-----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, Fe+OT8+C9PqeEo3vcI0lzSwL4lu6ZkknYBNdf0EzdT0EGl3rOiweHJoj0jvHPooZ MO7hrZO5BubJIwmcQbrJcA== 0001171520-02-000160.txt : 20021213 0001171520-02-000160.hdr.sgml : 20021213 20021213164505 ACCESSION NUMBER: 0001171520-02-000160 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021031 FILED AS OF DATE: 20021213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED NATURAL FOODS INC CENTRAL INDEX KEY: 0001020859 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 050376157 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15723 FILM NUMBER: 02857426 BUSINESS ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 BUSINESS PHONE: 8607792800 MAIL ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 10-Q 1 d1093.txt UNITED NATURAL FOODS, INC. ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2002 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 000-21531 UNITED NATURAL FOODS, INC. (Exact name of Registrant as Specified in Its Charter) Delaware 05-0376157 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 260 Lake Road Dayville, CT 06241 (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (860) 779-2800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes |X| No |_| As of December 3, 2002 there were 19,111,067 shares of the Registrant's Common Stock, $0.01 par value per share, outstanding. ================================================================================ UNITED NATURAL FOODS, INC. FORM 10-Q FOR THE QUARTER ENDED OCTOBER 31, 2002 TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of October 31, 2002 and July 31, 2002 3 Consolidated Statements of Operations for the quarters ended October 31, 2002 and 2001 4 Consolidated Statements of Cash Flows for the quarters ended October 31, 2002 and 2001 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosure About Market Risk 18 Item 4. Controls and Procedures 18 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 31, July 31, (In thousands, except per share amounts) 2002 2002 ASSETS Current assets: Cash $ 4,399 $ 11,184 Accounts receivable, net 86,418 84,303 Notes receivable, trade 474 513 Inventories 150,386 131,932 Prepaid expenses 6,144 4,493 Deferred income taxes 4,612 4,612 Refundable income taxes -- 58 --------- --------- Total current assets 252,433 237,095 Property & equipment, net 92,415 82,702 Other assets: Notes receivable, trade, net 1,365 956 Goodwill 45,049 31,399 Covenants not to compete, net 221 248 Deferred taxes 800 800 Other, net 1,453 1,257 --------- --------- Total assets $ 393,736 $ 354,457 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - line of credit $ 118,186 $ 106,109 Current installments of long-term debt 1,593 1,658 Current installment of obligations under capital leases 783 1,037 Accounts payable 67,566 52,789 Accrued expenses 20,225 18,185 Financial instruments 7,326 5,620 Income taxes payable 1,838 -- --------- --------- Total current liabilities 217,517 185,398 Long-term debt, excluding current installments 10,867 7,677 Obligations under capital leases, excluding current installments 936 995 --------- --------- Total liabilities 229,320 194,070 --------- --------- Stockholders' equity: Preferred stock, $.01 par value, authorized 5,000 shares, none issued and outstanding -- -- Common stock, $.01 par value, authorized 50,000 shares, issued and outstanding 19,110 at October 31, 2002; issued and outstanding 19,106 at July 31, 2002 191 191 Additional paid-in capital 79,716 79,711 Unallocated shares of ESOP (2,054) (2,094) Retained earnings 86,563 82,579 --------- --------- Total stockholders' equity 164,416 160,387 --------- --------- Total liabilities and stockholders' equity $ 393,736 $ 354,457 ========= =========
See notes to consolidated financial statements. 3 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Quarter Ended October 31, ----------- (In thousands, except per share data) 2002 2001 ---- ---- Net sales $ 310,993 $280,315 Cost of sales 250,157 225,314 --------- -------- Gross profit 60,836 55,001 Operating expenses 50,843 45,024 Amortization of intangibles 38 64 Operating expenses 50,881 45,088 --------- -------- Operating income 9,955 9,913 --------- -------- Other expense (income): Interest expense 1,847 1,746 Change in fair value of financial instruments 1,706 3,787 Other, net (238) 44 --------- -------- Total other expense 3,315 5,577 --------- -------- Income before income taxes 6,640 4,336 Income taxes 2,656 1,734 --------- -------- Net income $ 3,984 $ 2,602 ========= ======== Per share data (basic): Net income $ 0.21 $ 0.14 ========= ======== Weighted average shares of common stock 19,106 18,665 ========= ======== Per share data (diluted): Net income $ 0.20 $ 0.14 ========= ======== Weighted average shares of common stock 19,434 19,060 ========= ======== See notes to consolidated financial statements. 4 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Quarter Ended October 31, ----------- (In thousands) 2002 2001 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,984 $ 2,602 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,370 1,814 Change in fair value of financial instruments 1,706 3,787 Gain (loss) on disposals of property and equipment 9 (3) Deferred income tax benefit -- (287) Provision for doubtful accounts 1,060 513 Changes in assets and liabilities: Accountsreceivable (227) (9,487) Inventory (4,111) (14,208) Prepaidexpenses (1,404) (643) Refundableincometaxes 58 366 Otherassets 758 (727) Notesreceivable,trade 95 141 Accountspayable 9,303 19,532 Accruedexpenses 750 6,038 Incometaxespayable 1,805 2,006 -------------------- Net cash provided by operating activities 16,156 11,444 -------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of acquired businesses, net of cash acquired (29,960) -- Proceeds from sale of property and equipment 33 16 Capital expenditures (4,313) (4,360) -------------------- Net cash used in investing activities (34,240) (4,344) -------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under note payable 12,077 12,184 Repayments of long-term debt (470) (20,188) Principal payments of capital lease obligations (312) (299) Proceeds from exercise of stock options 4 119 -------------------- Net cash provided by (used in) financing activities 11,299 (8,184) -------------------- NET DECREASE IN CASH (6,785) (1,084) Cash at beginning of period 11,184 6,393 -------------------- Cash at end of period $ 4,399 $ 5,309 ==================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,823 $ 1,629 ==================== Income taxes $ 819 $ 196 ====================
In the quarter ended October 31, 2002 and 2001, the Company incurred $0 and $628, respectively, of capital lease obligations. See notes to consolidated financial statements. 5 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2002 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of United Natural Foods, Inc. (the "Company") and its wholly owned subsidiaries. The Company is a distributor and retailer of natural and organic foods and related products and sells its products throughout the United States. The financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally required in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In our opinion, these financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for interim periods, however, may not be indicative of the results that may be expected for a full year. 2. INTEREST RATE SWAP AGREEMENTS In October 1998, the Company entered into an interest rate swap agreement that provides for it 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. This swap has been entered into as a hedge against LIBOR interest rate movements on current variable rate indebtedness totaling $60 million at LIBOR plus 1.50%, thereby fixing its effective rate at 6.50%. The five-year term of the swap agreement may be extended to seven years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." The Company entered into an additional interest rate swap agreement effective August 1, 2001. The additional agreement provides for it to pay interest for a four-year period at a fixed rate of 4.81% on a notional principal amount of $30 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing its effective rate on the notional amount at 6.31%. If LIBOR exceeds 6.0% in a given period, the agreement is suspended for that period. The four-year term of the swap agreement may be extended to six years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under SFAS No. 133. The Company recorded $1.7 million and $3.8 million of expense for the quarters ended October 31, 2002 and October 31, 2001, respectively, on its interest rate swap agreements and related option agreements to reflect the change in fair value of the financial instruments. 3. STOCK OPTION PLANS The Company has adopted Statement of Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for Stock-Based Compensation." Under SFAS No. 123, companies can elect to account for stock-based compensation using a fair value based method or continue to measure compensation expense using the intrinsic value method. The Company has elected to continue to apply Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees". If the fair value method of accounting had been used for the periods ended October 31, 2002 and October 31, 2001, net income would have been $3.2 million and $2.0 million, respectively, basic earnings per share would have been $0.17 and $0.11, respectively, and diluted earnings per share would have been $0.17 and $0.11, respectively. The fair value of each option grant was estimated using the Black-Sholes Option Pricing Model with the following weighted average assumptions for the periods ended October 31, 2002 and October 31, 2001: dividend yields of 0.0% for both periods, risk free interest rates of 3.3% and 4.7%, respectively, and expected lives of five years for both periods. The expected volatility was 63.0% and 64.0%, respectively. The effects of applying SFAS No. 123 in this pro forma disclosure are not necessarily indicative of future amounts. 6 The Board of Directors adopted and the stockholders approved the 2002 Stock Incentive Plan of the Company, which provides for grants of stock options to employees, officers, directors and others, on October 2, 2002 and December 3, 2002, respectively. These options are intended to either qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code or be "non-statutory stock options". A total of 1,400,000 shares of common stock may be issued upon the exercise of options granted under the 2002 Stock Option Plan. In the quarter ended October 31, 2002, the Company granted 25,000 shares under the 1996 Stock Option Plan. On December 3, 2002, the Company granted approximately 490,000 under the 2002 Stock Incentive Plan. 4. EARNINGS PER SHARE Following is a reconciliation of the basic and diluted number of shares used in computing earnings per share: Quarter Ended October 31, ----------- (In thousands) 2002 2001 ---- ---- Basic weighted average shares outstanding 19,106 18,665 Net effect of dilutive stock options based upon the treasury stock method 328 395 ------ ------ Diluted weighted average shares outstanding 19,434 19,060 ====== ====== Antidilutive stock options were 0 and 150 for the quarters ended October 31, 2002 and 2001, respectively. 5. ACQUISITION On October 11, 2002, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Blooming Prairie Cooperative ("Blooming Prairie"), a distributor of natural foods and related products in the Midwest region of the United States, for cash consideration of $30 million. The acquisition was financed by proceeds from the Company's line of credit. The operating results of Blooming Prairie have been included in the accompanying condensed consolidated financial statements of the Company beginning with the acquisition date. Based on a preliminary purchase price allocation, the Company has recorded goodwill of $13.7 million related to this acquisition. 6. 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 national distribution of natural foods, produce 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 engaged in importing, 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. 7 Following is business segment information for the periods indicated:
Distribution Other Eliminations Consolidated ------------ ----- ------------ ------------ Quarter Ended October 31, 2002 Net sales $299,087 $ 16,890 $ (4,984) $310,993 Operating income (loss) $ 11,415 $ (1,411) $ (49) $ 9,955 Depreciation and amortization $ 2,046 $ 324 $ -- $ 2,370 Capital expenditures $ 3,914 $ 399 $ -- $ 4,313 Total assets $525,210 $ 46,841 $(178,315) $393,736 Quarter Ended October 31, 2001 Net sales $269,992 $ 15,501 $ (5,178) $280,315 Operating income (loss) $ 10,423 $ (506) $ (4) $ 9,913 Depreciation and amortization $ 1,571 $ 243 $ -- $ 1,814 Capital expenditures $ 3,994 $ 366 $ -- $ 4,360 Total assets $466,034 $ 2,187 $(141,328) $326,893
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We are the leading national distributor of natural and organic foods and related products in the United States. In recent years, our sales to existing and new customers have increased through the acquisition of or merger with natural products distributors, the expansion of existing distribution centers and the continued growth of the natural products industry in general. Through these efforts, we believe that we have been able to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share. Our distribution operations are divided into four principal units: United Natural Foods, Inc in the Eastern Region, Mountain People's Warehouse, Inc. and Rainbow Natural Foods, Inc in the Western Region, Blooming Prairie in the Midwest and Albert's Organics in various markets in the United States. Through our subsidiary, the Natural Retail Group, we also own and operate 12 natural products retail stores located primarily in Florida. We believe our retail business serves as a natural complement to our distribution business, enabling us to develop new marketing programs and improve customer service. In addition, our Hershey Import subsidiary is a business that specializes in the international trading, roasting and packaging of nuts, seeds, dried fruits and snack items. We are continually integrating certain operating functions in order to improve operating efficiencies, including: (i) expanding marketing and customer service programs across the four regions; (ii) expanding national purchasing opportunities; (iii) consolidating systems applications among physical locations and regions; (iv) integrating administrative and accounting functions; and (v) reducing geographic overlap between regions. In addition, our continued growth has created the need for expansion and relocation of existing facilities to achieve maximum operating efficiencies and to assure adequate space for future needs. We have made considerable capital expenditures and incurred considerable expenses in connection with the expansion of our facilities located in Auburn, California, New Oxford, Pennsylvania, Los Angeles, California, and the relocation of our Atlanta, Georgia facility. At the end of fiscal year 2002, the increased capacity of our distribution centers was approximately 1,000,000 square feet greater than it was five years ago. We are in the process of expanding our Chesterfield, New Hampshire distribution facility from its existing 117,000 square feet to 289,000 square feet. This will enable us to service existing and new customers, integrate our pending acquisition of Northeast Cooperatives into existing facilities, provide more product diversity, and enable us to better balance products among our distribution centers in our Eastern Region. 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. In addition, we continue to increase our leading market share of the growing natural products industry by expanding our customer base, increasing our share of existing customers' business and continuing to expand and further penetrate new distribution territories, particularly in the Midwest and Texas 8 markets. To this end, on October 11, 2002, we acquired substantially all of the assets of Blooming Prairie, the largest volume distributor of natural foods and products in the Midwest region of the United States. The acquisition of Blooming Prairie's Iowa City, Iowa and Mounds View, Minnesota distribution facilities has provided us with an immediate physical base and growth platform with which to broaden our presence in the fast growing Midwest market. On October 23, 2002, we signed an agreement to purchase Northeast Cooperatives, a distributor of natural foods and products in the Eastern United States. Northeast Cooperatives, headquartered in Brattleboro, Vermont, and in business since 1973, had approximately $125 million in sales for the latest twelve months. Consummation of the transaction is contingent upon customary closing conditions, approval by the members of Northeast Cooperatives, and approval from Northeast Cooperatives' lenders by December 14, 2002. 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, insurance, administrative, depreciation and amortization expense. Other expenses (income) include interest on outstanding indebtedness, interest income, the change in fair value of financial instruments and miscellaneous income and expenses. Critical Accounting Policies The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The U.S. Securities and Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results, and require our most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the policies of accounts receivable valuation and the valuation of goodwill and intangible assets. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies. Allowance for doubtful accounts We analyze customer creditworthiness, accounts receivable and notes receivable balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of our allowance for doubtful accounts. Our accounts receivable balance was $86.4 million, net of allowance for doubtful accounts of $6.5 million, and $84.3 million, net of allowance for doubtful accounts of $5.8 million, as of October 31, 2002 and July 31, 2002, respectively. Our notes receivable balance was $1.8 million, net of allowance for doubtful accounts of $0.7 million, and $1.5 million, net of allowance of $0.2 million, as of October 31, 2002 and July 31, 2002, respectively. Valuation of goodwill and intangible assets Intangible assets consist principally of goodwill and covenants not to compete. Goodwill represents the excess purchase price over fair value of net assets acquired in connection with purchase business combinations. Covenants not to compete are initially recorded at fair value, and are amortized using the straight-line method over the lives of the respective agreements, generally five years. We adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets" on August 1, 2001. Goodwill is no longer amortized and is tested annually for impairment. There can be no assurance that at our annual review a material impairment charge will not be recorded. 9 Results of Operations The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales: Quarter Ended October 31, ------------------ 2002 2001 ------------------ Net sales 100.0% 100.0% Cost of sales 80.4% 80.4% ------------------ Gross profit 19.6% 19.6% ------------------ Operating expenses 16.3% 16.1% ------------------ Total operating expenses 16.4% 16.1% ------------------ Operating income 3.2% 3.5% ------------------ Other expense (income): Interest expense 0.6% 0.6% Change in value of financial instruments 0.5% 1.4% Other, net (0.1)% 0.0% ------------------ Total other expense 1.1% 2.0% ------------------ Income before income taxes 2.1% 1.5% Income taxes 0.9% 0.6% ------------------ Net income 1.3% 0.9% ================== The following table presents, for the periods indicated, a reconciliation of income and per share items including special items to income and per share items excluding special items: - -------------------------------------------------------------------------------- Quarter Ended October 31, 2002 Pretax Per diluted (in thousands, except per share data) Income Net of Tax share Income, excluding special items: $8,920 $5,352 $0.28 Less: special items Interest rate swap agreements (change in value of financial instruments) 1,706 1,023 0.05 Costs related to loss of major customer (included in operating expenses) 574 345 0.02 - -------------------------------------------------------------------------------- Income, including special items: $6,640 $3,984 $0.20 ================================================================================ - -------------------------------------------------------------------------------- Quarter Ended October 31, 2001 Pretax Per diluted (in thousands, except per share data) Income Net of Tax share Income, excluding special items: $8,180 $4,908 $0.26 Less: special items Interest rate swap agreement (change in value of financial instruments) 3,787 2,272 0.12 Costs related to relocating distribution center (included in operating expenses) 57 34 -- - -------------------------------------------------------------------------------- Income, including special items: $4,336 $2,602 $0.14 ================================================================================ 10 Quarter Ended October 31, 2002 Compared To Quarter Ended October 31, 2001 Net Sales. Our net sales increased approximately 10.9%, or $30.7 million, to $311.0 million for the quarter ended October 31, 2002 from $280.3 million for the quarter ended October 31, 2001. This increase was due primarily to growth in the independent and mass-market distribution channels of approximately 11.8% and 21.4%, respectively. The supernatural distribution channel increased approximately 5.5%. Included in these increases are sales from the Blooming Prairie division, acquired on October 11, 2002, and Boulder Fruit Express, acquired on November 7, 2001. Sales growth for the quarter, excluding the effect of acquisitions, was 6.5%. Sales growth was also impacted by the transition of the Company's second-largest customer, Wild Oats, Inc., to a new primary distributor. Sales growth excluding these acquisitions and the impact of this transition was 16.5%. Sales to our two largest customers, Whole Foods Market, Inc. and Wild Oats, Inc., represented approximately 22.8% and 6.1%, respectively, of net sales for the quarter ended October 31, 2002. Whole Foods Market, Inc. represented approximately 17.7% and Wild Oats, Inc. represented approximately 14.3% of net sales for the quarter ended October 31, 2001. Whole Foods Market, Inc. has extended its current distribution arrangement through August 31, 2004. In addition, Whole Foods Market, Inc. is a member of Blooming Prairie Cooperative Warehouse, which we recently acquired, and we expect Whole Foods Market, Inc. to represent approximately 25% of our total sales in fiscal 2003. Our contract as primary distributor to Wild Oats, Inc. was not renewed past its expiration date of August 31, 2002. However, we continue to distribute to Wild Oats, Inc. and expect revenue of approximately $12 million to $20 million in fiscal 2003. We believe sales growth for the quarter ending January 31, 2003 will be in the 9% to 12% range. We believe sales growth excluding acquisitions and the effects of losing Wild Oats to a new primary distributor will be in the mid-teens. Gross Profit. Our gross profit increased approximately 10.6%, or $5.8 million, to $60.8 million for the quarter ended October 31, 2002 from $55.0 million for the quarter ended October 31, 2001. Our gross profit as a percentage of net sales was 19.6% for the quarters ended October 31, 2002 and October 31, 2001. We expect our gross margin as a percentage of sales to be in the mid- to high 19% range for the remainder of fiscal 2003. Operating Expenses. Our total operating expenses, excluding special charges, increased approximately 11.7%, or $5.3 million, to $50.3 million for the quarter ended October 31, 2002 from $45.0 million for the quarter ended October 31, 2001. As a percentage of net sales, operating expenses, excluding special charges, increased to 16.2% for the quarter ended October 31, 2002 from 16.1% for the quarter ended October 31, 2001. The increase in operating expenses was due primarily to lower productivity and higher than expected operating expenses since relocating the operations at our Hershey Import division during our last fiscal quarter. We also experienced increases in workers' compensation and commercial automobile insurance premiums. The insurance premium market is somewhat volatile, and whether there is improvement or deterioration in future quarters is largely dependent on our ability to control our automobile and workers' compensation losses, which are retained risks. Operating expenses for the quarter ended October 31, 2002 11 included special charges of $0.6 million related to the transition of our second largest customer to a new primary distributor and consisted primarily of severance and expenses related to the transfer of private label inventory. Operating expenses for the quarter ended October 31, 2001 included special charges of $0.1 million related to the relocation of our Atlanta, Georgia distribution facility. Operating expenses, including special charges, increased approximately 12.8%, or $5.8 million, to $50.9 million from $45.1 million for the quarter ended October 31, 2001. As a percentage of sales, operating expenses, including special charges, increased to 16.4% for the quarter ended October 31, 2002 from 16.1% for the quarter ended October 31, 2001. We expect operating expenses as a percentage of sales to be in the low to mid-16% range for the fiscal year 2003 due to absorption of fixed costs over a lower sales base as our Wild Oats, Inc. business is reduced and we integrate our Blooming Prairie acquisition. We expect to incur additional special charges as we increase our warehouse capacity. Operating Income. Operating income, excluding the special charges discussed above, increased $0.5 million to $10.5 million for the quarter ended October 31, 2002 from $10.0 million for the quarter ended October 31, 2001. As a percentage of sales, operating income, excluding special charges, decreased to 3.4% for the quarter ended October 31, 2002 compared to 3.6% for the quarter ended October 31, 2001. Operating income, including special charges, was $10.0 million for the quarter ended October 31, 2002 and $9.9 million for the quarter October 31, 2001. Other Expense (Income). Other expense, excluding the change in fair value of financial instruments, decreased $0.2 million to $1.6 million for the quarter ended October 31, 2002 from $1.8 million for the quarter ended October 31, 2001. Interest expense for the quarter ended October 31, 2002 was $1.8 million compared to $1.7 million for the quarter ended October 31, 2001. This increase in interest expense is due to higher debt levels substantially offset by lower interest rates. Other expense, including the change in fair value of financial instruments, decreased $2.3 million to $3.3 million for the quarter ended October 31, 2002 from $5.6 million for the quarter ended October 31, 2001. This decrease was primarily due to the decrease in the change in fair value on our interest rate swap agreements and related option agreements. We will continue to recognize either income or expense quarterly for the duration of the swap agreement until either October 2003 or 2005 for the swap agreement entered into in October 1998, and either August 2005 or 2007 for the swap agreement entered into in August 2001, depending on whether the agreements are extended by the counter party. The recognition of income or expense in any given quarter, and the magnitude of that item, is dependent on interest rates and the remaining term of the contracts. Upon expiration of any such contract, the cumulative earnings impact from the changes in fair value of the instruments will be zero. Income Taxes. Our effective income tax rate was 40.0% for the quarters ended October 31, 2002 and 2001. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes. Net Income. As a result of the foregoing, net income, excluding special items, increased $0.5 million to $5.4 million, or $0.28 per diluted share, for the quarter ended October 31, 2002, compared to $4.9 million, or $0.26 per diluted share, for the quarter ended October 31, 2001. Net income, including special charges, increased $1.4 million to $4.0 million, or $0.20 per diluted share, for the quarter ended October 31, 2002, compared to $2.6 million, or $0.14 per diluted share, for the quarter ended October 31, 2001. We expect earnings per diluted share, excluding any special items, to be in the range of $0.26 to $0.28 for the second quarter of fiscal 2003, and to be in the range of $1.18 to $1.20 for all of fiscal 2003. 12 Liquidity and Capital Resources We finance operations and growth primarily with 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. Our secured revolving credit facility is $150 million. Interest accrues, at the Company's option, either at the New York Prime Rate or 1.50% above the banks' London Interbank Offered Rate. On October 23, 2002, we arranged for a temporary borrowing base increase of $15.0 million secured by real estate which increased our net borrowing base to $150 million with an unused availability of $25.1 million. Additionally, we expect to procure $30.0 million in additional long-term financing secured by our real estate during our second quarter. Net cash provided by operations was $16.2 million for the quarter ended October 31, 2002, and was the result of cash collected from customers net of cash paid to vendors, partially offset by investments in inventory. The increases in inventory levels relate to supporting increased sales with wider product assortment combined with our ability to capture purchasing efficiency opportunities in excess of total carrying costs. Days in inventory increased to 52 days at October 31, 2002 from 48 days at October 31, 2001. Days sales outstanding at October 31, 2002 was 29 days compared to 31 days at October 31, 2001. Net cash provided by operations was $11.4 million for the quarter ended October 31, 2001 and was due to cash collected from customers, net of cash paid to vendors, exceeding our investments in accounts receivable and inventory. Working capital at October 31, 2002 was $35.0 million. Net cash used in investing activities was $34.2 million for the quarter ended October 31, 2002, and was due primarily to the purchase of substantially all the assets of Blooming Prairie, headquartered in Iowa City, Iowa, and the initial costs of the expansion of our Chesterfield, New Hampshire facility. Net cash used in investing activities was $4.3 million for the same period last year, and was due primarily to the development of our new Atlanta and Los Angeles facilities. Net cash provided by financing activities was $11.3 million for the quarter ended October 31, 2002, due to increased borrowings on our line of credit and our equipment financing lines, offset by repayment of long-term debt. Net cash used in financing activities was $8.2 million for the quarter ended October 31, 2001, due to increased borrowings on our line of credit offset by repayment of long-term debt as a result of the establishment of our $150 million secured revolving credit facility. 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 variable rate indebtedness totaling $60 million at LIBOR plus 1.50%, thereby fixing the Company's effective rate at 6.50%. The five-year term of the swap agreement may be extended to seven years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities." We entered into an additional interest rate swap agreement effective August 1, 2001. The additional agreement provides for us to pay interest for a four-year period at a fixed rate of 4.81% on a notional principal amount of $30 million, while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing our effective rate on the notional amount at 6.31%. If LIBOR exceeds 6.0% in a given period, the agreement is suspended for that period. LIBOR was 1.81% as of July 31, 2002. The four-year term of the swap agreement may be extended to six years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under SFAS No. 133. 13 IMPACT OF INFLATION Historically, we have been able to pass along inflation-related increases. Consequently, inflation has not had a material impact upon the results of our operations or profitability. SEASONALITY Generally, we do not experience any material seasonality. However, our sales and operating results may vary significantly from quarter to quarter due to factors such as changes in our operating expenses, management's ability to execute our operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In June 2002, the Financial Accounting Standards Board issued SFAS No 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Certain Factors That May Affect Future Results This Form 10-Q and the documents incorporated by reference in this Form 10-Q contain forward-looking statements that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would," or similar words. You should read statements that contain these words carefully because they discuss future expectations contain projections of future results of operations or of financial position or state other "forward-looking" information. The important factors listed below as well as any cautionary language in this Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in these forward-looking statements. You should be aware that the occurrence of the events described in the risk factors below and elsewhere in this Form 10-Q could have an adverse effect on our business, results of operations and financial position. Any forward-looking statements in this Form 10-Q and the documents incorporated by reference in this Form 10-Q are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements, possibly materially. We disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statement in this section. 14 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, including our acquisition of substantially all of the assets of Blooming Prairie Cooperative Warehouse on October 11, 2002. Successful integration of mergers is critical to our future operating and financial performance. Integration requires, among other things: the optimization of delivery routes, coordination of administrative, distribution and finance functions, the integration of management information systems and personnel and maintaining customer base. The integration process could divert the attention of management and any difficulties or problems encountered in the transition process could have a material adverse effect on our business, financial condition or results of operations. In addition, the process of combining companies could cause the interruption of, or a loss of momentum in, the activities of the respective businesses, which could have an adverse effect on their combined operations. We may also lose key employees of the acquired company. There can be no assurance that we will realize any of the anticipated benefits of mergers. Access to capital and the cost of that capital On October 23, 2002, we arranged for a temporary borrowing base increase of $15.0 million secured by real estate which increased our net borrowing base to $150 million with an unused availability of $25.1 million. Additionally, we expect to procure $30.0 million in additional long-term financing secured by our real estate during our second quarter. Future low cash availability levels could restrict our ability to expand our business. In order to maintain our profit margins, we rely on strategic investment buying initiatives, such as discounted bulk purchases, which require spending significant amounts of working capital. In the event that capital market turmoil significantly increases our cost of capital or limits our ability to borrow funds or raise equity capital, we could suffer reduced profit margins and be unable to grow our business organically or through acquisitions, which could have a material adverse effect on our business, financial condition or results of operations. 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 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. 15 We have significant competition from a variety of sources We operate in 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 mass-market grocery 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 us, to evolving industry trends or changing market conditions. It is also possible that alliances among competitors may develop 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 current distribution arrangement with our top customer, Whole Foods Market, Inc., is effective through August 31, 2004. On June 19, 2002, we announced that our contract as primary distributor to Wild Oats, Inc. would not be renewed past its expiration date of August 31, 2002. However, we continue to distribute to Wild Oats, Inc. and expect revenue of approximately $12 million to $20 million from such distribution in fiscal 2003. Whole Foods Market, Inc. and Wild Oats, Inc. accounted for approximately 22.8% and 6.1%, respectively, of our net sales during the quarter ended October 31, 2002. On October 11, 2002, we acquired substantially all of the assets of Blooming Prairie, the largest volume distributor of natural foods and products in the Midwest region of the United States. Whole Foods Market, Inc. is a member of Blooming Prairie and we expect Whole Foods Market, Inc. to represent approximately 25% of our total sales in fiscal 2003. As a result of this concentration of our customer base, the loss or cancellation of business from Whole Foods Market, Inc. could materially and adversely affect our business, financial condition or results of operations. We sell products under purchase orders, and we generally have no agreements with or commitments from our customers for the purchase of products. No assurance can be given that our customers will maintain or increase their sales volumes or orders for the products supplied by us or that we will be able to maintain or add to our existing customer base. Our profit margins may decrease due to consolidation in the grocery industry The grocery distribution industry generally is characterized by relatively high volume with relatively low profit margins. The continuing consolidation of retailers in the natural products industry, and the growth of super natural chains, may reduce our profit margins in the future as more customers qualify for greater volume discounts. 16 Our industry is sensitive to economic downturns The grocery industry is sensitive to national and regional economic conditions, and the demand for our products may be adversely affected from time to time by economic downturns. In addition, our operating results are particularly sensitive to, and may be materially adversely affected by: difficulties with the collectibility of accounts receivable, difficulties with inventory control, competitive pricing pressures, and unexpected increases in fuel or other transportation-related costs. There can be no assurance that one or more of such factors will not materially adversely affect our business, financial condition or results of operations. We are dependent on a number of key executives Management of our business is substantially dependent upon the services of Michael S. Funk, Chief Executive Officer, Steven H. Townsend, President, Todd Weintraub, Chief Financial Officer, Kevin Michel, President of the Western Region, Daniel V. Atwood, Senior Vice President and Secretary, Richard Antonelli, Eastern Region President and other key management employees. We announced on December 3, 2002, that Steven H. Townsend has been appointed to the position of President and Chief Executive Officer effective January 1, 2003. Michael S. Funk, currently United Natural Foods' Chief Executive Officer and Vice Chair of the Board, has been elected Chair of the Board of Directors. Loss of the services of any additional 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 as a result of: changes in our operating expenses, management's ability to execute our business and growth strategies, personnel changes, demand for natural products, supply shortages, general economic conditions, changes in customer preferences and demands for natural products, including levels of enthusiasm for health, fitness and environmental issues, fluctuation of natural product prices due to competitive pressures, lack of an adequate supply of high quality agricultural products due to poor growing conditions, natural disasters or otherwise, volatility in prices of high quality agricultural products resulting from poor growing conditions, natural disasters or otherwise, and future acquisitions, particularly in periods immediately following the consummation of such acquisition transactions, while the operations of the acquired businesses are being integrated into our operations. 17 Due to the foregoing factors, we believe that period-to-period comparisons of our operating results may not necessarily be meaningful, and that such comparisons cannot be relied upon as indicators of future performance. We are subject to significant governmental regulation Our business is highly regulated at the federal, state and local levels and our products and distribution operations require various licenses, permits and approvals. In particular: our products are subject to inspection by the U.S. Food and Drug Administration, our warehouse and distribution facilities are subject to inspection by the U.S. Department of Agriculture and state health authorities, and The U.S. Department of Transportation and the U.S. Federal Highway Administration regulate our trucking operations. 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. Union-organizing activities could cause labor relations difficulties As of October 31, 2002, approximately 381 employees, representing approximately 13% of our approximately 2,950 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. Item 3. Quantitative and Qualitative Disclosure About Market Risk We do not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. Item 4. Controls and Procedures Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely reporting material information required to be included in our periodic reports filed with the Securities and Exchange Commission. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those internal controls subsequent to the date we carried out our last evaluation. 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Exhibits - ----------------------------------------------------------------------- Exhibit No. Description Page - ----------------------------------------------------------------------- 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CEO - ----------------------------------------------------------------------- 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CFO - ----------------------------------------------------------------------- 99.3 Third Amendment to Loan and Security with Fleet Capital Corporation dated October 17, 2002. - ----------------------------------------------------------------------- 99.4 Fourth Amendment to Loan and Security with Fleet Capital Corporation dated October 23, 2002. - ----------------------------------------------------------------------- 99.5 Employment Agreement between Steven H. Townsend and United Natural Foods, Inc. - ----------------------------------------------------------------------- Reports on Form 8-K Current Report on Form 8-K, filed with the Commission on August 7, 2002. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED NATURAL FOODS, INC. /s/ Todd Weintraub ----------------------------- Todd Weintraub Chief Financial Officer (Principal Financial and Accounting Officer) Dated: December 13, 2002 20 CERTIFICATION Each of the undersigned, in his capacity as the Chief Executive Officer and Chief Financial Officer of United Natural Foods, Inc., as the case may be, provides the following certifications required by 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Executive Officer I, Michael S. Funk, hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of United Natural Foods, Inc., a Delaware corporation (the "Company"). 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report. 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. 21 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Michael S. Funk -------------------------- Michael S. Funk Chief Executive Officer December 13, 2002 22 Certification of Chief Financial Officer I, Todd Weintraub, hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of United Natural Foods, Inc., a Delaware corporation (the "Company"). 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report. 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) for the Company and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. 6. The Company's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Todd Weintraub ----------------------- Todd Weintraub Chief Financial Officer December 13, 2002 23 EX-99.1 3 ex99-1.txt Exhibit 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of United Natural Foods, Inc., a Delaware corporation (the "Company"), on Form 10-Q for the period ended October 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael S. Funk, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge and based on my review of the Report: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Michael S. Funk Michael S. Funk Chief Executive Officer December 13, 2002 EX-99.2 4 ex99-2.txt Exhibit 99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of United Natural Foods, Inc., a Delaware corporation (the "Company"), on Form 10-Q for the period ended October 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Todd Weintraub, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge and based on my review of the Report: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Todd Weintraub ---------------------- Todd Weintraub Chief Financial Officer December 13, 2002 EX-99.3 5 ex99-3.txt Exhibit 99.3 October 17, 2002 United Natural Foods, Inc. 260 Lake Road Dayville, CT 06241 Attention: Todd Weintraub, Chief Financial Officer RE: Third Amendment to Loan and Security Agreement Dear Todd: Reference is made to the Loan and Security Agreement dated as of August 31, 2001 (as amended, the "Loan Agreement") among United Natural Foods, Inc. ("UNF"), Mountain People's Warehouse Incorporated ("MPW"), Nutrasource, Inc. ("Nutrasource"), Rainbow Natural Foods, Inc. ("Rainbow"), Stow Mills, Inc. ("SMI"), United Natural Foods Pennsylvania, Inc. ("UNFPA" and together with UNF, MPW, Nutrasource, Rainbow and SMI, the "Borrowers") each of the Lenders identified under the caption "Lenders" on the signature pages thereto and Fleet Capital Corporation as administrative and collateral agent for the Lenders (the "Agent"), Citizens Bank of Massachusetts (the "Syndication Agent"), U.S. Bank National Association (the "Documentation Agent") and Fleet Securities, Inc. (the "Arranger"), as amended by First Amendment dated April 16, 2002, and Second Amendment dated September 26, 2002. Capitalized terms not defined herein shall have the meanings ascribed thereto in the Loan Agreement. UNF has entered into a certain letter of intent (the "Letter of Intent") dated September 19, 2002 with Northeast Cooperatives ("NEC") pursuant to which UNF will make a certain bridge loan to NEC, UNF will form a subsidiary ("NEC Acquisition Corp.") and NEC will (ultimately) merge with and into NEC Acquisition Corp., all as described more fully therein (as described in the Letter of Intent, the "NEC Transaction"). UNF has requested the consent of the Lenders to the NEC Transaction and the Lenders have agreed to consent thereto, on the terms and conditions set forth herein. Accordingly, the parties hereto hereby agree as follows: Waivers and Amendments Acquisition of over $5,000,000. Section 9.2.1(a) is hereby waived insofar as it applies to the NEC Transaction. Permitted Indebtedness. Section 9.2.3 is hereby waived insofar as it would prohibit Indebtedness of NEC, provided that such Indebtedness of NEC shall not exceed the following amounts: $20,000,000 of trade indebtedness incurred in the ordinary course of business; and $1,500,000 of unsecured Indebtedness for borrowed money. Loans. Section 9.2.2 is hereby waived insofar as it would prohibit UNF from making the $10,000,000 bridge loan to NEC as described in paragraph 4 of the Letter of Intent, so long as UNF grants to the Agent a first priority security interest in such loan and the collateral therefore simultaneously therewith (including delivery of the note evidencing such loan and assignment of UCC financing statements to Agent). Availability. Section 9.2.1(c) is hereby waived for a period commencing on the date hereof and continuing through and including the earlier of (1) February 14, 2003, and (2) any date on which refinancing of real estate owned by the Borrowers and Guarantors is completed (provided that nothing set forth herein shall be deemed to constitute the consent of the Agent or Lenders to such refinancing). Covenants and Agreements. In consideration of the Lenders' agreements set forth herein, the Borrowers hereby agree as follows. The agreements set forth below shall be deemed to constitute covenants under the Loan Agreement. On or before the closing date, the Borrowers shall provide the following items to the Agent, all in form and content satisfactory to the Agent, and duly executed (where applicable) by all parties thereto: a Joinder Agreement pursuant to which NEC Acquisition Corp. (the surviving entity involved in the NEC Acquisition) shall become a "Borrower" for all purposes under the Loan Agreement; duly filed UCC financing statements which serve to perfect Agent's security interest in all of NEC Acquisition Corp.'s personal property assets; a stock pledge agreement pursuant to which UNF pledges 100% of the shares of NEC Acquisition Corp. to Agent, together with stock powers and stock certificates to perfect such pledge; such other agreements as may be required by Agent (such as trademark security agreements and the like) to ensure that Agent holds a duly perfected security interest in all of NEC Acquisition Corp.'s assets; a landlord's waiver for each location in which NEC Acquisition Corp. does business or maintains assets; evidence satisfactory to Agent (including UCC, tax lien and similar search reports) that Agent holds a duly perfected, first priority security interest in the assets of NEC Acquisition Corp., subject to no other Liens except as permitted under the Loan Agreement; confirmation that the bridge loan described in paragraph 4 of the Letter of Intent is no longer outstanding; evidence of corporate authorization of the transactions contemplated hereby, together with legal opinions on behalf of NEC Acquisition Corp. and the Borrowers Guarantors in scope consistent with the legal opinion delivered in connection with the Loan Agreement; updated casualty and liability insurance certificates with respect to NEC Acquisition Corp. and its assets, consistent with the requirements set forth in the Loan Agreement; and payment of the reasonable fees and expenses of Agent's counsel in connection with any of the transactions contemplated hereby. UNF shall compete the NEC Transaction substantially in accordance with the terms of the Letter of Intent without material amendment or waiver, not later than December 31, 2002. UNF agrees that Agent may complete a field exam with respect to the assets and liabilities of NEC, including without limitation, inventory and accounts, on or before the consummation of the NEC Transaction; and further agrees that if such a field exam is not completed by such date, Agent may, in its discretion, impose reserves or reduce advance rates with respect to NEC's inventory and accounts used for purposes of calculating the Borrowing Base, until such a field exam is completed. Representations and Warranties. The Borrowers hereby represent and warrant as follows: Power, Authority, Etc. The Borrowers have the power and authority for the making and performing of this Third Amendment. This Third Amendment has been duly executed and delivered by or on behalf of the Borrowers pursuant to authority legally adequate therefore, and this Third Amendment is in full force 2 and effect and is a legal, valid and binding obligation of the Borrowers enforceable in accordance with its terms subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws and equitable principles affecting the enforcement of creditors' rights generally. Incorporation of Representations and Warranties. The representations and warranties of the Borrowers contained in the Loan Agreement, after giving effect to the amendments thereto contemplated hereby, and except for any changes resulting only from the passage of time, are true and correct on and as of the date hereof as though made on and as of the date hereof and such representations and warranties are hereto incorporated in this Third Amendment as though fully set forth herein. Corporate Purposes. The Borrowers hereby represent that the NEC Transaction is within the UNFI's general corporate purposes. Conditions Precedent. This Amendment and the Agent's and Lenders' obligations hereunder shall not be effective until each of the following conditions are satisfied (the "Amendment Effective Date"): Borrowers, Agent and the Required Lenders shall have duly executed and delivered this Amendment; All requisite corporate action and proceedings of the Borrower in connection with this Amendment shall be satisfactory in form and substance to Agent; and There shall have occurred no Default or Event of Default under the Loan Agreement. Miscellaneous Counterparts. This Third Amendment may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Third Amendment by signing any such counterpart. Force and Effect. Except as amended or modified by this Third Amendment, the Loan Agreement and each of its terms and provisions, shall continue in full force or effect. Loan Document. This Third Amendment and all other documents executed in connection herewith are "Loan Documents" as such term is defined in the Loan Agreement. This Third Amendment and the other documents executed and delivered in connection herewith set forth the entire agreement of the parties with respect to the subject matter thereof and supersede any prior agreement and contemporaneous oral agreements of the parties concerning their subject matter. Reaffirmation. By executing this Third Amendment, the undersigned Guarantors hereby assent to the execution and delivery of this Third Amendment and all other instruments and documents required to be executed and delivered pursuant thereto by the Borrowers, and to the performance by the Borrowers of their agreements and obligations hereunder and there under. Guarantors further affirm that neither the First Amendment to Loan and Security Agreement dated April 16, 2002, the Second Amendment to Loan and Security Agreement dated September 26, 2002 nor this Third Amendment nor the performance or consummation of any transactions contemplated thereby shall limit, restrict, extinguish or otherwise impair their agreements and obligations under the Guaranty Agreements, and Guarantors hereby acknowledge and reaffirm such obligations. Guarantors acknowledge, affirm and agree that the Guaranty Agreements are hereby ratified and confirmed and benefit the Lenders under the Loan Agreement, as amended. [remainder of page intentionally left blank] 3 IN WITNESS WHEREOF, the parties have executed this agreement as of the date first above written. BORROWERS: UNITED NATURAL FOODS, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Vice Chair and CEO MOUNTAIN PEOPLE'S WAREHOUSE INCORPORATED By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board, President, CEO NUTRASOURCE, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board, President, CEO Treasurer RAINBOW NATURAL FOODS, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board, President STOW MILLS, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board, President 4 UNITED NATURAL FOODS OF PENNSYLVANIA, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board GUARANTORS: NATURAL RETAIL GROUP, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair UNITED NATURAL TRADING, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board THE HEALTH HUT, INC. By: ______________________________ Name: ________________________ Title: _______________________ ALBERT'S ORGANICS, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board 5 AGENT: FLEET CAPITAL CORPORATION, as Administrative Agent By: /s/ KIM BUSHEY Name: Kim Bushey Title: Senior Vice President LENDERS: FLEET CAPITAL CORPORATION, as a Lender By: /s/ KIM BUSHEY Name: Kim Bushey Title: Senior Vice President CITIZENS BANK OF MASSACHUSETTS, as a Lender By: /s/ PAUL R. CRIMLISK Name: Paul R. Crimlisk Title: Vice President U.S. BANK NATIONAL ASSOCIATION, as a Lender By: /s/ JOHN W. BALL Name: John W. Ball Title: Vice President PNC BANK, NATIONAL ASSOCIATION, a Lender By: /s/ JOHN C. WILLIAMS Name: John C. Williams Title: Vice President 6 NATIONAL CITY BANK, a Lender By: ______________________________ Name: ________________________ Title: _______________________ FIRST PIONEER FARM CREDIT, ACA, a Lender By: /s/ CAROL L. SOBSON Name: Carol L. Sobson Title: Assistant Vice President ISRAEL DISCOUNT BANK OF NEW YORK, a Lender By: /s/ STEPHEN SHAPIRO Name: Stephen Shapiro Title: First Vice President By: /s/ AMIR BARASH Name: Amir Barash Title: Vice President WEBSTER BANK, a Lender By: /s/ JOHN H. FROST Name: John H. Frost Title: Vice President SOVEREIGN BANK, a Lender By: /s/ CHRISTOPHER T. PHELAN Name: Christopher T. Phelan Title: Senior Vice President 7 EX-99.4 6 ex99-4.txt Exhibit 99.4 October 23, 2002 United Natural Foods, Inc. 260 Lake Road Dayville, CT 06241 Attention: Todd Weintraub, Chief Financial Officer RE: Fourth Amendment to Loan and Security Agreement Dear Todd: Reference is made to the Loan and Security Agreement dated as of August 31, 2001 (as amended, the "Loan Agreement") among United Natural Foods, Inc. ("UNF"), Mountain People's Warehouse Incorporated ("MPW"), Nutrasource, Inc. ("Nutrasource"), Rainbow Natural Foods, Inc. ("Rainbow"), Stow Mills, Inc. ("SMI"), United Natural Foods Pennsylvania, Inc. ("UNFPA" and together with UNF, MPW, Nutrasource, Rainbow and SMI, the "Borrowers") each of the Lenders identified under the caption "Lenders" on the signature pages thereto and Fleet Capital Corporation as administrative and collateral agent for the Lenders (the "Agent"), Citizens Bank of Massachusetts (the "Syndication Agent"), U.S. Bank National Association (the "Documentation Agent") and Fleet Securities, Inc. (the "Arranger"), as amended by First Amendment dated April 16, 2002, Second Amendment dated September 26, 2002 and Third Amendment dated October 17, 2002. Capitalized terms not defined herein shall have the meanings ascribed thereto in the Loan Agreement. The Borrowers have advised that Agent that they intend to refinance the Real Property and that until such refinancing is consummated they require additional borrowing availability under the Loan Agreement. The Lenders are willing to make such additional amounts available, subject to the terms and conditions hereof. Accordingly, the parties hereto hereby agree as follows: Amendments. For so long as the Borrowers continue diligently to pursue efforts to refinance the Real Property, for a period (the "Refinancing Period") commencing on the date hereof and continuing through and including the earlier of (1) February 14, 2003, and (2) any date on which refinancing of real estate owned by the Borrowers and Guarantors is completed (provided that nothing set forth herein shall be deemed to constitute the consent of the Agent or Lenders to such refinancing), the definition of the term "Borrowing Base" as set forth in Appendix A to the Loan Agreement is amended to add the phrase "$15,000,000 plus" immediately before the phrase "an amount equal to the lesser of" in the first line of such definition. After the end of such Refinancing Period, such amendment shall be of no further force or effect. Representations and Warranties. The Borrowers hereby represent and warrant as follows: Power, Authority, Etc. The Borrowers have the power and authority for the making and performing of this Fourth Amendment. This Fourth Amendment has been duly executed and delivered by or on behalf of the Borrowers pursuant to authority legally adequate therefore, and this Fourth Amendment is in full force and effect and is a legal, valid and binding obligation of the Borrowers enforceable in accordance with its terms subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws and equitable principles affecting the enforcement of creditors' rights generally. Incorporation of Representations and Warranties. The representations and warranties of the Borrowers contained in the Loan Agreement, after giving effect to the amendments thereto contemplated hereby, and except for any changes resulting only from the passage of time, are true and correct on and as of the date hereof as though made on and as of the date hereof and such representations and warranties are hereto incorporated in this Fourth Amendment as though fully set forth herein. Miscellaneous Counterparts. This Fourth Amendment may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Fourth Amendment by signing any such counterpart. Force and Effect. Except as amended or modified by this Fourth Amendment, the Loan Agreement and each of its terms and provisions, shall continue in full force or effect. Loan Document. This Fourth Amendment and all other documents executed in connection herewith are "Loan Documents" as such term is defined in the Loan Agreement. This Fourth Amendment and the other documents executed and delivered in connection herewith set forth the entire agreement of the parties with respect to the subject matter thereof and supersede any prior agreement and contemporaneous oral agreements of the parties concerning their subject matter. Reaffirmation. By executing this Fourth Amendment, the undersigned Guarantors hereby assent to the execution and delivery of this Fourth Amendment and all other instruments and documents required to be executed and delivered pursuant thereto by the Borrowers, and to the performance by the Borrowers of their agreements and obligations hereunder and thereunder. Guarantors further affirm that neither this Fourth Amendment nor the performance or consummation of any transactions contemplated thereby shall limit, restrict, extinguish or otherwise impair their agreements and obligations under the Guaranty Agreements, and Guarantors hereby acknowledge and reaffirm such obligations. Guarantors acknowledge, affirm and agree that the Guaranty Agreements are hereby ratified and confirmed and benefit the Lenders under the Loan Agreement, as amended. 2 IN WITNESS WHEREOF, the parties have executed this agreement as of the date first above written. BORROWERS: UNITED NATURAL FOODS, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Vice Chair and CEO MOUNTAIN PEOPLE'S WAREHOUSE INCORPORATED By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board, President, CEO NUTRASOURCE, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board, President, CEO Treasurer RAINBOW NATURAL FOODS, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board, President STOW MILLS, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board, President 3 UNITED NATURAL FOODS OF PENNSYLVANIA, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board GUARANTORS: NATURAL RETAIL GROUP, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair UNITED NATURAL TRADING, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board THE HEALTH HUT, INC. By: ______________________________ Name: ________________________ Title: _______________________ ALBERT'S ORGANICS, INC. By: /s/ MICHAEL S. FUNK Name: Michael S. Funk Title: Chair of the Board 4 AGENT: FLEET CAPITAL CORPORATION, as Administrative Agent By: /s/ KIM BUSHEY Name: Kim Bushey Title: Senior Vice President LENDERS: FLEET CAPITAL CORPORATION, as a Lender By: /s/ KIM BUSHEY Name: Kim Bushey Title: Senior Vice President CITIZENS BANK OF MASSACHUSETTS, as a Lender By: /s/ PAUL R. CRIMLISK Name: Paul R. Crimlisk Title: Vice President U.S. BANK NATIONAL ASSOCIATION, as a Lender By: /s/ JOHN W. BALL Name: John W. Ball Title: Vice President PNC BANK, NATIONAL ASSOCIATION, a Lender By: /s/ JOHN C. WILLIAMS Name: John C. Williams Title: Vice President 5 NATIONAL CITY BANK, a Lender By: ______________________________ Name: ________________________ Title: _______________________ FIRST PIONEER FARM CREDIT, ACA, a Lender By: /s/ CAROL L. SOBSON Name: Carol L. Sobson Title: Assistant Vice President ISRAEL DISCOUNT BANK OF NEW YORK, a Lender By: /s/ STEPHEN SHAPIRO Name: Stephen Shapiro Title: First Vice President By: /s/ AMIR BARASH Name: Amir Barash Title: Vice President WEBSTER BANK, a Lender By: /s/ JOHN H. FROST Name: John H. Frost Title: Vice President SOVEREIGN BANK, a Lender By: /s/ CHRISTOPHER T. PHELAN Name: Christopher T. Phelan Title: Senior Vice President 6 EX-99.5 7 ex99-5.txt EXHIBIT 99.5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is dated December 5, 2002, is effective as of January 1, 2003 and is by and between UNITED NATURAL FOODS, INC., a Delaware corporation (the "Company"), and STEVEN H. TOWNSEND ("Employee"). 1. Employment. The Company hereby agrees to employ Employee, and Employee agrees to be employed by the Company, for the Term defined in Section 3, subject to earlier termination as hereinafter provided, at the rate of compensation and upon the other terms and conditions hereinafter set forth. 2. Position and Responsibilities. 2.1 During the Term (as defined in Section 3.1) of this Agreement, Employee agrees to serve as President and Chief Executive Officer ("CEO") of the Company, with the duties, responsibilities and authority consistent with such positions. Employee's principal office shall be at Company headquarters in Dayville, Connecticut, with such travel as is necessary to perform his duties. Employee shall report to the Board of Directors (the "Board of Directors") of the Company. During the Term, Employee also agrees to perform such other executive services not inconsistent with this position as shall from time to time be assigned to him by the Board of Directors. 2.2 During the Term, the Employee shall be a member of the Board of Directors. Thereafter, the Board of Directors shall appoint the Employee to fill any vacancies it is authorized to fill, and shall recommend to the shareholders of the Company that the Employee be re-elected to the Board of Directors in the event the Board of Directors is not so authorized. The Employee shall serve on any committees of the Board of Directors as may be requested by the Board of Directors. The Employee shall also serve as a member of the board of directors of any subsidiaries of the Company, and as President/Chief Executive Officer of such subsidiaries, as the Board of Directors requests. 3. Term and Duties. 3.1 This Agreement shall be for a term commencing on January 1, 2003 and, unless this Agreement is sooner terminated under the provisions hereof, expiring December 31, 2005 (the "Initial Term"); provided that this Agreement shall immediately thereafter be automatically renewed for a series of one-year terms unless either party provides notice to the other party at least ninety (90) days prior to the end of the Initial Term or any renewal term of such party's decision not to renew this Agreement (the Initial Term and all renewal terms are hereinafter referred to as the "Term"). 3.2 During the Term, except for illness, vacations and holidays in accordance with then current Company policy, The Employee shall devote his full business efforts to the Company. Other activities of the Employee shall be limited in time and scope and not conflict with the terms of this Agreement. Subject to the foregoing, Employee may (i) continue to serve as a member of any board of directors on which he currently serves, as set forth in Attachment A; (ii) serve on the board of directors of other companies with the prior written approval of the Nominating and Corporate Governance Committee of the Board of Directors, which shall not be unreasonably withheld; (iii) engage in such charitable activities, including board service, as he deems appropriate and (iv) devote reasonable time to the management of his personal assets. 4. Compensation; Reimbursement of Expenses. 4.1 For all services rendered by Employee in any capacity during the Term of his employment under this Agreement, Employee shall receive a base salary at an annualized rate of Five Hundred Thousand Dollars ($500,000) ("Base Salary"), payable in accordance with the customary payroll practices of the Company. 4.2 In addition to Base Salary, Employee shall receive an incentive bonus per year of up to fifty percent (50%) of Base Salary based upon fulfillment of Company performance objectives determined semi-annually by the Compensation Committee of the Board of Directors (the "Compensation Committee") and agreed upon by the Employee. The incentive bonus will be paid no less than annually within forty-five (45) days of the end of each fiscal year provided that the Company's outside independent public accountants have issued an unqualified opinion as to the Company's financial statements for such year. For the first year of the Term, the incentive bonus will be paid on a semi-annual basis and thereafter on either a semi-annual or annual basis as determined by the Compensation Committee. Initial performance objectives shall include: attaining the Company's projected financial performance; successful integration of recent acquisitions, significantly strengthening the Company's leadership, developing key customer and supplier services, focus on the Company's core distribution business, raising internal goals for growth and profitability while improving key operating metrics. 4.3 The Company agrees that the Compensation Committee shall review the Employee's amount of Base Salary annually and based on performance may increase (but shall not decrease) Base Salary effective each January 1, commencing January 1, 2004. Historically the Compensation Committee reviews compensation levels paid to Company executives based on a study commissioned periodically by the Compensation Committee of approximately twelve (12) comparable companies. It is the objective of the Company to increase the Employee's Base Salary effective January 1, 2005 to the 75th percentile of similarly situated executives, subject to the Employee's fulfillment of Compensation Committee established and agreed upon performance criteria. 4.4 All payments under Sections 4.1 through 4.3 above shall be subject to the withholding of all applicable taxes and applicable benefits deductions. 4.5 Consistent with established policies of the Company, the Company shall pay or reimburse Employee for all reasonable travel and other expenses incurred by Employee in performing his obligations under this Agreement. 4.6 Employee shall be entitled to participate in all Company benefits now in effect or subsequently provided to other Company employees, to the extent he is eligible. In determining such benefits, the Company has given Employee service credit for past service to the Company after a prior break in service, all in accordance with the terms of each benefit plan and applicable law. Such benefits shall include, without limitation, participation in annual grants of stock options as determined by the Compensation Committee. 4.7 Employee shall be entitled to a combined four (4) weeks (20 business days) of paid vacation per year, as well as all paid holidays of the Company. 5. Termination of Employment; Payments. 5.1 Employee's employment hereunder shall terminate: (a) automatically upon the death of Employee; (b) at the election of the Company in the event of Employee's disability. As used in this Agreement, the term "disability" shall mean the material inability, in the reasonable opinion of the Board of Directors, of Employee to render his agreed upon full-time services to the Company due to physical and/or mental infirmity for a period of one hundred twenty (120) consecutive days, or an aggregate period of time exceeding one hundred twenty (120) days in any consecutive twelve (12) month period; 2 (c) upon discharge of Employee by the Company for cause. As used in this Agreement, "cause" shall mean (i) conviction of a felony or crime of moral turpitude under applicable law, (ii) unauthorized acts intended to result in Employee's personal enrichment at the material expense of the Company or its reputation, (iii) any violation of Employee's duties or responsibilities to the Company which constitutes willful misconduct or dereliction of duty, or breach of Section 6, or (iv) Employee's other material breach of this Agreement which breach shall have continued unremedied for twenty (20) days after written notice by the Company to Employee specifying such failure; (d) upon discharge of Employee by the Company without cause, other than at the end of the Initial Term or any renewal term in accordance with Section 2 hereof and not due to his death or disability; or (e) upon Employee's election to terminate his employment. 5.2 Upon such termination, and subject only to Section 5.3 below, the Company shall be obligated to make only the following payments to Employee: (a) With respect to termination pursuant to Sections 5.1(c) and (e) above, the Company shall be under no obligation other than to provide Employee his Base Salary and benefits accrued through the date of such termination; provided, however, that with respect to a termination pursuant to subsection (c), the Company may withhold any compensation due to Employee as a partial offset against any damages suffered by the Company as a result of Employee's actions. (b) With respect to termination pursuant to Sections 5.1(a) and (b) above, the Company shall be under no other obligation than to continue Employee's Base Salary and benefits under Section 5.2(c) below for a period of one (1) year following such termination. With respect to termination pursuant to Section 5.1(d) above, the Company shall be under no other obligation than to continue Employee's Base Salary and benefits under Section 5.2(c) below for a period of two (2) years following such termination. Employee shall also be entitled to an incentive bonus pursuant to Section 4.2 at the end of the fiscal year in which such termination occurs, if termination is pursuant to Sections 5.1(a), (b) or (d) above. (c) The benefits to be continued upon termination shall be limited to medical and insurance benefits. All other benefits and perquisites shall cease upon termination. (d) The Company will make withholdings from said termination payments in accordance with the Company's generally applicable policies regarding employee contributions for any insurance coverages. (e) All unvested options to purchase Company common stock granted to the Employee shall automatically vest as of the date of termination if termination occurs under Sections 5.1(a), (b) or (d) above. 5.3 Resignation for Good Reason. The Employee may terminate this Agreement for good reason (as defined below) by giving the Board of Directors written notice of termination, stating the basis for such termination, effective upon the date stated in such notice, which shall not be earlier than thirty (30) days following the Company's receipt of such notice. For purposes of this Agreement, "Good Reason" shall mean, without the Employee's express written consent, the occurrence of any one or more of the following: 3 (a) The assignment of Employee to duties materially inconsistent with the Employee's duties as President and CEO, and failure to rescind such assignment within thirty (30) days of receipt of notice from the Employee; (b) A relocation more than fifty miles from the Company's Dayville, Connecticut offices; (c) A reduction by the Company in the Employee's Base Salary, or the failure of the Company to pay or cause to be paid any compensation or benefits hereunder when due or under the terms of any plan established by the Company, and failure to restore such Base Salary or make such payments within five (5) days of receipt of notice from the Employee; (d) Failure to include the Employee in any new employee benefit plans proposed by the Company or a material reduction in the Employee's level of participation in any existing plans of any type; provided that a Company-wide reduction or elimination of such plans shall not be a violation of this Section (d); or (e) The failure of the Company to obtain a satisfactory agreement from any successor to the Company with respect to the ownership of substantially all the stock or assets of the Company to assume and agree to perform this Agreement. In the event of such termination for Good Reason, other than at the end of the Initial Term or any renewal term in accordance with Section 3.1 hereof, Employee shall be entitled to all salary and other benefits (including vesting of all unvested options) as if Employee had been terminated without cause under Section 5.1(d) above. 5.4 Change In Control. If a Change in Control (as below defined) occurs, and as a result, the Employee does not continue as President and CEO of the Company, Employee shall have the option of resigning from the Company. Employee must give written notice to the Board of Directors within thirty (30) days of the occurrence of a Change in Control, specifying that such resignation is the result of a Change in Control, and such resignation shall be effective upon the Board of Directors' receipt of such resignation. Upon such receipt, the Company shall pay the Employee Base Salary and benefits under Section 4.6 above for two (2) years following such resignation. Employee shall also be entitled for such two (2) years to bonus compensation within the limitations as a percentage of Base Salary as set forth in Section 4.2 and in accordance with objectives set forth by the Compensation Committee for such period. In the event the Employee should die within such period, the Company shall continue to make such payments and provide insurance and health benefits to and for his widow, if living, otherwise continue such payments to his estate and such benefits above for the full period from the effective date of the resignation. Upon the Employee giving such notice, all unvested options to purchase Company stock shall automatically vest. The above payments and benefits shall also apply if the Employee is terminated within one year of a Change in Control for other than Cause. The above benefits shall be in lieu of, and not in addition to, any post-employment benefits otherwise set forth herein. 4 "Change in Control" means the happening of any of the following: (i) any "person", including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Act"), but excluding the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Act), directly or indirectly, of securities of the Company representing the greater of 30% or more of the combined voting power of the Company's then outstanding securities. "Affiliate" means any corporation which is a subsidiary of the Company within the definition of "subsidiary corporation" under Section 424(f) of the Internal Revenue Code of 1986, as amended; (ii) the stockholders of the Company shall approve a definitive agreement (1) for the merger or other business combination of the Company with or into another corporation if (A) a majority of the directors of the surviving corporation were not directors of the Company immediately prior to the effective date of such merger or (B) the stockholders of the Company immediately prior to the effective date of such merger own less than 50% of the combined voting power in the then outstanding securities in such surviving corporation or (2) for the sale or other disposition of all or substantially all of the assets of the Company; or (iii) the purchase of 50% or more of the Stock pursuant to any tender or exchange offer made by any "person", including a "group" (as such terms are used in Sections 13(d) and 14(d) of the Act), other than the Company, any of its Affiliates, or any employee benefit plan of the Company or any of its Affiliates. 6. Certain Obligations of Employee. 6.1 Employee represents and warrants that (a) there are no restrictions, agreements or understandings whatsoever to which Employee is a party which would prevent or make unlawful his execution of this Agreement or his employment hereunder, (b) his execution of this Agreement and his employment hereunder shall not constitute a breach of any law, rule or regulation, or of any contract, agreement or understanding, oral or written, to which he is a party or by which he is bound and (c) he is free and able to execute this Agreement and to enter into employment by the Company. 6.2 Employee further covenants with the Company as follows (as used in this Section 6, "Company" shall include the Company and its subsidiaries and affiliates): (a) Employee shall, upon reasonable notice, furnish such information and proper assistance to the Company as may reasonably be required by the Company in connection with any litigation in which it is, or may become, a party. The Company shall, upon reasonable notice, furnish such information and proper assistance to Employee as may reasonably be required by Employee in connection with any litigation in which he is, or may become, a party as a result of his status as an employee of the Company. (b) Employee shall not knowingly use for his own benefit or disclose or reveal to any unauthorized person, any trade secret or other confidential information relating to the Company, or to any of the businesses operated by it, including, without limitation, any customer lists, customer needs, price and performance information, processes, specifications, hardware, software, devices, supply sources and characteristics, business opportunities, potential business interests, marketing, promotional pricing and financing techniques, or other information relating to the business of the Company, and Employee confirms that such information constitutes the exclusive property of the Company. Such restriction on confidential information shall remain in effect until such time as the confidential information is (i) generally available in the industry, (ii) disclosed in published literature or (iii) obtained by Employee during the term of his employment or after the expiration or earlier termination of this Agreement from a third party with the prior right to make such disclosure. Employee agrees that he will return to the Company any physical embodiment of such confidential information upon termination of employment. 5 (c) During the term of his employment, and for a period of one (1) year following termination of such employment for any reason or payment of any compensation in accordance with Section 5 herein, whichever occurs last, Employee shall not engage, directly or indirectly (which includes, without limitation, owning, managing, operating, controlling, being employed by, giving financial assistance to, participating in or being connected in any material way with any person or entity), anywhere in the United States in the wholesale distribution of natural foods; provided, however, that: Employee's ownership as a passive investor of less than two percent (2%) of the issued and outstanding stock of a publicly held corporation so engaged, shall not by itself be deemed to constitute such competition. Further, during such one-year period Employee shall not act to induce any of the Company's vendors, customers or employees to take action, which might be disadvantageous to the Company. (d) Employee hereby acknowledges that he will treat as for the Company's sole benefit, and fully and promptly disclose and assign to the Company without additional compensation, all ideas, information, discoveries, inventions and improvements which are based upon or related to any confidential information protected under Section 6.2(b) herein, and which are made, conceived or reduced to practice by him during his employment by the Company and within one (1) year after termination thereof. The provisions of this subsection 6.2(d) shall apply whether such ideas, discoveries, inventions, improvements or knowledge are conceived, made or gained by him alone or with others, whether during or after usual working hours, either on or off the job, to matters directly or indirectly related to the Company's business interests (including potential business interests), and whether or not within the realm of his duties. (e) Employee shall, upon request of the Company, but at no expense to Employee, at any time during or after employment by the Company, sign all instruments and documents and cooperate in such other acts reasonably required of him to protect rights to the ideas, discoveries, inventions, improvements and knowledge referred to above, including applying for, obtaining and enforcing patents and copyrights thereon in any and all countries. (f) Employee agrees that he will not disclose to the Company, or use during the term of his employment, any proprietary or confidential information belonging to any third party which Employee may have acquired because of an employment, consulting or other relationship with such third party, whether such information is in Employee's memory or embodied in a writing or other physical form. (g) Employee recognizes that the possible restrictions on his activities which may occur as a result of his performance of his obligations under this Section 6 are required for the reasonable protection of the Company and its investments, and Employee expressly acknowledges that such restrictions are fair and reasonable for that purpose. Employee further expressly acknowledges that damages alone will be an inadequate remedy for any breach or violation of any of the provisions of this Section 6, and that the Company, in addition to all other remedies hereunder, shall be entitled, as a matter of right, to injunctive relief, including specific performance, with respect to any such breach or violation, in any court of competent jurisdiction. If any of the provisions of this Section 6 are held to be in any respect an unreasonable restriction upon Employee then they shall be deemed to extend only over the maximum period of time, geographic area, and/or range of activities as to which they may be enforceable. 6.3 Employee expressly agrees that all payments and benefits due Employee under this Agreement shall be subject to Employee's compliance with the provisions set forth in this Section 6. 6 6.4 In the event of termination of employment for any reason, the Employee shall resign from the Board of Directors on the effective date of employment termination. 6.5 This Section 6 shall survive the expiration or earlier termination of this Agreement without time limitation. 7. Indemnification. The Company shall indemnify the Employee to the fullest extent permitted under the laws of the State of Delaware. Such obligations shall survive during the Term and for ten (10) years thereafter. The Company's By-laws notwithstanding, upon the Employee's request, the Company shall pay any expenses incurred by the Employee in defending any action, suit or proceeding which may be subject to indemnification, provided the Employee undertakes to repay such amount if it is ultimately determined that Employee was not entitled to such indemnification. The Company shall use its best efforts to maintain its current level of directors and officers liability insurance during the time it has any obligation to indemnify the Employee. 8. Resolution of Disputes. Any dispute by and among the parties hereto arising out of or relying to this Agreement, the terms, conditions or a breach thereof, or the rights or obligations of the parties with respect thereto, shall be arbitrated in the City of Hartford, Connecticut, by a single arbitrator pursuant to then applicable commercial rules and regulations of the American Arbitration Association, or any successor organization. In such proceeding, the arbitrator shall determine who is a substantially prevailing party and shall award to such party its reasonable attorneys', accountants' and other professionals' fees and its costs incurred in connection with the proceeding. The award of the arbitrator shall be final, binding upon the parties and nonappealable and may be entered in and enforced by any court of competent jurisdiction. Such court may add to the award of the arbitrator additional reasonable attorneys' fees and costs incurred by the substantially prevailing party in attempting to enforce the award. 9. General Provisions. 9.1 Neither Employee nor his beneficiaries or legal representatives may assign this Agreement, or any rights or obligations hereunder, without the Company's prior written consent. 9.2 This Agreement shall be binding upon, and inure to the benefit of, Employee and the Company and their respective heirs, executors, administrators, successors and permitted assigns. 9.3 This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. 9.4 No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege nor shall any other waiver of right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. 9.5 If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held so invalid, and each such other provision shall to the full extent consistent with law continue in force and effect. 7 9.6 The sections headings are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 9.7 This Agreement has been executed and delivered in the State of Delaware, and its validity, interpretation, performance, and enforcement shall be governed by the laws of said State. 9.8 This Agreement contains the entire understanding between the parties hereto and supersedes any and all prior agreements, oral or written, on the subject matter hereof between the Company and Employee. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, intending the Agreement to become binding and effective as of the date and year first written above. UNITED NATURAL FOODS, INC. By /s/ MICHAEL FUNK /s/ STEVEN H. TOWNSEND -------------------------- --------------------------- Michael Funk Steven H. Townsend Vice Chair of the Board and CEO 8 ATTACHMENT A Entities of Which Employee Serves on Board of Directors and/or Holds Office 1. Board Member of Day Kimball Hospital and Chair of Audit Committee 2. President of Northeast Connecticut Chamber of Commerce. 3. President of Quinebaug Valley Community College Foundation. 4. Soon to be appointed to Board of The Savings Institute in Willimantic, Connecticut and a member of its Audit Committee. 9 -----END PRIVACY-ENHANCED MESSAGE-----