10-Q 1 eps1764.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, 2005 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 11, 2005, there were 40,863,678 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, 2005 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 11 and Results of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk 25 Item 4. Controls and Procedures 25 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 26 Item 6. Exhibits and Reports on Form 8-K 26 Signatures 28 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements UNITED NATURAL FOODS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except per share amounts)
January 31, July 31, 2005 2004 ----------- -------- ASSETS Current assets: Cash $ 4,198 $ 13,633 Accounts receivable, net 139,990 106,178 Notes receivable, trade 766 772 Inventories 214,738 196,171 Prepaid expenses 9,524 7,007 Deferred income taxes 8,061 7,610 --------- --------- Total current assets 377,277 331,371 Property & equipment, net 117,747 114,140 Other assets: Goodwill 67,240 57,242 Notes receivable, trade, net 1,960 1,601 Intangible assets, net 373 154 Other, net 5,665 4,259 --------- --------- Total assets $ 570,262 $ 508,767 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 91,500 $ 80,875 Notes payable - line of credit 129,826 107,004 Accrued expenses and other current liabilities 30,791 29,501 Current portion of long-term debt 6,078 4,766 --------- --------- Total current liabilities 258,195 222,146 Long-term debt, excluding current portion 38,317 43,978 Deferred income taxes 8,127 7,730 Other long-term liabilities 490 137 --------- --------- Total liabilities 305,129 273,991 --------- --------- 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; 40,792 and 40,118 issued and outstanding at January 31, 2005 and July 31, 2004, respectively 408 401 Additional paid-in capital 112,365 101,118 Unallocated shares of ESOP (1,686) (1,768) Accumulated other comprehensive income 153 240 Retained earnings 153,893 134,785 --------- --------- Total stockholders' equity 265,133 234,776 --------- --------- Total liabilities and stockholders' equity $ 570,262 $ 508,767 ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 UNITED NATURAL FOODS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
Quarters ended Six months ended January 31, January 31, 2005 2004 2005 2004 Net sales $ 504,710 $ 393,248 $ 982,252 $ 774,631 Cost of sales (Note 1) 409,385 314,463 794,484 619,673 --------- --------- --------- --------- Gross profit 95,325 78,785 187,768 154,958 Operating expenses 78,577 65,386 153,173 128,318 Restructuring charge -- -- 170 -- Amortization of intangibles 172 234 314 466 --------- --------- --------- --------- Total operating expenses 78,749 65,620 153,657 128,784 --------- --------- --------- --------- Operating income 16,576 13,165 34,111 26,174 --------- --------- --------- --------- Other expense (income): Interest expense 1,577 2,133 3,010 4,454 Change in fair value of financial instruments -- (400) -- (704) Other, net (122) (112) (223) (230) --------- --------- --------- --------- Total other expense 1,455 1,621 2,787 3,520 --------- --------- --------- --------- Income before income taxes 15,121 11,544 31,324 22,654 Income taxes 5,897 4,502 12,216 8,835 --------- --------- --------- --------- Net income $ 9,224 $ 7,042 $ 19,108 $ 13,819 ========= ========= ========= ========= Per share data (basic): Net income $ 0.23 $ 0.18 $ 0.47 $ 0.35 ========= ========= ========= ========= Weighted average shares of common stock 40,400 39,196 40,261 39,124 ========= ========= ========= ========= Per share data (diluted): Net income $ 0.22 $ 0.17 $ 0.46 $ 0.34 ========= ========= ========= ========= Weighted average shares of common stock 41,495 40,750 41,369 40,563 ========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 UNITED NATURAL FOODS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six months ended January 31, 2005 2004 -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 19,108 $ 13,819 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 6,438 5,531 Change in fair value of financial instruments -- (704) Loss on disposals of property and equipment (12) (22) Provision for doubtful accounts 998 1,320 Deferred income tax benefit -- 450 Changes in assets and liabilities, net of acquired companies: Accounts receivable (31,408) (10,861) Inventory (14,359) (17,185) Prepaid expenses and other assets (4,010) (1,743) Notes receivable, trade (353) (1,722) Accounts payable 5,756 11,943 Accrued expenses and other liabilities (181) (1,838) Financial instruments -- (5,400) Tax effect of stock option exercises 5,193 921 -------------------- Net cash used in operating activities (12,830) (5,941) -------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (9,039) (9,335) Purchases of acquired businesses, net of cash acquired (6,168) (6) Proceeds from sale of property and equipment 114 141 -------------------- Net cash used in investing activities (15,093) (9,200) -------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under note payable 17,101 10,328 Proceeds from exercise of stock options 6,061 2,759 Repayments of long-term debt (4,349) (2,098) Principal payments on capital lease obligations (325) (537) Proceeds from issuance of long-term debt -- 9,904 -------------------- Net cash provided by financing activities 18,488 20,356 -------------------- NET (DECREASE) INCREASE IN CASH (9,435) 5,215 Cash at beginning of period 13,633 3,645 -------------------- Cash at end of period $ 4,198 $ 8,860 ==================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3,067 $ 4,354 ==================== Income taxes $ 6,062 $ 9,079 ====================
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 UNITED NATURAL FOODS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2005 (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, 2004. Net sales consist primarily of sales of natural and organic products to retailers adjusted for customer volume discounts, returns and allowances. Net sales also consist of amounts paid to the Company by customers for shipping and handling. The principal components of cost of sales include the amount paid to manufacturers and growers for product sold, plus the cost of transportation necessary to bring the product to the Company's distribution facilities. Cost of sales also includes amounts paid by the Company for shipping and handling, depreciation for manufacturing equipment at the Company's manufacturing segment, Hershey Imports Company, Inc and consideration received from suppliers in connection with the purchase or promotion of the suppliers' products. Operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, insurance, administrative, and amortization expense. Operating expenses also includes depreciation expense related to the wholesale and retail segments. Other expenses (income) include interest on outstanding indebtedness, interest income, and the change in fair value of financial instruments and miscellaneous income and expenses. 2. 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 Statement of Financial Accounting Standards ("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, ----------- ---------- 2005 2004 2005 2004 ------- ------- -------- -------- Net income - as reported $ 9,224 $ 7,042 $ 19,108 $ 13,819 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (5,287) (729) (6,178) (1,399) ------- ------- -------- -------- Net income - pro forma $ 3,937 $ 6,313 $ 12,930 $ 12,420 ------- ------- -------- -------- 6 Basic earnings per share As reported $ 0.23 $ 0.18 $ 0.47 $ 0.35 ------- ------- -------- -------- Pro forma $ 0.10 $ 0.16 $ 0.33 $ 0.32 ------- ------- -------- -------- Diluted earnings per share As reported $ 0.22 $ 0.17 $ 0.46 $ 0.34 ------- ------- -------- -------- Pro forma $ 0.10 $ 0.15 $ 0.32 $ 0.31 ------- ------- -------- --------
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, 2005 and 2004:
Quarters ended January 31, Six months ended January 31, -------------------------- ---------------------------- 2005 2004 2005 2004 ------- ------- -------- -------- Expected volatility 41.4% 49.6% 41.4% 49.7% Dividend yield 0.0% 0.0% 0.0% 0.0% Risk free interest rate 3.15% 3.70% 3.15% 3.70% Expected life 3.25 years 3.25 years 3.25 years 3.27 years
An average vesting period of four years was used for the assumption regarding stock options granted, except for options for 844,200 shares that were granted in the second quarter of fiscal 2005 that vested immediately. The after-tax effect of the accelerated vesting is included in stock-based employee compensation expense in the table above and amounted to $4.8 million, or $0.12 per pro-forma diluted share. Shares obtained upon the exercise of options issued under this grant become eligible to be sold in four equal annual installments, beginning on the first anniversary of the grant date. The Company took this as an opportunity to reduce costs in future periods as a result of SFAS 123R, which the Company is expected to adopt in the first quarter of fiscal 2006 (See Note 9). Generally, options granted to officers and other key employees become exercisable in one-quarter increments beginning on the first anniversary of the grant date. At January 31, 2005, the Company had two stock option plans: the 2002 Stock Incentive Plan and the 1996 Stock Option Plan (collectively, the "Plans"). The Plans provide for grants of stock options to employees, officers, directors and others. 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." Vesting requirements for awards under the Plans are at the discretion of the Company's Board of Directors and are typically four years for employees and two years for non-employee directors. The maximum term of all incentive stock options granted under the Plans, and non-statutory stock options granted under the 2002 Stock Incentive Plan, is ten years. The maximum term for non-statutory stock options granted under the 1996 Stock Option Plan is at the discretion of the Company's Board of Directors, and all grants to date have had a term of ten years. In the six months ended January 31, 2005, the Company granted options for the purchase of 855,200 shares under the Plans. At January 31, 2005, the Company also had the 2004 Equity Incentive Plan (the "2004 Plan"). The 2004 Plan provides for the issuance of equity-based compensation awards other than stock options, such as restricted shares and units, performance shares and units, bonus shares and stock appreciation rights. In the six months ended January 31, 2005, the Company did not make any grants under the 2004 Plan. 3. RESTRUCTURING CHARGE In the first quarter of fiscal 2005, the Company's management approved and implemented plans to restructure certain of its operations at its Mounds View, Minnesota distribution facility, because the facility was not large enough to accommodate the needs of customers relative to product selection and availability. The $170,000 restructuring charge in the first quarter of fiscal 2005 is associated primarily with severance costs related to the termination of approximately 85 employees at this facility. This closing was completed in the second quarter of fiscal 2005. 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) 2005 2004 2005 2004 ------ ------ ------ ------ Basic weighted average shares outstanding 40,400 39,196 40,261 39,124 Net effect of dilutive stock options based upon the treasury stock method 1,095 1,554 1,108 1,439 ------ ------ ------ ------ Diluted weighted average shares outstanding 41,495 40,750 41,369 40,563 ====== ====== ====== ======
There were 3,000 and 326 anti-dilutive stock options for the quarters ended January 31, 2005 and 2004, respectively. For the six months ended January 31, 2005 and 2004, there were 742,750 and 246,144 anti-dilutive stock options, respectively. These anti-dilutive stock options were excluded from the calculation of diluted earnings per share. 5. 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 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. The Company recorded $0.4 million and $0.7 million of income in the statement of operations for the quarter ended January 31, 2004 and six months ended January 31, 2004, respectively, on these interest rate swap agreements and related option agreements to reflect the change in fair value of the financial instruments. The Company 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 notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing 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 an asset of $0.2 million as of January 31, 2005, and a corresponding increase to accumulated other comprehensive income, net of taxes, in the condensed consolidated balance sheet to reflect the fair value of the instrument. 6. COMPREHENSIVE INCOME Total comprehensive income for the three-month period ended January 31, 2005 amounted to $9,457,000 as compared to $6,810,000 in the same period in the prior year. For the six months ended January 31, 2005 and 2004, comprehensive income amounted to $19,022,000 and $13,195,000, 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 5. 8 7. ACQUISITION On December 20, 2004, the Company acquired by merger privately held Select Nutrition Distributors, Inc. ("Select Nutrition"), distributor of health and beauty aids and vitamins, minerals and supplements, which serviced customers nationwide from two warehouse facilities in Philadelphia, Pennsylvania and Visalia, California, for cash consideration and debt assumed of approximately $12.6 million. The acquisition was financed by borrowings against the Company's line of credit. The operating results of Select Nutrition have been included in the consolidated financial statements of the Company beginning with the acquisition date. The acquisition resulted in goodwill (based on the preliminary allocation of the purchase price) of $9.7 million, none of which is expected to be deductible for tax purposes. Such goodwill was assigned to the Company's wholesale segment. 8. BUSINESS SEGMENTS The Company has several operating divisions aggregated under the wholesale segment, which is the Company's only reportable segment. These operating divisions have similar products and services, customer channels, distribution methods and historical margins. The wholesale segment is engaged in national distribution of natural foods, produce and related products in the United States. The Company has additional operating divisions that do not meet the quantitative thresholds for reportable segments. Therefore, these operating divisions are aggregated under the caption of "Other" with corporate operating expenses that are not allocated to operating divisions. "Other" includes a retail division, 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 division, which engages in importing, roasting and packaging of nuts, seeds, dried fruit and snack items. "Other" also includes corporate expenses, which consist of salaries, retainers, and other related expenses of officers, directors, corporate finance (including professional services), governance, human resources and internal audit that are necessary to operate the Company's headquarters located in Dayville, Connecticut. Non-operating expenses that are not allocated to the operating divisions are under the caption of "Unallocated Expenses." Following is business segment information for the periods indicated:
Unallocated Wholesale Other Eliminations Expenses Consolidated --------- ----- ------------ ----------- ------------ Three months ended January 31, 2005: Net sales $494,526 $17,497 $ (7,313) $504,710 Operating income (loss) 17,722 (926) (220) 16,576 Interest expense $1,577 1,577 Other, net (122) (122) Income before income taxes 15,121 Depreciation and amortization 3,063 283 -- 3,346 Capital expenditures 5,229 220 -- 5,449 Total assets 719,569 45,651 (194,958) 570,262 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 Depreciation and amortization 2,479 308 -- 2,787 Capital expenditures 6,849 157 -- 7,006 Total assets 619,693 41,805 (193,060) 468,438
9
Unallocated Wholesale Other Eliminations Expenses Consolidated --------- ----- ------------ -------- ------------ Six months ended January 31, 2005: Net sales $963,075 $35,236 $ (16,059) $982,252 Operating income (loss) 36,506 (2,165) (230) 34,111 Interest expense $3,010 3,010 Other, net (223) (223) Income before income taxes 31,324 Depreciation and amortization 5,824 614 -- 6,438 Capital expenditures 8,748 291 -- 9,039 Total assets 719,569 45,651 (194,958) 570,262 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 Depreciation and amortization 4,924 607 -- 5,531 Capital expenditures 9,108 227 -- 9,335 Total assets 619,693 41,805 (193,060) 468,438
9. NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151 ("SFAS 151"), Inventory Costs: an amendment of ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 151 will have a material impact on its consolidated financial position or results of operations. In December 2004, the FASB issued SFAS No. 123R ("SFAS 123R"), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R will require the Company to, among other things, to measure all employee stock-based compensation awards using a fair value method and record such expense in the Company's consolidated financial statements. The provisions of SFAS 123R are effective for the first interim or annual reporting period beginning after June 15, 2005; therefore, the Company is expected to adopt SFAS 123R in its first quarter of fiscal 2006. Management is currently evaluating the specific impacts of adoption. 10. SUBSEQUENT EVENT On March 1, 2005, the Company announced the purchase of a new facility in Rocklin, California and its plans to move the Auburn, California operations to this facility by September 2005. The new facility is 487,000 square feet and will serve as a distribution hub for customers in northern California and surrounding states. The purchase of this facility was financed by borrowings against the Company's line of credit. 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. We believe that we are the primary distributor of natural and organic products to a majority of our customers. We carry more than 40,000 high-quality natural and organic products, consisting of national brand, regional brand, private label and master distribution products in six product categories consisting of grocery and general merchandise, produce, perishables and frozen foods, nutritional supplements, bulk and food service products and personal care items. We serve more than 21,000 customers, including independently owned natural products retailers, supernatural chains, (which are comprised of large chains of natural foods supermarkets), and conventional supermarkets located across the United States. Our other distribution channels include food service, international customers and buying clubs. In recent years, our sales to existing and new customers have increased through the continued growth of the natural products industry in general, entry into new sales channels, the acquisition of or merger with natural products distributors and the expansion of our 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. Through our subsidiary, the Natural Retail Group, Inc. ("NRG), we also own and operate 12 natural products retail stores located primarily in Florida. We believe that our retail business serves as a natural complement to our distribution business because it enables us to develop new marketing programs and improve customer service. In addition, our subsidiary, Hershey Imports Company, Inc. ("Hershey Imports"), specializes in the international importing, roasting and packaging of nuts, seeds, dried fruits and snack items. We have been the primary distributor to the largest supernatural chain in the United States, Whole Foods Market, Inc. ("Whole Foods Market") for more than 10 years. We renewed our primary distribution agreement with Whole Foods Market in December 2004 for an additional three years. During fiscal 2004, we also entered into and consummated a five-year primary distribution agreement with Wild Oats Markets, Inc. ("Wild Oats Markets"). We had previously served as primary distributor for Wild Oats Markets through August 2002. Since our formation, we have completed a number of acquisitions of distributors and suppliers, including Hershey Imports, Albert's Organics, Inc. ("Albert's Organics"), and NRG, all of which have expanded our distribution network, product offerings and customer base. In the second quarter of fiscal 2005, we acquired Select Nutrition Distributors, Inc. ("Select Nutrition"). Our operations are comprised of three principal divisions: o our Wholesale Division, which includes our Eastern Region, Western Region, Albert's Organics and Select Nutrition; o our Retail Division, which consists of 12 retail stores; and o our Manufacturing Division, which is comprised of Hershey Imports. In order to maintain our market leadership and improve our operating efficiencies, we are continually: o investing in people, facilities, equipment and technology; o entering into new channels of business 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 recent expansions of our facilities located in Iowa City, Iowa and Dayville, Connecticut in fiscal 2004. In November 2004, we announced our intention to expand our Midwest operations by opening a new distribution center in Greenwood, Indiana. The new 309,000 square foot facility is scheduled to commence operations in July 2005 and will serve as a distribution hub for our customers in Illinois, Indiana, Ohio and other Midwest states. In March 2005, we announced the purchase of a new facility in Rocklin, California and our plans to move our Auburn, California operations to this facility by September 2005. The new facility is 487,000 square feet and will serve as a distribution hub for customers in northern California and surrounding states. It will also be the largest facility in our nationwide distribution network. 11 The additional storage space in our Iowa City, Iowa and Dayville, Connecticut facilities allows for more product diversity and the elimination of outside storage expenses. We expect the efficiencies created by expanding our Iowa City and Dayville facilities to lower our expenses relative to sales over the long-term. Having completed the Iowa City and Dayville facilities expansion and with the new facilities in Greenwood, Indiana and Rocklin, California, we have now added approximately 1,556,000 square feet to our distribution centers since fiscal 2000, representing a 105% increase in our distribution capacity. Our current capacity utilization is 70%. 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 penetrate into new sales channels and new regions of distribution, particularly in the Midwest market. Our strategy is to continue to provide the leading distribution solution to the natural products industry through our national presence, regional responsiveness, high customer service focus and breadth of product offerings. Our net sales consist primarily of sales of natural and organic products to retailers adjusted for customer volume discounts, returns and allowances. Net sales also consist of amounts paid to us by customers for shipping and handling. 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. Cost of sales also includes amounts paid by us for shipping and handling, depreciation for manufacturing equipment at our manufacturing subsidiary, Hershey Imports and consideration received from suppliers in connection with the purchase or promotion of the suppliers' products. Operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, insurance, administrative, depreciation and amortization expense. Other expenses (income) include interest on outstanding indebtedness, interest income, the change in fair value of financial instruments and miscellaneous income and expenses. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses. We include purchasing and outbound transportation expenses within our operating expenses rather than our cost of sales. 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 reserve for the self-insured portion of our workers' compensation, health insurance and automobile liabilities and (iii) valuing 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 and notes 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 $140.0 million and $106.2 million, net of the allowance for doubtful accounts of $5.2 million and $5.6 million, as of January 31, 2005 and July 31, 2004, respectively. Our notes receivable balance was $2.7 million and $2.4 million, net of the allowance of doubtful accounts of $4.5 million and $4.2 million, as of January 31, 2005 and July 31, 2004, respectively. 12 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 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. Valuation of goodwill and intangible assets 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 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 was $67.2 million and $57.2 million, as of January 31, 2005 and July 31, 2004, 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, ------------------- ------------------- 2005 2004 2005 2004 ------------------- ------------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 81.1% 80.0% 80.9% 80.0% ------------------- ------------------- Gross profit 18.9% 20.0% 19.1% 20.0% ------------------- ------------------- Operating expenses 15.6% 16.6% 15.6% 16.6% Restructuring charge 0.0% 0.0% 0.0% 0.0% Amortization of intangibles 0.0% 0.1% 0.0% 0.1% ------------------- ------------------- Total operating expenses 15.6% 16.7% 15.6% 16.6%* ------------------- ------------------- Operating income 3.3% 3.3% 3.5% 3.4% ------------------- ------------------- Other expense (income): Interest expense 0.3% 0.5% 0.3% 0.6% Change in fair value of financial instruments 0.0% (0.1)% 0.0% (0.1)% Other, net (0.0)% (0.0)% (0.0)% (0.0)% ------------------- ------------------- Total other expense 0.3% 0.4% 0.3% 0.5% ------------------- ------------------- Income before income taxes 3.0% 2.9% 3.2% 2.9% Income taxes 1.2% 1.1% 1.2% 1.1% ------------------- ------------------- Net income 1.8% 1.8% 1.9%* 1.8% =================== ===================
* Total reflects rounding 13 Quarter Ended January 31, 2005 Compared To Quarter Ended January 31, 2004 Net Sales Our net sales increased approximately 28.3%, or $111.5 million, to $504.7 million for the quarter ended January 31, 2005 from $393.2 million for the quarter ended January 31, 2004. This increase was due to organic growth in our wholesale segment of 14.5%, the implementation of our primary distribution agreement with Wild Oats Markets in the third quarter of fiscal 2004 and the inclusion of sales related to Select Nutrition that were not included in fiscal 2004. Our organic growth is due to the continued growth of the natural products industry in general, increased market share and the expansion of our existing distribution centers. For the quarter ended January 31, 2005, we experienced growth in all channels with the most significant growth in the supernatural chains distribution channel, which includes sales to Whole Foods Market and Wild Oats Markets. This was primarily due to the increase in sales to Wild Oats Markets discussed above. In the quarter ended January 31, 2005, Whole Foods Market comprised approximately 26.3% of net sales and Wild Oats Markets comprised approximately 11.6% of net sales. In the second quarter of fiscal 2004, Whole Foods Market comprised approximately 26.6% of net sales and was the only customer that accounted for more than 10% of net sales. In December 2004, we announced a definitive three-year distribution agreement with Whole Foods Market, which commenced on January 1, 2005, under which we will continue to serve as the primary U.S. distributor to it in the regions where we previously served. The following table lists the percentage of sales by customer channel for the quarters ended January 31, 2005 and 2004: Customer channel Percentage of Net Sales ---------------- ----------------------- 2005 2004 ---- ---- Independently owned natural products retailers 45% 51% Supernatural chains 38% 28% Mass Market 13% 15% Other 4% 6% The shift in our sales mix to supernatural chains from independently owned natural products retailers was the result of the implementation of our primary distribution agreement with Wild Oats Markets in the third quarter of fiscal 2004 and the continued strong growth in this channel. Gross Profit Our gross profit increased approximately 21.0%, or $16.5 million, to $95.3 million for the quarter ended January 31, 2005 from $78.8 million for the quarter ended January 31, 2004. Our gross profit as a percentage of net sales was 18.9% and 20.0% for the quarters ended January 31, 2005 and 2004, respectively. This decrease in gross profit as a percentage of net sales in comparison to the quarter ended January 31, 2004 was primarily the result of the change in our sales mix to supernatural chains, as we implemented our primary distribution agreement with Wild Oats Markets during the third quarter of fiscal 2004. In addition, we initiated an aggressive product rationalization program in the second quarter of fiscal 2005 which will continue through the third quarter. As our sales channel mix has shifted, we expect gross margins to be in the low 19 percent range in the future. Total Operating Expenses Total operating expenses, excluding special items, increased approximately 20.5%, or $13.3 million, to $78.4 million for the quarter ended January 31, 2005 from $65.1 million for the quarter ended January 31, 2004. As a percentage of net sales, total operating expenses, excluding special items, decreased to approximately 15.5% for the quarter ended January 31, 2005 from approximately 16.5% for the quarter ended January 31, 2004. The increase in total operating expenses, excluding special items, for the quarter ended January 31, 2005 was due to the increase in our infrastructure to support our continued sales growth, an increase in fuel costs as a percentage of sales of 25 basis points and the inclusion of approximately one and a half months of operating expenses related 14 to Select Nutrition that were not included in the quarter ended January 31, 2004. Total operating expenses for the quarter ended January 31, 2005 included a special item of $0.4 million for certain labor costs associated with the closing of our Mounds View, Minnesota facility. Total 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. Total operating expenses, including special items, increased approximately 20.0%, or $13.1 million, to $78.7 million from $65.6 million for the quarter ended January 31, 2004. As a percentage of sales, total operating expenses, including special items, decreased to 15.6% for the quarter ended January 31, 2005 from 16.7% for the quarter ended January 31, 2004. The decrease in total operating expenses as a percentage of net sales was primarily attributable to a decrease in salaries and wages as a percentage of sales due to improved operating efficiencies. The improved operating efficiencies were a result of our recent facility expansions and recent integration of management information systems following our fiscal 2003 acquisition of Blooming Prairie Cooperative. This improvement was partially offset by higher fuel costs and the inclusion of approximately one and a half months of operating expenses related to Select Nutrition that were not included in the quarter ended January 31, 2004. Operating Income Operating income, excluding special items, increased $3.2 million to $16.9 million for the quarter ended January 31, 2005 from $13.7 million for the quarter ended January 31, 2004. As a percentage of sales, operating income, excluding special items, decreased from 3.5% for the quarter ended January 31, 2004 to 3.4% for the quarter ended January 31, 2005. Operating income for the quarter ended January 31, 2005 included a special item of $0.4 million for certain labor costs associated with the closing of the Mounds View, Minnesota facility. Excluding the incremental fuel costs and Select Nutrition, operating income would have been approximately 3.7%. 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, including special items, was $16.6 million for the quarter ended January 31, 2005 and $13.2 million for the quarter January 31, 2004. Operating income, including special items, as a percentage of sales, remained consistent at 3.3% for the quarters ended January 31, 2005 and January 31, 2004. Other Expense (Income) Other expense, excluding special items, decreased $0.6 million to $1.5 million for the quarter ended January 31, 2005 from $2.0 million for the quarter ended January 31, 2004. Interest expense for the quarter ended January 31, 2005 was $1.6 million, $0.6 million lower than for the quarter ended January 31, 2004. The decrease in interest expense was due to the novation of two of our interest rate swap agreements in December 2003, which served to lower our effective interest rate, partially offset by higher average debt levels as a result of our acquisition of Select Nutrition in the second quarter of fiscal 2005, recent facility expansions and an increase in inventory levels to support the growth in our business. Other expense (income) for the quarter ended January 31, 2004 included a special item of $0.4 million in income related to the change in the fair value of financial instruments. In December 2003, we assigned and transferred all of our obligations of our two "ineffective" interest rate swaps to a third party. As a result of this assignment, these "ineffective" swaps will not be included as a special item for future fiscal periods. These "ineffective" swaps were included as a special item through the second quarter of fiscal 2004. Other expense including special items decreased $0.2 million from $1.6 million for the quarter ended January 31, 2004 to $1.5 million for the quarter ended January 31, 2005. The decrease in other expense including special items was primarily due to the decrease in interest expense discussed above and the novation of our two "ineffective" swap agreements. Income Taxes Our effective income tax rate was 39.0% for the quarters ended January 31, 2005 and 2004. The effective rate was higher than the federal statutory rate primarily due to state and local income taxes. 15 Net Income Net income, excluding special items, increased $2.3 million to $9.4 million, or $0.23 per diluted share, for the quarter ended January 31, 2005, compared to $7.1 million, or $0.18 per diluted share, for the quarter ended January 31, 2004. Net income, including special items, increased $2.2 million to $9.2 million, or $0.22 per diluted share, for the quarter ended January 31, 2005, compared to $7.0 million, or $0.17 per diluted share, for the quarter ended January 31, 2004. Special Items The following table presents, for the periods indicated, a reconciliation of income and per share amounts excluding special items to income and per share amounts including special items:
------------------------------------------------------------------------------------------------------ Quarter ended January 31, 2005 Pretax Per diluted (in thousands, except per share data) income Net of tax share ---------------------------------------- Income, excluding special items: $15,474 $9,439 $0.23 Special items - Income/(Expense): Related to the closing of the Mounds View, Minnesota facility (included in operating expenses) (353) (215) (0.01) ------------------------------------------------------------------------------------------------------ Income, including special items: $15,121 $9,224 $0.22 ====================================================================================================== ------------------------------------------------------------------------------------------------------ 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 $0.18 Special items - Income (Expense): Wild Oats Markets, Inc. primary distributorship start-up and transition related costs (included in operating expenses) (551) (336) (0.01) Interest rate swap agreements (change in fair value of financial instruments) 400 244 0.01 ------------------------------------------------------------------------------------------------------ Income, including special items: $11,544 $7,042 $0.17* ======================================================================================================
* Total reflects rounding The special item for the quarter ended January 31, 2005 included certain labor costs associated with the closing of the Mounds View, Minnesota facility. This closing was completed in the quarter ending January 31, 2005. Special items for the quarter ended January 31, 2004 included: (i) the start-up and transition costs of the new Wild Oats Markets primary distribution agreement consisting of certain equipment rental and labor costs and (ii) the non-cash items from the change in fair value on interest rate swap agreements which were caused by favorable changes in interest rate yield curves. In December 2003, we assigned and transferred all of our obligations of our two "ineffective" interest rate swaps to a third party. As a result of this novation, 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 through the second quarter of fiscal 2004. 16 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 could 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 "accumulated 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 were 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 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 $0.03. Six Months Ended January 31, 2005 Compared To Six Months Ended January 31, 2004 Net Sales Our net sales increased approximately 26.8%, or $207.6 million, to $982.3 million for the six months ended January 31, 2005 from $774.6 million for the six months ended January 31, 2004. This increase was due to due to organic growth in our wholesale segment of 13.4%, the implementation of our primary distribution agreement with Wild Oats Markets in the third quarter of fiscal 2004, our organic growth and the inclusion of sales related to Select Nutrition that were not included in fiscal 2004. Our organic growth is due to the continued growth of the natural products industry in general, increased market share and the expansion of our existing distribution centers. For the six months ended January 31, 2005, we experienced growth in all channels with the most significant growth in the supernatural chains distribution channel, which includes sales to Whole Foods Market and Wild Oats Markets. This was primarily due to the increase in sales to Wild Oats Markets discussed above. In the six months ended January 31, 2005, Whole Foods Market comprised approximately 26.0% of net sales and Wild Oats Markets comprised approximately 11.7% of net sales. In the six months ended January 31, 2004, Whole Foods Market comprised approximately 26.4% of net sales and was the only customer that accounted for more than 10% of net sales. In December 2004, we announced a definitive three-year distribution agreement with Whole Foods Market, which commenced on January 1, 2005, under which we will continue to serve as the primary U.S. distributor to it in the regions where we previously served. The following table lists the percentage of sales by customer channel for the six months ended January 31, 2005 and 2004: Customer channel Percentage of Net Sales ---------------- ----------------------- 2005 2004 ---- ---- Independently owned natural products retailers 45% 50% Supernatural chains 38% 29% Mass Market 13% 15% Other 4% 5% The shift in our sales mix to supernatural chains from independently owned natural products retailers was the result of the implementation of our primary distribution agreement with Wild Oats Markets in the third quarter of fiscal 2004 and the continued strong growth in this channel. Gross Profit Our gross profit increased approximately 21.2%, or $32.8 million, to $187.8 million for the six months ended January 31, 2005 from $155.0 million for the six months ended January 31, 2004. Our gross profit as a percentage of net sales was 19.1% and 20.0% for the six months ended January 31, 2005 and 2004, respectively. The decrease in gross profit as a percentage of net sales in comparison to the six months ended January 31, 2004 was the result of an increase in the sales to supernaturals as part of our overall sales mix, as we implemented our primary distribution agreement with Wild Oats Markets during the third quarter of fiscal 2004. In addition, we initiated an aggressive product rationalization program in the second quarter of fiscal 2005 which will continue through the third quarter. As our sales channel mix has shifted, we expect gross margins to be in the low 19 percent range in the future. 17 Operating Expenses Total operating expenses, excluding special items, increased approximately 19.6%, or $25.1 million, to $153.3 million for the six months ended January 31, 2005 from $128.2 million for the six months ended January 31, 2004. As a percentage of net sales, total operating expenses, excluding special items, decreased to approximately 15.6% for the six months ended January 31, 2005 from approximately 16.6% for the six months ended January 31, 2004. The approximately $25.1 million increase in total operating expenses excluding special items for the six months ended January 31, 2005 was due to the increase in our infrastructure to support our continued sales growth, an increase in fuel costs as a percentage of sales of 18 basis points and the inclusion of approximately one and a half months of operating expenses related to Select Nutrition that were not included in the six months ended January 31, 2004. In addition, the hurricanes which devastated Florida in the first quarter of fiscal 2005 increased operating expenses by approximately $0.5 million and we recorded a $0.2 million restructuring charge in the first quarter of fiscal 2005 related to severance costs, which resulted from our plan to reduce operations at our Mounds View, Minnesota facility. Total operating expenses for the six months ended January 31, 2005 included a special item of $0.4 million for certain labor costs associated with the closing of the Mounds View, Minnesota facility. Total 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. Total operating expenses, including special items, increased approximately 19.3%, or $24.9 million, to $153.7 million for the six months ended January 31, 2005 from $128.8 million for the six months ended January 31, 2004. As a percentage of sales, total operating expenses, including special items, decreased to 15.6% for the six months ended January 31, 2005 from 16.6% 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 $7.9 million to $34.6 million for the six months ended January 31, 2005 from $26.7 million for the six months ended January 31, 2004. As a percentage of sales, operating income, excluding special items, remained consistent at 3.5% for the six months ended January 31, 2005 and 2004. Operating income for the six months ended January 31, 2005 included a special item of $0.4 million for certain labor costs associated with the closing of the Mounds View, Minnesota facility. Excluding the incremental fuel costs and Select Nutrition, operating income would have been approximately 3.7%. 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. Operating income, including special items, was $34.1 million for the six months ended January 31, 2005 and $26.2 million for the six months ended January 31, 2004. Operating income, including special items, as a percentage of sales, increased to 3.5% for the six months ended January 31, 2005 compared to 3.4% for the six months ended January 31, 2004. Other Expense (Income) Other expense, excluding special items, decreased $1.4 million to $2.8 million for the six months ended January 31, 2005 from $4.2 million for the six months ended January 31, 2004. Interest expense for the six months ended January 31, 2005 was $3.0 million compared to $4.5 million for the six months ended January 31, 2004. The decrease in interest expense was due to the novation of two of our interest rate swap agreements in December 2003, which served to lower our effective interest rate, partially offset by higher average debt levels as a result of our acquisition of Select Nutrition in the second quarter of fiscal 2005, recent facility expansions and an increase in inventory levels to support the growth in our business. Other expense (income), including special items, decreased by $0.7 million resulting in expense of $2.8 million for the six months ended January 31, 2005 compared to expense of $3.5 million for the six months ended January 31, 2004. This decrease was due to the novation of our "ineffective" swap agreements and decreased interest expense as discussed above. These "ineffective" swaps were included as a special item for the six months ended January 31, 2004. Income Taxes Our effective income tax rate was 39.0% for the six months ended January 31, 2005 and 2004. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes. 18 Net Income Net income, excluding special items, increased $5.6 million to $19.3 million, or $0.47 per diluted share, for the six months ended January 31, 2005, compared to $13.7 million, or $0.34 per diluted share, for the six months ended January 31, 2004. Net income, including special items, increased $5.3 million to $19.1 million, or $0.46 per diluted share, for the six months ended January 31, 2005, compared to $13.8 million, or $0.34 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 amounts excluding special items to income and per share amounts including special items:
-------------------------------------------------------------------------------------------------------- Six months ended January 31, 2005 Pretax Per diluted (in thousands, except per share data) income Net of tax share ------------------------------------------- Income, excluding special items: $31,677 $19,323 $0.47 Special items - Income (Expense): Related to the closing of the Mounds View, Minnesota facility (included in operating expenses) (353) (215) (0.01) -------------------------------------------------------------------------------------------------------- Income, including special items: $31,324 $19,108 $0.46 ======================================================================================================== -------------------------------------------------------------------------------------------------------- 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 $0.34 Special items - Income (Expense): Wild Oats Markets, Inc. primary distributorship transition related costs (included in operating expenses) (551) (336) (0.01) Interest rate swap agreements (change in fair value of financial instruments) 704 429 0.01 -------------------------------------------------------------------------------------------------------- Income, including special items: $22,654 $13,819 $0.34 ========================================================================================================
The special item for the six months ended January 31, 2005 included certain labor costs associated with the closing of the Mounds View, Minnesota facility. This closing was completed in the quarter ending January 31, 2005. Special items for the six months ended January 31, 2004 included: (i) the start-up and transition costs of the new Wild Oats Markets primary distribution agreement consisting of certain equipment rental and labor costs and (ii) the non-cash items from the change in fair value on interest rate swap agreements which were caused by favorable changes in interest rate yield curves. In December 2003, we assigned and transferred all of our obligations of our two "ineffective" interest rate swaps to a third party. As a result of this novation, 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 through 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 could 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 "accumulated 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 were special items that are excludable as non-recurring items. First, we only intend to enter into "effective" hedges 19 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 $0.03. 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. On April 30, 2004, we entered into an amended and restated four-year $250 million revolving credit facility with a bank group that was led by Bank of America Business Capital (formerly Fleet Capital Corporation) as the administrative agent. The amended and restated credit facility provides for improved terms and conditions that provide us with more financial and operational flexibility, reduced costs and increased liquidity. The amended and restated credit facility replaced an existing $150 million revolving credit facility. Our amended and restated secured revolving credit facility allows for borrowing up to $250 million, on which interest accrues at LIBOR plus 0.90%. The $250 million credit facility matures on March 31, 2008. This increased credit facility will support our working capital requirements in the ordinary course of business and provide capital to grow our business organically or through acquisitions. As of January 31, 2005, our borrowing base, based on accounts receivable and inventory levels, was $245.9 million, with remaining availability of $105.1 million. In April 2003, we executed a term loan agreement in the principal amount of $30 million secured by the real property that was released in accordance with an amendment to the loan and security agreement related to the revolving credit facility. The $30 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 by increasing the principal amount from $30 million to $40 million under the existing terms and conditions. We believe that our capital requirements for fiscal 2005 will be in the $35 to $38 million range, and that we will finance these requirements with cash generated from operations and the use of our existing credit facilities. These projects will provide both new facilities and technology that will provide us with the capacity to continue to support the growth and expansion of our customers. We believe that our future capital requirements will be similar to our anticipated fiscal 2005 requirements, as we continue to invest in our growth by upgrading our infrastructure and expanding our facilities. Future investments in 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 $12.8 million for the six months ended January 31, 2005 and was the result of net income and the change in cash collected from customers net of cash paid to vendors and a $14.4 million investment in inventory. The increase in inventory levels relate to supporting increased sales with wider product assortment and availability. Days in inventory improved to 48 days at January 31, 2005 compared to 51 days at July 31, 2004. Days sales outstanding increased to 25 days at January 31, 2005 from 24 days at July 31, 2004. Net cash used in operations was $5.9 million for the six months ended January 31, 2004 and was due to the change in cash collected from customers, net of cash paid to vendors, partially offset by increased inventory levels of $17.2 million as a result of increased sales. Working capital increased by $9.9 million, or 9.0%, to $119.1 million at January 31, 2005, compared to working capital of $109.2 million at July 31, 2004. Net cash used in investing activities increased $5.9 million to $15.1 million for the six months ended January 31, 2005 compared to $9.2 million for the same period last year. The increase was due to the acquisition of Select Nutrition in December 2004. Net cash provided by financing activities was $18.5 million for the six months ended January 31, 2005 primarily due to $17.1 million in borrowings under our $250 million secured revolving credit facility and proceeds from the exercise of stock options, partially offset by repayments of long-term debt. 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 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. 20 In May 2003, we entered into an 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 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing our effective rate on the notional amount at 5.18%. The swap agreement qualifies as an "effective" hedge under SFAS No. 133. There have been no material changes to our commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the year ended July 31, 2004. IMPACT OF INFLATION Historically, we have been able to pass along inflation-related increases to our customers. Consequently, inflation has not had a material impact upon the results of our operations or profitability. SEASONALITY Generally, we do not experience any material seasonality. However, our sales and operating results may vary significantly from quarter to quarter due to factors such as changes in our operating expenses, management's ability to execute our operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151 ("SFAS 151"), Inventory Costs: an amendment of ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe that the adoption of SFAS 151 will have a material impact on our consolidated financial position or results of operations. In December 2004, the FASB issued SFAS No. 123R ("SFAS 123R"), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R will require the Company to, among other things, measure all employee stock-based compensation awards using a fair value method and record such expense in the Company's consolidated financial statements. The provisions of SFAS 123R are effective for the first interim or annual reporting period that begins after June 15, 2005; therefore, we will adopt SFAS 123R in our first quarter of fiscal 2006. Management is currently evaluating the specific impacts of adoption. 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 table under "Special Items" 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 future performance, and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements, possibly materially. We do not undertake to update any information in the foregoing reports 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 optimizing of delivery routes; o coordinating administrative, distribution and finance functions; and o integrating 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 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. 22 We depend heavily on our principal customers Our ability to maintain close, mutually beneficial relationships with our two largest customers, Whole Foods Market and Wild Oats Markets, is an important element to our continued growth. In December 2004, we announced a definitive three-year distribution agreement with Whole Foods Market, which commenced on January 1, 2005, under which we will continue to serve as the primary U.S. distributor to it in the regions where we previously served. Whole Foods Market accounted for approximately 26.3% and 26.6% of our net sales during the quarters ended January 31, 2005 and 2004, respectively, and 26.0% and 26.4% of our net sales for the six months ended January 31, 2005 and 2004, respectively. In January 2004, we entered into a five-year distribution agreement, as primary distributor, with Wild Oats Markets. For the quarter and six months ended January 31, 2005, Wild Oats Markets accounted for approximately 11.6% and 11.7% of our net sales, respectively. As a result of this concentration of our customer base, the loss or cancellation of business from either of these customers including from increased distribution to their own facilities, could materially and adversely affect our business, financial condition or results of operations. We sell products under purchase orders, and we generally have no agreements with or commitments from our customers for the purchase of products. No assurance can be given that our customers will maintain or increase their sales volumes or orders for the products supplied by us or that we will be able to maintain or add to our existing customer base. Our profit margins may decrease due to consolidation in the grocery industry The grocery distribution industry generally is characterized by relatively high volume with relatively low profit margins. The continuing consolidation of retailers in the natural products industry and the growth of supernatural 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. We are dependent on a number of key executives Management of our business is substantially dependent upon the services of Richard Antonelli (President of United Distribution), Daniel V. Atwood (Senior Vice President of Marketing and Secretary), Michael D. Beaudry (Vice President of Distribution), Barclay Hope (President of Albert's Organics), Rick D. Puckett (Chief Financial Officer and Treasurer), Steven H. Townsend (Chairman, President and Chief Executive Officer), 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. 23 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; 24 o our warehouse and distribution facilities are subject to inspection by the U.S. Department of Agriculture and state health authorities; and 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, 2005, we had approximately 4,000 full and part-time employees. An aggregate of approximately 420, or 10.5%, 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 $250 million at an interest rate of LIBOR plus 0.90% maturing on March 31, 2008. As of January 31, 2005, our borrowing base, based on accounts receivable and inventory levels, was $245.9 million, with remaining availability of $105.1 million. In April 2003, we executed a term loan agreement in the principal amount of $30 million secured by the real property that was released in accordance with an amendment to the loan and security agreement related to the revolving credit facility. The $30 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 by increasing the principal amount from $30 million to $40 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. 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 condensed consolidated financial statements, we use interest rate swap agreements to modify variable rate obligations to fixed rate obligations for a portion of our debt. 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, 2004. 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-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report on Form 10-Q (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. 25 (b) Changes in internal controls. There has been no change in the Company's internal control over financial reporting that occurred during the fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 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 held on December 1, 2004, the stockholders of the Company considered and voted on three proposals: 1. Election of Directors. The stockholders elected Gordon D. Barker, Gail A. Graham and Thomas B. Simone, to serve as Class II directors for the ensuing three years. The terms of office as directors of Steven Townsend, Joseph M. Cianciolo, Michael S. Funk and James P. Heffernan continued after the Annual Meeting. The stockholders voted in the following manner: ------------------------------------------------------------------------ Name Votes "FOR" Votes "WITHHELD" ------------------------------------------------------------------------ ------------------------------------------------------------------------ Gordon D. Barker 36,840,328 1,349,472 ------------------------------------------------------------------------ Gail A. Graham 36,944,090 1,245,710 ------------------------------------------------------------------------ Thomas B. Simone 35,698,032 2,491,768 ------------------------------------------------------------------------ 2. Adoption and approval of the 2004 Equity Incentive Plan. The stockholders voted in the following manner: (i) 23,700,284 votes were cast "FOR" the proposal; (ii) 9,380,697 votes were cast "AGAINST" the proposal; and (iii) 19,865 votes were cast to "ABSTAIN" from the proposal. 3. Independent Auditor. The stockholders ratified the appointment of KPMG LLP as the Company's independent registered public accounting firm for the year ended July 31, 2005. The stockholders voted in the following manner: (i) 38,078,804 votes were cast "FOR" the proposal; (ii) 101,570 votes were cast "AGAINST" the proposal; and (iii) 9,426 votes were cast to "ABSTAIN" from the proposal. Item 6. Exhibits and Reports on Form 8-K Exhibits -------------------------------------------------------------------------------- Exhibit No. Description -------------------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation -------------------------------------------------------------------------------- 3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation -------------------------------------------------------------------------------- 10.1 (1) Distribution Agreement between the Registrant and Whole Foods Market, Inc. dated January 1, 2005 -------------------------------------------------------------------------------- 10.2 First Amendment to Amended and Restated Loan and Security Agreement dated December 30, 2004 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- 32.2 Certification Pursuant to 18 U.S.C. Section 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. 26 Reports on Form 8-K November 23, 2004 The Company announced plans to open a new distribution facility in Greenwood, Indiana. December 1, 2004 The Company announced its financial results for the fiscal quarter ended October 31, 2004. December 7, 2004 The Company announced certain appointments to the Company's Board of Directors and the results of the Company's annual meeting of stockholders. December 8, 2004 The Company announced certain appointments to the Company's Board of Directors and the results of the Company's annual meeting of stockholders. December 23, 2004 The Company announced the acquisition of Select Nutrition Distributors, Inc. December 29, 2004 The Company announced the definitive three-year distribution agreement with Whole Foods Market. * * * 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 27 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 14, 2005 28