10-K 1 d01-34883.txt 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, 2001 or |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________. Commission File Number: 000-1020859 UNITED NATURAL FOODS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 05-0376157 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 260 Lake Road Dayville, CT 06241 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (860) 779-2800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock,$.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of the common stock held by non-affiliates of the registrant was $332,249,104, based upon the closing price of the registrant's common stock on the Nasdaq National Market on October 1, 2001. The number of shares of the registrant's common stock, $0.01 par value, outstanding as of October 1, 2001 was 18,665,680. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on December 3, 2001 are incorporated herein by reference into Part III of this report. UNITED NATURAL FOODS, INC. FORM 10-K TABLE OF CONTENTS Section Page Part I Item 1. Business 3 Item 2. Properties 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 Part II Item 5. Market for the Registrant's Common Equity and Related 11 Stockholder Matters Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial 13 Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosure About Market 22 Risk Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements with Accountants on 39 Accounting and Financial Disclosure Part III Item 10. Directors and Executive Officers of the Registrant 39 Item 11. Executive Compensation 39 Item 12. Security Ownership of Certain Beneficial Owners and 39 Management Item 13. Certain Relationships and Related Transactions 39 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports 39 on Form 8-K Signatures 40 2 PART I. ITEM 1. BUSINESS We are the leading national distributor of natural and organic foods and related products in the United States. We are the primary supplier to a majority of our customers, offering more than 30,000 high-quality natural products consisting of groceries and general merchandise, nutritional supplements, bulk and foodservice products, personal care items, perishables and frozen foods. We serve more than 7,000 customers in 49 states, including super natural chains, independent natural products retailers and conventional supermarkets, and are the primary distributor to the two largest super natural chains, Whole Foods Markets, Inc. ("Whole Foods") and Wild Oats Markets, Inc. ("Wild Oats"). In recent years, our sales to existing and new customers have increased through the acquisition of or merger with natural products distributors, the expansion of existing distribution centers and the continued growth of the natural products industry in general. Through these efforts, we believe that we have been able to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share. Through our subsidiary, the Natural Retail Group, we also own and operate 12 retail natural products stores located in the eastern United States. We believe our retail business serves as a natural complement to our distribution business as it enables us to develop new marketing programs and improve customer service. Since 1985, we have completed 11 acquisitions of distributors and suppliers, including Stow Mills, Inc. ("Stow Mills"), Hershey Import Co., Inc. ("Hershey") and Albert's Organics, Inc. ("Albert's"), and 11 acquisitions of retail stores, which have significantly expanded our distribution network, product offering and customer base. On October 31, 1997, we merged with Stow Mills, a regional natural products distributor serving the Northeast and Midwest regions of the United States. On February 11, 1998, we acquired the assets of Hershey, located in Rahway, New Jersey, a business specializing in the international trading, roasting and packaging of nuts, seeds, dried fruits and snack items. On September 30, 1998, we acquired substantially all of the outstanding stock of Albert's, a wholesale distributor of organic produce. Our distribution operations are divided into three principal units: United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods, Inc. and Stow Mills, Inc.), Mountain People's Warehouse, Inc. and Rainbow Natural Foods, Inc. in the Western Region (previously Rainbow Natural Foods solely comprised the Central Region), and Albert's Organics in various markets in the United States. NATURAL PRODUCTS INDUSTRY Although most natural products are food products, including organic foods, the natural products industry encompasses a number of other categories, including nutritional and herbal supplements, toiletries and personal care items, naturally based cosmetics, natural/homeopathic medicines and cleaning agents. According to the June 2001 Natural Foods Merchandiser, sales revenues for all types of natural products exceeded $32 billion in 2000. The 7% increase in the industry sales was driven by substantial growth in the sales of organic food, especially for the following organic food categories: organic non-dairy beverages, organic milk, organic frozen convenience foods, organic produce, organic yogurt and kefir, organic cheese and cheese alternatives. Other product categories driving industry growth include: selected fresh and frozen foods, most notably meat, poultry, and seafood, as well as non-dairy yogurt; selected non-perishable foods, such as puffed and other snacks, pasta dishes and other mixes, ready to eat soups, and organic juices; selected personal care categories, including essential oils, beauty products, body wash and bath gels, and feminine products; and selected nutritional supplements, most notably food-supplements, homeopathic medicines, women's and children's vitamin/mineral formulas, probiotics, therapeutic ointments, lozenges and sprays, and ready to drink meal replacements. The growth in these categories appears to be due to the consumer's interest in natural products that address their health-related concerns. The Natural Foods Merchandiser noted in particular the consumer's desire to avoid bovine growth hormone, drink bottled water, and to otherwise postpone the onset of old age as examples of these health-related concerns. These trends are expected to continue as the population ages. COMPETITIVE ADVANTAGES We believe we benefit from a number of significant competitive advantages including: MARKET LEADER WITH A NATIONWIDE PRESENCE. We believe we are one of the few distributors capable of serving local and regional customers as well as the rapidly growing super natural chains. We believe we have significant advantages over smaller, regional natural products distributors as a result of our ability to: (i) expand marketing and 3 customer service programs between regions; (ii) expand national purchasing opportunities; (iii) consolidate systems applications between physical locations and regions; (iv) integrate administrative and accounting functions; and (v) reduce geographic overlap between regions. LOW-COST OPERATOR. In addition to our volume purchasing opportunities, a critical component of our position as a low-cost provider is our management of warehouse and distribution costs. Our continuing growth has created the need for expansion of existing facilities to achieve maximum operating efficiencies and to ensure adequate space for future needs. We have made considerable capital expenditures and incurred considerable expenses in connection with the expansion of our facilities, including the expansion of our Auburn, California, New Oxford, Pennsylvania and Albert's Los Angeles, California locations. We recently signed a lease to move our Atlanta, Georgia distribution center to a 300,000 square foot facility, an increase of approximately 100,000 square feet. While we anticipate incremental short-term costs between $0.5 million and $1.0 million during the second and third quarters of fiscal 2002 as we relocate operations into this facility, we expect the efficiencies created by consolidating our two existing facilities into one will lower our expenses relative to sales over the long-term. We are expanding our Western Region operations into the Los Angeles area and recently signed an agreement to lease a 200,000 square foot distribution center with the option to lease an additional 83,000 square feet for expansion. The Los Angeles facility will enable us to provide enhanced service levels to our southwestern customers and to further penetrate that market. While we anticipate short-term incremental costs of approximately $1.0 million, we expect to realize transportation savings and efficiencies once we are operational early in calendar year 2002. Upon the completion of the Los Angeles expansion the increased capacity of our distribution centers will be approximately 55% greater than it was five years ago. While operating margins may be affected in periods in which these expenses are incurred, over the long term, we expect to benefit from the increased absorption of our expenses over a larger sales base. EXPANDING BASE OF PREMIER CUSTOMER RELATIONSHIPS. We serve more than 7,000 customers in 49 states. We have developed long-standing customer relationships, which we believe are among the strongest in the industry. We have also been the primary supplier to each of the industry's two largest super natural chains, Whole Foods Market, Inc. and Wild Oats, Inc., for more than ten years. Whole Foods Market, Inc., has recently agreed to extend our current distribution arrangement through August 31, 2004. EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. Our management team has extensive experience in the natural products industry and has been successful in identifying, consummating and integrating multiple acquisitions. Since 1985, we have successfully completed 11 acquisitions of distributors and suppliers, including Stow Mills, Hershey and Albert's, and 11 acquisitions of retail stores. In addition, our executive officers and directors and their affiliates, and the Employee Stock Ownership Trust ("ESOT"), beneficially own in the aggregate approximately 15% of the Company's Common Stock. Accordingly, senior management and employees have significant incentive to continue to generate strong growth in operating results in the future. GROWTH STRATEGY Our growth strategy is to maintain and enhance our position as a leading national distributor to the natural products industry. Key elements of our strategy include: INCREASE MARKET SHARE OF THE GROWING NATURAL PRODUCTS INDUSTRY. Our strategy is to continue to increase our leading market share of the growing natural products industry by expanding our customer base, increasing our share of existing customers' business and continuing to expand and further penetrate new distribution territories. EXPAND CUSTOMER BASE. We have expanded the number of customers served to more than 7,000 as of July 31, 2001. We plan to continue to expand our coverage of the highly fragmented natural products industry by cultivating new customer relationships within the industry and by developing other channels of distribution such as traditional supermarkets, mass market outlets, institutional foodservice providers, hotels and gourmet stores. INCREASE MARKET SHARE OF EXISTING CUSTOMERS' BUSINESS. We seek to become the primary supplier for a majority of our customers by offering the broadest product offering in the industry at the most competitive prices. Since 1993, we have expanded our product offering from approximately 14,000 to more than 30,000 SKUs as of July 31, 2001. Additionally, we have launched a number of private label programs that present to us and our customers higher margins than many of our existing product offerings. As a result, we believe we have become the primary distributor to the majority of our natural products customer base. 4 CONTINUE TO EXPAND AND PENETRATE INTO NEW CHANNELS OF DISTRIBUTION. We have made considerable capital expenditures and incurred considerable expenses in connection with the expansion of our facilities, including the expansion of our Auburn, California, New Oxford, Pennsylvania and Albert's Los Angeles locations. We recently signed a lease to move our Atlanta, Georgia distribution center to a 300,000 square foot facility, an increase of approximately 100,000 square feet. We are expanding our Western Region operations into the Los Angeles area and recently signed an agreement to lease a 200,000 square foot distribution center with the option to lease an additional 83,000 square feet for expansion. The Los Angeles facility will enable us to provide enhanced service levels to our southwestern customers and to further penetrate that market. Upon the completion of the Los Angeles expansion early in calendar year 2002, the increased capacity of our distribution centers will be approximately 55% greater than it was five years ago. We will continue to selectively evaluate opportunities to acquire (i) distributors to fulfill existing markets and expand into new markets and (ii) suppliers to expand margins through vertical integration and brand differentiation. We currently have no agreements or understandings with regard to any material acquisitions. CONTINUE TO IMPROVE EFFICIENCY OF NATIONWIDE DISTRIBUTION NETWORK. We continually seek to improve our operating results by integrating our nationwide network utilizing the best practices within the industry and within each of the regions, which have formed our foundation. This focus on achieving improved economies of scale in purchasing, warehousing, transportation and general and administrative functions has improved our operating margins, which increased from 2.5% in fiscal 1994 to 3.4% for the quarter ended July 31, 2001 (excluding special charges). CONTINUE TO PROVIDE THE LEADING DISTRIBUTION SOLUTION. Our strategy is to continue to provide the leading distribution solution to the natural products industry through our national presence, regional responsiveness, high customer service focus and breadth of product offering. We offer our customers a selection of inventory management, merchandising, marketing, promotional and event management services to increase sales and enhance customer satisfaction. The marketing services, many of which are supplier-sponsored, include monthly and thematic flyer programs, in-store signage and assistance in product display, are offered to assist our customers in increasing their sales. PRODUCTS Our extensive selection of high-quality natural products enables us to provide a primary source of supply to a diverse base of customers whose product needs vary significantly. We carry more than 30,000 high-quality natural products, consisting of national brand, regional brand, private label and master distribution products in six product categories consisting of grocery and general merchandise, nutritional supplements, bulk and foodservice products, personal care items, fresh produce and perishables, and frozen foods. Our private label products address certain preferences of customers, which are not otherwise being met by other suppliers. We evaluate approximately 10,000 potential new products each year based on both existing and anticipated trends in consumer preferences and buying patterns. Our buyers regularly attend regional and national natural, organic, specialty, ethnic and gourmet products shows to review the latest products which are likely to be of interest to retailers and consumers. We also actively solicit suggestions for new products from our customers. We make the majority of our new product decisions at the regional level. We believe that our decentralized purchasing practices allow our regional buyers to react quickly to changing consumer preferences and to evaluate new products and new product categories regionally. Additionally, many of the new products that we offer are marketed on a regional basis or in our own retail stores prior to being offered nationally, which enables us to evaluate local consumer reaction to the products without incurring significant inventory risk. Furthermore, by exchanging regional product sales information between our regions, we are able to make more informed and timely new product decisions in each region. SUPPLIERS We purchase our products from approximately 1,800 suppliers. The majority of our suppliers are based in the United States, but we source products from suppliers throughout Europe, Asia, South America, Africa and Australia. We believe that the reason natural products suppliers seek distribution of their products through us is because we provide access to a large and growing customer base, distribute the majority of the suppliers' products and support their marketing programs. Substantially all product categories that we distribute are available from a number of suppliers and therefore we are not dependent on any single source of supply for any product category. Our largest supplier, Hain Celestial Group, Inc., accounted for approximately 8.9% of total purchases in fiscal 2001. 5 We are well positioned to respond to regional and local customer preferences for natural products by decentralizing the majority of our purchasing decisions for all products except bulk commodities. We believe that regional buyers are best suited to identify and to respond to local demands and preferences. Although each of our regions is responsible for placing its own orders and can select the products that it believes will most appeal to its customers, each region is required to participate in company-wide purchasing programs that enable us to take advantage of our consolidated purchasing power. For example, we have positioned ourselves as the largest purchaser of organically grown bulk products in the natural products industry by centralizing our purchase of nuts, seeds, grains, flours and dried foods. In addition, we have implemented a number of national consumer flyer programs, which have resulted in incremental sales growth for our customers and ourselves. Our purchasing staff cooperates closely with suppliers to provide new and existing products. The suppliers assist in training our customer service representatives in marketing new products, identifying industry trends and coordinating advertising and other promotions. We maintain a comprehensive quality assurance program. All of the products we sell, which are represented as "organic", are required to be certified as such by an independent third-party agency. We maintain current certification affidavits on all organic commodities and produce in order to verify the authenticity of the product. All potential suppliers of organic products are required to provide such third-party certification to us before they are approved as a supplier. CUSTOMERS We market our products to more than 7,000 customers located in 49 states. We maintain long-standing customer relationships with independent natural products retailers, including super natural chains, and have continued to emphasize our relationships with new customers, such as conventional supermarkets, mass market outlets and gourmet stores, all of which are continually increasing their natural product offerings. Among our wholesale customers are leading super natural chains doing business as Whole Foods Market, Inc. (including Bread and Circus, Fresh Fields, and Bread of Life), Wild Oats, Inc. (including Henry's), Nature's Fresh! Northwest, Wild Harvest, Rainbow, Basha's, and conventional supermarket chains such as Wegman's, Stop and Shop, Shaws/Star Market, Quality Food Centers (QFC), Hannaford, Pathmark, Bilos, Lowe's and Publix. We believe that we are the primary supplier to the majority of our customers. Whole Foods accounted for approximately 17% and 16% of the Company's net sales in fiscal 2001 and 2000, respectively. Wild Oats accounted for approximately 14% and 13% of our net sales in fiscal 2001 and 2000, respectively. No other customer accounted for more than 10% of our net sales in fiscal 2001. FILL RATES Our average fill rates for fiscal 2001 were approximately 95%. We believe that our high fill rates are attributable to our experienced purchasing department and sophisticated warehousing, inventory control and distribution systems. We offer next-day delivery service to a majority of our active customers and offer multiple deliveries each week to our largest customers. We believe that customer loyalty is dependent upon outstanding customer service to ensure accurate fulfillment of orders, timely product delivery, low prices and a high level of product marketing support. MARKETING We have developed a variety of supplier-sponsored marketing services, which cater to a broad range of retail formats. These programs are designed to educate consumers, profile suppliers and increase sales for retailers, the majority of which do not have the resources necessary to conduct such marketing programs independently. We offer multiple monthly flyer programs featuring the logo and address of the participating retailer imprinted on a flyer advertising approximately 200 sale items, which are sold by the retailer to its customers. The color flyers are designed by our in-house marketing department utilizing modern digital photography and contain detailed product descriptions and pricing information. Additionally, each flyer generally includes detailed information on selected suppliers, recipes, product features and a comparison of the characteristics of a natural product with a similar mass-market product. The monthly flyer programs are structured to pass through to the retailer the benefit of company negotiated discounts and advertising allowances. The program also provides retailers with posters, window banners and shelf tags to coincide with each month's promotions. In addition, in order to maximize our national leverage and to utilize our rich internal marketing resources to best effect, we have increased the number of national flyer programs we offer, with favorable results for our suppliers, our customers and ourselves. 6 In addition to our monthly flyer programs, we offer thematic custom and seasonal consumer flyers which are used to promote items associated with a particular cause or season, such as environmentally sensitive products for Earth Day or foods and gifts particularly popular during the holiday season. We also (i) offer in-store signage and promotional materials, including shopping bags and end-cap displays, (ii) provide assistance with planning and setting up product displays and (iii) advise on pricing decisions to enable our customers to respond to local competition. DISTRIBUTION We have carefully chosen the sites for our distribution centers to provide direct access to our regional markets. This proximity allows us to reduce our transportation costs compared to competitors that seek to service their customers from locations that are often hundreds of miles away. We believe that we incur lower inbound freight expense than our regional competitors because our national presence allows us to buy full and partial truckloads of products. Whenever necessary we can backhaul between our distribution centers and satellite staging facilities using our own trucks. Many of our competitors must employ outside consolidation services and pay higher carrier transportation fees to move products from other regions. Additionally, we can redistribute overstocks and inventory imbalances at one distribution center to another distribution center to ensure products are sold prior to their expiration date. Products are delivered to our distribution centers primarily by our leased fleet of trucks, contract carriers and the suppliers themselves. We lease most of our trucks from Ryder Truck Leasing, which in some cases maintains facilities on our premises for the maintenance and service of these vehicles. Other trucks are leased from regional firms that offer competitive services. We ship orders for supplements or for items that are destined for areas outside regular delivery routes through United Parcel Service and other independent carriers. Deliveries to areas outside the continental United States are shipped by ocean-going containers on a weekly basis. TECHNOLOGY We have made a significant investment in information and warehouse management systems. We continually evaluate and upgrade our management information systems based on the best practices in the distribution industry and at our regional operations in order to make the systems more efficient, cost effective and responsive to customer needs. These systems include radio frequency-based inventory control, paperless receiving, computer-assisted order processing and slot locator/retrieval assignment systems. At the receiving docks, warehouse workers attach computer-generated, preprinted locator tags to inbound products. These tags contain the expiration date, locations, quantity, lot number and other information in bar code format. Warehouse workers use hand-held radio frequency devices to process customer orders by scanning the UPC bar code as the product is removed from its assigned slot. Similarly, customer returns are processed by scanning the UPC bar codes. We also employ a management information system that enables us to lower our inbound transportation costs by making optimum use of our own fleet of trucks or by consolidating deliveries into full truckloads. Orders from multiple suppliers and multiple distribution centers are consolidated into single truckloads for efficient use of available vehicle capacity and return-haul trips. RETAIL OPERATIONS The Company's Natural Retail Group ("NRG") currently owns and operates 11 natural product retail stores located in Florida, Maryland and Massachusetts. Our retail strategy is to: i) selectively acquire existing stores that meet our strict criteria in categories such as sales and profitability, growth potential, merchandising and management; and ii) open new stores in areas with favorable competitive climates and growth potential. Generally, we will not purchase or open new stores that directly compete with primary retail customers of our distribution business. We believe our retail stores have a number of advantages over their competitors, including our financial strength and marketing expertise, the purchasing power resulting from group purchasing by stores within NRG and the breadth of their product selection. We acquired Palm Harbor Natural Foods in Palm Harbor, Florida in March of 2001 and are planning to open our twelfth store, SunSplash Market in Port Charlotte, Florida, during the first quarter of fiscal year 2002. Our strategy for future retail growth is to identify and acquire or open additional retail stores as opportunities arise and to continue to focus on the sale of higher margin nutritional supplements while maintaining emphasis on the sale of organic produce, delicatessen, and bakery products. Acting as a distributor to our retail stores is an advantageous position for us and includes the ability to: (i) control the purchases made by these stores; (ii) expand the number of high-growth, high-margin product categories such as produce 7 and prepared foods within these stores; and (iii) keep current with the retail marketplace which enables us to better serve our distribution customers. Additionally, as the primary natural products distributor to our retail locations, we expect to realize significant economies of scale and operating and buying efficiencies. As an operator of retail stores, we also have the ability to test market select products prior to offering them nationally. We can then evaluate consumer reaction to the product without incurring significant inventory risk. We are able to test new marketing and promotional programs within our stores prior to offering them to a broader customer base. COMPETITION The natural products distribution industry is highly competitive. The industry has been characterized in recent years by significant consolidation and the emergence of large competitors. Our major national competitor is Tree of Life Distribution, Inc. (a subsidiary of Koninklijke Wessanen N.V.) and our major regional competitors are Nature's Best, Inc. in the Western United States, Northeast Cooperative in the Eastern United States and Blooming Prairie Cooperative Warehouse in the Midwestern United States. We also compete with numerous smaller regional and local distributors of ethnic, Kosher, gourmet and other specialty foods. Additionally, we compete with national, regional and local distributors of conventional groceries and, to a lesser extent, companies that distribute to their own retail facilities. We believe that distributors in the natural products industry primarily compete on product quality and depth of inventory selection, price and quality of customer service. Although we believe we currently compete effectively with respect to each of these factors, there can be no assurance that we will be able to maintain our competitive position against current and potential competitors. Our retail stores compete against other natural products outlets, conventional supermarkets and specialty stores. We believe that retailers of natural products compete principally on product quality and selection, price, customer service, knowledge of personnel and convenience of location. EMPLOYEES As of July 31, 2001, we had approximately 2,700 full- and part-time employees. An aggregate of approximately 230 of the employees at our Auburn, Washington, and Rahway, New Jersey facilities are covered by a collective bargaining agreement. We have never experienced a work stoppage by our unionized employees and we believe that our employee relations are good. ITEM 2. PROPERTIES We maintain eleven distribution centers. These facilities consist of an aggregate of approximately 1.6 million square feet of space, the largest capacity of any distributor in the natural products industry. We are planning to move our Atlanta, Georgia distribution center to a facility of approximately 300,000 square feet and we are expanding our Western Region operations into a 200,000 square foot distribution center in Fontana, California. Upon completion of these moves our total distribution space will be approximately 1.9 million square feet. LOCATION SIZE LEASE EXPIRATION (Square feet) Atlanta, Georgia 175,000 February 2002 Atlanta, Georgia 80,000 April 2002 Atlanta, Georgia1 300,000 January 2002 Auburn, California 150,000 Owned Auburn, California 100,000 Owned Auburn, Washington 204,800 March 2009 Bridgeport, New Jersey 35,700 Owned Chesterfield, New Hampshire 126,500 Owned Dayville, Connecticut 245,000 Owned Denver, Colorado 180,800 July 2013 Kealeakua, Hawaii 16,300 October 2002 Fontana, California2 200,000 November 2011 Vernon, California 34,500 Owned New Oxford, Pennsylvania 250,000 Owned Winterhaven, Florida 10,600 October 2001 8 (1) In August 2001, we exercised the option to purchase this facility with the close date to be determined by the lessor. This facility will replace our two existing Atlanta facilities. We plan to relocate operations into this facility during the second and third quarters of fiscal 2002. (2) We expect to complete the expansion in early calendar 2002. We also rent facilities to operate twelve retail stores along the east coast with various lease expiration dates and a 38,000 square foot processing and manufacturing facility in Rahway, New Jersey with a lease expiration date of March 2002. ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in routine litigation that arises in the ordinary course of our business. There are no pending material legal proceedings to which we are a party or to which our property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended July 31, 2001. EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS OF THE REGISTRANT The executive officers, key employees and directors of the Company and their ages as of October 19, 2001 are listed below: NAME AGE POSITION Thomas B. Simone (1)(2)(3) 59 Chairman of the Board Michael S. Funk (2) 47 Chief Executive Officer and Vice Chairman of the Board Steven Townsend 48 President, President of Eastern Region and Director Todd Weintraub 38 Vice President, Chief Financial Officer and Treasurer Kevin Michel 44 President of Western Region, Assistant Secretary and Director Daniel V. Atwood 43 National Vice President of Marketing and Secretary Gordon Barker (1)(3) 55 Director and Chairman of the Compensation Committee Joseph M. Cianciolo (1)(3) 62 Director and Chairman of the Audit Committee James P. Heffernan (1) 55 Director (1) Member of the Audit Committee. (2) Member of the Nominating Committee. (3) Member of the Compensation Committee. 9 Thomas B. Simone has served as the Chairman of the Board of Directors since December 1999 and as a member of the Board of Directors since October 1996. Mr. Simone is a member of the Audit Committee, the Nominating Committee and the Compensation Committee. Mr. Simone has served as President and Chief Executive Officer of Simone & Associates, a healthcare and natural products investment and consulting company, since April 1994. Mr. Simone also serves on the Board of Directors of ECO-DENT International, Inc. and Spectrum Organic Products, Inc. Michael S. Funk has served as Vice Chairman of the Board of Directors since February 1996 and as a member of the Board of Directors since February 1996. Mr. Funk has served as our Chief Executive Officer since December 1999. Mr. Funk served as our President from October 1996 to December 1999 and as our Executive Vice President from February 1996 until October 1996. Since its inception in July 1976 until April 2001, Mr. Funk served as President of Mountain People's Warehouse. Steven Townsend has served as a member of the Board of Directors since December 2000, as our President since April 2001 and as President of our Eastern Region since January 2000. Mr. Townsend served as a member of our Board of Directors from August 1988 until September 1999, as our Vice President of Finance and Administration from July 1983 until May 1995, as Chief Financial Officer from June 1995 until December 1997. Todd Weintraub has served as our Vice President, Treasurer and Chief Financial Officer since April 2001. Mr. Weintraub served as our Corporate Controller from July 2000 until April 2001. From December 1997 until July 2000 Mr. Weintraub served as our Manager of Financial Reporting. From June 1995 until December 1997, Mr. Weintraub served in certain financial reporting positions at State Street Corporation and Allmerica Financial Corporation. Mr. Weintraub met all requirements as a Certified Public Accountant and was also employed by KPMG LLP from January 1990 until Feb 1994. Kevin T. Michel has served as a member of the Board of Directors since February 1996 and as President of our Western Region since April 2001. Mr. Michel served as our Chief Financial Officer and Treasurer from December 1999 until March 2001, as our interim Chief Financial Officer and Treasurer from August 1999 until November 1999, as Executive Vice President of our Western Region from April 1999 until July 1999 and as President of our Central Region from January 1998 until March 1999. Mr. Michel served as Chief Financial Officer of Mountain People's Warehouse from January 1995 until December 1997. Daniel V. Atwood has served as our National Vice President of Marketing since April 2001 and as our Vice President and Secretary since January 1998. Mr. Atwood served on our Board of Directors from August 1988 to December 1997. Mr. Atwood served as President of our Natural Retail Group from August 1995 until March 2001. Gordon D. Barker has served as a member of the Board of Directors since September 1999. Mr. Barker serves as the Chairman of the Compensation Committee and as a member of the Audit Committee. Mr. Barker has served as Chief Executive Officer of Snyder's Drug Stores, Inc. since October 1999. Mr. Barker was the principal of Barker Enterprises, an investment and consultant firm from January 1997 until September 1999. Mr. Barker also serves on the following Boards of Directors: Gart Sports Company, Infinity Towers, NuMedics Inc., and Advanced Cosmetic Treatments, LLC. Joseph M. Cianciolo has served as a member of the Board of Directors since September 1999. Mr. Cianciolo serves as Chairman of the Audit Committee and as a member of the Compensation Committee. Mr. Cianciolo served as the Managing Partner of KPMG LLP, Providence, Rhode Island Office, from June 1990 until June 1999. Mr. Cianciolo also serves on the Board of Directors of Speidel, Inc. and serves on the Board of Trustees of Providence College and is Trustee and Treasurer of Rhode Island Hospital. James P. Heffernan has served as a member of the Board of Directors since March 2000. Mr. Heffernan serves as a member of the Audit Committee. Mr. Heffernan has served as a Trustee for the New York Racing Association since November 1998. Mr. Heffernan served as a member of the Board of Directors and Chairman of the Finance Committee of Columbia Gas System, Inc. from January 1993 until November 2000. 10 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock is traded on the Nasdaq National Market under the symbol "UNFI." Our Common Stock began trading on the Nasdaq National Market on November 1, 1996. The following table sets forth for the periods indicated the high and low sale prices per share of our Common Stock on the Nasdaq National Market: Fiscal 2000 High Low ----------- ---- --- First Quarter $19.625 $ 7.625 Second Quarter 15.188 7.000 Third Quarter 16.000 9.625 Fourth Quarter 16.688 12.375 Fiscal 2001 High Low ----------- ---- --- First Quarter $15.250 $ 9.563 Second Quarter 20.375 11.375 Third Quarter 19.500 10.875 Fourth Quarter 23.200 13.940 On July 31, 2001 we had 76 stockholders of record. The number of record holders may not be representative of the number of beneficial holders because depositories, brokers or other nominees hold many shares. We have never declared or paid any cash dividends on our capital stock. We anticipate that all of our earnings in the foreseeable future will be retained to finance the continued growth and development of our business and we have no current intention to pay cash dividends. Our future dividend policy will depend on earnings, capital requirements and financial condition, requirements of the financing agreements to which we are then a party and other factors considered relevant by the Board of Directors. Our existing revolving line of credit agreement prohibits the declaration or payment of cash dividends to our stockholders without the written consent of the bank during the term of the credit agreement and until all of our obligations under the credit agreement have been met. 11 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below under the caption Consolidated Statement of Operations Data with respect to the fiscal years ended July 31, 1997, 1998, 1999, 2000 and 2001, and under the caption Consolidated Balance Sheet Data at July 31, 1997, 1998, 1999, 2000 and 2001, are derived from our consolidated financial statements, which have been audited by KPMG LLP, independent certified public accountants. The historical results are not necessarily indicative of results to be expected for any future period. The following selected consolidated financial data should be read in conjunction with and are qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K. Consolidated Statement of Operations Data
(In thousands, except per share data) 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- Statement of Operations Data: Net sales $634,825 $728,910 $856,998 $908,688 $1,016,834 Cost of sales 507,547 578,575 680,301 734,673 818,040 Gross profit 127,278 150,335 176,697 174,015 198,794 Operating expenses 103,885 116,042 144,937 166,673 167,325 Merger, restructuring and asset impairment expenses -- 4,064 3,869 2,420 801 Amortization of intangibles 1,060 1,185 1,075 1,070 1,036 Total operating expenses 104,945 121,291 149,881 170,163 169,162 Operating Income 22,333 29,044 26,816 3,852 29,632 Other expense (income): Interest expense 5,976 5,157 5,700 6,412 6,939 Other, net (679) (778) (2,477) (527) 429 Total other expense 5,297 4,379 3,223 5,885 7,368 Income (loss) before income taxes and extraordinary item 17,036 24,665 23,593 (2,033) 22,264 Income taxes (benefit) 6,636 11,580 10,126 (802) 8,906 Extraordinary item, net of income tax benefit 933 -- -- -- -- Net income (loss) $ 9,467 $ 13,085 $ 13,467 $ (1,231) $ 13,358 Per share data (Basic): Income (loss) before extraordinary item $ 0.64 $ 0.75 $ 0.74 $ (0.07) $ 0.72 Extraordinary item, net of income tax benefit 0.06 -- -- -- -- Net income (loss) $ 0.58 $ 0.75 $ 0.74 $ (0.07) $ 0.72 Weighted average basic shares of common stock 16,367 17,467 18,196 18,264 18,482 Per share data (Diluted): Income (loss) before extraordinary item $ 0.63 $ 0.74 $ 0.73 $ (0.07) $ 0.71 Extraordinary item, net of income tax benefit 0.06 -- -- -- -- Net income (loss) per share $ 0.57 $ 0.74 $ 0.73 $ (0.07) $ 0.71 Weighted average diluted shares of common stock 16,553 17,798 18,537 18,264 18,818
12
Consolidated Balance Sheet Data: (In thousands) 1997 1998 1999 2000 2001 -------- -------- -------- -------- ---------- Working capital $ 53,101 $ 65,568 $ 73,825 $ 65,812 $ 53,351 Total assets 164,561 212,242 237,901 270,234 300,444 Total long term debt and capital leases 21,647 25,845 25,791 28,529 9,289 Total stockholders' equity 73,916 104,386 118,581 117,954 135,943
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are the leading national distributor of natural and organic foods and related products in the United States. In recent years, our sales to existing and new customers have increased through the acquisition of or merger with natural products distributors, the expansion of existing distribution centers and the continued growth of the natural products industry in general. Through these efforts, we believe that we have been able to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share. Our distribution operations are divided into three principal units: United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods, Inc. and Stow Mills, Inc.), Mountain People's Warehouse, Inc. and Rainbow Natural Foods in the Western Region (previously Rainbow Natural Foods solely comprised the Central Region), and Albert's Organics in various markets in the United States. Through our subsidiary, the Natural Retail Group, we also own and operate twelve natural products retail stores located in the eastern United States. We believe our retail business serves as a natural complement to our distribution business enabling us to develop new marketing programs and improve customer service. In addition, Hershey Import Co., located in Rahway, New Jersey, is a business that specializes in the international trading, roasting and packaging of nuts, seeds, dried fruits and snack items. We are continually integrating certain operating functions in order to improve operating efficiencies, including: (i) expanding marketing and customer service programs across the three regions; (ii) expanding national purchasing opportunities; (iii) consolidating systems applications between physical locations and regions; (iv) integrating administrative and accounting functions; and (v) reducing geographic overlap between regions. In addition, our continued growth has created the need for expansion of existing facilities to achieve maximum operating efficiencies and to assure adequate space for future needs. We have made considerable capital expenditures and incurred considerable expenses in connection with the expansion of our facilities, including the expansion of our Auburn, California, New Oxford, Pennsylvania and Albert's Los Angeles locations. We recently signed a lease to move our Atlanta, Georgia distribution center to a 300,000 square foot facility, an increase of approximately 100,000 square feet. While we anticipate incremental short-term costs between $0.5 million and $1.0 million during the second and third quarters of fiscal 2002 while we relocate operations into this facility, we expect the efficiencies created by consolidating our two existing facilities into one to lower our expenses relative to sales over the long-term. We are expanding our Western Region operations into the Los Angeles area and recently signed an agreement to lease a 200,000 square foot distribution center with the option to lease an additional 83,000 square feet for expansion. The Los Angeles facility will enable us to provide enhanced service levels to our southwestern customers and to further penetrate that market. While we anticipate short-term incremental costs of approximately $1.0 million, we expect to realize transportation savings and efficiencies once we are operational early in calendar year 2002. Upon the completion of the Los Angeles expansion, the increased capacity of our distribution centers will be approximately 55% greater than it was five years ago. While operating margins may be affected in periods in which these expenses are incurred, over the long term, we expect to benefit from the increased absorption of our expenses over a larger sales base. Our net sales consist primarily of sales of natural products to retailers adjusted for customer volume discounts, returns and allowances. The principal components of our cost of sales include the amount paid to manufacturers and growers for product sold, plus the cost of transportation necessary to bring the product to our distribution facilities. Operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, administrative, depreciation and amortization expense. Other expenses (income) include interest on outstanding indebtedness, interest income and miscellaneous income and expenses. Our operating margin (excluding restructuring costs) increased from 2.5% in fiscal 1994 to 3.40% for the fiscal year ended July 31, 2001. 13 RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales: Year Ended July 31, ----------------------------- 2001 2000 1999 ----------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 80.4% 80.8% 79.4% ----------------------------- Gross profit 19.6% 19.2% 20.6% ----------------------------- Operating expenses 16.5% 18.3% 16.9% Merger, restructuring and asset impairment expenses 0.1% 0.3% 0.5% Amortization of intangibles 0.1% 0.1% 0.1% ----------------------------- Total operating expenses 16.6% 18.7% 17.5% ----------------------------- Operating income 2.9% 0.4% 3.1% ----------------------------- Other expense (income): Interest expense 0.7% 0.7% 0.7% Other, net 0.0% -0.1% -0.3% ----------------------------- Total other expense (income) 0.7% 0.6% 0.4% ----------------------------- Income before income taxes 2.2% -0.2% 2.8% Income taxes 0.9% -0.1% 1.2% ----------------------------- Net income 1.3% -0.1% 1.6% ============================= TWELVE MONTHS ENDED JULY 31, 2001 COMPARED TO TWELVE MONTHS ENDED JULY 31, 2000 Net Sales. Our net sales increased approximately 11.9%, or $108.1 million, to $1.0 billion for the year ended July 31, 2001 from $908.7 million for the year ended July 31, 2000. This increase was primarily due to increased sales throughout all divisions and distribution channels including super naturals, independents and mass market. We also experienced market share gains during fiscal year 2001 by selling to a greater number of new customers. Sales to our two largest customers, Whole Foods Market, Inc. and Wild Oats Markets, Inc. represented approximately 17% and 14%, respectively, of net sales for the twelve months ended July 31, 2001. Whole Foods Market, Inc. represented approximately 16% and Wild Oats Markets, Inc. represented approximately 13%, of net sales for the twelve months ended July 31, 2000. We expect sales for fiscal 2002 to increase 8% - 12% from fiscal 2001. Gross Profit. Gross profit increased approximately 14.2%, or $24.8 million, to $198.8 million for the year ended July 31, 2001 from $174.0 million for the year ended July 31, 2000. Gross profit as a percentage of net sales increased to 19.6% for the year ended July 31, 2001 from 19.2% for the year ended July 31, 2000. The increase in gross profit resulted primarily from our recovery in our Eastern Region as customer returns and allowances, inventory shrink, pricing errors and inbound transportation costs decreased significantly. This increase was partially offset by inventory loss at an outside storage location, as well as reduced margins in our Albert's Organics division. Additionally, the gain in our gross profit was further offset by a change in our channel mix as the percentage of our sales to super naturals, which are at lower gross margins, increased. We expect the increase in percentage of sales to super naturals to continue in future periods. We expect our gross margin as a percentage of sales to be 19.4% - 19.8% for fiscal 2002. Operating Expenses. Our total operating expenses, excluding special charges, increased approximately 1.9%, or $3.2 million, to $168.0 million for the twelve months ended July 31, 2001 from $164.8 million for the twelve months ended July 31, 2000. As a percentage of net sales, operating expenses, excluding special charges, decreased to 16.5% for the twelve months ended 14 July 31, 2001 from 18.1% for the twelve months ended July 31, 2000. The reduction in operating expenses as a percentage of net sales was due primarily to increased labor productivity in our distribution centers, increased efficiencies in our transportation departments as a result of better routing and successfully leveraging our fixed expenses against a higher sales base. The improved labor productivity was due primarily to a more favorable labor market nationwide and higher retention rate of experienced warehouse employees. The improved transportation routing resulted in less miles traveled by our fleet, and corresponding reductions in expenses. We expect to reduce our operating expenses, excluding special charges, as a percentage of sales to less than 16% as we continue to realize operating efficiencies and expand our sales base. We also expect to incur additional special charges as we increase our warehouse capacity. Operating expenses for the twelve months ended July 31, 2001 included special charges of $0.8 million related to the expansion of our New Oxford, PA distribution facility, and $0.4 million of asset impairment charges, primarily goodwill, associated with the closing of an unprofitable retail store. Our operating expenses for the twelve months ended July 31, 2000 were impacted by several special charges. These charges included approximately $3.0 million of executive severance costs and the write-off of current assets in the Eastern Region and Chicago and approximately $2.4 million of restructuring and asset impairment charges related to the write-off of certain Eastern Region fixed assets and the planned closing of our Chicago facility. Operating expenses, including special charges, decreased approximately 0.6% or $1.1 million, to $169.1 million for the twelve months ended July 31, 2001 from $170.2 million for the twelve months ended July 31, 2000. As a percentage of sales, operating expenses, including special charges, decreased to 16.6% for the twelve months ended July 31, 2001 from 18.7% for the twelve months ended July 31, 2000. Operating Income. Operating income, excluding the special charges discussed above, increased $21.1 million to $30.8 million for the twelve months ended July 31, 2001 compared to $9.7 million for the twelve months ended July 31, 2000. As a percentage of sales, operating income, excluding special charges, increased to 3.0% for the twelve months ended July 31, 2001 compared to 1.1% for the twelve months ended July 31, 2000. Operating income, including special charges, increased $25.8 million to $29.6 million for the twelve months ended July 31, 2001 compared to $3.9 million for the comparable prior period. Other (Income)/Expense. The $1.5 million increase in other expense for the twelve months ended July 31, 2001 compared to the twelve months ended July 31, 2000 was attributable to slightly higher debt levels and non-cash expense related to an interest rate swap that were partially offset by lower interest rates. Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities" requires recognition in the financial statements of the change in fair value during the year of certain interest rate protection contracts and other derivatives. We recorded FAS 133 expense of $1.3 million on our interest rate swap agreement resulting from the significant decline in interest rates during the year. We will continue to recognize this income or expense for the duration of the swap contract until either October 2003 or 2005, depending on whether the contract is extended. We entered into a second interest rate swap agreement effective August 2001, with a termination date of either August 2005 or August 2007. Whether we recognize income or expense in any given quarter, and the magnitude of that item, is dependent on interest rates and the remaining term of the contract. Upon expiration of the swap contract, the cumulative earnings impact will be zero. Income Taxes. Our effective income tax rates (benefit) were 40% and (39.5%) for the years ended July 31, 2001 and 2000, respectively. The effective rates for 2001 and 2000 were higher than the federal statutory rate primarily due to state and local income taxes. Net (Loss) Income. As a result, net income was $13.4 million for the year ended July 31, 2001, compared to a net loss of ($1.2) million in the year ended July 31, 2000, an increase of $14.6 million. Excluding the $1.3 million SFAS No. 133 expense ($0.8 million, net of tax), the $0.8 million special charge related to the expansion of our New Oxford distribution center ($0.5 million, net of tax), and $0.4 million of asset impairment related primarily to the closing of an unprofitable retail store ($0.2 million, net of tax) in fiscal 2001 and $3.0 million in other special charges ($1.8 million, net of tax) and $2.4 million in restructuring costs ($1.4 million net of tax) in fiscal 2000, net income would have been $14.8 million and $2.0 million in 15 2001 and 2000 respectively, resulting in an increase of approximately $12.6 million for the year ended July 31, 2001 . We expect earnings per diluted share, excluding any special charges, of $1.05 - $1.09 for fiscal 2002. TWELVE MONTHS ENDED JULY 31, 2000 COMPARED TO TWELVE MONTHS ENDED JULY 31, 1999 Net Sales. Our net sales increased approximately 6.0%, or $51.7 million, to $908.7 million for the year ended July 31, 2000 from $857.0 million for the year ended July 31, 1999. The overall increase in net sales was attributable to increased sales to existing customers, the sale of new product offerings and sales to new customers. This increase was partially offset by a decrease in net sales from the Natural Retail Group due to the sale of four stores and the closing of one store in April 1999. Excluding the Natural Retail Group's fiscal 1999 sales by the sold and closed stores, sales increased approximately 7.0% for the year ended July 31, 2000 over the comparable prior year period. This growth rate is lower than in past years. The major factor contributing to our lower growth rate was loss of volume in the Eastern Region to other suppliers due to difficulties encountered in the consolidation effort. Another contributing factor was the closure of our Chicago facility and the resulting inability to fully service this region from our Aurora, CO and New Oxford, PA facilities, which resulted in combined lost sales for our third and fourth quarters of approximately $2 million. Gross Profit. Gross profit decreased approximately 1.5%, or $2.7 million, to $174.0 million for the year ended July 31, 2000 from $176.7 million for the year ended July 31, 1999. Gross profit as a percentage of net sales decreased to 19.2% for the year ended July 31, 2000 from 20.6% for the year ended July 31, 1999. The decrease in gross profit as a percentage of net sales resulted primarily from ongoing difficulties with the Eastern Region consolidation, as well as an increased percentage of sales to existing customers under our volume discount program and the divestiture of four retail stores, which have higher gross margins than our distribution business. Difficulties in the Eastern Region, which impacted our margin, include higher than normal levels of customer returns and allowances, pricing errors, inventory shrink and higher inbound transportation costs for expedited shipments. Operating Expenses. Total operating expenses increased approximately 13.5%, or $20.3 million, to $170.2 million for year ended July 31, 2000 from $149.9 million for the year ended July 31, 1999. Our operating expenses for the year ended July 31, 2000 were also impacted by approximately $2.4 million of restructuring and asset impairment charges related to the write-off of certain Eastern Region fixed assets and the closing of our Chicago facility. Excluding fiscal 2000 restructuring and asset impairment costs of $2.4 million and other special charges of $3.0 million, and fiscal 1999 restructuring costs of $3.9 million, total operating expenses for the years ended July 31, 2000 and 1999 would have been $164.8 million or 18.1% of net sales, and $146.0 million or 17.0% of net sales, respectively, resulting in an increase for the year ended July 31, 2000 of $18.8 million, or 12.9% over the comparable prior period. As a percentage of net sales, operating expenses increased to 18.7% for the year ended July 31, 2000 from 17.5% for the year ended July 31, 1999. The increase in operating expenses as a percentage of net sales was primarily due to the continuing difficulties in the Eastern Region, including redundant transportation expenses, reduced labor productivity, and outside storage expenses. An increase in the cost of fuel of approximately $2.2 million during the year impacted all of our distribution centers. In addition, increased labor expenses related to the tight labor market limited our ability to attract and retain trained qualified employees in the Eastern Region particularly, but also affected all of our distribution centers. Operating Income. Operating income decreased $22.9 million to $3.9 million for the year ended July 31, 2000 from $26.8 million for the year ended July 31, 1999. As a percentage of net sales, operating income decreased to 0.4% in the year ended July 31, 2000 from 3.1% in the comparable 1999 period. Excluding the restructuring, asset impairment and other special charges noted above, operating income for the year ended July 31, 2000 and 1999 would have been $9.3 million, or 1.0% of net sales and $30.7 million, or 3.6% of net sales, respectively, resulting in a decrease for the year ended July 31, 2000 of $21.4 million versus the comparable prior period. 16 Other (Income)/Expense. The $2.7 million increase in other expense for the year ended July 31, 2000 compared to the year ended July 31, 1999 was attributable to a $1.4 million gain on the sale of retail stores in 1999 and higher interest expense of approximately $0.7 million in 2000, reflecting a higher level of debt for fiscal 2000. Income Taxes. Our effective income tax rates were 39.5% and 42.9% for the years ended July 31, 2000 and 1999, respectively. The effective rates for 2000 and 1999 were higher than the federal statutory rate primarily due to state and local income taxes and the settlement of an IRS audit for $0.3 million in 1999. Net (Loss) Income. As a result, net income decreased by $14.7 million to a net loss of ($1.2) million, for the year ended July 31, 2000 from net income of $13.5 million in the year ended July 31, 1999. Excluding the $2.4 million in restructuring costs ($1.4 million, net of tax) and the $3.0 million in special charges ($1.8 million, net of tax) in fiscal 2000 and the $3.9 million in restructuring costs ($2.3 million, net of tax), the $1.4 million gain on the sale of four retail stores ($0.8 million, net of tax) and the $0.3 million IRS settlement in fiscal 1999, net income would have been $2.0 million and $15.2 million, respectively, resulting in a decrease for the year ended July 31, 2000 of $13.1 million over the comparable prior period. LIQUIDITY AND CAPITAL RESOURCES We have historically financed operations and growth primarily from cash flows from operations, borrowings under our credit facility, seller financing of acquisitions, operating and capital leases, trade payables, bank indebtedness and the sale of equity and debt securities. Primary uses of capital have been acquisitions, expansion of plant and equipment and investments in accounts receivable and inventory. Net cash provided by operations was $22.0 million for the year ended July 31, 2001 and $11.6 million for the year ended July 31, 2000. Cash provided by operations in fiscal 2001 related primarily to cash collected from customers net of cash paid to vendors, partially offset by investments in inventory in the normal course of business. Days sales outstanding at July 31, 2001 remained unchanged from July 31, 2000 at 28 days. The increases in inventory levels relate to supporting increased sales with wider product assortment combined with our ability to capture purchasing efficiency opportunities in excess of total carrying costs. These items were partially offset by an increase in accounts payable. Cash used in operations in fiscal 2000 related primarily to an increase in accounts receivable and investments in inventory in the ordinary course of business. Working capital at July 31, 2001 was $53.4 million. Net cash used in investing activities was $18.2 million and $17.0 million for the years ended July 31, 2001 and 2000, respectively. Investing activities in fiscal years 2001 and 2000 were primarily for capital expenditures. Cash provided by financing activities was $0.7 million and $27.7 million for the years ended July 31, 2001 and 2000, respectively. Net cash provided by financing activities was $0.7 million for the year ended July 31, 2001 due to proceeds of approximately $4.5 million from the exercise of stock options, partially offset by repayment of long-term debt of approximately $2.7 million and principal payments on capital leases of approximately $1.2 million. We increased borrowings on our line of credit by $26.9 million during fiscal 2000 that was partially offset by debt repayments of $3.8 million. As of July 31 2001, we had less than $13.0 million available under our revolving credit facility. In September 2001 we entered into an agreement to increase our secured revolving credit facility to $150 million from $100 million at an interest rate of LIBOR plus 1.50% maturing on June 30, 2005. The proceeds were used to refinance our existing credit facility, several fixed rate mortgage loans, and an equipment loan. This additional access to capital will provide for working capital requirements in the normal course of business and the opportunity to grow our business organically or through acquisitions. In October 1998, we entered into an interest rate swap agreement. The agreement provides for us to pay interest for a five-year period at a fixed rate of 5% on a notional principal amount of $60 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million. The five-year term of the swap agreement may be extended to seven years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under SFAS No. 133. We entered into a second swap agreement in August 17 2001. This agreement provides for us to pay interest for a four-year period at a fixed rate of 4.8% on a notional principal amount of $30 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. If LIBOR exceeds 6.0% in a given period the agreement is suspended for that period. The four-year term of the swap agreement may be extended to six years at the option of the counterparty, which prohibits accounting for the swap as an effective hedge under SFAS No. 133. IMPACT OF INFLATION Historically, we have been able to pass along inflation-related increases. Consequently, inflation has not had a material impact upon the results of our operations or profitability. SEASONALITY Generally, we do not experience any material seasonality. However, our sales and operating results may vary significantly from quarter to quarter due to factors such as changes in our operating expenses, management's ability to execute our operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In June 1998, The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments, and hedging activities related to those instruments, as well as other hedging activities, and was amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133 requires recognition in the financial statements of the change in fair value during the quarter of certain interest rate protection contracts and other derivatives. We adopted FAS 133 on August 1, 2000. We recorded $1.3 million in other expense resulting from the significant decline in interest rates and the related impact on our interest rate swap agreement during the year ended July 31, 2001. In July 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS No. 141), and No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually (or more frequently if impairment indicators arise). SFAS No. 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS No. 142 requires us to complete a transitional goodwill impairment test six months from the date of adoption. We are also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS No. 142. We early adopted SFAS No. 142 on August 1, 2001. As of July 31, 2001 we had goodwill of $30.9 million less accumulated amortization of $3.4 million with amortization expense of approximately $0.8 million in fiscal 2001. Therefore, we expect a reduction of approximately $0.8 million in operating expenses in fiscal 2002 as the result of adopting SFAS No. 142. Certain Factors That May Affect Future Results This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K contain forward-looking statements that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would," or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future results of operations or of financial position or state other "forward-looking" information. The important factors listed below as well as any cautionary language in this Annual Report on Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in these forward-looking statements. You should be aware that the occurrence of the events described in the risk factors below and elsewhere in this Annual Report on Form 10-K could have an adverse effect on our business, results of operations and financial position. Any forward-looking statements in this Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements, possibly materially. We 18 disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statement in this section. Our business could be adversely affected if we are unable to integrate our acquisitions and mergers A significant portion of our historical growth has been achieved through acquisitions of or mergers with other distributors of natural products. Successful integration of mergers is critical to our future operating and financial performance. Integration requires, among other things: * the optimization of delivery routes; * coordination of administrative, distribution and finance functions; and * the integration of personnel. The integration process has and could divert the attention of management and any difficulties or problems encountered in the transition process could have a material adverse effect on our business, financial condition or results of operations. In addition, the process of combining companies has and could cause the interruption of, or a loss of momentum in, the activities of the respective businesses, which could have an adverse effect on their combined operations. There can be no assurance that we will realize any of the anticipated benefits of mergers. We may have difficulty in managing our growth The growth in the size of our business and operations has placed and is expected to continue to place a significant strain on our management. Our future growth is limited in part by the size and location of our distribution centers. There can be no assurance that we will be able to successfully expand our existing distribution facilities or open new distribution facilities in new or existing markets to facilitate growth. In addition, our growth strategy to expand our market presence includes possible additional acquisitions. To the extent our future growth includes acquisitions, there can be no assurance that we will successfully identify suitable acquisition candidates, consummate and integrate such potential acquisitions or expand into new markets. Our ability to compete effectively and to manage future growth, if any, will depend on our ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage our work force. There can be no assurance that our personnel, systems, procedures and controls will be adequate to support our operations. Our inability to manage our growth effectively could have a material adverse effect on our business, financial condition or results of operations. We have significant competition from a variety of sources We operate in highly competitive markets, and our future success will be largely dependent on our ability to provide quality products and services at competitive prices. Our competition comes from a variety of sources, including other distributors of natural products as well as specialty grocery and mass market grocery distributors. There can be no assurance that mass market grocery distributors will not increase their emphasis on natural products and more directly compete with us or that new competitors will not enter the market. These distributors may have been in business longer than us, may have substantially greater financial and other resources than us and may be better established in their markets. There can be no assurance that our current or potential competitors will not provide services comparable or superior to those provided by us or adapt more quickly than United Natural to evolving industry trends or changing market requirements. It is also possible that alliances among competitors may develop and rapidly acquire significant market share or that certain of our customers will increase distribution to their own retail facilities. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect our business, financial condition or results of operations. There can be no assurance that we will be able to compete effectively against current and future competitors. We depend heavily on our principal customers Our ability to maintain close, mutually beneficial relationships with our top two customers, Whole Foods Market, Inc. and Wild Oats Markets, Inc., is important to the ongoing growth and profitability of our business. Whole Foods Market, Inc., recently agreed to extend our current distribution arrangement through August 31, 2004. Whole Foods and Wild Oats accounted for approximately 17% and 14%, respectively, of our net sales during the fiscal year ended July 31, 2001. As a 19 result of this concentration of our customer base, the loss or cancellation of business from either of these customers, including from increased distribution to their own facilities, could materially and adversely affect our business, financial condition or results of operations. We sell products under purchase orders, and we generally have no agreements with or commitments from our customers for the purchase of products. No assurance can be given that our customers will maintain or increase their sales volumes or orders for the products supplied by us or that we will be able to maintain or add to our existing customer base. Our profit margins may decrease due to consolidation in the grocery industry The grocery distribution industry generally is characterized by relatively high volume with relatively low profit margins. The continuing consolidation of retailers in the natural products industry and the growth of super natural chains may reduce our profit margins in the future as more customers qualify for greater volume discounts. Our industry is sensitive to economic downturns The grocery industry is also sensitive to national and regional economic conditions, and the demand for our products may be adversely affected from time to time by economic downturns. In addition, our operating results are particularly sensitive to, and may be materially adversely affected by: * difficulties with the collectibility of accounts receivable, * difficulties with inventory control, * competitive pricing pressures, and * unexpected increases in fuel or other transportation-related costs. There can be no assurance that one or more of such factors will not materially adversely affect our business, financial condition or results of operations. We are dependent on a number of key executives Management of our business is substantially dependent upon the services of Michael S. Funk, Chief Executive Officer, Steven Townsend, President, Todd Weintraub, Chief Financial Officer, Kevin T. Michel, President of our Western Region and other key management employees. Loss of the services of any officers or any other key management employee could have a material adverse effect on our business, financial condition or results of operations. Our operating results are subject to significant fluctuations Our net sales and operating results may vary significantly from period to period due to: * changes in our operating expenses, * management's ability to execute our business and growth strategies, * personnel changes, * demand for natural products, * supply shortages, * general economic conditions, * changes in customer preferences and demands for natural products, including levels of enthusiasm for health, fitness and environmental issues, 20 * fluctuation of natural product prices due to competitive pressures, * lack of an adequate supply of high-quality agricultural products due to poor growing conditions, natural disasters or otherwise, * volatility in prices of high-quality agricultural products resulting from poor growing conditions, natural disasters or otherwise, and * future acquisitions, particularly in periods immediately following the consummation of such acquisition transactions while the operations of the acquired businesses are being integrated into our operations. Due to the foregoing factors, we believe that period-to-period comparisons of our operating results may not necessarily be meaningful and that such comparisons cannot be relied upon as indicators of future performance. We are subject to significant governmental regulation Our business is highly regulated at the federal, state and local levels and our products and distribution operations require various licenses, permits and approvals. In particular: * our products are subject to inspection by the U.S. Food and Drug Administration, * our warehouse and distribution facilities are subject to inspection by the U.S. Department of Agriculture and state health authorities, and * our trucking operations are regulated by the U.S. Department of Transportation and the U.S. Federal Highway Administration. The loss or revocation of any existing licenses, permits or approvals or the failure to obtain any additional licenses, permits or approvals in new jurisdictions where we intend to do business could have a material adverse effect on our business, financial condition or results of operations. Our officers and directors and the employee stock ownership trust have significant voting power. As of October 1, 2001, our executive officers and directors, and their affiliates, and the United Natural Foods Employee Stock Ownership Trust beneficially owned in the aggregate approximately 15% of United Natural's common stock. Accordingly, these stockholders, if acting together, may have the ability to impact the election of our directors and determine the outcome of corporate actions requiring stockholder approval, depending on how other stockholders may vote. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of United Natural. Union-organizing activities could cause labor relations difficulties As of July 31, 2001, approximately 230 employees, representing approximately 8% of our approximately 2,700 employees, were union members. We have in the past been the focus of union-organizing efforts. As we increase our employee base and broaden our distribution operations to new geographic markets, our increased visibility could result in increased or expanded union-organizing efforts. Although we have not experienced a work stoppage to date, if additional employees were to unionize, we could be subject to work stoppages and increases in labor costs, either of which could materially adversely affect our business, financial condition or results of operations. 21 Access to capital and the cost of that capital In September 2001 we entered into an agreement to increase our secured revolving credit facility to $150 million from $100 million at an interest rate of LIBOR plus 1.5% maturing on June 30, 2005. The proceeds were used to refinance our existing credit facility, several fixed term mortgage loans, and an equipment loan. This additional access to capital will provide for working capital requirements in the normal course of business and the opportunity to grow our business organically or through acquisitions. In order to maintain our profit margins, we rely on strategic investment buying initiatives, such as discounted bulk purchases, which require spending significant amounts of working capital. In the event that capital market turmoil significantly increases our cost of capital or limits our ability to borrow funds or raise equity capital, we could suffer reduced profit margins and be unable to grow our business organically or through acquisitions, which could have a material adverse effect on our business, financial condition or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. We do not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements listed below are filed as part of this Annual Report on Form 10-K. INDEX TO FINANCIAL STATEMENTS United Natural Foods, Inc. and Subsidiaries: Page Independent Auditors' Report 23 Consolidated Balance Sheets 24 Consolidated Statements of Operations 25 Consolidated Statements of Stockholders' Equity 26 Consolidated Statements of Cash Flows 27 Notes to Consolidated Financial Statements 28 22 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders United Natural Foods, Inc.: We have audited the accompanying consolidated balance sheets of United Natural Foods, Inc. and Subsidiaries as of July 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Natural Foods, Inc. and Subsidiaries as of July 31, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP KPMG LLP Providence, Rhode Island September 4, 2001 23 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
JULY 31, JULY 31, ASSETS 2001 2000 ------ --------- -------- Current assets: Cash and cash equivalents $ 6,393 $ 1,943 Accounts receivable, net of allowance of $3,544 and $3,302, respectively 81,559 69,474 Notes receivable, trade 685 456 Inventories 110,653 104,486 Prepaid expenses 5,394 6,085 Deferred income taxes 3,513 2,350 Refundable income taxes 366 4,401 -------------------- Total current assets $208,563 $189,195 Property & equipment, net 62,186 52,625 Notes receivable, trade, net 1,050 765 Goodwill, net of accumulated amortization of $3,470 and $2,680, respectively 27,500 26,624 Covenants not to compete, net of accumulated amortization of $250 and $317, respectively 180 181 Deferred taxes 276 -- Other, net 689 844 -------------------- Total assets $300,444 $270,234 ==================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 68,056 $ 68,007 Current installments of long-term debt 19,625 2,770 Current installments of obligations under capital leases 1,120 1,036 Accounts payable 53,169 39,393 Accrued expenses 13,242 12,178 -------------------- Total current liabilities $155,212 $123,384 Long-term debt, excluding current installments 7,805 26,722 Deferred income taxes -- 367 Obligations under capital leases, excluding current installments 1,484 1,807 -------------------- Total liabilities $164,501 152,280 -------------------- Stockholders' equity: Preferred stock, $.01 par value, authorized 5,000 shares; none issued or outstanding -- -- Common stock, $.01 par value, authorized 50,000 shares; issued and outstanding 18,653 at July 31, 2001 issued and outstanding 18,283 at July 31, 2000 187 183 Additional paid-in capital 72,644 68,180 Unallocated shares of Employee Stock Ownership Plan (2,258) (2,421) Retained earnings 65,370 52,012 -------------------- Total stockholders' equity 135,943 117,954 -------------------- Total liabilities and stockholders' equity $300,444 $270,234 =====================
See notes to consolidated financial statements. 24 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED JULY 31, ------------------- (In thousands, except per share data) 2001 2000 1999 ---- ---- ---- Net sales $1,016,834 $908,688 $856,998 Cost of sales 818,040 734,673 680,301 --------------------------------- Gross profit 198,794 174,015 176,697 --------------------------------- Operating expenses 167,325 166,673 144,937 Merger, restructuring and asset impairment expenses 801 2,420 3,869 Amortization of intangibles 1,036 1,070 1,075 --------------------------------- Total operating expenses 169,162 170,163 149,881 --------------------------------- Operating income 29,632 3,852 26,816 --------------------------------- Other expense (income): Interest expense 6,939 6,412 5,700 Other, net 429 (527) (2,477) --------------------------------- Total other expense 7,368 5,885 3,223 --------------------------------- Income (loss) before income taxes (benefit) 22,264 (2,033) 23,593 Income taxes (benefit) 8,906 (802) 10,126 --------------------------------- Net income (loss) $ 13,358 $ (1,231) $ 13,467 ================================= Basic per share data: Net income (loss) $ 0.72 $ (0.07) $ 0.74 ================================= Weighted average basic shares of common stock 18,482 18,264 18,196 ================================= Diluted per share data: Net income (loss) $ 0.71 $ (0.07) $ 0.73 Weighted average diluted shares of common stock 18,818 18,264 18,537 ================================= See notes to consolidated financial statements. 25 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Outstanding Unallocated Total Number of Common Additional Paid Shares of Retained Treasury Stockholders' Shares Stock in Capital ESOP Earnings Stock Equity --------------------------------------------------------------------------------------------- (In thousands) Balances at July 31, 1998 18,175 $182 $67,440 $(2,747) $39,776 $(265) $104,386 Allocation of shares to ESOP -- -- -- 163 -- -- 163 Transfer of undistributed loss to -- -- 19 -- -- -- 19 additional paid-in-capital Issuance of common stock, net 74 -- 546 -- -- -- 546 Retirement of treasury stock -- -- (265) -- -- 265 -- Net income -- -- -- -- 13,467 -- 13,467 --------------------------------------------------------------------------------------------- Balances at July 31, 1999 18,249 $182 $67,740 $(2,584) $53,243 $ -- $118,581 --------------------------------------------------------------------------------------------- Allocation of shares to ESOP -- -- -- 163 -- -- 163 Issuance of common stock, net 34 1 328 -- -- -- 329 Tax effect of exercises of stock options -- -- 112 -- -- -- 112 Net income -- -- -- -- (1,231) -- (1,231) --------------------------------------------------------------------------------------------- Balances at July 31, 2000 18,283 $183 $68,180 $(2,421) $52,012 $ -- $117,954 --------------------------------------------------------------------------------------------- Allocation of shares to ESOP -- -- -- 163 -- -- 163 Issuance of common stock, net 370 4 3,505 -- -- -- 3,509 Tax effect of exercises of stock -- -- 959 -- -- -- 959 options Net income -- -- -- -- 13,358 -- 13,358 --------------------------------------------------------------------------------------------- Balances at July 31, 2001 18,653 $187 $72,644 $(2,258) $65,370 $ -- $135,943 =============================================================================================
See notes to consolidated financial statements. 26 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31, (In thousands) 2001 2000 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 13,358 $ (1,231) $ 13,467 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 7,908 7,601 9,205 Loss on impairment of intangible asset 255 -- -- Gain on sale of business -- -- (1,397) Loss (gain) on disposals of property & equipment 640 1,977 (195) Deferred income tax expense (1,529) (930) (941) Provision for doubtful accounts 2,903 1,992 1,995 Changes in assets and liabilities, net of acquired companies: Accounts receivable (14,887) (10,854) (11,524) Inventory (5,719) (13,761) (460) Prepaid expenses 713 (425) (2,319) Refundable income taxes 4,035 (461) (3,889) Other assets 42 (117) 771 Notes receivable, trade (514) 208 445 Accounts payable 13,725 5,950 334 Accrued expenses 1,056 (1,528) 2,805 -------------------------------------- Net cash provided by (used in) operating activities 21,986 (11,579) 8,297 -------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchases of subsidiaries, net of cash acquired (2,393) (1,200) (8,888) Proceeds from sale of business -- -- 7,086 Proceeds from disposals of property and equipment 46 57 1,477 Capital expenditures (15,891) (15,870) (6,610) -------------------------------------- Net cash used in investing activities (18,238) (17,013) (6,935) -------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under note payable 49 26,854 4,546 Repayments on long-term debt (2,742) (3,846) (4,337) Proceeds from long-term debt 89 5,287 -- Principal payments of capital lease obligations (1,162) (1,045) (683) Proceeds from issuance of common stock, net 4,468 440 564 -------------------------------------- Net cash provided by financing activities 702 27,690 90 -------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,450 (902) 1,452 Cash and cash equivalents at beginning of period 1,943 2,845 1,393 -------------------------------------- Cash and cash equivalents at end of period $ 6,393 $ 1,943 $ 2,845 ====================================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 6,822 $ 5,746 $ 5,540 ====================================== Income taxes, net of refunds $ 5,709 $ 795 $ 15,273 ======================================
In 2001, 2000 and 1999, the Company incurred capital lease obligations of approximately $905, $1,634, and $1,686, respectively. See notes to consolidated financial statements. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SIGNIFICANT ACCOUNTING POLICIES (a) Nature of Business United Natural Foods, Inc. and Subsidiaries (the "Company") is a distributor and retailer of natural and organic products. The Company sells its products throughout the United States. (b) Basis of Consolidation The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. (c) Cash Equivalents Cash equivalents consist of highly liquid investment instruments with original maturities of three months or less. (d) Inventories Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out (FIFO) method. (e) Property and Equipment Property and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments at the inception of the lease. Depreciation and amortization are principally provided using the straight-line method over the estimated useful lives. (f) Income Taxes The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Intangible Assets and Other Long-Lived Assets Intangible assets consist principally of goodwill and covenants not to compete. Goodwill represents the excess purchase price over fair value of net assets acquired in connection with purchase business combinations and is being amortized on the straight-line method not exceeding forty years. Covenants not to compete are initially recorded at fair value and are amortized using the straight-line method over the lives of the respective agreements, generally five years. The Company evaluates impairment of long-lived assets annually, or more frequently if events or changes in circumstances indicate that carrying amounts may no longer be recoverable. Impairment losses are determined based upon the excess of carrying amounts over expected future cash flows (undiscounted) of the underlying business. The assessment of the recoverability of long-lived assets will be impacted if estimated future cash flows are not achieved. (h) Revenue Recognition and Trade Receivables The Company records revenue upon shipment of products. Revenues are recorded net of applicable sales discounts. The Company's sales are with customers located throughout the United States. The Company had two customers in 2001, 2000 and 1999, Whole Foods Market, Inc., and Wild Oats Markets, Inc., which provided 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 10% or more of the Company's revenue. Total net sales to Whole Foods and Wild Oats in 2001 were approximately $169 million and $147 million, respectively. Total net sales to Whole Foods and Wild Oats in 2000 were approximately $147 million and $121 million, respectively. Total net sales to Whole Foods and Wild Oats in 1999 were approximately $143 million and $90 million, respectively. (i) Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments including cash, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying value of notes receivable, long-term debt and capital lease obligations approximate fair value based on the instruments' interest rate, terms, maturity date and collateral, if any, in comparison to the Company's incremental borrowing rate for similar financial instruments. (j) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. (k) Notes Receivable, Trade The Company issues notes receivable, trade to certain customers under two basic circumstances, inventory purchases for initial store openings and overdue accounts receivable. Initial store opening notes are generally receivable over a period not to exceed twelve months. The overdue accounts receivable notes may extend for periods greater than one year. All notes are issued at a market interest rate and contain certain guarantees and collateral assignments in favor of the Company. (1) 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. (m) Earnings Per Share Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated by adding the dilutive potential common shares to the weighted average number of common shares that were outstanding during the period. For purposes of the diluted earnings per share calculation, outstanding stock options are considered common stock equivalents, using the treasury stock method. A reconciliation of the weighted average number of shares outstanding used in the computation of the basic and diluted earnings per share for all periods presented follows: YEAR ENDED JULY 31, (In thousands) 2001 2000 1999 ---- ---- ---- Basic weighted average shares outstanding 18,482 18,264 18,196 Net effect of dilutive stock options based upon 336 -- 341 the treasury stock method -------------------------- Diluted weighted average shares outstanding 18,818 18,264 18,537 -------------------------- Antidilutive potential common shares excluded from -- 1,578 -- the computation above ========================== (n) Interest rate swaps The fair market value on the adoption date of August 1, 2000 was less than $0.1 million. As of July 31, 2001 the fair market values were $(1.0) million and ($0.3) million of the swap agreement and the option respectively. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The Company recorded other expense of $1.3 million to reflect this change in fair market value. Fair market values are not actual market prices but are mathematically calculated using models that rely on certain assumptions regarding past, present and future market conditions. (2) ACQUISITIONS Fiscal 1999 On September 30, 1998, the Company acquired substantially all of the outstanding stock of Albert's Organics, Inc. ("Albert's"), a wholesale distributor of organic vegetables and fruits for $12.0 million, including $ 1.2 million contingent payment that was made during fiscal 2000. Albert's had sales of $47.8 million (unaudited) for its most recent fiscal year ending December 31, 1997. This acquisition was accounted for as a purchase with goodwill of approximately $10.3 million being amortized on a straight-line basis over 40 years. (3) STOCK OPTION PLAN The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation,". Under SFAS No. 123, companies can elect to account for stock-based compensation using a fair value based method or continue to measure compensation expense using the intrinsic value method. The Company has elected to continue to apply APB No. 25 accounting treatment for stock-based compensation. If the fair value method of accounting had been used, net income (loss) would have been $11.6 million, $(1.8) million and $11.9 million for 2001, 2000 and 1999, respectively, basic earnings (loss) per share would have been $0.63, $(0.10) and $0.65 for 2001, 2000 and 1999, respectively, and diluted earnings (loss) per share would have been $0.62,$(0.10) and $0.64 for 2001, 2000 and 1999 respectively. The weighted average grant date fair value of options granted during 2001, 2000 and 1999 is shown below. The fair value of each option grant was estimated using the Black-Sholes Option Pricing Model with the following weighted average assumptions for 2001, 2000 and 1999: a dividend yield of 0.0%, a risk free interest rate of 5.06% and an expected life of 8 years. The expected volatility was 76.8%, 77.5% and 66.0% for 2001, 2000 and 1999, respectively. The effects of applying SFAS No. 123 in this pro forma disclosure are not necessarily indicative of future amounts. On July 29, 1996, the Board of Directors adopted and the stockholders approved, the 1996 Stock Option Plan, which provides for grants of stock options to employees, officers, directors and others. These options are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code or options not intended to qualify as incentive stock options ("non-statutory stock options"). A total of 2,500,000 shares of common stock may be issued upon the exercise of options granted under the 1996 Stock Option Plan. The following table summarizes the stock option activity for the fiscal years ended July 31, 2001, 2000 and 1999:
2001 2000 1999 ---- ---- ---- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 1,578,140 $ 10.76 985,259 $ 14.05 989,346 $ 13.02 Granted 486,750 $ 15.38 839,500 $ 9.38 80,000 $ 21.37 Exercised (369,881) $ 9.48 (34,119) $ 9.64 (74,087) $ 7.38 Forfeited (276,125) $ 12.93 (212,500) $ 20.74 (10,000) $ 20.25 ------------- ------------- ----------- Outstanding at end of year 1,418,884 $ 12.26 1,578,140 $ 10.76 985,259 $ 14.05 ============= ============= =========== Options exercisable at year-end 600,509 $ 10.09 604,113 $ 10.12 490,913 $ 9.32 Weighted average fair value of options granted during the year: Exercise price equals stock $ 11.91 $ 7.38 $ 15.54 price Exercise price exceeds stock -- -- -- price Stock price exceeds exercise -- -- -- price
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The 1,418,884 options outstanding at July 31, 2001 had exercise prices and remaining contractual lives as follows:
Weighted Weighted Weighted Average Average Average Range of Exercise Shares Remaining Contractual Exercise Exercise Prices Outstanding Life (years) Price Shares Exercisable Price ------ ----------- ------------ ----- ------------------ ----- $ 6.38 - $ 8.97 520,000 6.5 $ 7.61 338,125 $ 7.01 $ 9.64 - $14.25 300,875 7.1 $11.11 170,375 $10.62 $15.50 - $22.28 598,009 8.1 $16.87 92,009 $20.40
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 five subsequent amendments effective March 1997, July 1997, October 1997, July 1999 and April 2000. In October 1997, the Company amended the agreement with its bank to increase the amount of the facility from $50 million to $100 million, to increase the limit on inventory advances to $50 million and the advance rate to 60%, to establish a term loan of $6.6 million and to increase the aggregate amount of real estate acquisition loans and real estate term loans to $20 million. The agreement also provides for the bank to syndicate the credit facility to other banks and lending institutions. The credit facility was used to repay existing indebtedness of Stow owed to the Company's bank at the date of the merger and is currently used for general operating capital needs. Interest under the facility, except the portion related to the mortgage commitments, accrues at the Company's option at the New York Prime Rate (6.75% at July 31, 2001 and 9.50% at July 31, 2000) or 1.25% above the bank's London Interbank Offered Rate ("LIBOR", 3.78% and 6.62% at July 31, 2001 and 2000, respectively), and the Company has the option to fix the rate for all or a portion of the debt for a period up to 180 days. The Company opted to pay 1.25% above LIBOR for substantially all of fiscal 2001. Interest on approximately $5.9 million of the mortgage facility accrues at 7.36%, with the remainder to accrue at 1.25% above the bank's LIBOR rate, although the Company has the option to fix the variable portion for a period of five years at a rate of 1.25% above the five-year U.S Treasury Note rate. At July 31, 2001 and 2000, the weighted average interest rate on the line of credit was 5.06% and 7.87%, respectively. The Company has pledged all of its assets as collateral for its obligations under the credit agreement. As of July 31, 2001, the Company's outstanding borrowings under the credit agreement totaled $86.6 million. The credit agreement originally was set to expire on July 31, 2002 and contains certain restrictive covenants. The Company is in compliance with all restrictive covenants at July 31, 2001. In connection with the amendment to the Company's credit agreement with its bank as noted above, an Agency and Interlender Agreement was entered into by the Company, its bank and two additional participating banks effective December 1, 1997. This agreement states, among other things, that the Company's primary bank will participate in this credit facility with the other banks. In October 1998, the Company entered into an interest rate swap agreement. The agreement provides for the Company to pay interest for a five-year period at a fixed rate of 5% on a notional principal amount of $60 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap was entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million. The five-year term of the swap agreement may be extended to seven years at the option of the counter party. Subsequent to July 31, 2001, the Company entered into a new credit agreement and terminated the existing credit agreement. The Company also entered into a new interest rate swap agreement subsequent to July 31, 2001. See note 16, Subsequent Events, for further detail of these transactions. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 5) LONG-TERM DEBT
Long-term debt consisted of the following: (dollars in July 31, July 31, thousands) 2001 2000 ---- ---- Term loan for employee stock ownership plan, secured by stock of the Company, due $14 monthly plus interest at 10%, balance $2,258 $2,421 due May 1, 2015 Term loan payable to bank, secured by substantially all assets of the Company, due $235 quarterly plus interest at 3,075 4,015 1.25% above LIBOR, balance due July 31, 2002 Real estate term loan payable to bank, secured by land and building, due $28 monthly plus interest at 7.36%, balance due 5,555 5,885 July 31, 2002 Term loan payable to bank, secured by substantially all assets of the Company, with monthly principal payments of $50 9,890 10,490 through July 2002 and the remaining principal due on July 31, 2002, interest at 7.71% Real estate term loans payable to bank and others, secured by building and other assets, due monthly and maturing at various dates from July 2002 through April 2015, at rates 6,652 6,681 ranging from 5% to 8.6 % -------------------- 27,430 29,492 Less: current installments 19,625 2,770 -------------------- Long-term debt, excluding current installments $ 7,805 $ 26,722 ====================
Certain debt agreements contain restrictive covenants. The Company was in compliance with all of its restrictive covenants at July 31, 2001. Aggregate maturities of long-term debt for the next five years and thereafter are as follows at July 31, 2001: Year (Thousands) 2002 $19,625 2003 1,047 2004 1,043 2005 980 2006 411 Thereafter 4,324 ------- $27,430 ======= Subsequent to July 31, 2001, the Company entered into a new credit agreement and terminated the existing credit agreement. Loans maturing in July 2002 were repaid with proceeds from the new credit facility. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (6) PROPERTY AND EQUIPMENT Property and equipment consisted of the following at July 31, 2001 and 2000: (Dollars in thousands) Estimated 2001 2000 Useful Lives (Years) Land $ 3,824 $ 1,741 Buildings 20-40 38,279 33,912 Building Improvements 20-40 6,939 - Leasehold improvements 5-30 7,174 9,981 Warehouse equipment 5-20 21,360 20,479 Office equipment 3-10 9,870 8,531 Motor vehicles 3-5 6,164 5,877 Equipment under capital leases 5 5,581 3,984 Construction in progress 1,278 1,742 -------- ------- 100,469 86,247 Less accumulated depreciation and amortization 38,283 33,622 -------------------- Net property and equipment. $ 62,186 $52,625 ==================== (7) CAPITAL LEASES The Company leases computer, office and warehouse equipment under capital leases expiring in various years through 2007. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are depreciated over the lower of their related lease terms or their estimated productive lives. Total capital leased assets for fiscal year 2001 and 2000 were $5,581 and $3,984, respectively, less accumulated depreciation of $2,898 and $2,248, respectively. Minimum future lease payments under capital leases as of July 31, 2001 for each of the next five fiscal years and in the aggregate are: Year ended July 31 Amount (In thousands) 2002 $ 1,280 2003 964 2004 493 2005 134 2006 and thereafter 49 ----------------- Total minimum lease payments 2,920 Less: Amount representing interest 316 ----------------- Present value of net minimum lease payments 2,604 Less: current installments 1,120 ----------------- Capital lease obligations, excluding current installments $ 1,484 ================= (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 three to five 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, 2001. Rent and other lease expense for the years ended July 31, 2001, 2000 and 1999 totaled approximately $9.7 million, $8.5 million and $7.2 million, respectively. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Future minimum annual fixed payments required under non-cancelable operating leases having an original term of more than one year as of July 31, 2001 are as follows: Year (In thousands) 2002 $ 10,149 2003 9,680 2004 8,892 2005 7,296 2006 5,237 2007 and thereafter 30,670 -------- $ 71,924 ======== Outstanding commitments as of July 31, 2001 for the purchase of inventory were approximately $5.5 million. The Company had outstanding letters of credit of approximately $3.9 million at July 31, 2001. 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) PROFIT SHARING / SALARY REDUCTION PLANS The Company has several profit sharing/salary reduction plans, generally called "401(k) Plans" ("the Plans"), covering various employee groups. Under these types of Plans the employees may choose to reduce their compensation and have these amounts contributed to the Plans on their behalf. In order to become a participant in the Plans, employees must meet certain eligibility requirements as described in the respective Plan's document. In addition to amounts contributed to the Plans by employees, the Company makes contributions to the Plans on behalf of the employees. The Company contributions to the Plans were approximately $1.3 million, $1.0 million and $1.0 million for the years ended July 31, 2001, 2000 and 1999, respectively. (10) INCOME TAXES Total federal and state income tax (benefit) expense from continuing operations consists of the following: (In thousands) Current Deferred Total ------- -------- ----- Fiscal year ended July 31, 2001: U.S. Federal $ 9,212 $(1,399) $ 7,813 State and local 1,499 (406) 1,093 ------- ------- ------- $10,711 $(1,805) $ 8,906 ======= ======= ======= Fiscal year ended July 31, 2000: U.S. Federal $ (141) $ 79 $ (62) State and local 269 (1,009) (740) ------- ------- ------- $ 128 $ (930) $ (802) ======= ======= ======= Fiscal year ended July 31, 1999: U.S. Federal $ 9,447 $ (811) $ 8,636 State and local 1,619 (129) 1,490 ------- ------- ------- $11,066 $ (940) $10,126 ======= ======= ======= 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Total income tax expense (benefit) was different than the amounts computed using the United States statutory income tax rate (40%) applied to income before income taxes as a result of the following: July 31, July 31, July 31, (In thousands) 2001 2000 1999 ---- ---- ---- Computed "expected" tax expense (benefit) $7,792 $(712) $ 8,258 State and local income tax, net of Federal income tax (expense) benefit 710 (481) 968 Non-deductible expenses 137 119 155 Non-deductible amortization 94 88 79 Other, net 173 184 666 ------ ----- ------- $8,906 $(802) $10,126 ====== ====== ======= Total income tax expense for the years ended July 31, 2001, 2000, and 1999 was allocated as follows; July 31, July 31, July 31, (In thousands) 2001 2000 1999 ---- ---- ---- Income from continuing operations $8,906 $(802) $10,126 Shareholders' equity, for compensation expense for tax purposes in excess of amounts recognized for financial statement purposes ($959) ($112) -- ------ ------ ------- $7,947 ($914) $10,126 ====== ====== ======= 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, 2001 and 2000 are presented below:
(In thousands) 2001 2000 ---- ---- Deferred tax assets: Inventories, principally due to additional costs inventoried for tax purposes $1,315 $1,245 Compensation and benefit related 886 750 State net operating loss carryforward 682 617 Accounts receivable, principally due to allowances for uncollectible accounts 545 304 Reserve for LIFO inventory 45 -- Other 987 169 ------ ------ Total gross deferred tax assets 4,460 3,085 Less valuation allowance -- -- Net deferred tax assets 4,460 3,085 ------ ------ Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation 33 405 Reserve for LIFO inventory method -- 329 Intangible assets 564 285 Other 74 83 ------ ------ Total deferred tax liabilities 671 1,102 ------ ------ Net deferred tax assets $3,789 $1,983 ====== ====== Current deferred income tax assets $3,513 $2,350 Non-current deferred income tax liabilities 276 (367) ------ ------ $3,789 $1,983 ====== ======
At July 31, 2001, the Company had net operating loss carryforwards of approximately $17 million for state income tax purposes that expire in years 2003 through 2021. The valuation allowance at July 31, 2001 and 2000 was zero. 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. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (11) EMPLOYEE STOCK OWNERSHIP PLAN The Company adopted the UNFI Employee Stock Ownership Plan (the "Plan") for the purpose of acquiring outstanding shares of the Company for the benefit of eligible employees. The Plan was effective as of November 1, 1988 and has received notice of qualification by the Internal Revenue Service. In connection with the adoption of the Plan, a Trust was established to hold the shares acquired. On November 1, 1988, the Trust purchased 40% of the outstanding Common Stock of the Company at a price of $4,080,000. The trustees funded this purchase by issuing promissory notes to the initial stockholders, with the Trust shares pledged as collateral. These notes bear interest at 10% and are payable through May 2015. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans," in November 1993. The statement provides guidance on employers' accounting for ESOPs and is required to be applied to shares purchased by ESOPs after December 31, 1992, that have not been committed to be released as of the beginning of the year of adoption. In accordance with SOP 93-6, the Company elected not to adopt the guidance in SOP 93-6 for the shares held by the ESOP, all of which were purchased prior to December 31, 1992. The debt of the ESOP is recorded as debt and the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. During each of 2001, 2000 and 1999 contributions totaling approximately $0.4 million were made to the Trust. Of these contributions, approximately $0.2 million represented interest in 2001 and approximately $0.3 million represented interest in years 2000 and 1999. The ESOP shares were classified as follows: (In thousands) July 31, July 31, 2001 2000 Allocated shares. 902 814 Shares released for allocation 88 88 Shares distributed to employees (376) (327) Unreleased shares 1,210 1,298 ----- ----- Total ESOP shares 1,824 1,873 ===== ===== The fair value of unreleased shares was approximately $26.8 million at July 31, 2001. 12) BUSINESS SEGMENTS The Company has several operating segments aggregated under the distribution segment, which is the Company's only reportable segment. These operating segments have similar products and services, customer types, distribution methods and historical margins. The distribution segment is engaged in independent national distribution of natural foods and related products in the United States. Other operating segments include the retail segment, which engages in the sale of natural foods and related products to the general public through retail storefronts on the east coast of the United States, and a segment engaging in trading, roasting and packaging of nuts, seeds, dried fruit and snack items. These other operating segments do not meet the quantitative thresholds for reportable segments and are therefore included in an "other" caption in the segment information. The "other" caption also includes corporate expenses that are not allocated to operating segments. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Following is business segment information for the periods indicated: (dollars in thousands) Distribution Other Eliminations Consolidated 2001 ---- Revenue 977,199 58,464 (18,829) 1,016,834 Operating Income 30,974 (1,339) (3) 29,632 Amortization and 6,625 1,283 -- 7,908 Depreciation Capital Expenditures 14,457 1,434 -- 15,891 Assets 440,187 1,266 (141,009) 300,444 2000 ---- Revenue 870,307 56,131 (17,750) 908,688 Operating Income 8,333 (4,549)) 68 3,852 Amortization and 6,431 1,170 -- 7,601 Depreciation Capital Expenditures 15,190 680 -- 15,870 Assets 400,538 7,129 (137,433) 270,234 1999 ---- Revenue 806,013 72,860 (21,875) 856,998 Operating Income 26,242 422 152 26,816 Amortization and 7,819 1,386 -- 9,205 Depreciation Capital Expenditures 5,668 942 -- 6,610 Assets 357,401 18,824 (138,324) 237,901 (13) RESTRUCTURING COSTS The Company's operating expenses for fiscal year 2001 included restructuring charges of $0.4 million related to the expansion of its New Oxford, PA distribution facility, and $0.4 million of asset impairment charges, primarily goodwill, associated with the closing of an unprofitable retail store. (14) QUARTERLY FINANCIAL DATA (UNAUDITED) Following is a summary of quarterly operating results and share data. There were no dividends paid or declared during 2001 and 2000 and the Company anticipates that it will continue to retain earnings for use in its business and not pay cash dividends in the foreseeable future.
(In thousands except per share data) First Second Third Fourth Full Year ------------------------------------------------------------------------------------------------------- 2001 ---- Net sales $244,141 $244,422 $258,536 $269,735 $1,016,834 Gross profit 48,051 47,790 49,683 53,270 198,794 Income before income taxes 5,442 4,345 5,470 7,007 22,264 Net income 3,265 2,607 3,282 4,204 13,358 Per common share income Basic: $ 0.18 $ 0.14 $ 0.18 $ 0.23 $ 0.72 Diluted: $ 0.18 $ 0.14 $ 0.17 $ 0.22 $ 0.71 Weighted average basic Shares outstanding 18,320 18,414 18,580 18,616 18,482 Weighted average diluted Shares outstanding 18,633 18,784 18,839 19,027 18,818 Market Price High $15.25 $20.38 $19.50 $23.20 $23.20 Low $ 9.56 $11.38 $10.88 $13.94 $ 9.56
37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands except per share data) First Second Third Fourth Full Year ------------------------------------------------------------------------------------------------------- 2000 ---- Net sales $218,455 $231,375 $229,205 $229,653 $908,688 Gross profit 40,452 42,171 45,305 46,087 174,015 (Loss) income before income (benefit) taxes (1,697) (7,527) 2,940 4,251 (2,033) Net (loss) income (1,018) (4,528) 1,765 2,550 (1,231) Per common share income (loss) Basic: $ (0.06) $ (0.25) $ 0.10 $ 0.14 $ (0.07) Diluted: $ (0.06) $ (0.25) $ 0.10 $ 0.14 $ (0.07) Weighted average basic Shares outstanding 18,260 18,260 18,261 18,275 18,264 Weighted average diluted Shares outstanding 18,260 18,260 18,562 18,651 18,264 Market Price High $19.63 $15.19 $16.00 $16.69 $19.63 Low $ 7.63 $ 7.00 $ 9.63 $12.38 $ 7.00
(15) INTEREST RATE SWAP AGREEMENT In October 1998, the Company entered into an interest rate swap agreement. The agreement provides for the Company to pay interest for a five-year period at a fixed rate of 5% on a notional principal amount of $60 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million at LIBOR plus 1.25%, thereby fixing the Company's effective rate at 6.25%. The five-year term of the swap agreement may be extended to seven years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under Statement of Financial Accounting Standards No. 133. The fair market value on the adoption date of August 1, 2000 was less than $0.1 million. As of July 31, 2001 the fair market values were $(1.0) million and ($0.3) million of the swap agreement and the option respectively. The Company recorded other expense of $1.3 million to reflect this change in fair market value. Subsequent to July 31, 2001 the Company entered into a second interest rate swap agreement. See note 16, Subsequent Events, for further detail of this transaction. (16) SUBSEQUENT EVENTS The Company entered into a new line of credit with its bank effective September 4, 2001. The agreement increased the amount of the credit facility to $150 million from $100 million. Interest accrues, at the Company's option, at the New York Prime Rate or the banks' London Interbank Offered Rate ("LIBOR") plus 1.50%. The agreement also provides for the bank to syndicate the credit facility to other banks and lending institutions. The Company has pledged all of its assets as collateral for its obligations under the credit agreement. The proceeds were received on September 4, 2001 and were used to refinance the Company's existing credit facility consisting of a revolving loan balance of $61.8 million and fixed rate mortgages of $18.3 million. An additional fixed rate mortgage of $1.5 million and an equipment loan of approximately $2.0 million will also be paid in full. The Company also entered into an additional interest rate swap agreement effective August 1, 2001. The agreement provides for the Company to pay interest for a four-year period at a fixed rate of 4.81% on a notional principal amount of $30 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing the Company's effective rate on the notional amount at 6.31%. If LIBOR exceeds 6.0% in a given period the agreement is suspended for that period. The four-year term of the swap agreement may be extended to six years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under SFAS No. 133. Subsequent to July 31, 2001, the Company signed an agreement to lease a 200,000 square foot distribution center in the greater Los Angeles, California area with the option to lease an additional 83,000 square feet for expansion. 38 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 and Directors of the Registrant" in PART I hereof, and the remainder is contained in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held in December 2001 (the "2001 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 2001 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 2001 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 2001 Proxy Statement and is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as a part of this Form 10-K 1. Financial Statements. The Financial Statements listed in the Index to Financial Statements in Item 8 hereof are filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedules. Schedule II Valuation and Qualifying Accounts All other schedules are omitted, since the required information is not present or is not present in amounts 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. None. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED NATURAL FOODS, INC. /s/ TODD WEINTRAUB ----------------------------- Todd Weintraub Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Dated: October 19, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date /s/ THOMAS B. SIMONE Chairman of the Board October 19, 2001 ----------------------- Thomas B. Simone /s/ MICHAEL S. FUNK Chief Executive Officer and Vice Chairman October 19, 2001 ----------------------- of the Board Michael S. Funk (Principal Executive Officer) /s/ STEVEN TOWNSEND President, President of Eastern Region and October 19, 2001 ----------------------- Director Steven Townsend /s/ TODD WEINTRAUB Vice President, Chief Financial Officer and October 19, 2001 ----------------------- Treasurer (Principal Financial and Todd Weintraub Accounting Officer) /s/ KEVIN T. MICHEL President of Western Region, Assistant October 19, 2001 ----------------------- Secretary and Director Kevin T. Michel /s/ GORDON D. BARKER Director October 19, 2001 ----------------------- Gordon D. Barker /s/ JOSEPH M. CIANCIOLO Director October 19, 2001 ----------------------- Joseph M. Cianciolo /s/ JAMES P. HEFFERNAN Director October 19, 2001 ----------------------- James P. Heffernan
40 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* 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. 10.3* 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. 10.4* Trust Agreement between Norman A. Cloutier, Steven H. Townsend, Daniel V. Atwood, Theodore Cloutier and Steven H. Townsend as Trustee, dated November 1, 1988. 10.5* 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. 10.6*+# 1996 Stock Option Plan. 10.61y Amendment No. 1 to Amended and Restated 1996 Stock Option Plan 10.62y Amendment No. 2 to Amended and Restated 1996 Stock Option Plan 10.63y Amended and Restated 1996 Stock Option Plan 10.8*+ Non-competition Agreement between the Registrant and Norman A. Cloutier, dated November 16, 1993. 10.9* Amended and Restated Loan and Security Agreement among the Registrant, Mountain People's, Natural Retail Group, Inc., Rainbow, Nutrasource, Inc. and Fleet Capital Corporation, dated February 20, 1996. 10.10* Purchase and Sale Agreement between the Registrant and O.M. Killingly Investment Company, dated March 31, 1995. 10.11* Real Estate Term Note between the Registrant and Shawmut Capital Corporation (now Fleet Capital Corporation), dated September 8, 1995. 10.12* Distribution Agreement between Mountain People's Wine Distributing, Inc., and Mountain People's, dated August 23, 1994. 10.13* Lease, dated July 29, 1995, between Prem Mark, Inc. and the Registrant. Exhibit No. Description 10.14* Lease, dated July 12, 1990, between the Registrant and Sylvan and Stanford Makover Joint Venture, as amended. 10.15 * Lease, dated August 23, 1989, between the Registrant and Bradley Spear and Seattle First National Bank, co-executors of the estate of A.H. Spear. 10.16*+ 1996 Employee Stock Purchase Plan. 10.17*** First Amendment to Amended and Restated Loan Agreement with Fleet Capital Corporation, dated March 1, 1997. 10.18**** Second Amendment to Amended and Restated Loan Agreement with Fleet Capital Corporation, dated July 1, 1997. 10.19xx Third Amendment to Amended and Restated Loan Agreement with Fleet Capital Corporation, dated October 31, 1997. 10.20**** Lease dated July 11, 1997 between AmberJack, Ltd. and the Registrant. 10.21xxxxx Lease dated June 6, 2001 between M.D. Hodges Enterprises, Inc. and the Registrant 10.22xxxxx Lease dated July 31, 2001 between Metropolitan Life Insurance Company and the Registrant 10.23xxx Employment Transition Agreement and Release for Norman A. Cloutier dated December 8, 1999 10.24yy Employment Agreement for Steven H. Townsend dated December 6, 1999 10.25xx Third Amendment to Amended and Restated Loan Agreement with Fleet Capital Corporation, dated October 31, 1997. 10.26xx Agency and Interlender Agreement between United Natural Foods, Inc. and Fleet Capital Corporation, First Union National Bank and Nationsbank, N.A., dated December 1, 1997. 10.27***** Fourth Amendment to Amended and Restated Loan Agreement with Fleet Capital Corporation, dated July 31, 1999. 10.28***** Lease dated August, 1998 between Valley Centre I, L.L.C. and the Registrant. 10.29xxxx Fifth Amendment to Amended and Restated Loan Agreement with Fleet Capital Corporation, dated March 31, 2000 10.30yy Lease dated December 31, 1996 between Dove Investments, Inc. and the Registrant and Amendments 10.31yy Purchase and Sale agreement between the Registrant and Dynamic Builders, Inc., dated June 30, 1999, Amendments and attachment 10.32yy Real estate Term Notes between the Registrant and City National Bank dated April 28, 2000 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP. Schedule II - Valuation and Qualifying Accounts and Report of Independent Accountants thereon. * Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-11349) ** Incorporated by reference to an Annex to the Registrant's Proxy Statement dated October 15, 1997 with respect to the Special Meeting of Stockholders dated October 30, 1997. *** Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 1997. **** Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1997. ***** Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1999. x Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 1998. xx Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1997. xxx Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 2000. xxxx Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 2000. + Management contract or compensatory plan or arrangement filed in response to Item 14(a)(3) of the instructions to Form 10-K. # Incorporated by reference to the Registrant's Registration Statement on Form S-8 dated February 3, 1999. xxxxx Filed herewith. y Incorporated by reference to the Registrant's Definitive Proxy Statement on Form DEF 14A (File No. 001-15723). yy Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended July 31, 2000. INDEPENDENT AUDITORS' REPORT The Board of Directors United Natural Foods, Inc.: Under date of September 4, 2001, we reported on the consolidated balance sheets of United Natural Foods, Inc. and subsidiaries as of July 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 2001, as contained in the annual report on Form 10-K for the year 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP ------------ KPMG LLP Providence, Rhode Island September 4, 2001 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions beginning of charged to costs Balance at end of period and expenses Deductions period ------------------------------------------------------------------ Year ended July 31, $3,302 $ 2,903 $2,661 $ 3,544 2001 Year ended July 31, $2,297 $1,992 $ 987 $3,302 2000 Year ended July 31, $1,780 $1,995 $1,478 $2,297 1999