-----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, KNXtjDmSUXvNAXdWaYH4NZ4oZBmhmHAuwXOqXfC4yP+cm0sA4dciaOotBs4meYZa lieX07FQ90oHWntoCz3ySw== 0001005477-99-004921.txt : 19991101 0001005477-99-004921.hdr.sgml : 19991101 ACCESSION NUMBER: 0001005477-99-004921 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19991029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED NATURAL FOODS INC CENTRAL INDEX KEY: 0001020859 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 050376157 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21531 FILM NUMBER: 99737861 BUSINESS ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 BUSINESS PHONE: 8607792800 MAIL ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for fiscal year ended July 31, 1999 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 $142,653,734, based upon the closing price of the registrant's common stock on the Nasdaq National Market on October 5, 1999. The number of shares of the registrant's common stock, $0.01 par value, outstanding as of October 5, 1999 was 18,259,678. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held in December 1999 are incorporated herein by reference into Part III of this report. =============================================================================== UNITED NATURAL FOODS, INC. FORM 10-K TABLE OF CONTENTS Page ---- PART I. Item 1. Business 3 Item 2. Properties 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 11 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 25 Item 8. Financial Statements and Supplementary Data 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42 Part III Item 10. Directors and Executive Officers of the Registrant 42 Item 11. Executive Compensation 42 Item 12. Security Ownership of Certain Beneficial Owners and Management 42 Item 13. Certain Relationships and Related Transactions 42 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 42 Signatures 44 PART I. ITEM 1. BUSINESS United Natural Foods, Inc. ("UNFI")is the leading independent national distributor of natural foods and related products in the United States. We are the primary supplier to a majority of our customers, offering more than 26,000 high-quality natural products consisting of groceries and general merchandise, nutritional supplements, bulk and foodservice products, personal care items, perishables and frozen foods. We serve more than 6,500 customers in 47 states, including independent natural products retailers, super natural chains 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"). We also own and operate 11 retail natural products stores which complement our distribution business. Our strategy is to continue to capitalize on our leading market position and strong industry trends to enhance our position as the leading independent national distributor to the natural products industry. For the twelve months ended July 31, 1999, we generated net sales and operating income of $857.0 million and $26.8 million, respectively, representing compound annual growth rates of 20.0% and 26.1%, respectively, from the twelve months ended October 31, 1994. We have achieved our market leadership position through a strategy consisting of both strong internal growth and acquisitions. Since 1985, we have successfully completed 14 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, significantly expanding 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, 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. In managing our growth strategy, we have captured the benefits of our national scale, while utilizing a regional approach to managing our business, taking advantage of the strong customer loyalty developed by our regional divisions which have formed the foundation of the Company. As a result of our national expansion, we have organized our distribution operations into four principal units: United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods, Inc. and Stow Mills, Inc.) Rainbow Natural Foods, Inc. ("Rainbow") in the Central Region, Mountain People's Warehouse ("Mountain People's")in the Western Region and Alberts Organics in various markets in the United States. NATURAL PRODUCTS INDUSTRY According to the March 1999 Nutrition Business Journal, a leading industry publication, aggregate growth in wholesale sales of natural food manufacturers was 13% in 1998. We believe that this growth reflects a broadening of the natural products consumer base which is being driven by several factors, including an increasing awareness of the link between diet and health, healthier eating patterns, increasing concern regarding food purity and safety and greater environmental awareness. According to the June 1999 Natural Foods Merchandiser, the natural products retailing sector is highly fragmented, with over 9,000 independent natural products retailers in operation in 1998 and continuing to grow annually. Although the natural products industry sector remains fragmented, natural products supermarkets continue to increase their market share of total natural products sales as they expand into additional geographic markets and acquire smaller independent competitors. In addition, conventional supermarkets and mass market outlets have also begun to increase their emphasis on the sale of natural products as the sector gains appeal. Moreover, as consumer demand for natural products has grown, an increasing number of national, regional and local natural products have become available as more suppliers and producers have entered the market. COMPETITIVE ADVANTAGES We believe we benefit from a number of significant competitive advantages including: 3 o MARKET LEADER WITH A NATIONWIDE PRESENCE. As a result of our nationwide presence, we believe we are one of the few distributors capable of serving both 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) derive significant economies of scale in operating and distribution expenses; (ii) benefit from increased purchasing power and breadth of product offering; (iii) make significant investments in advanced technology and equipment to enhance productivity and customer service; and (iv) provide superior customer service on a national scale. o LOW-COST OPERATOR. We believe that we are well positioned to provide value added distribution services to our customers at attractive prices while also providing superior customer service. In addition to our volume purchasing power advantage, a critical component of our position as a low-cost provider is our management of warehouse and distribution costs, primarily as a result of utilizing larger distribution centers within each of our geographic regions and integrating our facilities through our nationwide interregional logistics network. In addition, we have made significant investment in transportation equipment and information technology to enable us to serve our customers. o EXPANDING BASE OF PREMIER CUSTOMER RELATIONSHIPS. We serve more than 6,500 customers in 47 states. We have developed long-standing customer relationships that 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 and Wild Oats, for more than ten years. o 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 14 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 47% 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 the leading independent national distributor to the natural products industry. Key elements of our strategy include: o INCREASE MARKET SHARE OF THE RAPIDLY GROWING NATURAL PRODUCTS INDUSTRY. Our strategy is to continue to increase our leading market share of the rapidly growing natural products industry by significantly expanding our customer base, increasing our share of existing customers' business and continuing to expand and further penetrate new distribution territories. o EXPAND CUSTOMER BASE. We have expanded substantially the number of customers served to more than 6,500 as of July 31, 1999. 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, Internet retailers, institutional foodservice providers, hotels and gourmet stores. o 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 26,000 SKUs as of July 31, 1999. 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 o CONTINUE TO EXPAND AND PENETRATE INTO NEW CHANNELS OF DISTRIBUTION. Since 1993 we have increased the aggregate size of our distribution centers from approximately 660,000 square feet to approximately 1,400,000 square feet and the number of states served from 25 to 47. We will continue to selectively evaluate opportunities to acquire (i) distributors to fill in existing markets and expand into new markets and (ii) suppliers to expand margins through vertical integration and brand differentiation. We currently have no agreements or understandings with regard to any material acquisitions. o 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 that have formed the foundation of UNFI. This focus on achieving improved economies of scale in purchasing, warehousing, transportation and general and administrative functions has resulted in improvements in operating margins, which increased from 2.5% in fiscal 1994 to 3.6% (excluding restructuring costs) in fiscal 1999, although our operating margin (excluding restructuring costs) in the fourth quarter of fiscal 1999 was 0.0% due to computer and related issues arising from the consolidation of operations in the Eastern Region. We believe that there are additional opportunities for margin improvement from our best practices programs. o 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 seasonal flier programs, in-store signage and assistance in product display, all in order 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 distribute more than 26,000 high-quality natural products, consisting of national brand, regional brand, private label and master distribution products in six product categories consisting of grocery and general merchandise, nutritional supplements, bulk and foodservice products, personal care items, fresh produce and perishables, and frozen foods. Our private label products address certain preferences of customers that are not otherwise being met by other suppliers. We evaluate more than 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 natural, organic, specialty, ethnic and gourmet products shows to review the latest products that 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. SUPPLIERS We purchase our products from approximately 1,800 suppliers. The majority of our vendors 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 UNFI 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 accounted for approximately 4.7% of total purchases in fiscal 1999. 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 their own orders and can select the products that they believe will most appeal to their 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. Our purchasing staff cooperates closely with vendors to provide new and existing products. The suppliers assist in training our account and customer service representatives in marketing new products, identifying industry trends and coordinating advertising and other promotions. We maintain a comprehensive quality control assurance program. All of the products we sell that 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 vendors of organic products are required to provide such third-party certification to us before they are approved as a supplier. Additionally, we have secured the services of counsel specializing in Food and Drug Administration ("FDA") matters to audit all labels, packaging, ingredient lists and product claims relating to products that we offer to ensure that all products meet current FDA requirements. We believe that we are the only natural products distributor which has performed such an audit to date. CUSTOMERS We market our products to more than 6,500 customers located in 47 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, Internet retailers and other 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 (including Bread and Circus, Fresh Fields, and Nature's Heartland), Wild Oats, Nature's Fresh!, Northwest, Wild Harvest and conventional supermarket chains such as Wegman's, Stop and Shop, Shaws/Star Market, Quality Food Centers (QFC), Hannaford, Pathmark and Kroger. 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 1999 and 1998, respectively. Wild Oats accounted for approximately 11% and 9% of our net sales in fiscal 1999 and 1998, respectively. No other customer accounted for more than 10% of our net sales in fiscal 1999. 6 SALES We have historically maintained an order fill rate that exceeds on average 95% (excluding products unavailable from the supplier), which we believe is one of the highest order fill rates in the natural products distribution industry. The fill rate has averaged approximately 75% to 80% in the Eastern Region during the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000 due to difficulties encountered relating to consolidation of operations in that region. 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 that cater to a broad range of retail formats. These programs are designed to educate consumers, profile suppliers and increase sales for retailers, the majority of which do not have the resources necessary to conduct such marketing programs independently. We offer multiple monthly flier programs featuring the logo and address of the participating retailer imprinted on a flier advertising approximately 200 sale items which is distributed by the retailer to its customers. The color fliers are designed by our in-house marketing department utilizing modern digital photography and contain detailed product descriptions and pricing information. Additionally, each flier generally includes detailed information on selected vendors, recipes, product features and a comparison of the characteristics of a natural product with a similar mass market product. The monthly flier 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 to our monthly flier programs, we offer thematic custom and seasonal consumer fliers that are used to promote items associated with a particular cause or season, such as environmentally sensitive products for Earth Day or foods and gifts particularly popular during the holiday season. The Company also (i) offers in-store signage and promotional materials, including shopping bags and end-cap displays, (ii) provides assistance with planning and setting up product displays and (iii) advises on pricing decisions to enable its customers to respond to local competition. DISTRIBUTION We maintain twelve distribution centers. These facilities consist of an aggregate of approximately 1.4 million square feet of space, the largest capacity of any distributor in the natural products industry. We have recently leased a new facility in Auburn, Washington which, at 200,000 square feet is twice the size of our former distribution center in Seattle. Our Chesterfield facility is currently offered for sale. We expect to complete the transfer the current Chesterfield volume to other facilities during fiscal 2000. See Item 2 - Properties for information on our distribution centers. 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. 7 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 the United Parcel Service and other independent carriers. Deliveries to areas outside the continental United States are shipped by ocean-going containers on a weekly basis. TECHNOLOGY 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, engineered labor standards, computer-assisted order processing and slot locator/retrieval assignment systems. At the receiving docks, warehouse workers attach computer-generated, preprinted locator tags to inbound products. These tags contain the expiration date, locations, quantity, lot number and other information in bar code format. 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 retail natural products stores located in Florida, Maryland, Massachusetts and New York. Our retail strategy is to selectively acquire existing stores that meet our strict criteria in categories such as sales and profitability, growth potential, merchandising and management. Generally, we will not purchase 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 the financial strength and marketing expertise provided by the Company, the purchasing power resulting from group purchasing by stores within NRG and the breadth of their product selection. Our strategy for future retail growth is to identify and acquire additional retail stores as opportunities arise and to focus on increased sales of higher margin nutritional supplements while maintaining emphasis on the sale of organic produce and delicatessen and bakery products and consumer education. 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 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 consolidationand the emergence of large competitors. Our major national competitor is Tree of Life Distribution, Inc. (a subsidiary of Koninklijke Bolswessanen 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 states. We also compete with numerous smaller 8 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. There can be no assurance that distributors of conventional groceries will not increase their emphasis on natural products and more directly compete with us or that new competitors will not enter the market. Many of these distributors may have been in business longer, may have substantially greater financial and other resources than we have 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 that we provide or adapt more quickly than we are able to evolving industry trends or changing market requirements. It is also possible that alliances among competitors may emerge and rapidly acquire significant market share or that certain of 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. We believe that distributors in the natural products industry compete principally 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, knowledge of personnel and convenience of location. EMPLOYEES As of April 30, 1999 we had approximately 2,600 full- and part- time employees. An aggregate of approximately 160 of the employees at our Seattle, Washington and Rahway, New Jersey facilities are covered by a collective bargaining agreement. We have never experienced a work stoppage by its unionized employees. We believe that its relationship with our employees is good. ITEM 2. PROPERTIES We maintain twelve distribution centers. These facilities consist of an aggregate of approximately 1.4 million square feet of space, the largest capacity of any distributor in the natural products industry. We have recently leased a new facility in Auburn, Washington which, at 200,000 square feet is twice the size of our former distribution center in Seattle. Our Chesterfield facility is currently offered for sale. We expect to complete the transfer the current Chesterfield volume to other facilities during fiscal 2000. SIZE LEASE LOCATION (IN SQUARE FEET) EXPIRATION Atlanta, Georgia............................... 175,000 March 2001 Auburn, California............................. 150,000 Owned Auburn, Washington............................. 200,000 March 2009 Bridgeport, New Jersey......................... 35,700 Owned Chesterfield, New Hampshire.................... 126,500 Owned Chicago, Illinois.............................. 80,000 February 2000 Dayville, Connecticut.......................... 245,000 Owned Denver, Colorado............................... 180,800 July 2013 Kealeakua, Hawaii.............................. 16,300 October 2002 Los Angeles, California........................ 30,900 February 2000 New Oxford, Pennsylvania....................... 127,000 May 2003 Winterhaven, Florida........................... 10,600 October 2000 We also rent facilities to operate 11 retail stores along the east coast and a 38,000 square foot processing and manufacturing facility in Rahway, New Jersey. 9 ITEM 3. LEGAL PROCEEDINGS. From time to time, the Company is involved in routine litigation which arises in the ordinary course of its business. There are no pending material legal proceedings to which the Company is a party or to which the property of the Company is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of the security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended July 31, 1999. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT The executive officers and directors of the Company and their ages as of October 29, 1999 are as follows: NAME AGE POSITION Norman A. Cloutier(1)(2)...... 46 Chairman of the Board and Chief Executive Officer Michael S. Funk(2)............ 45 Vice Chairman of the Board, President of the Company and President of the Company's Western Region Richard S. Youngman........... 48 Director and Vice President of Business Development of the Company Daniel V. Atwood.............. 41 Secretary of the Board, Vice President of the Company and President of NRG Kevin T. Michel............... 42 Interim Chief Financial Officer and Treasurer, Secretary and Director of the Company Gordon Barker(1)(3)........... 53 Director Joseph M. Cianciolo(1)(3)..... 60 Director Thomas B. Simone(1)(3)........ 57 Director Richard J. Williams........... 38 Director - --------------------- (1) Member of the Audit Committee. (2) Member of the Nominating Committee. (3) Member of the Compensation Committee. Norman A. Cloutier founded the Company in 1978. Mr. Cloutier has been Chairman of the Board and Chief Executive Officer of the Company since its inception. Mr. Cloutier served as President of the Company from its inception until October 1996. Mr. Cloutier previously operated a natural products retail store in Coventry, Rhode Island from 1977 to 1978. Michael S. Funk has been Vice Chairman of the Board of the Company since February 1996 and President of the Company since October 1996. Mr. Funk served as Executive Vice President of the Company from February 1996 until October 1996. Since its inception in July 1976, Mr. Funk has been President of Mountain People's Warehouse (currently the Company's Western Region). Mr. Funk has served on the Board of Directors since February 1996. Richard S. Youngman has been the Vice President of Business Development since March 1999. Mr. Youngman had previously served as President of the Company's Eastern Region from October 1997 until March 1999. Mr. Youngman was the President and a director of Stow Mills and its predecessor company from 1979 until October 1997. Mr. Youngman has served on the Board of Directors since December 1997. Daniel V. Atwood has been President of NRG and Vice President of the Company since August 1995. Mr. Atwood was Vice President--Marketing of the Company from January 1984 to August 1995. From 1979 to 1982, Mr. Atwood was a Store Manager at Bread & Circus Supermarkets, a super natural chain. Mr. Atwood served on the Board of Directors from August 1988 to December 1997. 10 Kevin T. Michel has been the Executive Vice President of the Company's Western Region since March 1999 and interim Chief Financial Officer and Treasurer since August 1999. Mr. Michel served as President of the Company's 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. Mr. Michel has served on the Board of Directors since February 1996. Gordon Barker was appointed as a Director on the Board of Directors in September 1999. Mr. Barker was employed for 30 years at PayLess Drug Stores (subsequently renamed ThriftyPayLess Drug Stores). While at the company Mr. Barker rose from Pharmacist, through several levels of management, ultimately leading the company as its CEO/President. Currently Mr. Barker is serving on the following Boards of Directors: Gart/Sportsmart Sporting Goods, Infinity Towers, NuMedics Inc., and Allure Inc. Joseph M. Ciancolo was appointed as a Director on the Board of Directors in September 1999. Mr. Cianciolo will also serve as Chairman of the Audit Committee and as a member of the Compensation Committee. Mr. Cianciolo was the Managing Partner of KPMG LLP, Providence, Rhode Island Office from June 1990 until June 1999. Prior to his appointment as managing partner, Mr. Cianciolo served as the engagement partner from 1970 - 1999 for various manufacturing and distribution companies, health, beauty and restaurant chains, and a manufacturer of electronic devices. Thomas B. Simone has served on the Board of Directors since October 1996. Mr. Simone serves as Chairman of the Compensation Committee and as a member of the Audit 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. From February 1991 until April 1994, Mr. Simone was President of McKesson Drug Company. Mr. Simone also serves on the Board of Directors of ECO-DENT International, Inc. Richard J. Williams has been a Managing Director of Triumph Capital Group, Inc. since March 1990. Mr. Williams has served on the Board of Directors since November 1993. Mr. Williams also serves on the Board of Directors of Outsource International, Inc. PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "UNFI." The United Natural Common Stock began trading on the Nasdaq National Market on November 1, 1996. The following table sets forth for the periods indicated the high and low sale prices per share of United Natural Common Stock on the Nasdaq National Market: Fiscal 1998 High Low ----------- ---- --- First Quarter $26.750 $19.250 Second Quarter 27.125 19.750 Third Quarter 30.688 23.750 Fourth Quarter 33.375 22.500 Fiscal 1999 High Low ----------- ---- --- First Quarter $29.500 $19.000 Second Quarter 29.250 22.500 Third Quarter 29.750 17.750 Fourth Quarter 29.250 17.250 On July 31, 1999 United Natural had 49 stockholders of record. The number of record holders may not be representative of the number of beneficial holders because many shares are held by depositories, brokers or other nominees. 11 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 the Company is 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. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below under the caption Consolidated Statement of Income Data with respect to the fiscal years ended July 31, 1997, 1998 and 1999, and under the caption Consolidated Balance Sheet Data at July 31, 1996, 1997, 1998 and 1999, are derived from the consolidated financial statements of the Company, which financial statements have been audited by KPMG LLP, independent certified public accountants. The selected consolidated financial data presented below under the caption Consolidated Statement of Income Data with respect to the years ended October 31, 1995 and July 31, 1996 and under the caption Consolidated Balance Sheet Data at October 31, 1995 are derived from the unaudited consolidated financial statements of the Company that have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. The historical results are not necessarily indicative of results to be expected for any future period. The following selected consolidated financial data should be read in conjunction with and are qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K. 12 Consolidated Statement of Income Data
Year Ended October 31, Year Ended July 31, (In thousands, except per share data) 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Statement of Operations Data: Net sales $458,849 $580,049 $634,825 $728,910 $856,998 Cost of sales 363,757 462,506 507,547 578,575 680,301 Gross profit 95,092 117,543 127,278 150,335 176,697 Operating expenses 81,355 99,261 103,885 116,042 144,937 Merger and restructuring expenses -- -- -- 4,064 3,869 Amortization of intangibles 2,426 2,616 1,060 1,185 1,075 Total operating expenses 83,781 101,877 104,945 121,291 149,881 Operating income 11,311 15,666 22,333 29,044 26,816 Other expense (income): Interest expense 5,969 7,730 5,976 5,157 5,700 Other, net (428) (411) (679) (778) (2,477) Total other expense 5,541 7,319 5,297 4,379 3,223 Income before income taxes and extraordinary item 5,770 8,347 17,036 24,665 23,593 Income taxes 2,953 3,652 6,636 11,580 10,126 Extraordinary item -- -- 933 -- -- Net income $ 2,817 $ 4,695 $ 9,467 $ 13,085 $ 13,467 Per share data (Basic): Income before extraordinary item $ 0.21 $ 0.34 $ 0.64 $ 0.75 $ 0.74 Extraordinary item, net of income tax benefit -- -- 0.06 -- -- Net income $ 0.21 $ 0.34 $ 0.58 $ 0.75 $ 0.74 Weighted average basic shares of common stock 13,691 13,688 16,367 17,467 18,196 Per share data (Diluted): Income before extraordinary item $ 0.19 $ 0.32 $ 0.63 $ 0.74 $ 0.73 Extraordinary item, net of income tax benefit -- -- 0.06 -- -- Net income per share (diluted) $ 0.19 $ 0.32 $ 0.57 $ 0.74 $ 0.73 Weighted average diluted shares of common stock 14,858 14,855 16,553 17,798 18,537 As of October 31, As of July 31, Consolidated Balance Sheet Data: (In thousands) 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Working capital $ 26,983 $ 13,453 $ 53,101 $ 65,568 $ 73,825 Total assets $134,508 $152,343 $164,561 $212,242 $237,901 Total debt and capital leases $ 48,890 $ 34,108 $ 21,647 $ 25,845 $ 25,791 Total stockholders' equity $ 17,117 $ 23,440 $ 73,916 $104,386 $118,581
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are the leading independent national distributor of natural 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 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, 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 four principal units: United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods, Inc. and Stow Mills, Inc.), Rainbow Natural Foods, Inc. in the Central Region, Mountain People's Warehouse, Inc. in the Western Region and Albert's Organics in various markets in the United States. Through our subsidiary, the Natural Retail Group, we also own and operate a number of retail natural products stores located in the eastern United States. Our retail strategy is to selectively acquire existing natural products stores that meet our strict criteria in areas such as sales growth, profitability, growth potential and store management. 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. We are 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, 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. 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. We have incurred considerable expenses in connection with the consolidation of operations in the Eastern Region, and expect these expenses to continue into fiscal 2000. These expenses consist of restructuring costs, including additional depreciation, severance and retention expenses, and the cost of moving inventory, as well as additional temporary expenses for information technology, inventory management and redundant staffing and transportation. We have also made considerable expenditures in connection with the expansion of our facilities, including the relocation of our Denver, Colorado distribution center and the expansion of refrigerated and frozen space at our Auburn, California and Atlanta, Georgia facilities. Additionally, our Seattle, Washington facility was relocated to a larger facility in Auburn, Washington during the third quarter of fiscal 1999. 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, merger expenses and amortization expense. Other expenses include gain on the sale of retail stores, interest on outstanding indebtedness, interest income and miscellaneous income and expenses. Our operating results for the fourth quarter of fiscal 1999 were negatively impacted by computer and related issues arising from the continuing consolidation of Eastern Region operations. The consolidation resulted in increased operating expenses, a lower gross margin and lower sales than prior quarters in the Eastern Region. We had a net loss of $(0.08) per share for the fourth quarter of fiscal 1999. Excluding restructuring costs of approximately $1.6 million for the quarter, net loss per share was $(0.03). The computer and related issues arising from the continuing consolidation of Eastern Region operations have continued into fiscal 2000 and we expect our operating results to continue to be negatively impacted. 14 Recent Acquisitions On September 30, 1998, we acquired substantially all of the outstanding stock of Albert's Organics, Inc., a business specializing in the purchase, sale and distribution of produce and other perishable items, for $10.8 million to $12 million, predicated upon the future performance of the acquired business, including $9.1 million of goodwill which we are amortizing over 40 years. The final price will be determined by March 2000. Albert's had sales of $47.8 million for the fiscal year ended December 31, 1997 and provides us with additional expertise in the purchasing of produce and other perishable items. Albert's also enables us to avail ourselves of a number of cross-selling opportunities, which will be mutually beneficial to both businesses. The acquisition of Albert's has been accounted for as a purchase and, accordingly, all financial information has been included since the date of acquisition. Our merger 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: Year Ended July 31, ------------------------ 1999 1998 1997 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of sales 79.4% 79.4% 80.0% ------ ------ ------ Gross profit 20.6% 20.6% 20.0% ------ ------ ------ Operating expenses 16.9% 15.9% 16.4% Merger and restructuring expenses 0.5% 0.6% -- Amortization of intangibles 0.1% 0.2% 0.2% ------ ------ ------ Total operating expenses 17.5% 16.6% 16.5% ------ ------ ------ Operating income 3.1% 4.0% 3.5% ------ ------ ------ Other expense (income): Interest expense 0.7% 0.7% 0.9% Other, net -0.3% -0.1% -0.1% ------ ------ ------ Total other expense (income) 0.4% 0.6% 0.8% ------ ------ ------ Income before income taxes and extraordinary item 2.8% 3.4% 2.7% Income taxes 1.2% 1.6% 1.0% ------ ------ ------ Income before extraordinary item 1.6% 1.8% 1.7% Extraordinary item - Loss on early extinguishment of debt, net of tax -- -- 0.1% ------ ------ ------ Net income 1.6% 1.8% 1.5% ====== ====== ====== 15 TWELVE MONTHS ENDED JULY 31, 1999 COMPARED TO TWELVE MONTHS ENDED JULY 31, 1998 Net Sales. Our net sales increased approximately 17.6%, or $128.1 million, to $857.0 million for the year ended July 31, 1999 from $728.9 million for the year ended July 31, 1998. The overall increase in net sales was attributable to increased sales to existing customers, the sale of new product offerings and the newly acquired Albert's Organics business. Excluding Albert's Organics, our most recent acquisition, our net sales growth would have been 11.4% over the prior year comparable period. Gross Profit. Gross profit increased approximately 17.5%, or $26.4 million, to $176.7 million for the year ended July 31, 1999 from $150.3 million for the year ended July 31, 1998. Gross profit as a percentage of net sales was consistent at 20.6% for both years. Operating Expenses. Total operating expenses increased approximately 23.6%, or $28.6 million, to $149.9 million for year ended July 31, 1999 from $121.3 million for the year ended July 31, 1998. As a percentage of net sales, operating expenses increased to 17.5% for year ended July 31, 1999 from 16.6% for the year ended July 31, 1998. Excluding fiscal 1999 restructuring costs of $3.9 million and fiscal 1998 merger costs of $4.1 million, total operating expenses for the years ended July 31, 1999 and 1998 would have been $146.0 million, or 17.0% of net sales, and $117.2 million, or 16.1% of net sales, respectively, resulting in an increase for the year ended July 31, 1999 of $28.8 million, or 24.6%, over the comparable prior period. The increase in operating expenses as a percentage of net sales, excluding restructuring and merger costs, is primarily due to increased information technology expenditures and additional business integration costs for redundant staffing and training related to the migration of the business from the Chesterfield, New Hampshire facility to the Dayville, Connecticut facility. Operating Income. Operating income decreased $2.2 million to $26.8 million for the year ended July 31, 1999 from $29.0 million for the year ended July 31, 1999. As a percentage of net sales, operating income decreased to 3.1% in the year ended July 31, 1998 from 4.0% in the comparable 1998 period. Excluding the restructuring and merger costs noted above, operating income for the year ended July 31, 1999 and 1998 would have been $30.7 million, or 3.6% of net sales, and $33.1 million, or 4.5% of net sales, respectively, resulting in a decrease for year ended July 31, 1999 of $2.4 million, or 7.3%, versus the comparable prior period. Other (Income)/Expense. The $1.2 million decrease in other expense in the year ended July 31, 1999 compared to the year ended July 31, 1998 was primarily attributable to the $1.4 million gain on the sale of four retail stores in April 1999, partially offset by an increase in interest expense relating to the higher level of debt in fiscal 1999 used to fund working capital investments and the Albert's acquisition. This increase in interest expense was partially offset by a decrease in our average interest rate on debt. Income Taxes. Our effective income tax rates were 42.9% and 46.9% for the year ended July 31, 1999 and 1998, respectively. The effective rate for 1999 was 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. The effective rate for 1998 was higher than the federal statutory rate primarily due to state and local income taxes and non-deductible merger expenses incurred in the first quarter of fiscal 1998, partially offset by Stow Mills being an S Corporation prior to the merger and, as such, having no federal tax expense for the first fiscal quarter of 1998. 16 Net Income. As a result of the foregoing, net income increased by $0.4 million to $13.5 million, or 1.6% of net sales, for the year ended July 31, 1999 from $13.1 million in the year ended July 31, 1998. Excluding 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 the third quarter of fiscal 1999, and the $4.1 million in merger costs in fiscal 1998, net income would have been $15.2 million, or 1.8% of net sales, and $17.1 million, or 2.4% of net sales, respectively, resulting in an decrease for the year ended July 31, 1999 of $1.9 million, or 11.3%, over the comparable prior period. TWELVE MONTHS ENDED JULY 31, 1998 COMPARED TO TWELVE MONTHS ENDED JULY 31, 1997 Net Sales. Our net sales increased approximately 14.8%, or $94.1 million, to $728.9 million for the twelve months ended July 31, 1998 from $634.8 million for the twelve months ended July 31, 1997. The overall increase in net sales was primarily attributable to increased sales to existing customers, sales to new accounts in existing geographic areas and the introduction of new products not previously offered. Gross Profit. Our gross profit increased approximately 18.1%, or $23.1 million, to $150.3 million for the twelve months ended July 31, 1998 from $127.3 million for the twelve months ended July 31, 1997. Our gross profit as a percentage of net sales increased to 20.6% for the twelve months ended July 31, 1998 from 20.0% for the twelve months ended July 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, partially offset by increased sales to existing customers under our volume discount program. Operating Expenses. Our total operating expenses increased approximately 15.6%, or $16.3 million, to $121.3 million for the twelve months ended July 31, 1998 from $104.9 million for the twelve months ended July 31, 1997. As a percentage of net sales, operating expenses increased to 16.6% for the twelve months ended July 31, 1998 from 16.5% for the twelve months ended July 31, 1997. Excluding merger costs of $4.1 million and relocation and start-up costs of $0.7 million for the new expanded Denver distribution and Central Region headquarters facility, our total operating expenses for the twelve months ended July 31, 1998 would have been $116.6 million, or 16.0% of net sales, representing an increase of $11.6 million, or 11.1%, over the comparable prior period. The decrease in total operating expenses as a percentage of net sales was primarily attributable to our ability to leverage our overhead and realize synergies from recent acquisitions. Operating Income. Operating income increased $6.7 million, or approximately 30.1%, to $29.0 million for the twelve months ended July 31, 1998 from $22.3 million for the twelve months ended July 31, 1997. As a percentage of net sales, operating income increased to 4.0% in the twelve months ended July 31, 1998 from 3.5% in the comparable 1997 period. Excluding the merger costs and relocation and start-up costs noted above, operating income for the twelve months ended July 31, 1998 would have been $33.8 million (representing an increase of 51.2% over the prior period), or 4.6% of net sales. Other (Income)/Expense. The $0.9 million decrease in other expense in the twelve months ended July 31, 1998 compared to the twelve months ended July 31, 1997 was primarily attributable to the reduction in interest expense in the first six months of fiscal 1998 relating to the repayment of Stow Mills' debt with proceeds from our credit facility, which bears interest at a lower rate. In addition, the proceeds from our secondary public offering in June 1998 were used to repay debt. 17 Income Taxes. Our effective income tax rates were 46.9% and 39.0% for the twelve months ended July 31, 1998 and 1997, respectively. The effective rates were higher than the federal statutory rate primarily due to nondeductible merger costs incurred during the first quarter of fiscal 1998 and state and local income taxes, partially offset by the fact that Stow Mills was an S Corporation prior to the merger and, as such, had no federal tax expense. Net Income. As a result of the foregoing, our net income increased by $3.6 million to $13.1 million for the twelve months ended July 31, 1998 from $9.5 million in the twelve months ended July 31, 1997. Excluding the $4.1 million in merger costs and the $0.7 million ($0.4 million, net of taxes) in fiscal 1998 and $0.9 million extraordinary item (net of taxes) related to the early extinguishment of debt in fiscal 1997, net income would have been $17.5 million (representing an increase of 68.5% over the prior period), or 2.4% of net sales, and $10.4 million, or 1.6% of net sales, for the twelve months ended July 31, 1998 and 1997, respectively. 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 investment in accounts receivable and inventory. Net cash provided by operations was $8.3 million, $4.5 million and $1.9 million for the years ended July 31, 1999, 1998 and 1997, respectively. Excluding merger expenses of $4.1 million, net cash provided by operations in fiscal 1998 would have been $8.6 million. Cash provided by operations in fiscal 1999 related primarily to cash collected from customers net of cash paid to vendors, partially offset by investments in accounts receivable in the ordinary course of business. Working capital at July 31, 1999 was $73.8 million. Net cash used in investing activities was $6.9 million, $34.7 million and $3.8 million for the years ended July 31, 1999, 1998 and 1997, respectively. Investing activities in fiscal 1999 and 1998 were primarily for the acquisition of new businesses and investing activities for all three years included the continued upgrade of existing management information systems. Net cash used in investing activities in fiscal 1999 was partially offset by proceeds from the sale of four retail stores in April 1999. Cash provided by financing activities was $0.1 million, $30.6 million and $2.0 million for the years ended July 31, 1999, 1998 and 1997, respectively. We increased borrowings on our line of credit by $4.5 million during fiscal 1999, which was mostly offset by debt repayments totaling $4.3 million. The primary financing activities in fiscal 1998 were net proceeds of $17.2 million from the issuance of common stock and proceeds of $14.4 million from long-term debt incurred. Net borrowings on our line of credit during fiscal 1998 of $9.4 million were offset by repayments of long-term debt totaling $9.5 million. The primary financing activities in fiscal 1997 were net proceeds of $35.5 million from the issuance of common stock and proceeds of $12.5 million from long-term debt incurred. The primary use of these proceeds was a net paydown of our line of credit totaling $ 23.0 million and repayments of long-term debt totaling $22.3 million. We expect 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 our material handling equipment. 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 counterparty. 18 IMPACT OF INFLATION Historically, the Company has been able to pass along inflation-related increases. Consequently, inflation has not had a material impact upon the results of the Company's operations or profitability. SEASONALITY Generally, the Company does not experience any material seasonality. However, the Company's sales and operating results may vary significantly from quarter to quarter due to factors such as changes in the Company's operating expenses, management's ability to execute the Company's operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS The Financial Accounting Standards Board 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. We adopted this standard in fiscal 1999. 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 as we do 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, 2000. We believe this standard will not have a material impact on our financial statement presentation. Year 2000 Issues The following information constitutes "Year 2000 Readiness Disclosure" under the Year 2000 Information and Readiness Disclosure Act of 1998. We have completed an assessment of most of our internal exposure to the year 2000 issue. We continue to assess our customer and vendor exposure. Generally, we believe we have "Year 2000" exposure in three areas: o our information technology infrastructure, including computer operating systems and applications, o microprocessors and other electronic devices -- "embedded chips" -- included as components of non-computer equipment, and o computer systems used by third parties, including our customers and suppliers. The information technology infrastructure and embedded chips are being addressed on a regional level. The third parties are being evaluated centrally on a company-wide basis. We have completed our assessment of our information technology infrastructure, and are in the process of completing our evaluation of all microprocessors and other electronic devices, third-party vendors and customers. 19 Our Western Region We believe that our western region's critical information technology infrastructure components and embedded chips are year 2000 compliant. Our Western Region does not utilize two digit date coding logic, and we have successfully tested hardware, operating system and applications software simulating post year 2000 dates. We have tested our microprocessors and other electronic devices and have completed implementing changes designed to achieve year 2000 compliance. The Seattle facility's phone system was replaced for other business reasons during the third quarter of fiscal 1999 and is year 2000 compliant. Our Central Region We believe our central region's critical information technology infrastructure components and embedded chips are also year 2000 compliant. Our central region does not employ two digit date coding logic and has simulated year 2000 dates in tests of its hardware and operating systems as well as selected applications software. We have completed all year 2000 simulation testing. We have also completed an independent third-party review of our central region's operating system and critical information technology applications software code which has indicated that they are year 2000 compliant. The Denver facility's telephone system was replaced in October 1999 and is now Year 2000 compliant. All other significant information technology infrastructure components and embedded chips either have been modified or, if not year 2000 compliant, have been retired. Our Eastern Region Our Eastern Region information technology department has been focused on a business recovery strategy to normalize operations, which were disrupted as a result of the conversion to the Stow Mills system in our Atlanta and Dayville facilities. A new management team has been appointed to continue the recovery process and address year 2000 compliance. The primary business operation systems in the Eastern Region are: BIP - Utilized by all four Eastern Region warehouses to accept customer orders, place purchase orders with our vendors and maintain inventory controls. BAKO - Warehouse management system used in Chesterfield and New Oxford. CWMS - Warehouse management system used in Dayville and Atlanta. Down to Earth - accounting software. BIP, BAKO and CWMS are currently being re-evaluated for year 2000 compliance. Many critical components, including all hardware and network equipment, have been successfully tested. The remaining components are undergoing testing for compliance. We may not achieve comprehensive testing and remediation for the systems prior to January 2000. However, substantially all the systems are currently handling dates beyond January 1, 2000. We have assembled a team of IT professionals both from within and outside the company who are familiar with our systems in an effort to successfully resolve any year 2000 issues in a timely manner if testing and remediation are not completed by year-end. If we are unable to resolve these issues by January 1, 2000, we expect to manually perform certain functions performed by the affected systems until the issues are resolved. This could adversely affect our ability to fill and process customer orders which could result in a reduction in our revenues and net income. In addition, any additional costs incurred to address these problems could adversely impact our operating earnings and net income. The Down to Earth accounting software is developed and supported by an outside vendor. The vendor has represented to us that the software has been tested and is year 2000 compliant. The system has successfully accepted dates beyond January 1, 2000. Our EDI software, which enables us to communicate electronically with some of our customers, including receiving orders, is not compliant and must be upgraded to become year 2000 compliant. We are working with our EDI vendor, and expect to complete the upgrade before year-end. If this system is not upgraded, we expect to process these orders manually. 20 Microprocessors and other electronic devices used in the Eastern Region have been tested and are year 2000 compliant. The telephone systems in Atlanta and New Oxford are year 2000 compliant. The telephone systems in Dayville and Chesterfield are not compliant and are scheduled to be replaced in November 1999. Retail Stores All but one of our cash registers are year 2000 compliant. We plan to replace the last register by November 1999. We believe all other critical information technology infrastructure and embedded chips are year 2000 compliant. Albert's Organics, Inc. and Hershey Import Co., Inc. Our Hershey business has turned back its system clock to simulate 1990 to avoid Year 2000 issues. We have simulated year 2000 system clock dates for the Albert's systems and made the code changes required to make these systems year 2000 compliant. Our Suppliers and Customers We have sent written requests for year 2000 information to substantially all suppliers. We are currently reviewing the responses received and have sent second requests to the top suppliers making up at least 80% of our purchases. We have also compiled a database of all customers regarding their year 2000 status and plans for remediation and have sent both initial and follow-up information requests. Substantially all responses received from both suppliers and customers indicate they are Year 2000 compliant or will be by January 1, 2000. Expenditures We are in the process of updating our systems for business functionality reasons and have adopted a systems strategy of staying current with state of the art systems technology. We are also in the process of integrating acquisitions to achieve customer service and operating efficiency improvements, which require common state of the art systems technology. Accordingly, all business systems changes would be performed regardless of the year 2000 issue both from a timing and cost perspective. We have significantly increased our information technology expenditures to execute our systems strategy that includes any immaterial incremental amounts to achieve year 2000 compliance. We therefore believe that we will have spent an incremental amount of less than $0.4 million on year 2000 remediation over what we would have spent to execute our going forward systems strategy. We spent on information technology systems and support approximately $7 million, $4 million and $3 million in fiscal 1999, 1998 and 1997, respectively. Potential Risks The dates on which we believe we will be year 2000 compliant are based on our 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 we are 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 our business, financial condition and results of operations. We have not yet established a contingency plan in the event of non-compliance by any parties. We are developing regional contingency plans for any critical business applications and expect to have such plans completed by the end of November 1999. Certain Factors That May Affect Future Results If any of the events described below actually occur, our business, financial condition, or results of operations could be materially adversely affected. This Form 10-K contains 21 forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, including those set forth in the following risk factors and elsewhere in, or incorporated by reference into, this Form 10-K. 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. United Natural merged with Stow Mills in October 1997. The successful and timely integration of this merger is critical to our future operating and financial performance. The integration will require, among other things: o the integration of computer systems onto a single systems platform; o the optimization of delivery routes; o coordination of administrative, distribution and finance functions; and o the integration of personnel. The integration process has and could continue to divert the attention of management, and any further difficulties or problems encountered in the transition process could continue to have a material adverse effect on our business, financial condition or results of operations. In addition, the process of combining the companies has and could continue to 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 United Natural will retain key employees of Stow Mills or that we will realize any of the other anticipated benefits of the Stow Mills merger. We announced plans during fiscal 1999 to close our Chesterfield, New Hampshire distribution center and to consolidate its operations with our Dayville, Connecticut and New Oxford, Pennsylvania facilities. We began transferring sales operations from the Chesterfield facility to our Dayville facility during June of 1999 and the process is still ongoing. There continue to be numerous risks involved with this consolidation of operations including, among other things: o we have had and may continue to have difficulty retaining drivers currently employed at our Chesterfield facility or hiring a sufficient number of new drivers at our Dayville and New Oxford facilities to handle the increased sales volume at those facilities; o we have had and may continue to have difficulty retaining warehouse employees at our Chesterfield facility or hiring a sufficient number of new warehouse employees at our Dayville and New Oxford facilities to handle the increased sales volume at those facilities; o we have lost and may continue to lose business; o our operating costs have increased and may continue to increase because of the expenses involved in closing the Chesterfield facility and consolidating its operations into the operations in place at the Dayville and New Oxford facilities; o our Dayville and New Oxford facilities have had and may continue to have difficulty accommodating the increased sales volume; and o construction delays in the expansion of the New Oxford facility could delay the realization of savings. The occurrence of any of these events could have a material adverse effect on our business, financial condition or results of operations. 22 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. and Wild Oats Markets, Inc. accounted for approximately 17% and 11%, respectively, of our net sales during the fiscal year ended July 31, 1999. As a 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 emergence 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: 23 o difficulties with the collectibility of accounts receivable, o difficulties with inventory control, o competitive pricing pressures, and o 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 on the services of Norman A. Cloutier, Chairman of the Board and Chief Executive 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 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: o changes in our operating expenses, o management's ability to execute our business and growth strategies, o personnel changes, o demand for natural products, o supply shortages, o general economic conditions, o changes in customer preferences and demands for natural products, including levels of enthusiasm for health, fitness and environmental issues, o fluctuation of natural product prices due to competitive pressures, o lack of an adequate supply of high-quality agricultural products due to poor growing conditions, natural disasters or otherwise, o volatility in prices of high-quality agricultural products resulting from poor growing conditions, natural disasters or otherwise, and o 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: o our products are subject to inspection by the U.S. Food and Drug Administration, o our warehouse and distribution facilities are subject to inspection by the U.S. Department of Agriculture and state health authorities, and 24 o 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 January 31, 1999, our executive officers and directors, and their affiliates, and the United Natural Foods Employee Stock Ownership Trust beneficially owned in the aggregate approximately 47% of United Natural's common stock. Accordingly, these stockholders, if acting together, would have the ability to elect our directors and may have the ability to determine the outcome of corporate actions requiring stockholder approval, irrespective of 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 May 31, 1999, approximately 160 employees, representing approximately 6% of our approximately 2,600 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. Access to capital and the cost of that capital 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 increased our cost of capital or the 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. Our systems may not all be Year 2000 compliant by January 1, 2000 As discussed above, our systems may not all be Year 2000 compliant by January 1, 2000. This could result in being unable to accept, process and invoice orders which could have a material adverse effect on our business, financial condition and results of operations. ITEM 7A. 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. 25 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 Page ---- United Natural Foods, Inc. and Subsidiaries: Independent Auditors' Report........................................ 27 Consolidated Balance Sheets......................................... 28 Consolidated Statements of Income................................... 29 Consolidated Statements of Stockholders' Equity..................... 30 Consolidated Statements of Cash Flows............................... 31 Notes to Consolidated Financial Statements.......................... 32-41 26 INDEPENDENT AUDITORS' REPORT The Board of Directors United Natural Foods, Inc.: We have audited the accompanying consolidated balance sheets of United Natural Foods, Inc. and Subsidiaries as of July 31, 1999 and 1998 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Natural Foods, Inc. and Subsidiaries as of July 31, 1999 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1999 in conformity with generally accepted accounting principles. /s/ KPMG LLP KPMG LLP Providence, Rhode Island September 3, 1999 27 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts) JULY 31, JULY 31, 1999 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 2,845 $ 1,393 Accounts receivable, net of allowance of $2,297 and $1,780, respectively 60,612 48,078 Notes receivable, trade 1,096 705 Inventories 90,725 91,119 Prepaid expenses 5,660 3,209 Deferred income taxes 1,765 1,540 Refundable income taxes 3,939 165 --------- --------- Total current assets 166,642 146,209 --------- --------- Property & equipment, net 43,784 44,434 --------- --------- Other assets: Notes receivable, trade, net 333 1,170 Goodwill, net of accumulated amortization of $1,853 and $1,237, respectively 26,250 19,136 Covenants not to compete, net of accumulated amortization of $365 and $450, respectively 328 613 Other, net 564 680 --------- --------- Total assets $ 237,901 $ 212,242 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 41,154 $ 36,608 Current installments of long-term debt 3,682 3,309 Current installment of obligations under capital leases 833 488 Accounts payable 33,442 32,017 Accrued expenses 13,706 8,219 --------- --------- Total current liabilities 92,817 80,641 Long-term debt, excluding current installments 24,370 25,081 Deferred income taxes 712 1,370 Obligations under capital leases, excluding current installments 1,421 764 --------- --------- Total liabilities 119,320 107,856 --------- --------- 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 18,249 at July 31, 1999 issued 18,184 and outstanding 18,175 at July 31, 1998 182 182 Additional paid-in capital 67,740 67,440 Unallocated shares of Employee Stock Ownership Plan (2,584) (2,747) Retained earnings 53,243 39,776 Treasury stock, 9 shares at July 31, 1998, at cost -- (265) --------- --------- Total stockholders' equity 118,581 104,386 --------- --------- Total liabilities and stockholders' equity $ 237,901 $ 212,242 ========= =========
See notes to consolidated financial statements 28 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JULY 31, (In thousands, except per share data) 1999 1998 1997 ----- ----- ---- Net sales $ 856,998 $ 728,910 $ 634,825 Cost of sales 680,301 578,575 507,547 --------- --------- --------- Gross profit 176,697 150,335 127,278 --------- --------- --------- Operating expenses 144,937 116,042 103,885 Merger and restructuring expenses 3,869 4,064 -- Amortization of intangibles 1,075 1,185 1,060 --------- --------- --------- Total operating expenses 149,881 121,291 104,945 --------- --------- --------- Operating income 26,816 29,044 22,333 --------- --------- --------- Other expense (income): Interest expense 5,700 5,157 5,481 Interest expense on notes to Stow officers/stockholders -- -- 495 Other, net (2,477) (778) (679) --------- --------- --------- Total other expense 3,223 4,379 5,297 --------- --------- --------- Income before income taxes and extraordinary item 23,593 24,665 17,036 Income taxes 10,126 11,580 6,636 --------- --------- --------- Income before extraordinary item 13,467 13,085 10,400 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $662 -- -- 933 --------- --------- --------- Net income $ 13,467 $ 13,085 $ 9,467 ========= ========= ========= Pro forma additional income tax expense (unaudited) -- 320 401 --------- --------- --------- Pro forma net income before extraordinary item (unaudited) $ 13,467 $ 12,765 $ 9,999 ========= ========= ========= Per share data (basic): Income before extraordinary item $ 0.74 $ 0.75 $ 0.64 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit -- -- 0.06 --------- --------- --------- Net income $ 0.74 $ 0.75 $ 0.58 ========= ========= ========= Pro forma net income before extraordinary item (unaudited) $ 0.74 $ 0.73 $ 0.61 ========= ========= ========= Weighted average basic shares of common stock 18,196 17,467 16,367 ========= ========= ========= Per share data (diluted): Income before extraordinary item $ 0.73 $ 0.74 $ 0.63 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit -- -- 0.06 --------- --------- --------- Net income $ 0.73 $ 0.74 $ 0.57 ========= ========= ========= Pro forma net income before extraordinary item (unaudited) $ 0.73 $ 0.72 $ 0.60 ========= ========= ========= Weighted average diluted shares of common stock 18,537 17,798 16,553 ========= ========= =========
See notes to consolidated financial statements. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unallocated Outstanding Additional Shares of Total Number Common Paid-in Stock Employee Stock Retained Treasury Stockholders' (In thousands) of Shares Stock Capital Warrants Ownership Plan Earnings Stock Equity --------------------------------------------------------------------------------------------- Balances at July 31, 1996 13,671 $137 $ 6,592 $ 3,200 $(3,074) $ 16,629 $ (44) $ 23,440 Issuance of common stock (note 1(n)) 2,900 29 35,481 -- -- -- -- 35,510 Exercise of stock warrants (note 5) 786 8 3,192 (3,200) -- -- -- -- Allocation of shares to ESOP -- -- -- -- 164 -- -- 164 Distributions to Stow officers/stockholders -- -- -- -- -- (611) -- (611) Capital contribution -- -- 6,043 -- -- -- -- 6,043 Effect of change in year end -- -- -- -- -- (97) -- (97) Transfer of undistributed earnings to additional paid-in-capital -- -- 534 -- -- (534) -- -- Net income -- -- -- -- -- 9,467 -- 9,467 --------------------------------------------------------------------------------------------- Balances at July 31, 1997 17,357 174 51,842 -- (2,910) 24,854 (44) 73,916 Allocation of shares to ESOP -- -- -- -- 163 -- -- 163 Transfer of undistributed loss to additional paid-in-capital -- -- (1,837) -- -- 1,837 -- -- Issuance of common stock, net 818 8 17,479 -- -- -- (265) 17,222 Retirement of treasury stock -- -- (44) -- -- -- 44 -- Net income -- -- -- -- -- 13,085 -- 13,085 --------------------------------------------------------------------------------------------- Balances at July 31, 1998 18,175 $182 $ 67,440 $ -- $(2,747) $ 39,776 $(265) $ 104,386 Allocation of shares to ESOP -- -- -- -- 163 -- -- 163 Other -- -- 19 -- -- -- -- 19 Issuance of common stock 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 =============================================================================================
See notes to consolidated financial statements. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31, (In thousands) 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,467 $ 13,085 $ 9,467 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on early extinguishment of debt, net of tax benefit -- -- 933 Depreciation and amortization 9,205 6,068 5,609 Gain on sale of business (1,397) -- -- (Gain) loss on disposals of property & equipment (195) 80 9 Accretion of original issue discount -- -- 153 Deferred income tax (benefit) expense (941) 184 (5) Provision for doubtful accounts 1,995 2,462 2,112 Changes in assets and liabilities, net of acquired companies: Accounts receivable (11,524) (5,911) (3,782) Inventory (460) (14,111) (7,748) Prepaid expenses (2,319) 1,175 (1,977) Refundable income taxes (3,889) (165) -- Other assets 771 1,085 (1,299) Notes receivable, trade 445 (71) (434) Accounts payable 334 732 523 Accrued expenses 2,805 307 (1,704) Income taxes payable -- (377) 73 -------- -------- -------- Net cash provided by operating activities 8,297 4,543 1,930 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchases of subsidiaries, net of cash acquired (8,888) (20,029) -- Proceeds from sale of business 7,086 -- -- Proceeds from disposals of property and equipment 1,477 545 111 Capital expenditures (6,610) (15,209) (3,875) -------- -------- -------- Net cash used in investing activities (6,935) (34,693) (3,764) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) under note payable 4,546 9,386 (23,029) Repayments on long-term debt (4,337) (9,482) (22,276) Proceeds from long-term debt -- 14,445 12,529 Principal payments of capital lease obligations (683) (980) (646) Proceeds from issuance of common stock, net 564 17,222 35,510 Net borrowings on Stow Mills stockholder loans -- -- 560 Cash distributions to Stow officers/stockholders -- -- (611) -------- -------- -------- Net cash provided by financing activities 90 30,591 2,037 -------- -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,452 441 203 Cash and cash equivalents at beginning of period 1,393 952 749 -------- -------- -------- Cash and cash equivalents at end of period $ 2,845 $ 1,393 $ 952 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 5,540 $ 4,897 $ 5,895 ======== ======== ======== Income taxes $ 15,273 $ 11,938 $ 5,534 ======== ======== ========
In 1999, 1998 and 1997, the Company incurred capital lease obligations of approximately $1,686, $316 and $582, respectively. See notes to consolidated financial statements. 31 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 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 under the straight-line method over the estimated useful lives. (f) Income Taxes The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Intangible Assets 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 stated at cost and are amortized using the straight-line method over the lives of the respective agreements, generally five years. The Company evaluates impairment of 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 1999, Whole Foods Market, Inc. and Wild Oats Markets, Inc., who provided 10% or more of the Company's revenue. Total net sales to Whole Foods and Wild Oats in 1999 were approximately $143 million and $90 million, respectively. Whole Foods was the only customer in 1998 and 1997 who provided 10% or more of the Company's revenue. Total net sales to Whole Foods were approximately $120 million and $89 million in 1998 and 1997, respectively. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (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) Merger with Stow Mills On October 31, 1997, the Company completed its merger with Stow Mills, Inc. and Subsidiary and Hendrickson Partners ("Stow") wherein Stow became a wholly-owned subsidiary of the Company. Prior to this merger, Stow's fiscal year ended December 31. (k) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (l) Notes Receivable, Trade The Company issues notes receivable, trade to certain customers under two basic circumstances, inventory purchases for initial store openings and overdue accounts receivable. Initial store opening notes are generally receivable over a period not to exceed twelve months. The overdue accounts receivable notes may extend for periods greater than one year. All notes are issued at a market interest rate and contain certain guarantees and collateral assignments in favor of the Company. (m) Employee Benefit Plans The Company sponsors various defined contribution plans that cover substantially all employees. Pursuant to certain stock incentive plans, the Company has granted stock options to key employees and to non-employee directors. The Company accounts for stock option grants using the intrinsic value based method. (n) Earnings Per Share During fiscal 1998, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Under the provisions of SFAS No. 128, basic earnings per share replaces primary earnings per share and the dilutive effect of stock options are excluded from the calculation. Fully diluted earnings per share are replaced by diluted earnings per share, and include the dilutive effect of stock options using the treasury stock method. All earnings per share information included in these financial statements has been restated to conform to the requirements of SFAS No. 128. For purposes of the diluted earnings per share calculation, outstanding stock options and stock warrants are considered common stock equivalents, using the treasury stock method. 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, except per share data) 1999 1998 1997 ------ ------ ------ Basic weighted average shares outstanding 18,196 17,467 16,367 Net effect of dilutive stock options based upon the treasury stock method 341 331 186 ------ ------ ------ Diluted weighted average shares outstanding 18,537 17,798 16,553 ====== ====== ====== In November 1996, the Company completed a public offering of its common stock. Proceeds from the sale of 2.9 million shares were used to repay outstanding bank indebtedness. Assuming the aforementioned sale of common stock and repayment of debt occurred effective August 1, 1996, unaudited supplementary income before extraordinary item per basic common and diluted common share for the 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED year ended July 31, 1997 would have been $0.62, based upon 17.4 million and 17.5 million weighted average basic common and diluted common shares, respectively. (o) Pro Forma Additional Income Tax Expense (Unaudited) Stow was organized as an S corporation for Federal income tax purposes prior to the merger. Pro forma income tax expense reflects Federal income tax applied to taxable income at a rate of 35% for Stow for all periods prior to the effective date of the merger. (2) ACQUISITIONS 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 $10.8 million to $12.0 million, contingent upon future performance. The final price will be determined by March 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 $9.1 million being amortized on a straight-line basis over 40 years. Fiscal 1998 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 (unaudited) for its most recent fiscal year ending June 30, 1997. This acquisition was accounted for as a purchase with goodwill of approximately $6.3 million being amortized on a straight-line basis over 40 years. On October 31, 1997, the Company completed its merger with Stow wherein Stow became a wholly-owned subsidiary of the Company. The merger with Stow was accounted for as a pooling of interests and, accordingly, all financial information included is reported as though the companies had been combined for all periods reported. The Company issued 4,978,280 shares, which represented approximately 29% of the Company's common stock after the merger. Net sales for the quarter ended October 31, 1997 and the year ended July 31 1997 for the Company excluding Stow were approximately $116.5 million (unaudited) and $421.7 million, respectively. Net income for the quarter ended October 31, 1997 and the year ended July 31, 1997 for the Company excluding Stow was $1.2 million (unaudited) and $8.3 million, respectively. Net sales for the quarter ended October 31, 1997 and the year ended July 31, 1997 for Stow were $56.9 million (unaudited) and $213.1, respectively. Net (loss) income for the quarter ended October 31, 1997 and the year ended July 31, 1997 for Stow was $(1.8) million (unaudited) and $1.1 million, respectively. (3) STOCK OPTION PLAN The Company implemented Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," during fiscal 1997. While SFAS No. 123 established financial accounting and reporting standards for stock-based employee compensation plans using a fair value method of accounting, it allows companies to continue to measure compensation using the intrinsic value method of accounting as prescribed in APB Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees." The Company will continue to use its present APB No. 25 accounting treatment for stock-based compensation. If the fair value method of accounting had been used, net income would have been $11.9 million, $12.1 million and $9.3 million for 1999, 1998 and 1997, respectively, basic earnings per share would have been $0.65, $0.69 and $0.57 for 1999, 1998 and 1997, respectively, and diluted earnings per share would have been $0.64, $0.68 and $0.56 for 1999, 1998 and 1997, respectively. The weighted average grant date fair value of options granted during 1999, 1998 and 1997 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 1999, 1998 and 1997: a dividend yield of 0.0%, a risk free interest rate of 6.07% and an expected life of 8 years. The expected volatility was 66.0%, 60.9% and 46.5% for 1999, 1998 and 1997, 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 on July 31, 1996 the stockholders approved, the 1996 Stock Option Plan which provides for grants of stock options to employees, officers, directors and others. These options are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code or options not intended to qualify as incentive stock options ("non-statutory stock options"). A total of 2,000,000 shares of common stock may be issued upon the exercise of options granted under the 1996 Stock Option Plan. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The following table summarizes the stock option activity for the fiscal years ended July 31, 1999, 1998 and 1997.
1999 1998 1997 ------------------- ------------------ ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 989,346 $13.02 654,500 $ 8.14 638,000 $ 8.11 Granted 80,000 $21.37 392,346 $21.47 16,500 $ 9.64 Exercised (74,087) $ 7.38 (27,500) $ 9.64 -- -- Forfeited (10,000) $20.25 (30,000) $20.25 -- -- ------- ------- ------- Outstanding at end of year 985,259 $14.05 989,346 $13.02 654,500 $ 8.14 ======= ======= ======= Options exercisable at year-end 490,913 $ 9.32 392,107 $ 7.38 382,978 $ 6.80 Weighted average fair value of options granted during the year: Exercise price equals stock price $ 15.54 $ 14.92 $ 5.85 Exercise price exceeds stock price -- $ 10.03 -- Stock price exceeds exercise price -- -- --
The 985,259 options outstanding at July 31, 1999 had exercise prices and remaining contractual lives as follows: Exercise Price Number Remaining Contractual Life -------------- ------ -------------------------- $6.38 255,750 7 Years $9.64 220,000 7 Years $10.60 82,500 2 Years $20.25 205,917 8 Years $20.06 35,000 10 Years $21.38 30,000 10 Years $22.28 41,092 3 Years $24.19 100,000 8 Years $24.38 15,000 9 Years (4) NOTES PAYABLE The Company entered into a line of credit and term loan agreement (see note 5) with a bank effective February 20, 1996. The agreement has had four subsequent amendments effective March 1997, July 1997, October 1997 and July 1999. 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 owing to the Company's bank at the date of the merger and is used for general operating capital needs. Interest under the facility, except the portion related to the mortgage commitments, accrues at the Company's option at the New York Prime Rate (8.25% at July 31, 1999 and 8.50% at July 31, 1998 and 1997) or 1.00% above the bank's London Interbank Offered Rate ("LIBOR", 5.18% and 5.65625% at July 31, 1999 and 1998, 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 1.00% above LIBOR for substantially all of fiscal 1999. Interest on approximately $6.2 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, 1999 and 1998, the weighted average interest rate on the line of credit was 6.23% and 6.66%, respectively. The Company has pledged all of its assets as collateral for its obligations under the credit agreement. As of July 31, 1999, the Company's outstanding borrowings under the credit agreement totaled $63.4 million. The credit agreement expires on July 31, 2002 and contains certain restrictive covenants. The Company was not in compliance with one of its restrictive covenants at July 31, 1999 and was granted a waiver of this covenant by the bank. 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. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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. Notes payable to Stow officers/stockholders totaling $5.5 million at July 31, 1996 were due on demand and carried interest at 8.25%. The noteholders waived rights to collect these notes through December 31, 1997, and accordingly, that portion of the notes has been classified as long-term in the accompanying combined balance sheets. These long-term notes were subordinated to all bank debt. The total outstanding balance of the notes was contributed to capital as of June 30, 1997. (5) LONG-TERM DEBT Long-term debt consisted of the following: (dollars in thousands)
July 31, July 31, 1999 1998 ---- ---- Term loan for employee stock ownership plan, secured by stock of the Company, due $14 monthly plus interest at 10%, balance due May 1, 2015............................................................... $ 2,584 $ 2,734 Term loan payable to bank, secured by substantially all assets of the Company, due $235 quarterly plus interest at 1.25% above LIBOR, balance due July 31, 2002.......................................................... 4,955 5,895 Real estate term loan payable to bank, secured by land and building, due $28 monthly plus interest at 7.36%, balance due July 31, 2002.......... 6,215 6,600 Term loan payable to bank, secured by substantially all assets of the Company, with monthly principal payments of $50 through July 2002 and the remaining principal due on July 31, 2002, interest at 7.71%... 11,090 11,693 Other notes payable to former owners of acquired businesses and former stockholders of subsidiaries, maturing at various dates through February 2002 at interest rates ranging from 5.35% to 10%.................. 1,578 1,233 Real estate term loans payable to bank and others, secured by building and other assets, with 15 year amortization due monthly and interest at 5% and 8.55%, balance due July 31, 2002...................................... 1,630 -- Miscellaneous other notes payable............................................. -- 235 ------------------------- 28,052 28,390 Less: current installments.................................................... 3,682 3,309 ------------------------- Long-term debt, excluding current installments................................ $ 24,370 $ 25,081 =========================
The Company entered into a Note and Warrant Purchase Agreement (the Agreement) with a limited partnership (the Purchaser) on November 17, 1993. Under the Agreement, the Company issued to the Purchaser a Senior Note in the principal amount of $6.5 million and a Common Stock Purchase Warrant for 1,166,660 shares of the common stock of the Company. The Senior Note was repaid in full in November 1996 upon receipt of the proceeds from the initial public offering. The loss on the early retirement of debt has been reflected as an extraordinary item of $933, net of the income tax benefit of $662. This loss represents the charge off of the remaining original issue discount at the date of repayment. The Purchaser exercised stock warrants to purchase 785,730 shares of common stock during fiscal 1997 at a price of $.01 per share, with the remaining stock warrants repurchased by the Company. Certain debt agreements contain restrictive covenants. The Company was not in compliance with one of its restrictive covenants at July 31, 1999 and was granted a waiver of this covenant by the bank. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Aggregate maturities of long-term debt for the next five years and thereafter are as follows at July 31, 1999: (dollars in thousands) 2000.............. $ 3,682 2001.............. 2,114 2002.............. 20,162 2003.............. 163 2004.............. 163 Thereafter........ 1,768 ------- $28,052 ======= (6) PROPERTY AND EQUIPMENT Property and equipment consisted of the following at July 31, 1999 and 1998:
Estimated Useful (dollars in thousands) Lives (Years) 1999 1998 ------------- ---- ---- Land ............................................. $ 1,535 $ 1,349 Building.......................................... 20-40 26,797 24,684 Leasehold improvements............................ 5-30 7,282 9,129 Warehouse equipment............................... 5-20 19,177 18,458 Office equipment.................................. 3-10 6,629 5,166 Motor vehicles.................................... 3-5 5,468 5,128 Equipment under capital leases.................... 5 3,758 2,851 Construction in progress.......................... 1,851 1,297 ------- ------- 72,497 68,062 Less accumulated depreciation and amortization.... 28,713 23,628 ------- ------- Net property and equipment................... $43,784 $44,434 ======= =======
(7) CAPITAL LEASES The Company leases computer, office and warehouse equipment under capital leases expiring in various years through 2004. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are depreciated over the lower of their related lease terms or their estimated productive lives. Minimum future lease payments under capital leases as of July 31, 1999 for each of the next five fiscal years and in the aggregate are: Year ended July 31 (In thousands) Amount - ------------------ ------- 2000 ........................................................ $ 962 2001 ........................................................ 706 2002 ........................................................ 501 2003 ........................................................ 253 2004 and thereafter............................................. 98 ------- Total minimum lease payments............................... 2,520 Less: Amount representing interest.............................. 266 ------- Present value of net minimum lease payments................ 2,254 Less: current installments...................................... 833 ------- Capital lease obligations, excluding current installments.. $ 1,421 ======= (8) COMMITMENTS AND CONTINGENCIES The Company leases various facilities under operating lease agreements with varying terms. Most of the leases contain renewal options and purchase options at several specific dates throughout the terms of the leases. The Company also leases equipment under master lease agreements. Payment under these agreements will continue for a period of four years. The equipment lease agreements contain covenants concerning the maintenance of certain financial ratios. The Company was in compliance with its covenants at July 31, 1999. 37 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, 1999 are as follows: (In thousands) 2000........................... $ 7,738 2001........................... 6,326 2002........................... 4,844 2003........................... 3,491 2004........................... 2,538 2005 and thereafter............ 12,948 -------- $ 37,885 ======== Rent and other lease expense for the years ended July 31, 1999, 1998 and 1997 totaled approximately $7.2 million, $17.5 million and $7.1 million, respectively. Outstanding commitments as of July 31, 1999 for the purchase of inventory were approximately $5.7 million. The Company had outstanding letters of credit of approximately $2.4 million at July 31, 1999. The Company may from time to time be involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. (9) SALARY REDUCTION/PROFIT SHARING PLANS The Company has several salary reduction/profit sharing plans, generally called "401(k) Plans" (the Plans), covering various employee groups. Under these types of Plans the employees may choose to reduce their compensation and have these amounts contributed to the Plans on their behalf. In order to become a participant in the Plans, employees must meet certain eligibility requirements as described in the respective Plan's document. In addition to amounts contributed to the Plans by employees, the Company makes contributions to the Plans on behalf of the employees. The Company contributions to the Plans were approximately $1.0 million, $0.8 million and $0.6 million for the years ended July 31, 1999, 1998 and 1997, respectively. (10) INCOME TAXES Total Federal and state income tax expense consists of the following: (In thousands) Current Deferred Total ------- -------- ----- 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 ======= ===== ======= Fiscal year ended July 31, 1998: U.S. Federal....................... $ 8,736 $ 173 $ 8,909 State and local.................... 2,660 11 2,671 ------- ----- ------- $11,396 $ 184 $11,580 ======= ===== ======= Fiscal year ended July 31, 1997: From continuing operations U.S. Federal....................... $ 4,839 $ 19 $ 4,858 State and local.................... 1,802 (24) 1,778 ------- ----- ------- 6,641 (5) 6,636 ------- ----- ------- Extraordinary item U.S. Federal....................... (542) -- (542) State and local.................... (120) -- (120) ------- ----- ------- (662) -- (662) ------- ----- ------- $ 5,979 $ (5) $ 5,974 ======= ===== ======= 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Total income tax expense was different than the amounts computed using the United States statutory income tax rate (35%) applied to income before income taxes and extraordinary item as a result of the following:
July 31, July 31, July 31, (In thousands) 1999 1998 1997 ---- ---- ---- Computed "expected" tax expense ......................... $ 8,258 $ 8,633 $ 5,505 State and local income tax, net of Federal income tax benefit ................................................ 968 1,736 1,078 Effect of entities not taxed for Federal income tax ....... -- 383 (401) Rate differential ......................................... -- -- (100) Merger related expenses ................................... -- 491 -- Non-deductible expenses ................................... 155 84 42 Non-deductible amortization ............................... 79 15 16 Other, net ................................................ 666 238 (166) ------- ------- ------- $10,126 $11,580 $ 5,974 ======= ======= =======
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, 1999 and 1998 are presented below:
(In thousands) 1999 1998 ---- ---- Deferred tax assets: Inventories, principally due to additional costs inventoried for tax purposes ............................................................. $ 958 $ 1,338 Intangible assets ....................................................... -- 242 Compensation and benefit related ........................................ 792 705 Accounts receivable, principally due to allowances for uncollectible accounts ............................................................. 382 174 Other ................................................................... 136 61 ------- ------- Total gross deferred tax assets .................................... 2,268 2,520 Less valuation allowance ..................................................... -- -- ------- ------- Net deferred tax assets ............................................ 2,268 2,520 ------- ------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation ..... 495 1,255 Reserve for LIFO inventory method ....................................... 611 994 Intangible assets ....................................................... 21 -- Other ................................................................... 88 101 ------- ------- Total deferred tax liabilities ..................................... 1,215 2,350 ------- ------- Net deferred tax assets ...................................................... $ 1,053 $ 170 ======= ======= Current deferred income tax assets ........................................... $ 1,765 $ 1,540 Non-current deferred income tax liabilities .................................. (712) (1,370) ------- ------- $ 1,053 $ 170 ======= =======
In assessing the recoverability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to the fact that the Company has sufficient taxable income in the federal carryback period and anticipates sufficient future taxable income over the periods which the deferred tax assets are deductible, the ultimate realization of deferred tax assets for Federal and state tax purposes appears more likely than not. (11) EMPLOYEE STOCK OWNERSHIP PLAN The Company adopted the UNF Employee Stock Ownership Plan (the Plan) for the purpose of acquiring outstanding shares of the Company for the benefit of eligible employees. The Plan was effective as of November 1, 1988 and has received notice of qualification by the Internal Revenue Service. In connection with the adoption of the Plan, a Trust was established to hold the shares acquired. On November 1, 1988, the Trust purchased 40% of the outstanding Common Stock of the Company at a price of $4,080,000. The trustees funded this purchase by issuing promissory notes to the initial stockholders, with the ESOT shares pledged as collateral. These notes bear interest at 10% and are payable through May 2015. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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 1999, 1998 and 1997 contributions totaling approximately $0.4 million, $0.4 million and $0.5 million, respectively, were made to the Trust. Of these contributions, approximately $0.3 million each year represented interest. The ESOP shares were classified as follows: July 31, July 31, (In thousands) 1999 1998 ---- ---- Allocated shares.................... 726 638 Shares released for allocation...... 88 88 Shares distributed to employees..... (261) (164) Unreleased shares................... 1,386 1,474 ----- ----- Total ESOP shares.............. 1,939 2,036 ===== ===== The fair value of unreleased shares was approximately $26.0 million at July 31, 1999. (12) STOCK SPLIT In connection with the Company's initial public offering of shares of common stock, on August 30, 1996, the Board of Directors adopted, and the stockholders approved, an amendment to the Company's certificate of incorporation increasing the number of authorized shares of common stock from 0.2 million to 25.0 million and stating the par value of such shares as $0.01, and the Company effected a fifty-five-for-one split of its issued and outstanding common stock. All share, option and warrant and per share data presented in the accompanying consolidated financial statements have been restated to reflect the increased number of authorized and outstanding shares of common stock. (13) 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. Following is business segment information for the periods indicated: Distribution Other Eliminations Consolidated 1999 Revenue $806,013 $ 72,860 $ (21,875) $856,998 Operating Income $ 26,242 $ 422 $ 152 $ 26,816 Amortization and Depreciation $ 7,819 $ 1,386 $ - $ 9,205 Capital Expenditures $ 7,354 $ 942 $ - $ 8,296 Assets $357,401 $ 18,824 $(138,324) $237,901 1998 Revenue $691,389 $ 49,977 $ (12,456) $728,910 Operating Income $ 29,454 $ (544) $ 134 $ 29,044 Amortization and Depreciation $ 4,931 $ 1,137 $ - $ 6,068 Capital Expenditures $ 14,107 $ 1,417 $ - $ 15,524 Assets $252,716 $ 30,845 $ (71,319) $212,242 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Distribution Other Eliminations Consolidated 1997 Revenue $614,177 $ 28,271 $ (7,623) $634,825 Operating Income $ 21,689 $ 738 $ (94) $ 22,333 Amortization and Depreciation $ 4,833 $ 776 $ -- $ 5,609 Capital Expenditures $ 3,639 $ 436 $ -- $ 4,075 Assets $169,368 $ 7,569 $ (12,376) $164,561 (14) RESTRUCTURING COSTS In connection with the consolidation of operations in the Eastern Region, we accrued employee severance expenses and employee retention expenses of $0.8 million and $0.7 million, respectively, and recorded incremental depreciation of $2.4 million for the year ended July 31, 1999. Less than $0.2 million of the retention and severance expenses had been paid as of July 31, 1999 with the remaining amounts expected to be paid during fiscal 2000. The incremental depreciation was to reduce the book value of the Chesterfield, New Hampshire facility, which is being held for sale, to its estimated net realizable value. (15) QUARTERLY FINANCIAL DATA (UNAUDITED) Following is a summary of quarterly operating results and share data. There were no dividends paid or declared during 1999 and 1998, and the Company anticipates that it will continue to retain earnings for use in its business and not pay cash dividends in the foreseeable future.
(In thousands except per share data) First Second Third Fourth Full Year - ------------------------------------------------------------------------------------------ 1999 Net sales $199,889 $215,748 $226,892 $214,469 $856,998 Gross profit 42,614 46,208 47,939 39,936 176,697 Income before income taxes 8,163 8,405 9,350 (2,325) 23,593 Net income (loss) 4,779 4,916 5,119 (1,347) 13,467 Per common share income (loss) Basic: $ 0.26 $ 0.27 $ 0.28 $ (0.07) $ 0.74 Diluted: $ 0.26 $ 0.27 $ 0.28 $ (0.07) $ 0.73 Weighted average basic shares outstanding 18,175 18,175 18,183 18,249 18,196 Weighted average diluted shares outstanding 18,537 18,538 18,512 18,249 18,537 Market Price High 29 1/2 29 1/4 29 3/4 29 1/4 29 3/4 Low 19 22 1/2 17 3/4 17 1/4 17 1/4 1998 Net sales $173,383 $177,976 $187,581 $189,970 $728,910 Gross profit 34,189 36,308 39,381 40,457 150,335 Income before income taxes 1,293 7,134 8,737 7,501 24,665 Net income (loss) (628) 4,200 5,079 4,434 13,085 Per common share income (loss) Basic: $ (0.04) $ 0.24 $ 0.29 $ 0.25 $ 0.75 Diluted: $ (0.04) $ 0.24 $ 0.29 $ 0.25 $ 0.74 Weighted average basic shares outstanding 17,357 17,357 17,369 17,784 17,467 Weighted average diluted shares outstanding 17,649 17,659 17,750 18,153 17,798 Market Price High 26 3/4 27 1/8 30 11/16 33 3/8 33 3/8 Low 19 1/4 19 3/4 23 3/4 22 1/2 19 1/4
41 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 1999 (the "1999 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 1999 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 1999 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 1999 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 sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements and notes thereto. Independent Auditor's Report on Financial Statement Schedule. 42 3. Exhibits. The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K. On August 18, 1999, the Company filed a Current Report on Form 8-K dated August 12, 1999 announcing under Item 5 (Other Events) a press release regarding the resignation of the Chief Financial Officer and a director and the appointment of an interim Chief Financial Officer, and presenting under Item 7 (Financial Statements, Pro-Forma Financial Information and Exhibits) the following information: EXHIBITS 99 Press Release dated August 12, 1999. 43 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/ KEVIN T. MICHEL ----------------------------- Kevin T. Michel Chief Financial Officer (Principal Financial and Accounting Officer) Dated: October 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ NORMAN A. CLOUTIER Chairman of the Board and Chief Executive Officer October 29, 1999 - ----------------------- (Principal Executive Officer) Norman A. Cloutier /s/ MICHAEL S. FUNK Vice Chairman of the Board and President October 29, 1999 - ----------------------- Michael S. Funk /s/ KEVIN T. MICHEL Chief Financial Officer and Director October 29, 1999 - ----------------------- (Principal Financial and Accounting Officer) Kevin T. Michel /s/ JOSEPH M. CIANCIOLO Director October 29, 1999 - ----------------------- Joseph M. Cianciolo Director October 29, 1999 - ----------------------- Richard J. Williams /s/ THOMAS B. SIMONE Director October 29, 1999 - ----------------------- Thomas B. Simone Director October 29, 1999 - ----------------------- Gordon D. Barker /s/ RICHARD S. YOUNGMAN Director October 29, 1999 - ----------------------- Richard S. Youngman
44 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. 10.7*+ Employment Agreement between the Registrant, Mountain People's and Michael S. Funk, dated February 20, 1996. 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. 10.14* Lease, dated July 12, 1990, between the Registrant and Sylvan and Stanford Makover Joint Venture, as amended. 45 Exhibit No. Description 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. 10.21x+ Employment Agreement for Robert Cirulnick 10.22x+ Employment Agreement for Richard S. Youngman 10.23x+ Termination Agreement for Steven Townsend 10.24x+ Addendum to Incentive Stock Option Agreement for Steven H. Townsend 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. 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP. 27 Financial Data Schedule 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. 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. + Management contract or compensatory plan or arrangement filed in response to Item 14(a)(3) of the instructions to Form 10-K. 46 INDEPENDENT AUDITORS' REPORT The Board of Directors United Natural Foods, Inc.: Under date of September 3, 1999, we reported on the consolidated balance sheets of United Natural Foods, Inc. and subsidiaries as of July 31, 1999 and 1998 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 1999, as contained in the annual report on Form 10-K for the year 1999. 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. Providence, Rhode Island September 3, 1999 KPMG LLP 47 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COST AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD (in thousands) Bad Debt Allowance Year ended July 31, 1999 $1,780 $1,995 $1,478 $2,297 Year ended July 31, 1998 $2,283 $2,462 $2,965 $1,780 Year ended July 31, 1997 $1,411 $2,191 $1,319 $2,283 48 EX-10.27 2 FOURTH AMENDMENT TO LOAN AGREEMENT EXHIBIT 10.27 UNITED NATURAL FOODS, NC. 260 LAKE ROAD DAYVILLE, CONNECTICUT 06241 As of July 31, 1999 FLEET CAPITAL CORPORATION 200 Glastonbury Boulevard Glastonbury, Connecticut 06033 Re: Fourth Amendment to Amended and Restated Loan Agreement Ladies and Gentlemen: Reference is made to the Amended and Restated Loan and Security Agreement dated February 20, 1996 as amended ("Loan Agreement") and all promissory notes, mortgages, guaranties, agreements, documents and instruments entered into by United Natural Foods, Inc., Mountain People's Warehouse Incorporated, Natural Retail Group, Inc., Rainbow Natural Foods, Inc., Nutrasource, Inc., Stow Mills, Inc. and RB Acquisition L.L.C. (collectively, the "Borrowers") and any other person or obligor pursuant thereto (collectively, the "Loan Documents") with or for the benefit of Fleet Capital Corporation ("Agent" or "FCC") and the financial institutions identified under the caption "Lenders" on the signature page to that Agency and Interlender Agreement dated as of December 1, 1997 (the "Interlender Agreement"). Except as otherwise defined herein, capitalized terms used herein shall have the meanings given them in the Loan Agreement. This Fourth Amendment to Loan Agreement is referred to as the "Fourth Amendment". 1. Background. The Borrowers have requested that the Lenders waive the Borrowers' noncompliance on July 31, 1999 with Section 8.3.4 of the Loan Agreement and agree to amend such Section. 2. Waiver. The Lenders waive Borrowers' non-compliance with Section 8.3.4. as of July 31, 1999. 3. Amendments to the Loan Agreement. Subject to the satisfaction of the terms and conditions hereof, Lenders and Borrowers agree that the Loan Agreement be deleted in its entirety and the following substituted in its place: "8.3.4. Cash Flow. Achieve Cash Flow of not less than $1,000,000 at each fiscal quarter end for the period of the prior four consecutive fiscal quarters of the Borrowers." 4 Representations and Warranties. To induce Lenders to enter into this Fourth Amendment, each Borrower warrants, represents and covenants to the Lenders and Agent that (a) Organization and Qualification. Each Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Each Borrower is duly qualified or is authorized to do business and is in good standing as a foreign corporation or limited liability company in all states and jurisdictions in which the failure of such Borrower to be so qualified would have a material adverse effect on the financial condition, business or properties of such Borrower. (b) Corporate Power and Authority. Each Borrower is duly authorized and empowered to enter into, execute, deliver and perform this Fourth Amendment and each of the Loan Documents to which it is a party. The execution, delivery and performance of this Fourth Amendment and each of the other Loan Documents have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the shareholders or members of a Borrower; (ii) contravene any Borrower's charter, by-laws or operating agreement; (iii) violate, or cause Borrower to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to any Borrower; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Borrower is a party or by which Borrower's Properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than Permitted Liens) upon or with respect to any of the Properties now owned or hereafter acquired by Borrower. (c) Legally Enforceable Agreement. This Fourth Amendment and each of the other Loan Documents when delivered under this Fourth Amendment will be, a legal, valid and binding obligation of each Borrower, enforceable against each Borrower in accordance with its respective terms. (d) No Material Adverse Change. Since the date of the last financial statements provided by the Borrowers to the Lenders, there has been no material adverse change in the condition, financial or otherwise, of any Borrower as shown on the Consolidated balance sheet as of such date and no change in the aggregate value of the Collateral, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. (e) Continuous Nature of Representations and Warranties. Each representation and warranty contained in the Loan Agreement and the other Loan Documents remains accurate, complete and not misleading in any material respect on the date of this Fourth Amendment, except for representations and warranties that explicitly relate to an earlier date and changes in the nature of any Borrower's business or operations that would render the information in any exhibit attached thereto either inaccurate, incomplete or misleading, so long as such changes were disclosed in the Form S-1 Registration Statement of UNF as filed with the Securities and Exchange Commission on September 4, 1996, as amended, in the amended Exhibits attached hereto or Lenders have consented to such changes or such changes are expressly permitted by the Loan Agreement. 5. Conditions Precedent. Notwithstanding any other provision of this Fourth Amendment or any of the other Loan Documents, and without affecting in any manner the rights of Lenders under the other sections of this Fourth Amendment, this Fourth Amendment shall not be effective as to Lenders unless and until each of the following conditions has been and continues to be satisfied (the "Fourth Amendment Closing Date"): 2 (a) Documentation. Lenders shall have received, in form and substance satisfactory to Lenders and their counsel, a duly executed copy of this Fourth Amendment, together with such additional documents, instruments, opinions of Borrowers' counsel and certificates as FCC and its counsel shall require in connection therewith, all in form and substance satisfactory to Lenders and their counsel. (b) No Default. No Default or Event of Default shall exist except as previously disclosed to and consented to by Lenders (c) No Litigation. Except as previously disclosed to and consented to by Lender, no action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of the Loan Agreement or this Fourth Amendment or the consummation of the transactions contemplated thereby or hereby. 6. Acknowledgment of Obligations. Each Borrower hereby (1) reaffirms and ratifies all of the promises, agreements, covenants and obligations to Lenders under or in respect of the Loan Agreement and other Loan Documents as amended hereby and (2) acknowledges that it is unconditionally liable for the punctual and full payment of all Obligations, including, without limitation, all charges, fees, expenses and costs (including reasonable attorneys' fees and expenses) under the Loan Documents, as amended hereby, and that it has no defenses, counterclaims or setoffs with respect to full, complete and timely payment and performance of all Obligations. 7. Confirmation of Liens. Each Borrower acknowledges, confirms and agrees that the Loan Documents, as amended hereby, are effective to grant to Agent and to Lenders duly perfected, valid and enforceable first priority security interests and liens in the Collateral described therein and that the locations for such Collateral specified in the Loan Documents have not changed. Each Borrower further acknowledges and agrees that all Obligations of such Borrower are and shall be secured by the Collateral. 8. Miscellaneous. Except as set forth herein, the undersigned confirms and agrees that the Loan Documents remain in full force and effect without amendment or modification of any kind. Each Borrower hereby acknowledges its obligation to pay to Lenders' and Agent's reasonable attorneys' fees and costs incurred in connection with this Fourth Amendment, as set forth in the Loan Agreement. The execution and delivery of this Fourth Amendment by Lenders and Agent shall not be construed as a waiver by Lenders of any Default or Event of Default under the Loan Documents. This Fourth Amendment, together with the Loan Agreement and other Loan Documents, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior dealings, correspondence, conversations or communications between the parties with respect to the subject matter hereof. This Fourth Amendment and the transactions hereunder shall be deemed to be consummated in the State of Connecticut and shall be governed by and interpreted in accordance with the laws of that state. This Fourth Amendment and the agreements, instruments and documents entered into pursuant hereto or in connection herewith shall be "Loan Documents" under and as defined in the Loan Agreement. 3 EACH BORROWER HEREBY WAIVES SUCH RIGHTS AS IT MAY HAVE TO NOTICE AND/OR HEARING UNDER ANY APPLICABLE FEDERAL OR STATE LAWS INCLUDING, WITHOUT LIMITATION, CONNECTICUT GENERAL STATUTES SECTIONS 52-278A, ET-SEQ., AS AMENDED, PERTAINING TO THE EXERCISE BY AGENT AND/OR LENDERS OF SUCH RIGHTS AS THE AGENT AND/OR LENDERS MAY HAVE INCLUDING, BUT NOT LIMJTED TO, THE RIGHT TO SEEK PREJUDGMENT REMEDIES AND/OR DEPRIVE BORROWERS OF OR AFFECT THE USE OF OR POSSESSION OR ENJOYMENT OF BORROWERS' PROPERTY PRIOR TO THE RENDITION OF A FINAL JUDGMENT AGAINST A BORROWER. EACH BORROWER FURTHER WAIVES ANY RIGHT IT MAY HAVE TO REQUIRE AGENT AND/OR LENDERS TO PROVIDE A BOND OR OTHER SECURITY AS A PRECONDITION TO OR IN CONNECTION WITH ANY PREJUDGMENT REMEDY SOUGHT BY AGENT AND/OR LENDERS. [remainder of page left intentionally blank] 4 Executed under seal on the date set forth above. ATTEST: UNITED NATURAL FOODS, INC. By: /s/ Kevin T. Michel Name: Kevin T. Michel Title: Chief Financial Officer ATTEST: MOUNTAIN PEOPLE'S WAREHOUSE, INC. By: /s/ Kevin T. Michel Name: Kevin T. Michel Title: Chief Financial Officer ATTEST: NATURAL RETAIL GROUP, INC. By: /s/ Kevin T. Michel Name: Kevin T. Michel Title: Chief Financial Officer ATTEST: NUTRASOURCE, INC. By: /s/ Kevin T. Michel Name: Kevin T. Michel Title: Chief Financial Officer ATTEST: RAINBOW NATURAL FOODS, INC. By: /s/ Kevin T. Michel Name: Kevin T. Michel Title: Chief Financial Officer ATTEST: STOW MILLS, INC. By: /s/ Kevin T. Michel Name: Kevin T. Michel Title: Chief Financial Officer ATTEST: RB ACQUISITION, L.L.C. By: /s/ Kevin T. Michel Name: Kevin T. Michel Title: Chief Financial Officer 5 Accepted in Glastonbury, Connecticut on September 10, 1999 FLEET CAPITAL CORPORATION, as Agent By: /s/Howard Handman Name: Howard Handman Title: Senior Vice President FLEET CAPITAL CORPORATION, as a Lender By: /s/Howard Handman Name: Howard Handman Title: Senior Vice President FIRST UNION NATIONAL BANK OF CONNECTICUT, as a Lender By: /s/ Stephen T. Doresh Name: Stephen T. Doresh Title: Vice President NATIONS BANK, N A., as a Lender By: Name: Title: 6 EX-10.28 3 LEASE AGREEMENT EXHIBIT 10.28 LEASE AGREEMENT Basic Lease Information Lease Date: August 3, 1998 Lessor: Valley Centre I, L.L.C. Lessor's Address: 1109 First Avenue, Suite 500 Seattle, WA 98104 Lessee: United Natural Foods, Inc., a Delaware corporation Lessee's Address: 12745 Earhart Avenue Auburn, CA 95602 Park: Valley Centre Corporate Park Lot: The tax parcel on which the Building is located (Exhibit A), which is legally described in Exhibit A-1. Building: The approximate 320,710 square foot building to be constructed on the Lot by Lessor in which the Premises will be located. Premises: Approximately 204,804 square feet as outlined in red on Exhibit A. Premises Address: To Be Determined Auburn, Washington Term: ten (10) years commencing on. the Commencement Date defined in Section 2, subject to extension as provided in Section 30. Early Occupancy Date: Twelve (12) weeks prior to the anticipated completion of Lessor's Work defined in Section 2. Base Rent Schedule: Month 1: $ 0 Month 2 through 36: $ 62,762 Month 37-60: $ 65,931 Month 61-96; $ 69,577 Months 97-120 $ 74,955 Lessee's Share of Operating Expenses: 58.58% Lessee's Share of Tax Expense: 58.58% Lessee's Share of Common Utility Expenses: 58.58% Permitted Uses: Any lawful purpose including general office, receiving, storing, shipping, assembly, light manufacturing, and selling products, materials and merchandise made and/or distributed by Lessee. Insurance Amount: Bodily injury limit of not less than $1,000,000.00 per occurrence. Property damage limit of not less than $1,000,000.00 per occurrence. Parking Spaces: Lessee's pro rata share of the common area parking at the Premises which shall include not fewer than 120 spaces. Exhibits: Exhibit A - Premises Exhibit B - Work Letter Exhibit C - Exclusion From Operating Expenses Exhibit D - Rules and Regulations (ii) LEASE AGREEMENT This Lease is made and entered into as of the Lease Date included in the Basic Lease Information as set forth on pages (i) and (ii). The Basic Lease Information is incorporated by reference herein, and the Basic Lease Information and this Lease are and shall be construed as a single instrument. 1. Premises: Lessor hereby leases to Lessee upon the terms and conditions contained herein the Premises, together with (a) any and all easements, appurtenances, rights, privileges and benefits now or hereafter belonging thereto or commonly enjoyed therewith and (b) the right to use in common with Lessor and other lessees of the Park, the Common Areas (defined below). 2. Commencement Date: The Term and the obligation to pay Rent shall commence on the date (the "Commencement Date") which is the earlier of (a) the date of Substantial Completion (as defined in Section 4.E) of Lessor's Work (defined below) or (b) the date on which Lessee commences business in the ordinary course in the Premises, and terminate on the date (the "Expiration Date") which is ten (10) years after the Commencement Date or, if the Commencement Date is not the first day of a month, on the tenth anniversary of the last day of the month in which the Commencement Date occurs. Lessor shall permit Lessee to occupy the Premises on the Early Occupancy Date at Lessee's risk in order to perform Lessee's Work (defined in the Work Letter) attached hereto as Exhibit B and incorporated by reference herein) and, to the extent permitted under applicable laws, to deliver inventory to the Premises. Occupancy by Lessee prior to the Commencement Date shall be subject to the terms of this Lease, except Sections 3, 5, 7 and 10. References to the "Term of this Lease" shall mean the original term as provided in this Section 2 and any Additional Term (defined below) pursuant to Section 30. 3. Rent: Beginning on the Commencement Date, Lessee shall pay to Lessor, without prior notice or demand, the Base Rent shown in the Basic Lease Information, payable in advance at Lessor's address shown in the Basic Lease Information on the first day of each month throughout the term of the Lease. The term "Rent" as used in this Lease shall mean the Base Rent and Lessee's share of Operating Expenses and Tax Expenses and Utilities as specified in Sections 5.A, 5.B, and 6 of this Lease. 4. Construction: A. Lessor's Work. Lessor, at its cost and expense, shall be responsible for the construction of the Building and Common Areas and other improvements (collectively, "Lessor's Work") as provided in the Work Letter. B. Lessee's Work. Lessee, at its cost and expense shall be responsible for the construction of Lessee's Work as defined in the Work Letter. C. Redecoration Allowance. On the fifth anniversary of the Commencement Date and on the first day of each Additional Term if this Lease remains in effect, Lessor shall pay Lessee $40,000 to 2 defray Lessee's costs of redecorating and refurbishing the Premises. D. Completion of Construction. Lessor shall promptly commence and diligently proceed to complete Lessor's Work on or before March 1, 1999 (the "Anticipated Completion Date"). If Substantial Completion has not occurred on or before April 30, 1999, Lessee shall have the right at any time thereafter to terminate this Lease upon not less than thirty (30) days prior written notice to Lessor, as Lessee's sole and exclusive remedy for Lessor's failure to substantially complete Lessor's Work by such date, unless during such period, Substantial Completion shall have occurred. In addition, if Substantial Completion has not occurred on or before April 30, 1999, and (a) if Lessee is required to reimburse or pay to a Sublessee Holdover Rent (as defined in each Sublease), Lessor shall reimburse Lessee for all such amounts and (b) if a Sublease (defined below) is terminated by a Sublessee or Lessee, Lessor shall pay to Lessee all amounts which would have been paid to Lessee under the applicable Sublease. All amounts payable to Lessee pursuant to this Section 4.E shall be paid within ten (10) days of written request accompanied by reasonable evidence of the amounts payable. E. Substantial Completion. For purposes of this Lease, the term "Substantial Completion" means completion of Lessor's Work in accordance with the Work Letter as certified by (i) the architect for the Building, except so-called "punch list" items not exceeding $37,500, in the aggregate, the failure of which to complete does 3 not interfere with Lessee's use of the Premises and Common Areas, and (ii) the delivery of a certificate of occupancy by appropriate public officials having jurisdiction confirming Lessee's right to occupy and use the Premises and Common Areas in accordance with applicable laws, or if such certificate is not available by reason of uncompleted Lessee's Work, other written evidence that such certificate will be issued upon completion of Lessee's Work in accordance with applicable laws. F. Common Areas. For purposes of this Lease, the term "Common Areas" shall mean and include, but not be limited to, any and all parking areas, roads, streets, drives, passageways, sidewalks, landscaped areas, ramps, walkways, entrances and exits, curb-cuts, lighting equipment, surface drainage facilities, traffic control signs, fences, retaining walls, and other common areas and improvements from time to time located on the Lot or in the Park. Without Lessee's prior written consent, Lessor or its lessees shall not construct any building, structure or improvement in those portions of the Lot and Park designated as "NO BUILD AREA" on Exhibit A. 5. Expenses: A. Operating Expenses. In addition to the Rent set forth in Section 3, Lessee shall pay its share, which is defined in the Basic Lease Information, of all Operating Expenses. "Operating Expenses" are defined as the all reasonable amounts reasonably incurred and paid by Lessor in connection with the ownership, maintenance, repair and operation of the Premises, the Building and 4 the Park, and where applicable, of the Lot, except Operating Expenses shall not include any of the amounts described in Exhibit C. Operating Expenses may include, but are not limited to: (a) Lessor's cost of non-structural repairs to and maintenance of the roof and exterior walls of the Building, including patching of the roof and roof membrane; (b) Lessor's cost of maintaining the outside paved area, landscaping and other common areas of the Park; (c) Lessor's annual cost of all risk and other insurance including earthquake endorsements for the Building and the Park and rental loss insurance; (d) Lessor's cost of modifications to the Building occasioned by any rules, laws or regulations effective subsequent to the Commencement Date; (e) Lessor's cost of modifications to the Building occasioned by any rules, laws or regulations arising from Lessee's use of the Premises regardless of when such rules, laws or regulations became effective, excluding such costs relating to Lessor's Work on account of rules, laws and regulations in effect as of the time such work is performed; (f) Lessor's cost of preventative maintenance contracts including, but not limited to, contracts for elevator systems and heating, ventilation and air conditioning systems, with bi-monthly service; 5 (g) Lessor's cost of security and fire protection services for the Park, if in Lessor's sole discretion such services are provided; and (h) Reasonable management fees and expenses and reasonable accounting fees and expenses. B. Tax Expenses. In addition to the Rent set forth in Section 3, Lessee shall pay its share, which is defined in the Basic Lease Information, of all real property taxes applicable to the land and improvements included within the Park. The term "Tax Expense" means and includes any form of tax, assessment, general assessment, special assessment, lien, levy, bond obligation, license fee, license tax, tax or excise on rent, or any other levy, charge or expense, together with any statutory interest thereon, (individually and collectively, the "Impositions"), now or hereafter imposed or required by any authority having the direct or indirect power to tax, including any federal, state, county or city government or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, (individually and collectively, the "Governmental Agencies") on any interest of Lessor or Lessee or both (including any legal or equitable interest of Lessor or its mortgagee, if any) in the Premises or the Building or the Park, including without limitation: (a) any Impositions upon, allocable to or measured by the area of the Premises or the Building or the Park, or the rental payable hereunder, including without limitation, any gross income tax or excise tax levied by any Governmental Agencies with respect 6 to the receipt of such rental (except any business and occupation taxes imposed on Lessor's gross income); (b) any Impositions upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair or use or occupancy by Lessee of the Premises or any portion thereof; (c) any Impositions upon or with respect to the building equipment and personal property used in connection with the operation and maintenance of the Building or the Park or upon or with respect to the furniture, fixtures and decorations in the common areas of the Building or the Park; (d) any Impositions upon this Lease or this transaction or any document to which Lessee is a party creating or transferring an interest or an estate in the Premises; (e) any Impositions by Governmental Agencies (whether or not such impositions constitute tax receipts) in substitution, partially or totally, of any impositions now or previously included within the definition of real property taxes, including those calculated to increase tax increments to Governmental Agencies and to pay for such services as fire protection, water drainage, street, sidewalk and road maintenance, refuse removal or other governmental services formerly provided without charge to property owners or occupants; or (f) any and all reasonable costs, including without limitation, the fees of attorneys, tax consultants and experts, reasonably incurred by Lessor in negotiating or contesting the 7 amount of such real property taxes in formal or informal proceedings before the Governmental Agency imposing such real property taxes; provided, however, that Impositions shall in no event include (i) Lessor's general income, inheritance, estate, gift, franchise or transfer taxes, (ii) Impositions separately assessed and directly attributable to particular improvements for the benefit of, or owned by, other lessees of the Park or (iii) penalties, interest or late charges on account of Lessor's failure to pay any of the Impositions, except to the extent caused by Lessee's failure to pay its share of Impositions as provided in this Section 7.B. C. Payment of Expenses. Lessor shall estimate the Operating Expenses and Tax Expense for the calendar year in which the Lease commences. Commencing on the Commencement Date, one-twelfth (1/12th) of this estimate shall be paid by Lessee to Lessor on the first day of each month of the remaining months of the calendar year. Thereafter, Lessor may estimate such expenses as of the beginning of each calendar year and require Lessee to pay one-twelfth (1/12th) of such estimated amount as additional Rent hereunder on the first day of each month. Not later than March 31 of the following calendar year, or as soon thereafter as reasonably possible, including the year following the year in which this Lease terminates, Lessor shall furnish Lessee with a true and correct accounting of actual Operating Expenses and Tax Expense, and within thirty (30) days of Lessor's delivery of such accounting, Lessee shall pay to Lessor, the amount of any underpayment. 8 Notwithstanding the foregoing, failure by Lessor to give such accounting by such date shall not constitute a waiver of Lessor of its right to collect Lessee's share of any underpayment. Lessor shall credit the amount of any overpayment by Lessee toward the next estimated monthly installment(s) falling due, or where the term of the Lease has expired, refund the amount of overpayment to Lessee. D. Limitation. Notwithstanding the foregoing, in no event shall the aggregate amount of Lessee's share of Operating Expenses and Tax Expense during the first thirty-six (36) months of the Term exceed $405,803.52. 6. Utilities: Lessee shall pay the cost of all water, sewer use and connection fees, gas, heat, electricity, telephone and other utilities billed or metered separately to Lessee, except the cost of constructing utility lines and installing utility meters included in Lessor's Work. For utility fees or use charges that are not billed separately to Lessee, Lessee shall pay the amount which Lessor reasonably determines by survey, separate meter or similar means is attributable to Lessee's use of the Premises. In addition, Lessee shall within fifteen (15) days after receiving a bill from Lessor pay Lessor its share, which is described on page 1, of any common area utility costs. 7. Late Charges: Lessee acknowledges that late payment by Lessee to Lessor of Rent, Lessee's share of Operating Expenses, Tax Expenses, utility costs or other sums due hereunder, will cause Lessor to incur costs not contemplated by this Lease and the exact 9 amount of such costs are extremely difficult and impracticable to fix. Such costs, include without limitation, processing and accounting charges, and late charges that may be imposed on Lessor by the terms of any note secured by any encumbrance against the Premises. Therefore, in the event any installment of Rent or other sum remains unpaid for more than five (5) days from the date due, upon Lessor's written request made within thirty (30) days of the date payment was due, Lessee shall pay Lessor, a late charge of five percent (5%) of the overdue amount; provided, however, that Lessor shall give one (1) written notice during each year before assessing such late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will incur by reason of late payment by Lessee. Acceptance of any late charge without concurrent or prior payment of the overdue amount shall not constitute a waiver of Lessee's default with respect to the overdue amount, nor prevent Lessor from exercising any of the other rights and remedies available to Lessor. 8. Use of Premises: The Premises are to be used for the uses stated in the Basic Lease Information and for no other purposes without Lessor's prior written consent. Lessee shall not do or permit anything to be done in or about the Premises nor keep or bring anything therein which will increase the existing rate of or affect any policy of fire or other insurance upon the Building or any of its contents, or cause a cancellation of any insurance policy. Lessee shall not do or permit anything to be done in or 10 about the Premises which will unreasonably obstruct or interfere with the rights of other tenants or occupants of the Building or other buildings in the Park or injure or unreasonably annoy other tenants or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Lessee cause, maintain or permit any nuisance in, on or about the Premises. Lessee shall not damage or deface or otherwise commit or suffer to be committed any waste in or upon the Premises. Lessee shall honor the terms of all covenants, conditions and restrictions relating to the Park listed in Exhibit D hereto. Lessee shall honor the rules and regulations attached to and made a part of this Lease and any other reasonable regulations of the Lessor related to parking and the operation of the Building. All such rules and regulations shall be uniformly applied and enforced. 9. Alterations and Additions: Lessee shall not install any signs, fixtures or improvements to the Premises (collectively, "Alterations") without the prior written consent of Lessor, which consent shall not be unreasonably withheld, delayed or conditioned; provided, however, that Lessee shall make no structural alterations and shall make no roof penetrations without Lessor's consent in Lessor's sole discretion except as provided below. Lessor acknowledges that Lessee may wish to expand freezer and cooler areas and equipment. Lessor agrees that it will not unreasonably withhold its consent to such expansion provided the structural integrity of the Building is maintained and the work is of a 11 quality consistent with Lessee's Work. Lessor expressly consents to Lessee's Work. Lessee shall keep the Premises and the property on which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Lessee. Prior to the commencement of Alterations involving a cost of more than Two Hundred Thousand Dollars ($200,000), Lessor may require Lessee to post a completion bond for up to 125% of the cost of the work. Lessee shall have the right to contest the correctness or validity of any such lien if,within thirty (30) days of demand by Lessor, it procures and records a lien release bond issued by a responsible corporate surety in an amount sufficient to satisfy statutory requirements therefor in the State of Washington. Lessee shall promptly pay or cause to be paid all sums awarded to the claimant on its suit, and, in any event, before any execution is issued with respect to any judgment obtained by the claimant in its suit or before such judgment becomes a lien on the Premises, whichever is earlier. Upon termination of this Lease, Lessee shall remove all signs, fixtures, furniture and furnishings and if requested by Lessor, remove any improvements made by Lessee (including freezers and coolers included in Lessee's Work) and repair any damage caused by the installation or removal of such signs, fixtures, furniture, furnishings and improvements and leave Premises in as good condition as they were at the time of the commencement of this Lease, excepting for reasonable wear and tear and damage by fire or casualty. Notwithstanding the foregoing, Lessee may, without 12 Lessor's consent, install and replace its trade fixtures and equipment and make interior, non-structural alterations to the Premises. 10. Repairs and Maintenance: Lessee shall, at Lessee's sole cost and expense, maintain the Premises in the condition delivered, reasonable wear and tear and damage by fire or other casualty excepted, and in clean and safe condition. Lessee shall keep the sidewalks, loading areas, driveways and other areas immediately adjacent to the Premises free from rubbish and other debris. Lessee, at its sole cost and expense, shall repair to its prior condition any damage to the Premises caused by Lessee or its employees, agents, invitees, licensees or contractors. Without limiting the generality of the foregoing, Lessee shall be solely responsible for maintaining and repairing all plumbing, lighting, electrical wiring and equipment within the Premises and interior walls. Lessee shall repair and maintain the heating, ventilation and air conditioning ("HVAC") systems for the Premises pursuant to a maintenance contract with a recognized HVAC contractor. Except for repairs rendered necessary by the negligence of Lessee, its agents, employees and contractors, Lessor shall maintain, repair and replace, if necessary, in good condition, reasonable wear and tear excepted, the roof, foundations and exterior walls of the Building (exclusive of glass and exterior doors within the Premises), utility and sewer pipes outside the Premises and all parking areas, sidewalks, driveways and other Common Areas and to keep the Common Areas in a neat, clean, safe, 13 good and orderly condition. Lessor shall be responsible for the removal of all snow and ice from the Common Areas. Except as otherwise provided in Section 5.A, costs incurred by Lessor pursuant to this Section 10 shall be Operating Expenses. Except for normal maintenance and repair of the items outlined above, Lessee shall have no right of access to or install any device on the roof of the Building nor make any penetrations of the roof of the Building without the express prior written consent of Lessor, except as set forth in the last paragraph of Section 9. 11. Insurance: A. Lessee shall at all times during the term of this Lease, and at its sole cost and expense, maintain workers compensation insurance and comprehensive general liability insurance against liability for bodily injury and property damage by reason of the use and occupancy of the Premises by Lessee, its Authorized Representative (defined below) and its invitees, with liability limits as set forth in the Basic Lease Information with such insurance naming Lessor and any mortgagee of Lessor as an additional insured and including such endorsements as may be reasonably required by Lessor. In no event shall the limits of said policy or policies be considered as limiting the liability of Lessee under this Lease. All insurance required to be carried by Lessee under this Lease shall: (i) be issued by insurance companies authorized to do business in the State of Washington with a rating of A/VI or better as rated in the most recent edition of Best's Insurance Reports; (ii) be issued as a primary policy, and (iii) contain an 14 endorsement requiring thirty (30) days' prior written notice from the insurance company to both parties, and, if requested by Lessor, to Lessor's lender, before cancellation or change in the coverage, scope, or amount of any policy. Each policy or a certificate of the policy, together with evidence of payment of premiums, shall be deposited with Lessor on or before the Commencement Date, and on renewal of the policy not less than ten (10) days before the expiration of the term of the policy. B. Lessor shall at all times during the term of the Lease maintain comprehensive general liability insurance on the Park (including the Building) against liability for bodily injury and property damage with liability limits as set forth in the Basic Lease Information. Lessor shall also maintain with respect to the Park (including the Building) fire insurance with "all risk" endorsements, including flood and earthquake, in an amount not less than the full replacement cost thereof. All such insurance shall be issued by companies and otherwise meet the standards set forth in the second paragraph of Section 11A. 12. Indemnity and Limitation of Liability: A. Generally. Lessee agrees to save and hold Lessor harmless and indemnify Lessor from and against all liabilities, charges and expenses (including reasonable attorneys' fees, costs of court and expenses necessary in the prosecution or defense of any litigation) by reason of injury to person or property (a) occurring in, on or about the Premises resulting from the acts or omissions of Lessee, its Authorized Representatives, its customers or invitees and (b) 15 occurring in, on or about the Building or the Park resulting from the acts or omissions of Lessee or its Authorized Representatives. Lessor agrees to save and hold Lessee harmless and indemnify Lessee from and against all liabilities, charges and expenses (including reasonable attorneys' fees, costs of court and expenses necessary in the prosecution or defense of any litigation) by reason of injury to person or property occurring in, on or about the Premises or the Building or the Park resulting from the acts or omissions of Lessor or its Authorized Representatives. A party's obligation under this Section to indemnify and hold the other party harmless shall be limited to the sum that exceeds the amount of insurance proceeds, if any, received by the party being indemnified. B. Concurrent Negligence of Lessor and Lessee. Notwithstanding Section 12.A above, in the event of concurrent negligence of Lessee, or its Authorized Representatives, on the one hand, and that of Lessor, or its Authorized Representatives, on the other hand, which concurrent negligence results in damage to any persons or property occurring in, on or about the Premises or the Building or the Park, either party's obligation to indemnify the other party as set forth in Section 12.A shall be limited to the extent of the negligence of the indemnifying party, or its authorized representatives, including the indemnifying party's proportional share of costs and attorneys' fees incurred in connection with any claims, actions or proceedings brought with respect to such damage. 16 C. Waiver of Worker's Compensation Immunity. The indemnification obligations contained in this Section shall not be limited by any worker's compensation, benefit or disability laws, and each indemnifying party hereby waives (solely for the benefit of the indemnified party) any immunity that said indemnifying party may have under the Industrial Insurance Act, Title 51 RCW and similar worker's compensation, benefit or disability laws. D. Provisions Specifically Negotiated. LESSOR AND LESSEE ACKNOWLEDGE BY THEIR EXECUTION OF THIS LEASE THAT EACH OF THE INDEMNIFICATION PROVISIONS OF THIS LEASE (SPECIFICALLY INCLUDING BUT NOT LIMITED THOSE RELATING TO WORKER'S COMPENSATION BENEFITS AND LAWS) WAS SPECIFICALLY NEGOTIATED AND AGREED TO BY LESSOR AND LESSEE. E. Exemption of Lessor from Liability. Except as provided in Section 4.D, and except for damage resulting from the negligence of Lessor or its Authorized Representatives or as a result of any misrepresentation, breach of warranty or failure to perform its obligations hereunder, Lessor shall not be liable to Lessee for any damage to Lessee or Lessee's property, for any injury to or loss of Lessee's business or for any damage or injury to any person from any cause. F. Definitions. The term "Authorized Representatives" means any shareholder, director, officer, partner, agent, employee or independent contractor of either party. 13. Assignment and Subleasing: 17 A. Lessee shall not assign or transfer this Lease or sublet more than thirty percent (30%) of the Premises except to a Permitted Transferee (defined below) without the written consent of Lessor, which shall not be unreasonably withheld. If Lessee seeks to sublet or assign all or any portion of the Premises for which Lessor's consent is required, Lessee shall give written notice (the "Transfer Notice") together with a copy of the proposed sublease or assignment agreement and all agreements collateral thereto, to Lessor at least thirty (30) days prior to the commencement of the sublease or assignment. If Lessor has not given Lessee written notice of its objection to the proposed assignment or sublease within fifteen (15) days of receipt of the Transfer Notice, Lessor shall be deemed to have consented thereto. Each permitted assignee or sublessee shall assume and be deemed to assume this Lease and shall be and remain liable jointly and severally with Lessee for payment of Rent and for the due performance of, and compliance with all the terms, covenants, conditions and agreements herein contained on Lessee's part to be performed or complied with, for the term of this Lease. In the event of any sublease or assignment of all or any portion of the Premises for which Lessor's consent is required where the Rent reserved in the sublease or assignment exceeds the sum of (a) the Rent or pro rata portion of the Rent, as the case may be, for such space reserved in the Lease and (b) amounts payable by Lessee under the Current Lease not reimbursed by a Sublessee, Lessee shall pay the Lessor monthly, as additional Rent, at the same time as the monthly installments of Rent 18 hereunder, one-half (1/2) of the excess of the Rent reserved in the sublease over the Rent reserved in this Lease applicable to the sublease space. B. For purposes of this Lease, the term "Permitted Transferee" means a corporation or other business entity which controls, is controlled by, or is under common control with, Lessee, and the term "control" means the ownership of a majority of the outstanding voting stock or similar equity interest of such corporation or other entity. 14. Subrogation: Subject to the approval of their respective insurers, Lessor and Lessee hereby mutually waive their respective rights of recovery against each other from any insured loss. Each party shall obtain any special endorsements, if required by their insurer, to evidence compliance with the aforementioned waiver. 15. Ad Valorem Taxes: Lessee shall pay before delinquent all taxes assessed against the personal property of the Lessee and all taxes attributable to any leasehold improvements made by Lessee. 16. Subordination; Landlord's Waiver: A. This Lease is and shall be prior to any mortgage or deed of trust (a "Mortgage") recorded after the date of this Lease affecting the Premises, the Building, the Park or the Lot. If, however, a lender requires that this Lease be subordinate to any Mortgage, this Lease shall be subordinate to that Mortgage if Lessor first obtains from the lender a written agreement reasonably acceptable to Lessee that provides substantially the following: 19 "As long as Lessee performs its obligations under this Lease, no foreclosure of, deed given in lieu of foreclosure of or sale under the mortgage, and no steps or procedures taken under the mortgage, shall affect Lessee's rights under this Lease." Lessee shall attorn to any purchaser at any foreclosure sale, or to any grantee or transferee designated in any deed given in lieu of foreclosure. Lessee shall execute the written agreement and any other documents reasonably required by the lender to accomplish the purposes of this Section. B. Lessor agrees to pay and perform as and when due each of its obligations under each Mortgage. C. Lessor agrees to execute and deliver from time to time such documents and instruments reasonably requested by Lessee's lenders waiving any security interest of Lessor in any of Lessee's property, permitting such lender to enter the Premises to enforce its rights against Lessee and including other customary provisions; provided such agreement (i) requires lender to repair any damage to the Premises caused in connection therewith and to pay Rent during any period of occupancy and (ii) does not permit such lender to occupy the Premises for more than sixty (60) days. 17. Right of Entry: Lessee grants Lessor or its agents the right to enter the Premises at all reasonable times after twenty-four (24) hours notice for purposes of inspection, exhibition, repair and alteration. Lessor shall at all times have and retain a key with which to unlock all the doors in, upon and about the Premises, excluding Lessee's vaults and safes, and Lessor shall have the right to use any and all reasonable means Lessor deems necessary to 20 enter the Premises in an emergency. Lessor shall also have the right to place "for rent" and/or "for sale" signs on the outside of the Premises during the last six (6) months of the term of this Lease. Lessee hereby waives any claim from damages or for any injury or inconvenience to or interference with Lessee's business, or any other loss occasioned thereby except for any claim for any of the foregoing arising out of the negligent acts or omissions of Lessor or its authorized representatives. 18. Estoppel Certificate: Upon the reasonable request of either party, at any time or from time to time, Lessor and Lessee agree to execute, acknowledge and deliver to the other, within twenty (20) days after request, a written instrument, duly executed and acknowledged, (a) certifying that this Lease has not been modified and is in full force and effect or, if there has been a modification of this Lease, that this Lease is in full force and effect as modified, stating such modifications, (b) specifying the dates to which the Rent and other amounts have been paid, (c) stating whether or not, to the knowledge of the party executing such instrument, the other party hereto is in default and, if such party is in default, stating the nature of such default and (d) stating whether or not, to the knowledge of the party executing such instrument, there are then existing any set-offs or defenses against the enforcement of any of the obligations hereunder upon the part of Lessor or Lessee, as the case may be, to be performed or complied with and, if so, specifying the same. Any such 21 statement may be conclusively relied upon by any prospective purchaser or encumbrance of the Premises. Lessee's failure to deliver such statement within such time shall be conclusive upon the Lessee that (x) this Lease is in full force and effect, without modification except as may be represented by Lessor; (y) there are no uncured defaults in the Lessor's performance, and (z) not more than one month's rent has been paid in advance. 19. Lessee's Default: The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Lessee: (a) The vacation or abandonment of the Premises by the Lessee. (b) The failure by Lessee to make any payment of Rent or any other payment required hereunder after receiving ten (10) days written notice that Lessee has failed to make such payment by the date said payment is due. (c) The failure of Lessee to observe, perform or comply with any of the conditions or provisions of this Lease for a period of thirty (30) days after written notice, or such additional time as may be reasonably required to remedy the same by appropriate action promptly commenced and diligently continued. (d) Lessee becoming the subject of any bankruptcy (including reorganization or arrangement proceedings pursuant to any bankruptcy act) or insolvency proceeding whether voluntary or involuntary. 22 (e) The use or storage by Lessee of Hazardous Materials on the Premises other than as permitted by the provisions of Section 27 of this Lease for a period of thirty (30) days after written notice or such additional time as may be reasonably necessary to remedy the same by appropriate action promptly commenced and diligently continued. 20. Remedies for Lessee's Default: In the event of Lessee's default or breach of the Lease, Lessor may terminate Lessee's right to possession of the Premises by any lawful means in which case this Lease shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In addition, the Lessor shall have the immediate right of re-entry, and if this right of re-entry is exercised following abandonment of the Premises by Lessee, Lessor may consider any personal property belonging to Lessee and left on the Premises to also have been abandoned. If Lessee breaches this Lease and abandons the property before the end of the term, or if Lessee's right to possession is terminated by Lessor because of a breach of the Lease, then in either such case, Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including without limitation thereto, the following: (i) the worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount 23 of such rental loss that Lessee proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of such rental loss that is proved could be reasonably avoided; plus (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including without limitation, any reasonable costs or expenses incurred by Lessor in (A) retaking possession of the Premises, including reasonable attorney fees therefor, (B) maintaining or preserving the Premises after such default, (C) preparing the Premises for reletting to a new Lessee, including repairs or necessary alterations to the Premises for such reletting, (D) leasing commissions, and (E) any other costs reasonably necessary or appropriate to relet the Premises; plus (v) at Lessor's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable state law. Upon any such re-entry Lessor shall have the right to make any reasonable repairs, alterations or modifications to the Premises, which Lessor in its reasonable discretion deems necessary. As used in Subsection 20(i) the "worth at the time of award" is computed by allowing interest at the rate of twelve percent (12%) per year from the date of default. As used in Subsections 20(ii) and 20(iii) the "worth at the time of award" is 24 computed by discounting such amounts at the discount rate of twelve percent (12%) per year. The foregoing remedies are not exclusive; they are cumulative in addition to any remedies now or later allowed by law or to any equitable remedies Lessor may have, and to any remedies Lessor may have under bankruptcy laws or laws affecting creditor's rights generally. The waiver by Lessor of any breach of any term of this Lease shall not be deemed a waiver of such term or of any subsequent breach thereof. 21. Holding Over: If Lessee holds possession of the Premises after the Term of this Lease with Lessor's consent, Lessee shall become a tenant from month to month upon the terms specified at a monthly Rent of one hundred twenty-five percent (125%) of the Rent due on the last month of the Lease Term, payable in advance on or before the first day of each month. All options, if any, granted under the terms of this Lease shall be deemed terminated and be of no effect during said month to month tenancy. Lessee shall continue in possession until such tenancy shall be terminated by either Lessor or Lessee giving written notice of termination to the other party at least thirty (30) days prior to the effective date of termination. 22. Lessor's Default: Lessee agrees to give any holder of a deed of trust encumbering the Premises and of which Lessee has actual notice ("Trust Deed Holders"), by certified mail, a copy of any notice of default served upon the Lessor by Lessee, provided that 25 prior to such notice Lessee has been notified in writing (by way of actual delivery of Notice of Assignment of Rents and Leases, or otherwise) of the address of such Trust Deed Holder. Lessee further agrees that if Lessor shall have failed to cure such default within the time, if any, provided for in this Lease, then the Trust Deed Holders shall have an additional thirty (30) days within which to cure such default or, if such default cannot be cured within that time, then such additional time as may be necessary, if the Trust Deed Holder has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. The failure by Lessee to give any notice to a Trust Deed Holder pursuant to this Section 22 shall not in any way release or limit Lessor's obligations to Lessee. 23. Sale of Premises: In the event of a sale of the Building and Lot (including the Common Areas) and the assumption in writing by the purchaser of all obligations of Lessor hereunder arising after such sale, Lessor shall have no liability to Lessee on account of obligations of Lessor arising after such sale. The foregoing shall not release Lessor of any obligations on account of acts or events occurring prior to such sale. 24. Waiver: No delay or omission in the exercise of any right or remedy of Lessor on any default by Lessee shall impair such a right of remedy or be construed as a waiver. The subsequent acceptance 26 of Rent by Lessor after breach by Lessee of any covenant or term of this Lease shall not be deemed a waiver of such breach, other than a waiver of timely payment for the particular Rent payment involved, and shall not prevent Lessor from maintaining an unlawful detainer or other action based on such breach. No payment by Lessee or receipt by Lessor of a lesser amount than the monthly Rent and other sums due hereunder shall be deemed to be other than on account of the earliest Rent or other sums due, nor shall any endorsement or statement on any check or accompanying any check or payment be deemed an accord and satisfaction; and Lessor may accept such check or payment without prejudice to Lessor's right to recover the balance of such Rent or other sum or pursue any other remedy provided in this Lease. 25. Casualty Damage: If the Premises or any part thereof shall be damaged by fire or other casualty (a "Casualty"), Lessee shall give prompt written notice thereof to Lessor. In case of Substantial Damage (described below), each of Lessor and Lessee may, at its option, terminate this Lease as of the date of such damage by notifying the other in writing of such termination within thirty (30) days after the date of such damage. If this Lease is not terminated by Lessor or Lessee, Lessor shall promptly commence to repair and restore the Building and shall proceed with reasonable diligence to restore the Building and the Premises within two hundred ten (210) days from the date of the Casualty (except that Lessor shall not be responsible for delays outside its control) to 27 substantially the same condition in which it was immediately prior to the happening of the casualty, except that Lessor shall not be required to rebuild, repair or replace any part of Lessee's furniture, furnishings or fixtures and equipment removable by Lessee or, except to the extent of insurance proceeds available therefor, any improvements installed by Lessee under the provisions of this Lease. Lessor shall not be liable for any inconvenience or annoyance to Lessee, injury to the business of Lessee, loss of use of any part of the Premises by the Lessee or loss of Lessee's personal property resulting in any way from such damage or the repair thereof. If this Lease is not terminated as provided above, there shall be an appropriate abatement of Rent and other amounts payable hereunder from the date of such damage until restoration thereof, according to the extent to which Lessee is unable to use the Premises and Common Areas in the ordinary course of its business. For purposes of this Lease, "Substantial Damage" means damage or destruction to (a) the Building or the Premises which, in the reasonable opinion of Lessor's independent architect or engineer, cannot be repaired both (i) within two hundred ten (210) days from the date of the Casualty and (ii) more than ninety (90) days prior to the expiration of the term of this Lease, including any Additional Term the option for which shall have been exercised or (b) the Common Areas which, in the reasonable opinion of Lessee, materially interferes with the conduct of Lessee's business and which cannot be repaired within the period set forth in clause (a). Notwithstanding the foregoing, Lessor shall not in any event be 28 required to spend for such work an amount in excess of the insurance proceeds actually received by Lessor as a result of fire or other casualty. If Lessor is unable to restore the Building and Premises to substantially their condition prior to such casualty because insurance proceeds are not available, Lessee may terminate this Lease. 26. Condemnation: If more than fifteen percent (15%) of the Premises is taken for any public or quasi-public purpose of any lawful government power or authority or sold to a governmental entity to prevent such taking, Lessee or Lessor may terminate this Lease as of the date when physical possession of the Premises is taken by the taking authority. If any portion of the Common Areas designated as "Access and Parking" on Exhibit A which, in the reasonable opinion of Lessee, materially interferes with the conduct of Lessee's business in the ordinary course is so taken or sold and Lessor is unable to provide within a reasonable time an alternative reasonably acceptable to Lessee, Lessee may terminate this Lease as of the date when physical possession of such Common Areas is taken by the taking authority. Lessee shall not because of such taking assert any claim against Lessor or the taking authority for any compensation because of such taking, and Lessor shall be entitled to receive the portion of the award attributable to the Lot and Building without deduction for any estate or interest of Lessee, and Lessee shall be entitled to receive the portion of the award attributable to Lessee's furniture, fixtures 29 and equipment and for business interruption. If this Lease is not terminated by Lessor or Lessee, Lessor shall promptly proceed to restore the Premises, Building or Common Areas to substantially the same condition prior to such partial taking, allowing for the reasonable effects of such taking, and a proportionate allowance shall be made to Lessee for the Rent and a reduction in Lessee's share of other amounts shall be made, in each case corresponding to the time during which, and to the part of the Premises of which, Lessee is deprived and to the extent of the permanent interference with Lessee's business on account of such taking and restoration. Lessor shall not be required to spend funds for restoration in excess of the amount received by Lessor as compensation awarded. 27. Environmental Matters/Hazardous Materials: A. Hazardous Materials Disclosure Certificate. Concurrently with executing this Lease, and within thirty (30) days of each anniversary of the Commencement Date during the Term of this Lease, Lessee shall execute, and deliver to Lessor, the Hazardous Materials Disclosure Certificate (the "HazMat Certificate") in substantially the form attached hereto as Exhibit__, and any other reasonably necessary documents as requested by Lessor. B. Definition of Hazardous Materials. As used in this Lease, the term Hazardous Materials shall mean and include (a) any hazardous or toxic wastes, materials or substances, and other pollutants or contaminants, which are or become regulated by any Environmental Laws; (b) petroleum, petroleum byproducts, crude oil or any fraction thereof; (c) asbestos; (d) polychlorinated 30 biphenyls; (e) radioactive materials; (f) any other material or substance displaying toxic, reactive, ignitable or corrosive characteristics, as all such terms are used in their broadest sense, and are defined or become defined by any Environmental Law (defined below); or (g) any materials which cause a nuisance upon or waste to the Premises, the Building, the Lot, the Park or any portion of any of the foregoing. C. Prohibition; Environmental Laws. Subject to the remaining provisions of this Section 29, Lessee shall be entitled to use and store only those Hazardous Materials that are necessary for Lessee's business and to the extent disclosed in the HazMat Certificate, provided that such usage and storage is only to the extent of the quantities of Hazardous Materials as specified in the then applicable HazMat Certificate and provided further that such usage and storage is in full compliance with any and all local, state and federal environmental, health and/or safety-related laws, statutes, orders, standards, courts' decisions, ordinances, rules and regulations (as interpreted by judicial and administrative decisions), decrees, directives, guidelines, permits or permit conditions, currently existing and as amended, enacted, issued or adopted in the future which are or become applicable to Lessee or all or any portion of the Premises (collectively, the "Environmental Laws"). Lessee agrees that any changes to the type and/or quantities of Hazardous Materials specified in the most recent HazMat Certificate may be implemented only with the prior written consent of Lessor, which consent shall not be unreasonably 31 withheld. The HazMat Certificate need not disclose minor quantities of cleaning solvents, office products and similar materials used in the ordinary course of business ("Excluded Materials"). Lessee shall not be entitled nor permitted to install any tanks under, on or about the Premises for the storage of Hazardous Materials without the express written consent of Lessor, which may be given or withheld in Lessor's sole discretion. Lessor shall have the right at all times during the Term of this Lease at reasonable times and upon reasonable notice to (i) inspect the Premises, (ii) conduct tests and investigations to determine whether Lessee is in compliance with the provisions of this Section 27 and (iii) request lists of all Hazardous Materials used, stored or otherwise located on, under or about the Premises, the Common Areas and/or the parking lots (to the extent the Common Areas and/or parking lots are not considered part of the Premises), except such lists need not include Excepted Materials or fuel and similar materials in motor vehicles. The cost of all such inspections, tests and investigations shall be borne solely by Lessor. D. Lessee's Environmental Obligations. Lessee shall give to Lessor immediate verbal and follow-up written notice of any spills, releases, discharges, disposals, emissions, migrations, removals or transportation of Hazardous Materials in violation of or required to be reported under Environmental Laws on, under or about the Premises, or in any Common Areas or parking lots (to the extent 32 such areas are not considered part of the Premises). Lessee covenants and warrants to promptly investigate, clean up, remove, restore and otherwise remediate (including, without limitation, preparation of any feasibility studies or reports and the performance of any and all closures) any spill, release, discharge, disposal, emission, migration or transportation of Hazardous Materials arising from or related to the intentional or negligent acts or omissions of Lessee or Lessee's Representatives at Lessee's sole cost and expense. Any such investigation, clean up, removal, restoration and other remediation shall only be performed after Lessee has obtained Lessor's prior written consent, which consent shall not be unreasonably withheld so long as such actions would not potentially have a material adverse long-term or short-term effect on the Premises, the Building, the Lot or the Park, or any portion of any of the foregoing. Notwithstanding the foregoing, Lessee shall be entitled to respond immediately to an emergency without first obtaining Lessor's prior written consent. Lessee, at its sole cost and expense, shall conduct and perform, or cause to be conducted and performed, all closures as required by any Environmental Laws or any agencies or other governmental authorities having jurisdiction thereof. If Lessee fails to so promptly investigate, clean up, remove, restore, provide closure or otherwise so remediate as required by this paragraph, Lessor may, but without obligation to do so, take any and all steps necessary to rectify the same and Lessee shall promptly reimburse Lessor, upon demand, for all reasonable costs and expenses to Lessor of 33 performing investigation, clean up, removal, restoration, closure and remediation work. All such work undertaken by Lessee, as required herein, shall be performed in such a manner so as to enable Lessor to make full economic use of the Premises, the Building, the Lot and the Park for lawful commercial purposes after the satisfactory completion of such work. E. Lessee's Environmental Indemnity. In addition to Lessee's obligations set forth above, Lessee agrees to, and shall, protect, indemnify, defend (with counsel reasonably acceptable to Lessor) and hold Lessor and Lessor's lenders, partners, property management company (if other than Lessor), agents, directors, officers, employees, representatives, contractors, shareholders, successors and assigns and each of their respective partners, directors, employees, representatives, agents, contracts, shareholders, successors and assigns harmless from and against any and all claims, judgments, damages, penalties, fines, liabilities, losses (including, without limitation, diminution in value of the Premises, the Building, the Lot, the Park, or any portion of any of the foregoing, damages for the loss of or restriction on the use of rentable or usable space), suits, administrative proceedings and costs (including, but not limited to, reasonable attorneys' and consultant fees and court costs) arising at any time during or after the Term of this Lease in connection with or related to, directly or indirectly, the use, presence, transportation, storage, disposal, migration, removal, spill, release or discharge of Hazardous Materials on, in or about the Premises, or in any Common 34 Areas or parking lots (to the extent such areas are not considered part of the Premises) as a result (directly or indirectly) of the intentional or negligent acts or omissions of Lessee or Lessee's Authorized Representatives. Neither the written consent of Lessor to the presence of Hazardous Materials on, under or about the Premises nor the strict compliance by Lessee with all Environmental Laws shall excuse Lessee and Lessee's officers and directors from its obligations of indemnification pursuant hereto. F. Lessor's Environmental Indemnity. Lessor agrees to, and shall, protect, indemnify, defend (with counsel acceptable to Lessee) and hold Lessee and Lessee's partners, agents, directors, officers, employees, representatives, contractors, shareholders, successors and assigns and each of their respective partners, directors, employees, representatives, agents, contractors, shareholders, successors and assigns harmless from and against any and all claims, judgments, damages, penalties, fines, liabilities, losses, suits, administrative proceedings and costs (including, but not limited to, attorneys' and consultant fees and court costs) arising at any time during or after the Term of this Lease in connection with or related to, directly or indirectly, the use, presence, transportation, storage, disposal, migration, removal, spill, release or discharge of Hazardous Materials on, in or about the Premises, or in any Common Areas or parking lots (to the extent such areas are not considered part of the Premises) as a result (directly or indirectly) of the intentional or negligent acts or omissions of Lessor or Lessor's Authorized Representatives. 35 In addition, Lessor expressly agrees that Lessor shall protect, indemnify, defend and hold Lessee and Lessee's partners, agents, directors, officers, employees, representatives, contractors, shareholders, successors and assigns harmless for any and all claims, judgments, damages, penalties, fines, liabilities, losses, suits, administrative proceedings and costs arising at any time during or after the term of this Lease related to, directly or indirectly, any of the contamination and/or hazardous substances located on the Premises or in any Common Areas or parking lots prior to execution of this Lease, including the contamination and/or hazardous substances identified in the "Remedial Action Summary and Site Closure Request, Former Sewage Lagoon Site, Auburn Washington", dated February 25, 1998, by GeoEngineers, or any of the studies and/or reports referenced in that document. G. Lessor's Obligations. Lessor represents, warrants and agrees that, except as set forth in the Remedial Action Summary and Site Closure Request dated February 25, 1998 submitted by GeoEngineers, Inc. to the Washington Department of Ecology: (a) Lessor has not, and to the best of Lessor's knowledge no other party, has used, generated, manufactured, produced, stored, released, discharged or disposed of on, under or about the Premises or transported to or from the Premises any Hazardous Material, except for any Hazardous Material used in the ordinary operation, repair and maintenance of the Premises and Building. (b) Lessor will not use, generate, manufacture, produce, store, release, discharge or dispose of on, under or about the 36 Premises or transport to or from the Premises any Hazardous Material, except for any Hazardous Material used in the ordinary operation, repair and maintenance of the Premises and Building. (c) Lessor has not, and to the best of Lessor's knowledge no other party has, removed any underground storage tanks from the Premises, and no underground storage tanks are located on the Premises. (d) Lessor will give prompt written notice to Lessee of: (1) any proceeding or inquiry by any governmental authority known to Lessor with respect to the presence of any Hazardous Material on the Premises or relating to any loss or injury resulting from any Hazardous Material not caused by Lessee; (2) any action filed in State or Federal Court by any third party against Lessor or the Premises relating to any loss or injury resulting from any Hazardous Material; and (3) Lessor's discovery as evidenced by receipt of written notice from any governmental authority or agency or by receipt of any environment report from a third party of any occurrence or condition on the Premises that could cause the Premises or any part thereof to be subject to any restrictions on occupancy or use of the Premises under any environmental law. The provisions of Section 40D shall not apply to the obligations of Lessor or in any way limit the obligations of Lessor set forth in this Section 27G. 37 H. Survival. Lessee's and Lessor's obligations and liabilities pursuant to the provisions of this Section 27 shall survive the expiration or earlier termination of this Lease. 28. Right to Audit: Lessee shall have the right to inspect and audit Lessor's books and records relating to actual Operating Expenses and Tax Expenses. Such inspection and audit shall be conducted by Lessee during normal business hours at the principal place of business of Lessor's Agent or such other place of business of Lessor in the Seattle, Washington, area at which such books and records shall be kept in the ordinary course of business. If Lessee does not give Lessor notice of its intent to conduct such an inspection and audit within twelve (12) months of the date on which Lessor furnished Lessee with a statement for a calendar year during the Term, then such statement shall conclusively be deemed to be true and correct and Lessee shall have no further right to audit Lessor's books and records relating to actual Operating Expenses and Tax Expenses for such calendar year. If it shall be determined as a result of such audit that the Statement overstated the actual Operating Expenses and Tax Expenses, then Lessor shall immediately pay to Lessee an amount equal to Lessee's share of the amount by which the actual Operating Expenses and Tax Expenses were overstated. In addition, if the statement overstated the actual Operating Expenses and Tax Expenses by four percent (4%) or more, then Lessor shall pay to Lessee the reasonable and necessary fees and costs incurred by Lessee in conducting such audit. Any information gained by Lessee from such inspection and audit shall 38 be confidential and shall not be disclosed other than to carry out the purpose hereof. 29. First Refusal - Lease: If Lessor intends to offer any unoccupied space in the Building (the "Option Space") for lease to a prospective tenant (the "Prospective Lease"), it will so advise Lessee in writing the ("Offer Notice"). The Offer Notice shall include all of the material terms and conditions (including allowances and free rent) on which Lessor is willing to lease the Option Space to the Prospective Lessee. Lessee shall have five (5) business days within which to elect in writing to lease the Option Space on terms and conditions set forth in the Offer Notice. If Lessee exercises its rights under this Section 29, Lessee and Lessor shall enter into a new lease or an amendment to this Lease reflecting the leasing of the Option Space on such terms. 30. Extension: A. Lessee shall have the options to renew this Lease for three (3) successive additional terms of five (5) years each (each an "Additional Term") on the same terms and conditions as are provided herein except that (a) Rent for each Additional Term shall be determined in accordance with the provisions of Section 30.C and (b) there shall be no additional option to renew or extend this Lease. B. Each such option shall be exercised by Lessee by written notice (the "Extension Notice") to Lessor at least six (6) months before the expiration of the original or prior Additional Term. Any termination of this Lease by Lessor in accordance with the 39 terms hereof shall automatically terminate such options without further act by Lessor. It shall be a condition to the exercise of such second and third options that the prior option shall have been validly exercised. C. The Rent for each Additional Term shall be an amount (the "FMV Rent") equal to the then fair market value of comparable space in the Kent Valley, Washington area (including Kent and Auburn, Washington) for each such Additional Term as determined below, but in no event less than the Rent then payable for the then current Term of this Lease. Within thirty (30) days of its receipt of the Extension Notice for an Additional Term, Lessor shall deliver to Lessee notice ("Lessor's Rental Notice") of Lessor's estimate of the FMV Rent for the Premises for the applicable Additional Term. If Lessor and Lessee cannot agree on the FMV Rent within fourteen (14) days of Lessee's receipt of Lessor's Rental Notice (the "Rental Notice Date"), the parties shall, within thirty (30) days after the Rental Notice Date, select a single appraiser who will determine the FMV Rent. If the parties cannot agree on a single appraiser, then each party will select an appraiser within said thirty (30) days, and such two (2) appraisers will select a third appraiser within seven (7) days of the date of the selection of such two (2) appraisers. The appraisers so selected shall all be members of the American Institute of Real Estate Appraisers, and in the case of the third appraiser chosen by the other two (2) appraisers, shall not have acted in any capacity for either Lessor or Lessee within five (5) years of such appraiser's selection. 40 The three (3) appraisers shall render their decision as to the FMV Rent for the Premises for the applicable Additional Term, and a decision by a majority of the appraisers shall be binding upon Lessor and Lessee. The costs of the foregoing appraisers will be borne equally by Lessor and Lessee. 31. Parking. Lessee shall have the use of the number of undesignated parking spaces set forth in the Basic Lease Information. Lessor agrees to use its reasonable best efforts to provide such parking adjacent to the Building. 32. Lessor's Title: If at the time of recording by Lessee of a notice or memorandum of lease there shall be any mortgage or mortgages affecting the Premises or the Park, or any portion thereof, Lessor shall obtain and deliver to Lessee within thirty (30) days after the date of such recording, an Agreement with respect to such mortgage or mortgages (in accordance with the provisions of Section 16.A). Lessee shall have the right, within thirty (30) days after the date of this Lease, at Lessee's cost and expense (except as hereinafter provided), to obtain a commitment for leasehold title insurance from a title insurance company of Lessee's selection, committing to insure Lessee's leasehold interest under this Lease. Lessor's will cooperate with Lessee with regard to such title insurance commitment, including using reasonable efforts (i) to cause such commitment to be issued by any title insurance company that may have issued a title insurance policy to Lessor, and (ii) to procure any "simultaneous issue" rate 41 (or similar discount) for the benefit of Lessee in conjunction with the issuance of any other title insurance policy on the Park. 33. Quiet Enjoyment: Lessor covenants and agrees that Lessee, upon performance of its obligations under this Lease, shall peaceably and quietly hold and enjoy the Premises and shall have the rights to the Common Areas as provided for herein, throughout the Term of this Lease. 34. Lessee's Right to Cure: If Lessor shall be in default hereunder, which default shall continue for thirty (30) days after written notice thereof from Lessee, then, in addition to any other right or remedy of Lessee under this Lease or otherwise, Lessee shall have the right, but not the obligation, to cure such default, in which event Lessor shall pay to Lessee, upon demand, the reasonable cost thereof plus interest (as hereinafter provided) from the date of such cure by Lessee to the date of reimbursement to Lessee; provided, however, if such default is not susceptible of being cured within a period of thirty (30) days then, as long as Lessor shall commence the curing thereof within such time and shall proceed continuously with due diligence to cure the same, Lessee shall not have such right. If Lessor shall not reimburse Lessee as provided herein, Lessee, after the entering of a judgment in favor of Lessee in the Superior Court for King County, Washington or by the United States District Court for the Western District of Washington, shall have the right to deduct such amount to be reimbursed from any installment or installments of Rent or other charges due or becoming due under 42 this Lease. If in Lessee's reasonable judgment an emergency shall exist, the thirty (30) day period shall be shortened to such reduced period, following notice, as shall be reasonable in the circumstances prior to Lessee curing such default; and Lessee's notice, in such an event, may be given by fax transmission or other substitute means of writing. 35. Payment of Costs: A. Lessor acknowledges that Lessee currently is the lessee under a certain lease dated as of August 23, 1989 (the "Current Lease") of space at 4005 Sixth Avenue South, Seattle, Washington (the "Current Space") between the Executors of the Estate of A.H. Spear ("Spear") and Lessee (as successor to NutraSource) and that Lessee has entered into negotiations to sublease (a "Sublease" or the "Subleases") the Current Space to one or more persons (a "Sublessee" or the "Sublessees"). Lessor agrees to reimburse Lessee for the payment of fifty percent (50%) of the Subleasing Costs (defined below), up to a maximum payment by Lessor of $100,000. Payments by Lessor shall be made within ten (10) days following written request by Lessee (but in no event prior to August 31, 1998) setting forth in reasonable detail the amounts of Subleasing Costs paid by Lessee. B. For purposes of this Lease, the term "Subleasing Costs" means all reasonable costs, typical fees and expenses incurred or payable by Lessee in connection with the Subleases, including (a) rent and other charges and payments payable under the Current Lease in excess of those received by Lessee under the Subleases, (b) 43 costs of demising walls, tenant improvements and similar work to the Current Space necessary for such subleasing or required under the Subleases and (c) brokerage fees relating to such subleasing. 36. Tax Incentives: Lessor expressly acknowledges and agrees that Lessee would not enter into this Lease unless the Washington state sales and use tax exemption provided by RCW 82.08.820 and RCW 82.12.820 (the "Warehouse Tax Exemption") is available for Lessor's Work, Lessee's Work and other equipment and property to be installed by Lessee. Lessor shall take no action which would result in the loss or unavailability of the Warehouse Tax Exemption. Lessor and Lessee shall cooperate in filing quarterly applications for remittance with the Washington Department of Revenue, together with all other applications for refunds, reports, returns and other documents and keeping and disclosing all records and information necessary to take advantage of the Warehouse Tax Exemption and all other available state and local tax incentive programs. Lessor shall assign to Lessee the right to receive all tax refunds available to Lessor under the Warehouse Tax Exemption. If such assignment is not permitted, Lessor shall pay to Lessee, within ten (10) days of receipt, all tax refunds received by Lessor under the Warehouse Tax Exemption. 37. Reduction in Premises: If within forty-five (45) days of the date hereof, Lessee has not received written assurances reasonably acceptable to it confirming that the Warehouse Tax Exemption and the full benefit 44 thereunder relating to the Park (exclusive of buildings other than the Building) will be available exclusively for the benefit of Lessee, Lessee may elect to reduce the size of the Premises to approximately 160,000 square feet in accordance with revisions to Lessor's Plans (defined in the Work Letter) reasonably acceptable to Lessor and Lessee. In such event, the Rent and Lessee's share of Operating Expenses, Tax Expense and utilities shall be reduced in proportion to the reduction in the size of the Premises. Lessor and Lessee shall cooperate in good faith in carrying out the provisions of this Section 37.C and shall execute and deliver such amendments to this Lease and other documents and instruments as may be reasonably requested in connection therewith. 38. Special Termination: Notwithstanding anything to the contrary contained herein, in the event the Commencement Date has not occurred on or before August 1, 1999 (the "Outside Commencement Date") through no fault of Lessor or its Authorized Representatives, either Lessor or Lessee may terminate this Lease upon written notice to the other within thirty (30) days of the Outside Commencement Date, upon which all obligations of Lessor and Lessee shall terminate and be of no further force or effect. 39. Financial Statements: In the event Lessee is not required to file reports under the Securities and Exchange Act of 1934, as amended, within ten (10) days after Lessor's request Lessee shall deliver to Lessor the then current financial statements of Lessee (including interim periods following the end of the last fiscal year for which annual statements are available) which statements 45 shall be prepared or compiled by a certified public accountant and shall present fairly the financial condition of Lessee at such dates and the result of its operations and changes in its financial positions for the periods ended on such dates. Lessee shall be required to comply with this provision only in the event Lessor is contemplating a sale or re-financing of the property and so notifies Lessee in writing. Lessor agrees that it will use its reasonable best efforts to keep such financial statements confidential and will not disclose the same except to its lenders or prospective purchasers (other than entities which are competitors of Lessee). 40. General Provisions: A. Time. Time is of the essence in this Lease and with respect to each and all of its provisions in which performance is a factor. B. Successors and Assigns. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. C. Recordation. Lessor agrees to execute, acknowledge and deliver a short form or memorandum of this Lease for recording purposes promptly upon the prior written request of Lessee. D. Lessor's Personal Liability. Except as provided in Section 27G, the liability of Lessor (which, for purposes of this Lease, shall include Lessor and the owner of the Building if other than Lessor) to Lessee for any default by Lessor under the terms of 46 this Lease shall be limited to the actual interest of Lessor and its present or future partners in the Park, including proceeds of insurance and rents and profits (collectively, "Lessor's Interest"), and Lessee agrees to look solely to Lessor's Interest for the recovery of any judgment against Lessor, it being intended that Lessor shall not be personally liable for any judgment or deficiency. The liability of Lessor under this Lease is limited to liability on account of acts and circumstances occurring during its actual period of ownership of title to the Building, and Lessor shall be released from liability upon transfer of title to the Building and the assumption in writing by the transferee of all obligations of Lessor hereunder. E. Separability. Any provisions of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provisions hereof and such other provision shall remain in full force and effect. F. Choice of Law. This Lease shall be governed by the laws of the State of Washington. G. Attorney's Fees. In the event any legal action is brought to enforce or interpret the provisions of this Lease, the prevailing party therein shall be entitled to recover all costs and expenses including reasonable attorneys' fees. H. Entire Agreement. This Lease supersedes any prior agreements and contains the entire agreement of the parties on matters covered. No other agreement, statement or promise made by 47 any party that is not in writing and signed by all parties to this Lease shall be binding. I. Warranty of Authority. Each person executing this agreement on behalf of a party represents and warrants that (1) such person is duly and validly authorized to do so on behalf of the entity it purports to so bind, and (2) if such party is a partnership, corporation or trustee, that such partnership, corporation or trustee has full right and authority to enter into this Lease and perform all of its obligations hereunder. J. Notices. All notices and demands required or permitted to be sent to the Lessor or Lessee shall be in writing and shall be sent by United States mail, postage prepaid, certified or by personal delivery or by overnight courier, addressed to Lessor at c/o Martin Smith Inc., 1109 First Avenue, Suite 500, Seattle, Washington 98101, Attention: H. Martin Smith III, or to Lessee at the Premises and c/o United Natural Foods, Inc., 260 Lake Road, Dayville, Connecticut 06241, Attention: Chief Financial Officer, and 12745 Earhart Avenue, Auburn, California 95602 or to such other place(s) as such party may designate in a notice to the other party given as provided herein. Notice shall be deemed given upon the earlier of actual receipt or the third day following deposit in the United States mail. K. Interlineation. The use of underlining or strikeouts within the Lease is for reference purposes only. No other meaning or emphasis is intended by this use, nor should any be inferred. 48 L. Consent. Except as otherwise expressly provided in this Lease, whenever it is necessary under the terms of this Lease for either party to obtain the consent or approval of the other party, such consent or approval shall not be unreasonably withheld or delayed, and all such determinations shall be made on a reasonable basis and in a reasonable manner. M. Force Majeure. In any case where either party hereto is required to do any act, delays caused by or resulting from Acts of god, war, civil commotion, fire, flood or other casualty, labor difficulties, shortages of labor, materials or equipment, government regulations, unusually severe weather, or other causes beyond such party's reasonable control shall not be counted in determining the time during which work shall be completed, whether such time be designated by a fixed date, a fixed time or a "reasonable time", and such time shall be deemed to be extended by the period of such delay. (the next page is the signature page) 49 IN WITNESS WHEREOF, this Lease is executed on the date and year first written above. LESSOR: LESSEE: Valley Centre I, L.L.C., a Washington Limited Liability Company UNITED NATURAL FOODS, INC., a Delaware corporation By:________________________ By:___________________________ Its:_______________________ Its:__________________________ STATE OF WASHINGTON COUNTY OF ____________ On this ____ day of August, 1998, before me personally appeared _________________________, to me known to be the _________________ of Valley Centre I, L.L.C. and executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said limited liability company, for the uses and purposes therein mentioned, and on oath stated that (s)he was authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunder set my hand and affixed my official seal the day and year first above written. _____________________________ (Signature) _____________________________ (Typed or printed name) NOTARY PUBLIC in and for the State of Washington, residing at ______________________________ My appointment expires: ______________________________ 50 STATE OF WASHINGTON COUNTY OF ____________ On this ____ day of August, 1998, before me personally appeared _________________________, to me known to be the _________________ of United Natural Foods, Inc. and executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that (s)he was authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunder set my hand and affixed my official seal the day and year first above written. _____________________________ (Signature) _____________________________ (Typed or printed name) NOTARY PUBLIC in and for the State of Washington, residing at ______________________________ My appointment expires: ______________________________ 51 EX-21 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT NAME STATE OF INCORPORATION The Health Hut, Inc. New York Mountain People's Warehouse Incorporated California Natural Retail Group, Inc. Delaware Nutrasource, Inc. Washington Rainbow Natural Foods, Inc. Colorado GEM Acquisition Corporation Delaware Stow Mills, Inc. New Hampshire Nature's Finest, Inc. Florida Hershey Imports, Inc. New Jersey Mother Earth, Inc. Florida Albert's Organics , Inc. California EX-23 5 ACCOUNTANTS' CONSENT Exhibit 23 ACCOUNTANTS' CONSENT The Board of Directors United Natural Foods, Inc.: We consent to incorporation by reference in the Registration Statements (Nos. 333-19945, 333-19947, and 333-19949 on Form S-8) of United Natural Foods, Inc. of our reports dated September 3, 1999, relating to the consolidated balance sheets of United Natural Foods, Inc. and Subsidiaries as of July 31, 1999 and 1998 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended July 31, 1999, and the related schedule, which reports appear in the July 31, 1999 annual report on Form 10-K of United Natural Foods, Inc. Providence, Rhode Island /s/ KPMG LLP October 28, 1999 ------------ KPMG LLP EX-27 6 FINANCIAL DATA SCHEDULE
5 EXHIBIT 27 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM CONSOLIDATED STATEMENTS OF INCOME FOR THEYEAR ENDED JULY 31, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUL-31-1999 JUL-31-1999 2,845 0 64,005 2,297 90,725 166,871 72,497 28,713 238,130 93,104 25,791 0 0 182 118,399 238,130 856,998 856,998 680,301 680,301 0 1,995 5,700 23,593 10,126 13,467 0 0 0 13,467 0.74 0.73
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