-----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, DVItpohVe448igwaX1//KSy49H5+o8TNe5ncphlppZJhbo4ekeGr2xe6GhF21/C1 XDxuZyONJwDJEhd7wc0iBA== 0001171520-04-000094.txt : 20040316 0001171520-04-000094.hdr.sgml : 20040316 20040316150556 ACCESSION NUMBER: 0001171520-04-000094 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040131 FILED AS OF DATE: 20040316 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: 04672290 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 eps1408.txt UNITED NATURAL FOODS, INC. UNITED STATES 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 January 31, 2004 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 Identification No.) Incorporation or Organization) 260 Lake Road Dayville, CT 06241 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (860) 779-2800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_| As of March 5, 2004 there were 19,785,478 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 JANUARY 31, 2004 TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) 3 Condensed Consolidated Statements of Income (unaudited) 4 Condensed Consolidated Statements of Cash Flows (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosure About Market Risk 26 Item 4. Controls and Procedures 26 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 27 Item 6. Exhibits and Reports on Form 8-K 27 Signatures 28 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
January 31, July 31, (In thousands, except per share amounts) 2004 2003 ----------- --------- ASSETS - ------ Current assets: Cash $ 8,860 $ 3,645 Accounts receivable, net 99,652 90,111 Notes receivable, trade 736 585 Inventories 175,555 158,263 Prepaid expenses 6,499 5,706 Deferred income taxes 6,004 6,455 Refundable income taxes 1,890 704 --------- --------- Total current assets 299,196 265,469 Property & equipment, net 105,195 101,238 Other assets: Notes receivable, trade, net 2,832 1,261 Goodwill 57,202 57,400 Intangible assets, net 742 1,014 Other, net 3,272 3,717 --------- --------- Total assets $ 468,439 $ 430,099 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Notes payable - line of credit $ 106,498 $ 96,170 Current portion of long-term debt 4,739 4,459 Current portion of obligations under capital leases 809 903 Accounts payable 79,130 67,187 Accrued expenses and other current liabilities 24,007 26,347 Financial instruments 192 6,104 --------- --------- Total current liabilities 215,375 201,170 Long-term debt, excluding current portion 46,129 38,507 Deferred income taxes 169 2,247 Obligations under capital leases, excluding current portion 2,247 612 --------- --------- Total liabilities 263,920 242,536 --------- --------- Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value, authorized 5,000 shares; none issued and outstanding -- -- Common stock, $0.01 par value, authorized 50,000 shares; 19,674 and 19,510 issued and outstanding at January 31, 2004 and July 31, 2003, respectively 197 195 Additional paid-in capital 89,746 86,068 Unallocated shares of ESOP (1,850) (1,931) Accumulated other comprehensive (loss) income (192) 432 Retained earnings 116,618 102,799 --------- --------- Total stockholders' equity 204,519 187,563 --------- --------- Total liabilities and stockholders' equity $ 468,439 $ 430,099 ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. -3- UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarters ended January 31, Six months ended January 31, (In thousands, except per share data) 2004 2003 2004 2003 --------- --------- --------- --------- Net sales $ 393,248 $ 338,447 $ 774,631 $ 649,440 Cost of sales 314,463 269,598 619,673 517,166 --------- --------- --------- --------- Gross profit 78,785 68,849 154,958 132,274 Operating expenses 65,386 57,940 128,318 111,372 Amortization of intangibles 234 66 466 104 --------- --------- --------- --------- Total operating expenses 65,620 58,006 128,784 111,476 --------- --------- --------- --------- Operating income 13,165 10,843 26,174 20,798 --------- --------- --------- --------- Other expense (income): Interest expense 2,133 2,072 4,454 3,919 Change in fair value of financial instruments (400) (226) (704) 1,479 Other, net (112) (183) (230) (420) --------- --------- --------- --------- Total other expense 1,621 1,663 3,520 4,978 --------- --------- --------- --------- Income before income taxes 11,544 9,180 22,654 15,820 Income taxes 4,502 3,672 8,835 6,328 --------- --------- --------- --------- Net income $ 7,042 $ 5,508 $ 13,819 $ 9,492 ========= ========= ========= ========= Per share data (basic): Net income $ 0.36 $ 0.29 $ 0.71 $ 0.50 ========= ========= ========= ========= Weighted average shares of common stock 19,598 19,119 19,562 19,113 ========= ========= ========= ========= Per share data (diluted): Net income $ 0.35 $ 0.28 $ 0.68 $ 0.49 ========= ========= ========= ========= Weighted average shares of common stock 20,375 19,526 20,282 19,471 ========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. -4- UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended January 31, (In thousands) 2004 2003 ---------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,819 $ 9,492 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 5,531 5,051 Change in fair value of financial instruments (704) 1,479 Gain on disposals of property and equipment (22) (6) Deferred income tax benefit 451 -- Provision for doubtful accounts 1,320 1,699 Changes in assets and liabilities: Accounts receivable (10,861) 5,242 Inventory (17,185) 2,934 Prepaid expenses and other assets (1,743) (3,177) Notes receivable, trade (1,722) (1,467) Accounts payable 11,943 2,658 Accrued expenses and other liabilities (1,838) 1,331 Financial instruments (5,400) -- Tax effect of stock option exercises 921 107 -------------------------- Net cash (used in) provided by operating activities (5,941) 25,343 -------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of acquired businesses, net of cash acquired (6) (43,724) Proceeds from sale of property and equipment 141 47 Capital expenditures (9,335) (11,221) -------------------------- Net cash used in investing activities (9,200) (54,898) -------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under note payable 10,328 31,392 Net proceeds from issuance of long-term debt 9,904 -- Repayments of long-term debt (2,098) (854) Principal payments of capital lease obligations (537) (657) Proceeds from exercise of stock options 2,759 317 -------------------------- Net cash provided by financing activities 20,356 30,198 -------------------------- NET INCREASE IN CASH 5,215 643 Cash at beginning of period 3,645 11,184 -------------------------- Cash at end of period $ 8,860 $ 11,827 ========================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 4,354 $ 3,798 ========================== Income taxes $ 9,079 $ 6,421 ==========================
The accompanying notes are an integral part of the condensed consolidated financial statements. -5- UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2004 (UNAUDITED) 1. BASIS OF PRESENTATION United Natural Foods, Inc. (the "Company") is a distributor and retailer of natural and organic products. The Company sells its products throughout the United States. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year's presentation. The accompanying unaudited condensed consolidated 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. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended July 31, 2003. 2. INTEREST RATE SWAP AGREEMENTS In October 1998, the Company entered into an interest rate swap agreement that provided for the Company to pay interest for a five-year period at a fixed rate of 5% on a notional principal amount of $60 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. This swap had been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million at LIBOR plus 1.50%, thereby fixing the effective rate at 6.50%. In October 2003, the counter party exercised its option to extend the original five-year term of the swap agreement to seven years. The inclusion of this option prohibited accounting for the swap as an effective hedge under Statement of Financial Accounting Standards ("SFAS") No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. The Company entered into an additional interest rate swap agreement effective August 2001. The additional agreement provided for the Company to pay interest for a four-year period at a fixed rate of 4.81% on a notional principal amount of $30 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The four-year term of the swap agreement could have been extended to six years at the option of the counter party, which prohibited accounting for the swap as an effective hedge under SFAS 133. The swap had been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing the effective rate on the notional amount at 6.31%. If LIBOR exceeded 6.0% in a given period, the agreement was suspended for that period. On December 29, 2003, the Company assigned and transferred all of its obligations of its two "ineffective" interest rate swaps to a third party at a cost of $5.4 million plus accrued interest. As a result of this assignment, these "ineffective" swaps will no longer be included as a special item for future fiscal periods. These "ineffective" swaps were included as special items for the first two quarters of fiscal 2004. The Company recorded $0.4 million and $0.2 million of income for the quarters ended January 31, 2004 and 2003, respectively, and $0.7 million of income and $1.5 million of expense for the six months ended January 31, 2004 and 2003, respectively, on these interest rate swap agreements and related option agreements to reflect the change in fair value of the financial instruments. The Company also entered into an interest rate swap agreement effective May 2003. The agreement provides for the Company to pay interest for a seven-year period at a fixed rate of 3.68% on a notional principal amount of $30 million while receiving interest for the same period at the LIBOR rate on the same -6- notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current variable rate indebtedness totaling $30.0 million at LIBOR plus 1.50%, thereby fixing the Company's effective rate on the notional amount at 5.18%. The swap agreement qualifies as an "effective" hedge under SFAS 133. The Company recorded a liability of $192,000 as of January 31, 2004, and a corresponding amount to accumulated other comprehensive loss in the statement of stockholders' equity to reflect the fair value of the instrument. 3. STOCK OPTION PLANS The Company grants stock options for a fixed number of shares to employees and certain other individuals with exercise prices equal to the fair value of the shares at the dates of grant. The Company has adopted the disclosure only provisions of SFAS No. 123 ("SFAS 123"), Accounting for Stock-based Compensation, and will continue to account for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees. In addition, the Company has made the appropriate disclosures as required under SFAS No. 148 ("SFAS 148"), Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of SFAS 123 and SFAS 148 to stock-based employee compensation:
Quarters ended Six months ended January 31, January 31, -------------------- -------------------- 2004 2003 2004 2003 - ------------------------------------------------ -------- -------- -------- -------- Net income - as reported $ 7,042 $ 5,508 $ 13,819 $ 9,492 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (729) (917) (1,399) (1,687) -------- -------- -------- -------- Net income - pro forma $ 6,313 $ 4,591 $ 12,420 $ 7,805 -------- -------- -------- -------- Basic earnings per share As reported $ 0.36 $ 0.29 $ 0.71 $ 0.50 -------- -------- -------- -------- Pro forma $ 0.32 $ 0.24 $ 0.63 $ 0.41 -------- -------- -------- -------- Diluted earnings per share As reported $ 0.35 $ 0.28 $ 0.68 $ 0.49 -------- -------- -------- -------- Pro forma $ 0.31 $ 0.24 $ 0.61 $ 0.40 -------- -------- -------- --------
The Company estimates the fair value of each option as of the date of grant using the Black-Scholes pricing model with the following weighted average assumptions used for grants in the quarters and the six months ended January 31, 2004 and 2003:
Quarters ended January 31, Six months ended January 31, -------------------------- ---------------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Expected volatility 49.6% 62.0% 49.7% 62.0% Dividend yield 0.0% 0.0% 0.0% 0.0% Risk free interest rate 3.70% 3.3% 3.70% 3.3% Expected life 3.25 years 5 years 3.27 years 5 years
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 Incentive Plan. In the quarter ended January 31, 2004, the Company granted options for the purchase of 381,500 shares under its stock incentive plans. -7- 4. EARNINGS PER SHARE Following is a reconciliation of the basic and diluted number of shares used in computing earnings per share:
Quarters ended Six months ended January 31, January 31, ----------------- ----------------- (In thousands) 2004 2003 2004 2003 ------ ------ ------ ------ Basic weighted average shares outstanding 19,598 19,119 19,562 19,113 Net effect of dilutive stock options based upon the treasury stock method 777 407 720 358 ------ ------ ------ ------ Diluted weighted average shares outstanding 20,375 19,526 20,282 19,471 ====== ====== ====== ======
There were 163 and 315,489 anti-dilutive stock options for the quarters ended January 31, 2004 and 2003, respectively. For the six months ended January 31, 2004 and 2003, there were 123,057 and 710,547 anti-dilutive stock options, respectively. 5. COMPREHENSIVE INCOME Total comprehensive income for the three-month period ended January 31, 2004 amounted to $6,810,000 as compared to $5,508,000 in the same period in the prior year. For the six months ended January 31, 2004 and 2003, comprehensive income amounted to $13,195,000 and $9,492,000, respectively. Comprehensive income is comprised of net income plus the increase/decrease in the fair value of the May 2003 swap agreement discussed in Note 2. 6. ACQUISITIONS On December 31, 2002, the Company acquired by merger privately held Northeast Cooperative, a natural food distributor, headquartered in Brattleboro, Vermont, which serviced customers in the Northeast and Midwest regions of the United States, for cash consideration of $14.1 million. The acquisition was financed by proceeds from the Company's line of credit. The operating results of Northeast Cooperative have been included in the consolidated financial statements of the Company beginning with the acquisition date. The Company has recorded goodwill of $13.5 million related to this purchase 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 $29.6 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 consolidated financial statements of the Company beginning with the acquisition date. The Company recorded goodwill of $13.7 million related to this purchase acquisition. The following presents the unaudited pro forma results assuming that the acquisitions discussed above had occurred as of the beginning of fiscal 2003. These pro forma results are not necessarily indicative of the results that will occur in future periods. -8- Quarter ended Six months ended (in thousands, except per share data) January 31, January 31, 2003 2003 ------------- ---------------- Net sales $360,383 $729,734 ======== ======== Income before income taxes $ 8,373 $ 15,091 ======== ======== Net income $ 5,024 $ 9,055 ======== ======== Earnings per common share: Basic $0.26 $0.47 ======== ======== Diluted $0.26 $0.47 ======== ======== 7. BUSINESS SEGMENTS The Company has several operating divisions aggregated under the distribution segment, which is the Company's only reportable segment. These operating divisions 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 divisions include a 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 manufacturing segment, which engages in importing, roasting and packaging of nuts, seeds, dried fruit and snack items. These other operating divisions 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 divisions. Following is business segment information for the periods indicated:
Unallocated Distribution Other Eliminations Expenses Consolidated ------------ ----- ------------ -------- ------------ Six months ended January 31, 2004 Net sales $753,706 $35,794 $(14,869) $774,631 Operating income (loss) 28,317 (2,037) (106) 26,174 Interest expense $4,454 4,454 Other, net (934) (934) Income before income taxes 22,654 Amortization and depreciation 4,924 607 -- 5,531 Capital expenditures 9,108 227 -- 9,335 Total assets 619,693 41,805 (193,060) 468,438 Six months ended January 31, 2003 Net sales $626,243 $33,209 $(10,012) $649,440 Operating income (loss) 23,916 (3,079) (39) 20,798 Interest expense 3,919 3,919 Other, net 1,059 1,059 Income before income taxes 15,820 Amortization and depreciation 4,399 652 -- 5,051 Capital expenditures 10,654 567 -- 11,221 Total assets 572,769 46,160 (192,524) 426,405
-9-
Unallocated Distribution Other Eliminations Expenses Consolidated ------------ ----- ------------ -------- ------------ Three months ended January 31, 2004 Net sales $382,549 $17,922 $(7,223) $393,248 Operating income (loss) 13,976 (785) (26) 13,165 Interest expense $2,133 2,133 Other, net (512) (512) Income before income taxes 11,544 Amortization and depreciation 2,479 308 -- 2,787 Capital expenditures 6,849 157 -- 7,006 Total assets 619,693 41,805 (193,060) 468,438 Three months ended January 31, 2003 Net sales $327,156 $16,890 $ (5,028) $338,447 Operating income (loss) 12,501 (1,668) 10 10,843 Interest expense 2,072 2,072 Other, net (409) (409) Income before income taxes 9,180 Amortization and depreciation 2,353 328 -- 2,681 Capital expenditures 6,740 168 -- 6,908 Total assets 572,769 46,160 (192,524) 426,405
8. NEW ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial Accounting Standards Board issued SFAS No. 149 ("SFAS 149"), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The adoption of SFAS 149 did not have a material impact on the Company's consolidated financial position or results of operations. In May 2003, the Financial Accounting Standards Board issued SFAS No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 requires issuers to classify as liabilities (or assets in some circumstance) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB issued FASB Staff Position 150-3 which deferred the application of certain provisions of SFAS 150. The Company adopted the remaining provisions of SFAS 150 on August 1, 2003. The adoption of SFAS 150 did not have a material impact on the Company's consolidated financial position or results of operations. -10- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We are a 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 continued growth of the natural products industry in general, our acquisition of or merger with natural products distributors, and the expansion of existing distribution centers. 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 comprised of three principal units: o Our Eastern Region, which is comprised of United Natural Foods, United Northeast (formerly Northeast Cooperative) and Blooming Prairie (formerly Blooming Prairie Cooperative); o Our Western Region, which is comprised of Mountain People's Warehouse, Inc. and Rainbow Natural Foods, Inc.; and o Albert's, which operates in various markets across 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, Hershey Import is a business that specializes in the international trading, roasting and packaging of nuts, seeds, dried fruits and snack items. 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, and the change in fair value of financial instruments and miscellaneous income and expenses. In order to maintain our market leadership and improve our operating efficiencies, we are continually: o expanding marketing and customer service programs across the regions; o expanding national purchasing opportunities; o consolidating systems applications among physical locations and regions; o integrating administrative and accounting functions; and o reducing geographic overlap between regions. In addition, our continued growth has created the need for expansion of existing facilities to achieve maximum operating efficiencies and to assure adequate space for future needs. We have made considerable capital expenditures and incurred considerable expenses in connection with the expansion of our facilities, including the current expansion of our facilities located in Iowa City, Iowa and Dayville, Connecticut. In June 2003, we completed the expansion of our Chesterfield, New Hampshire distribution facility to 289,000 square feet. This expansion included the consolidation of our operations from Brattleboro, Vermont to Chesterfield, New Hampshire. We are currently expanding our Iowa City, Iowa distribution facility from its existing 120,000 square feet to 260,000 square feet. This will enable us to provide enhanced service levels to our customers in the Midwest market and -11- continue to grow our sales base in that market. We are also currently expanding our Dayville, Connecticut distribution facility from its existing 245,000 square feet to 315,000 square feet. The additional storage space in our Iowa City and Dayville facilities allows for more product diversity and the elimination of outside storage expenses. While we will experience incremental short-term costs during fiscal 2004, we expect the efficiencies created by expanding our Iowa City and Dayville facilities to lower our expenses relative to sales over the long-term. Upon completion of the Iowa City and Dayville facilities' expansions, we will have added approximately 1,037,500 square feet to our distribution centers in the last 5 years, which represents a 75% increase in our distribution capacity. 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 markets. The acquisition of Blooming Prairie Cooperative's Iowa City, Iowa and Mounds View, Minnesota distribution facilities have provided us with an immediate physical base and growth platform with which to broaden our presence in the fast growing Midwest market. The expansion of our Chesterfield, New Hampshire distribution facility has enabled us to service existing and new customers, to provide more product diversity, and to better balance products among our distribution centers in our Eastern Region. 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 following: (i) determining our allowance for doubtful accounts, (ii) determining our insurance reserves and (iii) assessing 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 balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of our allowance for doubtful accounts. In instances where a reserve has been recorded for a particular customer, future sales to the customer are conducted using either cash-on-delivery terms, or the account is closely monitored so that as agreed upon payments are received, orders are released; a failure to pay results in held or cancelled orders. Our accounts receivable balance was $99.7 million and $90.1 million, net of the allowance for doubtful accounts of $6.3 million and $5.1 million, as of January 31, 2004 and July 31, 2003, respectively. Our notes receivable balances were $3.6 million and $1.8 million, net of the allowance of doubtful accounts of $2.6 million and $2.8 million, as of January 31, 2004 and July 31, 2003, respectively. Insurance reserves It is our policy to record the self-insured portion of our workers' compensation, health insurance and automobile liabilities based upon actuarial methods of estimating of the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not yet reported. Any projection of losses concerning workers' compensation and automobile liability is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting litigation trends, benefit level changes and claim settlement patterns. If actual claims incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in the consolidated financial statements. Assessing goodwill and intangible assets valuation Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, requires that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually and between -12- annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We have elected to perform our annual tests for indications of goodwill impairment as of July 31 of each year. Impairment losses are determined based upon the excess of carrying amounts over discounted expected future cash flows of the underlying business. The assessment of the recoverability of long-lived assets will be impacted if estimated future cash flows are not achieved. For reporting units that indicated potential impairment, we determined the implied fair value of that reporting unit using a discounted cash flow analysis and compared such values to the respective reporting units' carrying amounts. Total goodwill as of January 31, 2004 and July 31, 2003 was $57.2 million and $57.4 million, respectively, with goodwill for the Distribution operating segment totaling $45.6 million and $45.7 million as of January 31, 2004 and July 31, 2003, respectively. Results of Operations The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales:
Quarters ended Six Months Ended January 31, January 31, ---------------- ---------------- 2004 2003 2004 2003 ------ ------ ------ ------ Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 80.0% 79.7% 80.0% 79.6% ------ ------ ------ ------ Gross profit 20.0% 20.3% 20.0% 20.4% ------ ------ ------ ------ Operating expenses 16.6% 17.1% 16.6% 17.1% Amortization of intangibles 0.1% 0.0% 0.1% 0.0% ------ ------ ------ ------ Total operating expenses 16.7% 17.1% 16.6%* 17.2%* ------ ------ ------ ------ Operating income 3.3% 3.2% 3.4% 3.2% ------ ------ ------ ------ Other expense (income): Interest expense 0.5% 0.6% 0.6% 0.6% Change in fair value of financial instruments (0.1)% (0.1)% (0.1)% 0.2% Other, net (0.0)% (0.1)% (0.0)% (0.1)% ------ ------ ------ ------ Total other expense 0.4% 0.5%* 0.5% 0.8%* ------ ------ ------ ------ Income before income taxes 2.9% 2.7% 2.9% 2.4% Income taxes 1.1% 1.1% 1.1% 1.0% ------ ------ ------ ------ Net income 1.8% 1.6% 1.8% 1.5%* ====== ====== ====== ======
* Total reflects rounding Quarter Ended January 31, 2004 Compared To Quarter Ended January 31, 2003 Net Sales Our net sales increased approximately 16.2%, or $54.8 million, to $393.2 million for the quarter ended January 31, 2004 from $338.4 million for the quarter ended January 31, 2003. This increase was primarily due to our organic growth, although we also benefited from sales from the acquisition of Northeast Cooperative in December 2002 and the strike of certain mass market grocery stores in southern California, resulting in growth in the independently owned natural products retailers and mass market distribution channels of approximately 17.2% and 16.5%, respectively, compared to the same period in the -13- prior year. Growth in the supernaturals distribution channel was approximately 14.9% compared to the same period in the prior year. Sales to our largest customer, Whole Foods Market, Inc. ("Whole Foods Market") represented approximately 25.4% and 25.5% of net sales for the quarters ended January 31, 2004 and 2003, respectively. Our current distribution arrangement with Whole Foods Market expires on August 31, 2004. We will be entering into discussions with Whole Foods Market over the next quarter to continue our relationship upon expiration of the existing agreement. Gross Profit Our gross profit increased approximately 14.4%, or $9.9 million, to $78.8 million for the quarter ended January 31, 2004 from $68.8 million for the quarter ended January 31, 2003. Our gross profit as a percentage of net sales was 20.0% and 20.3% for the quarters ended January 31, 2004 and 2003, respectively. The decrease in gross profit as a percentage of net sales in comparison to the quarter ended January 31, 2003 was due to an increase in our sales to supernaturals, which have lower gross profits. Operating Expenses Operating expenses, excluding special items, increased approximately 12.3%, or $7.1 million, to $65.1 million for the quarter ended January 31, 2004 from $57.9 million for the quarter ended January 31, 2003. As a percentage of net sales, operating expenses, excluding special items, decreased to approximately 16.5% for the quarter ended January 31, 2004 from approximately 17.1% for the quarter ended January 31, 2003. The approximately $7.1 million increase in operating expenses for the quarter ended January 31, 2004 was due primarily to the inclusion of a full quarter of expenses from Northeast Cooperative and an increase in our infrastructure to support our continued growth. Operating expenses for the quarter ended January 31, 2004 included a special item of $0.6 million in start-up and transition costs for certain equipment rental and labor costs incurred in connection with the implementation of our primary distribution agreement with Wild Oats Markets, Inc. ("Wild Oats Markets"), which has staggered effective dates up to and including April 1, 2004. Operating expenses for the quarter ended January 31, 2003 included special items of $0.1 million in costs incurred related to the expansion of our Chesterfield, New Hampshire distribution center. Operating expenses, including special items, increased approximately 13.1%, or $7.6 million, to $65.6 million from $58.0 million for the quarter ended January 31, 2003. As a percentage of sales, operating expenses, including special items, decreased to 16.7% for the quarter ended January 31, 2004 from 17.1% for the quarter ended January 31, 2003. Operating Income Operating income, excluding special items, increased $2.8 million to $13.7 million for the quarter ended January 31, 2004 from $10.9 million for the quarter ended January 31, 2003. As a percentage of sales, operating income, excluding special items, improved from 3.2% for the quarters ended January 31, 2003 to 3.5% for the quarter ended January 31, 2004. Operating income for the quarter ended January 31, 2004 included a special item of $0.6 million of start-up and transition costs for certain equipment rental and labor costs incurred in connection with the implementation of our primary distribution agreement with Wild Oats Markets. Operating income for the quarter ended January 31, 2003 included special items of $0.1 million related to the expansion of our Chesterfield, New Hampshire distribution center. Operating income, including special items, was $13.2 million for the quarter ended January 31, 2004 and $10.8 million for the quarter January 31, 2003. Operating income, including special items, as a percentage of sales, improved to 3.3% for the quarter ended January 31, 2004 compared to 3.2% for the quarter ended January 31, 2003. Other Expense (Income) Other expense, excluding special items, increased $0.1 million to $2.0 million for the quarter ended January 31, 2004 from $1.9 million for the quarter ended January 31, 2003. Interest expense for the quarters ended January 31, 2004 and 2003 was relatively consistent at $2.1 million. The consistency in interest expense was primarily due to higher debt levels in fiscal 2004 following the acquisitions of Blooming Prairie and Northeast Cooperative in fiscal 2003 offset by the novation of two of our interest rate swap agreements in late December 2003, which served to lower our effective interest rate. Other expense (income) for the quarters ended January 31, 2004 and 2003 included special items of $0.4 million and $0.2 million in income, respectively, related to the change in the fair value of financial instruments. Other income, including special items, increased by $0.1 million to $0.5 million for the quarter ended January 31, -14- 2004, from $0.4 million for the quarter ended January 31, 2003. This increase was primarily due to the favorable change in the fair value on our interest rate swap agreements and related option agreements. On December 29, 2003, we assigned and transferred all of our obligations of our two "ineffective" interest rate swaps to a third party at a cost of $5.4 million plus accrued interest. As a result of this assignment, these "ineffective" swaps will no longer be included as a special item for future fiscal periods. However, these "ineffective" swaps were included as a special item for the second quarter of fiscal 2004. Income Taxes Our accrued income tax rate was 39.0% and 40.0% for the quarters ended January 31, 2004 and 2003, respectively. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes. Net Income Net income, excluding special items, increased $1.7 million to $7.1 million, or $0.35 per diluted share, for the quarter ended January 31, 2004, compared to $5.4 million, or $0.28 per diluted share, for the quarter ended January 31, 2003. Net income, including special items, increased $1.5 million to $7.0 million, or $0.35 per diluted share, for the quarter ended January 31, 2004, compared to $5.5 million, or $0.28 per diluted share, for the quarter ended January 31, 2003. As we announced in January 2004, we have updated our guidance for our fiscal year ending July 31, 2004 to reflect both the execution of our primary distribution agreement with Wild Oats and the novation of certain of our interest rate swap transactions. We now expect earnings per diluted share in the range of $1.46-$1.52 for fiscal 2004, excluding any potential special items. Special Items The following table presents, for the periods indicated, a reconciliation of income and per share items excluding special items to income and per share items including special items:
- ----------------------------------------------------------------------------------------- Quarter ended January 31, 2004 Pretax Per diluted (in thousands, except per share data) income Net of tax share -------------------------------------- Income, excluding special items: $11,695 $7,134 $0.35 Special items - Income (Expense): Wild Oats Markets, Inc. primary distributorship start-up and transition related costs (included in operating expenses) (551) (336) (0.02) Interest rate swap agreements (change in fair value of financial instruments) 400 244 0.01 - ----------------------------------------------------------------------------------------- Income, including special items: $11,544 $7,042 $0.35* ========================================================================================= - ----------------------------------------------------------------------------------------- Quarter ended January 31, 2003 Pretax Per diluted (in thousands, except per share data) income Net of tax share -------------------------------------- Income, excluding special items: $9,023 $5,414 $0.28 Special items - Income (Expense): Interest rate swap agreements (change in fair value of financial instruments) 226 136 (0.00) Costs related to the expansion of our Chesterfield, New Hampshire distribution center (included in operating expenses) (69) (42) (0.00) - ----------------------------------------------------------------------------------------- Income, including special items: $9,180 $5,508 $0.28 =========================================================================================
* Total reflects rounding -15- The non-cash items from the change in fair value on interest rate swap agreements were caused by favorable and unfavorable changes in interest rate yield curves during the quarters ended January 31, 2004 and 2003, respectively. The costs related to the expansion of the Chesterfield facility were primarily labor related. The start-up and transition costs of the new Wild Oats Markets primary distributorship were for certain equipment rental and labor costs. On December 29, 2003, we assigned and transferred all of our obligations of our two "ineffective" interest rate swaps to a third party at a cost of $5.4 million plus accrued interest. As a result of this assignment, these "ineffective" swaps will no longer be included as a special item for future fiscal periods. These "ineffective" swaps were included as a special item for the second quarter of fiscal 2004. We entered into interest rate swap agreements in October 1998, August 2001 and May 2003. The October 1998 and August 2001 agreements were "ineffective" hedges as a result of the options held by the counter parties that may extend the original term of the interest rate swap agreements. Applicable accounting treatment required that we record the changes in fair value of the October 1998 and August 2001 agreements in our consolidated statement of income, rather than within "other comprehensive income" in our statement of stockholders' equity. The changes in fair value were dependent upon the forward looking yield curves for each swap. The May 2003 agreement is an "effective" hedge and therefore does not require this treatment. We believe that our October 1998 and August 2001 agreements were special items that were excludable as non-recurring items. First, we only intend to enter into "effective" hedges going forward. This stated intention began with the May 2003 agreement. Second, we believe that the October 1998 and August 2001 agreements may distort and confuse investors if the change in fair value cannot be treated as a special item because their inclusion directly impacts our reported earnings per share. A change in fair value, whether positive or negative, can significantly increase or decrease our reported earnings per share. For example, we recorded a positive change in fair value for the second quarter of fiscal 2004 that increased our diluted earnings per share by $0.01, and in the first quarter of fiscal 2003 we recorded a negative change in fair value that decreased our diluted earnings per share by $0.05. If we were prohibited from excluding this item as a special item, it would artificially inflate our reported earnings per share and thereby mislead investors as to our results of operations and our financial condition. Six Months Ended January 31, 2004 Compared To Six Months Ended January 31, 2003 Net Sales Our net sales increased approximately 19.3%, or $125.2 million, to $774.6 million for the six months ended January 31, 2004 from $649.4 million for the six months ended January 31, 2003. This increase was primarily due to our organic growth, further benefited by sales from acquired businesses, resulting in growth in the independently owned natural products retailers and mass market distribution channels of approximately 36.9% and 20.6%, respectively, compared to the same period in the prior year. We acquired Blooming Prairie Cooperative, a distributor of natural foods and products in the Midwest region of the United States, in October 2002, and Northeast Cooperative, a distributor of natural foods and products in the Northeast region of the United States, in December 2002. Growth in the supernaturals distribution channel was approximately 12.0% compared to the same period in the prior year. The lower growth rate in the percentage of sales to supernaturals was due primarily to the expiration of our contract as primary distributor to Wild Oats Markets in August 2002. Fiscal 2004 sales growth to supernaturals for the six months ended January 31, 2004 was approximately 12.0%. Sales to our largest customer, Whole Foods Market represented approximately 25.1% and 24.2% of net sales for the six months ended January 31, 2004 and 2003, respectively. Our current distribution arrangement with Whole Foods Market expires on August 31, 2004. We will be entering into discussions with Whole Foods Market over the next quarter to continue our relationship upon expiration of the existing agreement. Gross Profit Our gross profit increased approximately 17.1%, or $22.7 million, to $155.0 million for the six months ended January 31, 2004 from $132.3 million for the six months ended January 31, 2003. Our gross profit as a percentage of net sales was 20.0% and 20.4% for the six months ended January 31, 2004 and 2003, respectively. The decrease in gross profit as a percentage of net sales in comparison to the six months ended January 31, 2003 was due in part to lost -16- discounts in the first two months of the quarter resulting from an accounts payable systems implementation, operational issues within certain regions of our produce division and an increase in the supernaturals business as part of our overall sales mix (which results in lower operating expenses). Operating Expenses Operating expenses, excluding special items, increased approximately 15.7%, or $17.4 million, to $128.2 million for the six months ended January 31, 2004 from $110.8 million for the six months ended January 31, 2003. As a percentage of net sales, operating expenses, excluding special items, decreased to approximately 16.6% for the six months ended January 31, 2004 from approximately 17.1% for the six months ended January 31, 2003. The approximately $17.4 million increase in operating expenses for the six months ended January 31, 2004 was due primarily to the inclusion of approximately two and a half months of operating expenses related to Blooming Prairie and five months of operating expenses related to Northeast Cooperative that were not included in fiscal 2003, along with increased operating expenses associated with the continued growth of our business. Operating expenses for the six months ended January 31, 2004 included a special item of $0.6 million in start-up and transition costs for certain equipment rental and labor costs incurred in connection with the implementation of our primary distribution agreement with Wild Oats Markets, which has staggered effective dates up to and including April 1, 2004. Operating expenses for the six months ended January 31, 2003 included special items of $0.6 million related to the transition of Wild Oats Markets to a new primary distributor, consisting primarily of severance and expenses related to the transfer of private label inventory and costs incurred related to the expansion of our Chesterfield, New Hampshire distribution center. Operating expenses, including special items, increased approximately 15.5%, or $17.3 million, to $128.8 million from $111.5 million for the six months ended January 31, 2004. As a percentage of sales, operating expenses, including special items, decreased to 16.6% for the six months ended January 31, 2004 from 17.2% for the six months ended January 31, 2004 as operating expenses grew at a slower rate than sales. Operating Income Operating income, excluding special items, increased $5.3 million to $26.7 million for the six months ended January 31, 2004 from $21.4 million for the six months ended January 31, 2003. As a percentage of sales, operating income, excluding special items, improved to 3.5% for the six months ended January 31, 2004 up from operating income of 3.3% for the six months ended January 31, 2003. Operating income for the six months ended January 31, 2004 included a special item of $0.6 million in start-up and transition costs for certain equipment rental and labor costs incurred in connection with the implementation of our primary distribution agreement with Wild Oats Markets, which has staggered effective dates up to and including April 1, 2004. Operating income for the six months ended January 31, 2003 included special items of $0.6 million related to the transition of Wild Oats Markets to a different primary distributor, consisting primarily of severance and expenses related to the transfer of private label inventory and costs incurred related to the expansion of our Chesterfield, New Hampshire distribution center. Operating income, including special items, was $26.2 million for the six months ended January 31, 2004 and $20.8 million for the six months ended January 31, 2003. Operating income, including special items, as a percentage of sales, increased to 3.4% for the six months ended January 31, 2004 compared to 3.2% for the six months ended January 31, 2003. Other Expense (Income) Other expense, excluding special items, increased $0.7 million to $4.2 million for the six months ended January 31, 2004 from $3.5 million for the six months ended January 31, 2003. Interest expense for the six months ended January 31, 2004 was $4.5 million compared to the $3.9 million for the six months ended January 31, 2003. This increase in interest expense was primarily due to higher average debt levels following our acquisitions of Blooming Prairie and Northeast Cooperative in fiscal 2003. Other expense (income) for the six months ended January 31, 2004 and 2003 included special items of $0.7 million and $1.5 million in expense, respectively, related to the change in the fair value of financial instruments. Other expenses (income), including special items, changed by $2.0 million resulting in income of $0.9 million for the six months ended January 31, 2004 in comparison to expense of $1.1 million for the six months ended January 31, 2003. This decrease was primarily due to the decrease in the change in the fair value on our interest rate swap agreements and related option agreements. On December 29, 2003, we assigned and transferred all of our obligations of our two "ineffective" interest rate swaps to a third party at a cost of $5.4 million plus accrued interest. As a result of this assignment, these "ineffective" swaps will no longer be included as a special item for future fiscal periods. These "ineffective" swaps were included as a special item for the second quarter of fiscal 2004. -17- Income Taxes Our accrued income tax rate was 39.0% and 40.0% for the six months ended January 31, 2004 and 2003, respectively. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes. Net Income Net income, excluding special items, increased $3.0 million to $13.7 million, or $0.68 per diluted share, for the six months ended January 31, 2004, compared to $10.8 million, or $0.55 per diluted share, for the six months ended January 31, 2003. Net income, including special items, increased $4.3 million to $13.8 million, or $0.68 per diluted share, for the six months ended January 31, 2004, compared to $9.5 million, or $0.49 per diluted share, for the six months ended January 31, 2004. Special Items The following table presents, for the periods indicated, a reconciliation of income and per share items excluding special items to income and per share items including special items:
- ------------------------------------------------------------------------------------------- Six months ended January 31, 2004 Pretax Per diluted (in thousands, except per share data) income Net of tax share ---------------------------------------- Income, excluding special items: $22,501 $13,726 $0.68 Special items -- Income (Expense): Wild Oats Markets, Inc. primary distributorship transition related costs (included in operating expenses) (551) (336) (0.02) Interest rate swap agreements (change in fair value of financial instruments) 704 429 0.01 - ------------------------------------------------------------------------------------------- Income, including special items: $22,654 $13,819 $0.68* =========================================================================================== - ------------------------------------------------------------------------------------------- Six months ended January 31, 2003 Pretax Per diluted (in thousands, except per share data) income Net of tax share ---------------------------------------- Income, excluding special items: $17,943 $10,766 $0.55 Special items -- Income (Expense): Interest rate swap agreements (change in fair value of financial instruments) (1,480) (887) (0.04) Costs related to loss of major customer (included in operating expenses) (574) (345) (0.02) Costs related to the expansion of our Chesterfield, New Hampshire distribution center (included in operating expenses) (69) (42) (0.00) - ------------------------------------------------------------------------------------------- Income, including special items: $15,820 $9,492 $0.49 ===========================================================================================
* Total reflects rounding The non-cash items from the change in fair value on interest rate swap agreements were caused by favorable and unfavorable changes in interest rate yield curves during the six months ended January 31, 2004 and 2003, -18- respectively. The costs related to the transition of a major customer, Wild Oats Markets, to a new primary distributor during the six months ended January 31, 2003 consisted primarily of severance and expenses related to the transfer of Wild Oats Markets' private label inventory. For the six months ended January 31, 2004, the start-up and transition costs of the new Wild Oats Markets primary distributorship were for certain equipment rental and labor costs. On December 29, 2003, we assigned and transferred all of our obligations of our two "ineffective" interest rate swaps to a third party at a cost of $5.4 million plus accrued interest. As a result of this assignment, these "ineffective" swaps will no longer be included as a special item for future fiscal periods. These "ineffective" swaps were included as a special item for the second quarter of fiscal 2004. We entered into interest rate swap agreements in October 1998, August 2001 and May 2003. The October 1998 and August 2001 agreements were "ineffective" hedges as a result of the options held by the counter parties that may extend the original term of the interest rate swap agreements. Applicable accounting treatment requires that we record the changes in fair value of the October 1998 and August 2001 agreements in our consolidated statement of income, rather than within "other comprehensive income" in our statement of stockholders' equity. The changes in fair value are dependent upon the forward looking yield curves for each swap. The May 2003 agreement is an "effective" hedge and therefore does not require this treatment. We believe that our October 1998 and August 2001 agreements are special items that are excludable as non-recurring items. First, we only intend to enter into "effective" hedges going forward. This stated intention began with the May 2003 agreement. Second, we believe that the October 1998 and August 2001 agreements may distort and confuse investors if the change in fair value cannot be treated as a special item because their inclusion directly impacts our reported earnings per share. A change in fair value, whether positive or negative, can significantly increase or decrease our reported earnings per share. For example, we recorded a positive change in fair value for the first quarter of fiscal 2004 that increased our diluted earnings per share by $0.01, and in the first quarter of fiscal 2003, we recorded a negative change in fair value that decreased our diluted earnings per share by $0.05. If we were prohibited from excluding this item as a special item, it would artificially inflate our reported earnings per share and thereby mislead investors as to our results of operations and our financial condition. Liquidity and Capital Resources We finance operations and growth primarily with cash flows from operations, borrowings under our credit facility, operating leases, trade payables, bank indebtedness and the sale of equity and debt securities. Our secured revolving credit facility allows for borrowing up to $150.0 million, on which interest accrues at the banks' London Interbank Offered Rate ("LIBOR") plus 1.50%. The current credit facility matures on June 30, 2005. This access to capital provides for our working capital requirements in the normal course of business and the opportunity to grow our business organically or through acquisitions. As of January 31, 2004, our borrowing base, based on accounts receivable and inventory levels, was $150.0 million, with remaining availability of $34.6 million. In April 2003, we executed an amendment to our loan and security agreement, which released and discharged real estate mortgages on certain real property. Additionally, in April 2003 we executed a term loan agreement in the principal amount of $30.0 million secured by the real property that was released in accordance with the aforementioned amendment. In December 2003, we amended this term loan agreement by increasing the principal amount by $10.0 million to $40.0 million, under the existing terms and conditions. The $40.0 million term loan is repayable over seven years based on a fifteen year amortization schedule. Interest on the term loan accrues at LIBOR plus 1.50%. Proceeds received from the term loan were used to reduce the outstanding balance on our $150.0 million credit facility on which interest accrues at the New York Prime Rate or LIBOR plus 1.50%. We continue to believe that our capital requirements for fiscal 2004 will be in the $24.0 to $28.0 million range, and that we will finance these requirements with cash generated from operations and the use of our existing credit facilities. Approximately $10.0 million of the capital required for the expansion of our distribution facilities has been financed through the additional long term debt we incurred by increasing to $40.0 million the principal amount of our existing $30.0 million term loan. We believe that our future capital requirements will be similar to our anticipated fiscal 2004 requirements, as we continue to invest in our growth by upgrading our infrastructure and expanding our facilities. Future investments in major acquisitions will be financed through either equity or long term debt negotiated at the time of the potential acquisition. Net cash used in operations was $5.9 million for the six months ended January 31, 2004 and was the result of net income and the change in cash collected from customers net of cash paid to vendors, offset by a $17.2 million investment in -19- inventory and a $5.4 payment to novate the "ineffective" swap agreements. The investment in inventory relates to increasing inventory levels to meet the anticipated needs of Wild Oats Markets as we commence our role as Wild Oats Markets' primary distributor, supporting increased sales with wider product assortment combined with our ability to capture purchasing efficiency opportunities in excess of total carrying costs, and our acquisitions of Blooming Prairie and Northeast Cooperative. Days in inventory was consistent at 51 days at January 31, 2004 and 2003. Days sales outstanding at January 31, 2004 improved to 24 days compared to 25 days at January 31, 2003. Net cash provided by operations was $25.3 million for the six months ended January 31, 2003 and was also due to the change in cash collected from customers, net of cash paid to vendors, and reductions of inventory levels of $2.9 million despite increased sales. Working capital increased by $19.5 million, or 30.4%, to $83.8 million at January 31, 2004 compared to working capital of $64.3 million at July 31, 2003. Net cash used in investing activities was $9.2 million for the six months ended January 31, 2004 and was due primarily to costs incurred in the expansion of our Iowa City, Iowa and Dayville, Connecticut facilities, compared to $54.9 million for the same period last year that was due primarily to the purchase of substantially all the assets of Blooming Prairie and Northeast Cooperative and the expansion of our Chesterfield, New Hampshire facility. Net cash provided by financing activities was $20.4 million for the six months ended January 31, 2004 due to the $10.0 million in additional long-term debt and borrowings under our $150 million secured revolving credit facility, and proceeds from the exercise of stock options, partially offset by $2.1 million in repayments of our long-term debt. Net cash provided by financing activities was $30.2 million for the six months ended January 31, 2003, due primarily to increased borrowings on our line of credit, offset by repayment of long-term debt of $0.9 million. In October 1998, we entered into an interest rate swap agreement that provided 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. This swap had been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million at LIBOR plus 1.50%, thereby fixing the effective rate at 6.50%. In October 2003, the counter party exercised its option to extend the original five-year term of the swap agreement to seven years. The inclusion of this option prohibited accounting for the swap as an effective hedge under Statement of Financial Accounting Standards ("SFAS") No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. We entered into an additional interest rate swap agreement effective August 2001. The additional agreement provided 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 four-year term of the swap agreement could have been extended to six years at the option of the counter party, which prohibited accounting for the swap as an effective hedge under SFAS 133. The swap had been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing the effective rate on the notional amount at 6.31%. If LIBOR exceeded 6.0% in a given period, the agreement was suspended for that period. On December 29, 2003, we assigned and transferred all of our obligations of our two "ineffective" interest rate swaps to a third party at a cost of $5.4 million plus accrued interest. As a result of this assignment, these "ineffective" swaps will no longer be included as a special item for future fiscal periods. These "ineffective" swaps were included as special items for the first two quarters of fiscal 2004. In May 2003, we entered into an additional interest rate swap agreement. The agreement provides for us to pay interest for a seven-year period at a fixed rate of 3.68% on a notional principal amount of $30.0 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 $30.0 million at LIBOR plus 1.50%, thereby fixing our effective rate on the notional amount at 5.18%. The swap agreement qualifies as an "effective" hedge under SFAS No. 133. IMPACT OF INFLATION Historically, we have been able to pass along inflation-related increases. Consequently, inflation has not had a material impact upon the results of our operations or profitability. -20- 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 April 2003, the Financial Accounting Standards Board issued SFAS No. 149 ("SFAS 149"), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The adoption of SFAS 149 did not have a material impact on our consolidated financial position or results of operations. In May 2003, the Financial Accounting Standards Board issued SFAS No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 requires issuers to classify as liabilities (or assets in some circumstance) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB issued FASB Staff Position 150-3 which deferred the application of certain provisions of SFAS 150. We adopted the remaining provisions of SFAS 150 on August 1, 2003. The adoption of SFAS 150 did not have a material impact on our consolidated financial position or results of operations. Use of Non-GAAP Results Financial measures included in this Management's Discussion and Analysis of Financial Condition and Results of Operations that are not in accordance with generally accepted accounting principles ("GAAP") are referred to as non-GAAP financial measures. To supplement our financial statements presented on a GAAP basis, we use non-GAAP additional measures of operating results, net earnings and earnings per share adjusted to exclude special items. We believe that the use of these additional measures is appropriate to enhance an overall understanding of our past financial performance and also our prospects for the future as these special items are not expected to be part of our ongoing business. The adjustments to our GAAP results are made with the intent of providing both management and investors with a more complete understanding of the underlying operational results and trends and its marketplace performance. For example, these adjusted non-GAAP results are among the primary indicators management uses as a basis for our planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net earnings or diluted earnings per share prepared in accordance with generally accepted accounting principles in the United States. A comparison and reconciliation from non-GAAP to GAAP results is included in the tables above. 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. -21- Any forward-looking statements in this Form 10-Q and the documents incorporated by reference in this Form 10-Q are not guarantees of futures 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, until the effective date of our future reports required by applicable laws. Any projections of future results of operations should not be construed in any manner as a guarantee that such results will in fact occur. These projections are subject to change and could differ materially from final reported results. We may from time to time update these publicly announced projections, but we are not obligated to do so. Acquisitions We continually evaluate opportunities to acquire other companies. We believe that there are risks related to acquiring companies including overpaying for acquisitions, losing key employees of acquired companies and failing to achieve potential synergies. Additionally, our business could be adversely affected if we are unable to integrate our acquisitions and mergers. A significant portion of our historical growth has been achieved through acquisitions of or mergers with other distributors of natural products. Successful integration of mergers is critical to our future operating and financial performance. Integration requires, among other things: o maintaining the customer base; o the optimization of delivery routes; o coordination of administrative, distribution and finance functions; and o the integration of management information systems and personnel. The integration process has and could divert the attention of management and any difficulties or problems encountered in the transition process could have a material adverse effect on our business, financial condition or results of operations. In addition, the process of combining companies has and could cause the interruption of, or a loss of momentum in, the activities of the respective businesses, which could have an adverse effect on their combined operations. There can be no assurance that we will realize any of the anticipated benefits of mergers. We may have difficulty in managing our growth The growth in the size of our business and operations has placed and is expected to continue to place a significant strain on our management. Our future growth is limited in part by the size and location of our distribution centers. There can be no assurance that we will be able to successfully expand our existing distribution facilities or open new distribution facilities in new or existing markets to facilitate growth. In addition, our growth strategy to expand our market presence includes possible additional acquisitions. To the extent our future growth includes acquisitions, there can be no assurance that we will successfully identify suitable acquisition candidates, consummate and integrate such potential acquisitions or expand into new markets. Our ability to compete effectively and to manage future growth, if any, will depend on our ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage our work force. There can be no assurance that our personnel, systems, procedures and controls will be adequate to support our operations. Our inability to manage our growth effectively could have a material adverse effect on our business, financial condition or results of operations. We have significant competition from a variety of sources We operate in 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 -22- distributors will not increase their emphasis on natural products and more directly compete with us or that new competitors will not enter the market. These distributors may have been in business longer than us, may have substantially greater financial and other resources than us and may be better established in their markets. There can be no assurance that our current or potential competitors will not provide services comparable or superior to those provided by us or adapt more quickly than we do to evolving industry trends or changing market requirements. It is also possible that alliances among competitors may develop and rapidly acquire significant market share or that certain of our customers will increase distribution to their own retail facilities. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect our business, financial condition or results of operations. There can be no assurance that we will be able to compete effectively against current and future competitors. We depend heavily on our principal customer Our current distribution arrangement with our top customer, Whole Foods Market, is effective through August 31, 2004. Whole Foods Market accounted for approximately 25.4% and 25.5% of our net sales during the quarters ended January 31, 2004 and 2003, respectively, and 25.1% and 24.2% for the six months ended January 31, 2004 and 2003, respectively. As a result of this concentration of our customer base, the loss or cancellation of business from Whole Foods Market, including from increased distribution from its own facilities, could materially and adversely affect our business, financial condition or results of operations. We sell products under purchase orders, and we generally have no agreements with or commitments from our customers for the purchase of products. No assurance can be given that our customers will maintain or increase their sales volumes or orders for the products supplied by us or that we will be able to maintain or add to our existing customer base. Upon the commencement of our distribution agreement with Wild Oats Markets on April 1, 2004, our sales to Whole Foods Markets as a percentage of our total net sales may decline over the next twelve months, and our sales to Wild Oats Markets may increase as a percentage of our total net sales over the next twelve months. 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, and we experience pricing pressures from both ends of the supply chain. Our operations are sensitive to economic downturns The grocery industry is also sensitive to national and regional economic conditions, and the demand for our products may be adversely affected from time to time by economic downturns. In addition, our operating results are particularly sensitive to, and may be materially adversely affected by: o difficulties with the collectibility of accounts receivable; o difficulties with inventory control; o competitive pricing pressures; and o unexpected increases in fuel or other transportation-related costs. There can be no assurance that one or more of such factors will not materially adversely affect our business, financial condition or results of operations. -23- We are dependent on a number of key executives Management of our business is substantially dependent upon the services of Richard Antonelli, President of our Western Region and Director, Dan Atwood, President of United Natural Brands, Senior Vice President and Secretary, Rick D. Puckett, Chief Financial Officer, Steven H. Townsend, Chair of the Board of Directors, President and Chief Executive Officer and interim President of our Eastern Region, and other key management employees. Loss of the services of any officers or any other key management employee could have a material adverse effect on our business, financial condition or results of operations. Our operating results are subject to significant fluctuations Our net sales and operating results may vary significantly from period to period due to: o demand for natural products; o changes in our operating expenses, including in fuel and insurance; o management's ability to execute our business and growth strategies; o changes in customer preferences and demands for natural products, including levels of enthusiasm for health, fitness and environmental issues; o fluctuation of natural product prices due to competitive pressures; o personnel changes; o supply shortages; o general economic conditions; o lack of an adequate supply of high-quality agricultural products due to poor growing conditions, natural disasters or otherwise; o volatility in prices of high-quality agricultural products resulting from poor growing conditions, natural disasters or otherwise; and o future acquisitions, particularly in periods immediately following the consummation of such acquisition transactions while the operations of the acquired businesses are being integrated into our operations. Due to the foregoing factors, we believe that period-to-period comparisons of our operating results may not necessarily be meaningful and that such comparisons cannot be relied upon as indicators of future performance. We are subject to significant governmental regulation Our business is highly regulated at the federal, state and local levels and our products and distribution operations require various licenses, permits and approvals. In particular: o our products are subject to inspection by the U.S. Food and Drug Administration; o our warehouse and distribution facilities are subject to inspection by the U.S. Department of Agriculture and state health authorities; and -24- o 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 January 31, 2004, we had approximately 3,715 full and part-time employees. An aggregate of approximately 365, or 10%, of the employees at our Auburn, Washington, Iowa City, Iowa and Edison, New Jersey facilities are covered by collective bargaining agreements. These agreements expire in March 2006, June 2006 and June 2005, respectively. We have in the past been the focus of union-organizing efforts. As we increase our employee base and broaden our distribution operations to new geographic markets, our increased visibility could result in increased or expanded union-organizing efforts. Although we have not experienced a work stoppage to date, if additional employees were to unionize, we could be subject to work stoppages and increases in labor costs, either of which could materially adversely affect our business, financial condition or results of operations. Access to capital and the cost of that capital We have a secured revolving credit facility with available credit under it of $150.0 million at an interest rate of LIBOR plus 1.5% maturing on June 30, 2005. As of January 31, 2004, our borrowing base, based on accounts receivable and inventory levels, was $150.0 million with remaining availability of $34.6 million. In April 2003, we executed a term loan agreement in the principal amount of $30.0 million secured by real property that was released in accordance with an amendment to the loan and security agreement related to the revolving credit facility. The $30.0 million term loan is repayable over seven years based on a fifteen year amortization schedule. Interest on the term loan accrues at LIBOR plus 1.50%. In December 2003, we amended this term loan agreement to increase the principal amount from $30.0 million to $40.0 million under the existing terms and conditions. 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 our cost of capital increases or our ability to borrow funds or raise equity capital is limited, 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. -25- Item 3. Quantitative and Qualitative Disclosure About Market Risk Our exposure to market risks results primarily from fluctuations in interest rates on our borrowings. As more fully described in the notes to the consolidated financial statements, we use interest rate swap agreements to modify variable rate obligations to fixed rate obligations. There have been no material changes to our exposure to market risks from those disclosed in our Annual Report on Form 10-K for the year ended July 31, 2003. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. 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) as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, 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. (b) Changes in internal controls. Since the Evaluation Date, there have not been any significant changes to our internal controls or in other factors that could significantly affect those internal controls. -26- PART II. OTHER INFORMATION Items 1, 2, 3 and 5 are not applicable and have been omitted. Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders of the Company (the "Annual Meeting") held on December 3, 2003, the stockholders of the Company considered and voted on two proposals: 1. Election of Directors. The stockholders elected Richard Antonelli, Joseph M. Cianciolo and Steven H. Townsend as Class I directors for the ensuing three years. The terms of office as directors of Gordon D. Barker, Michael S. Funk, Gail A. Graham, James P. Heffernan, and Thomas B. Simone continued after the Annual Meeting. The stockholders voted in the following manner: - --------------------------------------------------------------------------- Name Votes "FOR" Votes "WITHHELD" - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- Richard Antonelli 16,559,202 509,145 - --------------------------------------------------------------------------- Joseph M. Cianciolo 16,477,091 591,256 - --------------------------------------------------------------------------- Steven H. Townsend 16,537,752 530,595 - --------------------------------------------------------------------------- 2. Independent Auditor. The stockholders ratified the appointment of KPMG LLP as the Company's independent auditor for the year ended July 31, 2004. The stockholders voted in the following manner: (i) 16,093,827 votes were cast "FOR" the proposal; (ii) 967,253 votes were cast "AGAINST" the proposal; and (iii) 7,267 votes were cast to "ABSTAIN" from the proposal. Item 6. Exhibits and Reports on Form 8-K Exhibits - ------------------------------------------------------------------------------ Exhibit No. Description Page - ------------------------------------------------------------------------------ 10.1 (1) Distribution Agreement between the Registrant 29 and Wild Oats Market, Inc. dated January 12, 2004. - ------------------------------------------------------------------------------ 10.2 Second Amendment to Term Loan Agreement with Fleet Capital Corporation dated December 18, 2003. 55 - ------------------------------------------------------------------------------ 31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - CEO 61 - ------------------------------------------------------------------------------ 31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - CFO 63 - ------------------------------------------------------------------------------ 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CEO 65 - ------------------------------------------------------------------------------ 32.2 Certification Pursuant to 18 U.S.C. Section 66 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CFO - ------------------------------------------------------------------------------ (1) Certain confidential portions of this exhibit were omitted by means of redacting a portion of the text. This exhibit has been filed separately with the Securities and Exchange Commission accompanied by a confidential treatment request pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Reports on Form 8-K December 2, 2003 The Company announced its financial results for the fiscal quarter ended October 31, 2003. December 3, 2003 The Company announced certain appointments to the Company's Board of Directors and the results of the Company's annual meeting of stockholders. -27- January 12, 2004 The Company announced the signing of a distribution agreement with a customer, the novation of certain swap agreements and updated guidance for fiscal 2004. * * * We would be pleased to furnish a copy of this Form 10-Q to any stockholder who requests it by writing to: United Natural Foods, Inc. Investor Relations 260 Lake Road Dayville, CT 06241 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/ Rick D. Puckett ------------------ Rick D. Puckett Chief Financial Officer (Principal Financial and Accounting Officer) Dated: March 16, 2004 -28- EX-10.1 3 ex10-1.txt Exhibit 10.1 AGREEMENT FOR DISTRIBUTION OF PRODUCTS This Agreement for Distribution of Products, dated January 9, 2004, is between Wild Oats Market, Inc. ("WO") and United Natural Foods, Inc. and its subsidiaries and affiliates (collectively "UNFI"). RECITALS A. WO operates certain retail supermarket stores in the United States which are primarily engaged in the sale of natural and organic products (the "Stores"). B. The parties desire to enter into an agreement pursuant to which UNFI shall provide, sell and distribute to WO, its Stores and wholesale locations, and WO shall buy, the goods and services specified below on the terms set forth below. AGREEMENT For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Agreement Term. (a) The Agreement shall have an initial term of five years (the "Term") commencing as of the date hereof (the "Commencement Date"). (b) After the expiration of the initial Term, the Term shall be automatically renewed for successive two-year periods unless either party gives notice to the other not less than 180 days prior to the end of the initial or any renewal Term. 2. Distribution Arrangement. (a) Commencing April 1, 2004 (the "Effective Date"), UNFI shall be the primary wholesale distributor to WO of WO selected (i) specialty grocery items, (ii) natural and organic packaged grocery products, (iii) frozen products (including certain grocery and meat), (iv) bulk products, (v) vitamins, supplements, body care and other health and beauty aid products and (vi) dairy products (but excluding produce, meat, seafood, cheese, food service products, mercantile and other categories not specifically identified above) either (A) not purchased directly from manufacturers or (B) for which WO currently does not have an existing contractual obligation to purchase which continues after the Effective Date (the "Products"), for all WO Stores, and all such new Stores acquired or opened by WO during the Term, subject to the limitations set forth below. Produce and alcoholic beverages are not included in Products for the purposes of this Agreement. (b) "Primary" for purposes of this Agreement shall be defined as purchasing from UNFI and its affiliates (i) a minimum of [CONFIDENTIAL](1) in Products and (ii) a majority, in the aggregate by region, of the Natural and Organic Products carried by the Stores (as defined in the - ---------- (1) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. -29- Product Standards set forth on Exhibit A attached hereto) purchased in the various categories under 2(a) above, with (i) and (ii) calculated inclusive of orders for Products that are out of stock, during each 12-month period of the Term, commencing as of the Effective Date. (c) WO will purchase, and UNFI will sell Products at net prices, quantities and upon the other terms and conditions set forth herein. 3. Products. (a) Authorized List. (a) WO has provided to UNFI an Authorized Product List ("APL"), DC by DC, which, as modified from time to time, will be the complete list of the only Products authorized to be distributed to the Stores by UNFI. WO shall have the obligation to purchase, on a monthly basis, not less than (i) [CONFIDENTIAL](2) per DC for grocery, chilled and frozen Products, and (ii) [CONFIDENTIAL](3) cases per DC for repack, health and beauty Products (including all body care Products) and vitamins, minerals, supplements and homeopathic remedies (the "Velocity Requirement") of each Product on the APL which is carried by UNFI solely for distribution to WO Stores, exclusive of Private Label Products (the "Exclusive Products"). Notwithstanding the foregoing, the parties agree that the Velocity Requirement for Products purchased by WO from the New Oxford, PA and Chesterfield, NH DCs shall be established by the parties six months after the Effective Date, based upon a review of WO's purchasing volumes and Product velocities during the first six months' purchasing from such DCs. Calculation whether a Product meets the Velocity Requirement shall include all orders placed by WO, including those not filled as a result of manufacturer or UNFI out-of-stocks ("OOS"). (b) WO shall have final determination of items on the APL; provided, however, that the following Products shall not be included within the APL without UNFI's consent, not to be unreasonably withheld, conditioned or delayed: (i) Products that do not meet the product standards set forth on Exhibit A (the "Product Standards"); or (ii) SKUs of Exclusive Products and WO Private Label in excess of [CONFIDENTIAL]4 (the "Exclusive/PL Product SKU limit"). (c) APL Additions and Deletions. (i) WO may require the addition of Products to the APL upon written notice to UNFI specifying the Products to be added, the Stores designated to purchase such Products and the estimated weekly purchases of the Products by the designated Stores; provided, however, that Products will not be added to the APL without UNFI's consent, not to be unreasonably withheld: (i) if the Products do not meet the Product Standards; (ii) if the Exclusive/PL Product SKU limit will be exceeded; and (iii) until adequate inventory of the Product shall be available in all UNFI servicing divisions, as determined by UNFI, based on the estimated weekly purchases provided by WO. At the time WO gives notice to UNFI adding Products to the APL, UNFI shall notify WO if the added Products will be Exclusive Products. Notwithstanding the foregoing, all Products - ---------- (2) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (3) Ibid. (4) Ibid. -30- identified for addition to the APL that do not require consent pursuant to the criteria set forth above shall be added to the APL within 21 days after receipt of written notice of their addition from WO. If UNFI does not have such new Products available for distribution to WO Stores within 21 days after addition to the APL for other than Force Majeure events, WO may include orders of the new Products for purposes of the calculation under Section 14 (Out of Stock Calculation) below and such other obligations of UNFI hereunder regarding delivery of Products. (ii) WO shall designate those Stores to purchase any item added to the APL in the notice described in (c)(i) above. (iii) [CONFIDENTIAL](5),: (1) [CONFIDENTIAL](6), or (2) [CONFIDENTIAL](7), WO shall have no obligation to purchase any of the foregoing Products which are deleted from the APL at UNFI's request for reasons other than a failure of such Products to meet the Velocity Requirement, unless WO agrees to such purchase. (iv) If either party requests deletion from the APL of any Product and the other party agrees to deletion of such item, there shall be a 60-day notice period, after agreement of the parties as to deletion, prior to the actual deletion of the Product from the APL. Unless the deletion is made by UNFI for Products failing to meet the Velocity Requirement or because of excessive manufacturer OOS (as determined by UNFI based upon historic information), the requesting party shall indemnify the other party from the costs of the return to the manufacturer or failure to pay by the manufacturer of: (A) any bill backs (manufacturer direct rebate) or charge back issued by UNFI (contribution by the manufacturer to any ad costs, funds or campaigns for such Product); (B) coupons or rain checks issued by manufacturer or WO or UNFI; and (C) store credits (credits for damaged goods, out of stock Product, demonstration costs agreed to by the manufacturer) issued for the deleted Product; provided that, so long as the deleted Product is not an Exclusive Product, if the deleted Products are sold, or a sale is arranged, within 90 days to another customer, then the requesting party shall not have any indemnification or reimbursement obligation as specifically enumerated above under this Section 3(c)(iv) for the items identified above related to those deleted Products that have been sold. (d) Private Label Products. (i) [CONFIDENTIAL](8) - ---------- (5) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (6) Ibid (7) Ibid. (8) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. -31- (ii) UNFI will carry any WO Private Label Products requested by WO, provided that each WO Private Label Product sells well enough to turn one inventory turn: (A) [CONFIDENTIAL](9) for Products which are imported from outside of the continental United States, and (B) [CONFIDENTIAL](10) for Products which are shipped from manufacturers within the continental United States. At the end of the inventory turn periods specified in (A) and (B) above, UNFI shall notify WO of the amount of inventory of any Product not meeting the turn periods, and [CONFIDENTIAL](11). WO shall use its best efforts to sell through inventory remaining beyond the turn periods within CONFIDENTIAL](12) after the end of the applicable turn period (the "Sell Through Period") or may elect to have the inventory "plussed out" (shipped) to the Stores on a logistics schedule supplied by WO. If inventory not moving within the turn periods remains in the DCs for more than [CONFIDENTIAL](13) after the end of the turn periods, [CONFIDENTIAL](14). To the extent a Private Label Product does not sell within the foregoing turn periods, the parties shall review the Product on a case-by-case basis, and shall mutually determine whether to remove it from the APL. UNFI shall hold the inventories of WO Private Label in the three DCs listed on Exhibit C hereto, and in additional DCs as Private Label Product velocity may warrant. "WO Private Label Products" shall mean those products that Wild Oats offers from time to time in its Stores under Wild Oats' proprietary labels (including "Wild Oats", "Henry's", "Sun Harvest" and such other tradenames or marks used by WO from time to time). UNFI covenants not to sell, and to take commercially reasonable efforts to prevent the sale of any WO Private Label Products by UNFI to any distribution network, stores, or persons not approved in advance by WO. UNFI agrees to fully cooperate with WO in any investigation and litigation originated by WO over such unauthorized sales. UNFI shall bear the cost of retrieval of any WO Private Label Product sold in unauthorized sales by UNFI. 4. Pricing. (a) Pricing of Products. Commencing as of the Commencement Date, during the Term the UNFI pricing for Products shall be as follows: (i) As to all Products other than WO Private Label Products, [CONFIDENTIAL](15); and (ii) As to WO Private Label Products, [CONFIDENTIAL](16) (b) At the end of each of WO's fiscal quarters, [CONFIDENTIAL](17) - ---------- (9) Ibid. (10) Ibid. (11) Ibid. (12) Ibid. (13) Ibid. (14) Ibid. (15) Ibid. (16) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (17) Ibid. -32- (iii) For purposes of this Agreement, "Cost" shall be defined as [CONFIDENTIAL](18) (iv) In the event of a partial Fiscal Quarter based on the Commencement Date or remaining at the end of the term hereof (whether by early termination or normal expiration of the term of this Agreement), the Quarterly Run Rate Volume shall be pro rated based on the percentage of the Fiscal Quarter at the Commencement Date or remaining at the end of the term of the Agreement. (v) If there has been a Force Majeure event during any Fiscal Quarter that materially affects WO's ability to purchase or UNFI's ability to sell Products, the Quarterly Run Rate Volume shall not be reduced, but the [CONFIDENTIAL](19) minimum purchase level referenced under Section 2(b) above for any calendar year shall be reduced by an amount based on the purchases from those Stores impacted by the Force Majeure event from other distributors, or estimated purchases in the event the Stores are unable to operate and the length of time that the Force Majeure event continues to disrupt operations at such Stores or DCs. (c) Modification of Pricing. (i) The parties agree to meet semiannually to review the freight delivery charges to the Stores as set forth in Exhibit E and, upon mutual agreement based on a modification in freight charges, shall modify the inbound freight charges as a component of Product cost. (ii) UNFI may only increase the prices for Products referenced in this Section 4 if there is an actual per item price increase from the manufacturer. Price increases shall only be effective after [CONFIDENTIAL](20) electronic notification to WO. UNFI shall reduce or increase the prices for Products if there is an actual per item price decrease or increase, as applicable, from the manufacturer in accordance with manufacturer deal periods. Price decreases shall be effective within [CONFIDENTIAL](21) from the reduction in pricing by the manufacturer to UNFI. All published vendor deals (advertised to wholesalers and retailers), pricing and promotional discounts, will be passed dollar for dollar directly to WO as and when received by UNFI as a reduction in pricing subject to vendor performance requirements being met. Notwithstanding the foregoing, UNFI's or WO's new item set up discounts and policies will be mutually supported. (iii) WO may negotiate scan downs or off-invoice receiving allowances with manufacturers pursuant to which WO receives a rebate from the manufacturer based upon actual sales of goods. - ---------- (18) Ibid. (19) Ibid. (20) Ibid. (21) Ibid. -33- [CONFIDENTIAL](22). The total number of scan-downs per month that can be negotiated by WO shall not exceed [CONFIDENTIAL](23). The payment shall be accompanied by a copy of the manufacturer bill back documents sent to the manufacturer as part of the scan down or off-invoice arrangement. (d) Freight Costs to the Stores. (i) WO shall pay a freight charge for delivery of Product from each UNFI distribution center to the Stores. The freight charge shall be a percentage, as set forth on Exhibit E to this Agreement, of Product Cost. Freight will be shown separately on each Product invoice from the cost of the Product delivered. WO shall be under no obligation to pay higher net freight costs that result from UNFI's election to close any distribution centers that were operating on the date of this Agreement, and any increase in freight charges resulting from such closure or reassignment of more Stores to other DCs shall be the responsibility of UNFI. In the event that federal or state regulations regarding hours of service for drivers are implemented that result in substantial increases in freight costs over those costs represented by the percentages set forth on Exhibit E, the parties shall review the actual costs and make such adjustments to Exhibit E to cover the incremental cost increases allocated to WO's business as a result of such implementation. (ii) In the event that fuel costs average in excess of [CONFIDENTIAL](24) over the prior three-month period, UNFI shall be entitled to charge WO a surcharge for fuel used in delivery of Product equal to the actual average and [CONFIDENTIAL](25), and such surcharge shall be charged for the following three-month period as set forth on Exhibit F attached hereto. (e) Inclusions of Items on Invoices. WO shall send its suggested specific Store retail pricing for the Products to UNFI in a mutually agreeable format at mutually agreed times. UNFI will print such pricing on all appropriate WO documents. The mechanics of such arrangement are set forth in Exhibit G attached to this Agreement. Each invoice from UNFI for Product delivered to the Stores shall show the cost of the item per unit specified, the freight costs and, to the extent UNFI's computer systems may include such information, the retail price at which WO sells the Product and margin received at such price, as reflected in WO's data. UNFI shall have no liability to WO hereunder for loss arising out of errors in WO's data. (f) Conflict with Purchase Orders and Other Documents. The terms and conditions of the Agreement shall govern any purchase order and shall supersede any additional or contrary terms set forth in any WO purchase order or any UNFI acceptance, confirmation, invoice or other similar document. - ---------- (22) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (23) Ibid. (24) Ibid. (25) Ibid. -34- (g) Cross-Dock Billing. UNFI will, from time to time, and based on UNFI space availability, ship non-APL Product, for pallet and shipper displays only, on a cross-dock basis (as opposed to "bill to, ship to") for WO. UNFI shall charge WO [CONFIDENTIAL](26) shipped on a cross-dock basis, and [CONFIDENTIAL](27). UNFI shall not unreasonably withhold its consent to cross-dock arrangements established by WO, based on space availability per DC. WO shall give UNFI 45-day prior notice of any proposed cross-dock arrangement. Within 15 days prior to the actual shipment pursuant to the cross dock arrangement, WO shall provide the weight, volume and pallet count of the cross-docked Products per Store. All cross-docked Products received from the manufacturer shall be accompanied by a bill of lading, shall identify that the shipment is for WO, and shall identify the Store to which the Product is to be shipped. UNFI shall deliver the cross-docked Products on the next scheduled shipment to the Store, space permitting but, as to Wild Oats Stores only (not as to Henry's or Sun Harvest Stores) shall not ship cross-docked Products in the first week of any WO promotional period. 5. Placement of Personnel and Equipment. (a) On Site Personnel. UNFI shall commit to providing, at its cost, the following personnel at WO Headquarters in Boulder, Colorado, during the Term of this Agreement: [CONFIDENTIAL](28). In addition, UNFI will provide [CONFIDENTIAL](29). (b) Transition Personnel. As part of the transition of distribution purchasing from WO's current primary distributor to UNFI, UNFI and WO recognize that certain existing shelf tags for certain items on the APL must be replaced. [CONFIDENTIAL](30). The timetable for the completion of all retagging, and the process by which retagging will proceed, will occur over a nine-month period on a timetable mutually agreeable to the parties. (c) Replacement of Personnel. All personnel supplied by UNFI under (a) and (b) above shall be reasonably satisfactory to WO. If WO requests the replacement of any UNFI personnel for any non-discriminatory reason, UNFI shall use commercially reasonable efforts to promptly replace such individuals with new, competent personnel reasonably satisfactory to WO. (d) Electronic Ordering Equipment. As part of the retagging process of existing Stores, UNFI shall loan to each Store three electronic store order units, and shall train all department managers, the scanning coordinator and the designated person for order placement at Store level on the use of the equipment. Upon full implementation of WO's backdoor receiving project, WO shall return to UNFI two of the three electronic ordering units provided by UNFI at each Store. Any malfunctioning units shall be repaired or replaced, at UNFI's sole election, within 72 hours after UNFI's receipt of notification by WO, provided that WO shall provide UNFI with specific information as to any malfunctioning. WO shall be responsible - ---------- (26) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (27) Ibid. (28) Ibid. (29) Ibid. (30) Ibid -35- for malfunctioning caused by the gross negligence of WO employees. UNFI shall provide three, or more based on Store size if requested by WO, units to each new Store, and shall train the aforesaid new Store personnel in the use of the equipment, within 21 days prior to the opening of the new Store; provided that WO shall have given UNFI 90 days' prior written notice of new Store openings to facilitate the programming of the equipment and the training of personnel and WO makes such personnel available to UNFI at mutually agreed upon dates, times and places. WO is currently testing and plans to implement in the future a new order taking technology as part of its back door receiving program. (e) [CONFIDENTIAL](31) 6. Product Quantity: (a) Quantities. UNFI agrees to sell to WO and supply WO with APL Products, throughout the Term of the Agreement, in the quantities ordered by WO in its sole discretion. The parties have established two [CONFIDENTIAL](32) minimum order quantities for each Store based on Store volume, frequency of delivery, etc., as set forth on Exhibit H attached hereto. The parties shall review the schedule semi-annually and shall move Stores' minimum order quantities from one order quantity category to the other based on market conditions and competitive impacts. WO may be charged a [CONFIDENTIAL](33)charge for deliveries not meeting the minimum order requirement size. (b) Shipment of Booked Orders. If WO has (i) pre-ordered specified quantities of Product for a promotional event and has given UNFI 45 days notice, or (ii) completed a forward buy negotiation with a manufacturer for Product meeting the requirements set forth in (c) below, and UNFI has accepted the orders, UNFI shall deliver the booked quantities of Products to the WO Stores per WO's Product orders. For inventory not falling within the definitions of (i) and (ii) above, if UNFI has stocking issues, UNFI will ship all customers on an equal first come, first serve basis. (c) [CONFIDENTIAL](34). 7. UNFI Covenants Concerning Facilities; Delivery Standards. (a) Standards for Facilities. UNFI warrants and covenants that all UNFI participating distribution centers will be maintained and operated in all material respects in accordance with UNFI warehousing and delivery standards, which will be available for review upon request by WO. WO may inspect the physical plant of any distribution center during normal business hours upon reasonable advance notice to the designated UNFI personnel, but shall not impair or impede the business operations of the center. With WO's consent, not to be unreasonably withheld, UNFI shall have the right to move service for groups of Stores from one facility to another, provided the new facility has the ability to adequately service the Stores, UNFI has - ---------- (31) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (32) Ibid. (33) Ibid. (34) Ibid. -36- given WO at least 60 days notice of the proposed modification and obtained WO's consent, such move shall not result in an incremental increase in cost to WO, and the parties have had the opportunity to prepare and implement a plan for transition to the new DC. (b) Covenants for Delivery. UNFI shall: (i) receive and process WO orders only from the WO Stores or designated home office personnel and no other WO personnel or manufacturers, brokers or other third parties. Notwithstanding anything to the contrary, UNFI shall be entitled to rely upon the list of authorized persons in accepting orders from personnel identifying themselves as on such list. If orders are transmitted by MSI, then UNFI may rely upon orders received from a Store; and (ii) at UNFI's election, transport ordered Product on UNFI fleet or WO approved carriers to individual Stores. UNFI shall comply with any regional or national, as applicable, limitations or guidelines regarding deliveries (e.g., municipal, residential or property owner imposed restrictions on delivery hours, parking of trucks, unacceptable levels of noise in residential areas, etc.) of which WO has provided notice. (iii) maintain adequate stock at each DC to meet WO Store requirements on an individual store basis [CONFIDENTIAL]35. (c) Delivery Windows. Exhibit I sets forth the following information per Store: (a) estimated shipment volumes per delivery location; (b) municipal, residential or property owner imposed restrictions on delivery hours, parking of trucks, delivery routes, curfews, noise ordinances, lease covenants, neighborhood covenants and operating hours. In the event of changes in these restrictions, WO shall provide updated information and the parties shall evaluate such information and make such scheduling changes as necessary to comply with any restrictions so imposed. UNFI will apply its routing system to prepare a routing and constraint analysis, taking into account, in order of priority, (a) Store delivery restrictions such as curfews, ordinances, neighborhood covenants, landlord regulations, (b) WO desired delivery times, (c) UNFI's route departure schedule, (d) UNFI warehouse and transportation operating constraints such as shift schedules. The routing schedule (the "Delivery Schedule") adopted based on the routing and constraint analysis will define the following: (1) each Store's days of delivery per week, (2) the hours of the delivery window for each store delivery, (3) delivery days and delivery windows per day for special promotional events, and (4) delivery days and delivery windows for holiday week shipments. After the initial development of the Delivery Schedule, a designated WO employee and UNFI will meet monthly, if requested by WO or UNFI, or quarterly, if no monthly meetings are held, to review the Schedule and make any necessary modifications. [CONFIDENTIAL](36). - ---------- (35) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (36) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. -37- (d) Code Date Policy; Inventory Management. Products shall be distributed to WO Stores in compliance with the Code Date Policy attached as Exhibit J to this Agreement related to the minimum number of days prior to expiration of the final code date, for perishable Products, under which such Products will be accepted upon delivery to the Stores. Product delivered with less than the minimum code date shall be deemed an out-of-stock for purposes of performance hereunder. UNFI agrees to deliver all Product (including WO Exclusive and Private Label Product) on a "first-in, first-out" inventory management basis, to ensure proper inventory turns and maximize available Product Code Dates. (e) Quality Standards. Products will be delivered palletized and shrink-wrapped and meet WO's Quality Standards as to damage, rodent or insect presence, and other quality standards attached as Exhibit K to this Agreement. The parties will comply with the mutually agreeable pallet exchange program described on Exhibit L. In the event that any Product is recalled or withdrawn (the "Recalled Product"), UNFI will use its personnel (or a third party retrieval service if UNFI reasonably believes the recall or withdrawal will be achieved faster, at less expense or more efficient) to remove any Recalled Product from the WO Stores and shall dispose of or return any Recalled Products as required. In addition to the foregoing responsibilities, UNFI shall use its reasonable commercial efforts to cooperate with WO in removing the Recalled Product that UNFI has delivered from the WO Stores and replenishing the Store with replacement Products. (f) Store Receiving. All Product shipments by UNFI to the Stores must be evidenced by an invoice, in the form attached hereto as Exhibit G. Shipments of Product shall be acknowledged as received by execution by Store personnel of the delivered invoice (a copy of which shall be left with the Store). WO will not be responsible for paying any invoice for a shipment not complying with the foregoing conditions of receipt. (g) Passage of Title and Risk of Loss. Title and risk of loss shall pass upon delivery to WO Stores when delivered by UNFI fleet. Risk of loss upon delivery by independent carriers shall be governed by such arrangements as are made between UNFI, WO and the independent carrier at the time of shipment. 8. Certain Wild Oats Ordering Responsibilities. (a) WO shall place phone orders only by designated WO personnel. To enable timely delivery of Products, WO shall place orders in a timely manner in accordance with Exhibit M. WO shall give UNFI a minimum 45-day written lead time on promotion orders. No third party orders will be honored by UNFI. (b) The parties agree to establish an electronic data interchange capability ("EDI")between WO and UNFI in a mutually agreed upon format by December 31, 2004. The EDI shall be used both for the placement of orders and the movement of other data used in the ordering and payment for Products. (c) The average minimum order size for each Store delivery shall be as set forth on Exhibit H per Store per placed order (inclusive of OOS and Private Label Product, whether -38- caused by the manufacturer, UNFI or promotional OOS, that is ordered but not delivered). Any order placed of less than the minimum order size shall incur [CONFIDENTIAL](37). (d) To the extent that WO forecasts Product sales for a WO promotion (other than WO Private Label promotions), and the Stores do not order the aggregate amount forecasted to UNFI, then within [CONFIDENTIAL](38) following completion of the promotion, UNFI shall notify WO of the amount of promotional Product remaining in inventory, and shall commence charging WO a pallet charge of [CONFIDENTIAL](39) for any of such inventory remaining at the DCs on the [CONFIDENTIAL](40) after completion of the promotion. WO shall use its best efforts to sell through the remaining promotional inventory within [CONFIDENTIAL](41) after completion of the promotion or may elect to have the inventory "plussed out" (shipped) to the Stores on a logistics schedule supplied by WO. If promotional inventory remains in the DCs for more than [CONFIDENTIAL](42) after the completion of the promotion, [CONFIDENTIAL](43). The foregoing shall not apply to purchases of "Wild Buys" as defined in Section 6(c) above. 9. Promotional and Marketing Funds. UNFI will assist WO in the solicitation of vendor funding for new and remodeled Stores and acquired Stores (except as and to the extent excluded under Section 2 above) at levels requested by WO, unless such levels are deemed unreasonable by UNFI. 10. Hold Harmless. (a) UNFI Indemnity. It is expressly understood and agreed that WO shall not be liable for, and UNFI shall hold WO harmless from, any obligations, claims, demands, losses, costs, damages, suits, judgments, penalties, expenses and liabilities of any kind or nature to a person not a party to this Agreement ("Third Party") arising out of or in connection with this Agreement caused by UNFI's negligence, willful misconduct or contractual breach, including but not limited to any costs, expenses, court costs and reasonable attorneys' fees incurred by WO by reason of any defense to any claims or lawsuits to which WO has been named a party. (b) WO Indemnity. It is expressly understood and agreed that UNFI shall not be liable for and WO shall hold UNFI harmless from any obligations, claims, demands, losses, costs, damages, suits, judgments, penalties, expenses and liabilities of any kind or nature to a Third Party arising out of or in connection with this Agreement caused by WO's negligence, willful misconduct or contractual breach, including but not limited to any costs, expenses, court costs and reasonable attorneys' fees incurred by the UNFI by reason of any defense to any claims or lawsuits to which UNFI has been named a party. WO agrees to indemnify UNFI for any loss, cost or damage resulting from any claim brought against UNFI by TOL and relating to WO's termination of a distribution agreement with TOL. - ---------- (37) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (38) Ibid. (39) Ibid. (40) Ibid. (41) Ibid. (42) Ibid. (43) Ibid. -39- (c) Third Person Claims. Promptly after a party has received notice of or has actual knowledge of any claim against it covered by Section 10 by a Third Party or the commencement of any action or proceeding by a Third Person with respect to any such claim, such party (sometimes referred to as the "Indemnitee") shall give the other party (sometimes referred to as the "Indemnitor") written notice of such claim or commencement of such action or proceeding; provided, however, that the failure to give such notice will not affect the right to indemnification hereunder with respect to such claim, action or proceeding, except to the extent that the other party has been actually prejudiced as a result of such failure. If the Indemnitor has notified the Indemnitee within thirty (30) days from the receipt of the foregoing notice that it wishes to defend against the claim by the Third Person, then the Indemnitor shall have the right to assume and control the defense of the claim by appropriate proceedings with counsel reasonably acceptable to Indemnitee, provided that the assumption of such defense by the Indemnitor shall constitute an acknowledgment of the obligation to indemnify the Indemnitee hereunder. The Indemnitee may participate in the defense, at its sole expense, of any such claim for which the Indemnitor shall have assumed the defense pursuant to the preceding sentence, provided, however, that counsel for the Indemnitor shall act as lead counsel in all matters pertaining to the defense or settlement of such claims, suit or proceeding other than claims that in Indemnitee's reasonable judgment could have a material and adverse effect on Indemnitee's business apart from the payment of money damages. The Indemnitee shall be entitled to indemnification for the reasonable fees and expenses of its counsel for any period during which the Indemnitor has not assumed the defense of any claim. The Indemnitor may not settle any claim without obtaining a release for the benefit of the Indemnitee, unless the consent of the Indemnitee is obtained. (d) Product Liability. UNFI acknowledges that it generally obtains indemnification agreements from the various manufacturers, vendors or distributors of the Products or other items being sold to WO by UNFI under this Agreement. UNFI agrees to indemnify and hold harmless WO for any liability arising from Products sold to WO by UNFI, without regard to any negligence by UNFI related to such Products. UNFI's obligation to indemnify WO for any liability arising from any Products sold to WO shall exist regardless of the existence or nonexistence of any such indemnification agreements from Product manufacturers. (e) Insurance. UNFI agrees that all material properties and risks of UNFI shall at all times be covered by valid and currently effective insurance policies or binders of insurance or programs of self-insurance in such types and amounts as are consistent with customary practices and standards of UNFI and the industry, but in no event less than $2 million aggregate general liability coverage. WO shall be named as an additional insured and certificates of insurance evidencing the renewal of insurance shall be delivered by UNFI to WO from time to time. WO agrees that all material properties and risks of WO and any third party providing transportation services to WO shall at all times be covered by valid and currently effective insurance policies or binders of insurance or programs of self-insurance in such types and amounts as are consistent with customary practices and standards of companies engaged in businesses and operations similar to those of WO. -40- 11. [CONFIDENTIAL](44) 12. Audits. (a) General. WO and its independent auditors will have the right to perform the following audits of UNFI's compliance with the terms of the Agreement: (i) Financial - WO sales data, WO cost data, WO promotions data, and WO discounts, [CONFIDENTIAL](45); (ii) Quality Assurance - audits of distribution facilities and transportation equipment; (iii) Freight - freight costs, rates, transportation costs; (iv) Vendors - invoices from vendors to UNFI. (b) Cost of Audit: All audits will be performed at WO's cost, using auditors of its choice, unless any audit of financial compliance discloses an aggregate over-billing to WO or an aggregate underreporting by UNFI under the terms of the Agreement of [CONFIDENTIAL](46) of the total billed/reported, in which case UNFI shall reimburse WO for the reasonable cost of the audit. If any audit shows any overpayment by WO or an underreported amount by UNFI, UNFI shall promptly refund any over-billed amount or credit any underreported amount to WO, plus interest at the rate of 1% per month from the earliest date of error until paid. WO shall provide UNFI promptly with copies of all audits before any adjustment may occur. If any audit shows any under-payment by WO or an over-reported amount to WO, WO shall promptly refund the deficiency or overpayment to UNFI, plus interest at 1% per month from the earliest date of error until paid. Any audit may be done by an audit of a statistically significant sampling of the data being audited, in accordance with generally recognized auditing practices, and such sampling shall be deemed representative of all data in that category. (c) Cooperation. UNFI shall cooperate with WO and its auditors in the performance of all audits by delivering such documents and other information, and making its personnel and facilities available for inspection, as WO shall reasonably request. WO shall provide to UNFI a list of all information required to perform its audit. WO agrees to maintain as confidential any information obtained during any audit regarding any other customer or vendor of UNFI, unless required to disclose such information by subpoena, by process of law, or by rules or regulations of any governmental agency which may require disclosure of information, but only upon first promptly notifying UNFI of such requirement and permitting reasonable opportunity to UNFI to seek a protective order. Any disclosure which, in the legal opinion of outside counsel is nevertheless necessary, shall be made only to the extent necessary and WO shall use its best efforts to obtain confidential treatment of the information. - ---------- (44) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (45) Ibid. (46) Ibid. -41- (d) Any audit under this Section or payments made by UNFI to WO in connection with any audit shall not affect WO's right to terminate the Agreement, and rights to audit shall survive termination of this Agreement. (e) In the event of a dispute as to the amount of any adjustment required as a result of any audit, the parties shall use their best reasonable efforts to reach agreement within 15 days, and, failing such agreement, either party may submit the dispute to a nationally recognized accounting firm (the "Auditor"), selected upon mutual agreement of the parties, which shall resolve the dispute within 30 days or as soon thereafter as reasonably practicable. The decision of the Auditor shall be final and binding on the parties. The cost and expense of the Auditor shall be paid one-half by each party. The parties shall make available to the Auditor all relevant books, records and material reasonably requested by the Auditor. 13. Compliance with Laws. (a) Each party covenants and agrees during that it will fully comply with all applicable laws, ordinances, regulations, licenses and permits of or issued by any federal, state or local government entity, agency or instrumentality applicable to its responsibilities hereunder. UNFI agrees that it shall comply with all certification procedures and regulations. Each party shall promptly notify the other party after it becomes aware of any material adverse proposed law, regulation or order that, to its knowledge, may or does conflict with the parties' obligations under this Agreement. The parties will then use reasonable efforts to promptly decide whether a change may be made to the terms of this Agreement to eliminate any such conflict or impracticability. (b) Organic Documentation. In connection with any organic Products, UNFI shall take all such actions as required by any federally recognized certifying organization (or as required by law) in order for such Products to be certified as organic, including, without limitation, the maintenance of any required documentation and the taking of the necessary precautions to prevent product compromise. UNFI shall provide all documentation relating to the foregoing to WO at WO's request. 14. [CONFIDENTIAL](47) 15. Payment Terms. (a) WO shall pay for all Product purchases, subject to deductions for amounts owed by UNFI to WO hereunder, by wire transfer of immediately available funds to UNFI within [CONFIDENTIAL](48) from the date of the UNFI invoice, which is dated no earlier than the date the Product is shipped to the Store (and a copy of such invoice accompanies the Product). In the event receipt of a shipment is substantially delayed (delay of 24 hours or greater), payment shall be due [CONFIDENTIAL](49) following actual receipt of the shipment. Invoices shall be on a Store by Store basis. A finance charge of - ---------- (47) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (48) Ibid. (49) Ibid. -42- [CONFIDENTIAL](50) monthly on any delinquent balance not paid within [CONFIDENTIAL](51) may be assessed monthly. (b) If UNFI fails to make any payment due hereunder, after 10 days' prior written notice by WO by the due date specified by WO, and provided that UNFI has not given WO notice of a good faith dispute with the amount due by the due date, WO may, at its election, deduct or offset from any invoice owed to UNFI, those amounts due from UNFI under this Agreement as a reimbursement, payment or credit. WO shall notify UNFI at the time of payment of the deduction or offset. (c) All monetary obligations under this Agreement will survive termination of the Agreement. (d) [CONFIDENTIAL](52). 16. Credits. (a) Product Credit. WO or its Stores may email notification, in accordance with UNFI's standard notification process, of credits for damaged Product, miss-picks of goods not on the APL and for short-dated/out-of-code Product received on delivery from UNFI in accordance to WO Code Date Policy attached as Exhibit J hereto, provided the total amount of the credit per Store is $25 or greater. The cost of miss-picks received at Store level of Products on the APL shall be debited to WO, assuming WO can use the Products based on the quantity delivered and remaining code dates on such Products. UNFI and WO shall discuss the disposition of miss-picks. (b) Shortage Credit. UNFI will credit WO [CONFIDENTIAL](53) for delivery shortages, calculated on Total Purchases by each Store on a monthly basis, which will be deducted through a credit memo by UNFI issued to each WO Store on a monthly basis. UNFI shall audit shortage levels on a quarterly basis using its internal audit teams, and shall provide the results thereof to WO each quarter. If UNFI's audit shows a lesser or greater than [CONFIDENTIAL](54) shortage, then the credit shall be decreased or increased, accordingly, to the level shown by audit, effective immediately. The shortage credit shall also be adjusted immediately in the event that any WO audit shows a lower or higher shortage. WO may audit at any time, provided that changes to the shortage credit shall be effected not more frequently than quarterly. WO shall provide a report to UNFI on the results of WO's audits with the notice of adjustment. Both parties shall audit using audit procedures to be mutually agreed to after good faith negotiation within 60 days after execution of this Agreement. Any disputes regarding audit results shall be resolved using the procedures set forth in Section 12(e) above. - ---------- (50) Ibid. (51) Ibid. (52) Ibid. (53) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (54) Ibid. -43- (c) Processing of Credits. UNFI agrees that it shall receive and process credit requests within five business days from receipt of the request from WO by email. WO agrees that it will provide notice of credits to UNFI within 48 hours of Product receipt. 17. Termination Provisions. (a) Either party may terminate this Agreement at the end of any initial or renewal term upon [CONFIDENTIAL](55) or more prior written notice. (b) WO may terminate the Agreement on immediate written notice (unless otherwise provided below) for cause if: (i) UNFI fails to make any payment, credit, rebate or other remittance of monetary consideration provided for herein on the date due, other than as to payments regarding which UNFI has given WO notice of good faith dispute, and fails to remedy any delinquent payment, credit, rebate or other remittance within fifteen business days after notice thereof from WO (which failure to cure shall be an event of default), or if such breach occurs more than twice in any calendar year (in which case, for such second breach WO may elect not to provide a cure period); (ii) [CONFIDENTIAL](56) (iii) UNFI breaches any other non-monetary obligations under the Agreement not specifically referenced above in this Section, and fails to cure such breach after 30 days' prior written notice of breach; (iv) The results of any audit conducted by WO or UNFI of any data points set forth the Agreement prove deliberate fraud or gross misconduct of UNFI of a nature that is material in either dollar amounts or percentages to total amounts or to the operational units affected, or that could reasonably result in a material impact to the reputation or operational performance of WO. WO may also terminate if it is determined by any regulatory agency, or UNFI publicly announces that any certification given by officers of UNFI relating to internal controls or fraud were materially incorrect. UNFI agrees that notwithstanding the amount of any fraud discovered, UNFI will take prompt steps to rectify any damage caused by the fraud and will implement controls designed to deter such fraud in the future; (v) Regulatory violations by UNFI where the violations or the corrective action required materially and adversely affect the continued ability of UNFI to perform all or any material portion of the Agreement; (vi) UNFI [CONFIDENTIAL](57), and UNFI has failed to remedy [CONFIDENTIAL](58), of breach by WO; provided, however, that UNFI shall not be - ---------- (55) Ibid. (56) Ibid. (57) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (58) Ibid. -44- entitled to a cure period upon the second breach of this provision in any running 12-month period and WO may, upon notice to UNFI of such second breach, immediately terminate this Agreement on a nationwide or regional basis; (vii) The quality of service provided by UNFI is below the level as required herein, and UNFI has failed to remedy service problems within 30 days after written notice of breach by WO. For purposes hereof, quality of service issues shall include, but not be limited to, the following: (A) UNFI is unable, after 10 days' written notice and opportunity to cure, to meet regional or national, as applicable, delivery windows to the Stores as set forth in this Agreement, including on Exhibit I attached hereto, as such may be amended by mutual agreement of the parties from time to time, including but not limited to hours and days of delivery, delivery routes, condition of Products, or execution of invoices at the Store, provided it has been given reasonable advance notice of any unusual requirements; or (B) Products delivered by UNFI fail to meet the quality standards and specifications set forth herein, including Code Date policies, temperature control limits or arrive in damaged, infested, or adulterated conditions, or the BNRs as shown by an audit by either party exceed [CONFIDENTIAL](59). Notwithstanding the foregoing, WO shall not have the right to terminate the Agreement for cause if noncompliance by UNFI with any of the foregoing results from intentional sabotage by WO employees, Force Majeure events (as defined below), or the negligent or intentional acts or omissions of WO. Nothing herein shall prohibit WO from ceasing to purchase Products under Section 2 above without notifying UNFI of a breach hereunder. (c) UNFI may terminate the Agreement for cause on immediate written notice if: (i) WO fails to make any payment, credit, rebate or other remittance of monetary consideration provided for herein on the date due, other than payments regarding which WO has given UNFI notice of a good faith dispute, and fails to remedy any delinquent payment within five business days after notice thereof from UNFI (which failure to cure shall be an event of default), or if such breach occurs more than twice in any given calendar year; (ii) Regulatory violations by WO where the violations or the corrective action required materially and adversely affect the continued ability of WO to perform under the Agreement beyond 30 days; - ---------- (59) Ibid. -45- (iii) WO fails to purchase [CONFIDENTIAL](60) during the Term hereof, commencing as of the Effective Date) during the Term of this Agreement, other than where such failure is caused by Force Majeure or UNFI or manufacturer OOS; and (iv) WO materially breaches any other non-monetary obligations under the Agreement not specifically referenced above in this Section, and fails to cure such breach after 30 days' prior written notice of breach; (v) The results of any audit conducted by UNFI of any data points set forth the Agreement prove deliberate fraud or gross misconduct of WO of a nature that is material in either dollar amounts or percentages to total amounts or to the operational units affected, or that could reasonably result in a material impact to the reputation or operational performance of WO. UNFI agrees that notwithstanding the amount of any fraud discovered, UNFI will take prompt steps to rectify any damage caused by the fraud and will implement controls designed to deter such fraud in the future. UNFI may also terminate if it is determined by any regulatory agency, or WO publicly announces that any certification given by officers of WO relating to internal controls or fraud were materially incorrect. (d) Not earlier than [CONFIDENTIAL](61), UNFI may give WO notice that UNFI [CONFIDENTIAL](62) from the business relationship evidenced by this Agreement. The parties shall then negotiate in good faith, [CONFIDENTIAL](63) following WO's receipt of such notice, such modifications of this Agreement as may be necessary to allow UNFI [CONFIDENTIAL](64). If after, [CONFIDENTIAL](65) the parties are unable to reach agreement on modifications sufficient to allow UNFI [CONFIDENTIAL](66), then UNFI may give WO notice of termination of this Agreement [CONFIDENTIAL](67) after WO's receipt of the termination notice. Such termination right shall not be deemed a default hereunder. [CONFIDENTIAL](68). (e) Notwithstanding anything to the contrary in this Agreement, the following will apply in a Force Majeure event: (i) If the Force Majeure event affects, for a period of at least 10 consecutive days, in any material manner the operations in any DC or any region served primarily by one DC, as the case may be, of the party who is not claiming the benefit of the Force Majeure provision (the "Non-Affected Party"), then the Non-Affected Party may on written notice to the Affected Party - ---------- (60) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (61) Ibid. (62) Ibid. (63) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. (64) Ibid. (65) Ibid. (66) Ibid. (67) Ibid. (68) Ibid. -46- suspend its obligations hereunder (including without limitation Section 2(a)), other than the payment of sums due unless the Force Majeure event relates to the operation of the banking system, with respect to such DC or region until such time that the Affected Party is able to resume its obligations in full with respect to such DC or region. The parties agree that [CONFIDENTIAL](69) of Buyer. (ii) In the event that Force Majeure continues for more than 60 consecutive days, and the Affected Party has not provided an acceptable alternative remedy to fully mitigate the disruption, the Non-Affected Party may terminate the Agreement or Definitive Agreement as to the DC or region affected by the Force Majeure event, on 30 days written notice to the Affected Party provided that the Force Majeure event exists on the date of the notice of termination. 18. Representations and Warranties of UNFI. UNFI represents and warrants to WO as follows, and such representations and warranties shall survive the Commencement Date: (a) Corporate Organization and Authority. UNFI (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is authorized to transact business in each State in which such authority is required by law; and (ii) has the corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted. (b) Authorization. UNFI has the corporate power and authority to execute, deliver and perform its obligations under this Agreement and has taken all necessary corporate action to authorize its execution, delivery and performance of this Agreement. This Agreement has been duly executed and delivered on behalf of UNFI and constitutes the legal, valid and binding obligation of UNFI, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether the issue of enforceability is considered in a proceeding in equity or at law). (c) No Consents; Conflicts. No consent, authorization by, approval of or other action by, and no notice to, or filing or registration with, any governmental authority, agency, regulatory body, lender, lessor, franchisee or other person is required for the execution, delivery or performance of this Agreement by UNFI, other than those that have been obtained and are in full force and effect. The execution, delivery and performance of this Agreement will not result (with or without due notice or lapse of time or both) in any violation or breach of any provision of the charter or by-laws of UNFI, any judgment, decree or order to which UNFI is a party or by which it is bound, any indenture, mortgage or other agreement or instrument to which UNFI is a party or by which it is bound or any statute, rule or regulation applicable to UNFI. (d) Sufficient Personnel to Perform Obligations. UNFI represents that as of the execution of this Agreement, UNFI has sufficient personnel with adequate training and expertise to perform its obligations as contemplated hereunder in the time frames contemplated herein. - ---------- (69) Ibid. -47- (e) National Organic Standards. UNFI represents that it has adequate processes and systems in place, and has adequately educated its personnel, to comply with all federal, state and local regulations relating to handling and labeling of organic products, including but not limited to the National Organic Standards as promulgated by the U.S. Department of Agriculture and as such applies to UNFI as a handler or processor of organic foods. UNFI acknowledges that WO has placed substantial reliance on UNFI to handle various foods for human consumption so as to not invalidate any "organic" designation of such foods. (f) Computer Systems. As of the date of this Agreement, UNFI has proper security safeguards in place to ensure the confidentiality of all of WO's data as contained in UNFI's computer systems. All such systems will perform without material defect or error in compliance with the performance standards set forth in this Agreement. UNFI has a disaster recovery program in place to ensure that, in the event of a catastrophic destruction of any portion of UNFI's computer systems, wherever located, UNFI will be able to recover all necessary data to continue to perform its obligations hereunder in substantially the time frames contemplated herein. (g) Facilities' Condition and Capacity. All of the DCs participating in this Agreement will be maintained and operated in accordance with UNFI warehousing and delivery standards. Such facilities have the operational systems required to support the obligations of UNFI as set forth in this Agreement, and all such facilities have adequate capacity to order, store and deliver Products in accordance with the terms of this Agreement and in the amounts contemplated by WO. All the DCs participating in this Agreement shall have sufficient security measures in place prior to receipt of Products for WO to ensure that such Products are not tampered with or adulterated in any manner, and that all such Products shall be maintained at temperatures and other storage conditions necessary to preserve the freshness and integrity of the Products. (h) Ownership of UNFI. No entity constituting a competitor to WO, which for purposes of this paragraph includes all conventional and natural food grocery store chains, owns more than a 5% equity interest in UNFI. No such entity has any rights to purchase, through warrants, options, rights of first refusal, preemptive rights or any other legal right or obligation, any equity interest in UNFI which, together with any existing interest, would aggregate more than 5% if fully exercised (other than purchases made on the open market). (i) Litigation. There is no pending nor, to UNFI's knowledge, threatened litigation, governmental action, action for injunctive or other equitable relief or other threatened or outstanding claims of any nature which could reasonably (i) interfere with UNFI's performance of its obligations hereunder, or (ii) have a material or detrimental impact on UNFI's assets or operations as such exist as of the Effective Date. (j) Information Provided to Auditors. All information that shall be provided by UNFI to auditors retained by WO shall be provided in the format in which such information is maintained in the normal course of UNFI's business, and to UNFI's knowledge, all such information shall be true and correct in all material respects, except as otherwise disclosed to WO and the auditors at the time of disclosure. -48- 19. Representations and Warranties of WO. WO hereby represents and warrants to UNFI as follows, and such representations and warranties shall survive the Commencement Date: (a) Corporate Organization and Authority. WO (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; and (ii) has the corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted. (b) Authorization. WO has the corporate power and authority to execute, deliver and perform its obligations under this Agreement and has taken all necessary corporate action to authorize its execution, delivery and performance of this Agreement. This Agreement has been duly executed and delivered on behalf of WO and constitutes the legal, valid and binding obligation of WO, enforceable in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether the issue of enforceability is considered in a proceeding in equity or at law). (c) No Consents; Conflicts. No consent, authorization by, approval of or other action by, and no notice to, or filing or registration with, any governmental authority, agency, regulatory body, lender, lessor, franchisee or other person is required for the execution, delivery or performance of this Agreement by WO, other than those that have been obtained and are in full force and effect. The execution, delivery and performance of this Agreement will not result in (with or without due notice or lapse of time or both) any violation or breach of any provision of the charter or by-laws of WO, any judgment, decree or order to which WO is a party or by which it is bound, any indenture, mortgage or other agreement. (d) Litigation. There is no pending nor, to WO's knowledge, threatened litigation, governmental action, action for injunctive or other equitable relief or other threatened or outstanding claims of any nature which could reasonably (i) interfere with WO's performance of its obligations hereunder, or (ii) have a material detrimental impact on WO's assets or operations as such exist as of the Effective Date. (e) Computer Systems. As of the date of this Agreement, WO has proper security safeguards in place to ensure the confidentiality of all of UNFI's data as contained in WO's computer systems. All such systems will perform without material defect or error in compliance with the performance standards set forth in this Agreement. WO has a disaster recovery program in place to ensure that, in the event of a catastrophic destruction of any portion of WO's computer systems, wherever located, WO will be able to recover all necessary data to continue to perform its obligations hereunder in substantially the time frames contemplated herein. (f) Sufficient Personnel to Perform Obligations. As of the execution of this Agreement, WO has sufficient personnel to perform its obligations as contemplated hereunder in timeframes contemplated herein. -49- (g) Ownership of WO. No entity constituting a competitor to UNFI, which for purposes of this paragraph includes other distributors with gross revenues of more than $100 million, owns more than a 5% equity interest in WO. No such entity has any rights to purchase, through warrants, options, rights of first refusal, preemptive rights or any other legal right or obligation, any equity interest in WO which, together with any existing interest, would aggregate more than 5% if fully exercised (other than purchases made on the open market). 20. Binding Effect. This Agreement is a binding obligation between the parties hereto for the sale by UNFI and purchase by WO for the Products referenced at the prices and other terms set out in or referenced herein, and may be enforced by either party in accordance with its terms. This Agreement supersedes all previous agreements between the parties. 21. Miscellaneous. (a) Force Majeure. "Force Majeure" events shall be events beyond the reasonable control of a party (and not through the fault or negligence of such party) that make timely performance of an obligation not possible. Without limiting the generality of the foregoing, vehicle breakdowns due to a party's failure to properly maintain a vehicle, or inclement weather not of unusual severity or in which vehicles similar to those of the party claiming Force Majeure are traveling, do not constitute Force Majeure events. A Force Majeure event is not reasonably foreseeable with the exercise of reasonable care, nor avoidable through the payment of nonmaterial additional sums. In the event of a Force Majeure, the party so affected shall give prompt written notice to the other party of the cause and shall take whatever reasonable steps are necessary to relieve the effect of such cause as rapidly as possible. No finance charge will be assessed on either party for late payments due to Force Majeure events. (b) Governing Law, etc. Each of the parties hereto irrevocably waives all rights to a trial by jury with respect to any dispute relating to this Agreement, the subject matter hereof or the entering into or termination of this Agreement (a "Dispute"). This Agreement and all actions related hereto shall be governed by, and any dispute shall be resolved in accordance with, the laws of the State of Colorado, excluding its internal choice of law principles. In the event of any Dispute, such Dispute, if not resolved promptly in the ordinary course between representatives of the parties, shall be submitted for settlement negotiation between the Chief Executive Officer of UNFI and Chief Executive Officer of WO, and if such procedure does not resolve such Dispute within 30 days after a request for such settlement negotiation to the other party, then and only then shall all such Disputes be resolved exclusively by the process of litigation in accordance with this Section. The parties agree that all disputes shall be brought either in Federal District Court for the Southern District of New York, and if Federal District Court is not available to the parties because of a lack of diversity jurisdiction, then in the Supreme Court for the State of New York, County of New York. (c) Recovery of Fees and Costs. In the event of a dispute, the prevailing party shall be entitled to recovery of reasonable attorneys' fees and costs (including costs of appeal). (d) Confidentiality. The parties to this Agreement shall maintain as confidential the specific terms hereof ("Confidential Information"), and shall not disclose such terms to any third -50- party (other than to its own outside legal, accounting, insurance or financial advisors as necessary) without the other party's prior written consent. "Confidential Information" about a party learned under this Agreement shall not be used during or after the term of this Agreement except in connection with the party's obligations hereunder, and without limiting the foregoing, such information as to WO may not be used by UNFI in connection with the marketing, distribution or sale of UNFI's products other than to WO. The term "Confidential Information" shall include computer software, source code, object code, hardware configurations and all other information relating to a party, its business and prospects, learned by the other party or disclosed by such party from time to time to the other party in any manner, whether orally, visually or in tangible form (including, without limitation, documents, devices and computer readable media) and all copies, improvements, derivatives and designs thereof, created by either party whether owned by or licensed to such party. The term "Confidential Information" shall also be deemed to include all notes, analyses, compilations, studies, interpretations or other documents prepared by a party that contain, reflect or are based upon the information furnished to such party by the other party pursuant hereto. Confidential Information shall not include any information that: (i) was in a party's possession prior to disclosure by the other party hereunder, provided such information is not known by such party to be subject to another confidentiality agreement with or secrecy obligation to the other party; (ii) was generally known in the grocery industry at the time of disclosure to a party hereunder, or becomes so generally known after such disclosure, through no act of such party; (iii) has come into the possession of a party from a third party who is not known by such party to be under any obligation to the other party to maintain the confidentiality of such information; or (iv) was independently developed by a party without the use of any Confidential Information of the other party, to the extent that such independent development is reasonably established by such first party to the other party. Notwithstanding the foregoing, nothing herein shall prevent the filing of a copy of this Agreement as an exhibit to any filing required by an regulatory agency having jurisdiction over either party, provided that a party required to file a copy hereof shall notify the other party of the filing and request and use its best efforts to obtain confidential treatment of all financial terms of this Agreement prior to the filing thereof. In addition, either party may disclose the terms of this Agreement pursuant to a valid subpoena, provided such party gives the other party reasonable prior notice of the service of any subpoena to permit the other party to seek a protective order, and seeks confidential treatment of all financial terms hereof. The parties acknowledge and agree that the non-breaching party's remedy at law is inadequate in the event of any breach or threatened breach by the other party of its agreements set forth in this Section. In the event of such breach or threatened breach, in addition to any -51- other remedy which may be available to the non-breaching party, the non-breaching party shall be entitled to seek, without posting a bond, preliminary or permanent injunctive and/or other equitable relief restraining the breaching party, or any of its agents or employees, from breaching or acting in any manner inconsistent with the conduct or performance required by this Section. (e) Amendment; Assignment. This Agreement may not be amended or modified except by an instrument in writing signed by an authorized officer of each party. It is agreed that neither party shall transfer or assign this Agreement or any part hereof or any right arising hereunder, by operation of law or otherwise, without the prior written consent of the other, which consent will not be unreasonably withheld. A party may reasonably withhold its consent if, in such party's good faith judgment, the proposed assignee: (i) does not have sufficient financial resources or assets to perform its obligations under the Agreement; (ii) does not have sufficient experience or expertise in the distribution and supply of food products in the case of an assignment by UNFI or its direct or indirect parent, or grocery retail business in the case of an assignment by WO, unless the existing operations management personnel prior to the assignment remain in control of the daily operations of the assignor after such assignment; (iii) is engaged in the same business as the non-assigning party; (iv) does not deliver its written commitment to carry out the Agreement at the same level of business being conducted by the assigning party immediately prior to the proposed assignment; or (v) is a competitor of the non-assigning party. This Agreement shall be assigned to and binding upon any purchaser of all or substantially all of the assets of either party hereto. In the event a party requests such consent to such a transfer, such party shall meet with the other party to provide any information reasonably requested by the other party regarding the proposed transferee. Any purported assignment without consent shall be void and of no force or effect or, at the other party's option, shall terminate this Agreement. Subject to the foregoing, this Agreement shall be binding on the respective parties and their permitted successors and assigns. CONFIDENTIAL](70). (f) Entire Agreement; Survival. This Agreement (and any documents referred to herein or therein) represents the entire agreement and understanding of the parties with respect to the matters set forth herein, and there are no representations, warranties or conditions or agreements (other than implementing invoices, purchase orders and the like necessary to implement this Agreement) not contained herein (or in any documents not referred to herein) that constitute any part hereof or that are being relied upon by any party hereunder. Notwithstanding any termination of this Agreement, all claims arising prior to such termination for any breach of or for any amount due under this Agreement (excluding any such claims that have been satisfied, waived or released prior to such termination) under this Agreement, shall survive such termination, and in addition, the following sections shall survive any such termination: 10, 12 (for not more than 120 days following termination), 14(b), 15, 16, 21(b) - (d) , (f), (g), (i), (j). - ---------- (70) Confidential treatment has been requested for the redacted portion. The confidential, redacted portions have been filed separately with the SEC. -52- (g) Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way. (h) Publicity. Both parties shall agree on a joint initial press release on the entering into of this Agreement; provided, however, that either party may issue releases as deemed necessary by their respective securities counsel under applicable laws governing the release of information. (i) Notices. Any notices to be given by either party to the other shall be in writing by personal delivery or by mail, registered or certified, postage prepaid with return receipt requested, or by facsimile (only with receipt confirmed). Notices shall be addressed to the parties at the addresses set forth below or to such other address as shall have been so notified to the other party in accordance with this Section. Notices to UNFI shall be addressed to: Steve Townsend, UNFI, 260 Lake Road, Dayville, CT 06241, FAX: 860-779-0746, with a copy, which shall not constitute notice, to E. Colby Cameron, Esq., Cameron & Mittleman LLP, 56 Exchange Terrace, Providence, RI 02903, FAX: 401-331-5787. Notices to WO shall be addressed to: Chief Executive Officer, Wild Oats Markets, Inc., 3375 Mitchell Lane, Boulder, CO 80301-2244, Fax: (303) 402-9920, with a copy to Freya Brier, Esq., General Counsel, Wild Oats Markets, Inc., 3375 Mitchell Lane, Boulder, CO 80301-2244, FAX: (303) 440-7316. (j) No Third Party Beneficiaries . Nothing in this Agreement, whether expressed or implied, is intended to confer on any person other than the parties to this Agreement or their respective successors or permitted assigns, any rights, remedies, obligations or liabilities. (k) Alliance. WO and UNFI agree that an objective of the parties is to establish during the Term of this Agreement, a mutually supportive alliance with respect to the Products and the unified supply chain management concept relating to the purchase and sale of the Products which is embodied in the Agreement. (l) Authority. WO and UNFI each represent and warrant to the other that the individual executing this Agreement has full authority to execute this Agreement, and when executed this Agreement is a binding obligation of the party. (m) Expenses. Except as otherwise provided herein, all costs and expenses (including legal and accounting fees) incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the party incurring such expense. (n) Independent Contractors. In all matters relating to this Agreement both parties shall be acting solely as independent contractors and shall be solely responsible for the acts of their respective employees, contractors and agents. Employees, agents or contractors of one party shall not be considered employees, agents or contractors of the other party. (o) Titles and Headings; Counterparts; Facsimile Signature. The titles and headings to Sections herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. This Agreement may be executed in one or more counterparts, all of which will be considered one and the same -53- agreement, and will become a binding agreement when one or more counterparts have been signed by each party and delivered to the other party. Facsimile signatures shall be deemed original signatures for purposes of execution of this document. (p) Negotiation of Agreement, Each party and its counsel have cooperated in the drafting and preparation of this Agreement and the documents referred to herein, and any drafts relating thereto shall be deemed the work product of the parties and may not be construed against any party by reason of its preparation. Any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against the party that drafted it is of no application and is hereby expressly waived. Executed as of the date first set forth above. WILD OATS MARKETS, INC. UNITED NATURAL FOODS, INC. By: /s/ Bruce Bowman By: /s/ Steve Townsend ---------------- ------------------ -54- EX-10.2 4 ex10-2.txt Exhibit 10.2 December 18, 2003 United Natural Foods, Inc. 260 Lake Road Dayville, CT 06241 Stow Mills, Inc. 70 Stow Drive Chesterfield, NH 03443 United Natural Foods Pennsylvania, Inc. 70 Stow Drive Chesterfield, NH 03443 Albert's Organics, Inc. 3268 East Vernon Avenue Vernon, CA 90058 Attention: Rick Puckett, Chief Financial Officer RE: Second Amendment to Term Loan Agreement Dear Rick: Reference is made to that certain Term Loan Agreement dated as of April 28, 2003 as amended by the Amendment to Term Loan Agreement dated August 26, 2003 (the "Loan Agreement") among United Natural Foods, Inc. ("UNFI"), Stow Mills, Inc. ("SMI"), United Natural Foods Pennsylvania, Inc. ("UNFPA") and Albert's Organics, Inc. ("Albert's" and together with UNFI, SMI and UNFPA, the "Borrowers") and Fleet Capital Corporation (the "Lender"). Capitalized terms not defined herein shall have the meanings ascribed thereto in the Loan Agreement. This Second Amendment to Term Loan Agreement shall be referred to as the "Second Amendment". The Borrowers have requested that the Lender agree to increase the principal amount of the Term Loan made pursuant to the Loan Agreement to $38,833,331.33 and the Lender has agreed to such increase, subject to the terms and conditions of this Second Amendment to Term Loan Agreement ("Second Amendment"). 1. Amendments to the Loan Agreement. Subject to the terms and conditions of this Second Amendment, Borrowers and Lender agree that the Loan Agreement shall be amended as follows: a. The First Recital of the Loan Agreement is deleted and replaced with the following: -55- "WHEREAS, the Borrowers have requested that the Lender extend credit to the Borrowers in the principal amount of THIRTY-EIGHT MILLION EIGHT HUNDRED THIRTY THREE THOUSAND THREE HUNDRED THIRTY-ONE DOLLARS AND THIRTY THREE CENTS ($38,833,331.33); and" b. Section 1.1.1 of the Loan Agreement is hereby deleted and replaced with the following: "1.1.1 Term Loan. The Lender agrees to make a Term Loan to Borrowers on the Second Amendment Closing Date in the principal amount of $38,833,331.33, which shall be repayable in accordance with the term of the Term Note and shall be secured by all the Collateral." c. Appendix A to the Loan Agreement is amended to add the following defined terms following the definition of "Restricted Investment": "Second Amendment - the Second Amendment to Term Loan Agreement dated as of December 12, 2003." "Second Amendment Closing Date - the date on which all the conditions precedent in Section 4 of the First Amendment are satisfied and the Term Loan made under the Agreement." d. Appendix A to the Loan Agreement is amended to delete the defined term "Term Note" and the definition thereof and to substitute the following in place thereof: "Term Note - the Amended and Restated Term Promissory Note executed by Borrower on the Second Amendment Closing Date in favor of Lender to evidence the Term Loan, which shall be in the form of Exhibit A to the Second Amendment." e. Appendix A to the Loan Agreement is amended to delete the defined term "Total Credit Facility" and the definition thereof and to substitute the following in place thereof: "Total Credit Facility - $38,833,331.33" 2. Amendment Commitment Fee. The Borrowers agree to pay to Lender an amendment commitment fee of $50,000, which fee shall be nonrefundable and due and payable on the Second Amendment Closing Date. 3. Representations and Warranties. The Borrowers hereby represent and warrant as follows: a. Power, Authority, Etc. The Borrowers have the power and authority for the making and performing of this Second Amendment to Loan Agreement. This Second Amendment to Loan Agreement has been duly executed and delivered by or on behalf of the Borrowers pursuant to authority legally adequate therefor, and this Second Amendment to Loan Agreement is in full force and effect and is a legal, valid and binding obligation of the Borrowers -56- 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. b. Incorporation of Representations and Warranties. The representations and warranties of the Borrowers contained in the Loan Agreement, except for any changes resulting only from the passage of time and which do not otherwise constitute a Default or Event of Default hereunder, 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 Second Amendment to Loan Agreement as though fully set forth herein. 4. Conditions Precedent. Notwithstanding any of the provisions of the Loan Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Lender under any other sections of the Loan Agreement or this Second Amendment, Lender shall not be required to make the Term Loan under this Second Amendment unless and until each of the following conditions has been and continues to be satisfied (the date when such conditions are satisfied shall be the "Second Amendment Closing Date"). a. Documentation. Lender shall have received, in form and substance satisfactory to Lender, a duly executed copy of this Second Amendment, the Amended and Restated Term Promissory Note in substantially the form of Exhibit A hereto, the amendments to Mortgages, the amendments of collateral assignments and such additional documents, instructions and certificates as Lender shall require in connection therewith, all in form and substance satisfactory to Lender and its counsel. b. No Default. No Default or Event of Default shall exist. c. Corporate Documents. All requisite corporate action and proceedings of the Borrowers in connection with this Second Amendment and all documentation and certificates required by Lender and/or its counsel in connection therewith shall be satisfactory in form and substance to Lender and its counsel; d. Opinions of Counsel. The receipt by Lender of an opinion, dated the Second Amendment Closing Date, of (i) Cameron & Mittleman LLP, counsel to Borrowers and Guarantors covering such matters as the Lender may reasonably request, and (ii) local counsel of Borrowers in the jurisdictions where the Real Property is located, covering such matters as the Lender may reasonably request; e. Payment of Fees. The payment by Borrowers of such fees as Borrowers have agreed to pay or deliver to Lender including, without limitation the amendment commitment fee, the reasonable fees and expenses of Brown Rudnick Berlack Israels LLP and of other counsel to Lender and all fees and expenses of title insurance companies; f. Title Insurance. Borrowers shall have obtained and delivered to Lender endorsements to the title insurance policies previously delivered to Lender, insuring the Mortgages as increased by the Term Loan provided for herein and as may be requested by Lender for any changes or modifications in the Real Property, all in form and substance satisfactory to Lender; -57- g. Participant Consent. Lender shall have received the written consent of its participant in the increase to the Term Loan pursuant to this Second Amendment and to the participant's participation therein in form and substance satisfactory to Lender; h. Eighth Amendment. The Required Lenders (as defined in the Working Capital Facility) shall have consented to the increase in the Term Loan to $38,833,331.33; and i. Other Documents. Such other agreements, instruments, and documents as Lender may reasonably require in connection with this Second Amendment. 5. Miscellaneous. a. Counterparts. This Second Amendment to Loan Agreement 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 Second Amendment to Loan Agreement by signing any such counterpart. b. Force and Effect. The Loan Agreement and each other Loan Document, as amended by this Second Amendment, are hereby ratified, confirmed and approved, and shall continue in full force or effect. c. Loan Document. This Second Amendment to Loan Agreement and all other documents executed in connection herewith are "Loan Documents" as such term is defined in the Loan Agreement. This Second Amendment shall be governed by the laws of the State of Connecticut. This Second Amendment to Loan Agreement 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. [remainder of page intentionally left blank] -58- Signature Page to Second Amendment to Loan Agreement IN WITNESS WHEREOF, the parties have executed this Second Amendment to Loan Agreement as of the date first above written. BORROWERS: UNITED NATURAL FOODS, INC. By: /s/ Rick D. Puckett ------------------------- Name: Rick D. Puckett Title: Vice President and Treasurer STOW MILLS, INC. By: /s/ Rick D. Puckett ------------------------- Name: Rick D. Puckett Title: Vice President and Treasurer UNITED NATURAL FOODS PENNSYLVANIA, INC. By: /s/ Rick D. Puckett ------------------------- Name: Rick D. Puckett Title: Vice President and Treasurer ALBERT'S ORGANICS, INC. By: /s/ Rick D. Puckett ------------------------- Name: Rick D. Puckett Title: Vice President and Treasurer LENDER: FLEET CAPITAL CORPORATION By: /s/ Kim B. Bushey ----------------------- Name: Kim B. Bushey Title: Senior Vice President -59- RATIFICATION OF GUARANTY AGREEMENT The undersigned Guarantors acknowledge receipt of the foregoing Second Amendment to Term Loan Agreement ("Second Amendment") and hereby (a) accept and agree to the terms and provisions of the Second Amendment including, without limitation, to the increase in the Term Loan to $38,833,331.33 and (b) ratify, confirm, and approve all of the terms and conditions of each of the Guaranty Agreements. IN WITNESS WHEREOF, the parties have executed the Ratification of Guaranty Agreement on this 18th day of December, 2003. NATURAL RETAIL GROUP, INC. By: /s/ Rick D. Puckett ------------------------- Name: Rick D. Puckett Title: Vice President and Treasurer UNITED NATURAL TRADING CO. By: /s/ Rick D. Puckett ------------------------- Name: Rick D. Puckett Title: Vice President and Treasurer MOUNTAIN PEOPLE'S WAREHOUSE INCORPORATED By: /s/ Rick D. Puckett ------------------------- Name: Rick D. Puckett Title: Vice President and Treasurer NUTRASOURCE, INC. By: /s/ Rick D. Puckett ------------------------- Name: Rick D. Puckett Title: Vice President and Treasurer RAINBOW NATURAL FOODS, INC. By: /s/ Rick D. Puckett ------------------------- Name: Rick D. Puckett Title: Vice President and Treasurer UNITED NORTHEAST, LLC By: /s/ Rick D. Puckett ------------------------- Name: Rick D. Puckett Title: Vice President and Treasurer -60- EX-31.1 5 ex31-1.txt Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven H. Townsend, in my capacity as the Chief Executive Officer of United Natural Foods, Inc. (the "Company"), hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of 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; and 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) for the Company and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and -61- (b) anyfraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. /s/ Steven H. Townsend ------------------------------ Steven H. Townsend Chief Executive Officer March 16, 2004 Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -62- EX-31.2 6 ex31-2.txt Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Rick D. Puckett, in my capacity as the Chief Financial Officer of United Natural Foods, Inc. (the "Company"), hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of 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; and 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) for the Company and we have: 1. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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; 2. evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and 3. disclosed in this quarterly report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and -63- (b) anyfraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. /s/ Rick D. Puckett ------------------------------------ Rick D. Puckett Chief Financial Officer March 16, 2004 Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -64- EX-32.1 7 ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, in his capacity as the Chief Executive Officer of United Natural Foods, Inc., a Delaware corporation (the "Company"), hereby certifies that the Quarterly Report of the Company on Form 10-Q for the period ended January 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company. /s/ Steven H. Townsend ------------------------------ Steven H. Townsend Chief Executive Officer March 16, 2004 Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -65- EX-32.2 8 ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, in his capacity as the Chief Financial Officer of United Natural Foods, Inc., a Delaware corporation (the "Company"), hereby certifies that the Quarterly Report of the Company on Form 10-Q for the period ended January 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company. /s/ Rick D. Puckett ------------------------------------ Rick D. Puckett Chief Financial Officer March 16, 2004 Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -66- -----END PRIVACY-ENHANCED MESSAGE-----