents have not changed. Borrower further acknowledges and agrees that all Obligations of Borrower are and shall be secured by the Collateral. Miscellaneous. ------------- Except as set forth herein, the undersigned confirms and agrees that the Loan Documents remain in full force and effect without amendment or modification of any kind. Each Borrower hereby acknowledges its obligation to pay to Lender's reasonable attorneys' fees and costs incurred in connection with this Second Amendment, as set forth in the Loan Agreement. The execution and delivery of this Second Amendment by Lender shall not be construed as a waiver by Lender of any Default or Event of Default under the Loan Documents. This Second Amendment, together with the Loan Agreement and other Loan Documents, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior dealings, correspondence, conversations or communications between the parties with respect to the subject matter hereof. This Second Amendment and the transactions hereunder shall be deemed to be consummated in the State of Connecticut and shall be governed by and interpreted in accordance with the laws of that state. This Second Amendment and the agreements, instruments and documents entered into pursuant hereto or in connection herewith shall be "Loan Documents" under and as defined in the Loan Agreement. Executed under seal on the date set forth above. ATTEST: UNITED NATURAL FOODS, INC. /s/ John F. Breggia By: /s/ Steven Townsend - ----------------------------- ------------------------------------ Name: Steven Townsend --------------------------- Title: Chief Financial Officer -------------------------- ATTEST: MOUNTAIN PEOPLE'S WAREHOUSE, INC. /s/ Ginny Feth-Michel By: /s/ Kevin Michel - ----------------------------- --------------------------------- Name: Kevin Michel --------------------------- Title: CFO / Treasurer -------------------------- ATTEST: NATURAL RETAIL GROUP, INC. /s/ John F. Breggia By: /s/ Steven Townsend - ----------------------------- --------------------------------- Name: Steven Townsend --------------------------- Title: Chief Financial Officer -------------------------- ATTEST: NUTRASOURCE, INC. /s/ Ginny Feth-Michel By: /s/ Kevin Michel - ----------------------------- --------------------------------- Name: Kevin Michel --------------------------- Title: CFO / Treasurer -------------------------- ATTEST: RAINBOW NATURAL FOODS, INC. /s/ John F. Breggia By: /s/ Steven Townsend - ----------------------------- --------------------------------- Name: Steven Townsend --------------------------- Title: Chief Financial Officer -------------------------- Accepted in Glastonbury, Connecticut on September 2, 1997 FLEET CAPITAL CORPORATION By: /s/ Howard Handman -------------------------- Name: Howard Handman -------------------- Title: Vice President ------------------ EX-10.28 3 COLORADO LEASE EXHIBIT 10.28 STANDARD FORM LEASE (Industrial, Multi-tenant, Net) This Lease dated July 11, 1997, by and between AmberJack, Ltd., an Arizona Corporation, ("Landlord") and United Natural Foods, Inc., a Delaware Corporation, ("Tenant") for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. ARTICLE I Basic Lease Provisions ---------------------- Each reference in this Lease to the "Basic Lease Provisions" shall mean and refer to the following terms, the application of which shall be governed by the provisions in the remaining Articles of this Lease: 1.1 Address of Landlord: AmberJack, Ltd., c/o Birtcher Property Services, 1100 Stout, Suite 100, Denver, CO 80204 1.2 Premises Address: 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011 1.3 Address of Tenant-Notices/Billings: Prior to Commencement Date: 260 Lake Road, Dayville, CT 06241 After Commencement Date: 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011 1.4 Tenant's Trade Name: d.b.a. Rainbow Natural Foods, Inc. 1.5 Tenant's Contact: Norman Cloutier Telephone: (860) 719-2800 1.6 Premises Square Footage: Approximately 180,800 Square Feet Building Square Footage: Approximately 220,800 Square Feet 1.7 Anticipated Commencement Date: January 15, 1998 1.8 Term: Fifteen (15) Years and Zero (0) Months 1.9 Initial Monthly Rent: Fifty Two Thousand Seven hundred thirty three Dollars and thirty three cents 33/100 ($52,733.33) Per Month 1.10 Security Deposit: Fifty Two Thousand Seven hundred thirty three Dollars and thirty three cents 33/100 ($52,733.33) 1.11 Permitted Uses: Any and all lawful uses and operations required by, incidental to or in any way connected with the business of Tenant, including, but not limited to, the distribution and internal storage of natural food products, provided such use is in compliance with Applicable Laws and Restrictions (as hereafter defined) and in accordance with any approvals that Tenant is required to obtain from all relevant City, County and other applicable governmental Applicable agencies and authorities . 1.12 Broker: CB Commercial and Cushman Wakefield 1.13 Landlord's Architect: M+O+A 1.14 Guarantor - Name & Address: None 1.15 Vehicle Parking Spaces: Two Hundred Twenty-two (222) 1.16 Additional Insureds: AmberJack, Ltd. and Birtcher Property Services 1.17 Tenant's Liability Insurance Limits: $ 5,000,000.00 1.18 Tenant's Share: See Section 7.2 Exhibits: A Description of the Premises E Adjustments to Monthly Rent B Project Site Plan F Rules and Regulations C Work Letter G Environmental Questionnaire D Commencement Date Memorandum H Sign Criteria I Parking Rider No. 1: Option to Extend Term Rider No. 2 Right of First Opportunity Rider No. 3 Assignment of Warranties ARTICLE II Definitions ----------- 2.1 Certain Definitions. The capitalized terms set forth below, unless the context clearly requires otherwise, shall have the following meanings in this Lease: "Additional Rent" means any and all sums (whether or not specifically called "Additional Rent" in this Lease) other than Monthly Rent which Tenant is or becomes obligated to pay to Landlord under this Lease. See also Rent. "Alterations" means any alterations, decorations, modifications, additions or improvements made in, on, about, under or contiguous to the Building or the Premises after the Commencement Date including, but not limited to, lighting, HVAC and electrical fixtures, pipes and conduits, transfer, storage and disposal facilities, partitions, drapery, wall coverings, shelves, cabinetwork, carpeting and other floor coverings, ceiling tiles, fixtures and carpentry installations. "Applicable Laws" means the laws, rules, regulations, ordinances, restrictions, and practices described in Section 5.2. "Applicable Rate" means the greater of ten percent (10%) per annum or five percent (5%) in excess of the discount rate of the Federal Reserve Bank of Kansas City in effect on the twenty-fifth (25th) day of the calendar month immediately prior to the event giving rise to the Applicable Rate imposition; provided, however, the Applicable Rate shall in no event exceed the maximum interest rate permitted to be charged by applicable law. "Broker" means the person or entity identified in Item 1.12 of the Basic Lease Provisions. "Building" means that certain building within which the Premises are located. "Casualty" is defined in Section 12.1. "CC&R's" means the Declaration of Covenants, Conditions and Restrictions applicable to the Project, if any, recorded in the Official Records of the County, as the same may be amended from time to time, provided no such amendment shall unreasonably materially interfere with Tenant's Permitted Use. "City" means the city in which the Premises are located. "Commencement Date" means the commencement date of the Term, described in Section 3.2. "Common Area" means all areas and facilities within the Project exclusive of the Premises and other portions of the Project leased (or to be leased) exclusively to other tenants. The Common Area includes, but is not limited to, parking areas, access and perimeter roads, sidewalk, landscaped areas and similar areas and facilities. Tenant's use of the Common Area, and its rights and obligations with respect thereto, are more particularly described in Article X . "County" means the county in which the Premises are located. "Event of Default" means the Tenant defaults described in Section 15.1. "Guarantor" means the person(s) or entity identified in Item 1.14 of the Basic Lease Provisions, if any. "HVAC" means the heating, ventilating and air conditioning system serving the Building. "Hazardous Materials" is defined in Section 6.1. "Landlord's Group" means Landlord's authorized representatives, property managers, whether as independent contractors, consultants, contractors, partners, subsidiaries, affiliates, directors, officers and employees, including without limitation the Additional Insureds named in Item 1.16 of the Basic Lease Provisions. "Landlord's Architect" means the architect or architectural firm from time to time designated by Landlord to perform the function of Landlord's Architect set forth in this Lease. Landlord's Architect initially shall be the architect or architectural firm designated in Item 1.13 of the Basic Lease Provisions. "Lease" means this instrument together with all exhibits, amendments, addenda and riders attached hereto and made a part hereof. "Monthly Rent" means the monthly rental which Tenant is to pay to Landlord pursuant to Section 4.1, as the same may be adjusted from time to time as set forth in this Lease. See also Rent. "Mortgage" means any mortgage, deed of trust, or similar lien on or covering the Project or any part thereof. "Mortgagee" means any mortgagee of a mortgage, beneficiary of a deed of trust or lender having a lien on or covering the Project or any part thereof. "Notice" means each and every notice, communication, request, demand, reply or advice, or duplicate thereof, in this Lease provided or permitted to be given, made or accepted by either party to any other party, which shall be in writing and given in accordance with the provisions of Section 21.6. "Operating Expenses" means, collectively, Project Costs and Real Property Taxes. "Plans" means the final working drawings for the construction of the Tenant Improvements to be prepared and approved as set forth in the Work Letter. "Premises" means the premises shown in Exhibit A, and all areas appurtenant thereto, if any, for the exclusive use of Tenant, as shown in Exhibit A. The Premises are located within and constitute a portion of the Building at the address set forth in Item 1.2 of the Basic Lease Provisions. "Premises Square Footage" means the approximate floor area of the Premises and, if the Building has other internal common features, then at Landlord's option, an additional factor approximating the total square footage of such features times the ratio of Tenant's floor area to the total square footage of the Building, as determined by Landlord's Architect. The Premises Square Footage as of the execution of this Lease is set forth in Item 1.6 of the Basic Lease Provisions. "Project" means that certain real property, and all improvements thereon, including the Building and other buildings, if any, now or hereafter located within the boundaries of such property, shown on the Project Site Plan; provided however Landlord reserves the right to change the boundaries of the property and to increase or decrease the size of the Project so long as the Building is included within the Project. "Project Costs" is defined in Section 7.3. "Project Site Plan" means Exhibit B. "REA" means the Reciprocal Easement Agreement applicable to the Project, if any, recorded in the Official Records of the County as the same may be amended from time to time. "Real Property Taxes" is defined in Section 7.4. "Rent" means Monthly Rent and Additional Rent, collectively. "Restrictions" means, collectively, the CC&R's, the REA and any other covenants, conditions or restrictions affecting the Premises or any portion thereof, as the same may be amended from time to time. "Rules and Regulations" means the rules and regulations of general application and any modifications thereto promulgated by Landlord or Landlord's Group from time to time. "Security Deposit" means the amount set forth in Item 1.10 of the Basic Lease Provisions, which shall be paid to Landlord by Tenant pursuant to Section 4.6. "Substantial Completion" and "substantially completed" means the Tenant Improvements, or repair of the Premises following a Casualty, have been fully completed except for minor details of construction, mechanical adjustments or decoration including exterior painting and landscaping which do not materially interfere with Tenant's use and enjoyment of the Premises (items normally referred to as "punch list" items) and a certificate of occupancy (temporary or otherwise) has been issued with respect thereto. "Tenant Delays" means (i) any and all delays in the construction of the Tenant Improvements due to the fault of the Tenant, as defined and specified in the Work Letter, and (ii) Tenant's failure to deliver to Landlord prior to the Anticipated Commencement Date, executed copies of policies of insurance or certificates thereof as required under Section 11.8. "Tenant Improvements" means those certain improvements, if any, to be constructed on the Premises as provided in Article XX and in the Work Letter. "Tenant's Agents" means Tenant's agents, representatives, consultants, contractors, affiliates, subsidiaries, officers, directors, employees, subtenants, guests and invitees. "Tenant's Personal Property" means Tenant's removable trade fixtures, furniture, equipment and other personal property located in or on the Premises. "Term" means the term of this Lease, as provided in Section 3.2. "Unavoidable Delay" means any delays which are beyond a party's reasonable control including, but not limited to, delays due to inclement weather, strikes, acts of God, inability to obtain labor or materials, inability to secure governmental approvals or permits, governmental restrictions, civil commotion, fire, earthquake, explosion, flood, hurricane, the elements, or the public enemy, action or interference of governmental authorities or agents, war invasion, insurrection, rebellion, riots, lockouts or any other cause whether similar or dissimilar to the foregoing which is beyond a party's reasonable control; provided however, that in no event shall any of the foregoing ever apply with respect to the payment of any monetary obligation. "Work Letter" means the work letter between Landlord and Tenant regarding the construction of the Tenant Improvements, if any, in the form of Exhibit C. 2.2 Other Definitions. Terms defined elsewhere in this Lease, unless the context clearly requires otherwise, shall have the meaning as they're given. ARTICLE III Premises And Term ----------------- 3.1 Lease of Premises. Subject to and upon the terms and conditions set forth herein, Landlord hereby leases the Premises to Tenant, and Tenant hereby leases the Premises from Landlord. 3.2 Terms and Commencement. Unless sooner terminated as provided herein, the Term of this Lease shall be for that period of years and months set forth in Item 1.8 of the Basic Lease Provisions, as the same may be extended in accordance with any option or options to extend the Term granted herein, and shall commence (the "Commencement Date") on the earlier of (i) the date upon which the City has approved the Tenant Improvements in accordance with its building code, as evidenced by its written approval thereof in accordance with the building permits issued for the Tenant Improvements, and issuance of a certificate of occupancy (temporary or otherwise) from the City for the Premises and Landlord's Architect has certified in writing that the Tenant Improvements are substantially completed in accordance with the Plans, provided that in such event Landlord shall deliver to Tenant a certificate of occupancy (temporary or otherwise) from the City for the Premises within five (5) business days of such date, or (ii)the date Tenant commences occupancy within the Premises to conduct business. When the actual Commencement Date has occurred, Landlord and Tenant shall execute a Commencement Date Memorandum in the form shown in Exhibit D. Landlord and Tenant anticipate that the Term will commence on the "Anticipated Commencement Date" set forth in Item 1.7 of the Basic Lease Provisions, but the Anticipated Commencement Date shall in no event affect the actual Commencement Date, which shall be determined as set forth in this Section 3.2. 3.3 Early Entry. Tenant and its authorized agents, contractors, subcontractors and employees shall be granted a license by Landlord to enter upon the Premises, at Tenant's sole risk and expense, during ordinary business hours prior to the Commencement Date, for the sole purpose of installing Tenant's trade fixtures and equipment in the Premises; provided, however, that (i) the provisions of this Lease, other than with respect to the payment of Rent, shall apply during such early entry including, but not limited to, the provisions of Article XI relating to Tenant's indemnification of Landlord, (ii) prior to any such entry, Tenant shall pay for and provide evidence of the insurance to be provided by Tenant pursuant to the provisions of Article XI, (iii) Tenant shall pay all utility, service and maintenance charges for the Premises attributable to Tenant's early entry and use of the Premises as reasonably determined by Landlord, (iv) Tenant shall not unreasonably interfere, delay or hinder Landlord, its agents, contractors or subcontractors in the construction of the Tenant Improvements in accordance with the provisions of this Lease, and (v) Tenant shall not use the Premises for the storage of inventory or otherwise commence the operation of business during the period of such early entry. Upon Tenant's breach of any of the foregoing conditions, Landlord may, in addition to exercising any of its other rights and remedies set forth herein, revoke such license upon notice to Tenant. Early entry by Tenant in accordance with this Section 3.3 shall not constitute occupancy of the Premises for purposes of establishing the Commencement Date. 3.4 Delay in Possession. If for any reasons Landlord cannot deliver possession of the Premises to Tenant with the Tenant Improvements substantially completed on or before the Anticipated Commencement Date, Landlord shall not be subject to any liability therefor, and such failure shall not affect the validity of this Lease or the obligations of Tenant hereunder, but in such case, Tenant shall not be obligated to pay Monthly Rent or Additional Rent other than as provided in Section 3.3 and Section 3.5 until the Commencement Date has occurred. If the Commencement Date has not occurred within one hundred twenty (120) days following the Anticipated Commencement Date plus periods attributable to Tenant Delays or Unavoidable Delay, Tenant may, at its option, by Notice to Landlord within ten (10) days thereafter, terminate this Lease, in which event the parties shall be discharged from all further obligations hereunder; provided, however, if Tenant fails to give such notice to Landlord within such ten-day period, Tenant shall no longer have the right to terminate this Lease under this Section 3.4. Tenant understands that, notwithstanding anything to the contrary contained herein, Landlord shall have no obligation to deliver possession of the Premises to Tenant for so long as Tenant fails to deliver to Landlord executed copies of policies of insurance or certificates thereof as required under Section 11.8. 3.5 Tenant Delays. The Commencement Date shall not be delayed or postponed due to Tenant Delays, and the Term, Tenant's obligations to pay Rent and all of Tenant's other obligations under this Lease shall commence upon the date which would have been the Commencement Date but for Tenant Delays. 3.6 Condition of Premises. Landlord's sole construction obligations, if any, regarding Tenant Improvements for the Premises are set forth in Article XX and the Work Letter. The taking of possession or use of the Premises by Tenant for any purpose other than as provided in Section 3.3 shall conclusively establish that Tenant has inspected the Premises and accepts them as being in good and sanitary order, condition and repair and that the Tenant Improvements have been constructed in accordance with the Plans; provided, however, Tenant shall have a period of thirty (30) days after taking possession of the Premises in which to notify Landlord in writing of any construction deficiencies or defects and any uncompleted punch list items (the punch list shall be limited to items required to be accomplished by Landlord under the Work Letter) and, except as hereafter provided, Landlord will repair, replace or complete at its expense all items referenced in such notice within thirty (30) days after receipt of such notice, subject to Unavoidable Delay, or as soon thereafter as Landlord, acting in good faith, can repair, replace or complete the same. If Landlord reasonably contends that a particular item in such notice is not justified, the parties will refer the issue to Landlord's Architect for resolution. Landlord's Architect's determination shall be final and binding upon the parties. Nothing in this Section 3.6 shall limit or expand Landlord's maintenance and repair obligations set forth in Article IX. Notwithstanding the foregoing, Landlord represents that the Building and Premises shall be delivered to Tenant in good operating condition as of the Commencement Date and that the Building and the Premises are in substantial compliance with all current government regulations, ordinances, and laws including zoning and building codes, regulations and ordinances and Title III of the American with Disabilities Act of 1990. 3.7 No Representations. Tenant acknowledges that neither Landlord nor any of Landlord's Group has made any representations or warranties as to the suitability or fitness of the Premises for the conduct of Tenant's business including, but not limited to, any representations or warranties regarding zoning or other land use matters, or for any other purpose, and that neither Landlord nor any of Landlord's Group has agreed to undertake any alterations or additions or construct any Tenant Improvements to the Premises except as expressly provided in this Lease. ARTICLE IV Rent And Adjustments -------------------- 4.1 Monthly Rent. From and after the Commencement Date, Tenant shall pay to the Landlord, for each calendar month of the Term, the Monthly Rent set forth in Item 1.9 of the Basic Lease Provisions, as the same may be adjusted from time to time as provided in Section 4.2. Monthly Rent shall be due and payable to Landlord in lawful money of the United States, in advance, on the first (1st) day of each calendar month of the Term, without abatement, deduction, claim or offset, and without prior notice, invoice or demand, at Landlord's address set forth in Item 1.1 of the Basic Lease Provisions or at such place as Landlord may from time to time designate. Tenant's payment of Monthly Rent for the first (1st) month of the Term shall be delivered to Landlord concurrently with Tenant's execution of this Lease. 4.2 Adjustments. Monthly Rent shall be adjusted from time to time as provided in Exhibit E. 4.3 Additional Rent. All Additional Rent shall be due and payable to Landlord in lawful money of the United States, at Landlord's address set forth in Item 1.1 of the Basic Lease Provisions or at such other place as Landlord may from time to time designate, without abatement, deduction, claim or offset, within ten (10) days of receipt of Landlord's invoice or statement for same, or if this Lease provides another time for the payment of certain items of Additional Rent, then at such other time. 4.4 Prorations. If the Commencement Date is not the first (1st) day of a month, or if the expiration of the Term of this Lease is not the last day of a month, a prorated installment of Monthly Rent based on a thirty (30) day month shall be paid for the fractional month during which the Term commences or terminates. 4.5 Late Payment Charges. Tenant acknowledges that late payment by Tenant to Landlord of Rent under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which is extremely difficult or impracticable to determine. Such costs include, but are not limited to, processing and accounting charges, late charges that may be imposed on Landlord by the terms of any Mortgage, and late charges and penalties that may be imposed due to late payment of Real Property Taxes. Therefore, if any installment of Monthly Rent or any payment of Additional Rent due from Tenant is not received by Landlord in good funds ten (10) days from the applicable due date, Tenant shall pay to Landlord an additional sum equal to five percent (5%) of the amount overdue as a late charge for every month or portion thereof that such amount remains unpaid. The parties acknowledge that this late charge presents a fair and reasonable estimate of the costs that Landlord will incur by reason of the late payment by Tenant. Acceptance of any late Rent and late charge therefor shall not prevent Landlord from exercising any of the other rights and remedies available to Landlord for any other Event of Default under this Lease. Notwithstanding the foregoing (i) should any payment of Rent by personal check be rejected for insufficient funds, Landlord shall have the right, upon notice to Tenant, to require that all future payments by Tenant under this Lease be by cashier's check acceptable to Landlord. 4.6 Security Deposit. Tenant has deposited with Landlord the sum set forth in Item 1.10 of the Basic Lease Provisions as a Security Deposit for the full and faithful performance of every provision of this Lease to be performed by Tenant. Landlord may apply, in its sole discretion at any time during the Term of this Lease, all or any part of the Security Deposit to the payment of all prepaid expenses by Landlord for which Tenant would be required to reimburse Landlord under this Lease, including without limitation for Tenant Improvements and Broker commissions. Such application of the Security Deposit is not and shall never be dependent upon an Event of Default. Upon an Event of Default, and whether or not Landlord is informed of or has knowledge of the event of Default, the Security Deposit (if not already applied as hereinabove provided) shall be deemed to be automatically applied, without waiver of any rights Landlord may have under this Lease or at law or in equity as a result of an Event of Default, to the payment of any Rent not paid when due, the repair of damage to the Premises or the payment of any other amount which Landlord may spend or become obligated to spend by reason of an Event of Default, to the full extent permitted by law. If any portion of the Security Deposit is so applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep the Security Deposit separate from its general funds. The unused portion of the Security Deposit, if any, shall be returned to Tenant within thirty (30) days of the expiration of this Lease or any termination of this Lease not resulting from an Event of Default, so long as Tenant has vacated the Premises in the manner required by this Lease and paid all sums required to be paid under this Lease, provided however, that Landlord may retain the Security Deposit until such time as any amounts of Additional Rent due from Tenant have been determined and paid in full. ARTICLE V Use --- 5.1 Tenant's Use. Tenant shall use the Premises solely for the purposes set forth in Item 1.11 of the Basic Lease Provisions and shall use the Premises for no other purpose. Tenant's use of the Premises shall be subject to all of the terms and conditions of this Lease including, but not limited to, all the provisions of this Article V. Tenant, at Tenant's sole cost and expense, shall procure, maintain and make available for Landlord's inspection after reasonable notice during normal business hours throughout the Term, all governmental approvals, licenses and permits required for the proper and lawful conduct of Tenant's permitted use of the Premises. 5.2 Compliance With Applicable Laws. Throughout the Term, Tenant, at Tenant's sole cost and expense, shall comply with, and shall not use the Premises, Building or Common Area, or suffer or permit anything to be done in or about the same which will in any way conflict with, (i) any and all present and future laws, statutes, zoning restrictions, ordinances, orders, regulations, directions, rules and requirements of all governmental or private authorities having jurisdiction over all or any part of the Premises (including, but not limited to, state, municipal, county and federal governments and their departments, bureaus, boards and officials) pertaining to the use or occupancy of, or applicable to, the Premises or privileges appurtenant to or in connection with the enjoyment of the Premises, (ii) any and all applicable federal, state and local laws, regulations or ordinances pertaining to air and water quality, Hazardous Materials (as defined in Section 6.1), waste disposal, air emissions and other environmental or health and safety matters, zoning, land use and utility availability, which impose any duty upon Landlord or Tenant directly or with respect to the use or occupation of the Project or any portion thereof, (iii) the requirements of the Board of Fire Underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Project or any portion thereof, (iv) any covenants, conditions, easements or restrictions including, but not limited to, the Restrictions, now or hereafter affecting or encumbering the Project or any portion thereof, regardless of when they become effective, provided no such Restrictions shall unreasonably materially interfere with Tenants Permitted Use, (v) the Rules and Regulations, and (vi) good business practices (collectively, (i) through (vi) above are hereinafter referred to as "Applicable Laws"). Tenant shall not commit any waste of the Premises, Building or Project, or any public or private nuisance or any other act or thing which might or would disturb the quiet enjoyment of any other tenant of Landlord or any occupant of nearby property. Tenant shall not place or permit to be placed any loads upon the floors, walls or ceilings in excess of the maximum designed load specified by Landlord or which might damage the Premises or the Building, or place or permit to be placed any harmful liquids in the drainage systems, and Tenant shall not dump or store, or permit to be dumped or stored, any inventory, waste materials, refuse or other materials or allow any such materials to remain outside the Building proper, except in designated enclosed trash areas. Tenant shall not conduct or permit any auctions, sheriff's sales or other like activities at the Project or any portion thereof. 5.3 Restrictions. Tenant agrees that this Lease is subject and subordinate to the Restrictions, as the same may now or hereafter exist, and that it will execute and deliver to Landlord within fifteen (15) days of Landlord's request therefor, any further documentation or instruments which Landlord deems necessary or desirable to evidence or effect such subordination. Without limiting the provisions of Section 5.2, Tenant shall throughout the Term timely comply with all of the terms, provisions, conditions and restrictions of the Restrictions which pertain to, restrict or affect the Premises or Tenant's use thereof, or Tenant's use of any other area of the Project permitted hereunder, including the payment by Tenant of any periodic or special dues or assessments charged by governmental agencies against the Premises or Tenant which may be allocated to the Premises or Tenant in accordance with the provisions of the Restrictions. Tenant shall hold Landlord, Landlord's Group and the Premises harmless and shall indemnify, protect and defend Landlord and Landlord's Group from and against any loss, expense, damage, attorneys' fees and costs or liability arising out of or in connection with the failure of Tenant to so perform or comply with the Restrictions. Tenant agrees that it will subordinate this Lease to any other covenants, conditions and restrictions and any reciprocal easement agreements or any similar agreements which Landlord may hereafter record against the Premises and to any amendment or modification to any of the existing Restrictions, provided that such Restrictions and subordination do not unreasonably materially interfere with Tenant's use and enjoyment of the Premises. 5.4 Landlord's Right of Entry. Landlord and Landlord's Group shall have the right to enter the Premises at all reasonable times upon reasonable notice to Tenant, except for emergencies in which case no notice shall be required, to inspect the Premises, to take samples and conduct environmental investigations, to post notices of nonresponsibility and similar notices and signs indicating the availability of the Premises for sale, to show the Premises to interested parties such as prospective lenders and purchasers, to make necessary Alterations or maintenance and repairs, to perform Tenant's obligations as permitted herein when Tenant has failed to do so and, at any reasonable time after one hundred eighty (180) days prior to the expiration of the Term, to place upon the Premises reasonable signs indicating the availability of the Premises for lease and to show the Premises to prospective tenants, all without being deemed to have caused an eviction of Tenant and without any liability to Tenant or abatement of Rent. The above rights are subject to reasonable security regulations of Tenant, and in exercising its rights set forth herein, Landlord shall endeavor to cause the least possible interference with Tenant's business. Landlord shall at all times have the right to retain a key which unlocks all of the doors in the Premises, excluding Tenant's vaults and safes, and Landlord and Landlord's Group shall have the right to use any and all means which Landlord may deem proper to open the doors in an emergency to obtain entry to the Premises, and any entry to the Premises so obtained by Landlord or Landlord's Group shall not under any circumstances be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises. ARTICLE VI Hazardous Materials ------------------- 6.1 Definition of Hazardous Materials. For purposes of this Lease, the term "Hazardous Materials" includes (i) all hazardous or toxic substances, materials or waste listed in the United States Department of Transportation Table (49 C.F.R. 172.1010 as amended) or by the Environmental Protection Agency as hazardous substances (40 C.F.R. Part 302 as amended), unless Tenant establishes, to the satisfaction of Landlord, that because of the quantity, concentration, or physical or chemical characteristics, such substance or matter does not pose a present or potential hazard to human health and safety or to the environment, (ii) any other substance or matter which results in liability to any person or entity from exposure to which substance or matter under any statutory or common law theory, and (iii) any substance or matter which is in excess of relevant and appropriate levels set forth in any applicable federal, state or local law or regulation pertaining to any hazardous or toxic substance, material or waste, or for which any applicable federal, state or local agency orders or otherwise requires removal, treatment or remediation. 6.2 Use of Hazardous Materials. Tenant shall not cause or permit any Hazardous Materials to be brought upon, stored, used, generated, released into the environment or disposed of on, under, from or about the Premises (which for purposes of this Article VI shall include, but is not limited to, subsurface soil and groundwater) by Tenant or Tenant's Agents without the prior written consent of Landlord. Landlord may, in its sole discretion, place such conditions as Landlord deems appropriate with respect to such Hazardous Materials, and may further require that Tenant demonstrates to Landlord that such Hazardous Materials are necessary or useful to Tenant's business and will be generated, stored, used and disposed of in a manner that complies with all Applicable Laws regulating such Hazardous Materials and with good business practices. Tenant shall have no responsibility or incur costs, however, for any Hazardous Materials whose existence pre- existed the Commencement Date of this Lease (except to the extent Tenant or Tenant's Agent's introduce such Hazardous Materials). Tenant understands that Landlord may utilize an environmental consultant to assist in determining conditions of approval and monitoring in connection with the presence, storage, generation or use of Hazardous Materials on or about the Premises by Tenant, and Tenant agrees that any costs reasonably incurred by Landlord in connection with any such environmental consultant's services shall be reimbursed by Tenant to Landlord as Additional Rent upon demand. 6.3 Environmental Questionnaire; Disclosure. Prior to the execution of this Lease, Tenant shall complete, execute and deliver to Landlord an Environmental Questionnaire and Disclosure Statement (the "Environmental Questionnaire") in the form of Exhibit G, and Tenant shall certify to Landlord all information contained in the Environmental Questionnaire as true and correct to the best of Tenant's knowledge and belief. The completed Environmental Questionnaire shall be deemed incorporated into this Lease for all purposes, and Landlord shall be entitled to rely fully on the information contained therein. On each anniversary of the Commencement Date (each such date is hereinafter referred to as a "Disclosure Date"), until and including the first Disclosure Date occurring after the expiration or sooner termination of this Lease, Tenant shall disclose to Landlord in writing the names and amounts of all Hazardous Materials, or any combination thereof, which were stored, generated, used or disposed of on, under or about the Premises for the twelve (12) month period prior to each Disclosure Date, and which Tenant intends to store, generate, use or dispose of on, under or about the Premises through the next Disclosure Date. At Landlord's option, Tenant's disclosure obligations under this Section 6.3 shall include a requirement that Tenant update, execute and deliver to Landlord the Environmental Questionnaire, as the same may be modified by Landlord from time to time. In addition to the foregoing, Tenant shall promptly notify Landlord of, and shall promptly provide Landlord with true, correct, complete and legible copies of, all of the following environmental items relating to the Premises: reports filed pursuant to any self- reporting requirements; reports filed pursuant to any Applicable Laws or this Lease; all permit applications, permits, monitoring reports, workplace exposure and community exposure warnings or notices, and all other reports, disclosures, plans or documents (even those which may be characterized as confidential) relating to water discharges, air pollution, waste generation or disposal, underground storage tanks or Hazardous Materials; all orders, reports, notices, listings and correspondence (even those which may be considered confidential) of or concerning the release, investigation, compliance, cleanup, remedial and corrective actions, and abatement of Hazardous Materials whether or not required by Applicable Laws; and all complaints, pleadings and other legal documents filed against Tenant related to Tenant's use, handling, storage or disposal of Hazardous Materials. 6.4 Inspection; Compliance. Landlord and Landlord's Group shall have the right, but not the obligation, to inspect, investigate, sample and/or monitor the Premises, upon prior written notice to Tenant, including any air, soil, water, groundwater or other sampling, and any other testing, digging, drilling or analyses, at any time to determine whether Tenant is complying with the terms of this Article VI, and in connection therewith, Tenant shall provide Landlord with full access to all relevant facilities, records and personnel. If Tenant is not in compliance with any of the provisions of this Article VI, or in the event of a release of any Hazardous Material on, under, from or about the Premises, by Tenant or, Tenant's Agent's, Landlord and Landlord's Group shall have the right, but not the obligation, without limitation on any of Landlord's other rights and remedies under this Lease, to immediately enter upon the Premises and to discharge Tenant's obligations under this Article VI at Tenant's expense, including without limitation the taking of emergency or long-term remedial action. Landlord and Landlord's Group shall endeavor to minimize interference with Tenant's business but shall not be liable for any such interference. In addition, Landlord, at Tenant's sole cost and expense, shall have the right, but not the obligation, to join and participate in any legal proceedings or actions initiated in connection with any claims or causes of action arising out of the storage, generation, use or disposal by Tenant or Tenant's Agents of Hazardous Materials on, under, from or about the Premises. All sums reasonably disbursed, deposited or incurred by Landlord in connection herewith including, but not limited to, all costs, expenses and actual attorneys' fees, shall be due and payable by Tenant to Landlord, as an item of Additional Rent, on demand by Landlord, together with interest thereon at the Applicable Rate from the date of such demand until paid by Tenant. 6.5 Tenant Obligations. If the presence of any Hazardous Materials on, under or about the Premises or the Project caused or permitted by Tenant or Tenant's Agents results in (i) injury to any person, (ii) injury to or contamination of the Premises or the Project, or (iii) injury to or contamination of any real or personal property wherever situated, Tenant, at its sole cost and expense, shall promptly take all actions necessary to return the Premises and the Project to the condition existing prior to the introduction of such Hazardous Materials to the Premises and the Project and to remedy or repair any such injury or contamination. Without limiting any other rights or remedies of Landlord under this Lease, Tenant shall pay the cost of any cleanup work performed on, under or about the Premises, the Building and the Project as required by this Lease or any Applicable Laws in connection with the removal, disposal, neutralization or other treatment of such Hazardous Materials caused or permitted by Tenant or Tenant's Agents. If Landlord has reason to believe that Tenant or Tenant's Agents may have caused or permitted the release of a Hazardous Material on, under, from or about the Premises, then Landlord may require Tenant, at Tenant's sole cost and expense, to conduct monitoring activities on or about the Premises satisfactory to Landlord, in its sole reasonable judgment, concerning such release of Hazardous Materials, on, under, from or about the Premises. Notwithstanding anything in the foregoing, Tenant shall not, without Landlord's prior written consent, take any remedial action in response to the presence of any Hazardous Materials on, under or about the Premises, or enter into any settlement agreement, consent decree or other compromise with any governmental agency with respect to any Hazardous Materials claims; provided, however, Landlord's prior written consent shall not be necessary in the event that the presence of Hazardous Materials on, under or abut the Premises (i) poses an immediate threat to the health, safety or welfare of any individual or (ii) is of such a nature that an immediate remedial response is necessary and it is not possible to obtain Landlord's consent before taking such action. 6.6 Indemnification. To the fullest extent permitted by law, Tenant hereby agrees to indemnify, hold harmless, protect and defend (with attorneys acceptable to Landlord) Landlord and Landlord's Group, and any successors to all or any portion of Landlord's interest in the Premises, the Building and the Project and their directors, officers, partners, employees, affiliates, representatives and Mortgagees, from and against any and all liabilities, losses, damages (including, but not limited to, damages for the loss or restriction on use of rentable or usable space or any amenity of the Premises, the Building and the Project), diminution in the value of the Premises, the Building and the Project, judgments, fines, demands, claims, recoveries, deficiencies, costs and expenses (including, but not limited to, reasonable attorneys' fees, disbursements and court costs and all other professional or consultant's expenses), whether foreseeable or unforeseeable, arising directly or indirectly out of the presence, use, generation, storage, treatment, on or off-site disposal or transportation of Hazardous Materials on, into, from, under or about the Premises, the Building and the Project by Tenant or Tenant's Agents, and specifically including the cost of any required or necessary repair, restoration, cleanup (including, but not limited to, the costs of investigation and removal of Hazardous Materials) or detoxification of the Premises, the Building and the Project and the preparation of any closure or other required plans, whether or not such action is required or necessary during the Term or after the expiration of this Lease. Notwithstanding the foregoing, Tenant shall have no responsibility with respect to Hazardous Materials on or within the Premises which Tenant proves existed prior to the Commencement Date of this Lease which were not present through acts of Tenant or Tenant's Agent's. 6.7 Tenant's Responsibility at Conclusion of Lease. Promptly upon the expiration or sooner termination of this Lease, Tenant shall represent to Landlord in writing no such Hazardous Materials exist on, under or about the Premises other than as specifically identified to Landlord by Tenant in writing as a result of any acts or omissions of Tenant or Tenant's Agent's. If Tenant discloses the existence of Hazardous Materials on, under or about the Premises, or if Landlord at any time discovers that Tenant or Tenant's Agents caused or permitted the release of a Hazardous Material on, under, from or about the Premises, Tenant shall, at Landlord's request, immediately prepare and submit to Landlord within thirty (30) days after such request a comprehensive plan, subject to Landlord's approval, specifying the actions to be taken by Tenant to return the Premises to the condition existing prior to the introduction of such Hazardous Materials. Upon Landlord's approval of such cleanup plan, Tenant shall, at Tenant's sole cost and expense, without limitation on any rights and remedies of Landlord under this Lease or at law or in equity, immediately implement such plan and proceed to clean up such Hazardous Materials in accordance with all Applicable Laws and as required by such plan and this Lease. ARTICLE VII Operating Expenses; Taxes; Utilities ------------------------------------ 7.1 Tenant to Bear Tenant's Share of Operating Expenses. Tenant shall pay to Landlord Tenant's Share (as defined in Section 7.2) of Project Costs and Real Property Taxes (the "Operating Expenses") as follows: Prior to the Commencement Date and thereafter prior to the commencement of each of Landlord's fiscal years during the Term, Landlord shall give Tenant a written estimate of Tenant's Share of Operating Expenses for the ensuing fiscal year or partial fiscal year, as the case may be. Tenant shall pay, as an item of Additional Rent, such estimated amount in equal monthly installments, in advance, on or before the first (1st) day of each calendar month concurrent with its payment of Monthly Rent. If Landlord has not furnished its written estimate by the time set forth above, Tenant shall pay monthly installments of Operating Expenses at the rate established for the prior fiscal year, if any; provided that when the new estimate is delivered to Tenant, Tenant shall at the next monthly payment date pay Landlord any accrued deficiency based on the new estimate, or Landlord shall credit any accrued overpayment based on such estimate toward Tenant's next installment payment hereunder. Within a reasonable period of time after the end of each fiscal year (in no event less than one hundred twenty (120) days after the end of each fiscal year unless sooner completed by Landlord) Landlord shall furnish Tenant a statement showing in reasonable detail Tenant's Share of the actual Operating Expenses incurred for the period in question. If Tenant's estimated payments are less than Tenant's Share of actual Operating Expenses as shown by the applicable statement, Tenant shall pay the difference to Landlord within thirty (30) days thereafter. If Tenant shall have overpaid Landlord, Landlord shall credit such overpayment toward Tenant's next installment payment hereunder. When the final determination is made of Tenant's Share of the actual Operating Expenses for the fiscal year in which this Lease terminates, Tenant shall, even if this Lease has terminated, pay to Landlord within fifteen (15) days after notice the excess of Tenant's Share of such actual Operating Expenses over the estimate of Tenant's Share of Operating Expenses paid. Conversely, any overpayment shall be rebated by Landlord to Tenant. If Landlord shall determine at any time that the estimate of Tenant's Share of Operating Expenses for the current fiscal year is or will become inadequate to meet Tenant's Share of all such Operating Expenses for any reason, Landlord shall immediately determine the approximate amount of such inadequacy and issue a supplemental estimate as to Tenant's Share of such Operating Expenses and Tenant shall pay any increase as reflected by such supplemental estimate. Landlord shall keep or cause to be kept separate and complete books of accounting covering all Operating Expenses and showing the method of calculating Tenant's Share of Operating Expenses, and shall preserve for at least twelve (12) months after the close of each fiscal year all material documents evidencing said Operating Expenses for that fiscal year. Tenant, at its sole cost and expense, through any certified public accountant designated by it, shall have the right, during reasonable business hours and not more frequently than once during any fiscal year, to examine and/or audit the books and documents mentioned above evidencing such costs and expenses for the previous fiscal year. Any delay or failure by Landlord in delivering any estimate or statement pursuant to this Section 7.1 shall not constitute a waiver of its right to require Tenant to pay Tenant's Share of Operating Expenses pursuant hereto. 7.2 Definition of Tenant's Share. The term "Tenant's Share" means that portion of an Operating Expense determined by multiplying the cost of such item by a fraction, the numerator of which is the Premises Square Footage and the denominator of which is the total square footage of the floor area of all buildings within the Project, as of the date on which the computation is made, which are to be charged with such Operating Expense. Landlord reserves the right (but shall have no obligation to do so) to construct additional buildings from time to time or to otherwise increase the total leasable square footage within the Project, and Tenant's Share shall be recalculated to reflect the increased leasable square footage at such time as the additional area is ready for occupancy. Likewise, Landlord may at its election reduce the total leasable square footage within the Project by subdividing, selling or otherwise segregating from the Project, one of more additional buildings which may be hereafter constructed, and Tenant's Share shall be recalculated to reflect the reduction in leasable square footage. 7.3 Definition of Project Costs. The term "Project Costs" means all costs and expenses incurred by Landlord or Landlord's Group in connection with the operation of the Project including, but not limited to, the following: repair and maintenance of the roof, foundation and exterior walls of the buildings in the Project, periodic painting of the buildings in the Project, periodic cleaning of the exterior windows of the buildings in the Project, landscaping services, outside pest control, normal maintenance and repair of the HVAC including unit heaters through maintenance contracts or otherwise (but not including repair or maintenance of any Specialized HVAC, unless Landlord elects to maintain the same pursuant to Section 9.2), sweeping, maintenance services, repairs to and replacement of paving, bumpers, striping, light bulbs, light standards, monument and directional signs and lighting systems, perimeter walls, retaining walls, sidewalks, planters, landscaping and sprinkler system in planting area, any and all assessments levied against the Project pursuant to the Restrictions, water, electrical and other utility services not supplied directly to a tenant, outside removal of trash, rubbish and other refuse from the Project (excluding trash dumpsters), cleaning of and replacement of monument and directional signs of the Project, including relamping and repairs made as required; repair, operation and maintenance of the Common Area including, but not limited to, removal of any obstructions not reasonably required for the Common Area uses, prohibition and removal of the sale or display of merchandise or the storing of materials and/or equipment in the Common Area, and payment of all electrical, water and other utility charges or fees for services furnished to the Common Area; obtaining and maintaining public liability, property damage and other forms of insurance which Landlord may or is required to maintain in connection with the Project (including the payment of any deductibles thereunder); costs incurred in connection with compliance of any laws or changes in laws applicable to the Project, including without limitation any laws or changes in laws regarding Hazardous Materials; establishment of reasonable reserves for replacements and/or repair of Common Area improvements, equipment and supplies; employment of such personnel as Landlord may deem reasonably necessary, if any, to direct parking and police the Common Area and facilities; the cost of any capital improvements (other than Tenant Improvements for specific tenants) made by or on behalf of Landlord to the Project or Common Area to the extent of the amortized amount thereof over the useful life of such capital improvements as reasonably determined by Landlord, for each such year of useful life during the Term; employment of personnel used in connection with any of the foregoing, including, but not limited to, payment or provision for unemployment insurance, worker's compensation insurance and other employee costs; the cost of bookkeeping, accounting and auditing and legal services provided in connection with any of the foregoing; the cost of any environmental consultant or other services used in connection with Landlord's monitoring of the Project with respect to Hazardous Materials; the cost of any tax, insurance or other consultant utilized in connection with the Project; and any other items reasonably necessary from time to time to properly repair, replace, maintain and operate the Project. Project Costs shall also include a management fee to cover Landlord's management, provided, however, that such management fees shall be consistent with the then prevailing rates in the industry; overhead and administrative expenses; provided, however, if Landlord elects to delegate its duties hereunder to a professional property manager, then Project Costs shall not include any management fee to Landlord (except for any costs and/or administrative and overhead expenses reasonably incurred by Landlord in monitoring and auditing the performance delegated to the professional property manager), but under such circumstances any reasonable amounts paid to the professional property manger shall be added to and deemed a part of Project Costs. (Notwithstanding the foregoing, non- recurring Project Costs incurred solely for the benefit of one building in the Project, including repair of a building's roof, foundation or exterior walls, exterior painting of a building and other major expenses which in Landlord's judgment are readily attributable to a single building ("Building Costs"), shall be allocated solely to the tenants and occupants of the affected building.) If Landlord elects to perform any maintenance or repair therein described in conjunction with properties other than the Project, and if a common maintenance contractor is contracted with for such purpose, the contract amount allocable to the Project, as reasonably determined by Landlord, shall be added to and deemed a part of Project Costs hereunder. Increases in Project Costs by reason of a disproportionate impact by Tenant thereon (for example, and not by way of limitation, increases in costs of trash collection because of Tenant's excessive generation of trash or increases in costs of Common Area maintenance because of Tenant's unpermitted storage of inventory or materials in the Common Area), in Landlord's reasonable judgment, may be billed by Landlord, as an item of Additional Rent, directly to Tenant. Notwithstanding anything to the contrary in this section 7.3 Project Costs shall not include (a) legal expenses or any other costs incurred in negotiations or disputes with occupants or prospective occupants; (b) the cost to prepare space for occupancy by any tenant; (c) interest, principal or late fee payments on notes secured by mortgages or deeds and trust, and other debt service costs; (d) any costs or expenditure (or portion thereof) for which landlord is reimbursed, whether by insurance proceeds or otherwise; (e) cost of any service furnished to any other occupant of the Building which Landlord does not provide to Tenant; (f) penalties due to late payment of invoices; (g) advertising, real estate commissions, legal fees, moving expenses or other costs or expenses incurred in leasing or procuring any tenants; (h) ground lease payments; (i) any costs of selling, exchanging or refinancing the Building or Project; (j) Landlord's general administrative and corporate overhead not directly attributed to management or operation of the Project; (k) advertising and promotional expenditures; (l) costs of curing latent and/or construction defects, if any; (m) costs for any unrelated facilities; (n) costs incurred in the operation of any restaurant or health or exercise club or any facility, which Landlord operates for a separate fee to other tenants; (o) cost of repairing and maintaining the premises of other tenants; or (p) depreciation on the Building, Common Areas, or other Tenants' premises or the Premises. 7.4 Definition of Real Property Taxes. The term "Real Property Taxes" means any form of tax, assessment, charge, license, fee, rent tax, levy, penalty (if a result of Tenant's delinquency), real property or other tax (other than Landlord's net income, estate, succession, inheritance, or franchise taxes), now or hereafter imposed with respect to the Project or any part thereof (including any alterations), this Lease or any Rent payable under this Lease by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement district or other district or division thereof, whether such tax or any portion thereof (i) is determined by the area of the Project or any part thereof or the Rent payable under this Lease by Tenant including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of the Rent due under this Lease, (ii) is levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes with respect to the Project or any part thereof whether or not now customary or within the contemplation of Landlord or Tenant, or (iii) is based upon any legal or equitable interest of Landlord in the Project or any part thereof. 7.5 Apportionment of Taxes. If the Building is assessed as part of a larger parcel, then Landlord shall equitably apportion the Real Property Taxes assessed against the real property, which includes the Building and reasonably determine the amount of Real Property Taxes attributable to the Building. If more than one building exists on the assessed parcel and Real Property Taxes are separately assessed against each of the buildings, Tenant's share of the Real Property Taxes included in the Operating Expenses shall be apportioned by Landlord between the taxes which are separately assessed against the Building in which the Premises are located (the "Building Tax") and those Real Estate Taxes assessed against Common Areas and other portions of the Project which are not exclusively reserved for use by tenants of other buildings. Landlord's reasonable determination of such apportionment shall be resumed correct absent manifest error and conclusive. 7.6 Payment of Real Property Taxes. Landlord shall pay, at Tenant's expense and subject to reimbursement by Tenant as hereinafter set forth, all Real Property Taxes levied against the Premises during the term. The amount of such payments by Landlord shall be based on tax bills and notices received by Landlord pertaining to the Premises (and if Tenant receives any such tax bills or notices, Tenant shall immediately forward same to Landlord) and such payment shall be made before the last day such Real Property Taxes are payable without penalty. Tenant shall reimburse to Landlord, as an item of Additional Rent, the full amount of such Real Property Taxes paid by Landlord within thirty (30) days after Landlord's statement or invoices therefore, which statement or invoice shall be accompanied by reasonable evidence of the amount of such Real Property Taxes. Real Property Taxes shall not include any late charges, penalties or interest attributable to Landlord's late payment (other than caused solely by Tenant) or any charges, assessments or levies attributable to another tenant or another tenant's improvements or another Tenant's late payment. 7.7 Tax on Improvements; Permitted Contests. Tenant shall, at Landlord's election, be directly responsible for and shall pay the full amount of any increase in Real Property Taxes attributable to any and all Tenant Improvements and any other improvements of any kind whatsoever placed in, on or about the Premises for the benefit of, at the request of, or by Tenant. Tenant may contest the amount or validity of any Real Property Taxes by appropriate proceedings, provided that Tenant gives Landlord prior Notice of any such contest and keeps Landlord advised as to all proceedings, and provided further that Tenant shall continue to reimburse Landlord for Landlord's payment of such Real Property Taxes unless such proceedings shall operate to prevent or stay such payment and the collection of the tax so contested. Landlord shall join in any such proceedings if any Applicable Laws shall so require, provided that Tenant shall hold harmless, indemnify, protect and defend Landlord from and against any liability, claim, demand, cost or expense in connection therewith including, but not limited to, actual attorneys' fees and costs reasonably incurred. 7.8 Utilities and Services. Tenant shall be responsible for and shall pay promptly, directly to the appropriate supplier, all charges for water, gas, electricity, heat, light, power, telephone, exterior trash dumpster refuse pickup, janitorial service, interior landscape maintenance and all other utilities, materials and services furnished directly to Tenant or the Premises or used by Tenant in, on or about the Premises during the Term, together with any taxes thereon. If any utilities or services are not separately metered or assessed to Tenant, Landlord shall make a reasonable determination of Tenant's proportionate share of the cost of such utilities and services and Tenant shall pay such amount to Landlord, as an item of Additional Rent, within ten (10) days after receipt of Landlord's statement or invoice therefor. Alternatively, Landlord may elect to include such cost in the definition of Project Costs, in which event Tenant shall pay Tenant's share of such cost in the manner set forth in Section 7.1. Landlord may also require Tenant to have any Specialized HVAC system separately metered to Tenant, at Tenant's expense. Landlord shall not be liable in damages or otherwise for any failure or interruption of any utility or other service furnished to the Premises. No such failure or interruption shall be deemed an eviction or entitle Tenant to terminate this Lease or withhold or abate any Rent due hereunder, however, if any utilities or services as described in this Section 7.8 or elsewhere in the Lease cease to be provided to Tenant as a result of the negligence or willful misconduct of Landlord result in the Premises being rendered uninhabitable, and if such interruption continues in excess of five (5) consecutive days, then all Rent payable by Tenant to Landlord under this Lease shall be abated for the period the Premises are rendered uninhabitable for such reasons. 7.9 Economic Incentives. Notwithstanding anything to the contrary contained within the Lease, Tenant shall receive the full, direct benefit of all state, county and city tax incentives, enterprise zone tax credits and similar economic development benefits granted to Tenant solely by reason of its relocation to the Premises, including Property Tax and Sales Tax reductions and credits. ARTICLE VIII Alterations ----------- 8.1 Permitted Alterations. After the Commencement Date, Tenant shall not make or permit any Alterations in, or about the Premises without the prior written consent of Landlord (which consent shall not be unreasonably withheld or delayed), except for Alterations not exceeding Ten Thousand Dollars ($10,000.00)in any calendar year. Notwithstanding the foregoing, without the prior written consent of Landlord (which consent shall not be unreasonably withheld), in no event shall any Alterations (i) affect the exterior of the Building or the outside areas (or be visible from adjoining sites), (ii) affect or penetrate any of the structural portions of the Building including, but not limited to, the roof, (iii) require any change to the basic floor plan of the Premises, any change to the structural or mechanical components of the Premises, or any governmental approval or permit as a prerequisite to the construction thereof, (iv) interfere in any manner with the proper functioning of or Landlord's access to any mechanical, electrical, plumbing or HVAC systems, facilities or equipment located in or serving the Building, or (v) diminish the value of the Premises. All Alterations requiring Landlord's consent shall be constructed pursuant to plans and specifications previously provided to and, when applicable, approved in writing by Landlord, shall be installed by a licensed contractor at Tenant's sole expense in compliance with all Applicable Laws, and shall be accomplished in a good and workmanlike manner conforming in quality and design with the Premises existing as of the Commencement Date. No Hazardous Materials including, but not limited to, asbestos or asbestos-containing materials, shall be used by Tenant or Tenant's Agents in the construction of any Alterations permitted hereunder. Tenant shall, if reasonably required by Landlord, obtain and pay for, at its own expense, a completion and indemnity bond covering such work, the form and amount of which shall be subject to the approval of Landlord. All Alterations made by Tenant shall be and become the property of Landlord upon the installation thereof and shall not be deemed Tenant's Personal Property; provided, however, that Landlord may, at its option, require that Tenant, upon the termination of this Lease, at Tenant's expense, remove any or all nonstructural Alterations installed by or on behalf of Tenant and return the Premises to its condition as of the Commencement Date of this Lease, normal wear and tear excepted. Notwithstanding any other provisions of this Lease, Tenant shall be solely responsible for the maintenance, repair and replacement of any and all Alterations made by or on behalf of Tenant (including without limitation by Landlord on behalf of Tenant) to the Premises. 8.2 Trade Fixtures. Tenant shall, at its own expense, provide, install and maintain in good condition all of Tenant's Personal Property required in the conduct of its business in the Premises. 8.3 Mechanic's Liens. Tenant shall give Landlord Notice of Tenant's intention to perform any work on the Premises which might result in any claim of lien at least twenty (20) days prior to the commencement of such work to enable Landlord to post and record a notice of nonresponsibility or other notice Landlord deems proper prior to the commencement of any such work. Tenant shall not permit any mechanics', materialmens' or other liens to be filed against the property of which the Premises are a part or against Tenant's leasehold interest in the Premises. If Tenant fails to cause the release of record of any lien(s) filed against the Premises or its leasehold estate therein by payment or posting of a proper bond within twenty (20) days from the date of the lien filing(s), then Landlord may, at Tenant's expense, cause such lien(s) to be released by any means Landlord deems proper including, but not limited to, payment of or defense against the claim giving rise to the lien(s). All sums reasonably disbursed, deposited or incurred by Landlord in connection with the release of the lien(s) including, but not limited to, all costs, expenses and actual attorneys' fees, shall be due and payable by Tenant to Landlord, as an item of Additional Rent, on demand by Landlord, together with interest thereon at the Applicable Rate from the date of such demand until paid by Tenant. ARTICLE IX Maintenance And Repair ---------------------- 9.1 Landlord's Maintenance and Repair Obligations. Landlord shall, subject to receiving Tenant's Share of Operating Expenses, and subject to Section 9.2, Article XII and Article XIII, maintain in good condition repair and replace the roof including any skylights, exterior walls and foundation of the Building, provide normal maintenance services for the HVAC serving the Building through maintenance contracts or otherwise, and paint the exterior of the Building and clean the exterior windows of the Building as and when such painting or window cleaning, as the case may be, becomes necessary in Landlord's reasonable discretion. Landlord shall also provide inspections, maintenance and repair services to the electrical, plumbing, fire life safety, and mechanical systems serving the Building. Landlord shall not be required to make any repairs to the roof, exterior walls, foundation or any systems within the Premises unless and until Tenant has notified Landlord in writing of the need for such repair and Landlord shall have a reasonable period of time thereafter to commence and complete said repair, if warranted. The cost of any maintenance and repairs on the part of Landlord provided for in this Section 9.1 shall be considered part of Project Costs, except that repairs which Landlord deems arise out of any act or omission of Tenant or Tenant's Agents shall be made at the expense of Tenant. Landlord's obligation to so repair and maintain the services to the Building shall be limited to the cost of effecting such repair and maintenance and in no event shall Landlord be liable for any costs or expenses in excess of said amounts including, but not limited to, any consequential damages, opportunity costs or lost profits incurred or suffered by Tenant. 9.2 Tenant's Maintenance and Repair Obligations. Tenant shall at all times during the Term of this Lease, at Tenant's sole cost and expense, clean, keep, maintain, repair and make necessary improvements to, the Premises and every portion thereof and all improvements therein or thereto, in and sanitary order and condition to the reasonable satisfaction of Landlord and in compliance with all Applicable Laws, usual wear and tear excepted. Landlord agrees to be reasonable in enforcing Tenant's repair obligations. Any damage or deterioration of the Premises shall not be deemed usual wear and tear if the same could have been prevented by good maintenance practices by Tenant. Tenant's repair and maintenance obligations herein shall include, but are not limited to interior pest control, all necessary maintenance and repairs to all portions of the Premises, and all exterior entrances, all interior glass, interior windows, including interior window casements and interior show window moldings, partitions, doors, doorjambs, door closures, hardware, fixtures, tenant signage, electrical lighting and outlets, plumbing fixtures, sewage facilities, interior walls, floors, ceilings, fans and exhaust equipment, fire extinguisher equipment and systems, and all repairs to Specialized HVAC (as hereinafter defined). As part of its maintenance obligations hereunder, Tenant shall, at Landlord's request, permit Landlord to inspect copies of all maintenance schedules, reports and notices prepared by, for, or on behalf of Tenant. Repairs by Tenant, shall be at least equal in quality to the original work, and the provisions of Section 8.3 shall apply to all such repairs. Tenant's obligation to repair includes the obligation to replace, as necessary, regardless of whether the benefit of such replacement extends beyond the Term. Any special or above- standard heating, ventilating and air conditioning installed by, on behalf of, or at the request of Tenant ("Specialized HVAC"), shall be paid for and maintained by Tenant at Tenant's sole cost and expense. Notwithstanding the foregoing, Landlord shall have the right, upon Notice to Tenant, to undertake the responsibility for maintenance and repair of automatic fire extinguisher equipment, such as sprinkler systems and alarms, Specialized HVAC and other obligations of Tenant hereunder which Landlord deems appropriate to undertake that affect the Building as a whole, in which event the cost thereof shall be included as part of Project Costs and paid by Tenant in the manner set forth in Section 7.1. Tenant shall not permit or authorize any person to go onto the roof of the building without the prior written consent of Landlord. 9.3 Waiver. Tenant hereby waives all rights provided for by any present or future Applicable Laws to make repairs at the expense of Landlord or to terminate this Lease because of the condition of the Premises. 9.4 Self-Help. If Tenant refuses or fails to commence and diligently pursue to repair and maintain the Premises as required hereunder within ten (10) days from the date on which Landlord makes a written demand on Tenant to effect such repair and maintenance, Landlord may enter upon the Premises and make such repairs or perform such maintenance without liability to Tenant for any loss or damage that may accrue to Tenant or its merchandise, fixtures or other property or to Tenant's business by reason thereof. All sums reasonably disbursed, deposited or incurred by Landlord in connection with such repairs or maintenance, plus ten percent (10%) for overhead, shall be due and payable by Tenant to Landlord, as an item of Additional Rent, on demand by Landlord, together with interest at the Applicable Rate on such aggregate amount from the date of such demand until paid by Tenant. ARTICLE X Common Area And Parking ----------------------- 10.1 Grant of Nonexclusive Common Area License and Right. Landlord hereby grants to Tenant and its permitted subtenants, in common with Landlord and all persons, firms and corporations conducting business in the Project and their respective customers, guests, licenses, invitees, subtenants, employees and agents, to use the Common Area within the Project for vehicular parking, for pedestrian and vehicular ingress, egress and travel, and for such other purposes and for doing such other things as may be provided for, authorized and/or permitted by the Restrictions, such nonexclusive license and right to be appurtenant to Tenant's leasehold estate created by this Lease. The nonexclusive license and rights granted pursuant to the provisions of this Article X shall be subject to the provisions of the Restrictions, which pertain in any way to the Common Area covered by such Restrictions, and the provisions of this Lease. 10.2 Use of Common Area. Notwithstanding anything to the contrary herein, Tenant and its successors, assigns, employees, agents and invitees shall use the Common Area only for the purposes permitted hereby and by the Restrictions and the Rules and Regulations. All uses permitted within the Common Area shall be undertaken with reason and judgment so as not to interfere with the primary use of the Common Area which is to provide parking and vehicular and pedestrian access throughout the Common Area within the Project and to adjacent public streets for the Landlord, Landlord's Group, its tenants, subtenants and all persons, firms and corporations conducting business within the Project and their respective customers, guests and licensees. In no event shall Tenant erect, install, or place, or cause to be erected, installed, or placed any structure, building, trailer, fence, wall, signs or other obstructions on the Common Area except as otherwise permitted herein and in the Restrictions, and Tenant shall not store or sell any merchandise, equipment or materials on the Common Area. 10.3 Control of Common Area. Subject to provisions of the Restrictions, all Common Area and all improvements located from time to time within the Common Area shall at all times be subject to the exclusive control and management of the Landlord. Landlord shall have the right to construct, maintain and operate lighting facilities within the Common Area; to police the Common Area from time to time; to change the area, level, location and arrangement of the parking areas and other improvements within the Common Area; to restrict parking by tenants, their officers, agents and employees to employee parking areas; to close all or any portion of the Common Area or improvements therein to such extent as may, in the opinion of counsel for Landlord, be legally sufficient to prevent a dedication thereof or the accrual of any rights to any person or to the public therein; to close temporarily all or any portion of the Common Area and/or the improvements thereon; to discourage non-customer parking; and to do and perform such other acts in and to said Common Area and improvements thereon as, in the use of good business judgment, Landlord shall determine to be advisable. 10.4 Maintenance of Common Area. Subject to the provisions of the Restrictions, Landlord shall operate and maintain (or cause to be operated and maintained) the Common Area in a first-class condition, in such manner as Landlord in its reasonable sole discretion shall determine from time to time. Without limiting the scope of such discretion, Landlord shall have the full right and authority to employ or cause to be employed all personnel and to make or cause to be made all rules and regulations pertaining to or necessary for the proper operation and maintenance of the Common Area and the improvements located thereon. The cost of such maintenance of the Common Area shall be included as part of Project Costs. No part of the Common Area may be used for the storage of any items, including without limitation, vehicles, materials, inventory and equipment. All trash and other refuse shall be placed in designated receptacles. No work of any kind including, but not limited to, painting, drying, cleaning, repairing, manufacturing, assembling, cutting, merchandising or displaying shall be permitted upon the Common Area. 10.5 Revocation of License. All Common Area and improvements located thereon which Tenant is permitted to use and occupy pursuant to the provisions of this Lease are to be used and occupied under a revocable license and right, and if any such license be revoked, or if the amount of such areas be diminished, Landlord shall not be subject to any liability nor shall Tenant be entitled to compensation or diminution or abatement of Rent, and such revocation or diminution of such areas shall not be deemed constructive or actual eviction. It is understood and agreed that the condemnation or other taking or appropriation by any public or quasi-public authority, or sale in lieu of condemnation, of all or any portion of the Common Area shall not constitute a violation of Landlord's agreements hereunder, and Tenant shall not be entitled to participate in or make any claim for any award or other condemnation proceeds arising from any such taking or appropriation of the Common Area. Notwithstanding the foregoing, so long as no Event of Default has occurred and is continuing, Landlord shall provide to Tenant the number of vehicle parking spaces set forth in Item 1.15 of the Basic Lease Provisions throughout the Term (subject to the rights of Landlord under this Article X). 10.6 Landlord's Reserved Rights. Landlord reserves the right to install, use, maintain, repair, relocate and replace pipes, ducts, conduits, wires and appurtenant meters and equipment included in the Premises or outside the Premises, change the boundary lines of the Project and install, use, maintain, repair, alter or relocate, expand and replace any Common Area; provided, however, Landlord shall not unreasonably interfere with Tenant's use of the Premises. Such rights of Landlord shall include, but are not limited to, designating from time to time certain portions of the Common Area as exclusively for the benefit of certain tenants in the Project. 10.7 Parking. Tenant shall be entitled to the number of vehicle parking spaces set forth in Item 1.15 of the Basic Lease Provisions, which spaces shall be unreserved and unassigned, on those portions of the Common Area designated by Landlord for parking. Tenant shall not use more parking spaces than such number. All parking spaces shall be used only for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks except in Tenant's truck bays. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described above, then Landlord shall have the right, without notice, in addition to such other rights and remedies that Landlord may have, to remove or tow away the vehicle involved and charge the cost to Tenant, which cost shall be immediately payable upon demand by Landlord. Parking within the Common Area shall be limited to striped parking stalls, and no parking shall be permitted in any driveways, accessways or in any area which would prohibit or impede the free flow of traffic within the Common Area. Vehicles which have been abandoned or parking in violation of the terms hereof may be towed away at the owner's expense. Notwithstanding any other provision of Article X, overnight parking of trucks used for Tenant's daily business shall be permitted by Landlord within the truck bays immediately adjacent to the Premises. The location of such parking shall be agreed upon by both parties. ARTICLE XI Indemnity And Insurance ----------------------- 11.1 Indemnification. Tenant agrees to indemnify, defend and hold Landlord and Landlord's Group entirely harmless from and against all liabilities, losses, demands, actions, expenses or claims, including attorneys' fees and court costs, for bodily injury to or death of any person or for property liability damages to any property arising out of, to the extent contributed, or in any manner connected with (i) the use, occupancy or enjoyment of the Premises, Building or Common Areas by Tenant or Tenant's Agents, or any work, activity or other things allowed or suffered by Tenant or Tenant's Agents to be done in or about the Premises, Building or Common Area, (ii) any negligence or willful misconduct of Tenant or Tenant's employees, agents or contractors on or about the Premises, Building or Common Area. Notwithstanding the foregoing, Tenant shall not be liable and Landlord shall indemnify and hold Tenant free and harmless to the extent that damage or injury is caused by the negligence or willful misconduct of Landlord, or Landlord's Group, on or about the Premises, the Building or the Common Area. Tenant's agreement to indemnify and hold Landlord harmless pursuant to this Article XI and the exclusion from Tenant's indemnity and the agreement by Landlord to indemnify and hold Tenant harmless pursuant to this Article XI are not intended to and shall not relieve any insurance carrier of its obligations under policies required to be carried by Landlord or Tenant, respectively, pursuant to the provisions of this Lease to the extent that such policies cover the results of such negligence or omissions or such willful misconduct. If either party breaches their obligations under this Lease by its failure to carry required insurance, such failure shall automatically be deemed to be the covenant and agreement by Landlord or Tenant, respectively, to self-insure such required coverage, with full waiver of subrogation. All property of Tenant kept or stored on the Premises or in the Building shall be so kept or stored at the risk of Tenant only, and Tenant shall hold Landlord harmless from any claims arising out of damage to the same, including subrogation claims by Tenant's insurance carriers, unless such damages shall be caused by the negligence or willful misconduct of Landlord, or Landlord's Group. The indemnifications contained herein shall survive the expiration or earlier termination of this Lease as to all matters occurring prior to the expiration or earlier termination of this Lease. 11.2 Property Insurance. Landlord shall obtain and keep in force during the Term of this Lease a policy or policies of insurance including loss of Rent, with deductibles at the sole discretion of Landlord, covering loss or damage to the Premises and the Building, the Tenant Improvements and objects owned by Landlord and normally covered under a "Boiler and Machinery" policy (as such term is used in the insurance industry) at least in the amount of the full replacement cost thereof, and in no event less than the total amount required by Mortgagees, against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils ("all risk" or "special causes of action," as such terms are used in the insurance industry, including, at Landlord's option, collapse, earthquake and flood) and other perils as required by the Mortgagees or deemed necessary by Landlord. A stipulated value or agreed amount endorsement deleting any co-insurance provision of said policy or policies shall be procured with said insurance. The cost of such insurance policies shall be included in the definition of Project Costs, and shall be paid by Tenant in the manner set forth in Section 7.1. Such insurance policies shall provide for payment of loss thereunder to Landlord or, at Landlord's election, to the Mortgagees. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Landlord which are adjacent to the Premises, then Tenant shall pay for any increase in the property insurance of the Building or such other building or buildings within the Project if such increase is caused by Tenant's acts, omissions, use or occupancy of the Premises. Tenant shall obtain and keep in force during the Term, at its sole cost and expense, (i) an "all risk" or "special causes of action" property policy in the amount of the full replacement cost covering Tenant's Personal Property and any alterations made by or at the request of Tenant, with Landlord insured as its interest may appear. 11.3 Liability/Miscellaneous Insurance. Tenant shall maintain in full force and effect at all times during the Term (plus such earlier and later periods as Tenant may be in occupancy of the Premises), at its sole cost and expense, for the protection of Tenant, Landlord and Landlord's Group and Mortgagees, policies of insurance issued by a carrier or carriers acceptable to Landlord and the Mortgagees which afford the following coverages: (i) statutory workers' compensation, (ii) employer's liability with minimum limits of Five Hundred Thousand Dollars ($500,000), (iii) comprehensive/commercial general liability including, but not limited to, blanket contractual liability (including the indemnity set forth in Section 11.1), fire and water legal liability, broad form property damage, personal injury, completed operations, products liability, independent contractors, warehouser's legal liability and, if alcoholic beverages are served, manufactured, distributed or sold in the Premises, comprehensive liquor liability, and owned, non-owned and hired vehicles, of not less than the limits set forth in Item 1.17 of the Basic Lease Provisions (or current limit carried, whichever is greater), naming Landlord, the Mortgagees, and the Additional Insureds named in Item 1.16 of the Basic Lease Provisions as additional insureds, and including a cross-liability or severability interests endorsement, and (iv) plate glass insurance, if applicable, and any other insurance in such form and amounts as may be commercially reasonable Landlord or Landlord's Group on behalf of Landlord will obtain liability insurance with minimum limits of One Million Dollars ($1,000,000.00) on such terms as Landlord shall determine, and the cost thereof shall be included in Project Costs and paid by Tenant in the manner described in Section 7.1. 11.4 Hazardous Materials. In the event Landlord consents to a material change in Tenant's use, generation or storage of Hazardous Materials on, under or about the Premises pursuant to Section 6.2, Landlord shall have the continuing right to require Tenant, at Tenant's sole cost and expense, to purchase insurance specified and approved by Landlord, with coverage of no less than Five Million Dollars ($5,000,000), insuring (i) any Hazardous Materials shall be removed from the Premises, (ii) the Premises shall be restored to a clean, neat, attractive, healthy, safe and sanitary condition, and (iii) any liability of Tenant, Landlord and Landlord's Group arising from such Hazardous Materials. 11.5 Deductibles; Blanket Coverage Tenant shall be solely responsible for the payment of any deductible. Any insurance required of Tenant pursuant to this Lease may be provided by means of a so-called "blanket policy," so long as (i) the Premises are specifically covered (by rider, endorsement or otherwise), (ii) the limits of the policy are applicable on a "per location" basis to the Premises and provide for restoration of the aggregate limits, and (iii) the policy otherwise complies with the provisions of this Lease. 11.6 Increased Coverage. Upon written demand, Tenant shall provide Landlord, at Tenant's reasonable expense, with such increased amount of existing insurance, and such other insurance as Landlord or the Mortgagees may reasonably require. 11.7 Sufficiency of Coverage. Neither Landlord nor any of Landlord's Group makes any representation that the types of insurance and limits specified to be carried by Tenant under this Lease are adequate to protect Tenant. If Tenant believes that any such insurance coverage is insufficient, Tenant shall provide, at its own expense, such additional insurance, as Tenant deems adequate. Nothing contained herein shall limit Tenant's liability under this Lease, and Tenant's liability under any provision of this Lease, including without limitation under any indemnity provisions, shall not be limited to the amount of any insurance obtained. 11.8 Insurance Requirements. Tenant's insurance (i) shall be in a commercially reasonable form and shall be carried with companies that have a general policyholder's rating of not less than "A" (ii) shall provide that such policies shall not be subject to material alteration or cancellation except after at least thirty (30) days prior written notice to Landlord, and (iii) shall be primary, and any insurance carried by Landlord or Landlord's Group shall be noncontributing. Tenant's policy or policies, or duly executed certificates for them shall be deposited with Landlord prior to the Commencement Date, and prior to renewal of such policies. If Tenant fails to procure and maintain the insurance required to be procured by Tenant under this Lease, Landlord may, but shall not be required to, order such insurance at Tenant's expense. All sums reasonably disbursed, deposited or incurred by Landlord in connection therewith including, but not limited to, all costs, expenses and actual reasonable attorneys' fees, shall be due and payable by Tenant to Landlord, as an item of Additional Rent, on demand by Landlord, together with interest thereon at the Applicable Rate from the date of such demand until paid by Tenant. 11.10 Landlord's Disclaimer. Notwithstanding any other provisions of this Lease, and to the fullest extent permitted by law, Landlord and Landlord's Group shall not be liable for any loss or damage to persons or property resulting from theft, vandalism, fire, explosion, falling materials, glass, tile or sheetrock, steam, gas, electricity, water or rain which may leak from any part of the Premises, or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or whatsoever, unless caused by or due to the sole negligence or willful misconduct of Landlord. Landlord and Landlord's Group shall not be liable for interference with light or air, or for any latent defect in the Premises except as otherwise expressly provided in this Lease. Tenant shall give prompt Notice to Landlord in case of a casualty, accident or repair needed to the Premises. 11.11 Waiver of Subrogation. Landlord, except to the extent Tenant's insurance covers loss to Landlord plus Tenant's obligations with respect to maintenance and repair and payment of insurance deductibles hereunder, and Tenant each hereby waives all rights of recovery against the other and the other's agents on account of loss and damage occasioned to such waiving party to the extent only that such loss or damage is insured against under any insurance policies required by this Article XI (and to the extent such insurance is inadequate to cover such loss, this waiver shall not apply to amounts of loss above such coverage). Tenant and Landlord shall, upon obtaining policies of insurance required hereunder, give notice to the insurance carriers that the foregoing waiver of subrogation is contained in this Lease. Notwithstanding the foregoing, it is agreed that in the event that any loss is due to the act, omission or negligence or willful misconduct of Tenant or Tenant's Agents, Tenant's liability insurance shall be primary and shall cover all losses and damages prior to any other insurance hereunder. ARTICLE XII Damage Or Destruction --------------------- 12.1 Landlord's Obligation to Rebuild. If the Premises are damaged or destroyed by fire or other casualty (a "Casualty"), Tenant shall promptly give notice thereof to Landlord, and Landlord shall thereafter repair the Premises as set forth in Sections 12.4 and 12.5 unless Landlord has the right to terminate this Lease as provided in Section 12.2 and Landlord elects to so terminate or Tenant has the right to terminate this Lease as provided in Section 12.3 and Tenant elects to so terminate. 12.2 Landlord's Right to Terminate. Landlord shall have the right to terminate this Lease following a Casualty if any of the following occurs: (i) insurance proceeds are not available to Landlord to pay one hundred percent (100%) of the cost to fully repair the Premises, excluding the deductible (ii) Landlord's Architect determines that the Premises cannot, with reasonable diligence, be fully repaired by Landlord (or cannot be safely repaired because of the presence of hazardous factors including, but not limited to, Hazardous Materials, earthquake faults, radiation, chemical waste and other similar dangers) within one hundred eighty (180) days after the date of such Casualty or; (iii) the Premises are destroyed or damaged during the last twelve (12) months of the Term. If Landlord elects to terminate this Lease following a Casualty pursuant to this Section 12.2, Landlord shall give Tenant Notice of its election to terminate within thirty (30) days after Landlord has knowledge of such Casualty, and this Lease shall terminate fifteen (15) days after the date of such Notice. 12.3 Tenant's Right to Terminate. Subject to the latter terms hereof, Tenant shall have the right to terminate this Lease following the destruction of the Premises (or damage to the Premises so extensive as to reasonably prevent Tenant's substantial use and enjoyment of the Premises) if any of the following occurs: (i) the Premises cannot, with reasonable diligence, be fully repaired by Landlord within one hundred eighty (180) days after the date of the damage or destruction, as determined by Landlord's Architect; (ii) the Premises cannot safely be repaired because of the presence of hazardous factors, including Hazardous Materials, earthquake faults, radiation, chemical waste and other similar dangers; or (iii) the damage or destruction occurs during the last twelve (12) months of the Term and cannot, with reasonable diligence, be fully repaired by Landlord within ninety (90) days after the date of the destruction or damage, as determined by Landlord's Architect. Notwithstanding the foregoing, Tenant shall not have the right to terminate under this Section 12.3 if (a) an Event of Default has occurred and is continuing at the time of such damage or destruction or at the time of exercising the right to terminate, or (b) the damage or destruction was caused, in whole or in part, by the act or omission of Tenant's or Tenant's Agents. If Tenant elects to terminate this Lease pursuant to this Section 12.3, Tenant shall give Landlord Notice of its election to terminate within ten (10) days after the date of such damage or destruction, and this Lease shall terminate thirty (30) days after the date of such Notice. 12.4 Effect of Termination. If this Lease is terminated following a Casualty pursuant to Section 12.2 or Section 12.3, Landlord shall, subject to the rights of the Mortgagees, be entitled to receive and retain all the insurance proceeds resulting from or attributable to such Casualty, except for those proceeds payable under policies obtained by Tenant which specifically insure Tenant's Personal Property. If neither party exercises any such right to terminate this Lease, this Lease will continue in full force and effect, and Landlord shall, promptly following the tenth (10th) day after the date of such Casualty and receipt of the amounts set forth in clause (i) of Section 12.2, commence the process of obtaining necessary permits and approvals for the repair of the Premises, and shall commence such repair and prosecute the same diligently to completion as soon thereafter as is practicable. Tenant shall fully cooperate with Landlord in removing Tenant's Personal Property and any debris from the Premises to facilitate the making of such repairs. 12.5 Limited Obligation to Repair. Landlord's obligation, should it elect or be obligated to repair the Premises following a Casualty, shall be limited to the basic Building and Tenant Improvements and Tenant shall, at its expense, replace or fully repair all Tenant's Personal Property and any Alterations installed by Tenant existing at the time of such Casualty. If the Premises are to be repaired in accordance with the foregoing, Tenant shall make available to Landlord any portion of insurance proceeds it receives which are allocable to the Tenant Improvements. 12.6 Abatement of Monthly Rent. During any period when Landlord or Landlord's Architect reasonably determines that there is substantial interference with Tenant's use of the Premises by reason of a Casualty, Rent shall be temporarily abated in proportion to the degree of such substantial interference. Such abatement shall commence upon the date Tenant notifies Landlord of such Casualty and shall end upon the Substantial Completion of the repair of the Premises which Landlord undertakes or is obligated to undertake hereunder. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the Premises, Tenant's Personal Property or other damage or any inconvenience occasioned by a Casualty or by the repair or restoration of the Premises thereafter, including, but not limited to, any consequential damages, opportunity costs or lost profits incurred or suffered by Tenant. 12.7 Landlord's Determination. The reasonable good faith determination by Landlord's Architect of or relating to the estimated cost of repair of any damage, replacement cost, the time period required for repair or the interference with or suitability of the Premises for Tenant's use or occupancy shall be conclusive for purposes of this Article XII and Article XIII. ARTICLE XIII Condemnation ------------ 13.1 Total Taking--Termination. If title to the Premises or so much thereof is taken for any public or quasi-public use under any statute or by right of eminent domain so that reconstruction of the Premises will not result in the Premises being reasonably suitable for Tenant's continued occupancy for the uses and purposes permitted by this Lease, this Lease shall terminate as of the date possession of the Premises or part thereof is so taken. 13.2 Partial Taking. If any part of the Premises is taken for any public or quasi-public use under any statute or by right of eminent domain and the remaining part is reasonably suitable for Tenant's continued occupancy for the conduct of Tenant's business in the ordinary course as then conducted, this Lease shall, as to the part so taken, terminate as of the date that possession of such part of the Premises is taken and the Monthly Rent shall be reduced in the same proportion than the floor area of the portion of the Premises so taken (less any addition thereto by reason of any reconstruction) bears to the original floor area of the Premises, as reasonably determined by Landlord or Landlord's Architect. Landlord shall, at its own cost and expense, make all necessary repairs or alterations to the Premises so as to make the portion of the Premises not taken a complete architectural unit. Such work shall not, however, exceed the scope of the work done by Landlord in originally constructing the Premises. If severance damages from the condemning authority are not available to Landlord in sufficient amounts to permit such restoration, Landlord may terminate this Lease upon Notice to Tenant. Monthly Rent due and payable hereunder shall be temporarily abated during such restoration period in proportion to the degree to which there is substantial interference with Tenant's use of the Premises, as reasonably determined by Landlord or Landlord's Architect. 13.3 Taking of Parking Areas. In the event there shall be a taking of portions of the Common Area made available to Tenant for vehicle parking under this Lease such that Landlord can no longer provide to Tenant the number of vehicle parking spaces set forth in Item 1.15 of the Basic Lease Provisions, Landlord may substitute reasonably equivalent parking spaces in a location reasonably close to the Building; provided that if Landlord fails to make such substitution within one hundred twenty (120) days following the taking and if the taking materially impairs Tenant's use and enjoyment of the Premises, Tenant may, at its option, terminate this Lease by giving Landlord Notice of its election to terminate within thirty (30) days after the expiration of such 120-day period. In the event of such termination by Tenant, there shall be no abatement of Rent and this Lease shall continue in full force and effect. 13.4 No Apportionment of Award. No award for any partial or total taking shall be apportioned, it being agreed and understood that Landlord shall be entitled to the entire award for any partial or entire taking. Tenant assigns to Landlord its interest in any award which may be made in such taking or condemnation, together with any and all rights of Tenant arising in or to the same or any part thereof. Nothing contained herein shall be deemed to give Landlord any interest in or require Tenant to assign to Landlord any separate award made to Tenant for the taking of Tenant's Personal Property, for the interruption of Tenant's business or its moving costs, or for the loss of its goodwill. 13.5 Temporary Taking. No temporary taking of the Premises (which for purposes hereof shall mean a taking of all or any part of the Premises for one hundred twenty (120) days or less) shall terminate this Lease or give Tenant any right to any abatement of Rent. Any award made to Tenant by reason for such temporary taking shall belong entirely to Tenant and Landlord shall not be entitled to share therein. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions of this Section 13.5. 13.6 Sale Under Threat of Condemnation. A sale made in good faith to any authority having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed a taking under the power of eminent domain for all purposes of this Article XIII. ARTICLE XIV Assignment And Subletting ------------------------- 14.1 Prohibition. Tenant shall not directly or indirectly, voluntarily or by operation of law, assign (which term shall include any transfer, assignment, pledge, mortgage or hypothecation) this Lease, or any right or interest hereunder, or sublet the Premises or any part thereof, or allow any other person or entity to occupy or use all or any part of the Premises without first obtaining the written consent of Landlord in each instance, which consent shall not be unreasonably withheld. No assignment, encumbrance, subletting, or other transfer in violation of the terms of this Article XIV, whether voluntary or involuntary, by operation of law, under legal process or proceedings, by receivership, in bankruptcy, or otherwise shall be valid or effective and, at the option of Landlord, shall constitute an Event of Default under this Lease. To the extent not prohibited by provisions of the Bankruptcy Code of 1978, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), Tenant on behalf of itself, creditors, administrators and assigns waives the applicability of Sections 541(c) and 365(e) of the Bankruptcy Code unless the proposed assignee of the trustee for the estate of the bankrupt meets Landlord's standards for consent as set forth below. Landlord has entered into this Lease with Tenant in order to obtain for the benefit of the Project the unique attraction of Tenant's name and business; the foregoing prohibition on assignment or subletting is expressly agreed to by Tenant in consideration of such fact. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under the proceeding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and be promptly paid or delivered to Landlord. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. 14.2 Landlord's Consent. In the event Landlord consents to any assignment or subletting, such consent shall not constitute a waiver of any of the restrictions of this Article XIV and the same shall apply to each successive assignment or subletting hereunder, if any. In no event shall Landlord's consent to an assignment or subletting affect the continuing primary liability of Tenant (which, following assignment, shall be joint and several with the assignee), or relieve Tenant of any of its obligations hereunder without an express written release being given by Landlord. In the event that Landlord shall consent to an assignment or subletting under this Article XIV, such assignment or subletting shall not be effective until the assignee or sublessee shall assume all of the obligations of this Lease on the part of Tenant to be performed or observed and whereby the assignee or sublessee shall agree that the provisions contained in this Lease shall, notwithstanding such assignment or subletting, continue to be binding upon it with respect to all future assignments and sublettings. Such assignment or sublease agreement shall be duly executed and a fully executed copy thereof shall be delivered to Landlord, and Landlord may collect Monthly Rent and Additional Rent due hereunder directly from the assignee or sublessee. Collection of Monthly Rent and Additional Rent directly from an assignee or sublessee shall not constitute a recognition of such assignee or sublessee as the Tenant hereunder or a release of Tenant from the performance of all of its obligations hereunder. 14.3 Information. Regardless of whether Landlord's consent is required under this Article XIV, Tenant shall notify Landlord in writing of Tenant's intent to assign this Lease or any right or interest hereunder, or to sublease the Premises or any part thereof, and of the name of the proposed assignee or sublessee, the nature of the proposed assignee's or sublessee's business to be conducted on the Premises, the terms and provisions of the proposed assignment or sublease, a copy of the proposed assignment or sublease form, and such other information as Landlord may reasonably request concerning the proposed assignee or sublessee including, but not limited to, net worth, income statements and other financial statements for a two-year period preceding Tenant's request for consent, evidence of insurance complying with the requirements of Article XI, a completed Environmental Questionnaire from the proposed assignee or sublessee, and the fee described in Section 14.7. 14.4 Standard for Consent. Landlord shall, within thirty (30) days of receipt of such Notice and all information requested by Landlord concerning the proposed assignee or sublessee, elect to take one of the following actions: (a) consent to such proposed assignment or sublease; (b) refuse to consent to such proposed assignment or sublease, which refusal shall be on reasonable grounds; or (c) if Tenant proposes to sublease all or part of the Premises for the entire remaining Term, Landlord may, at its option exercised by thirty (30) days Notice to Tenant, elect to recapture such portion of the Premises as Tenant proposes to sublease and as of the thirtieth (30th) day after Landlord so notifies Tenant of its election to recapture, this Lease shall terminate as to the portion of the Premises recaptured and the Monthly Rent payable under this Lease shall be reduced in the same proportion that the floor area of that portion of the Premises so recaptured bears to the floor area of the Premises prior to such recapture. Tenant agrees, by way of example and without limitation, that it shall not be unreasonable for Landlord to withhold its consent to a proposed assignment or subletting if any of the following situations exist or may exist: (i) Landlord determines that the proposed assignee's or sublessee's use of the Premises conflicts with Article V or Article VI, presents an unacceptable risk, as determined by Landlord, under Article VI (and Landlord may require such assignee or sublessee to complete the Environmental Questionnaire in the manner described in Section 6.5 prior to making such determination), or conflicts with any other provision under this Lease; (ii) Landlord determines that the proposed assignee or sublessee is not as financially responsible as Tenant as of the date of Tenant's request for consent or as of the effective date of such assignment or subletting; (iii) Landlord determines that the proposed assignee or sublessee lacks sufficient business reputation or experience to conduct on the Premises a business of a type and quality equal to that conducted by Tenant; (iv) Landlord determines that the proposed assignment or subletting would breach a covenant, condition or restriction in some other lease, financing agreement or other agreement relating to the Project, the Building, the Premises or this Lease; (v) Landlord determines that the proposed assignee or sublessee (a) has been required by any prior Landlord, lender or governmental authority to take remedial action in connection with Hazardous Materials contaminating a property if such contamination resulted from the proposed assignee's or sublessee's actions or use of the property in questions, or (b) is subject to any enforcement order issued by an governmental authority in connection with the use, disposal or storage of a Hazardous Material; or (vi) An Event of Default has occurred and is continuing at the time of Tenant's request for Landlord's consent, or as of the effective date of such assignment or subletting. Tenant acknowledges that if Tenant has any exterior sign rights under this Lease, such rights are personal to Tenant and may not be assigned or transferred to any assignee of this Lease or sublessee of the Premises without Landlord's prior written consent, which consent may be withheld in Landlord's sole and absolute discretion. 14.5 Bonus Value. Tenant agrees that fifty percent (50%) of any amounts paid by the assignee or sublessee, however described, in excess of (i) the monthly Rent payable by Tenant hereunder (or, in the case of sublease of a portion of the Premises, in excess of the Monthly Rent reasonably allocable to such portion), plus (ii) Tenant's direct out-of- pocket costs which Tenant certifies to Landlord have been paid to provide occupancy-related services to such assignee or sublessee of a nature commonly provided by Landlords of similar space, shall be the property of Landlord and such amounts shall be payable directly to Landlord by the assignee or sublessee. At Landlord's request, a written agreement shall be entered into by and among Tenant, Landlord and the proposed assignee or sublessee confirming the requirements of this Section 14.5. 14.6 Certain Transfers. The sale of all or substantially all of Tenant's assets (other than bulk sales in the ordinary course of business), or, if Tenant is a corporation, an unincorporated association, or a partnership, the transfer, assignment or hypothecation of any stock or interest in such corporation, association or partnership in the aggregate in excess of twenty-five percent (25%) (except for transfers of shares of a company required to file reports under the Securities Exchange Act of 1934, as amended) shall be deemed an assignment within the meaning and provisions of this Article XIV. Notwithstanding anything to the contrary in this Article XIV, Tenant may assign this Lease or sublet all or any portion of the Premises, without Landlord's consent, to any entity which controls, is controlled by, or is under common control with Tenant; to any entity which results from a merger or consolidation with Tenant; or to any entity which acquires substantially all of the stock or assets of Tenant, as a going concern, with respect to the business that is being conducted in the Premises, providing such entity has at least the same net worth as Tenant as of the date of this Lease (each a "Permitted Transferee," and each such transfer a "Permitted Transfer)" Landlord shall have no right to terminate the Lease in connection with, and shall have no right to any sums or other economic consideration resulting from any Permitted Transfer. 14.7 Landlord's Fee and Expenses. If Tenant requests Landlord's consent to an assignment or subletting by Tenant under this Lease, Tenant shall pay to Landlord a fee of Five Hundred Dollars ($500) and all of Landlord's out- of-pocket expenses including, but not limited to, attorneys' fees reasonably incurred related to such assignment or subletting by Tenant, whether or not the assignment or subletting is approved. 14.8 Transfer of the Premises by Landlord. Upon any conveyance of the Premises and assignment by Landlord of this Lease, Landlord shall and is hereby entirely released from all liability under any and all of its covenants and obligations contained in or derived from this Lease occurring after the date of such conveyance and assignment, provided transferee assumes obligations of Landlord under this Lease, and Tenant agrees to attorn to any entity purchasing or otherwise acquiring the Premises. ARTICLE XV Defaults And Remedies --------------------- 15.1 Tenant's Default. At the option of Landlord, a default under this Lease by Tenant shall exist if any of the following events shall occur (each is called an "Event of Default"): (a) Tenant fails to pay the Rent payable hereunder, for a period of ten (10) days from when due; (b) Tenant attempts to make or suffers to be made any transfer, assignment or subletting, except as provided in Article XIV hereof; (c) Any of Tenant's rights under this Lease are sold or otherwise transferred by or under court order or legal process or otherwise or if any of the actions described in Section 15.2 are taken by or against Tenant or any Guarantor; (d) The Premises are used for any purpose other than as permitted pursuant to Article V; (e) Tenant vacates or abandons the Premises or fails to continuously and uninterruptedly conduct its business in the Premises; (f) Any representation or warranty given by Tenant under or in connection with this Lease proves to be materially false or misleading; (g) Tenant fails to timely comply with the provisions of Article VI ("Hazardous Materials"), Article XIV ("Assignment and Subletting"), Article XVI ("Subordination; Estoppel Certificate; Financials"), Section 21.5 ("Modifications for Mortgagees") or Section 21.19 ("Authority"); or (h) Tenant fails to observe, keep, perform or cure within fifteen (15) days after Notice by Landlord any of the other terms, covenants, agreements or conditions contained in this Lease or those set forth in any other agreements or rules or regulations which Tenant is obligated to observe or perform. In the event such default reasonably could not be cured or corrected within such fifteen (15) day period, but is reasonably susceptible to cure or correction, then Tenant shall not be in default hereunder if Tenant commences the cure or correction of such default within such default within such fifteen (15) day period and diligently prosecutes the same to completion after commencing such cure or correction. Notices given under this Section 15.1 shall specify the alleged default and shall demand that Tenant perform the provisions of this Lease or pay the Rent that is in arrears, as the case may be, within the applicable period of time, or quit the Premises. No such Notice shall be deemed a forfeiture or a termination of this Lease unless Landlord so elects in the Notice. 15.2 Bankruptcy or Insolvency. In no event shall this Lease be assigned or assignable by operation of law and in no event shall this Lease be an asset of Tenant in any receivership, bankruptcy, insolvency or reorganization proceeding. In the event: (a) A court makes or enters any decree or order adjudging Tenant to be insolvent, or approving as properly filed by or against Tenant a petition seeking reorganization or other arrangement of Tenant under any provisions of the Bankruptcy Code or any applicable state law, or directing the winding up or liquidation of Tenant and such decree or order shall have continued for a period of thirty (30) days; (b) Tenant makes or suffers any transfer which constitutes a fraudulent or otherwise avoidable transfer under any provisions of the Bankruptcy Code or any applicable state law; (c) Tenant assigns its assets for the benefit of its creditors; or (d) The material part of the property of Tenant or any property essential to Tenant's business or of Tenant's interest in this Lease is sequestered, attached or executed upon, and Tenant fails to secure a return or release of such property within ten (10) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier. Then this Lease shall, at Landlord's election, immediately terminate and be of no further force or effect whatsoever, without the necessity for any further action by Landlord, except that Tenant shall not be relieved of obligations which have accrued prior to the date of such termination. Upon such termination, the provisions herein relating to the expiration or earlier termination of this Lease shall control and Tenant shall immediately surrender the Premises in the condition required by the provisions of this Lease. Additionally, Landlord shall be entitled to all relief, including recovery of damages from Tenant, which may from time to time be permitted, or recoverable, under the Bankruptcy Code or any other applicable state laws. 15.3 Landlord's Remedies. Upon the occurrence of an Event of Default, then, in addition to and without waiving any other rights and remedies available to Landlord at law or in equity or otherwise provided in this Lease, Landlord may, at its option, cumulatively or in the alternative, exercise the following remedies: (a) Landlord may terminate Tenant's right to possession of the Premises, in which case Tenant's right to possession of the Premises under this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. No act by Landlord other than giving Notice to Tenant of Landlord's election to terminate Tenant's right to possession shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. Termination shall terminate Tenant's right to possession of the Premises, but shall not relieve Tenant of any obligation under this Lease, which has accrued prior to the date of such termination. Upon such termination, Landlord shall have the right to re-enter the Premises, and remove all persons and property, and Landlord shall also be entitled to recover from Tenant: (i) The worth at the time of award of the unpaid Monthly Rent and Additional Rent which had been earned at the time of termination; (ii) The worth at the time of award of the amount by which the unpaid Monthly Rent and Additional Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) The worth at the time of award of the amount by which the unpaid Monthly Rent and Additional Rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (iv) Any other reasonable amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result from Tenant's default including, but not limited to, the cost of recovering possession of the Premises, commissions and other expenses of reletting, including necessary repair, demolition and renovation of the Premises to the condition existing immediately prior to Tenant's occupancy, the unamortized portion of any Tenant Improvements and brokerage commissions funded by Landlord in connection with this Lease, the cost of rectifying any damage to the Premises occasioned by the act or omission of Tenant, reasonable attorneys' fees, and any other reasonable costs; and (v) At Landlord's election, all other amounts in addition to or in lieu of the foregoing as may be permitted by law. As used in subsections (i) and (ii) above, the "worth at the time of award" shall be computed by discounting the amount at the discount rate of the Federal Reserve Bank of Kansas City at the time of award plus one percent (1%). (b) Landlord may elect not to terminate Tenant's right to possession of the Premises, in which event this Lease will continue in full force and effect as long as Landlord does not terminate Tenant's right to possession, and Landlord may continue to enforce all of its rights and remedies under this Lease, including the right to collect all Rent as it becomes due. In the event that Landlord elects to avail itself of the remedy provided by this subparagraph 15.3(b), Landlord shall not unreasonably withhold its consent to an assignment or subletting of the Premises subject to the reasonable standards for Landlord's consent as are contained in this Lease. In addition, in the event Tenant has entered into a sublease which is valid under the terms of this Lease, Landlord may also, at its option, cause Tenant to assign to Landlord the interest of Tenant under said sublease including, but not limited to, Tenant's right to payment of Rent as it becomes due. Landlord may elect to enter the Premises and relet them, or any part of them, to third parties for Tenant's account. Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the Premises including, but not limited to, broker's commissions, expenses of cleaning and remodeling the Premises required by the reletting, attorneys' fees and like costs. Reletting can be for a period shorter or longer than the remaining Term of this Lease and for the entire Premises or any portion thereof. Tenant shall pay to Landlord the Monthly Rent and Additional Rent due under this Lease on the dates the Monthly Rent and such Additional Rent are due, less the Rent Landlord actually collects from any reletting. Except as provided in the preceding sentence, if Landlord relets the Premises or any portion thereof, such reletting shall not relieve Tenant of any obligation hereunder. Notwithstanding the above, no act by Landlord allowed by this subparagraph 15.3(b) shall terminate this Lease unless Landlord notifies Tenant in writing that Landlord elects to terminate this Lease. 15.4 No Surrender. No agreement to accept a surrender shall be valid unless in writing and signed by Landlord. No employee of Landlord or of Landlord's Agent shall have any power to accept the keys to the Premises prior to the termination of this Lease, and the delivery of the keys to any employee shall not operate as a termination of this Lease or a surrender of the Premises. 15.5 Interest on Late Payments. Any Rent due under this Lease that is not paid to Landlord within ten (10) days of the date when due shall commence to bear interest at the Applicable Rate until fully paid. Neither the accrual nor the payment of interest shall cure any default by Tenant under this Lease. 15.6 Attorneys' and Other Fees. All sums reasonably incurred by Landlord in connection with an Event of Default or holding over of possession by Tenant after the expiration or termination of this Lease including, but not limited to, all reasonable costs, expenses and actual accountants', appraisers', attorneys' and other professional fees, and any collection agency or other collection charges, shall be due and payable by Tenant to Landlord on demand, and shall bear interest at the Applicable Rate from the date of such demand until paid by Tenant. In addition, in the event that any action shall be instituted by either of the parties hereto for the enforcement of any of its rights in and under this Lease, the party in whose favor judgment shall be rendered shall be entitled to recover from the other party all expenses reasonably incurred by the prevailing party in such action, including actual costs and reasonable attorneys' fees. 15.7 Landlord's Default. Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by it hereunder unless and until it has failed to perform such obligation within fifteen (15) days after receipt of Notice by Tenant to Landlord (and the Mortgagees who have provided Tenant with notice) specifying the nature of such default; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it shall commence such performance within such fifteen (15)day period and thereafter diligently prosecutes the same to completion. 15.8 Limitation of Landlord's Liability. The obligations of Landlord do not constitute the personal obligations of the individual partners, trustees, directors, officers or shareholders of Landlord or its constituent partners. If Landlord shall fail to perform any covenant, term, or condition of this Lease upon Landlord's part to be performed, Tenant shall be required to deliver to Landlord Notice of the same. If, as a consequence of such default, Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Building and out of rent or other income from such property receivable by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title or interest in the Building, and no action for any deficiency may be sought or obtained by Tenant. 15.9 Mortgagee Protection. Upon any default on the part of Landlord, Tenant will give notice by registered or certified mail to any Mortgagee who has provided Tenant with notice of its interest together with an address for receiving notice, and shall offer such Mortgagee a reasonable opportunity to cure the default (which in no event shall exceed sixty (60) days, including time to obtain possession of the Premises by power of sale or a judicial foreclosure, if such should prove necessary, to effect a cure. Tenant agrees that each of the Mortgagees to whom this Lease has been assigned by Landlord is an express third-party beneficiary of this section 15.9. Tenant shall not make any prepayment of Monthly Rent more than one (1) month in advance without the prior written consent of such Mortgagee. Tenant agrees to make all payments under this Lease to the Mortgagee with the most senior encumbrance upon receiving a direction, in writing, to pay said amounts to such Mortgagee. Tenant shall comply with such written direction to pay without determining whether an event of default exists under such Mortgagee's loan to Landlord. 15.10 Landlord's Right to Perform. If Tenant shall at any time fail to make any payment or perform any other act on its part to be made or performed under this Lease, Landlord may (but shall not be obligated to), at Tenant's expense, fifteen (15) days after written notice from Landlord and without waiving or releasing Tenant from any obligation of Tenant under this Lease, make such payment or perform such other act to the extent Landlord may deem desirable, and in connection therewith, pay expenses and employ counsel. All sums paid by Landlord and all penalties, interest and costs including, but not limited to, collection costs and attorneys' fees reasonably incurred in connection therewith, shall be due and payable by Tenant to Landlord, as an item of Additional Rent, on demand by Landlord, together with interest thereon at the Applicable Rate from the date of such demand until paid by Tenant. 15.12 Waiver of Jury Trial. To the fullest extent permitted by law, Tenant hereby waives the right to trial by jury in any action, proceeding or counterclaim brought by Tenant on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises and/or any claim of injury or damage. ARTICLE XVI Subordination; Estoppel Certificate; Financials ----------------------------------------------- 16.1 Subordination, Attornment and Non-Disturbance. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any Mortgagee or any ground lessor with respect to the land of which the Premises are a part, this Lease shall be subject and subordinate at all times to (1) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Building and (2) the lien of any First Mortgage which may now exist or hereafter be executed in any amount for which the Project, the Building, ground leases or underlying leases, or Landlord's interest or estate in any of said items is specified as security. Landlord or any such Mortgagee or ground lessor shall have the right, at its election, to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease provided in the event Landlord desires for this Lease to be subordinate, Landlord delivers to Tenant a non-disturbance agreement from any party which is to have a superior interest in this Lease. No subordination shall permit material interference with Tenant's rights hereunder, and any ground lessor or Mortgagee shall recognize Tenant and its permitted successors and assigns as the Tenant of the Premises and shall not disturb Tenant's right to quiet possession of the Premises during the Term so long as no Event of Default has occurred and is continuing under this Lease. If Landlord's interest in the Premises is acquired by any ground lessor or Mortgagee, or in the event proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any Mortgage made by Landlord covering the Premises or any part thereof, or in the event a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination and upon the request of such successor in interest to Landlord, attorn to and become the Tenant of the successor in interest to Landlord and recognize such successor in interest as the Landlord under this Lease. Although this Section 16.1 is self-executing, Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, or any Mortgagee or ground lessor, any additional commercially reasonable documents evidencing the priority or subordination of this Lease with respect to any such ground leases or underlying leases or the lien of any such Mortgage, or evidencing the attornment of Tenant to any successor in interest to Landlord as herein provided. Tenant's failure to timely execute and deliver such additional documents shall, at Landlord's option, constitute an Event of Default hereunder. Any subordination/non-disturbance agreement shall contain, at a minimum, the following provisions: (i) the lender or ground lessor recognizes and approves the Lease; (ii) the Lease and Tenant's leasehold interest will not be extinguished or terminated nor will the possession or rights thereunder of Tenant be disturbed, affected, or impaired by the foreclosure of any such security device arising out of any default thereunder or by delivery of a deed in lieu of foreclosure of such security device or otherwise or by termination of such ground lease or default by Landlord thereunder. Tenant agrees to give prompt notice to lender in the Event of Default under the Lease by Landlord and an opportunity to lender to cure such Event of Default (although lender is not obligated to cure such default); (iii) Tenant shall not be named or joined as a party defendant or otherwise in any proceeding for the foreclosure of any such mortgage or to enforce any rights thereunder or any proceeding to enforce any rights under any such ground lease; (iv) all condemnation awards and payments and all proceeds of insurance paid or payable with respect to the Premises shall be applied and used in the manner set forth in the Lease; and (v) neither the mortgage nor any other security instrument executed in connection therewith nor any ground lease shall cover or be construed as subjecting in any manner to the lien thereof of any trade fixtures, business equipment, signs, or other personal property at any time supplied or installed by Tenant in or on the Premises, regardless of the manner or mode of attachment thereof to the Premises. 16.2 Estoppel Certificate. Tenant shall, within ten (10) days following written request by Landlord, execute and deliver to Landlord any documents, including estoppel certificates, in a commercially reasonable form required by Landlord (i) certifying that this Lease is unmodified and in full force and effect or, if modified, attaching a copy of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the Rent and other charges are paid in advance, if any, (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of the Landlord or stating the nature of any uncured defaults, (iii) evidencing the status of this Lease as may be required by a Mortgagee or a purchaser of the Premises, (iv) certifying the current Monthly Rent among and the amount and form of Security Deposit on deposit with Landlord, and (v) certifying to such other information within Tenant's knowledge as Landlord, Landlord's Group, Mortgagees and prospective purchasers may reasonably request including, but not limited to, any requested information regarding Hazardous Materials. Tenant's failure to deliver an estoppel certificate within ten (10) days after delivery of Landlord's written request therefor shall constitute an Event of Default hereunder. 16.3 Financial Information. Tenant shall deliver to Landlord, prior to the execution of this Lease, and within ten (10) days following written request therefor by Landlord at any time during the Term, Tenant's current financial statements, and Tenant's financial statements for the two (2) years prior to the current fiscal financial statement's year, certified to be true, accurate and complete by the chief financial officer of Tenant, including a balance sheet and profit and loss statement for the most recent prior year (collectively, the "Statements"), which Statements shall accurately and completely reflect the financial condition of Tenant. Landlord agrees that it will keep the Statements confidential, except that Landlord shall have the right to deliver the same to any proposed purchaser of the Premises, the Project or any portion thereof, and to the Mortgagees of Landlord or such purchaser. Tenant acknowledges that Landlord is relying on the Statements in its determination to enter into this Lease, and Tenant represents to Landlord, which representation shall be deemed made on the date of this Lease and again on the Commencement Date, that no material change in the financial condition of Tenant, as reflected in the Statements, has occurred since the date Tenant delivered the Statements to Landlord. If any material change in Tenant's financial condition, as reflected in the Statements, occurs prior to the date of this Lease or prior to the Commencement Date, as the case may be, or if Tenant fails to inform Landlord of any such material change, Landlord shall have the right, in addition to any other rights and remedies of Landlord, to terminate this Lease by notice to Tenant given within thirty (30) days after Landlord learns of such material change. ARTICLE XVII Signs And Graphics ------------------ Landlord shall designate the location on the Premises, if any, for one (1) or more exterior identification signs for Tenant. Tenant shall have no right to maintain identification signs in any other location in, on, or about the Premises and shall not display or erect any other signs, displays or other advertising materials that are visible from the exterior of the Building. The size, design, color and other physical aspects of permitted signs shall be subject to Landlord's written approval prior to installation, which approval may be withheld in Landlord's discretion, any Restrictions and any applicable municipal or other governmental permits and approvals. All such signs and graphics shall conform to the Sign Criteria set forth in Exhibit H. The cost of all signs and graphics, including the installation, maintenance and removal thereof, shall be at Tenant's sole cost and expense. If Tenant fails to maintain its signs, or if Tenant fails to remove same upon termination of this Lease and repair any damage caused by such removal (including, but not limited to, repainting the affected area, if required by Landlord), Landlord may do so at Tenant's expense. All sums reasonably disbursed, deposited or incurred by Landlord in connection with such removal including, but not limited to, all costs, expenses and actual attorneys' fees, shall be due and payable by Tenant to Landlord or deemed by Landlord, together with interest thereon at the Applicable Rate from the date of such demand until paid by Tenant. ARTICLE XVIII Quiet Enjoyment --------------- Landlord covenants that Tenant, upon performing the terms, conditions and covenants of this Lease, shall have quiet and peaceful possession of the Premises as against any person claiming the same by, through or under Landlord. ARTICLE XIX Surrender; Holding Over ----------------------- 19.1 Surrender of the Premises. Upon the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord in its condition existing as of the Commencement Date, broom clean, normal wear and tear and acts of God excepted, all to the reasonable satisfaction of Landlord. Tenant shall remove from the Premises all of Tenant's Alterations which Landlord requires Tenant to remove pursuant to Section 8.1 and all Tenant's Personal Property, and shall repair any damage and perform any restoration work caused by such removal. If Tenant fails to remove such Alterations and Tenant's Personal Property which Tenant is authorized and obligated to remove pursuant to the above, and such failure continues after the termination of this Lease, Landlord may retain such property and all rights of Tenant with respect to it shall cease, or Landlord may place all or any portion of such property in public storage for Tenant's account. Tenant shall pay to Landlord, upon demand, the costs of removal of any such Alterations and Tenant's Personal Property and storage and transportation costs of same, and the cost of repairing and restoring the Premises, together with attorneys' fees and interest on said amounts at the Applicable Rate from the date of expenditure by Landlord. If the Premises are not so surrendered at the termination of this Lease, Tenant hereby agrees to indemnify Landlord and Landlord's Group against all loss or liability resulting from any delay by Tenant in so surrendering the Premises including, but not limited to, any claims made by any succeeding Tenant, losses to Landlord due to lost opportunities to lease to succeeding tenants, and actual attorneys' fees and costs. 19.2 Holding Over. If Tenant remains in possession of all or any part of the Premises after the expiration of the Term with the prior written consent of Landlord, such possession shall constitute a month-to-month tenancy only and shall not constitute a renewal or extension for any further term. If Tenant remains in possession of all or any part of the Premises after the expiration of the Term without the prior written consent of Landlord, such possession shall constitute a tenancy at sufferance. In either of such events, Monthly Rent shall be increased to an amount equal to one hundred fifty percent (150%) of the Monthly Rent payable during the last month of the Term, and any other sums due hereunder shall be payable in the amounts and at the times specified in this Lease. Any such tenancy shall be subject to every other term, condition, and covenant contained in this Lease. ARTICLE XX Construction Of Tenant Improvements ----------------------------------- The obligations of Landlord and Tenant, if any, with respect to the Tenant Improvements, are set forth in the Work Letter attached as Exhibit C. It is acknowledged and agreed that all Tenant Improvements under this Lease are and shall be the property of Landlord from and after their installation. ARTICLE XXI Miscellaneous And Interpretive Provisions ----------------------------------------- 21.1 Broker. Landlord and Tenant each warrant and represent to the other that neither has had any dealings with any real estate broker, agent or finder in connection with the negotiation of this Lease or the introduction of the parties to this transaction, except for the Broker (as defined in Article 1.12 whose commission shall be paid by Landlord), and that it knows of no other real estate broker, agent or finder who is or might be entitled to a commission or fee in connection with this Lease. In the event of any additional claims for brokers' or finders' fees with respect to this Lease, Tenant shall indemnify, hold harmless, protect and defend Landlord from and against such claims if they shall be based upon any statement or representation or agreement made by Tenant, and Landlord shall indemnify, hold harmless, protect and defend Tenant from and against such claims if they shall be based upon any statement, representation or agreement made by Landlord. 21.2 Examination of Lease. Submission of this Lease for examination or signature by Tenant does not create a reservation of or option to lease. This Lease shall become effective and binding only upon full execution of this Lease by both Landlord and Tenant. 21.3 No Recording. Tenant shall not record this Lease. However, if Landlord or Tenant so requests, either party shall agree to execute, and deliver a memorandum of this Lease in recordable form which either thereafter may file for record. 21.4 Quitclaim. Upon any termination of this Lease Tenant shall, at Landlord's request, execute, have acknowledged and deliver to Landlord an instrument in writing releasing and quitclaiming to Landlord all right, title and interest of Tenant in and to the Premises by reason of this Lease or otherwise. 21.5 Modifications for Mortgagees. If in connection with obtaining financing for the Premises or any portion thereof, Landlord's Mortgagees shall request reasonable modifications to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent thereto, provided such modifications do not adversely affect Tenant's rights hereunder. Tenant's failure to so consent shall constitute an Event of Default under this Lease. 21.6 Notice. Any Notice required or desired to be given under this Lease shall be in writing and shall be addressed to the address of the party to be served. The addresses of Landlord and Tenant are as set forth in Items 1.1 and 1.3, respectively, of the Basic Lease Provisions, except that (a) prior to the Commencement Date, the address for Notices to Tenant shall be as set forth opposite Tenant's signature on this Lease, and (b) from and after the Commencement Date, notwithstanding the addresses for Tenant set forth in Item 1.3 of the Basic Lease Provisions, all Notices regarding the operation and maintenance of the Project shall be delivered to Tenant as provided in Section 1.3. Each such Notice shall be deemed effective and given (i) upon receipt, if personally delivered (which shall include delivery by courier or overnight delivery service), (ii) upon being telephonically confirmed as transmitted, if sent by telegram, telex or telecopy, (iii) three (3) business days after deposit in the United States mail, certified and postage prepaid, properly addressed to the party to be served, or (iv) upon receipt if sent in any other way. Any party hereto may from time to time, by Notice to the other in accordance with this Section 21.6, designate a different address than that set forth above for the purposes of Notice. 21.7 Captions. The captions and headings used in this Lease are for the purpose of convenience only and shall not be construed to limit or extend the meaning of any part of this Lease. 21.8 Executed Copy. Any fully executed copy of this Lease shall be deemed an original for all purposes. 21.9 Time. Time is of the essence for the performance of each term, condition and covenant of this Lease. 21.10 Severability. If any one or more of the provisions contained herein shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. 21.11 Survival. All covenants and indemnities set forth herein which contemplate the payment of sums, or the performance by Tenant after the Term or following an Event of Default, including specifically, but not limited to, the covenants and indemnities set forth in Section 5.3, Article VI, Article VII, Section 8.1, Section 9.2, Section 11.1, Section 11.10, Article XV, and Article XIX, and all representations and warranties of Tenant, shall survive the expiration or sooner termination of this Lease. 21.12 Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State of Colorado. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either Landlord or Tenant. 21.13 Gender; Singular, Plural. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, the singular includes the plural and the plural includes the singular. 21.14 Non-Agency. It is not the intention of Landlord or Tenant to create hereby a relationship of master-servant or principal-agent, and under no circumstance shall Tenant herein be considered the agent of Landlord, it being the sole purpose and intent of the parties hereto to create a relationship of Landlord and Tenant. 21.15 Successors. The terms, covenants, conditions and agreements contained in this Lease shall, subject to the provisions as to assignment, subletting, and bankruptcy contained herein and any other provisions restricting successors or assigns, apply to and bind the heirs, successors, legal representatives and assigns of the parties hereto. 21.16 Waiver; Remedies Cumulative. The waiver by either party of any term, covenant, agreement or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant, agreement or condition herein contained, nor shall any custom or practice which may grow up between the parties in the administration of this Lease be construed to waive or to lessen the right of Landlord to insist upon the performance by Tenant in strict accordance with all of the provisions of this Lease. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any proceeding breach by Tenant of any provisions, covenant, agreement or condition of this Lease, other than the failure of Tenant to pay the particular Rent payment so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent payment. Landlord's acceptance of any check, letter of payment shall in no event be deemed an accord and satisfaction, and Landlord shall accept the check, letter or payment without prejudice to Landlord's right to recover the balance of the Rent or pursue any other remedy available to it. The rights and remedies of either party under this Lease shall be cumulative and in addition to any and all other rights and remedies which either party has or may have. 21.17 Unavoidable Delay. Except for the monetary obligations of Tenant under this Lease, neither party shall be chargeable with, liable for, or responsible to the other for anything or in any amount for any Unavoidable Delay and any Unavoidable Delay shall not be deemed a breach of or default in the performance of this Lease, it being specifically agreed that any time limit provision contained in this Lease (other than the scheduled expiration of the Term) shall be extended for the same period of time lost by Unavoidable Delay. 21.18 Entire Agreement. This Lease is the entire agreement between the parties, and supersedes any prior agreements, representations, negotiations or correspondence between the parties, except as expressed herein. Except as otherwise provided herein, no subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. 21.19 Authority. If Tenant is a corporation or a partnership, each individual executing this Lease on behalf of the corporation or partnership, as the case may be, represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said entity in accordance with its corporate bylaws, statement of partnership or certificate of limited partnership, as the case may be, and that this Lease is binding upon said entity in accordance with its terms. If Tenant is a corporation, Tenant shall, if requested by Landlord, within thirty (30) days after execution of this Lease and prior to entering into possession of the Premises, deliver to Landlord a certified copy of a resolution of the Board of Directors of the corporation or certificate of the Secretary of the corporation, authorizing, ratifying or confirming the execution of this Lease. If Tenant is a partnership, Tenant shall, if requested by Landlord, within thirty (30) days after the execution of this Lease and prior to entering into possession of the Premises, deliver to Landlord a certified copy of this partnership agreement authorizing such execution. 21.20 Guaranty. As a condition to the execution of this Lease by Landlord, the obligations, covenants and performance of the Tenant as herein provided shall be guaranteed in writing by the Guarantor listed in Item 1.14 of the Basic Lease Provisions, if any, on a form of guarantee approved by Landlord. 21.21 Exhibits; References. All exhibits, amendments, riders and addenda attached to this Lease are hereby incorporated into and made a part of this Lease. In the event of variation or discrepancy, the duplicate original hereof (including exhibits, amendments, riders and addenda, if any, specified above) held by Landlord shall control. All references in this Lease to Articles, Sections, Exhibits, Riders and clauses are made, respectively, to Articles, Sections, Exhibits, Riders and clauses of this Lease, unless otherwise specified. 21.22 Basic Lease Provisions. The Basic Lease Provisions at the beginning of this Lease are intended to provide general information only. In the event of any inconsistency between the Basic Lease Provisions and the specific provisions of this Lease, the specific provisions of this Lease shall prevail. 21.23 No Merger. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, or a termination by Landlord, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all such subtenancies. 21.24 Joint and Several Obligations. If more than one person or entity is Tenant, the obligations imposed on each such person or entity shall be joint and several. 21.25 No Light or Air Easement. Any diminution or shutting off of light or air by any structure which may be erected on lands adjacent to the Building shall in no way affect this Lease, abate Rent or otherwise impose any liability on Landlord. This Lease does not confer any right with regard to the subsurface below the ground level of the Building. 21.26 Security Measures. Tenant hereby acknowledges that Landlord shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Project. Tenant assumes all responsibility for the protection of Tenant, Tenant's Agents and the property of Tenant and of Tenant's Agents from acts of third parties. Nothing herein contained shall prevent Landlord, at Landlord's sole option, from providing security protection for the Project or any part thereof, in which event the cost thereof shall be included within the definition of Project Costs and paid by Tenant in the manner set forth in Section 7.1. THIS LEASE is effective as of the date the last signatory necessary to execute this Lease shall have executed this Lease.
LANDLORD: TENANT: AmberJack, Ltd., an Arizona United Natural Foods, Inc., a Delaware Corporation Corporation Birtcher Property Services as Manager By: /s/ G. Roger Gielow By: /s/ Norman Cloutier ----------------------------------- ----------------------------------------- Name: G. Roger Gielow Name: Norman Cloutier ----------------------------------- ----------------------------------------- Title: Assistant Title: CEO Secretary ----------------------------------- ----------------------------------------- Date: 8/5/97 Date: 7/25/97 ----------------------------------- ----------------------------------------- By: /s/ Earle B. Johnson, Jr. By: /s/ Steven Townsend ----------------------------------- ----------------------------------------- Name: Earle B. Johnson, Jr. Name: Steven Townsend ----------------------------------- ----------------------------------------- Title: Vice Title: CFO President ----------------------------------- ----------------------------------------- Date: 8/5/97 Date: 7/24/97 ----------------------------------- -----------------------------------------
EXHIBIT A DESCRIPTION OF THE PREMISES This Exhibit is attached to and made a part of that certain Standard Form Lease dated July 11, 1997, by and between AmberJack, Ltd., an Arizona Corporation, as "Landlord," and United Natural Foods, Inc., a Delaware Corporation, as "Tenant," for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. (To be attached) EXHIBIT B PROJECT SITE PLAN This Exhibit is attached to and made a part of that certain Standard Form Lease dated July 11, 1997, by and between AmberJack, Ltd., an Arizona Corporation, as "Landlord," and United Natural Foods, Inc., a Delaware Corporation, as "Tenant," for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. EXHIBIT C WORK LETTER (Pending Preliminary Plans) This Exhibit is attached to and made a part of that certain Standard Form Lease dated July 11, 1997, by and between AmberJack, Ltd., an Arizona Corporation, as "Landlord," and United Natural Foods, Inc., a Delaware Corporation, as "Tenant," for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. 1. APPLICATION OF EXHIBIT Capitalized terms used and not otherwise defined herein shall have the same definitions as set forth in the Lease. The provisions of this Work Letter shall apply to the planning and completion of Leasehold Improvements requested by Tenant (the "Tenant Improvements") for the fitting out of the initial Premises, as more fully set forth herein. 2. LANDLORD AND TENANT PRE-CONSTRUCTION OBLIGATIONS (a) Preliminary Plans. Within five (5) business days following full execution of this Lease by both Landlord and Tenant, Landlord's Architect shall prepare preliminary space plans for the Tenant Improvements (the "Preliminary Plans") which shall include, without limitation, sketches and/or drawings showing the locations of doors, partitioning, electrical fixtures, outlets and switches, plumbing fixtures, floor loads and other requirements, and a list of all specialized installations and improvements and upgrade specifications determined by Tenant as required for its use of the Premises. Tenant agrees to and shall promptly and fully cooperate with Landlord's Architect and shall supply all information Landlord's Architect deems necessary for the preparation of the Preliminary Plans. Tenant acknowledges that the Preliminary Plans shall be prepared by Landlord's Architect after consultation and cooperation between Tenant and Landlord's Architect regarding the proposed Tenant Improvements and Tenant's requirements. Landlord and Landlord's Architect shall be entitled, in all respects, to rely upon all information supplied by Tenant regarding the Tenant Improvements, The costs associated with preparation of the Preliminary Plans shall be borne by Tenant and paid as set forth in Section 5 and 6 of the Work Letter. Such costs shall not exceed Five Thousand Dollars ($5,000.00). (b) Working Drawings. Within twenty-one (21) days following Preliminary Plan Approval by both Landlord and Tenant, Landlord's Architect shall prepare working drawings (the "Working Drawings") for Tenant Improvements based upon the approved Preliminary Plans. The Working Drawings shall include architectural, mechanical and electrical construction drawings for the Tenant Improvements based on the Preliminary Plans. Notwithstanding the Preliminary Plans, in all cases the Working Drawings (i) shall be subject to Landlord's and Tenant's final approval, which approval shall not be unreasonably withheld, (ii) shall not be in conflict with building codes for the City or County or with insurance requirements for a comparable industrial building, and (iii) shall be in a form satisfactory to appropriate governmental authorities responsible for issuing permits and licenses required for construction. The cost associated with preparation of the Working Drawings shall be borne by Tenant and paid as set forth in Section 5 and 6 of this Work Letter. (c) Approval of Working Drawings. Landlord or Landlord's Architect shall submit the Working Drawings to Tenant for Tenant's review, and Tenant shall notify Landlord and Landlord's Architect within five (5) business days after delivery thereof of any requested revisions. Within five (5) business days after receipt of Tenant's notice, Landlord's Architect shall make all approved revisions to the Working Drawings and submit two (2) copies thereof to Tenant for its final review and approval, with Contractors written price which approval or rejection shall be given within five (5) business days thereafter. Concurrently with the above review and approval process, Landlord may submit all plans and specification to City and other applicable governmental agencies in an attempt to expedite City approval and issuance of all necessary permits and licenses to construct the Tenant Improvements as shown on the Working Drawings. Any changes which are required by City or other governmental agencies shall be immediately submitted to Landlord for Landlord's review and reasonable approval, and Landlord shall promptly notify Tenant of such changes. (d) Schedule of Critical Dates. Set forth below is a schedule of certain critical dates relating to Landlord's and Tenant's respective obligations for the design and construction of the Tenant Improvements. Such dates and the respective obligations of Landlord and Tenant are more fully described elsewhere in this Work Letter. The purpose of the following schedule is to provide a reference for Landlord and Tenant and to make certain the Final Approval Date occurs as set forth herein. Following the Final Approval Date, Tenant shall be deemed to have released Landlord to commence construction of the Tenant Improvements as set forth in Section 4 below.
Responsible ----------- Reference Date Due Party --------- -------- ----- (a) "Preliminary Plan Completion" Five (5) business days after full Tenant and Landlord execution of lease Preliminary Plan Approval Five (5) business days from Tenant Preliminary Plan Completion (b) "Working Drawings Twenty one (21) days after Landlord Completion" Preliminary Plan Approval (c) "Working Drawings Review" Five (5 ) days after Landlord Submits Tenant the Working Drawings to Tenant (d) Working Drawings Revision Five (5) days after Tenant returns Landlord the Working Drawings to Landlord (e) "Final Approval Date" Five (5) days after Landlord submits the revised Working Drawings to Tenant Tenant
3. BUILDING PERMIT After the Final Approval Date has occurred, Landlord shall, if Landlord has not already done so, submit the Working Drawings to the appropriate governmental body or bodies for final plan checking and a building permit. Landlord, with Tenant's cooperation, shall cause to be made any change in the Working Drawings necessary to obtain the building permit; provided, however, after the Final Approval Date, no changes shall be made to the Working Drawings without the prior written approval of both Landlord and Tenant, and then only after agreement by Tenant to pay any excess costs resulting from such changes. 4. CONSTRUCTION OF TENANT IMPROVEMENTS After the Final Approval Date has occurred and a building permit for the work has been issued, Landlord shall, through a guaranteed maximum cost or fixed price (at Landlord's sole option) obtain a construction contract ("Construction Contract") with a reputable, licensed contractor selected by Landlord ("Contractor"), cause the construction of the Tenant Improvements to be carried out in substantial conformance with the Working Drawings in a good and workman like manner using first-class materials. The costs associated with the construction of the Tenant Improvements shall be paid as set forth in Section 5 and 6 of this Work Letter. Landlord shall see that the construction complies with all applicable building, fire, health, and sanitary codes and regulations, the satisfaction of which shall be evidenced by a certificate of occupancy for the Premises. 5. TENANT IMPROVEMENT ALLOWANCE Landlord shall provide Tenant with a Tenant Improvement Allowance of Four Hundred Fifty Thousand Dollars ($450,000.00) for approximately 18,000 square feet of office space and an additional allowance of $1.25 per square foot for the remaining warehouse space towards the cost of the design, purchase and construction of the Tenant Improvements, including without limitation design, engineering and consulting fees (collectively, the "Tenant Improvement Costs"): (i) Preparation by Landlord's Architect of the Preliminary Plans and the Working Drawings as provided in Section 2 of the Work Letter, including without limitation all fees charged by the City (including without limitation fees for building permits and plan checks) exclusively in connection with the Tenant Improvements work in the Premises; (ii) Construction work for completion of the Tenant improvements as reflected in the Construction Contract; (iii) All contractors' charges, general condition, performance bond premiums and construction fees; and (iv) Tenant Improvements as shown on the approved Working Drawings. If Tenant does seek to modify, change or alter the Tenant Improvements from the Working Drawings, or does cause a Tenant Delay, Tenant shall pay to Landlord any excess costs resulting therefrom in accordance with Section 6 of the Work Letter. 6. COSTS IN EXCESS OF TENANT IMPROVEMENT ALLOWANCE AT TENANT'S EXPENSE (a) Cost Approval. Tenant shall pay the excess of the Tenant Improvement Costs over the amount of the Tenant Improvement Allowance available to defray such costs. Concurrent with the plan checking referred to in Section 3 of the Work Letter, Landlord and Contractor shall prepare and submit to Tenant a written estimate of the amount of the remaining Tenant Improvement Costs and the cost of the Tenant Improvement Allowance still available to defray such costs (after preparation of the Preliminary Plans and Working Drawings. Tenant shall approve or disapprove any such estimate by written notice to Landlord within five (5) business days after receipt thereof. If Tenant fails to notify Landlord of its disapproval within such five (5) day period, Tenant shall be deemed to have approved such estimate. If such estimate exceeds the Tenant Improvement Allowance then still available and Tenant approves such estimate, Tenant's notice of approval shall include payment to Landlord for the full amount of such excess. If Tenant disapproves such estimate within the five (5) day period, Tenant shall be required to direct Landlord and Landlord's Architect to amend the Working Drawings in a manner reasonably satisfactory to both parties so as to reduce the estimated costs to an amount acceptable to Tenant, and any excess estimated costs remaining after such amendment if any shall be paid by Tenant in the manner described in the preceding sentence. Tenant shall additionally pay any costs resulting from such amendment and Tenant shall be liable for the delay in completing the Tenant Improvements and the increased costs, if any, resulting from such delay. If Tenant is unwilling or unable to amend the Working Drawings, in a manner acceptable to Landlord, then Tenant shall be deemed to have approved of the estimate for the Working Drawings as prepared, and shall pay in full the amount of any excess estimated costs together with any costs arising from delay as a result of Tenant's actions hereunder, in the manner hereinabove provided. (b) Final Costs. Within sixty (60) days after completion by Landlord of the Tenant Improvements, Landlord shall determine the actual final Tenant Improvements Costs and shall submit a written statement of such amount to Tenant. If any estimate previously paid by Tenant exceeds the amount due hereunder from Tenant for such work, such excess shall be refunded to Tenant. If any amount is still due from Tenant for such work, then Tenant shall pay such amount in full within ten (10) days of receipt of Landlord's statement. 7. CHANGE ORDERS Tenant may from time to time request and obtain change orders during the course of construction provided that: (i) each such request shall be reasonable, shall be in writing and signed by or on behalf of Tenant, and shall not result in any structural change in the Building, as reasonably determined by Landlord, (ii) all additional charges and costs, including without limitation architectural and engineering costs, construction and material costs, and processing costs of any governmental entity shall be the sole and exclusive obligation of Tenant, and (iii) any resulting delay in the completion of the Tenant Improvements shall be deemed a Tenant Delay and in no event shall extend the Commencement Date of the Lease. Upon Tenant's request for a change order, Landlord shall as soon as reasonably possible submit to Tenant a written estimate of the increased or decreased cost and anticipated delay, if any, attributable to such requested change. Within three (3) business days of the date such estimated cost adjustment and delay are delivered to Tenant, Tenant shall advise Landlord whether it wishes to proceed with the change order, and if Tenant elects to proceed with the change order, Tenant shall remit, concurrently with Tenant's notice to proceed, the amount of the increased cost, if any, attributable to such change order. Unless Tenant includes in its initial change order request that the work in process at the time such request is made be halted pending approval and execution of a change order, Landlord shall not be obligated to stop construction of the Tenant Improvements, whether or not the change order relates to the work then in process or about to be started. 8. TENANT DELAYS In no event shall the Commencement Date of the Lease be extended or delayed due or attributable to delays due to the fault of Tenant ("Tenant Delays"). Tenant Delays shall include, but are not limited to delays caused by or resulting from any one or more of the following: (a) Tenant's failure to timely review and reasonably approve the Working Drawings or to promptly cooperate with Landlord's Architect and furnish information to Landlord for the preparation of the Preliminary Plans and Working Drawings; (b) Tenant's request for or use of special materials, finishes or installations which are not included in the Working Drawings, provided that Landlord shall notify Tenant in writing that the particular material, finish, or installation is not readily available promptly upon Landlord's discovery of same; (c) Change orders requested by Tenant; (d) Interference by Tenant or by Tenant's Agents with Landlord's construction activities; (e) Tenant's failure to approve any other item or perform any other obligation in accordance with and by the dates specified herein or in the Construction Contract; (f) Tenant's requested changes in the Preliminary Plans, Working Drawings or any other plans and specification after the approval thereof by Tenant or submission thereof by Tenant to Landlord; (g) Tenant's failure to approve written estimates of costs in accordance with this Work Letter; and (h) Tenant's obtaining or failure to obtain any necessary governmental approvals or permits for Tenant's intended use of the Premise. If the Commencement Date of the Lease is delayed by any Tenant Delays, then the Commencement Date of the Lease and the payment of Rent shall be accelerated by the number of days of such delay. Landlord shall give Tenant written notice within a reasonable time of any circumstance that Landlord believes constitutes a Tenant Delay. 9. TRADE FIXTURES AND EQUIPMENT Tenant acknowledges and agrees that Tenant is solely responsible for obtaining, delivering and installing in the Premises all necessary and desired furniture, trade fixtures, equipment and other similar items and that Landlord shall have no responsibility whatsoever with regard thereto. Tenant further acknowledges and agrees that neither the Commencement Date of the lease nor the payment of Rent shall be delayed for any period of time whatsoever due to any delay in the furnishing of the Premises with such items. 10. FAILURE OF TENANT TO COMPLY Any failure of Tenant to comply with any of the provisions contained in this Work Letter within the times for compliance herein set forth shall be deemed a default under the Lease. In addition to the remedies provided to Landlord in this Work Letter upon the occurrence of such a default by Tenant, Landlord shall have all remedies available at law or equity to a Landlord against a defaulting Tenant pursuant to a written lease, including but not limited to those set forth in the Lease. EXHIBIT D COMMENCEMENT DATE MEMORANDUM 1. Parties This Exhibit is attached to and made a part of that certain Standard Form Lease dated July 11, 1997, by and between AmberJack, Ltd., an Arizona Corporation, as "Landlord," and United Natural Foods, Inc., a Delaware Corporation, as "Tenant," for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. 2. Recitals Landlord and Tenant entered into that certain Lease dated July 11, 1997, (the "Lease") for those certain premises (the "Premises") located in the building commonly known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011 (as defined in the City of Aurora). The "Term" (as defined in the Lease) commences on the date the Premises are tendered to Tenant ready for occupancy or such earlier date as Tenant takes possession or commences use of the Premises for any purpose other than construction (the "Lease Commencement Date"). The Lease Commencement Date has now been determined by Landlord and Tenant as well as the date of the expiration of the Term (the "Expiration Date"). The purpose is to set forth such dates and to provide for Tenant's acceptance of the Premises. 3. Dates In accordance with Article 1. 8 of the Lease, Landlord and Tenant agree that the Term of the Lease has commenced and shall expire on the following dates: Lease Commencement Date: ---------------------------- Expiration Date: ---------------------------- 4. Acceptance of Premises Except with respect to those items listed on the punch list, if any, timely submitted by Tenant to Landlord pursuant to Article 3.6 of the Lease, Tenant accepts the Premises in the condition existing as of the Lease Commencement Date and acknowledges and agrees that all work required to be performed by Landlord pursuant to the "Work Letter" attached to the Lease as Exhibit C has been completed by Landlord in full compliance with Exhibit C and to the satisfaction of Tenant. 5. Miscellaneous A. Effect: Except to the extent this Lease has been modified by this Exhibit D to the Lease, the remaining terms and conditions of the Lease shall remain unmodified and in full force and effect. B. Defined Terms: The defined terms used in this Exhibit D to the Lease, as indicated by the first letter of a word being capitalized, shall have the same meaning in this Exhibit D as such terms and provisions have in the Lease. 6. Execution This Exhibit has been executed and shall be deemed effective as of the date first written above.
LANDLORD: TENANT: AmberJack, Ltd., an Arizona United Natural Foods, Inc., a Delaware Corporation Corporation Birtcher Property Services, as Manager By: By: /s/ Norman Cloutier --------------------------------- --------------------------------- Name: Name: Norman Cloutier --------------------------------- --------------------------------- Title: Title: CEO --------------------------------- --------------------------------- Date: Date: 7/25/97 ---------------------------- -------------------------------- By: By: /s/ Steven Townsend ---------------------------- -------------------------------- Name: Name: Steven Townsend ---------------------------- -------------------------------- Title: Title: CFO ---------------------------- -------------------------------- Date: Date: 7/24/97 ---------------------------- --------------------------------
EXHIBIT E ADJUSTMENTS TO MONTHLY RENT 180.800 Square Feet This Exhibit is attached to and made a part of that certain Standard Form Lease dated July 11, 1997, by and between AmberJack, Ltd., an Arizona Corporation, as "Landlord," and United Natural Foods, Inc., a Delaware Corporation, as "Tenant," for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. The capitalized terms used and not otherwise defined in this Exhibit shall have the same definitions a set forth in the Lease. The provisions of this Exhibit shall supersede any inconsistent or conflicting provisions of the Lease. The Monthly Rent shall be adjusted, as of the commencement of the dates set forth below, in accordance with the following schedule:
Months During Term Monthly Rent Rent/Sq.Ft/Year ------------------ ------------ --------------- 1-60 $52,733.33 $3.50 61-120 $60,266.67 $4.00 121-180 $67,800.00 $4.50
Total Lease Consideration = $10,848,000.00 EXHIBIT F RULES AND REGULATIONS (Industrial) This Exhibit is attached to and made a part of that certain Standard Form Lease dated July 11, 1997, by and between AmberJack, Ltd., an Arizona Corporation, as "Landlord," and United Natural Foods, Inc., a Delaware Corporation, as "Tenant," for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. This Exhibit sets forth the rules and regulations governing Tenant's use of the Common Area and the Premises leased to Tenant pursuant to the terms, covenants and conditions of the Lease to which this Exhibit is attached and therein made part thereof. Unless otherwise defined, capitalized terms used herein shall have the same meanings as set forth in the lease. In the event of any conflict or inconsistency between this Exhibit and the Lease, the Lease shall control. 1. Tenant shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall, which may appear unsightly from outside the Premises. 2. The walls, walkways, sidewalks, entrance passages, courts and vestibules shall not be obstructed or used for any purpose other than ingress and egress of pedestrian travel to and from the Premises, and shall not be used for loitering or gathering, or to display, store or place any merchandise, equipment or devices, or for any other purpose. The walkways, entrance passageways, courts, vestibules and roof are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of the Landlord shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of Tenant's business unless such persons are engaged in illegal activities. No tenant or employee or invitee of any tenant shall be permitted upon the roof of the Building. 3. No awnings or other projection shall be attached to the outside walls of the Building. No security bars or gates, curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises without the prior written consent of Landlord. Neither the interior nor exterior of any windows shall be coated or otherwise sunscreened without the express written consent of Landlord. 4. Tenant shall not in any way deface any part of the Premises or the Building. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by Landlord in writing. The expense of repairing any damage resulting from a violation of this rule or removal of any floor covering shall be borne by Tenant. 5. The toilet rooms, urinals, wash bowls and other plumbing apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant. 6. Landlord shall direct electricians as to the manner and location of any future telephone wiring. No boring or cutting for wires will be allowed without the prior consent of Landlord. The locations of the telephone, call boxes and other office equipment affixed to the Premises shall be subject to the prior written approval of Landlord. 7. The Premises shall not be used for manufacturing, offices or the storage of merchandise except as the same may be incidental to the permitted use of the Premises. No exterior storage shall be allowed at any time without the prior written approval of Landlord. The Premises shall not be used for cooking or washing clothes without the prior written consent of Landlord, or for lodging or sleeping of for any immoral or illegal purposes. 8. Tenant shall not make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of this or neighboring buildings or premises or those having business with them whether by the use of any musical instrument, radio, phonograph, machinery, or otherwise. Tenant shall not use, keep or permit to be used, or kept, any foul or obnoxious gas or substance in the premises or permit or suffer the Premises to be used or occupied in any manner offensive or objectionable to Landlord or other occupants of this or neighboring buildings or premises by reason of any odors, fumes or gases. 9. Neither Tenant nor any of Tenant's Agents shall at any time bring or keep upon the Premises any toxic, hazardous, inflammable, combustible or explosive fluid, chemical or substance without the prior written consent of Landlord. 10. No animals shall be permitted at any time within the Premises. 11. Tenant shall not use the name of the Building or the Project in connections with or in promoting or advertising the Business of Tenant, except as Tenant's address, without the prior written consent of Landlord. Landlord shall have the right to prohibit any advertising by Tenant which, in Landlord's reasonable opinion, tends to impair the reputation of the Project or its desirability for its intended uses, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 12. Canvassing, soliciting, peddling, parading, picketing, demonstrating or otherwise engaging in any conduct that unreasonably impairs the value or use of the Premises or the Project are prohibited and Tenant shall cooperate to prevent the same. 13. All equipment of any electrical or mechanical nature shall be placed by Tenant on the Premises, in settings approved by Landlord in writing, in such a way as to best minimize, absorb and prevent any vibration, noise or annoyance. No equipment of any type shall be placed on the Premises which in Landlord's opinion exceeds the load limits of the floor or otherwise threatens the soundness of the structure or improvements of the Building. 14. Any truck traffic in or out of the Building shall not impair vehicular and pedestrian circulation in the Common Area. Landlord will not be responsible for loss or damage to any furniture, equipment, or other personal property of Tenant from any cause. 15. No air conditioning unit or other similar apparatus shall be installed or used by Tenant without the prior written consent of Landlord 16. No aerial antenna shall be erected on the roof or exterior walls of the premises, or on the grounds, without in each instance the prior written consent of Landlord. Any aerial or antenna so installed by or on behalf of Tenant without such written consent shall be subject to removal by Landlord at any time without prior notice at the expense of Tenant, and Tenant shall upon Landlord's demand pay a removal fee to Landlord of not less than $200.00. 17. The entire Premises, including vestibules, entrances, doors, fixtures, windows and plate glass, shall at all times be maintained in a safe, neat and clean condition by Tenant. All trash, refuse and waste materials shall be regularly removed from the Premises by Tenant and placed in the containers at the locations designated by Landlord for refuse collection. All cardboard boxes must be "broken down" prior to being placed in the trash containers. All styrofoam chips must be bagged or otherwise contained prior to placement in the trash containers, so as not to constitute a nuisance. Pallets may not be disposed of in the trash containers or enclosures. The burning of trash, refuse or waste material is prohibited. 18. Tenant shall use at Tenant's cost such pest extermination contractor as Landlord may direct and at such intervals as Landlord may require. 19. All keys for the Premises shall be provided to Tenant by Landlord and Tenant shall return to Landlord any of such keys so provided upon the termination of the Lease. Tenant shall not change locks or install other locks on doors of the Premises, without the prior written consent of Landlord. In the event of loss of any keys furnished by Landlord for Tenant, Tenant shall pay to Landlord the costs thereof. 20. No person shall enter or remain within the Project while intoxicated or under the influence of liquor or drugs. Landlord shall have the right to exclude or expel from the Project any person who, in the absolute discretion of Landlord, is under the influence of liquor or drugs. 21. Tenant agrees to comply with all such Rules and Regulations. Should Tenant not abide by these Rules and Regulations, Landlord or any "Operator," "Association" or "Declarant" under any Restrictions may serve a three (3) day notice to correct the deficiencies. If Tenant has not corrected the deficiencies by the end of the notice period, Tenant will be in default of the Lease, and Landlord and/or its designee shall have the right, without further notice, to cure the violation at Tenant's expense. 22. Landlord reserves the right to amend or supplement the foregoing Rules and Regulations and to adopt and promulgate additional rules and regulations applicable to the Premises so long as Landlord does not limit Tenant's use or quiet enjoyment of the Premises and Common Areas. Notice of such rules and regulations and amendments and supplements thereto, if any, shall be given to the Tenant. 23. Neither Landlord nor Landlord's Group or any other person or entity shall be responsible to Tenant or to any other person for the ignorance or violation of these Rules and Regulations by any other tenant or other person. Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition precedent, waivable only by Landlord, to Tenant's occupancy of the Premises. EXHIBIT G ENVIRONMENTAL QUESTIONNAIRE AND DISCLOSURE STATEMENT The purpose of this form is to obtain information regarding the use of hazardous substances on the Premises. Prospective tenants should answer the questions in light of their proposed operation on the premises. Existing tenants should answer the questions as they relate to on-going operations on the premises and should update any information previously submitted. If additional space is needed to answer the questions, you may attach separate sheets of paper to this form. 1. GENERAL INFORMATION Name of Responding Company: Rainbow Natural Foods, Inc. --------- Check the Applicable Status: Prospective Tenant [xx] Existing Tenant [_] Mailing Address: 1596 S. East 32 Avenue, Suite A Aurora, Colorado 80011 ----------------------------------------- ----------------------------------------- Contact Person: ----------------------------------------- Title: General Manager - --------------------------------------------------------- Telephone Number: (303 ________ ) 373-1144 - --------------------------------------------------------- Address of Leased Premises: 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011 Length of Lease Term: Fifteen (15) Years and Zero (0) Months Describe the proposed operation to take place on the property, including principal products manufactured or services to be conducted. Existing Tenants should describe any proposed changes to on-going operations. ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- 2. STORAGE OF HAZARDOUS MATERIALS 2.1 Will any hazardous materials be used or stored on-site? Wastes: Yes [_] No x Chemical Products: Yes [_] No x 2.2 Attach the list of any hazardous materials to be used or stored, the quantities that will be on-site at any given time, and the location and method of storage (e.g. 55 gallon drums on concrete pad). 3. STORAGE TANKS & SUMPS 3.1 Is any above or below ground storage of gasoline, diesel, or other hazardous substances in tanks or sumps proposed or currently conducted on the premises? Yes [_] No x If yes, describe the materials to be stored, and the type, size and construction of the sump or tank. Attach copies of any permits obtained for the storage of such substances. ------------------------------------------------------------- ------------------------------------------------------------- 3.2 Have any of the tanks or sumps been inspected or tested for leakage? Yes [_] No [_] If so, attach the results. 3.3 Have any spills or leaks occurred from such tanks or sumps? Yes [_] No [_] If so, describe: ------------------------------------------------------------- ------------------------------------------------------------- 3.4 Were any regulatory agencies notified of the spill or leak? Yes [_] No [_] If so, attach copies of any spill reports filed, any clearance letters or other correspondence from regulatory agencies relating to the spill or leak. 3.5 Have any underground storage tanks or sumps been taken out of service or removed? Yes [_] No [_] If yes, attach copies of any closure permits and clearance obtained from regulatory agencies relating to closure and removal of such tanks. 4. SPILLS 4.1 During the past year, have any spills occurred on the premises? Yes [_] No [X] If so, please describe the spill and attach the results of any testing conducted to determine the extent of such spills? ------------------------------------------------------------- ------------------------------------------------------------- 4.2 Were any agencies notified in connection with such spills? Yes [_] No [_] If so, attach copies of any spill reports or other correspondence with regulatory agencies. 4.3 Were any clean-up actions undertaken in connection the spills? Yes [_] No [_] If so, briefly describe the actions taken. Attach copies of any clearance letters obtained from any regulatory agencies involved and the results of any final soil or groundwater sampling done upon completion of the clean-up work. ------------------------------------------------------------- ------------------------------------------------------------- WASTE MANAGEMENT 5.1 Has your company been issued an EPA Hazardous Waste Generator I.D. Number? Yes [_] No x 5.2 Has your company filed a biennial report as a hazardous waste generator? Yes [_] No x If so, attach a copy of the most recent report filed. 5.3 Attach the list of the hazardous waste, if any, generated or to be generated at the premises, its hazard class and the quantity generated on a monthly basis. 5.4 Describe the method(s) of disposal for each waste. Indicate where and how often disposal will take place. ------------------------------------------------------------- ------------------------------------------------------------- 5.5 Indicate the name of the person(s) responsible for maintaining copies of hazardous waste manifests completed for off-site shipments of hazardous waste. ------------------------------------------------------------- 5.6 Is any treatment or processing of hazardous wastes currently conducted or proposed to be conducted at the premises: Yes [_] No [_] If yes, please describe any existing or proposed treatment methods. ------------------------------------------------------------- ------------------------------------------------------------- 5.7 Attach copies of any hazardous waste permits or licenses issued to your company with respect to its operations on the premises. 6. WASTEWATER TREATMENT/DISCHARGE 6.1 Do you discharge wastewater to: _____ storm drain? _____ sewer? _____ surface water? _____ no industrial discharge 6.2 Is your wastewater treated before discharge? Yes [_] No [_] If yes, describe the type of treatment conducted. ------------------------------------------------------------- 6.3 Attach copies of any wastewater discharge permits issued to your company with respect to its operations on the premises. 7. AIR DISCHARGES 7.1 Do you have any air filtration systems or stacks that discharge into the air? Yes [_] No x 7.2 Do you operate any of the following types of equipment, or any other equipment requiring an air emissions permit? _____ Spray booth _____ Dip tank _____ Drying oven _____ Incinerator _____ Other (Please Describe) _____ No Equipment Requiring Air Permits 7.3 Are air emissions from your operations monitored? Yes [_] No [_] If so, indicate the frequency of monitoring and a description of the monitoring results. ------------------------------------------------------------- 7.4 Attach copies of any air emissions permits pertaining to your operations on the premises. 8. HAZARDOUS MATERIALS DISCLOSURES 8.1 Does your company handle hazardous materials in a quantity equal to or exceeding an aggregate of 500 pounds, 55 gallon, or 200 cubic feet? Yes [_] No x 8.2 Has your company prepared a hazardous materials management plan ("business plan") pursuant to local County/City Fire Department requirements? Yes [_] No [_] If so, attach a copy of the business plan. 8.3 Describe the procedures followed to comply with OSHA Hazard Communication Standard requirements. ------------------------------------------------------------- ------------------------------------------------------------- 9. ENFORCEMENT ACTIONS, COMPLAINTS 9.1 Has your company ever been subject to any agency enforcement actions, administrative orders, or consent decrees? Yes [_] No x If so, describe the actions and any continuing compliance obligations imposed as a result of these actions? 9.2 Has your company ever received requests for information, notice or demand letters, or any other inquiries regarding its operations? Yes [_] No x 9.3 Have there ever been, or are there now pending, any lawsuits against the company regarding any environmental or health and safety concerns? Yes [_] No x 9.4 Has an environmental audit ever been conducted at your company's current facility? Yes [_] No [_] If so, discuss the results of the audit. ------------------------------------------------------------- ------------------------------------------------------------- 9.5 Have there been any problems or complaints from neighbors at the company's current facility? Yes [_] No [_] TENANT: United Natural Foods, Inc., a Delaware Corporation By By: /s/ Norman Cloutier ---------------------------------- ------------------------------- Name: Name: Norman Cloutier ------------------------------ --------------------------- Title: Title: CEO ------------------------------ --------------------------- Date: Date 7/25/97 ------------------------------ --------------------------- EXHIBIT H SIGN CRITERIA This Exhibit is attached to and made a part of that certain Standard Form Lease dated July 11, 1997, by and between AmberJack, Ltd., an Arizona Corporation, as "Landlord," and United Natural Foods, Inc., a Delaware Corporation, as "Tenant," for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. LEASE RIDER NO. 1 OPTION TO EXTEND TERM (Fair Market Value Adjustment) This Exhibit is attached to and made a part of that certain Standard Form Lease dated July 11, 1997, by and between AmberJack, Ltd., an Arizona Corporation, as "Landlord," and United Natural Foods, Inc., a Delaware Corporation, as "Tenant," for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. The capitalized terms used and not otherwise defined herein shall have the same definitions as set forth in the Lease. The provisions of this Lease Rider shall supersede any inconsistent or conflicting provisions of the Lease. 1. Option to Extend Term (a) Provided that Tenant is not in monetary default or material non- monetary default under any provision of this Lease beyond the applicable cure period at the time of exercise of the extension right granted herein, Tenant shall have one (1) option to extend the Term of this Lease for sixty (60) months ("Extension Option"). Tenant shall exercise its Extension Option by delivering to Landlord, not less than one hundred eighty (180) days prior to the expiration date of the Term, Tenant's written notice of its election to extend (the "Election Notice"). The rent and other economic terms payable under the Lease during the extension of the Term shall be at the "fair market rental rate" for comparable space within the marketplace. As used herein, the "fair market rental rate" may include (as determined by the appraisers appointed by Landlord and Tenant) the annual amount per rentable square foot, projected during the relevant period, that a willing, comparable, tenant would pay, and a willing, comparable tenant would pay, and a willing, landlord of a comparable industrial building located in the Aurora area would accept, at arm's length (what Landlord is accepting in current transactions for the Building may be considered), for space of comparable size, quality and floor height as the leased area at issue taking into account the age, quality and layout of the existing improvements in the leased area at issue and taking into account items that professional real estate brokers customarily consider, including, but not limited to, rental rates, space availability, tenant size, tenant improvement allowances, operating expenses and allowance, parking charges, free rent, reduced rent, free parking, reduced parking, and any other lease concessions, if any, then being charged or granted by Landlord or the lessors of such similar industrial buildings. (b) As to the extension, if the parties are not able to agree on the fair market rental rate for the Premises within one hundred twenty (120) days prior to the expiration date of the Term (the "Outside Agreement Date"), Tenant shall have the right to elect, by written notice to Landlord, to either (i) revoke its exercise of the Extension Option, or (ii) cause the fair market rental rate for the premises to be determined by appraisal as follows: 2. Landlord and Tenant will each appoint one (1) independent appraiser who by profession must be a real estate broker who has been active over the five (5) year period ending on the date of such appointment in the leasing of commercial industrial properties located in the Aurora marketplace. The determination of the appraisers will be limited solely to the issue of whether Landlord's or Tenant's submitted Fair Market Rental Rate for the leased area at issue is the closest to the actual Fair Market Rental Rate for such area as determined by the appraisers, taking into account the requirements specified above. Each such appraiser will be appointed within fifteen (15) days after the Outside Agreement Date. 3. The two (2) appraisers so appointed will fifteen (15) days of the date of the appointment of the last appointed appraiser agree upon and appoint a third appraiser who shall be qualified under the same criteria set forth hereinabove for qualification of the initial two (2) appraisers. 4. The three (3) appraisers will within thirty (30) days of the appointment of the third appraiser reach a decision as to whether the parties will use Landlord's or Tenant's submitted fair market rental rate, and will notify Landlord and Tenant thereof. 5. The decision of the majority of the three (3) appraisers will be binding upon Landlord and Tenant. If either landlord or Tenant fails to appoint an appraiser within the time period specified in Subparagraph (i) hereinabove, the appraiser appointed by one of them will, within thirty (30) days following the date on which the party failing to appoint an appraiser could have last appointed such appraiser, reach a decision based upon the procedures set forth above (i.e., by selecting either Landlord's or Tenant's submitted Fair Market Rental Rate) and notify Landlord and Tenant thereof, and such appraiser's decision will be binding upon Landlord and Tenant. 6. If the two (2) appraisers fail to agree upon and timely appoint a third appraiser, both appraisers will be dismissed and the matter to be decided will be forthwith submitted to arbitration under the provisions of the American Arbitration Association based upon the procedures set forth above (i.e., by selecting either Landlord's or Tenant's submitted fair market rental rate). The cost of appraisal (and, if necessary, arbitration) will be shared. LEASE RIDER NO. 2 RIGHT OF FIRST OPPORTUNITY TO LEASE ADDITIONAL VACANT SPACE This Lease Riders is attached to and made a part of that certain Standard Form Lease dated July 11, 1997, by and between AmberJack, Ltd., and Arizona Corporation, as "Landlord", and United Natural Foods, Inc., a Delaware Corporation, as "Tenant", for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. The capitalized terms used and not otherwise defined herein shall have the same definitions as set forth in the Lease. The provisions of this Lease Rider shall supersede any inconsistent or conflicting provisions of the Lease. Provided no Event of Default has occurred and is continuing, Tenant shall have an ongoing right of first opportunity ("Right of First Opportunity") during the Term of the Lease to Lease any additional unleased space located within the Building which becomes available for leasing by other than the existing tenant(s) ("Additional Vacant Space"), upon the terms and conditions as follows: (i) Should Tenant exercise its Right of First Opportunity no later than twelve (12) months from the Commencement Date of the Lease, Tenant shall be able to lease the Additional Vacant Space upon the same terms and conditions of the Lease including Monthly Rent, Term and Tenant Improvement Allowance ($2.44 per square foot) or (ii) should Tenant exercise said Right of First Opportunity anytime after the expiration of month (12) of the Term, Tenant shall have the right to Lease the Additional Vacant Space at a Monthly Rent of ninety-five percent (95%) of "fair market rental rate" which shall be offered in an "As Is" condition; provided, however, the term for the Additional Vacant Space ("Expansion Term") shall be no less than three (3) years. As used herein, the "fair market rental rate" may include the annual amount per rentable square foot, projected during the relevant period, that a willing, comparable tenant would pay, and a willing Landlord of a comparable industrial building located in the Aurora area would accept, at arms length (what Landlord is accepting in current transactions for the Building may be considered), for space of comparable size, quality and floor height as the leased area at issue taking into account the age, quality and layout of the existing improvements in the leased area at issue and taking into account items that professional real estate brokers customarily consider, including, but not limited to, rental rates, space availability, tenant size, tenant improvement allowances, and operating expenses , if any, then being charged by Landlord or the Lessors of such similar industrial buildings. If at any time during the term of the Lease any Additional Vacant Space becomes available, Landlord shall, prior to making the Additional Vacant Space available to other third parties, first deliver written notice of such availability to Tenant incorporating the said terms an conditions ("Landlord's Notice"). For a period of ten (10) days following Tenant's receipt of Landlord's Notice, Tenant shall have the first opportunity to Lease the Additional Vacant Space upon the terms and conditions set forth in Landlord's Notice by delivering to Landlord within said ten (10) day period written notice ("Election Notice") of its election to exercise its Right of First Opportunity. Notwithstanding anything contained herein, if Tenant fails or elects not to exercise its Right of First Opportunity granted pursuant to Landlord's Notice within said ten (10) day period, the Right of First Opportunity shall automatically terminate without further action of the parties, and Landlord shall be free to Lease the Additional Vacant Space to any third party upon such terms and conditions as Landlord desires. If Tenant timely and properly exercises its Right of First Opportunity as hereinabove provided, Tenant shall, within five (5) days after receipt from Landlord, enter into an amendment to the Lease (the "Amendment") with Landlord which shall incorporate the terms set forth in Landlord's Notice with respect to the Additional Vacant Space. If Tenant fails to execute and deliver such new Amendment within said five (5) day period, the Right for First Opportunity shall automatically terminate without further action of the parties, and Landlord shall thereafter be free to Lease the Additional Vacant Space to any third party upon such terms and conditions as Landlord desires. Tenant's Right of First Opportunity shall be subject to any rights which may have been granted by Landlord prior to the execution of the Lease to other tenants of the Project, including without limitation, rights of first opportunity, options and/or rights of first offer or refusal with respect to the Additional Vacant Space. Tenant's Right of First Opportunity is personal to United Natural Foods and may not be exercised by or assigned to any person or entity other than United Natural Foods, and shall terminate and be of no further force or effect upon any assignment of the Lease or subletting of the Premises. Lease Rider No. 3 Assignment of Warranties This Lease Rider is attached to and made a part of that certain Standard Form Lease dated July 11, 1997, by and between AmberJack, Ltd., an Arizona Corporation, ("Landlord"), and United Natural Food, Inc., a Delaware Corporation, "Tenant"), for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. The capitalized terms used and not otherwise defined herein shall have the same definitions as set forth in the Lease. The provisions of this Lease Rider shall supersede any inconsistent or conflicting provisions of the Lease. Landlord hereby assigns, conveys, transfers and sets over unto Tenant, on a non- exclusive basis for as long as the Lease shall be in effect, and without warranty of any kind from Landlord or recourse against Landlord, Landlord's interest in and to any guaranties, warranties and agreements from suppliers, contractors and subcontractors for which they have an obligation to repair regarding their performance quality of workmanship and quality of materials supplied in connection with any and all improvements to the Premises, including without limitation the Tenant Improvements. This assignment shall expire, revert back to Landlord and be of no further force or effect upon the expiration or termination of the Lease for any cause whatsoever. EXHIBIT I PARKING This Exhibit is attached to and made a part of that certain Standard Form Lease dated July 11, 1997, by and between AmberJack, Ltd., an Arizona Corporation, as "Landlord," and United Natural Foods, Inc., a Delaware Corporation, as "Tenant," for the Premises known as 15965 East 32nd Avenue, Suite A, Aurora, Colorado 80011. EX-11 4 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED TWELVE MONTHS ENDED JULY 31, JULY 31, ------- ------- 1996 1997 1996 1997 ---- ---- ---- ---- Primary: Weighted average shares outstanding 8,702,898 12,378,425 8,710,549 11,388,833 Net effect of dilutive stock options and stock warrants based upon the treasury stock method using the initial public offering price for 1996 periods and average stock price for 1997 periods 1,435,274 370,308 1,435,274 308,754 ----------- ----------- ----------- ----------- Total 10,138,172 12,748,733 10,145,823 11,697,587 =========== =========== =========== =========== Net Income $ 1,364,212 $ 2,802,775 $ 3,394,768 $ 8,322,303 =========== =========== =========== =========== Per share amount $ 0.13 $ 0.22 $ 0.33 $ 0.71 =========== =========== =========== =========== Fully diluted: Weighted average shares outstanding 8,702,898 12,378,425 8,710,549 11,388,833 Net effect of dilutive stock options and stock warrants based upon the treasury stock method using the initial public offering price for 1996 periods and period end stock price if higher than average stock price for 1997 periods 1,435,274 432,400 1,435,274 432,400 ----------- ----------- ----------- ----------- Total 10,138,172 12,810,825 10,145,823 11,821,233 =========== =========== =========== =========== Net Income $ 1,364,212 $ 2,802,775 $ 3,394,768 $ 8,322,303 =========== =========== =========== =========== Per share amount $ 0.13 $ 0.22 $ 0.33 $ 0.71 =========== =========== =========== ===========
EX-21 5 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT STATE OF NAME INCORPORATION - ---- ------------- Cheese & Stuff, Inc. Connecticut Food For Thought Natural Foods Market, Inc. Connecticut The Health Hut, Inc. New York Mountain People's Warehouse Incorporated California Natural Retail Group, Inc. Delaware NATUREWORKS, Inc. Florida Nutrasource, Inc. Washington Rainbow Natural Foods, Inc. Colorado GEM Acquistion Corporation Delaware EX-23 6 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors United Natural Foods, Inc. We consent to incorporation by reference in the Registration Statements (Nos. 333-19945, 333-19947, and 333-19949) on Form S-8 of United Natural Foods, Inc. of our reports dated September 5, 1997, 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, and the related schedule, which reports appear in the July 31, 1997 annual report on Form 10-K of United Natural Foods, Inc. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Providence, Rhode Island October 27, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME FOR THE TWELVE MONTHS ENDED JULY 31, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS JUL-31-1997 JUL-31-1997 16,477 0 32,169,184 2,149,628 45,030,476 80,460,821 32,251,144 11,871,817 110,985,354 31,578,140 16,553,097 0 0 123,988 62,052,569 110,985,354 421,697,941 421,697,941 334,583,617 334,583,617 0 2,112,015 3,081,440 15,671,302 6,416,070 8,322,303 0 932,929 0 8,322,303 0.71 0.71
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