United Natural Foods, Inc. Form 10-Q; Fiscal Quarter Ended October 28, 2006

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains 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 elsewhere in this Quarterly Report on 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 Quarterly Report on Form 10-Q could have an adverse effect on our business, results of operations and financial position.

Any forward-looking statements in this Quarterly Report on 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 this Report 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.

We are a leading national distributor of natural and organic foods and related products in the United States. In recent years, our sales to existing and new customers have increased through the continued growth of the natural and organic products industry in general, increased market share through our high quality service and a broader product selection, and the acquisition of, or merger with, natural products distributors, the expansion of our existing distribution centers, the construction of new distribution centers and the development of our own line of natural and organic branded products. 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. We also own and operate 12 retail natural products stores, located primarily in Florida, through our subsidiary, the Natural Retail Group. 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, specializes in the international importing, roasting and packaging of nuts, seeds, dried fruits and snack items. Our operations are comprised of three principal divisions:

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our wholesale division, which includes our broadline distribution, Albert’s Organics and Select Nutrition;

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our retail division, which consists of our 12 retail stores; and

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our manufacturing division, which is comprised of Hershey Imports.

In order to maintain our market leadership and improve our operating efficiencies, we are continually:

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expanding our marketing and customer service programs across regions;

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expanding our national purchasing opportunities;

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offering a broader product selection;

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consolidating systems applications among physical locations and regions;

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increasing our investment in people, facilities, equipment and technology;

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integrating administrative and accounting functions; and

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reducing geographic overlap between regions.

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. In August 2006, we announced plans to build new facilities in the Pacific Northwest, Florida and Texas in the succeeding 18 to 24 months. We have made significant capital expenditures and incurred considerable expenses in connection with the opening and expansion of facilities. In October 2005, we opened our new Rocklin, California distribution center and moved our Auburn, California operations to this facility. The Rocklin distribution center is 487,000 square feet and serves as a distribution hub for customers in northern California and surrounding states. The Rocklin distribution center is the largest facility in our nationwide distribution network. In August 2005, we expanded our Midwest operations by opening a new 311,000 square foot distribution center in Greenwood, Indiana, which serves as a distribution hub for our customers in Illinois, Indiana, Ohio and other Midwest states. In addition, we expanded our facilities located in Iowa City, Iowa and Dayville, Connecticut during fiscal 2004.

We expect the efficiencies created by opening the Greenwood facility and by relocating from two facilities in Auburn, California into the Rocklin distribution center to continue to lower operating expenses relative to sales over the long-term. With the opening of the Greenwood and Rocklin facilities, we have added approximately 1,900,000 square feet to our distribution centers since fiscal 2001, representing a 124% increase in our distribution capacity. Our current capacity utilization is approximately 70%.

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 due to us from customers for shipping and handling and fuel surcharges. The principal components of our cost of sales include the amounts 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 incurred 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. Total operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation and amortization expense. Other expenses (income) include interest on our outstanding indebtedness, interest income, the change in fair value of certain 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 in 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 SEC 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 reserves for the self-insured portions of our workers’ compensation 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 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 $164.5 million and $147.7 million, net of the allowance for doubtful accounts of $5.2 million and $4.6 million, as of October 28, 2006 and July 29, 2006, respectively. Our notes receivable balances were $3.7 million and $4.0 million, net of the allowance of doubtful accounts of $3.6 million and $3.9 million, as of October 28, 2006 and July 29, 2006, respectively.

Insurance reserves

It is our policy to record the self-insured portions of our workers’ compensation 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

Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, requires that companies 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 during the fourth quarter of each year. Impairment losses are determined based upon the excess of carrying amounts over discounted expected future cash flows of the underlying business. The assessment of the recoverability of long-lived assets will be impacted if estimated future cash flows are not achieved. For reporting units that indicated potential impairment, we determined the implied fair value of that reporting unit using a discounted cash flow analysis and compared such values to the respective reporting units’ carrying amounts. Total goodwill as of October 28, 2006 and July 29, 2006 was $78.0 million.

Results of Operations

The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales:

	Three months ended
	October 28, 2006			October 29, 2005
Net sales		100.0	%		100.0	%
Cost of sales		80.9	%		80.8	%

Gross profit		19.1	%		19.2	%

Operating expenses		15.5	%		16.6	%
Amortization of intangibles		0.0	%		0.0	%

Total operating expenses		15.5	%		16.6	%

Operating income		3.6	%		2.5	%*

Other expense (income):
Interest expense		0.5	%		0.4	%
Interest income		0.0	%		0.0	%
Other, net		0.0	%		0.0	%

Total other expense		0.4	%*		0.4	%

Income before income taxes		3.2	%		2.1	%
Provision for income taxes		1.2	%		0.8	%

Net income		1.9	%*		1.3	%

* Total reflects rounding

Three Months Ended October 28, 2006 Compared To Three Months Ended October 29, 2005

Net Sales

Our net sales increased approximately 12.3%, or $70.8 million, to $646.4 million for the three months ended October 28, 2006, from $575.6 million for the three months ended October 29, 2005. This increase was primarily due to organic growth in our wholesale division. Our organic growth is due to the continued growth of the natural products industry in general, increased market share through our focus on service and value added services, and the opening of new distribution centers, which allows us to carry a broader selection of products.

In the three months ended October 28, 2006, Whole Foods Market, Inc. (“Whole Foods Market”) comprised approximately 25.5% of net sales and Wild Oats Markets, Inc. (“Wild Oats Markets”) comprised approximately 9.2% of net sales. In the three months ended October 29, 2005, Whole Foods Market comprised approximately 25.5% of net sales and Wild Oats Markets comprised approximately 10.1% of net sales.

The following table lists the percentage of sales by customer type for the quarters ended October 28, 2006 and October 29, 2005:

Customer type	Percentage of Net Sales
	2006	2005
Independently owned natural products retailers	45%	46%
Supernatural chains	35%	36%
Conventional supermarkets	16%	14%
Other	4%	4%

Sales by channel has been adjusted to properly reflect changes in customer types resulting from a review of our customer lists. As a result of this review, sales to the independents sales channel decreased 1.5% and 0.7% for the quarters ended October 28, 2006 and October 29, 2005, respectively and sales to the supermarket sales channel increased 1.5% and 0.7% for the quarters ended October 28, 2006 and October 29, 2005, respectively.

Gross Profit

Our gross profit increased approximately 12.1%, or $13.3 million, to $123.6 million for the three months ended October 28, 2006, from $110.3 million for the three months ended October 29, 2005. Our gross profit as a percentage of net sales was 19.1 % and 19.2% for the three months ended October 28, 2006 and October 29, 2005, respectively. The decrease in gross profit as a percentage of net sales was due primarily to the low gross margin at our Albert's Organics location in Greenwood, Indiana. Due to the slower than anticipated improvement in results, we elected to close the Albert’s Organics operations at this facility and began serving this market from Albert’s Organics’ Minneapolis, Minnesota facility effective October 31, 2006.

Operating Expenses

Our total operating expenses, excluding special items, increased approximately 9.9%, or $9.0 million, to $100.4 million for the three months ended October 28, 2006, from $91.4 million for the three months ended October 29, 2005. Total operating expenses, including special items, increased approximately 4.9%, or $4.7 million, to $100.4 million for the three months ended October 28, 2006, from $95.7 million for the three months ended October 29, 2005. Special items are discussed below under “Special Items.” The increase in total operating expenses, excluding special items, for the three months ended October 28, 2006 was due to increased spending to improve and expand our infrastructure to support our continued sales growth. In addition, operating expenses during the quarter were negatively impacted by an operating loss of $0.6 million related to the Greenwood, Indiana location of our Albert's Organics division. As a result, management decided to close these operations and we began serving this market from the Albert's Organics' Minneapolis, Minnesota facility, effective October 31, 2006. The three months ended October 28, 2006 includes share-based compensation expense of $1.0 million. Share-based compensation expense for the three months ended October 29, 2005 was $2.5 million, of which $1.5 million related to the expense for share-based payment awards and $1.0 million related to the accelerated vesting of certain options pursuant to the employment transition agreement we entered into during the first quarter of fiscal 2006 with our former President and Chief Executive Officer, which was treated as a special item.

As a percentage of net sales, total operating expenses, excluding special items, decreased to approximately 15.5% for the three months ended October 28, 2006, from approximately 15.9% for the three months ended October 29, 2005. As a percentage of net sales, total operating expenses, including special items, decreased to approximately 15.5% for the three months ended October 28, 2006, from approximately 16.6% for the three months ended October 29, 2005. The decrease in operating expenses as a percentage of net sales was primarily attributable to increased efficiencies due to our recent distribution facility openings, offset by operating losses related to the Albert’s Organics Greenwood, Indiana location (which operations were transferred to the Albert’s Organics Minneapolis, Minnesota facility effective October 31, 2006).

There were no special items for the three months ended October 28, 2006. As discussed below under “Special Items,” total operating expenses for the three months ended October 29, 2005 included special items related to incremental and redundant costs incurred during the transition from our former warehouses and outside storage facility in Auburn, California into our new larger facility in Rocklin, California of $0.7 million, certain incremental costs associated with the opening of our Greenwood, Indiana facility of $0.1 million and certain cash and non-cash expenses of $3.5 million incurred in accordance with the employment transition agreement we entered into during the first quarter of fiscal 2006 with our former President and Chief Executive Officer.

Operating Income

Operating income, excluding the special items discussed below under “Special Items,” increased approximately 22.5%, or $4.3 million, to $23.1 million for the three months ended October 28, 2006, from $18.9 million for the three months ended October 29, 2005. As a percentage of net sales, operating income, excluding special items, was 3.6% for the three months ended October 28, 2006, compared to 3.3% for the three months ended October 29, 2005. Operating income, including special items, increased approximately 58.4%, or $8.5 million, to $23.1 million, or 3.6% of net sales, for the three months ended October 28, 2006, from $14.6 million, or 2.5% of net sales, for the three months ended October 29, 2005.

Other Expense (Income)

Other expense (income) increased $0.5 million to $2.8 million for the three months ended October 28, 2006 from $2.2 million for the three months ended October 29, 2005. Interest expense for the three months ended October 28, 2006 increased to $2.9 million from $2.4 million in the three months ended October 29, 2005. The increase in interest expense was due to rising interest rates, partially offset by our lower debt levels during the quarter ended October 28, 2006 than during the quarter ended October 29, 2005.

Provision for Income Taxes

Our effective income tax rate was 39.0% and 38.0% for the three months ended October 28, 2006 and October 29, 2005, respectively. The effective rate was higher than the federal statutory rate primarily due to state and local income taxes. The increase in the effective tax rate was primarily due to share-based compensation for incentive stock options and the timing of disqualifying dispositions of certain share-based compensation awards. SFAS123(R) provides that the tax effect of the book compensation cost previously recognized for the incentive stock option that an employee does not retain for the minimum holding period required by the Internal Revenue Code (“disqualified disposition”) is recognized as a tax benefit in the period the disqualifying disposition occurs. Our effective income tax rate will continue to be effected by the tax impact related to incentive stock options and the timing of tax benefits related to disqualifying dispositions.

Net Income

Net income, excluding special items, increased $2.1 million to $12.4 million, or $0.29 per diluted share, for the three months ended October 28, 2006, compared to $10.3 million, or $0.24 per diluted share, for the three months ended October 29, 2005. Net income, including special items, increased $4.8 million to $12.4 million, or $0.29 per diluted share, for the three months ended October 28, 2006, compared to $7.7 million, or $0.18 per diluted share, for the three months ended October 29, 2005.

Special Items

There were no special items for three months ended October 28, 2006. Special items for three months ended October 29, 2005 included: (i) incremental and redundant costs incurred during the transition from our former warehouses and outside storage facility in Auburn, California into our new facility in Rocklin, California, (ii) certain costs associated with opening our Greenwood, Indiana facility, and (iii) non-recurring cash and non-cash expenses incurred in accordance with the employment transition agreement we entered into during the quarter with Steven H. Townsend.

The following table presents a reconciliation of net income and per share amounts, excluding special items (non-GAAP basis), to net income and per share amounts, including special items (GAAP basis), for the three months ended October 29, 2005:

Three Months Ended October 29, 2005 (in thousands, except per share data)	Pretax Income	Net of Tax	Per diluted share

Income, excluding special items:	$16,646	$10,320	$0.24

Special items – (Expense)
Employment transition agreement costs (included in operating expenses)	(3,512)	(2,177)	(0.05)
Rocklin, CA facility relocation costs (included in operating expenses)	(672)	(416)	(0.01)
Greenwood, IN facility openings costs (included in operating expenses)	(92)	(57)	(0.00)

Income, including special items:	$12,371*	$7,670	$0.18

* Total reflects rounding

A description of our use of non-GAAP information is provided under “Use of Non-GAAP Results” below.

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. Our 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 credit facility replaced an existing $150 million revolving credit facility. We further amended this facility effective as of January 1, 2006, reducing the rate at which interest accrues on LIBOR borrowings from one-month LIBOR plus 0.90% to one-month LIBOR plus 0.75%. Our amended and restated credit facility, which matures on March 31, 2008, supports our working capital requirements in the ordinary course of business and provides capital to grow our business organically or through acquisitions. As of October 28, 2006, our borrowing base, based on accounts receivable and inventory levels, was $250.0 million, with remaining availability of $119.9 million.

In April 2003, we executed a term loan agreement in the principal amount of $30 million, secured by certain real property that was released from the lien under our amended and restated credit facility in accordance with an amendment to the loan and security agreement related to that facility. The term loan is repayable over seven years based on a fifteen-year amortization schedule. Interest on the term loan accrued 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. On July 29, 2005, we entered into an amended term loan agreement which further increased the principal amount of this term loan from $40 million to up to $75 million and decreased the rate at which interest accrues to LIBOR plus 1.00%. As of October 28, 2006, $70 million was outstanding under the term loan agreement.

We believe that our capital requirements for fiscal 2007 will be between $40 and $45 million. We will finance these requirements with cash generated from operations and the use of our existing credit facilities. These projects will provide both expanded facilities and technology that we believe will provide us with the capacity to continue to support the growth and expansion of our customer base. We believe that our future capital requirements will be higher than our anticipated fiscal 2007 requirements, as a percentage of net sales, as we plan to continue to invest in our growth by upgrading our infrastructure and expanding our facilities. Future investments in acquisitions that we may pursue will be financed through either equity or long-term debt negotiated at the time of the potential acquisition.

Net cash used in operations was $17.2 million for the three months ended October 28, 2006, which reflected a $43.0 million investment in inventory that was partially offset by net income and a change in cash paid to vendors, net of cash collected from customers. Days in inventory decreased to 48 days at October 28, 2006, compared to 50 days at October 29, 2005. Days sales outstanding improved to 22 days at October 28, 2006, compared to 23 days at October 29, 2005. Net cash used in operations was $5.8 million for the three months ended October 29, 2005, primarily due to a $34.7 million investment in inventory that was partially offset by net income and a change in cash paid to vendors, net of cash collected from customers. Working capital increased by $18.6 million, or 10.2%, to $201.5 million at October 28, 2006, compared to working capital of $182.9 million at July 29, 2006.

Net cash used in investing activities decreased $3.4 million to $4.8 million for the three months ended October 28, 2006, compared to $8.2 million for the same period in fiscal 2006. The decrease was primarily due to lower capital expenditures in the three months ended October 28, 2006. The three months ended October 29, 2005 included capital expenditures related to the opening of the Rocklin, California facility.

Net cash provided by financing activities was $10.4 million for the three months ended October 28, 2006, primarily due to $10.0 million in proceeds from the increase in borrowings under our term loan agreement, the increase in our bank overdraft and proceeds from the exercise of stock options. This increase was offset by $8.5 million in net repayments on our amended and restated credit facility and long-term debt. Net cash provided by financing activities was $11.2 million for the three months ended October 29, 2005, primarily due to $15.4 million in borrowings under our amended and restated credit facility offset by the decrease in our bank overdraft.

On December 1, 2004, our Board of Directors authorized the repurchase of up to $50 million of common stock from time to time in the open market or in privately negotiated transactions. As part of the stock repurchase program, we have purchased an aggregate of 228,800 shares of our common stock for our treasury at an aggregate cost of approximately $6.1 million. All shares were purchased at prevailing market prices. We may continue or, from time to time, suspend repurchases of shares under our stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined in our complete discretion.

In August 2005, we entered into an interest rate swap agreement effective July 29, 2005. This agreement provides for us to pay interest for a seven-year period at a fixed rate of 4.70% on a notional principal amount of $50 million while receiving interest for the same period at LIBOR 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 $50 million at one-month LIBOR plus 1.00%, thereby fixing our effective rate on the notional amount at 5.70%. LIBOR was 5.32% as of October 28, 2006. The swap agreement qualifies as an “effective” hedge under SFAS 133.

We entered into commodity swap agreements to reduce price risk associated with anticipated purchases of diesel fuel. The outstanding commodity swap agreements hedge a portion of our expected fuel usage for the periods set forth in the agreements. We monitor the commodity (NYMEX #2 Heating oil) used in our swap agreements to determine that the correlation between the commodity and diesel fuel is deemed to be “highly effective.” At October 28, 2006, we had two outstanding commodity swap agreements which mature on October 31, 2006 and June 30, 2007.

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 29, 2006.

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 July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. We will adopt FIN 48 in fiscal 2008 and are currently evaluating whether the adoption of FIN 48 will have a material effect on our consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. (“SFAS”) 157, "Fair Value Measurements" (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements under other accounting pronouncements, but does not change the existing guidance as to whether or not an instrument is carried at fair value. The statement is effective for fiscal years beginning after November 15, 2007. We are currently evaluating this statement and its effect on our consolidated financial statements.

In September 2006, the SEC staff issued SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. We are currently evaluating this statement and its effect on our consolidated financial statements.

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 GAAP are referred to as “non-GAAP financial measures”. To supplement our financial statements presented on a GAAP basis, we use non-GAAP financial measures of operating results, net income and earnings per share adjusted to exclude special charges and/or share-based compensation. 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 charges 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 our marketplace performance. For example, these adjusted non-GAAP results are among the primary indicators our 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 GAAP. A comparison and reconciliation from non-GAAP to GAAP results is included in the tables under “Special Items” above.

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 29, 2006.

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.

(b)

Changes in internal controls. There has been no change in our internal control over financial reporting that occurred during the first fiscal quarter of 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

The statements in this item describe the major risks to our business and should be considered carefully. We provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. Our business, financial condition or results of operations could be materially adversely affected by any of these risks.

We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. See “Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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 merger partners is critical to our future operating and financial performance. Integration requires, among other things:

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maintaining the customer base;

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optimizing of delivery routes;

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coordinating administrative, distribution and finance functions; and

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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 caused 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. We cannot assure you 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. We cannot assure you 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, we cannot assure you 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. We cannot assure you 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.

Increased Fuel Costs

Increased fuel costs may have a negative impact on our results of operations. The high cost of diesel fuel can also increase the price we pay for products as well as the costs we incur to deliver products to our customers. These factors, in turn, may negatively impact our net sales, margins, operating expenses and operating results. To manage this risk, we have in the past periodically entered, and may in the future periodically enter, into heating oil derivative contracts to hedge a portion of our projected diesel fuel requirements. Heating crude oil prices have a highly correlated relationship to fuel prices, making these derivatives effective in offsetting changes in the cost of diesel fuel. We do not enter into fuel hedge contracts for speculative purposes.

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. We cannot assure you 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. We cannot assure you 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. We cannot assure you that we will be able to compete effectively against current and future competitors.

We depend heavily on our principal customers

Our ability to maintain close, mutually beneficial relationships with our two largest customers, Whole Foods Market and Wild Oats Markets, is an important element to our continued growth. In October 2006, we announced a seven-year distribution agreement with Whole Foods Market, which commenced on September 26, 2006, under which we will continue to serve as the primary U.S. distributor to Whole Foods Market in the regions where we previously served. In November 2006, we entered into an amendment to that distribution agreement, under which we were named the primary wholesale natural grocery distributor to Whole Foods Market’s Southern Pacific region, which includes Southern California, Arizona and Southern Nevada, and is a region we did not previously serve. Whole Foods Market accounted for approximately 25.5% of our net sales in the quarter ended October 28, 2006. In January 2004, we entered into a five-year primary distribution agreement with Wild Oats Markets. We had previously served as primary distributor for Wild Oats Markets through August 2002. Wild Oats Markets accounted for approximately 9.2% of our net sales in the quarter ended October 28, 2006. 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. We cannot assure you 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:

•

difficulties with the collectibility of accounts receivable;

•

difficulties with inventory control;

•

competitive pricing pressures; and

•

unexpected increases in fuel or other transportation-related costs.

We cannot assure you 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 (Executive Vice President, Chief Operating Officer and President of Distribution), Daniel V. Atwood (Executive Vice President, Chief Marketing Officer, and President of United Natural Brands), Michael D. Beaudry (President of the Eastern Region), Thomas A. Dziki (National Vice President of Real Estate and Construction), Michael S. Funk (President and Chief Executive Officer), Gary A. Glenn (Vice President of Information Technology), Randle Lindberg (President of the Western Region), Mark E. Shamber (Vice President, Chief Financial Officer and Treasurer), and other key management employees. Loss of the services of any officers or any other key management employee could have a material adverse effect on our business, financial condition or results of operations.

Our operating results are subject to significant fluctuations

Our net sales and operating results may vary significantly from period to period due to:

•

demand for natural products;

•

changes in our operating expenses, including in fuel and insurance;

•

management’s ability to execute our business and growth strategies;

•

changes in customer preferences and demands for natural products, including levels of enthusiasm for health, fitness and environmental issues;

•

fluctuation of natural product prices due to competitive pressures;

•

personnel changes;

•

supply shortages;

•

general economic conditions;

•

lack of an adequate supply of high-quality agricultural products due to poor growing conditions, natural disasters or otherwise;

•

volatility in prices of high-quality agricultural products resulting from poor growing conditions, natural disasters or otherwise; and

•

future acquisitions, particularly in periods immediately following the consummation of such acquisition transactions while the operations of the acquired businesses are being integrated into our operations.

Due to the foregoing factors, we believe that period-to-period comparisons of our operating results may not necessarily be meaningful and that such comparisons cannot be relied upon as indicators of future performance.

We are subject to significant governmental regulation

Our business is highly regulated at the federal, state and local levels and our products and distribution operations require various licenses, permits and approvals. In particular:

•

our products are subject to inspection by the U.S. Food and Drug Administration;

•

our warehouse and distribution facilities are subject to inspection by the U.S. Department of Agriculture and state health authorities; and

•

the U.S. Department of Transportation and the U.S. Federal Highway Administration regulate our trucking operations.

The loss or revocation of any existing licenses, permits or approvals or the failure to obtain any additional licenses, permits or approvals in new jurisdictions where we intend to do business could have a material adverse effect on our business, financial condition or results of operations.

Union-organizing activities could cause labor relations difficulties

As of October 28, 2006, we had approximately 4,570 full and part-time employees. An aggregate of 8% of our total employees, or approximately 350 of the employees at our Auburn, Washington, Iowa City, Iowa and Edison, New Jersey facilities, are covered by collective bargaining agreements. The Edison, New Jersey and Auburn, Washington agreements expire in June 2008 and February 2009, respectively. The Iowa City, Iowa agreement expired in June 2006. We are continuing to negotiate with these employees and expect to reach agreement in the first quarter of calendar 2007. 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 or we are not successful in reaching agreement with these employees, 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 an amended and restated secured revolving credit facility, with available credit under it of $250 million at an interest rate of one-month LIBOR plus 0.75% maturing on March 31, 2008. As of October 28, 2006, our borrowing base, based on accounts receivable and inventory levels, was $250 million, with remaining availability of $119.9 million. In April 2003, we executed a term loan agreement in the principal amount of $30 million secured by certain real property that was released from the lien under our amended and restated credit facility in accordance with an amendment to the loan and security agreement related to that facility. The 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 July 2005, we further amended the term loan agreement, which further increased the principal amount from $40 million to a maximum of up to $75 million. The amended term loan accrues interest at one-month LIBOR plus 1.00%, and is repayable over seven years based on a fifteen-year amortization schedule, with all other terms and conditions remaining unchanged. As of October 28, 2006, $70 million was outstanding under the term loan agreement.

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 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits

Exhibit No.	Description
10.1*	Distribution Agreement between the Registrant and Whole Foods Market, Inc.
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

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.

* * *

We would be pleased to furnish a copy of this Form 10-Q to any stockholder who requests it by writing to:

United Natural Foods, Inc.

Investor Relations

260 Lake Road

Dayville, CT 06241

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

UNITED NATURAL FOODS, INC.

/s/ Mark E. Shamber

Mark E. Shamber
Chief Financial Officer
(Principal Financial and Accounting Officer)

Dated: December 7, 2006

EX-10.1 2 ex10-1.htm DISTRIBUTION AGREEMENT United Natural Foods, Inc. Form 10-Q; Fiscal Quarter Ended October 28, 2006; Exhibit 10.1

Exhibit 10.1

NOTE: A request for confidential treatment has been made with respect to the portions of the following document that are marked with [*CONFIDENTIAL*]. The redacted portions have been filed separately with the SEC.

AGREEMENT FOR DISTRIBUTION OF PRODUCTS

This Agreement for Distribution of Products (the “Agreement”) is effective September 26, 2006 between Whole Foods Market Distribution, Inc., a Delaware corporation (“WFM”), and United Natural Foods, Inc., a Delaware corporation (“UNFI”).

RECITALS

A. WFM and its affiliates and subsidiaries are primarily engaged in the sale of natural and organic products. Their operations include retail stores (“WFM Stores”), food production/repacking facilities and distribution centers (together, including WFM Stores, the “WFM Locations”). WFM and its affiliates and subsidiaries have WFM Locations in a number of separate regions, which currently include the Florida Region, Mid-Atlantic Region, Mid-West Region, Pacific Northwest Region, Northern Atlantic Region, Northeast Region, Northern California Region, Rocky Mountain Region, South Region, Southern Pacific Region, and the Southwest Region (each a “WFM Region” and collectively the “WFM Regions”).

B. UNFI and its affiliates, subsidiaries and related parties including but not limited to, all distribution arms of the foregoing parties and Select Nutrition (together with UNFI, the “UNFI Parties”) operate a group of distribution centers (individually a “UNFI DC” and collectively the “UNFI DCs”) that sell natural and organic products. For purposes of this Agreement UNFI Parties specifically excludes Albert’s Organics, Inc. and manufacturing arms and retail divisions of UNFI and its affiliates subsidiaries and related parties.

C. The parties desire to enter into this Agreement to set forth the terms upon which UNFI will sell and distribute to WFM Locations and WFM Locations will purchase certain goods and services.

NOW, THEREFORE, the parties agree as follows:

1. Term. This Agreement shall have an initial term of seven years (the “Term”) commencing as of September 26, 2006 (the “Effective Date”).

2. Scope. This Agreement applies to any product purchased by a WFM Location in the continental United States from the UNFI Parties (in any case a “Product” and collectively “Products”). [*CONFIDENTIAL*].

3.	Distribution Arrangement.

(a) The pricing terms set forth in this Agreement will remain in effect as long as WFM uses UNFI as its “Primary Distributor.” WFM is deemed to have used UNFI as its Primary Distributor if the following two conditions are met: (i) each WFM Region (excluding [*CONFIDENTIAL*] and all WFM Stores outside of the continental United States) purchases [*CONFIDENTIAL*] in Products per “WFM Fiscal Year” (as identified on Exhibit A) as were purchased in [*CONFIDENTIAL*]; and (ii) if [*CONFIDENTIAL*] of the aggregate dollar amount of Product purchases by all WFM Stores (excluding [*CONFIDENTIAL*] and all WFM Stores outside of the continental United States) from wholesale natural grocery distributors during a WFM Fiscal Year are made from UNFI Parties. Orders submitted to the UNFI Parties

for Products that are out of stock (“OOS”) will be included in the calculation as purchases from UNFI Parties for determining whether both (a)(i) and (a)(ii) have been satisfied. The following purchases by WFM Stores are not considered to be purchases from a wholesale natural grocery distributor and therefore will not be included in determining the dollar amount of WFM Store product purchases for purposes of this Section 3(a)(ii): (A) purchases by WFM Stores from WFM or any of its affiliates or subsidiaries (collectively, the “WFM Parties”), including, but not limited to, purchases from a WFM distribution center, (B) purchases by WFM Store from the manufacturer of a product, (C) purchases by WFM Stores from non natural grocery distributors including, but not limited to, broad-line food service distributors, non-food distributors and specialty distributors such as but not limited to cheese, produce, meat, seafood, or alcoholic beverages distributors. If at any time UNFI believes that WFM has not satisfied the conditions set forth in Section 3(a)(i) or 3(a)(ii), UNFI will notify WFM in writing. WFM will have 3 WFM Periods from receipt of such notice to adjust purchases to meet the requirements. If WFM fails to cure the noncompliance in 3 WFM Periods (calculated on a consecutive 13 WFM Period basis) from the receipt of notice, UNFI’s sole remedy will be to renegotiate the “Gross Profit Margin Percent” identified on Exhibit B.

(b) UNFI agrees to (i) use commercially reasonable efforts to increase its distribution capacity in [*CONFIDENTIAL*] and (ii) establish a new distribution center in [*CONFIDENTIAL*]. If UNFI fails to provide fully functional UNFI DCs capable of servicing the applicable WFM Locations in the [*CONFIDENTIAL*] and [*CONFIDENTIAL*] (in each case, the “Online Date”), UNFI will be charged a penalty fee. The penalty fee begins on the applicable UNFI DCs Online Date and continues until the applicable UNFI DC is fully functional and is equal to [*CONFIDENTIAL*]. If there is an event of Force Majeure that prevents UNFI from meeting the applicable Online Date, the parties agree to negotiate a new Online Date.

(c) UNFI agrees to stock all new Products requested by WFM after the Effective Date if a majority of the WFM Stores (but in any case, not less than six WFM Stores or all the WFM Stores in a WFM Region if the WFM Region contains less than six WFM Stores) in the applicable WFM Region agree to stock the new Product, including, but not limited to, Exclusives (defined in Section 5(b)), Private Label SKUs (defined in Section 6(a)) and Control Label SKUs (defined in Section 6(a)). All new Product vendors must meet UNFI’s reasonable requirements for new vendors. Any single WFM Store requests for a new Product will be reviewed on a case by case basis.

(d) At any time during the term of this Agreement, the [*CONFIDENTIAL*] may choose to use UNFI as its Primary Distributor by executing a document substantially in the form of Exhibit C attached hereto. Subject to the requirements in Exhibit C, UNFI will become the Primary Distributor for the [*CONFIDENTIAL*] effective the date of execution of Exhibit C. Notwithstanding anything to the contrary in this Agreement, Exhibit C does not require the execution of UNFI although it will amend this Agreement.

4. Reports. At WFM’s reasonable request, UNFI will provide reports to WFM that include all information and data relevant to an evaluation of the WFM account and UNFI’s performance under this Agreement, including, but not limited to, the following reports: (i) all reports requested by WFM [*CONFIDENTIAL*]; (ii) any reports of the type provided to WFM prior to

the Effective Date; and (iii) all reports requested in this Agreement. In addition, WFM may submit requests to UNFI for additional information and data relating to WFM’s account and UNFI will prepare reports for WFM setting forth the requested information and data. UNFI will use commercially reasonable efforts to provide all such information and data in a timely manner and in the format requested by WFM. WFM may specify either a hard copy or electronic copy. For electronic copies, WFM may specific whether the report will be delivered in CSV, Excel or Word or another format reasonably acceptable to UNFI

5.	Branded Products.

(a) Quality Standards. WFM has a list of ingredients located at www.wholefoodsmarket.com (which the WFM Parties may modify from time to time) that WFM does not permit in any products sold at WFM Stores (the “Unacceptable Ingredient List”). UNFI agrees it will not knowingly sell WFM Products that contain ingredients listed on the Unacceptable Ingredient List.

(b) Exclusives. From time to time, WFM and certain Product manufacturers or suppliers may agree that a Product provided by such manufacturer or supplier will be sold exclusively to WFM (“Exclusives”). If a new Exclusive Product meets the requirements in Section 3(c), UNFI will purchase and stock Exclusives in inventory and for a period specified by WFM (not to exceed three UNFI Pricing Periods per UNFI DC unless mutually agreed upon by the parties), UNFI will sell the Product only to WFM Locations.

6.	Private Label and Control Label Products.

(a) Inventory. “Private Label SKUs” will mean those Products that WFM Locations offer from time to time with packaging that includes WFM proprietary labels including, but not limited to, “Whole Foods” “365 Everyday Value” “365 Organic Everyday Value” “Whole Kids Organic” “Whole Body” “Whole Pantry” and such other trade names or marks used by WFM Parties from time to time. In addition to Private Label SKUs, certain manufacturers or suppliers may agree from time to time to produce products for WFM that include manufacturer or supplier proprietary labels used exclusively on products sold to WFM Locations (“Control Label SKUs”). UNFI will purchase and stock the Private Label SKUs and the Control Label SKUs requested by WFM from time to time in the UNFI DCs designated by WFM. UNFI will provide WFM with a current list of individuals designated as contacts for Private Label SKU and Control Label SKU inventory matters and will keep WFM informed of any changes to contact information.

(b) Report. UNFI recognizes the importance of delivering all information regarding Private Label SKUs and Control Label SKUs in a clear, concise and complete manner. UNFI will provide WFM with a report of UNFI’s Private Label SKU inventory and Control Label SKU inventory in a form mutually agreed upon by the parties once every WFM Period as identified on Exhibit A (the “Private Label Report”). The Private Label Report will be per UNFI DC and UNFI in total and will include information about usage, stock level, amount on order and how many times each Private Label SKU and Control Label SKU turned during a WFM Period (an “Inventory Minimum Turn Period”). UNFI agrees to deliver the first Private Label Report 60 days from the Effective Date.

(c)

Product Hold; Stock Recovery, Withdrawals and Recalls.

(i) All notices relating to a Product hold, stock recovery, withdrawal or recall of a Private Label SKU or Control Label SKU may be communicated to UNFI by a member of the WFM Private Label Team (a “Product Action Notice”). UNFI will cooperate fully with the WFM Private Label Team, respond promptly to any Product Action Notice and confirm receipt of any such notice by email as soon as possible but in every case, within 24 hours. UNFI shall keep the WFM Private Label Team informed of the status of UNFI inventory subject to a Product Action Notice and all actions performed by a UNFI Party in response to any such notice. If UNFI receives notice from anyone other than a WFM Private Label Team member that involves a Product hold, stock recovery, withdrawal or recall associated with a Private Label SKU or a Control Label SKU, UNFI will immediately notify a member of the WFM Private Label Team. The Private Label SKU or Control Label SKU involved in this notice may be placed on hold; however, no other action should be taken until a directive is received from the WFM Private Label Team.

(ii) Product subject to a Product hold, stock recovery, withdrawal or recall of a Private Label SKU or a Control Label SKU inventory whether due to a defect, damage, misbranding or quality issue is considered “Rejected Inventory.” [*CONFIDENTIAL*]. UNFI will indemnify WFM for any losses incurred by the WFM Parties resulting from a UNFI Party’s failure to comply with a Product Action Notice.

(d) Product Sales. UNFI agrees to take commercially reasonable efforts to prevent any UNFI Party from selling or donating or otherwise distributing or conveying any Private Label SKU or any Control Label SKU to any distribution network, stores, entities or persons not approved in advance by a WFM Private Label Team Member. UNFI agrees to fully cooperate with WFM Private Label Team members and their representatives and designees in any investigation or litigation relating to any unauthorized sale. [*CONFIDENTIAL*].

(e) WFM Responsibility for Inventory. Except for (i) Rejected Inventory, (ii) inventory that is out of date or damaged or in unacceptable condition due to UNFI’s acts or omissions including, but not limited to, improper storage, improper rotation, improper ordering, damage incurred during transportation by UNFI or its designees or (iii) missing, short or lost Product (shrink), if WFM terminates a Private Label SKU or a Control Label SKU, WFM will be responsible for and will reimburse UNFI for the applicable Private Label SKU or Control Label SKU inventory held by UNFI not to exceed the greater of (i) a 90 day supply based upon the WFM Locations’ past purchasing practices, or, if a new Product, projections provided in writing by WFM, or (ii) the supplier’s minimum order quantity. If the WFM Private Label Team instructs UNFI to destroy a Private Label SKU or a Control Label SKU held in inventory, UNFI will promptly arrange for the destruction of the applicable Products and will promptly provide WFM with a certificate of destruction covering all applicable Products.

(f) [*CONFIDENTIAL*]. Private Label SKUs and Control Label SKUs will be priced for invoice purposes in the same manner as other Products purchased by WFM Locations from UNFI Parties except for [*CONFIDENTIAL*].

7.	Invoicing Payment Terms.

(a)

Product Invoices.

(i) Standard Invoices. Except for the EDLC Program (defined in Section 7(a)(iii)), UNFI will invoice WFM Locations for all Products purchased by WFM Locations consistent with practices in effect between WFM and UNFI prior to the Effective Date. The current practice applies to Products other than produce, wine and non-branded bulk items (“Standard Products”). For Standard Products, the price shown on the invoice to WFM (the “Standard Invoice Product Price”) will equal UNFI’s Cost (defined below) plus [*CONFIDENTIAL*]. “Cost” equals the manufacturer’s list price (the “MLP”) to UNFI for the Product, plus (ii) the Freight Charge. The “Freight Charge” means either (i) [*CONFIDENTIAL*] or (ii) [*CONFIDENTIAL*]. A Freight Charge will not be applied to Products that include freight in the MLP (i.e. Products with delivered cost pricing). WFM may change the amount of [*CONFIDENTIAL*] at any time by giving UNFI written notice. The foregoing change will be reflected in the next EDI cost files transmitted to WFM and the new [*CONFIDENTIAL*] becomes effective at the start of the next UNFI Pricing Period for such EDI cost files, not to exceed nine weeks.

(ii)

[*CONFIDENTIAL*]

(iii) EDLC Program. Certain Products will be included in a new program known as the WFM Everyday Low Cost Program (the “EDLC Program”). A Product will be included in the EDLC Program if WFM and the Product supplier or manufacturer agree upon an every day low cost (an “EDLC Cost”) for a Product that is resold by UNFI to WFM Locations (“EDLC Products”). For EDLC Products, the invoice price (the “EDLC Invoice Price”) will equal [*CONFIDENTIAL*]. A Freight Charge will not be applied to Products that include freight in the EDLC Cost. UNFI will report to the supplier or manufacturer the applicable EDLC Product sales and deduct from or credit to the supplier or manufacturer the appropriate EDLC reconciliation amount (the “EDLC Reconciliation Amount”). The EDLC Reconciliation Amount will be equal to [*CONFIDENTIAL*]. The parties will work together to create forms and procedures to support the EDLC Program, including, but not limited to, a WFM EDLC Reconciliation Process and a WFM EDLC Program Form. WFM may change the amount of the [*CONFIDENTIAL*] at any time by giving UNFI written notice. The foregoing change will be reflected in the next EDI cost files transmitted to WFM and the new [*CONFIDENTIAL*] becomes effective at the start of the next UNFI Pricing Period for such EDI cost files, not to exceed nine weeks.

(iv) Cross-Dock Billing UNFI will, from time to time, and based on UNFI space availability, ship goods and shipper displays on a cross-dock basis for WFM at a rate of $[*CONFIDENTIAL*].

(v) [*CONFIDENTIAL*]. From time to time, WFM or UNFI, on WFM’s behalf, may negotiate [*CONFIDENTIAL*] from the manufacturer and/or supplier. The [*CONFIDENTIAL*] will be reflected as a reduction in the applicable invoice price. For example, [*CONFIDENTIAL*]. The parties will work together to create a list of manufacturers and suppliers that have agreed to provide WFM [*CONFIDENTIAL*]. UNFI Authorization

forms for standing and one-time [*CONFIDENTIAL*] will be completed and submitted by WFM’s vendor or broker and submitted to UNFI designated personnel who will update and maintain this information and apply the specified reductions from the applicable invoice price. For any WFM specific [*CONFIDENTIAL*] UNFI will require manufacturer’s or supplier’s authorization. The foregoing WFM [*CONFIDENTIAL*] price will be reflected on the applicable invoice. UNFI Authorization forms will be submitted to UNFI with a minimum of two weeks lead time before desired delivery date.

(vi) Fuel Surcharge Program. If during a “WFM Fiscal Quarter” (set forth on Exhibit A) the average price per gallon of diesel fuel exceeds [*CONFIDENTIAL*] based on the U.S. weekly average from the U.S. Department of Energy’s Weekly Retail On-Highway Diesel Prices report found on the US Energy Information Administration website, www.eia.doe.gov, WFM will incur a “Fuel Surcharge” as set forth on Exhibit D. The foregoing government report is currently located at http://tonto.eia.doe.gov/oog/info/wohdp/diesel_detail_report.asp. The Fuel Surcharge, if any, is calculated each WFM Fiscal Quarter based on the sum of the U.S. weekly average price per gallon, as found above, during the prior WFM Fiscal Quarter divided by the number of weeks in such prior WFM Fiscal Quarter, rounded to 2 decimal places using standard rounding procedures. The Fuel Surcharge, if any, shall be incurred for each delivery by UNFI fleet to a WFM Location. In accordance with current practices the Fuel Surcharge will be billed to each WFM Region per WFM Fiscal Quarter with supporting documentation reflecting the calculation of the Fuel Surcharge for each WFM Location.

(vii) Pallet & Tote Program. The parties will develop a mutually agreeable pallet and tote exchange program. The pallet and totes received and returned by WFM will be tracked on each WFM Location invoice. WFM will pay UNFI a fee of [*CONFIDENTIAL*] per tote for totes not returned to UNFI (a “Tote Fee”). The Tote Fee will be invoiced to each WFM Region per WFM Fiscal Quarter with supporting documentation reflecting the calculation of the Tote Fee for each WFM Location. Upon Product deliveries, WFM will use its commercially reasonable efforts to provide UNFI with the number of empty pallets equal to the number of loaded pallets delivered to WFM.

(viii) WFM’s Manufacturer/Supplier Relationship. UNFI agrees (i) to cooperate with WFM regarding any WFM arrangement with the Product manufacturer and/or supplier including, but not limited to, the EDLC Program, funding for new, remodeled and acquired WFM Stores, promotions and free or discounted Product and (ii) it will not attempt to circumvent any such arrangement including, but not limited to, the EDLC Cost

(ix) Electronic Cost & Invoice Files. Consistent with past practices, UNFI will provide electronic cost files daily and each UNFI Pricing Period. Further, in addition to paper invoices submitted to WFM Locations, UNFI will provide daily electronic invoice files in EDI format. During the term of this Agreement, WFM intends to cross check the Product prices on the invoice against the electronic cost files. If there is a discrepancy in the Product price, WFM may adjust the applicable payment. [*CONFIDENTIAL*].

(b)

Payment Terms.

(i) Amounts due UNFI. WFM will send a wire transfer every [*CONFIDENTIAL*] with payment for all acceptable invoices received by WFM Locations [*CONFIDENTIAL*]. UNFI may impose a finance charge of 1% per WFM Period for any undisputed amounts that are not paid timely.

(ii) Amounts due WFM. Except as otherwise provided in this Agreement, any amount payable by UNFI to WFM will be due and payable within [*CONFIDENTIAL*] days from the beginning of the applicable WFM Period. WFM may impose a finance charge of 1% per WFM Period for any undisputed amounts that are not paid timely.

8.	[CONFIDENTIAL]

(a) Purpose. The parties acknowledge that UNFI may realize income from sales of Products to WFM Locations through various means including, but not limited to, (i) [*CONFIDENTIAL*] and (ii) [*CONFIDENTIAL*]. [*CONFIDENTIAL*]. UNFI represents to WFM that it will not attempt to circumvent the intent of this Section 8.

(b)

[*CONFIDENTIAL*]

(c)

[*CONFIDENTIAL*].

(i)

[*CONFIDENTIAL*]

(x)

Definition of Total Sales: [*CONFIDENTIAL*].

(y)

Definition of Total Cost of Goods Sold: [*CONFIDENTIAL*].

(ii)

[*CONFIDENTIAL*].

(d)

[*CONFIDENTIAL*]

(e)

[*CONFIDENTIAL*].

(f)

[*CONFIDENTIAL*]

(g) Accuracy of Information. In connection with the negotiation of this Agreement, UNFI has provided information to WFM relating to [*CONFIDENTIAL*]. UNFI acknowledges that WFM has relied upon this information in connection with the negotiation and execution of this Agreement. UNFI represents and warrants that all information provided to WFM during the negotiation of this Agreement is true and correct. If WFM determines that the above information is inaccurate or WFM was mislead, WFM may renegotiate the [*CONFIDENTIAL*]. If WFM chooses to renegotiate a reduction in the percentages listed on the [*CONFIDENTIAL*], UNFI agrees to negotiate in good faith.

(h)

[*CONFIDENTIAL*].

9. Credits. UNFI’s Standard Credit Policy and UNFI’s Credit Allowance Policy are outlined on Exhibit E (“UNFI Credit Policy”). These policies set forth two separate procedures for providing credit for certain errors relating to Product orders including, but not limited to, Products which are billed but not received, wrong Product shipped, damaged Product, Products with less than agreed upon shelf life remaining, spoiled or infested Product, Product with defective packaging, consumer returns, withdrawn or recalled Products and pricing errors. Each WFM Region will select one of the two UNFI Credit Policy options. Each WFM Region may change its UNFI Credit Policy once per WFM Fiscal Year by giving UNFI 30 days written notice, such change to be effective beginning with the WFM Period following the 30 day notice. Notwithstanding the terms set forth in the UNFI Credit Policy, during the transition from the credit policy process in place between UNFI and WFM prior to the Effective Date and the new UNFI Credit Policy, UNFI’s DCs in the EAST (i) will implement a transitional credit submission timeline of four calendar days for the first three WFM Periods after the effective date of the new UNFI Credit Policy, and (ii) will accept one last cycle of suncare returns at the end of the 2006 season.

10.	Other Rebates.

(a) Signing Bonus. In consideration of the execution of this Agreement, UNFI will pay WFM [*CONFIDENTIAL*]. The payment will be in the form of a check or wire transfer.

(b)

[*CONFIDENTIAL*]

(c)

[*CONFIDENTIAL*]

(d)

[*CONFIDENTIAL*]

11. New Product Slotting. WFM will submit a completed New Product Request Form (provided by UNFI) to request the addition of a new Product to UNFI’s inventory for sale to WFM Parties. The New Product Request Form will include a place to specify whether the new Product will be introduced by WFM on a national or regional basis. If the new Product will be introduced nationally, UNFI will purchase and slot the Product in all UNFI DCs for delivery to all WFM Locations. If the new Product will be introduced only in specific regions, UNFI will purchase and slot the new Product in the designated regions. UNFI will use commercially reasonable efforts to meet reasonable timelines requested by WFM for delivery of a new Product to WFM Locations. The parties agree that the following time frames are reasonable:

(a) if a supplier or manufacturer is new to any West or East division of UNFI, UNFI will submit purchase orders to the supplier or manufacturer within [*CONFIDENTIAL*] of the date WFM submits the New Product Request Form to UNFI (the “New Product Request Date”) and will use commercially reasonable efforts to deliver the requested new Product to WFM Locations within [*CONFIDENTIAL*] of the New Product Request Date;

(b) if the Product (but not the supplier or manufacturer) is new to any West or East division of UNFI, UNFI will submit purchase orders to the supplier or manufacturer within [*CONFIDENTIAL*] of the New Product Request Date and will use commercially reasonable efforts to deliver the Product to the designated WFM Locations within [*CONFIDENTIAL*] of the New Product Request Date; and

(c) if UNFI has a Product number for a Product in the appropriate division requested by WFM, UNFI will submit all purchase orders for the new Product within [*CONFIDENTIAL*] of the New Product Request Date and will use commercially reasonable efforts to deliver the new Product to WFM Locations within [*CONFIDENTIAL*] of the New Product Request Date unless the supplier or manufacturer is not on a weekly ordering schedule, in which case, UNFI will submit the purchase order on the next possible order date and the timing of new Product delivery to WFM Locations will be adjusted accordingly.

(d) The parties acknowledge that supplier or manufacturer lead times, transportation schedules and other factors outside of UNFI’s control may affect the final WFM Location delivery timeline. WFM also acknowledges that a new Product orders involving an unusually large number of Product may require longer timelines.

12. Fill Rate. UNFI agrees to use commercially reasonable efforts to maintain a “fill rate” for each UNFI DC of at least [*CONFIDENTIAL*]% meaning that [*CONFIDENTIAL*]% or more of Products ordered by WFM Locations will be delivered on time and in good condition with the correct invoice and selection of Products. UNFI will provide a report to WFM once a week by UNFI DC of the actual dollar amount of Product filled and delivered on time by that UNFI DC and the dollar amount of the Products that would have been filled and delivered if that UNFI DC had a 100% fill rate. UNFI warrants and guarantees (excluding the [*CONFIDENTIAL*] Region) a [*CONFIDENTIAL*]% fill rate for each UNFI DC (the “Minimum Fill Rate”), which excludes mispicks, bills not received, short-code and quality, consistent with past practices. If any UNFI DC fails to meet the Minimum Fill Rate for [*CONFIDENTIAL*] consecutive weeks, every week following until the UNFI DC meets the Minimum Fill Rate, UNFI will pay each WFM Location affected an amount equal to [*CONFIDENTIAL*] of the difference between the dollar amount of Product represented by the Minimum Fill Rate and the dollar amount of Products delivered pursuant to those orders (in each instance a “Fill Rate Penalty Fee”). For example, if a UNFI DC fails to meet the Minimum Fill Rate for [*CONFIDENTIAL*] weeks in a row, each WFM Location that placed orders for Products from the UNFI DC that were due to be delivered during the 5^th week would be entitled to a payment calculated as follows. If the dollar amount of Products received by the WFM Location from the UNFI DC during week five was $90,000 and there were $100,000 of Products ordered in corresponding purchase orders that were due to be delivered that week, the resulting fill rate would be [*CONFIDENTIAL*] for that WFM Location for that week. The difference between the actual fill rate dollar amount that week ($90,000) and the Minimum Fill Rate dollar amount [*CONFIDENTIAL*]. UNFI would owe that WFM Location a payment equal to [*CONFIDENTIAL*]. If the failure of UNFI to deliver any Product is a result of any of the following conditions, the Product will not be included in the calculations for determining the Minimum Fill Rate or the payment owed to a WFM Location: (i) if a Product is OOS as a result of a failure of the supplier or manufacturer (which can be independently verified by WFM) or as a result of a supply interruption due to natural disasters and UNFI has used commercially reasonable efforts to obtain the Product; (ii) promotional overpulls; (iii) applicable grocery strikes; (iv) interruptions in rail service or other transportation services other than those provided by UNFI; (v) mistakes in ordering on the part of WFM (e.g. WFM inadvertently requests the wrong amount of a Product on a purchase order).

13.	Minimum Orders.

(a) Select Nutrition. If the total purchase price of Select Nutrition Product ordered (including OOS Products) meets the $[*CONFIDENTIAL*] minimum order amount (until October 31, 2006) or the $[*CONFIDENTIAL*] minimum order amount (after October 31, 2006), UNFI will ship the Select Nutrition Products without a shipping fee. If WFM does not order the above minimum amount of Select Nutrition Products, WFM will be charged a $[*CONFIDENTIAL*] shipping fee.

(b) Other UNFI Parties. Except for the $[*CONFIDENTIAL*] minimum purchase requirement for all WFM Locations, all WFM Locations in [*CONFIDENTIAL*] and outside of the U.S. are excluded from this Section 13(b). WFM will use reasonable commercial efforts to maintain a national average minimum order amount of $[*CONFIDENTIAL*] for WFM Stores and $[*CONFIDENTIAL*] for other WFM Locations. Any WFM Store ordering on average less than $[*CONFIDENTIAL*] per order will make reasonable attempts towards increasing the WFM Store’s average order to at least $[*CONFIDENTIAL*]. In no event will UNFI be required to deliver an order that is less than $[*CONFIDENTIAL]. Order amounts will be based upon the total purchase price of Product ordered including the [*CONFIDENTIAL*] and OOS Products. UNFI will [*CONFIDENTIAL*]. If WFM fails to maintain a national average minimum order amount of $[*CONFIDENTIAL*] for WFM Stores and $[*CONFIDENTIAL*] for other WFM Locations, UNFI will notify WFM and WFM will take reasonable efforts to increase minimum order amounts.

14.

Auditing.

(a) Support. Notwithstanding any language to the contrary, UNFI agrees to assist WFM with [*CONFIDENTIAL*] audit requests pertaining to this Agreement [*CONFIDENTIAL*]. In addition, UNFI agrees to [*CONFIDENTIAL*].

(b) Records and Documentation. UNFI will maintain books, records, reports and documentation relating to its performance of this Agreement including, but not limited to, [*CONFIDENTIAL*] for a period of time, but in any case, not less than three years. Upon 21 days written notice UNFI will provide WFM and its designees access to [*CONFIDENTIAL*] for inspection during UNFI’s normal working hours. UNFI agrees to provide copies of any of the foregoing if requested by WFM. Alternatively, upon 21 days written notice from WFM, UNFI will send [*CONFIDENTIAL*] to a location of WFM’s choice for inspection by WFM or its designees. Upon WFM’s satisfactory conclusion of the audit, WFM will return all copies of books, records, reports and documentation. In addition, UNFI will provide WFM and its designees with [*CONFIDENTIAL*].

(c) Payment. If, as a result of any WFM audit there is evidence that WFM was overcharged or did not receive any amount due, then UNFI will promptly pay WFM the amount thereof. In addition, UNFI will promptly pay [*CONFIDENTIAL*]. If the amount payable to WFM exceeds 2% of the aggregate amount that WFM should have been charged or was due, UNFI will promptly pay the applicable reasonable audit expense.

15.	Personnel.

(a) National Account Manager. UNFI will continue to provide, [*CONFIDENTIAL*], a UNFI employee to serve as a National Account Manager for WFM’s account with UNFI. The primary responsibility for the National Account Manager is to be a liaison and singular point of contact between UNFI and WFM. The UNFI National Account Manager’s duties will be designated by UNFI but will all pertain to WFM’s account. The UNFI National Account Manager will reside in Austin, Texas and at WFM’s option, maintain an office at WFM Headquarters.

(b) National Promotions Coordinator. UNFI will designate a UNFI employee to serve as a WFM National Promotions Coordinator. The National Promotions Coordinator’s specific duties will be designated by UNFI but will all pertain to WFM’s account. The National Promotions Coordinator will draft WFM National Promotion Pre-orders subject to final approval by WFM and perform such other duties as the parties shall mutually agree. The Promotions Coordinator will reside in Austin, Texas and at WFM’s option, maintain an office at WFM Headquarters. UNFI has [*CONFIDENTIAL*] weeks from the Effective Date to hire a National Promotions Coordinator.

(c) Contract Manager. On or before September 26, 2006, UNFI will designate a UNFI employee to serve as a WFM Contract Manager. The Contract Manager’s specific duties will be designed by UNFI but will pertain to WFM’s account. The Contract Manager will help ensure that UNFI is in compliance with this Agreement and act as the liaison to WFM for auditing purposes. Further, the Contract Manager will conduct continuous self-auditing.

(d) Appointment Criteria. The individuals filling the National Account Manager and National Promotions Coordinator positions are subject to WFM’s reasonable satisfaction. If WFM requests the replacement of any UNFI personnel for any non-discriminatory reason, UNFI will use commercially reasonable efforts to promptly replace such individuals with new, competent personnel reasonably satisfactory to WFM.

(e) WFM Store Support. UNFI will [*CONFIDENTIAL*]. UNFI will continue to provide assistance for new and relocated WFM Stores as reasonably requested by WFM.

16.	[CONFIDENTIAL].

17.	UNFI Distribution Centers; Delivery Standards.

(a) Standards for Distribution Centers. UNFI represents and warrants that all UNFI DCs will be maintained and operated in accordance with all applicable laws, in compliance with industry standards (including industry sanitation standards), and in all material respects in accordance with UNFI’s warehousing and delivery standards, which will be available for review upon request by WFM. WFM may inspect the physical plant and inventory of any UNFI DC during normal business hours upon reasonable advance notice to the designated UNFI personnel, but shall not impair or impede the business operations of the center. After 60 days prior notice and receipt of WFM’s consent, UNFI shall have the right to move service for WFM Stores from one UNFI DC to another. The proposed move shall not result in any increase in cost to WFM,

and the parties will have had the opportunity to prepare and implement a plan for a transition to any new UNFI DC.

(b) Covenants for Delivery. UNFI shall, at UNFI’s election, transport Products on UNFI fleet or WFM-approved carriers to individual WFM Locations. UNFI shall comply with all applicable laws, including any regional or national limitations or guidelines regarding deliveries (e.g., municipal, residential or property owner imposed restrictions on delivery hours, parking of trucks, unacceptable levels of noise in residential areas, etc.).

(c) Delivery Time Windows. UNFI agrees to maintain the existing delivery time windows for delivery of Products to WFM Locations. If a WFM Location requests a change in a delivery time window that UNFI is unable to meet, UNFI and WFM may negotiate a [*CONFIDENTIAL*]. If the parties cannot agree on the amount of [*CONFIDENTIAL*], UNFI agrees it will meet the new delivery time window the WFM Location requested. If changes are required by municipal, residential or property owners on delivery hours, parking of trucks, delivery routes, curfews, noise ordinances, lease covenants, neighborhood covenants and/or operating hours, then WFM and UNFI will work together to make the scheduling changes necessary to comply with such restrictions.

(d) Code Date Policy; Inventory Management. Products shall be distributed to WFM Locations in compliance with the Code Date Policy attached as Exhibit G related to the minimum number of days prior to expiration of the final code date, for Products, under which such Products will be accepted upon delivery to the WFM Locations. The Code Date Policy may be amended from time to time upon mutual agreement of the parties. Product delivered with less than the minimum code date shall be deemed OOS for purposes of Sections 3(a) and 12. UNFI agrees to deliver all Products on a FEFO inventory management basis, to ensure proper inventory turns and maximize available Product Code Dates. Receipt of short-coded Product at any WFM Location that is not sold or used within the code date will be fully credited to WFM in accordance with the Code Date Policy.

(e) Quality Standards. Products will be delivered palletized and shrink-wrapped and meet WFM's quality standards and be free from damage including, but not limited to, temperature damage and be free from evidence of rodents or insects.

(f) Recalled Products. In the event that any Product is recalled or withdrawn (the “Recalled Product”), UNFI will use its personnel (or a third party retrieval service if UNFI reasonably believes the recall or withdrawal will be achieved faster, at less expense) to remove any Recalled Product from WFM Locations and shall dispose of or return any Recalled Products as required. In addition to the foregoing responsibilities, UNFI shall use its best efforts to cooperate with WFM in removing the Recalled Product and replenishing WFM Locations with replacement Products. Any credits for Recalled Products will be issued to WFM in compliance with the UNFI Credit Policy.

(g) Store Receiving. All Product shipments by UNFI to WFM Locations shall be evidenced by an invoice and signed by both parties. Shipments of Product shall be acknowledged as received by execution of the delivered invoice by a WFM employee at the WFM Location. A copy of each invoice shall be left with the WFM Location. In the event that

UNFI computer system issues prevent UNFI from delivering WFM product with invoices, WFM agrees to accept a Bill of Lading for such delivery in lieu of an invoice.

(h) Passage of Title and Risk of Loss. Title and risk of loss for Products purchased pursuant to this Agreement shall pass upon delivery to WFM Locations when delivered by UNFI fleet or by independent carrier.

18.	Indemnification.

(a) UNFI Indemnity. UNFI shall indemnify, defend and hold harmless WFM and its parent, subsidiaries and affiliates, together with their stockholders, general and limited partners, members, managers, directors, officers, employees, agents, representatives, successors and assigns from and against any and all demands, claims, liabilities, losses, judgments, settlements, penalties, costs, expenses, fees (including reasonable fees of any attorneys, consultants or experts), interest, liens, encumbrances, causes of action, damages of any kind and any other obligations (together “Liabilities”) arising out of, relating to or otherwise based upon (i) any actual or alleged violation by UNFI of any federal, state or local law, including any statute, ordinance, administrative order, rule or regulation; (ii) any negligence or willful misconduct of any UNFI Parties or any of their employees or agents; (iii) the breach or alleged breach of any term of this Agreement; (iv) the employment, presence or activities of any UNFI Parties or their employee or contractor at any WFM Location or other property (including, but not limited to, all personal injury, wage and hour, wrongful termination, harassment, discrimination, workers compensation, disability, tort, strict liability or contract claims or demands); and (v) any Product recall or withdrawal or safety notice initiated as a result of a request by a government agency, local health authority or consumer protection agency or court action because of or resulting from a condition which existed at the time of delivery of the Product to the WFM Locations.

(b) WFM Indemnity. WFM shall hold indemnify, defend and hold harmless UNFI and its parent, subsidiaries and affiliates, together with their stockholders, general and limited partners, members, managers, directors, officers, employees, agents, representatives, successors and assigns from and against any and all Liabilities arising out of, relating to or otherwise based upon (i) any actual or alleged violation by WFM of any federal, state or local law, including any statute, ordinance, administrative order, rule or regulation; (ii) any negligence or willful misconduct of WFM or any of its employees or agents; (iii) the breach or alleged breach of any term of this Agreement; and (iv) the employment, presence or activities of WFM or its employee or contractor on any UNFI premises related to this Agreement (including, but not limited to, all personal injury, wage and hour, wrongful termination, harassment, discrimination, workers compensation, disability, tort, strict liability or contract claims or demands).

(c) Third Person Claims. Promptly after a party has received notice of or has actual knowledge of any Claim against it covered by a third party or the commencement of any action or proceeding by a third person with respect to any such Claim, such party (sometimes referred to as the “Indemnitee”) shall give the other party (sometimes referred to as the “Indemnitor”) written notice of such claim or commencement of such action or proceeding; provided, however, that the failure to give such notice will not affect the right to indemnification hereunder with respect to such Claim, action or proceeding, except to the extent that the other party has been actually prejudiced as a result of such failure. If the Indemnitor has notified the Indemnitee

within thirty (30) days from the receipt of the foregoing notice that it wishes to defend against the Claim, unless there exists a potential conflict of interest between the parties, then the Indemnitor shall have the right to assume and control the defense of the Claim by appropriate proceedings with counsel reasonably acceptable to the Indemnitee. The Indemnitee may participate in the defense, at its sole expense, of any such Claim for which the Indemnitor shall have assumed the defense pursuant to the preceding sentence, provided, however, that counsel for the Indemnitor shall act as lead counsel in all matters pertaining to the defense or settlement of such Claims, suit or proceeding other than Claims that in the Indemnitee’s reasonable judgment could have a material and adverse effect on Indemnitee’s business apart from the payment of money damages. The Indemnitee shall be entitled to indemnification for the reasonable fees and expenses of its counsel for any period during which the Indemnitor has not assumed the defense of any claim. The Indemnitor may not settle any Claim without obtaining a release for the benefit of the Indemnitee, unless the consent of the Indemnitee is obtained.

(d) Product Liability. UNFI acknowledges that it generally obtains indemnification agreements from the various manufacturers, suppliers, vendors or distributors of Products it purchases and sells. UNFI agrees to indemnify, defend and hold harmless WFM and its parent and affiliates, together with their stockholders, general and limited partners, members, managers, directors, officers, employees, agents, representatives, successors and assigns for any and all Liabilities (including but not limited to, personal injury, illness or death of any person) arising from or pertaining to the handling, shipment, delivery, condition of, consumption or use of any Product (other than Private Label SKUs), without regard to any negligence by UNFI related to such Product, except where the loss is determined to have arisen from the negligence of WFM. UNFI’s obligation to indemnify WFM for any Liabilities arising from any Products sold to WFM shall exist regardless of the existence or nonexistence of any such indemnification agreements from Product manufacturers, suppliers, vendors or distributors. Indemnification under this section does not extend to Liabilities arising out of any Private Label SKUs, except where the Liability is attributable to the negligence or intentional acts or omissions of UNFI.

(e) Insurance. At all times during the Term and for a two (2) year period after its termination or expiration, UNFI shall maintain, at its expense, occurrence based insurance coverage (the “Insurance Coverage”) in the types and amounts as follows:

(i) Workers’ Compensation and Employer’s Liability insurance affording compensation benefits for all of its employees in an amount sufficient to meet all statutory requirements and employer’s liability insurance with limits of $[*CONFIDENTIAL*] for each accident or disease (with per incident or aggregate annual deductible of $[*CONFIDENTIAL*] or less).

(ii) Commercial General Liability Insurance with a combined single limit of $[*CONFIDENTIAL*] per occurrence and $[*CONFIDENTIAL*] in the aggregate for personal injury, bodily injury (including wrongful death), and property damage liability inclusive of coverage for all premises and operations, broad form property damage, independent contractors, contractual liability for this Agreement and product/completed operations coverage.

(iii) Automobile Liability Insurance with a combined single limit of $[*CONFIDENTIAL*] per occurrence for injuries, including accidental death and property damage.

(iv) Products Liability Insurance with limits not less than $[*CONFIDENTIAL*] per occurrence.

(v) Umbrella or Excess Liability Insurance with limits not less than $[*CONFIDENTIAL*] per occurrence that provides additional limits for employer’s liability, commercial general liability, automobile liability and products liability insurance.

The Insurance Coverage will be from an insurance company classified by A M Best as a Class IV or larger with a Financial Strength Rating of at least A, A-. None of the Insurance Coverage amounts will be construed as a limitation on UNFI’s potential liability. Except for Workers’ Compensation and Employer’s Liability insurance, the insurance policies will not have a per incident or aggregate annual deductible of greater than $[*CONFIDENTIAL*] without the prior written consent of WFM. In connection with UNFI’s execution of this Agreement, UNFI will provide WFM with certificates of insurance evidencing all of the referenced insurance policies, which will provide that: (i) such insurance will not be materially modified or cancelled unless WFM has been given at least 60 days’ advance written notice thereof; and (ii) such certificates will be renewed annually or as policy renewals occur. Except for Workers’ Compensation and Employers Liability, the required insurance policies will, at UNFI’s expense, name “Whole Foods Market Distribution, Inc. together with its direct and indirect affiliates and insurers as additional insureds.”

19.	Compliance with Laws.

(a) General. Each party covenants and agrees during the Term it will fully comply with all applicable laws, ordinances, regulations, licenses and permits of or issued by any federal, state or local government entity, agency or instrumentality applicable to its responsibilities hereunder. Each party agrees that it shall comply with all certification procedures and regulations. Each party shall promptly notify the other party after it becomes aware of any material adverse proposed law, regulation or order that, to its knowledge, may or does conflict with the parties’ obligations under this Agreement. The parties will then use reasonable efforts to promptly decide whether a change may be made to the terms of this Agreement to eliminate any such conflict or impracticability.

(b) Organic Documentation. In connection with any organic Products, UNFI shall take all such actions as required by any federally recognized certifying organization (or as required by law) in order for such Products to be certified as organic, including, without limitation, the maintenance of any required documentation and the taking of the necessary precautions to prevent Product compromise. UNFI shall provide all documentation relating to the foregoing to WFM at WFM’s request.

20.	Termination Provisions.

(a) Either party may terminate this Agreement immediately by providing written notice to the other party (unless otherwise provided below) for cause upon the occurrence of any one or more of the following:

(i) a failure to make any material payment, credit, rebate or other remittance of monetary consideration provided for herein (other than in good faith in connection with a dispute of which notice was given) or failure to remedy any delinquent material payment, credit, rebate or other remittance within fifteen (15) business days after notice (which failure to cure shall be an event of default); and

(ii) a breach of any non-monetary obligations under the Agreement, and failure to cure such breach after 30 days’ prior written notice of the breach.

(b) WFM may terminate this Agreement immediately by providing written notice to UNFI (unless otherwise provided below) for cause upon the occurrence of any one or more of the following:

(i)

[*CONFIDENTIAL*];

(ii) The results of any audit of UNFI show evidence of willful misconduct on the part of UNFI or any of its employees or representatives of a nature that is material in either dollar amount or percentage to total amounts or to the operational units affected, or that could reasonably result in a material impact to the reputation or operational performance of WFM;

(iii) It is determined by any regulatory agency, or UNFI publicly announces, that any certification given by officers of UNFI relating to internal controls was materially incorrect. Regulatory violations by UNFI where the violations or the corrective action required materially and adversely affect the continued ability of UNFI to perform all or any material portion of the Agreement; or

(iv) The quality of service provided by UNFI does not meet industry standards, and UNFI has failed to remedy service problems within [*CONFIDENTIAL*] days after written notice of breach by WFM.

21. Representations and Warranties of UNFI. UNFI represents and warrants to WFM as follows, and such representations and warranties shall survive the Effective Date:

(a) Sufficient Personnel to Perform Obligations. UNFI (i) has sufficient personnel with adequate training and expertise to perform its obligations as contemplated hereunder in the time frames contemplated herein and (ii) will use reasonable care in the performance of UNFI’s obligations under this Agreement.

(b) National Organic Standards. UNFI has adequate processes and systems in place, and has adequately educated its personnel, and that it will fully comply with all federal, state and local regulations relating to handling and labeling of organic Products, including, but

not limited to, the National Organic Standards as promulgated by the U.S. Department of Agriculture and as such applies to UNFI as a handler or processor of organic foods. UNFI acknowledges that WFM has placed substantial reliance on UNFI to handle various foods for human consumption so as to not invalidate any “organic” designation of such foods.

(c) Computer Systems. UNFI has proper security safeguards in place to ensure the confidentiality of all of WFM’s data as contained in UNFI’s computer systems. All such systems will perform without material defect or error in compliance with the performance standards set forth in this Agreement. UNFI has a disaster recovery program in place to ensure that, in the event of a catastrophic destruction of any portion of UNFI’s computer systems, wherever located, UNFI will be able to recover all necessary data to continue to perform its obligations hereunder in substantially the time frames contemplated herein.

(d) UNFI Distribution Center’s Condition and Capacity. All of the UNFI DCs servicing WFM will be maintained and operated in accordance with UNFI warehousing and delivery standards. Such UNFI DCs have the operational systems required to support the obligations of UNFI as set forth in this Agreement, and all such UNFI DCs have adequate capacity to order, store and deliver Products in accordance with the terms of this Agreement and in the amounts contemplated by WFM. All the UNFI DCs shall have sufficient security measures in place prior to receipt of Products for WFM to ensure that such Products are not tampered with or adulterated in any manner, and that all such Products shall be maintained at temperatures and other storage conditions necessary to preserve the freshness and integrity of the Products.

(e) Information Provided to Auditors. All information requested by WFM (i) will be provided by UNFI to WFM and/or its designated auditors, (ii) will be in the format required in this Agreement or agreed upon by the parties, and (iii) will be true and correct in all respects, except as otherwise disclosed to WFM and/or its designees at the time of disclosure.(f) Transfer of Title. Upon delivery of Products, UNFI will transfer title and ownership of Products to WFM. Upon WFM’s purchase of Products, the Products will be free of any liens, claims or other encumbrances.

(g) Recall. UNFI has a reliable recall system and policies in place including appropriate tracking, coding and accounting systems for all Products.

22. Representations and Warranties of WFM. WFM represents and warrants to UNFI as follows, and such representations and warranties shall survive the Effective Date:

(a) Sufficient Personnel to Perform Obligations. WFM represents that it has sufficient personnel with adequate training and expertise to perform its obligations as contemplated hereunder in the time frames contemplated herein.

(b) Computer Systems. WFM has proper security safeguards in place to ensure the confidentiality of all of UNFI’s data as contained in WFM’s computer systems. All such systems will perform without material defect or error in compliance with the performance standards set forth in this Agreement. WFM has a disaster recovery program in place to ensure

that, in the event of a catastrophic destruction of any portion of WFM’s computer systems, wherever located, WFM will be able to recover all necessary data to continue to perform its obligations hereunder in substantially the time frames contemplated herein.

23.	Miscellaneous.

(a) Binding Effect. This Agreement, including its exhibits, supersedes all prior agreements between UNFI and WFM and is the only agreement between UNFI and WFM, either oral or in writing relating to the subject matter hereof.

(b) Force Majeure. “Force Majeure” events shall be events beyond the reasonable control of a party (and not through the fault or negligence of such party) that make timely performance of an obligation not possible. Force Majeure events are those that are not reasonably foreseeable with the exercise of reasonable care, nor avoidable through the payment of nonmaterial additional sums. In the event of a Force Majeure, the party so affected shall give prompt written notice to the other party of the cause and shall take whatever reasonable steps are necessary to relieve the effect of such cause as rapidly as possible.

(c) Governing Law; Forum and Jurisdiction; Waiver of Punitive and Similar Types of Damages. The relationship of the parties hereto and all claims arising out of or related to that relationship, including, but not limited to, the construction and interpretation of any written agreements, including this Agreement, shall be governed by the substantive laws of the State of Delaware (without regard to conflicts of law principles). The parties agree and consent to the jurisdiction of the state and federal courts located in Chicago, Illinois and acknowledge that such courts are proper and convenient forums for the resolution of any actions between the parties with respect to the subject matter of this Agreement, and agree that, in such case, these courts shall be the sole and exclusive forums for the resolution of any actions between the parties with respect to the subject matter hereof. The parties hereby waive any right to a jury trial under any applicable law. The parties also waive any and all right to punitive, incidental or consequential damages, except to the extent such damages are included in any award for which indemnification is sought pursuant to the terms of this Agreement or an action is brought for breach of provisions relating to confidential information. The prevailing party in any action to enforce this Agreement shall be entitled to recover all related costs of the suit, including reasonable attorneys’ fees and court costs.

(d) Confidentiality. In connection with this Agreement, the parties may acquire or develop confidential information relating to each party and such party’s businesses that includes quality standards, business methods, sales data and trends, Intellectual Property, purchasing history, pricing, marketing and pricing strategies, technical data, general or specific customer information and the terms of this Agreement (“Confidential Information”). The term Confidential Information shall include computer software, source code, object code, hardware configurations and all other information relating to a party, its business and prospects, learned by the other party or disclosed by such party from time to time to the other party in any manner, whether orally, visually or in tangible form (including, without limitation, documents, devices and computer readable media) and all copies, improvements, derivatives and designs thereof, created by either party whether owned by or licensed to such party. The term Confidential Information shall also be deemed to include all notes, analyses, compilations, studies,

interpretations or other documents prepared by a party that contain, reflect or are based upon the information furnished to such party by the other party pursuant hereto. The parties (i) will hold all Confidential Information in strict confidence, (ii) will only use Confidential Information for the purpose of performing under this Agreement, and (iii) will not disclose any Confidential Information to any third party (other than to affiliates or subsidiaries and their own outside legal, accounting, insurance or financial advisors or other consultants as necessary) without the other party’s prior written consent. Without limiting the foregoing, UNFI will not use any Confidential Information in connection with the marketing, distribution or sale of UNFI’s Products other than to WFM. UNFI will not use, sell or share any Confidential Information, including, but not limited to, WFM sales data in connection with Infoshare, SIS or any other similar type of data compilation, without the written consent of WFM. The foregoing applies even if the WFM Confidential Information is in a generic format that does not specifically reference WFM. The parties will use the highest degree of care it uses to protect its own confidential information to maintain the confidentiality of all Confidential Information but in no event less than a reasonable degree of care. Confidential Information shall not include any information that:

(i) was in a party’s possession, prior to disclosure by the other party hereunder, provided such information is not known by such party to be subject to another confidentiality agreement with or secrecy obligation to the other party;

(ii) was generally known in the grocery industry at the time of disclosure to a party hereunder, or becomes so generally known after such disclosure, through no act of such party;

(iii) has come into the possession of a party from a third party who is not known by such party to be under any obligation to the other party to maintain the confidentiality of such information; or

(iv) was independently developed by a party without the use of any Confidential Information of the other party, to the extent that such independent development is reasonably established by such first party to the other party.

Notwithstanding the foregoing, nothing herein shall prevent the filing of a copy of this Agreement as an exhibit to any filing required by a regulatory agency having jurisdiction over either party, provided that a party required to file a copy hereof shall notify the other party of the filing and request and use its best efforts to obtain confidential treatment of all financial terms of this Agreement prior to the filing thereof. In addition, either party may disclose the terms of this Agreement pursuant to a valid subpoena, provided such party gives the other party reasonable prior notice of the service of any subpoena to permit the other party to seek a protective order, and seeks confidential treatment of all financial terms hereof.

If a party breaches or threatens to breach any provision of this Section 23(d), the parties agree that the non-breaching party’s remedy at law is inadequate. Therefore, in the event of such breach or threatened breach, in addition to any other remedy which may be available to the non-breaching party, the non-breaching party shall be entitled to seek, without posting a bond, preliminary or permanent injunctive and/or other equitable relief restraining the breaching party,

or any of its agents or employees, from breaching or acting in any manner inconsistent with the conduct or performance required by this Section 23(d). In addition to the foregoing, a party may demand from and be entitled to immediately receive payment from the other party, as liquidated damages for a breach of Section 23(d), if such breach is determined by a court of competent jurisdiction, the amount of $[*CONFIDENTIAL*] in immediately available funds. The disclosure of the same information at the same time to more than one third-party shall only be regarded as a single violation for purposes of this subsection (d). The parties agree that (A) the $[*CONFIDENTIAL*] in liquidated damages are a reasonable approximation of the injury that would be suffered by a party in the event of a breach of this Section 23(d) by either party; (B) the amount of actual loss cannot be precisely determined, but such liquidated damages provided for in this Section 23(d) are fair and reasonable; (C) all such payments made under this Section 23(d) shall be paid as liquidated damages and not as a penalty; (D) all such payments due under this Section 23(d) shall be made as an offset against all amounts due and owing under this Agreement.

(e) Amendment; Assignment. This Agreement may not be amended or modified except by a writing signed by an authorized officer of each party specifically referencing this Agreement and the intent to amend or modify. It is agreed that neither party shall transfer or assign this Agreement or any part hereof or any right arising hereunder, by operation of law or otherwise, without the prior written consent of the other party. A “Change of Control” shall be deemed to be an assignment for purposes of this Agreement. Any purported assignment (including a Change of Control) without consent shall be void and of no force or effect or, alternatively, a party may choose to consent to the assignment or terminate this Agreement. Subject to the foregoing, this Agreement shall be binding on the respective parties and their permitted successors and assigns. A “Change of Control” means (A) any transaction or series of related transactions in which a party or group, acting in concert, acquires beneficial ownership of more than 50% of the equity interests in a party or its direct or indirect parent, or (B) a merger or consolidation of another entity with or into a party or its direct or indirect parent, with the effect that any third party becomes beneficial owner of more than 50% of the equity interests of a party or its direct or indirect parent. Notwithstanding anything to the contrary stated above, WFM may assign this Agreement to any direct or indirect affiliate (whether or not such assignment results in a Change of Control) without obtaining the consent of UNFI.

(f) Entire Agreement; Survival. All exhibits to this Agreement are incorporated by reference. This Agreement (and any documents referred to herein) represents the entire agreement and understanding of the parties with respect to the matters set forth herein, and there are no representations, warranties or conditions or agreements (other than implementing invoices, purchase orders and the like necessary to implement this Agreement) not contained herein that constitute any part hereof or that are being relied upon by any party hereunder. In the event this Agreement terminates, all claims arising prior to such termination shall survive such termination, and in addition, the following sections shall survive any such termination: 5, 6(c), (d), (e) and (f), 7-10, 12-14, 17, 18 and 21-23.

(g) Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall be enforced.

(h) Publicity. Both parties shall agree on any press release related to the signing of this Agreement; provided, however, that either party may release information reasonably deemed necessary by their respective securities counsel under applicable governing laws. Except for the foregoing, UNFI will not (i) use for any reason any name, logo or trademark of Whole Foods Market, Inc., WFM Purchasing or any of their respective affiliates or subsidiaries in any manner suggesting that UNFI has a relationship with Whole Foods Market, Inc., WFM Purchasing or any of their respective affiliates or subsidiaries (ii) issue any press release or make any other statement to the press or authorize any publication to print anything that mentions Whole Foods Market, Inc., WFM or any of their respective affiliates or subsidiaries by name or refers to this Agreement or the transactions contemplated herein or (iii) disclose the content or existence of this Agreement to any third party.

(i) Notices. Unless otherwise stated, all notices given in connection with this Agreement will be in writing and will be deemed delivered at the time of personal delivery or 3 business days after being sent by facsimile (with a confirmation) or mailed by express, certified or registered mail, or sent by a recognized national or international courier, as appropriate (in all cases postage prepaid and return receipt requested). Notices shall be addressed to the parties at the addresses set forth below or to such other address as shall have been so notified to the other party in accordance with this Section. Notices to UNFI shall be addressed to: Chief Financial Officer, 260 Lake Road, Dayville, CT 06241, Phone: 860.779.2800, fax: 860.779.5678 with a copy to legal counsel E. Colby Cameron, Cameron & Mittleman, LLP, 56 Exchange Terrace, Providence, Rhode Island 02903. Except as set forth herein, notices to WFM shall be addressed to: Jim Speirs, Vice President Procurement Non-Perishables, Whole Foods Market, Inc., 550 Bowie Street, Austin, Texas 78703, phone 512.542.0720, fax 512.482.7720 with a copy to General Counsel, Whole Foods Market, Inc., 550 Bowie Street, Austin, Texas 78703.

(j) No Third Party Beneficiaries. Nothing in this Agreement, whether expressed or implied, is intended to confer on any person other than the parties to this Agreement or their parent, affiliates or subsidiaries, respective successors or permitted assigns, any rights, remedies, obligations or liabilities.

(k) Independent Contractors. In all matters relating to this Agreement both parties shall be acting solely as independent contractors and shall be solely responsible for the acts of their respective employees, contractors and agents. Employees, agents or contractors of one party shall not be considered employees, agents or contractors of the other party. Nothing contained in this Agreement shall be deemed or construed to create a partnership or joint venture, to create the relationship of an employer-employee or principal-agent, or to otherwise create any liability for or obligation of either party whatsoever with respect to the indebtedness, liabilities, and obligations of the other party. Neither UNFI nor any employee or representative of UNFI shall at any time wear a “Whole Foods Market” (Registered Trademark) uniform or in any way hold himself out to be an employee of WFM or any WFM Affiliate. The parties specifically agrees that this Agreement shall not be deemed to grant or imply that either party or any employee of either party is authorized to sign, contract, deal, or otherwise act in the name of or on behalf of the other party.

(l) Titles and Headings; Counterparts; Facsimile/Electronic Signature; Preprinted Forms. The titles and headings to Sections herein are inserted for the convenience of reference

only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. This Agreement may be executed in one or more counterparts, all of which will be considered one and the same agreement, and will become a binding agreement when one or more counterparts have been signed by each party and delivered to the other party. Electronic or facsimile signatures shall be deemed original signatures for purposes of execution of this document. This Agreement, including its attachments, supersedes all prior agreements between UNFI and WFM or any WFM Affiliate and is the only agreement between WFM and UNFI, either oral or in writing, relating to the matters set forth herein. Each party agrees that use of pre-printed forms, including, but not limited to email, purchase orders, acknowledgements or invoices, is for convenience only and all pre-printed terms and conditions stated thereon, except as specifically set forth in this Agreement, are void and of no effect.

(m) Negotiation of Agreement, Each party and its counsel have cooperated in the drafting and preparation of this Agreement and the documents referred to herein, and any drafts relating thereto shall be deemed the work product of the parties and may not be construed against any party by reason of its preparation. Any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against the party that drafted it is of no application and is hereby expressly waived.

(n) Termination of Prior Agreement. Upon execution of this Agreement, the Agreement for Distribution of Products dated January 1, 2005 between Whole Foods Market Distribution, Inc. and United Natural Foods, Inc. and its subsidiaries and affiliates that is due to expire on December 31, 2007 shall terminate.

[Signature Page to Follow]

WHEREAS, the parties have entered into this Agreement as of the Effective Date.

Whole Foods Market Distribution, Inc.,

a Delaware corporation

By: /s/ Lee Valkenaar
Lee Valkenaar, President

UNITED NATURAL FOODS, INC.

By: /s/ Michael D. Beaudry
Michael D. Beaudry, President of the Eastern Region

By: /s/ Richard Antonelli
Richard Antonelli, Executive Vice President,
Chief Operating Officer and President of Distribution

Exhibit A

Whole Foods Market, Inc

Fiscal Period Calendar

End of Period Dates

End of Quarter Dates

Period	Week	Fiscal 2006	2007	2008	2009	2010	2011	2012	2013	2014
1	1	10/02/2005	10/01/2006	10/07/2007	10/05/2008	10/04/2009	10/03/2010	10/02/2011	10/07/2012	10/06/2013
	2	10/09/2005	10/08/2006	10/14/2007	10/12/2008	10/11/2009	10/10/2010	10/09/2011	10/14/2012	10/13/2013
	3	10/16/2005	10/15/2006	10/21/2007	10/19/2008	10/18/2009	10/17/2010	10/16/2011	10/21/2012	10/20/2013
	4	10/23/2005	10/22/2006	10/28/2007	10/26/2008	10/25/2009	10/24/2010	10/23/2011	10/28/2012	10/27/2013
2	5	10/30/2005	10/29/2006	11/04/2007	11/02/2008	11/01/2009	10/31/2010	10/30/2011	11/04/2012	11/03/2013
	6	11/06/2005	11/05/2006	11/11/2007	11/09/2008	11/08/2009	11/07/2010	11/06/2011	11/11/2012	11/10/2013
	7	11/13/2005	11/12/2006	11/18/2007	11/16/2008	11/15/2009	11/14/2010	11/13/2011	11/18/2012	11/17/2013
	8	11/20/2005	11/19/2006	11/25/2007	11/23/2008	11/22/2009	11/21/2010	11/20/2011	11/25/2012	11/24/2013
3	9	11/27/2005	11/26/2006	12/02/2007	11/30/2008	11/29/2009	11/28/2010	11/27/2011	12/02/2012	12/01/2013
	10	12/04/2005	12/03/2006	12/09/2007	12/07/2008	12/06/2009	12/05/2010	12/04/2011	12/09/2012	12/08/2013
	11	12/11/2005	12/10/2006	12/16/2007	12/14/2008	12/13/2009	12/12/2010	12/11/2011	12/16/2012	12/15/2013
	12	12/18/2005	12/17/2006	12/23/2007	12/21/2008	12/20/2009	12/19/2010	12/18/2011	12/23/2012	12/22/2013
4	13	12/25/2005	12/24/2006	12/30/2007	12/28/2008	12/27/2009	12/26/2010	12/25/2011	12/30/2012	12/29/2013
	14	01/01/2006	12/31/2006	01/06/2008	01/04/2009	01/03/2010	01/02/2011	01/01/2012	01/06/2013	01/05/2014
	15	01/08/2006	01/07/2007	01/13/2008	01/11/2009	01/10/2010	01/09/2011	01/08/2012	01/13/2013	01/12/2014
1st Qtr	16	01/15/2006	01/14/2007	01/20/2008	01/18/2009	01/17/2010	01/16/2011	01/15/2012	01/20/2013	01/19/2014
5	17	01/22/2006	01/21/2007	01/27/2008	01/25/2009	01/24/2010	01/23/2011	01/22/2012	01/27/2013	01/26/2014
	18	01/29/2006	01/28/2007	02/03/2008	02/01/2009	01/31/2010	01/30/2011	01/29/2012	02/03/2013	02/02/2014
	19	02/05/2006	02/04/2007	02/10/2008	02/08/2009	02/07/2010	02/06/2011	02/05/2012	02/10/2013	02/09/2014
	20	02/12/2006	02/11/2007	02/17/2008	02/15/2009	02/14/2010	02/13/2011	02/12/2012	02/17/2013	02/16/2014
6	21	02/19/2006	02/18/2007	02/24/2008	02/22/2009	02/21/2010	02/20/2011	02/19/2012	02/24/2013	02/23/2014
	22	02/26/2006	02/25/2007	03/02/2008	03/01/2009	02/28/2010	02/27/2011	02/26/2012	03/03/2013	03/02/2014
	23	03/05/2006	03/04/2007	03/09/2008	03/08/2009	03/07/2010	03/06/2011	03/04/2012	03/10/2013	03/09/2014
	24	03/12/2006	03/11/2007	03/16/2008	03/15/2009	03/14/2010	03/13/2011	03/11/2012	03/17/2013	03/16/2014
7	25	03/19/2006	03/18/2007	03/23/2008	03/22/2009	03/21/2010	03/20/2011	03/18/2012	03/24/2013	03/23/2014
	26	03/26/2006	03/25/2007	03/30/2008	03/29/2009	03/28/2010	03/27/2011	03/25/2012	03/31/2013	03/30/2014
	27	04/02/2006	04/01/2007	04/06/2008	04/05/2009	04/04/2010	04/03/2011	04/01/2012	04/07/2013	04/06/2014
2nd Qtr	28	04/09/2006	04/08/2007	04/13/2008	04/12/2009	04/11/2010	04/10/2011	04/08/2012	04/14/2013	04/13/2014
8	29	04/16/2006	04/15/2007	04/20/2008	04/19/2009	04/18/2010	04/17/2011	04/15/2012	04/21/2013	04/20/2014
	30	04/23/2006	04/22/2007	04/27/2008	04/26/2009	04/25/2010	04/24/2011	04/22/2012	04/28/2013	04/27/2014
	31	04/30/2006	04/29/2007	05/04/2008	05/03/2009	05/02/2010	05/01/2011	04/29/2012	05/05/2013	05/04/2014
	32	05/07/2006	05/06/2007	05/11/2008	05/10/2009	05/09/2010	05/08/2011	05/06/2012	05/12/2013	05/11/2014
9	33	05/14/2006	05/13/2007	05/18/2008	05/17/2009	05/16/2010	05/15/2011	05/13/2012	05/19/2013	05/18/2014
	34	05/21/2006	05/20/2007	05/25/2008	05/24/2009	05/23/2010	05/22/2011	05/20/2012	05/26/2013	05/25/2014
	35	05/28/2006	05/27/2007	06/01/2008	05/31/2009	05/30/2010	05/29/2011	05/27/2012	06/02/2013	06/01/2014
	36	06/04/2006	06/03/2007	06/08/2008	06/07/2009	06/06/2010	06/05/2011	06/03/2012	06/09/2013	06/08/2014
10	37	06/11/2006	06/10/2007	06/15/2008	06/14/2009	06/13/2010	06/12/2011	06/10/2012	06/16/2013	06/15/2014
	38	06/18/2006	06/17/2007	06/22/2008	06/21/2009	06/20/2010	06/19/2011	06/17/2012	06/23/2013	06/22/2014
	39	06/25/2006	06/24/2007	06/29/2008	06/28/2009	06/27/2010	06/26/2011	06/24/2012	06/30/2013	06/29/2014
3rd Qtr	40	07/02/2006	07/01/2007	07/06/2008	07/05/2009	07/04/2010	07/03/2011	07/01/2012	07/07/2013	07/06/2014
11	41	07/09/2006	07/08/2007	07/13/2008	07/12/2009	07/11/2010	07/10/2011	07/08/2012	07/14/2013	07/13/2014
	42	07/16/2006	07/15/2007	07/20/2008	07/19/2009	07/18/2010	07/17/2011	07/15/2012	07/21/2013	07/20/2014
	43	07/23/2006	07/22/2007	07/27/2008	07/26/2009	07/25/2010	07/24/2011	07/22/2012	07/28/2013	07/27/2014
	44	07/30/2006	07/29/2007	08/03/2008	08/02/2009	08/01/2010	07/31/2011	07/29/2012	08/04/2013	08/03/2014
12	45	08/06/2006	08/05/2007	08/10/2008	08/09/2009	08/08/2010	08/07/2011	08/05/2012	08/11/2013	08/10/2014
	46	08/13/2006	08/12/2007	08/17/2008	08/16/2009	08/15/2010	08/14/2011	08/12/2012	08/18/2013	08/17/2014
	47	08/20/2006	08/19/2007	08/24/2008	08/23/2009	08/22/2010	08/21/2011	08/19/2012	08/25/2013	08/24/2014
	48	08/27/2006	08/26/2007	08/31/2008	08/30/2009	08/29/2010	08/28/2011	08/26/2012	09/01/2013	08/31/2014
13	49	09/03/2006	09/02/2007	09/07/2008	09/06/2009	09/05/2010	09/04/2011	09/02/2012	09/08/2013	09/07/2014
	50	09/10/2006	09/09/2007	09/14/2008	09/13/2009	09/12/2010	09/11/2011	09/09/2012	09/15/2013	09/14/2014
	51	09/17/2006	09/16/2007	09/21/2008	09/20/2009	09/19/2010	09/18/2011	09/16/2012	09/22/2013	09/21/2014
4th	52	09/24/2006	09/23/2007	09/28/2008	09/27/2009	09/26/2010	09/25/2011	09/23/2012	09/29/2013	09/28/2014
Qtr	53		09/30/2007					09/30/2012

Exhibit B

[*CONFIDENTIAL*]

		*[CONFIDENTIAL]*

*[CONFIDENTIAL]*	*[CONFIDENTIAL]*

[CONFIDENTIAL]	[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]	[CONFIDENTIAL]

Exhibit C

Southern Pacific Region

This Exhibit C to the Agreement for Distribution of Products (the “Agreement”) dated September 26, 2006 between Whole Foods Market Distribution, Inc., a Delaware corporation (“WFM”), and United Natural Foods, Inc., a Delaware corporation (“UNFI”) amends the Agreement to allow the Southern Pacific Region to use UNFI as its Primary Distributor pursuant to the following terms and conditions:

WFM agrees to work with UNFI to develop a time-line for transition of UNFI as the Primary Distributor for the Southern Pacific Region.

[*CONFIDENTIAL*].

All terms not defined herein will have the meeting set forth in the Agreement. This Exhibit C is dated __________ ___, ______.

Whole Foods Market Distribution, Inc.,

a Delaware corporation

By:

Name Printed: __________________

Title: __________________________

Exhibit D

Fuel Surcharge

The Fuel Surcharge amount, if any, will be set according to the table below.

Price Per Gallon	Surcharge Per Delivery
Up to [CONFIDENTIAL]	$0
[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]
[CONFIDENTIAL]	[CONFIDENTIAL]

Exhibit E

[*CONFIDENTIAL*]

EXHIBIT F

[*CONFIDENTIAL*]

Exhibit G

Code Date Policy

[*CONFIDENTIAL*] – [*CONFIDENTIAL*]

10.

[*CONFIDENTIAL*] – [*CONFIDENTIAL*]

11.

[*CONFIDENTIAL*] – [*CONFIDENTIAL*]

EX-31.1 3 ex31-1.htm United Natural Foods, Inc. Form 10-Q; Fiscal Quarter Ended October 28, 2006; Exhibit 31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Michael S. Funk, hereby certify that:

1.	I have reviewed this quarterly report on Form 10-Q of the Company;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report.

The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and we have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

(d)

disclosed in this quarterly report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

/s/ Michael S. Funk

Michael S. Funk

Chief Executive Officer

December 7, 2006

Note:

A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-31.2 4 ex31-2.htm United Natural Foods, Inc. Form 10-Q; Fiscal Quarter Ended October 28, 2006; Exhibit 31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Mark E. Shamber, hereby certify that:

1.	I have reviewed this quarterly report on Form 10-Q of the Company;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report.

(a)

(b)

(c)

(d)

5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

/s/ Mark E. Shamber

Mark E. Shamber

Chief Financial Officer

December 7, 2006

Note:

A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.1 5 ex32-1.htm United Natural Foods, Inc. Form 10-Q; Fiscal Quarter Ended October 28, 2006; Exhibit 32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, in his capacity as the Chief Executive Officer of United Natural Foods, Inc., a Delaware corporation (the “Company”), hereby certifies that the Quarterly Report of the Company on Form 10-Q for the period ended October 28, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company.

/s/ Michael S. Funk

Michael S. Funk

Chief Executive Officer

December 7, 2006

Note:

A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 6 ex32-2.htm United Natural Foods, Inc. Form 10-Q; Fiscal Quarter Ended October 28, 2006; Exhibit 32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, in his capacity as the Chief Financial Officer of United Natural Foods, Inc., a Delaware corporation (the “Company”), hereby certifies that the Quarterly Report of the Company on Form 10-Q for the period ended October 28, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company.

/s/ Mark E. Shamber

Mark E. Shamber

Chief Financial Officer

December 7, 2006

Note:

A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

-----END PRIVACY-ENHANCED MESSAGE-----

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)

	October 28, 2006			July 29, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	8,416		$	20,054
Accounts receivable, net		164,476			147,686
Notes receivable, trade, net		1,251			1,254
Inventories		300,214			257,259
Prepaid expenses and other current assets		14,856			12,596
Deferred income taxes		10,911			10,911

Total current assets		500,124			449,760
Property & equipment, net		163,579			163,247
Other assets:
Goodwill		78,044			78,016
Notes receivable, trade, net		2,499			2,760
Intangible assets, net		214			251
Other		9,615			6,561

Total assets	$	754,075		$	700,595

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	138,691		$	102,146
Notes payable		118,001			125,005
Accrued expenses and other current liabilities		36,236			34,245
Current portion of long-term debt		5,675			5,433

Total current liabilities		298,603			266,829
Long-term debt, excluding current portion		68,083			59,716
Deferred income taxes		8,586			9,693
Other long-term liabilities		658			883

Total liabilities		375,930			337,121


Commitments and contingencies

Stockholders' equity:
Preferred stock, $0.01 par value, authorized 5,000 shares
at October 28, 2006 and July 29, 2006, none issued and outstanding		—			—
Common stock, $0.01 par value, authorized 100,000 shares;
42,628 issued and 42,399 outstanding shares at October 28, 2006;
42,477 issued and 42,248 outstanding shares at July 29, 2006		426			425
Additional paid-in capital		153,819			149,840
Unallocated shares of Employee Stock Ownership Plan		(1,339	)		(1,380	)
Accumulated other comprehensive (loss) income		(729	)		1,047
Retained earnings		232,060			219,634
Treasury stock		(6,092	)		(6,092	)

Total stockholders' equity		378,145			363,474

Total liabilities and stockholders' equity	$	754,075		$	700,595

	Three months ended
	October 28, 2006			October 29, 2005
Net sales	$	646,433		$	575,641
Cost of sales		522,861			465,374

Gross profit		123,572			110,267

Operating expenses		100,281			95,513
Amortization of intangibles		151			145

Total operating expenses		100,432			95,658

Operating income		23,140			14,609

Other expense (income):
Interest expense		2,911			2,367
Interest income		(114	)		(68	)
Other, net		(28	)		(61	)

Total other expense		2,769			2,238

Income before income taxes		20,371			12,371
Provision for income taxes		7,945			4,701

Net income	$	12,426		$	7,670

Per share data (basic):
Net income	$	0.29		$	0.19

Weighted average shares of common stock		42,147			41,334

Per share data (diluted):
Net income	$	0.29		$	0.18

Weighted average shares of common stock		42,599			42,150

	Three months ended
	October 28, 2006			October 29, 2005

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	12,426		$	7,670
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization		4,555			3,754
Gain on disposals of property and equipment		5			(9	)
Provision for doubtful accounts		660			369
Share-based compensation		954			2,535
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		(17,450	)		(17,510	)
Inventories		(42,955	)		(34,749	)
Prepaid expenses and other assets		(6,585	)		(625	)
Notes receivable, trade		264			(246	)
Accounts payable		30,729			30,871
Accrued expenses and other liabilities		(3,914	)		2,189
Income taxes payable		4,064			-

Net cash used in operating activities		(17,247	)		(5,751	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(4,760	)		(7,683	)
Purchases of acquired businesses, net of cash acquired		(28	)		(517	)
Proceeds from disposals of property and equipment		19			21

Net cash used in investing activities		(4,769	)		(8,179	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		10,000			-
Net (repayments) borrowings under note payable		(7,004	)		15,401
Increase (decrease) in bank overdraft		5,816			(5,898	)
Proceeds from exercise of stock options		2,152			1,713
Repayments of long-term debt		(1,458	)		(1,131	)
Tax effect of stock option exercises		874			1,284
Principal payments of capital lease obligations		(2	)		(148	)

Net cash provided by financing activities		10,378			11,221


NET DECREASE IN CASH AND CASH EQUIVALENTS		(11,638	)		(2,709	)
Cash and cash equivalents at beginning of period		20,054			12,615

Cash and cash equivalents at end of period	$	8,416		$	9,906


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid, net of amounts capitalized	$	2,996		$	2,561

Federal and state income taxes paid, net of refunds	$	2,639		$	4,470

	Three months ended
	October 28, 2006	October 29, 2005

Expected volatility	35.2%	36.5%
Dividend yield	0.0%	0.0%
Risk free interest rate	4.7%	4.2%
Expected life	3.0 years	3.0 years

Part I.	Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (unaudited)	3

	Condensed Consolidated Statements of Income (unaudited)	4

	Condensed Consolidated Statements of Cash Flows (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	18

Item 4.	Controls and Procedures	19

Part II.	Other Information

Item 1.	Legal Proceedings	19

Item 1A.	Risk Factors	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	Submission of Matters to a Vote of Security Holders	23

Item 5.	Other Information	23

Item 6.	Exhibits	23

	Signatures	24

	Number of Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value

Outstanding at July 30, 2006	1,531,943	$20.42
Granted	3,000	$29.09
Exercised	(140,868)	$15.28
Forfeited	(10,600)	$22.43
Outstanding at October 28, 2006	1,383,475	$21.11	7.0	$29,202,000
Exercisable at October 28, 2006	886,604	$21.12	6.5	$18,727,000

	Number of Shares	Weighted Average Grant-Date Fair Value

Nonvested at July 30, 2006	113,276	$26.34
Granted	15,000	$30.14
Vested	(5,000)	$30.14
Forfeited	(4,200)	$25.37
Nonvested at October 28, 2006	119,076	$26.70

	October 28, 2006
(In thousands)	Three months ended
Basic weighted average shares outstanding		42,147	41,334
Net effect of dilutive stock options based
upon the treasury stock method		452	816

Diluted weighted average shares outstanding		42,599	42,150

	Wholesale	Other	Eliminations	Unallocated Expenses	Consolidated
Three months ended October 28, 2006:
Net sales	$635,769	$23,981	$(13,317)		$646,433
Operating income (loss)	22,767	365	8		23,140
Interest expense				$2,911	2,911
Other, net				(142)	(142)
Income before income taxes					20,371
Depreciation and amortization	4,326	229	-		4,555
Capital expenditures	4,636	124	-		4,760
Total assets	694,715	63,369	(4,009)		754,075

Three months ended October 29, 2005:
Net sales	$565,897	$18,927	$(9,183)		$575,641
Operating income (loss)	21,223	(6,338)	(276)		14,609
Interest expense				$2,367	2,367
Other, net				(129)	(129)
Income before income taxes					12,371
Depreciation and amortization	3,474	280	-		3,754
Capital expenditures	7,482	201	-		7,683
Total assets	659,187	50,982	(3,883)		706,286

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

Use of Non-GAAP Results

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002