-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ANASjwcd16s0tAVezGv1IyKofFmiobNarhsqQX47eCSswKXRMg9Z/MlHm7c5mZ+h Tk+LvoOfrxk0xPFR4SAdIw== 0001005477-98-003545.txt : 19981214 0001005477-98-003545.hdr.sgml : 19981214 ACCESSION NUMBER: 0001005477-98-003545 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED NATURAL FOODS INC CENTRAL INDEX KEY: 0001020859 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 050376157 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21531 FILM NUMBER: 98767986 BUSINESS ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 BUSINESS PHONE: 8607792800 MAIL ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 10-Q 1 QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 000-21531 UNITED NATURAL FOODS, INC. (Exact name of Registrant as Specified in Its Charter) Delaware 05-0376157 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 260 Lake Road Dayville, CT 06241 (Address of Principal Executive Offices, Including Zip Code) Registrant's Telephone Number, Including Area Code: (860) 779-2800 ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- As of December 11, 1998, there were 18,175,218 shares of the Registrant's Common Stock, $0.01 par value per share, outstanding. ================================================================================ UNITED NATURAL FOODS, INC. FORM 10-Q FOR THE QUARTER ENDED OCTOBER 31, 1998 TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of October 31, 1998 and July 31, 1998 3 Consolidated Statements of Income for the three months ended October 31, 1998 and 1997 4 Consolidated Statements of Cash Flows for the three months ended October 31, 1998 and 1997 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-15 Item 3. Quantitative and Qualitative Disclosure About Market Risk 15 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16
PART I. FINANCIAL INFORMATION Item 1. Financial Statements UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except per share amounts) October 31, 1998 July 31, 1998 ------------------ ----------------- ASSETS Current assets: Cash and cash equivalents $ 1,455 $ 1,393 Accounts receivable, net of allowance of $2,102 and $1,780, respectively 57,591 48,078 Notes receivable, trade 693 705 Inventories 100,538 91,119 Prepaid expenses 4,143 3,209 Deferred income taxes 1,732 1,540 Refundable income taxes 437 165 ------------------ ----------------- Total current assets 166,589 146,209 Property & equipment, net 47,436 44,434 Other assets: Notes receivable, trade, net 915 1,170 Goodwill, net 28,095 19,136 Covenants not to compete, net 550 613 Other, net 721 680 ------------------ ----------------- Total assets $ 244,306 $ 212,242 ================== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - line of credit $ 51,892 $ 36,608 Current installments of long-term debt 5,375 3,309 Current installments of obligations under capital leases 334 488 Accounts payable 37,426 32,017 Accrued expenses 11,479 8,219 ------------------ ----------------- Total current liabilities 106,506 80,641 Long-term debt, excluding current installments 26,116 25,081 Deferred income taxes 1,698 1,370 Obligations under capital leases, excluding current installments 762 764 ------------------ ----------------- Total liabilities 135,082 107,856 ------------------ ----------------- Stockholders' equity: Preferred stock, $.01 par value, authorized 5,000 shares; none issued or outstanding -- -- Common stock, $.01 par value, authorized 25,000 shares; issued and outstanding 18,175 at October 31, 1998 issued 18,184 and outstanding 18,175 at July 31, 1998 182 182 Additional paid-in capital 67,193 67,440 Unallocated shares of ESOP (2,706) (2,747) Retained earnings 44,555 39,776 Treasury stock, 9 shares at July 31, 1998, at cost -- (265) ------------------ ----------------- Total stockholders' equity 109,224 104,386 ------------------ ----------------- Total liabilities and stockholders' equity $ 244,306 $ 212,242 ================== =================
See notes to consolidated financial statements. 3 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended October 31, (In thousands, except per share data) 1998 1997 ------------- ------------- Net sales $ 199,889 $ 173,383 Cost of sales 157,275 139,194 ------------- ------------- Gross profit 42,614 34,189 ------------- ------------- Operating expenses 32,825 27,659 Merger expenses -- 4,064 Amortization of intangibles 286 260 ------------- ------------- Total operating expenses 33,111 31,983 ------------- ------------- Operating income 9,503 2,206 ------------- ------------- Other expense (income): Interest expense 1,516 1,081 Other, net (176) (168) ------------- ------------- Total other expense 1,340 913 ------------- ------------- Income before income taxes 8,163 1,293 Income taxes 3,384 1,921 ------------- ------------- Net income (loss) $ 4,779 $ (628) ============= ============= Pro forma additional income tax expense -- 320 ------------- ------------- Pro forma net income (loss) $ 4,779 $ (948) ============= ============= Per share data (basic): Net income (loss) $ 0.26 $ (0.04) ============= ============= Pro forma net income (loss) $ 0.26 $ (0.05) ============= ============= Weighted average basic shares of common stock 18,175 17,357 ============= ============= Per share data (diluted): Net income (loss) $ 0.26 $ (0.04) ============= ============= Pro forma net income (loss) $ 0.26 $ (0.05) ============= ============= Weighted average diluted shares of common stock 18,537 17,649 ============= =============
See notes to consolidated financial statements. 4 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended October 31, (In thousands) 1998 1997 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 4,779 $ (628) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 1,696 1,380 Loss on disposals of property & equipment (5) (12) Deferred income tax benefit 78 -- Provision for doubtful accounts 477 132 Changes in assets and liabilities, net of acquired companies: Accounts receivable (6,986) (5,940) Inventory (8,884) (6,917) Prepaid expenses (735) 933 Refundable income taxes (387) -- Other assets 569 874 Notes receivable, trade 266 (407) Accounts payable 4,318 8,171 Accrued expenses 1,085 2,733 Income taxes payable -- 911 ---------- ---------- Net cash (used in) provided by operating activities (3,729) 1,230 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchases of subsidiaries, net of cash acquired (8,888) (1,359) Proceeds from disposals of property and equipment 31 125 Capital expenditures (1,599) (971) ---------- ---------- Net cash used in investing activities (10,456) (2,205) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under note payable 15,285 7,240 Repayments on long-term debt (900) (6,151) Principal payments of capital lease obligations (156) (555) Other 18 -- ---------- ---------- Net cash provided by financing activities 14,247 534 ---------- ---------- NET INCREASE (DECREASE) IN CASH 62 (441) Cash at beginning of period 1,393 952 ---------- ---------- Cash at end of period $ 1,455 $ 511 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,263 $ 1,115 ========== ========== Income taxes $ 3,826 $ 892 ========== ==========
In the quarters ended October 31, 1998 and 1997, the Company incurred no capital lease obligations. See notes to consolidated financial statements. 5 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements ("financial statements") include the accounts of United Natural Foods, Inc. and its wholly owned subsidiaries (the "Company"). The Company is a distributor and retailer of natural foods and related products. On October 31, 1997, a subsidiary of the Company completed its merger with Stow Mills, Inc. ("Stow Mills") wherein Stow Mills became a wholly owned subsidiary of the Company. The merger with Stow was accounted for as a pooling of interests and, accordingly, all financial information included is reported as though the companies had been combined for all periods reported. Net sales for the quarter ended October 31, 1997 for the Company excluding Stow were approximately $116.5 million. Net income for the quarter ended October 31, 1997 for the Company excluding Stow was $1.2 million. Net sales for the quarter ended October 31, 1997 for Stow were $56.9 million. Net loss for the quarter ended October 31, 1997 for Stow was $1.8 million. The financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally required in complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of management, these financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for interim periods, however, may not be indicative of the results that may be expected for a full year. Certain fiscal 1998 balances have been reclassified to conform to the fiscal 1999 presentation. 2. 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. The five year term of the swap agreement may be extended to seven years at the option of the counterparty. 3. PRO FORMA NET INCOME Stow Mills was subject to taxation as an S corporation until the merger on October 31, 1997. For pro forma disclosure purposes, income tax adjustments were assumed in order to reflect results as if Stow Mills had been subject to taxation as a C corporation for periods prior to the merger. 4. EARNINGS PER SHARE 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:
Three Months Ended October 31, (In thousands) 1998 1997 ---- ---- Basic weighted average shares outstanding 18,175 17,357 Net effect of dilutive stock options based upon the treasury stock method using the average stock price 362 292 ---------- ---------- Diluted weighted average shares outstanding 18,537 17,649 ========== ==========
6 5. ACQUISITION 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 approximately $11 million, including $9.1 million of goodwill. Albert's had sales of $47.8 million for its most recent fiscal year ended December 31, 1997. This acquisition has been accounted for as a purchase and, accordingly, all financial information has been included since the date of acquisition. 6. COMPREHENSIVE INCOME The Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company's comprehensive income is equal to net income for all periods presented. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview United Natural Foods, Inc. (the "Company") is the leading independent national distributor of natural foods and related products in the United States. In recent years, the Company has increased sales to existing and new customers through the acquisition of or merger with natural products distributors, the opening of distribution centers in new geographic areas, the expansion of existing distribution centers and the continued growth of the natural products industry in general. Through these efforts, management believes that the Company has been able to broaden its geographic penetration, expand its customer base, enhance and diversify its product selections and increase its market share. The Company's distribution operations are divided into three principal regions: Cornucopia Natural Foods, Inc. ("Cornucopia") and Stow Mills, Inc. ("Stow Mills") in the Eastern Region, Rainbow Natural Foods, Inc. ("Rainbow") in the Central Region and Mountain People's Warehouse, Inc. ("Mountain People's") in the Western Region. Through its subsidiary, the Natural Retail Group ("NRG"), the Company also owns and operates 16 retail natural products stores located in the eastern United States. The Company's retail strategy for NRG is to selectively acquire existing natural products stores that meet the Company's strict criteria in areas such as sales growth, profitability, growth potential and store management. Management believes the Company's retail business serves as a natural complement to its distribution business enabling the Company to develop new marketing programs and improve customer service. The Company is continually integrating certain operating functions in order to improve operating efficiencies, including: (i) integrating administrative and accounting functions; (ii) expanding marketing and customer service programs across the three regions; (iii) expanding national purchasing opportunities; (iv) consolidating systems applications between physical locations and regions; and (v) reducing geographic overlap between regions. In addition, the Company's continued growth has created the need for expansion of existing facilities to achieve maximum operating efficiencies and to assure adequate space for future needs. While operating margins may be affected in periods in which expenses are incurred, over the long term, the Company expects to benefit from the increased absorption of its expenses over a larger sales base. The Company has made considerable expenditures in connection with the expansion of its facilities, including the relocation of its Denver, Colorado distribution center and the expansion of refrigerated and frozen space at its Auburn, California and Atlanta, Georgia facilities. The Company's net sales consist primarily of sales of natural products to retailers adjusted for customer volume discounts, returns and allowances and, to a lesser extent, sales from its natural products stores. The principal components of the Company's cost of sales include the amount paid to manufacturers and growers for product sold, plus the cost of transportation necessary to bring the product to the Company's distribution facilities. Operating expenses include salaries and wages, employee benefits (including payments under the Company's Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, administrative, depreciation, merger expenses and amortization expense. Other expenses include interest payments on outstanding indebtedness, interest income and miscellaneous income and expenses. 7 Recent Acquisitions 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 produce, for approximately $11 million. Albert's had sales of $47.8 million for its most recent fiscal year ended December 31, 1997. During February 1998, the Company acquired substantially all the assets of Hershey Import Co., Inc. ("Hershey"), an international trading, roasting and packaging business of nuts, seeds, dried fruit and snack items, for approximately $10.5 million. Hershey had sales of $20.8 million for its most recent fiscal year ended June 30, 1997. The acquisitions of Albert's and Hershey have been accounted for as purchases and, accordingly, all financial information has been included since the respective dates of acquisition. The merger of the Company with Stow Mills in October 1997 has been accounted for as a pooling of interests and, accordingly, all information included herein is reported as though United Natural and Stow Mills had been combined for all periods reported. Results Of Operations The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales: Quarter Ended October 31, 1998 1997 ------------------- Net sales 100.0% 100.0% Cost of sales 78.7% 80.3% ------ ------ Gross profit 21.3% 19.7% ------ ------ Operating expenses 16.4% 16.0% Merger expenses -- 2.3% Amortization of intangibles 0.1% 0.1% ------ ------ Total operating expenses 16.6% 18.4% ------ ------ Operating income 4.8% 1.3% ------ ------ Other expense (income): Interest expense 0.8% 0.6% Other, net -0.1% -0.1% ------ ------ Total other expense 0.7% 0.5% ------ ------ Income before income taxes 4.1% 0.7% Income taxes 1.7% 1.1% ------ ------ Net income 2.4% -0.4% ====== ====== 8 Quarter Ended October 31, 1998 Compared To Quarter Ended October 31, 1997 Net Sales. The Company's net sales increased approximately 15.3%, or $26.5 million, to $199.9 million for the quarter ended October 31, 1998 from $173.4 million for the the quarter ended October 31, 1997. The overall increase in net sales was primarily attributable to increased sales to existing customers, the sale of new product offerings and newly acquired businesses. Gross Profit. The Company's gross profit increased approximately 24.6%, or $8.4 million, to $42.6 million for the quarter ended October 31, 1998 from $34.2 million for the quarter ended October 31, 1997. The Company's gross profit as a percentage of net sales increased to 21.3% for the quarter ended October 31, 1998 from 19.7% for the quarter ended October 31, 1997. The increase in gross profit as a percentage of net sales resulted partially from greater purchasing efficiencies resulting from the integration of Stow Mills and inbound freight efficiencies, partially offset by increased sales to existing customers under the Company's volume discount program. Operating Expenses. The Company's total operating expenses increased approximately 3.5%, or $1.1 million, to $33.1 million for the quarter ended October 31, 1998 from $32.0 million for the quarter ended October 31, 1997. As a percentage of net sales, operating expenses decreased to 16.6% for the quarter ended October 31, 1998 from 18.4% for the quarter ended October 31, 1997. Excluding merger costs of $4.1 million, the Company's total operating expenses for the quarter ended October 31, 1997 would have been $27.9 million, or 16.1% of net sales, resulting in an increase for the quarter ended October 31, 1998 of $5.2 million, or 18.6%, over the comparable prior period. The increase in the Company's operating expenses as a percentage of net sales, excluding merger costs, is primarily due to increased information technology expenditures and the growth of the retail business, which generally has higher operating expenses as a percentage of net sales than the distribution business. Operating Income. Operating income increased $7.3 million, to $9.5 million for the quarter ended October 31, 1998 from $2.2 million for the quarter ended October 31, 1997. As a percentage of net sales, operating income increased to 4.8% in the quarter ended October 31, 1998 from 1.3% in the comparable 1997 period. Excluding the merger costs noted above, operating income for the quarter ended October 31, 1997 would have been $6.3 million, or 3.6% of net sales, resulting in an increase for the quarter ended October 31, 1998 of $3.2 million, or 51.6%, over the comparable prior period. Other (Income)/Expense. The $0.4 million increase in other expense in the quarter ended October 31, 1998 compared to the quarter ended October 31, 1997 was primarily attributable to an increase in interest expense relating to the higher level of debt in the first quarter of fiscal 1999 used to fund working capital investments and newly acquired businesses. Income Taxes. The Company's effective income tax rates were 41.5% and 148.6% for the quarters ended October 31, 1998 and 1997, respectively. The effective rates were higher than the federal statutory rate primarily due to nondeductible merger costs incurred during the first quarter of fiscal 1998 and state and local income taxes, partially offset by the fact that Stow Mills was an S Corporation prior to the merger and, as such, had no federal tax expense for the first fiscal quarter of 1998. 9 Net Income. As a result of the foregoing, the Company's net income increased by $5.4 million to $4.8 million, or 2.4% of net sales, for the quarter ended October 31, 1998 from a loss of $0.6 million in the quarter ended October 31, 1997. Excluding the $4.1 million in merger costs in the first quarter of fiscal 1998, net income would have been $3.4 million, or 2.0% of net sales, resulting in an increase for the quarter ended October 31, 1998 of $1.3 million, or 39.1%, over the comparable prior period. Liquidity And Capital Resources The Company historically has financed its operations and growth primarily from cash flows from operations, borrowings under its credit facility, seller financing of acquisitions, operating and capital leases, trade payables, bank indebtedness and the sale of debt and equity securities. Primary uses of capital have been acquisitions, expansion of plant and equipment and investment in accounts receivable and inventory. Net cash (used in) provided by operations was $(3.7) million and $1.2 million for the quarters ended October 31, 1998 and 1997, respectively. Excluding merger expenses of $4.1 million, net cash provided by operations in the first quarter of fiscal 1998 would have been $5.3 million. The Company's cash used in operations in the first quarter of fiscal 1999 related primarily to investments in accounts receivable and inventory in the ordinary course of business. The increases in inventory levels relate to supporting increased sales with wider product assortment combined with the Company's ability to capture purchasing efficiency opportunities in excess of total carrying costs. The Company's cash provided by operations in the first quarter of fiscal 1998, excluding merger expenses, is due primarily to net income plus depreciation and amortization, offset by investments in accounts receivable and inventory in the ordinary course of business. The Company's working capital at October 31, 1998 was $60.1 million. Net cash used in investing activities was $10.5 million and $2.2 million for the quarters ended October 31, 1998 and 1997, respectively. Investing activities in both years were primarily for the acquisition of new businesses and the continued upgrade of existing management information systems. Cash provided by financing activities was $14.2 million and $0.5 million for the quarters ended October 31, 1998 and 1997, respectively. The Company had net borrowings on its line of credit of $15.3 million and $7.2 million during the first quarter of fiscal 1999 and fiscal 1998, respectively, and paydowns of long-term obligations of $1.1 million and $6.7 million, respectively. The Company expects to spend approximately $45 million over the next five years in capital expenditures to fund the expansion of existing facilities, upgrade information systems and technology and update its material handling equipment. 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. The five year term of the swap agreement may be extended to seven years at the option of the counterparty. Impact Of Inflation Historically, the Company has been able to pass along inflation-related increases. Consequently, inflation has not had a material impact upon the results of the Company's operations or profitability. Seasonality Generally, the Company does not experience any material seasonality. However, the Company's sales and operating results may vary significantly from quarter to quarter due to factors such as changes in the Company's operating expenses, management's ability to execute the Company's operating and growth 10 strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. Recently Issued Financial Accounting Standards The Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting operating segments of publicly traded business enterprises in annual and interim financial statements and requires that those enterprises report selected information about operating segments. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business," but retains the requirement to report information about major customers. This statement also amends SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries." SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997 and requires that comparative information for earlier years be restated. The Company has not yet determined what impact, if any, this standard will have on its financial statement presentation. The Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes disclosure requirements for pensions and other postretirement benefits, and is effective for fiscal years beginning after December 15, 1997. This statement does not apply to the Company as the Company does not currently sponsor any defined benefit plans. The Financial Accounting Standards Board recently issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, and is effective for fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not yet determined what impact, if any, this standard will have on its financial statement presentation. Year 2000 Issues The Company is currently in the process of assessing its exposure to the Year 2000 issue, and has established a comprehensive response to that exposure. Generally, the Company has Year 2000 exposure in three areas: i) the Company's information technology ("IT") infrastructure, including computer operating systems and applications, ii) microprocessors and other electronic devices included as components of non-computer equipment ("embedded chips") and iii) computer systems used by third parties, including customers and suppliers of the Company. The IT infrastructure and embedded chips are being addressed on a regional level. The third parties are being evaluated centrally. The Company has completed its assessment of its IT infrastructure, and is in the process of completing its evaluation of all microprocessors and other electronic devices, and third-party vendors and customers. Any statements contained herein (including without limitations statements to the effect that the Company or its management "believes," "expects," "anticipates," "plans" and similar expressions) that are not statements of historical fact should be considered forward-looking statements. The Company believes that the Western Region's critical IT infrastructure components and embedded chips are Year 2000 compliant. The Western Region has made the minimal changes necessary for its IT infrastructure to operate in a Year 2000 environment. The Western Region does not utilize two digit date coding logic, and has successfully tested hardware, operating system, and applications software simulating post Year 2000 systems clock dates. The Western Region has tested its microprocessors and other electronic devises and is in the process of making any necessary modifications rendering them year 2000 compliant. The Company expects that the Western Region's microprocessors and other electronic devices will be Year 2000 compliant by February 1999, except for the replacement of the Seattle facility's phone system which is scheduled for replacement for other business reasons in July 1999. All critical IT infrastructure components and embedded chips have been tested and work properly for the year 2000 and beyond. Additionally, a third-party review has been conducted to understand the Western Region's Year 2000 progress and communicate matters that came to their attention regarding such progress. The Company believes the Central Region's critical IT infrastructure components and embedded chips are also Year 2000 compliant. The Central Region does not employ two digit date coding logic and has simulated Year 2000 system clock dates in tests of its hardware and operating systems as well as selected applications software. The Central Region completed all Year 2000 simulation testing by the end of 11 November 1998. The Company has also recently completed an independent third-party review of the Central Region's operating system and critical IT applications software code which has indicated Year 2000 compliance. All other IT infrastructure components and embedded chips have been modified, will be modified before January 1, 1999, or if not Year 2000 compliant, will be retired before July 1, 1999. The Eastern Region is currently reviewing the results of a third-party audit of its Year 2000 systems code for both the Cornucopia and Stow Mills systems. The Eastern Region is in the process of moving to one system for operational efficiency reasons. The Stow Mills system will become a hybrid of the best functionality components of each system. The Stow Mills systems require a number of code changes to achieve full Year 2000 compliance. The Company expects the existing operating system to be upgraded to a Year 2000 compliant version during the first calendar quarter of 1999. In addition, all code is expected to be Year 2000 compliant for the surviving Stow Mills business systems prior to the end of the first calendar quarter of 1999. Also, the surviving Eastern Region systems clock will be moved forward simulating the Year 2000 prior to the end of March 1999. The existing Cornucopia (Dayville, Connecticut and Atlanta, Georgia) systems are not Year 2000 compliant. The Company is expected to move its operations off these existing systems and on to the surviving Stow Mills system during the first calendar quarter of 1999. The Eastern Region's phone system is also not Year 2000 compliant and will be upgraded by July 1999. All other IT infrastructure components and embedded chips have been modified, will be modified before the end of December 1998, or if not Year 2000 compliant, will be retired before July 1, 1999. The Company is in the process of installing new Point of Sale systems in its retail stores to enable more sophisticated promotions and improved business controls. The current Point of Sale systems or cash registers are not all Year 2000 compliant. The Company plans to have the Year 2000 compliant Point of Sale systems or compliant cash registers in place on or before July 1999. The Company is in the process of evaluating a solution for the Hershey business, which is not currently Year 2000 compliant. Albert's will make remaining minor coding changes to be Year 2000 compliant by the end of March 1999. The Company has sent written requests for Year 2000 information to substantially all suppliers. The Company is currently reviewing the responses received and preparing to send second requests to the top suppliers making up at least 80% of the Company's purchases. The Company has sent information requests to all its customers in order to compile a database of the Year 2000 status and plans for of all customers. The Company is in the process of updating its systems for business functionality reasons and has adopted a going forward systems strategy of staying current with state of the art systems technology. Furthermore, the Company is in the process of integrating acquisitions to achieve customer service and operating efficiency improvements, which require common state of the art systems technology. Accordingly, substantially all business systems changes would be performed regardless of the Year 2000 issue both from a timing and cost perspective. The Company therefore believes that it has spent and is spending an immaterial incremental amount on Year 2000 remediation over what it would spend to execute its going forward systems strategy. The Company has significantly increased its IT expenditures to execute its systems strategy which includes any immaterial incremental amounts to achieve Year 2000 compliance. The Company expects to spend on IT systems and support approximately $6 million in fiscal 1999 and spent approximately $4 million and $3 million in fiscal 1998 and 1997, respectively. The dates on which the Company believes it will be Year 2000 compliant are based on management's plans for work to be performed and best estimates which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results may differ materially from those anticipated. If the Company is unsuccessful in completing remediation of non-compliant systems, correcting embedded chips or if customers or suppliers cannot rectify their Year 2000 issues, it could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has not yet established a contingency plan in the event of non-compliance by any parties and has a timeline to prepare such contingency plans for any critical application falling behind schedule after the completion of the first calendar quarter of 1999. Certain Factors That May Affect Future Results The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Quarterly Report on Form 10-Q and presented 12 elsewhere by management from time to time. Any statements contained herein (including without limitations statements to the effect that the Company or its management "believes," "expects," "anticipates," "plans" and similar expressions) that are not statements of historical fact should be considered forward-looking statements. Results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of the Company's common stock. A number of uncertainties exist that could affect the Company's future operating results, including, without limitation, continued demand for current products offered by the Company, the success of the Company's acquisition strategy, competitive pressures, general economic conditions, the success of new product introductions and government regulation. A significant portion of the Company's historical growth has been achieved through acquisitions of or mergers with other distributors of natural products. The Company merged with Stow Mills in October 1997. The successful and timely integration of this merger is critical to the future operating and financial performance of the Company. The Company believes that the integration of Stow Mills will not be substantially completed until mid calendar 1999. The integration will require, among other things, coordination of administrative, distribution and finance functions, the integration of personnel and expansion of information and warehouse management systems among the Company's regional operations. The integration process could divert the attention of management, and any difficulties or problems encountered in the transition process could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, the process of combining the companies could cause the interruption of, or a loss of momentum in, the activities of the respective businesses, which could have an adverse effect on their combined operations. There can be no assurance that the Company will retain key employees of Stow Mills or that the Company will realize any of the other anticipated benefits of the Stow Mills merger. The growth in the size of the Company's business and operations has placed and is expected to continue to place a significant strain on the Company's management. The Company's future growth is limited in part by the size and location of its distribution centers. There can be no assurance that the Company will be able to successfully expand its existing distribution facilities or open new distribution facilities in new or existing markets to facilitate growth. In addition, the Company's growth strategy to expand its market presence includes possible additional acquisitions. To the extent the Company's future growth includes acquisitions, there can be no assurance that the Company will successfully identify suitable acquisition candidates, consummate and integrate such potential acquisitions or expand into new markets. The Company's ability to compete effectively and to manage future growth, if any, will depend on its ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage its work force. There can be no assurance that the Company's personnel, systems, procedures and controls will be adequate to support the Company's operations. The inability of the Company to manage its growth effectively could have a material adverse effect on its business, financial condition or results of operations. The Company operates in highly competitive markets, and its future success will be largely dependent on its ability to provide quality products and services at competitive prices. The Company's competition comes from a variety of sources, including other distributors of natural products as well as specialty grocery and mass market grocery distributors. There can be no assurance that mass market grocery distributors will not increase their emphasis on natural products and more directly compete with the Company or that new competitors will not enter the market. These distributors may have been in business longer than the Company, may have substantially greater financial and other resources than the Company and may be better established in their markets. There can be no assurance that the Company's current or potential competitors will not provide services comparable or superior to those provided by the Company or adapt more quickly than the Company to evolving industry trends or changing market requirements. It is also possible that alliances among competitors may develop and rapidly acquire significant market share or that certain of the Company's customers will increase distribution to their own retail facilities. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, financial condition or results of operations. There can be no assurance that the Company will be able to compete effectively against current and future competitors. The ability of the Company to maintain close, mutually beneficial relationships with its top two customers, Whole Foods Markets, Inc. ("Whole Foods") and Wild Oats Markets, Inc. ("Wild Oats"), is important to the 13 ongoing growth and profitability of its business. Whole Foods, the Company's largest customer, accounted for approximately 16% of the Company's net sales during the fiscal year ended July 31, 1998. As a result of this concentration of the Company's customer base, the loss or cancellation of business from either of these customers, including from increased distribution to their own facilities, could materially and adversely affect the Company's business, financial condition or results of operations. The Company's sales are made pursuant to purchase orders and therefore the Company generally has no agreements with or commitments from its customers for the purchase of products. No assurance can be given that the Company's customers will maintain or increase their sales volumes or orders for the products supplied by the Company or that the Company will be able to maintain or add to its existing customer base. The grocery distribution industry generally is characterized by relatively high volume with relatively low profit margins. The continuing consolidation of retailers in the natural products industry and the emergence of super natural chains may have an adverse effect on the Company's profit margins in the future as more customers qualify for greater volume discounts offered by the Company. The grocery industry is also sensitive to national and regional economic conditions, and the demand for products supplied by the Company may be adversely affected from time to time by economic downturns. In addition, the Company's operating results are particularly sensitive to, and may be materially adversely affected by, difficulties with the collectibility of accounts receivable, inventory control, competitive pricing pressures and unexpected increases in fuel or other transportation-related costs. There can be no assurance that one or more of such factors will not materially adversely affect the Company's business, financial condition or results of operations. The Company is currently undergoing its first audit by the Internal Revenue Service ("IRS"). The IRS is investigating the Company's 1996 and 1995 fiscal years and is also examining pre-acquisition books and records of certain acquired subsidiaries. As this is the first IRS audit experienced by the Company, which also includes an audit of pre-acquisition results of subsidiaries, the Company is not yet able to determine the amount of financial impact, if any, that may result at the conclusion of the audit. Significant audit adjustments could negatively impact the Company's reported earnings. Management of the Company's business is substantially dependent on the services of Norman A. Cloutier, the Company's Chairman of the Board and Chief Executive Officer, Robert T. Cirulnick, the Company's Chief Financial Officer, and other key management employees. Loss of the services of such officers or any other key management employee could have a material adverse effect on the Company's business, financial condition or results of operations. The Company's net sales and operating results may vary significantly from period to period due to factors such as changes in the Company's operating expenses, management's ability to execute the Company's business and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. Both the Company's distribution and retail businesses are dependent upon consumer preferences and demands for natural products, including levels of enthusiasm for health, fitness and environmental issues. Furthermore, the future operating performance of the Company is directly influenced by natural product prices, which can be volatile and fluctuate according to competitive pressures. A lack of an adequate supply of high-quality agricultural products or volatility in prices resulting from poor growing conditions, natural disasters or otherwise, could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, there can be no assurance that any future acquisitions by the Company will not have an adverse effect on the Company's business, financial condition or results of operations, particularly in periods immediately following the consummation of such transactions, while the operations of the acquired businesses are being integrated into the Company's operations. Due to the foregoing factors, the Company believes that period-to-period comparisons of its operating results may not necessarily be meaningful and that such comparisons cannot be relied upon as indicators of future performance. In order to maintain its profit margins, the Company relies 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 increased the Company's cost of capital or the ability to borrow funds or raise equity capital, the Company could suffer reduced profit margins and be unable to grow its business organically or through acquisitions, which could have a material adverse effect on the Company's business, financial condition or results of operations. 14 The Company's business is highly regulated at the federal, state and local levels and its products and distribution operations require various licenses, permits and approvals. In particular, the Company's products are subject to inspection by the U.S. Food and Drug Administration, its warehouse and distribution facilities are subject to inspection by the U.S. Department of Agriculture and state health authorities, and its trucking operations are regulated by the U.S. Department of Transportation and the U.S. Federal Highway Administration. The loss or revocation of any existing licenses, permits or approvals or the failure to obtain any additional licenses, permits or approvals in new jurisdictions where the Company intends to do business could have a material adverse effect on the Company's business, financial condition or results of operations. As of September 30, 1998, the Company's executive officers and directors, and their affiliates, and the ESOT will beneficially own in the aggregate approximately 59% of the Company's Common Stock. Accordingly, these stockholders, if acting together, would have the ability to elect the Company's directors and may have the ability to determine the outcome of corporate actions requiring stockholder approval, irrespective of how other stockholders of the Company may vote. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company. As of September 30, 1998, approximately 170 employees, representing approximately 6.5% of the Company's approximately 2,600 employees, were union members. In the past, the Company has been the focus of union-organizing efforts. As the Company increases its employee base and broadens its distribution operations to new geographic markets, its increased visibility could result in increased or expanded union-organizing efforts. Although the Company has not experienced a work stoppage to date, if additional employees of the Company were to unionize, the Company could be subject to work stoppages and increases in labor costs, either of which could materially adversely affect the Company's business, financial condition or results of operations. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments which would require disclosure under this item. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Quarterly Report on Form 10-Q. b) Reports on Form 8-K. On September 11, 1998, the Company filed a Current Report on Form 8-K dated September 3, 1998 announcing under Item 5 (Other Events) a press release containing results for the fourth quarter and year ended July 31, 1998, as well as a press release stating that it has entered into an a definitive agreement to acquire 100% of the outstanding stock of Albert's Organics, Inc., and presenting under Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) the following information: EXHIBITS. 99.1 Press release dated September 3, 1998. 99.2 Consolidated Statements of Income of United Natural Foods, Inc. for the quarter and year ended July 31, 1998 (unaudited). 99.3 Press release dated September 10, 1998. Exhibit Index Exhibit No. Description Page - ----------- ----------- ---- 27 Financial Data Schedule 17 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED NATURAL FOODS, INC. /s/ Robert T. Cirulnick --------------------------- Robert T. Cirulnick Chief Financial Officer (Principal Financial and Accounting Officer) Dated: December 11, 1998 16 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 AND THE CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUL-31-1999 OCT-31-1998 1,455 0 60,386 (2,102) 100,538 166,589 72,378 24,942 244,306 106,506 26,878 0 0 182 109,042 244,306 199,889 199,889 157,275 157,275 0 477 1,516 8,163 3,384 4,779 0 0 0 4,779 0.26 0.26
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