<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): April 28, 1998
--------------
United Natural Foods, Inc.
------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware
------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
000-21531 05-0376157
- ------------------------ ------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
260 Lake Road
Dayville, CT 06241
- --------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
(860) 779-2800
------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 5. OTHER EVENTS.
On October 31, 1997, United Natural Foods, Inc. ("United Natural" or the
"Company") acquired Stow Mills, Inc. and Subsidiary and Hendrickson Partners
("Stow Mills"). The merger with Stow Mills was accounted for as a pooling of
interests.
The Company's Computation of Net Earnings Per Share, Restated Financial Data
Schedules, Selected Consolidated Financial Data, Management's Discussion and
Analysis of Financial Condition and Results of Operations, Consolidated
Financial Statements and Schedule II, which are filed as Exhibits 11, 27.1-27.3,
99.1, 99.2, 99.3 and 99.4, respectively, to this Current Report on Form 8-K and
are incorporated herein by reference, have been prepared accounting for the Stow
Mills acquisition using the pooling-of-interests method of accounting.
Additionally, all financial statements have been restated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) EXHIBITS.
11 Computation of Net Earnings per Share for the year ended October 31,
1995, the nine months ended July 31, 1996, the year ended July 31,
1997 and the six months ended January 31, 1997 and 1998.
23 Consent of KPMG Peat Marwick LLP, independent auditors.
27.1 Restated Financial Data Schedules - six months ended January 31,
1998 and three months ended October 31, 1997.
27.2 Restated Financial Data Schedules - year ended July 31, 1997,
nine months ended April 30, 1997 and six months ended January 31,
1997.
27.3 Restated Financial Data Schedules - three months ended October 31,
1996, nine months ended July 31, 1996 and year ended October 31,
1995.
99.1 Selected Consolidated Financial Data.
99.2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
99.3 Consolidated Financial Statements of United Natural Foods, Inc. as
of October 31, 1995, July 31, 1996 and 1997 and January 31, 1998
(unaudited) and for the year ended October 31, 1995, the nine months
ended July 31, 1996, the year ended July 31, 1997 and the six months
ended January 31, 1997 and 1998 (unaudited) and Reports of
Independent Accountants thereon.
99.4 Schedule II - Valuation and Qualifying Accounts and Report of
Independent Accountants thereon.
<PAGE>
SIGNATURE
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 hereunto duly authorized.
Date: April 28, 1998 UNITED NATURAL FOODS, INC.
--------------------------
(Registrant)
By: /s/ Robert T. Cirulnick
------------------------
Robert T. Cirulnick
Chief Financial Officer
and Principal Accounting
Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
11 Computation of Net Earnings per Share for the year ended October 31,
1995, the nine months ended July 31, 1996, the year ended July 31,
1997 and the six months ended January 31, 1997 and 1998.
23 Consent of KPMG Peat Marwick LLP, independent auditors.
27.1 Restated Financial Data Schedules - six months ended January 31,
1998 and three months ended October 31, 1997.
27.2 Restated Financial Data Schedules - year ended July 31, 1997,
nine months ended April 30, 1997 and six months ended January 31,
1997.
27.3 Restated Financial Data Schedules - three months ended October 31,
1996, nine months ended July 31, 1996 and year ended October 31,
1995.
99.1 Selected Consolidated Financial Data.
99.2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
99.3 Consolidated Financial Statements of United Natural Foods, Inc. as
of October 31, 1995, July 31, 1996 and 1997 and January 31, 1998
(unaudited) and for the year ended October 31, 1995, the nine months
ended July 31, 1996, the year ended July 31, 1997 and the six months
ended January 31, 1997 and 1998 (unaudited) and Reports of
Independent Accountants thereon.
99.4 Schedule II - Valuation and Qualifying Accounts and Report of
Independent Accountants thereon.
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR SIX MONTHS
ENDED ENDED ENDED ENDED
OCTOBER 31, JULY 31, JULY 31, JANUARY 31,
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Basic weighted average shares outstanding 13,691 13,687 16,367 15,394 17,357
Net effect of dilutive stock options based
upon the treasury stock method using the
average stock price 1,167 1,166 186 731 297
------- ------- ------- ------- -------
Diluted weighted average shares outstanding 14,858 14,853 16,553 16,125 17,654
======= ======= ======= ======= =======
Income before extraordinary item $ 2,817 $ 5,450 $10,400 $ 3,583 $ 3,572
Extraordinary item - loss on early
extinguishment of debt, net of income
tax benefit of $662 -- -- 933 933 --
------- ------- ------- ------- -------
Net income $ 2,817 $ 5,450 $ 9,467 $ 2,650 $ 3,572
======= ======= ======= ======= =======
Pro forma net income before extraordinary
item (Unaudited) $ 2,742 $ 4,951 $ 9,999 $ 3,577 $ 3,252
======= ======= ======= ======= =======
Basic Per Share Data:
Income before extraordinary item $ 0.21 $ 0.40 $ 0.64 $ 0.23 $ 0.21
Extraordinary item - loss on early
extinguishment of debt, net of income
tax benefit of $662 $ -- $ -- $ 0.06 $ 0.06 $ --
------- ------- ------- ------- -------
Net income $ 0.21 $ 0.40 $ 0.58 $ 0.17 $ 0.21
======= ======= ======= ======= =======
Pro forma net income before extraordinary
iten (Unaudited) $ 0.20 $ 0.36 $ 0.61 $ 0.23 $ 0.19
======= ======= ======= ======= =======
Diluted Per Share Data:
Income before extraordinary item $ 0.19 $ 0.37 $ 0.63 $ 0.22 $ 0.20
Extraordinary item - loss on early
extinguishment of debt, net of income
tax benefit of $662 $ -- $ -- $ 0.06 $ 0.06 $ --
------- ------- ------- ------- -------
Net income $ 0.19 $ 0.37 $ 0.57 $ 0.16 $ 0.20
======= ======= ======= ======= =======
Pro forma net income before extraordinary
item (Unaudited) $ 0.18 $ 0.33 $ 0.60 $ 0.22 $ 0.18
======= ======= ======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 23
The Board of Directors
United Natural Foods, Inc.:
We consent to incorporation by reference in the Registration Statements (Nos.
333-19945, 333-19947, and 333-19949) on Form S-8 of United Natural Foods, Inc.
of our reports dated April 15, 1998, relating to the consolidated balance sheets
of United Natural Foods, Inc. and subsidiaries as of July 31, 1996 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for the year ended October 31, 1995, for the nine months ended July 31,
1996, and for the year ended July 31, 1997, and the related schedule, which
reports appear in the current report on Form 8-K dated April 28, 1998 of United
Natural Foods, Inc.
KPMG Peat Marwick LLP
Providence, Rhode Island
April 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONSOLIDATED STATEMENTS OF INCOME AND THE CONSOLIDATED BALANCE SHEETS FOR ALL
PERIODS PRESENTED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1998
<PERIOD-END> JAN-31-1998 OCT-31-1997
<CASH> 3,458 511
<SECURITIES> 0 0
<RECEIVABLES> 51,698 51,304
<ALLOWANCES> 2,117 2,543
<INVENTORY> 78,035 78,761
<CURRENT-ASSETS> 136,582 133,142
<PP&E> 54,657 53,283
<DEPRECIATION> 21,936 21,020
<TOTAL-ASSETS> 180,337 176,322
<CURRENT-LIABILITIES> 79,174 86,283
<BONDS> 22,916 16,034
0 0
0 0
<COMMON> 174 174
<OTHER-SE> 77,395 73,154
<TOTAL-LIABILITY-AND-EQUITY> 180,337 176,322
<SALES> 351,359 173,383
<TOTAL-REVENUES> 351,359 173,383
<CGS> 280,862 139,194
<TOTAL-COSTS> 280,862 139,194
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 704 132
<INTEREST-EXPENSE> 2,273 1,081
<INCOME-PRETAX> 8,427 1,293
<INCOME-TAX> 4,855 1,921
<INCOME-CONTINUING> 3,572 (628)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,572 (628)
<EPS-PRIMARY> 0.21 (0.04)
<EPS-DILUTED> 0.20 (0.04)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONSOLIDATED STATEMENTS OF INCOME AND THE CONSOLIDATED BALANCE SHEETS FOR ALL
PERIODS PRESENTED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1997 JUL-31-1997
<PERIOD-END> JUL-31-1997 APR-30-1997 JAN-31-1997
<CASH> 952 563 1,812
<SECURITIES> 0 0 0
<RECEIVABLES> 45,235 48,262 47,888
<ALLOWANCES> 2,283 2,827 2,668
<INVENTORY> 71,509 76,524 66,801
<CURRENT-ASSETS> 121,421 126,654 117,230
<PP&E> 52,382 51,599 51,052
<DEPRECIATION> 19,970 18,917 17,823
<TOTAL-ASSETS> 164,561 169,688 160,814
<CURRENT-LIABILITIES> 68,320 82,920 75,803
<BONDS> 21,647 22,117 23,508
0 0 0
0 0 0
<COMMON> 174 174 174
<OTHER-SE> 73,742 64,318 60,971
<TOTAL-LIABILITY-AND-EQUITY> 164,561 169,688 160,814
<SALES> 634,825 465,958 307,068
<TOTAL-REVENUES> 634,825 465,958 307,068
<CGS> 507,547 372,266 245,023
<TOTAL-COSTS> 507,547 372,266 245,023
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 2,112 1,688 1,529
<INTEREST-EXPENSE> 5,976 4,745 3,508
<INCOME-PRETAX> 17,036 11,606 6,250
<INCOME-TAX> 6,636 4,640 2,571
<INCOME-CONTINUING> 10,400 6,966 3,589
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 933 933 933
<CHANGES> 0 0 0
<NET-INCOME> 9,467 6,033 2,656
<EPS-PRIMARY> 0.58 0.38 0.17
<EPS-DILUTED> 0.57 0.36 0.17
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONSOLIDATED STATEMENTS OF INCOME AND THE CONSOLIDATED BALANCE SHEETS FOR ALL
PERIODS PRESENTED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS YEAR
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1996 OCT-31-1995
<PERIOD-END> OCT-31-1996 JUL-31-1996 OCT-31-1995
<CASH> 1,106 749 689
<SECURITIES> 0 0 0
<RECEIVABLES> 43,423 41,453 38,081
<ALLOWANCES> 1,674 1,411 1,751
<INVENTORY> 69,119 63,761 54,585
<CURRENT-ASSETS> 115,458 107,841 95,868
<PP&E> 50,465 48,967 40,122
<DEPRECIATION> 16,841 15,749 12,175
<TOTAL-ASSETS> 160,089 152,343 134,451
<CURRENT-LIABILITIES> 101,074 94,388 84,615
<BONDS> 33,935 34,108 32,747
0 0 0
0 0 0
<COMMON> 137 137 137
<OTHER-SE> 24,569 23,303 16,589
<TOTAL-LIABILITY-AND-EQUITY> 160,089 152,343 134,451
<SALES> 146,659 439,842 458,849
<TOTAL-REVENUES> 146,659 439,842 458,849
<CGS> 117,190 350,130 363,757
<TOTAL-COSTS> 117,190 350,130 363,757
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 542 0 0
<INTEREST-EXPENSE> 2,111 5,887 5,969
<INCOME-PRETAX> 2,346 8,333 5,770
<INCOME-TAX> 1,054 2,883 2,953
<INCOME-CONTINUING> 1,292 5,450 2,817
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,292 5,450 2,817
<EPS-PRIMARY> 0.09 0.40 0.21
<EPS-DILUTED> 0.09 0.37 0.19
</TABLE>
<PAGE>
EXHIBIT 99.1
SELECTED CONSOLIDATED FINANCIAL DATA(1)
The following table sets forth selected consolidated financial data of the
Company for the periods indicated. Effective November 1, 1995, the Company
elected to change its fiscal year end from October 31 to July 31.
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31, JULY 31, JANUARY 31,
---------------------------- ------------------ -------------------- ------------------
1993 1994 1995 1995 1996 1996 1997 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales............... $290,990 $359,881 $458,849 $318,642 $439,842 $ 580,049 $ 634,825 $306,575 $351,359
Cost of sales........... 230,758 285,339 363,757 251,381 350,130 462,506 507,547 244,536 280,862
-------- -------- -------- -------- -------- --------- --------- -------- --------
Gross profit........... 60,232 74,542 95,092 67,261 89,712 117,543 127,278 62,039 70,497
Operating expenses...... 54,789 65,080 81,355 57,154 75,059 99,261 103,885 52,148 55,577
Merger expenses......... -- -- -- -- -- -- -- -- 4,064
Amortization of
intangibles............ 199 538 2,426 602 793 2,616 1,060 530 505
-------- -------- -------- -------- -------- --------- --------- -------- --------
Total operating ex-
penses................ 54,988 65,618 83,781 57,756 75,852 101,877 104,945 52,678 60,146
-------- -------- -------- -------- -------- --------- --------- -------- --------
Operating income....... 5,244 8,924 11,311 9,505 13,860 15,666 22,333 9,361 10,351
Interest expense........ 2,663 4,391 5,969 4,127 5,887 7,730 5,976 3,508 2,273
Other, net.............. (210) (226) (428) (377) (360) (411) (679) (301) (349)
-------- -------- -------- -------- -------- --------- --------- -------- --------
Total other expense.... 2,453 4,165 5,541 3,750 5,527 7,319 5,297 3,207 1,924
-------- -------- -------- -------- -------- --------- --------- -------- --------
Income before income
taxes and extraordi-
nary item............. 2,791 4,759 5,770 5,755 8,333 8,347 17,036 6,154 8,427
Income taxes............ 1,617 2,022 2,953 2,185 2,883 3,652 6,636 2,571 4,855
Income before
extraordinary item..... 1,174 2,737 2,817 3,570 5,450 4,695 10,400 3,583 3,572
Extraordinary item...... -- -- -- -- -- -- 933 933 --
-------- -------- -------- -------- -------- --------- --------- -------- --------
Net income............. $ 1,174 $ 2,737 $ 2,817 $ 3,570 $ 5,450 $ 4,695 $ 9,467 $ 2,650 $ 3,572
======== ======== ======== ======== ======== ========= ========= ======== ========
PER SHARE DATA (BA-
SIC)(2):
Income before extraordi-
nary item.............. $ 0.09 $ 0.20 $ 0.21 $ 0.26 $ 0.40 $ 0.34 $ 0.64 $ 0.23 $ 0.21
Extraordinary item...... -- -- -- -- -- -- 0.06 0.06 --
-------- -------- -------- -------- -------- --------- --------- -------- --------
Net income............. $ 0.09 $ 0.20 $ 0.21 $ 0.26 $ 0.40 $ 0.34 $ 0.58 $ 0.17 $ 0.21
======== ======== ======== ======== ======== ========= ========= ======== ========
Weighted average basic
shares of common
stock.................. 13,691 13,691 13,691 13,691 13,687 13,688 16,367 15,394 17,357
======== ======== ======== ======== ======== ========= ========= ======== ========
PER SHARE DATA (DILUT-
ED)(2):
Income before extraordi-
nary item.............. $ 0.09 $ 0.18 $ 0.19 $ 0.24 $ 0.37 $ 0.32 $ 0.63 $ 0.22 $ 0.20
Extraordinary item...... -- -- -- -- -- -- 0.06 0.06 --
-------- -------- -------- -------- -------- --------- --------- -------- --------
Net income............. $ 0.09 $ 0.18 $ 0.19 $ 0.24 $ 0.37 $ 0.32 $ 0.57 $ 0.16 $ 0.20
======== ======== ======== ======== ======== ========= ========= ======== ========
Weighted average diluted
shares of common
stock.................. 13,691 14,804 14,858 14,858 14,853 14,855 16,553 16,125 17,654
======== ======== ======== ======== ======== ========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF OCTOBER 31, AS OF JULY 31, JANUARY 31,
-------------------------- ----------------- -----------
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN
THOUSANDS):
Working capital......... $ 22,044 $ 24,713 $ 26,983 $ 13,453 $ 53,101 $ 57,408
Total assets............ 81,960 91,442 134,508 152,343 164,561 180,337
Total long term debt and
capital leases.......... 35,024 34,327 48,890 34,108 21,647 22,916
Total stockholders'
equity.................. 8,894 14,266 17,117 23,440 73,916 77,569
</TABLE>
- ---------------------
(1) Selected consolidated financial data for the year ended October 31, 1995,
nine months ended July 31, 1996 and year ended July 31, 1997 were derived
from financial statements of the Company which were audited by KPMG Peat
Marwick LLP, independent certified public accountants, whose report
appears elsewhere herein. Selected consolidated financial data should be
read in conjunction with the Company's Consolidated Financial Statements
and Notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information
included elsewhere herein.
Selected consolidated financial data for the years ended October 31, 1993
and 1994, nine months ended July 31, 1995, twelve months ended July 31,
1996 and six months ended January 31, 1997 and 1998 were derived from
unaudited financial statements of the Company. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position
and results of operations have been included in such unaudited financial
statements. Such results may not be indicative of the results expected for
a full year.
The Stow Mills merger has been accounted for as a pooling of interests and
therefore the financial data of the Company are presented as if United
Natural and Stow Mills had been combined for all periods presented. Stow
Mills' results of operations for its fiscal years ended December 31, 1993,
1994 and 1995, its nine months ended September 29, 1995 and September 27,
1996, its twelve months ended September 29, 1996 and July 31, 1997 and its
six months ended January 31, 1997 and 1998 have been combined with United
Natural's results of operations for the respective periods indicated
herein. Stow Mills' financial position as of December 31, 1993, 1994 and
1995, September 27, 1996, July 31, 1997 and January 31, 1998 has been
combined with United Natural's financial position for the respective
periods indicated herein.
(2) All per share and share data have been restated to reflect the adoption of
Statement of Financial Accounting Standards No. 128. See Note 1 of Notes
to the Company's Consolidated Financial Statements.
<PAGE>
EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
United Natural Foods, Inc. is the leading independent national distributor
of natural foods and related products in the United States. In recent years,
the Company has increased sales to existing and new customers through the
acquisition of or merger with natural products distributors, the opening of
distribution centers in new geographic areas, the expansion of existing
distribution centers and the continued growth of the natural products industry
in general. Through these efforts, management believes that the Company has
been able to broaden its geographic penetration, expand its customer base,
enhance and diversify its product selections and increase its market share.
The Company's distribution operations are divided into three principal
regions: Cornucopia Natural Foods, Inc. ("Cornucopia") and Stow Mills in the
Eastern Region, Rainbow Natural Foods, Inc. ("Rainbow") in the Central Region
and Mountain People's Warehouse Incorporated ("Mountain People's") in the
Western Region. Through its Natural Retail Group ("NRG"), the Company also
owns and operates 16 retail natural products stores located in the eastern
United States. The Company's retail strategy for NRG is to selectively acquire
existing natural products stores that meet the Company's strict criteria in
areas such as sales growth, profitability, growth potential and store
management. Management believes the Company's retail business serves as a
natural complement to its distribution business.
The Company is continually integrating certain operating functions in order
to improve operating efficiencies, including: (i) integrating administrative
and accounting functions; (ii) expanding marketing and customer service
programs across the three regions; (iii) expanding national purchasing
opportunities; (iv) consolidating systems applications between physical
locations and regions; and (v) reducing geographic overlap between regions. In
addition, the Company's continued growth has created the need for expansion of
existing facilities to achieve maximum operating efficiencies and to assure
adequate space for future needs. While operating margins may be affected in
periods in which expenses are incurred, over the long term, the Company
expects to benefit from the increased absorption of its expenses over a larger
sales base. In recent years, the Company has made considerable expenditures in
connection with the expansion of its facilities, including the expansion of
its distribution center and headquarters in Dayville, Connecticut, the
relocation of its Denver, Colorado distribution center and the expansion of
refrigerated and frozen space at its Auburn, California and Atlanta, Georgia
facilities.
The Company's net sales consist primarily of sales of natural products to
retailers adjusted for customer volume discounts, returns and allowances and,
to a lesser extent, sales from its natural products stores. The principal
components of the Company's cost of sales include the amount paid to
manufacturers and growers for product sold, plus the cost of transportation
necessary to bring the product to the Company's distribution facilities.
Operating expenses include salaries and wages, employee benefits (including
payments under the Company's Employee Stock Ownership Plan), warehousing and
delivery, selling, occupancy, administrative, depreciation, merger expenses
and amortization expense. Other expenses include interest payments on
outstanding indebtedness, miscellaneous expenses, interest income and
miscellaneous income.
RECENT ACQUISITIONS
The mergers of the Company with Mountain People's and Stow Mills have each
been accounted for as a pooling of interests and, accordingly, all information
included herein is reported as though United Natural, Mountain People's and
Stow Mills had been combined for all periods reported.
On May 22, 1995, prior to its merger with United Natural, Mountain People's
acquired Nutrasource, Inc. ("Nutrasource"), and on July 29, 1995 the Company
acquired Rainbow. The acquisitions of Nutrasource and Rainbow were each
accounted for under the purchase method of accounting and, accordingly, all
financial information for Nutrasource and Rainbow has been included since the
respective dates of acquisition. The acquisition of Hershey will also be
accounted for under the purchase method of accounting but, as the acquisition
was not consummated until after January 31, 1998, financial information for
Hershey will be included in all
<PAGE>
periods after the date of acquisition. The excess of the purchase price over
the net assets acquired in each of these acquisitions has been recorded as
goodwill and is being amortized by the Company over various useful lives, not
exceeding 40 years.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain income and
expense items expressed as a percentage of net sales:
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS SIX MONTHS
ENDED JULY 31, ENDED JULY 31, ENDED JANUARY 31,
---------------- ---------------- -----------------
1995 1996 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 78.9 79.6 79.7 80.0 79.8 79.9
------- ------- ------- ------- -------- --------
Gross profit.......... 21.1 20.4 20.3 20.0 20.2 20.1
------- ------- ------- ------- -------- --------
Operating expenses...... 17.9 17.0 17.1 16.3 17.0 15.8
Merger expenses......... -- -- -- -- -- 1.2
Amortization of intangi-
bles................... 0.2 0.2 0.5 0.2 0.2 0.1
------- ------- ------- ------- -------- --------
Total operating ex-
penses................ 18.1 17.2 17.6 16.5 17.2 17.1
------- ------- ------- ------- -------- --------
Operating income....... 3.0 3.2 2.7 3.5 3.0 3.0
------- ------- ------- ------- -------- --------
Other expense (income):
Interest expense...... 1.3 1.4 1.4 0.9 1.1 0.7
Other, net............ (0.1) (0.1) (0.1) (0.1) (0.1) (0.1)
------- ------- ------- ------- -------- --------
Total other expense,
net.................. 1.2 1.3 1.3 0.8 1.0 0.6
------- ------- ------- ------- -------- --------
Income before income
taxes and extraordi-
nary item............. 1.8 1.9 1.4 2.7 2.0 2.4
Income taxes........... 0.7 0.7 0.6 1.0 0.8 1.4
------- ------- ------- ------- -------- --------
Income before extraor-
dinary item........... 1.1 1.2 0.8 1.7 1.2 1.0
Extraordinary item--loss
on early extinguishment
of debt, net of income
tax benefit............ -- -- -- 0.2 0.3 --
------- ------- ------- ------- -------- --------
Net income............. 1.1% 1.2% 0.8% 1.5% 0.9% 1.0%
======= ======= ======= ======= ======== ========
</TABLE>
SIX MONTHS ENDED JANUARY 31, 1998 COMPARED TO SIX MONTHS ENDED JANUARY 31,
1997
Net Sales. The Company's net sales increased approximately 14.6%, or $44.8
million, to $351.4 million for the six months ended January 31, 1998 from
$306.6 million for the six months ended January 31, 1997. The overall increase
in net sales was primarily attributable to increased sales to existing
customers, sales to new accounts in existing geographic areas and the
introduction of new products not previously offered by the Company.
Gross Profit. The Company's gross profit increased approximately 13.6%, or
$8.5 million, to $70.5 million for the six months ended January 31, 1998 from
$62.0 million for the six months ended January 31, 1997. The Company's gross
profit as a percentage of net sales decreased to 20.1% for the six months
ended January 31, 1998 from 20.2% for the six months ended January 31, 1997.
The decrease in gross profit as a percentage of net sales resulted partially
from the comparatively lower gross margin contribution from Stow Mills'
operations in the first quarter of fiscal 1998. Also, as in prior periods,
increased sales to existing customers under the Company's volume discount
program resulted in a further reduction in gross margin. These factors were
partially offset by purchasing efficiencies gained with the integration of
Stow Mills in the second quarter of fiscal 1998.
Operating Expenses. The Company's total operating expenses increased
approximately 14.2%, or $7.4 million, to $60.1 million for the six months
ended January 31, 1998 from $52.7 million for the six months ended January 31,
1997. As a percentage of net sales, operating expenses decreased to 17.1% for
the six months ended January 31, 1998 from 17.2% for the six months ended
January 31, 1997. Excluding merger costs of $4.1 million,
<PAGE>
the Company's total operating expenses for the six months ended January 31,
1998 would have been $56.0 million, or 16.0% of net sales, representing an
increase of $3.3 million, or 6.5%, over the comparable prior period. The
decrease in total operating expenses as a percentage of net sales was
primarily attributable to the Company's ability to leverage its overhead and
realize synergies from recent acquisitions. Additionally, because of the
October 31, 1997 effective date of the Stow Mills merger, resulting
operational efficiencies were not realized in the first quarter of fiscal
1998.
Excluding merger costs of $4.1 million, operating expenses for the six
months ended January 31, 1998 and 1997 would have been $56.1 million, or 16.0%
of net sales, and $52.7 million, or 17.2% of net sales, respectively.
Operating Income. Operating income increased $1.0 million, or approximately
10.6%, to $10.4 million for the six months ended January 31, 1998 from $9.4
million for the six months ended January 31, 1997. As a percentage of net
sales, operating income was 3.0% in each of the six months ended January 31,
1998 and 1997. Excluding the merger costs noted above, operating income for
the six months ended January 31, 1998 would have been $14.4 million
(representing an increase of 54.0% over the prior period), or 4.1% of net
sales.
Other (Income)/Expense. The $1.3 million decrease in other expense in the
six months ended January 31, 1998 compared to the six months ended January 31,
1997 was primarily attributable to the reduction in interest expense relating
to the repayment of Stow Mills' debt with proceeds from the Company's credit
facility, which bears interest at a lower rate. In addition, the proceeds from
the Company's initial public offering were used to repay debt.
Income Taxes. The Company's effective income tax rates were 57.6% and 41.8%
for the six months ended January 31, 1998 and 1997, respectively. The
effective rates were higher than the federal statutory rate primarily due to
nondeductible merger costs incurred during the first quarter of fiscal 1998
and state and local income taxes, partially offset by the fact that Stow Mills
was an S Corporation prior to the merger and, as such, had no federal tax
expense.
Net Income. As a result of the foregoing, the Company's net income increased
by $0.9 million to $3.6 million for the six months ended January 31, 1998 from
$2.7 million in the six months ended January 31, 1997. Excluding the $4.1
million (net of taxes) in merger costs in fiscal 1998 and $0.9 million
extraordinary item (net of taxes) related to the early extinguishment of debt
in fiscal 1997, net income would have been $7.6 million (representing an
increase of 113.1% over the prior period), or 2.2% of net sales, and $3.6
million, or 1.2% of net sales, for the six months ended January 31, 1998 and
1997, respectively.
TWELVE MONTHS ENDED JULY 31, 1997 COMPARED TO TWELVE MONTHS ENDED JULY 31,
1996
Net Sales. The Company's net sales increased approximately 9.4%, or $54.8
million, to $634.8 million for the twelve months ended July 31, 1997 from
$580.0 million for the twelve months ended July 31, 1996. Net sales for Stow
Mills during the period increased at a lower rate than net sales for the
Company's other regions. The increase in net sales was primarily attributable
to increased sales by the Company to its existing customers, sales to new
customers, increased sales attributable to the introduction of new products
not formerly offered by the Company and increased market penetration in
existing geographic territories.
Gross Profit. The Company's gross profit increased approximately 8.3%, or
$9.8 million, to $127.3 million for the twelve months ended July 31, 1997 from
$117.5 million for the twelve months ended July 31, 1996. The Company's gross
profit as a percentage of net sales decreased to 20.0% for the twelve months
ended July 31, 1997 from 20.3% for the twelve months ended July 31, 1996. The
decrease in gross profit as a percentage of net sales resulted primarily from
increased sales to existing customers that earned greater discounts under the
Company's volume discount program.
<PAGE>
Operating Expenses. The Company's total operating expenses increased
approximately 3.0%, or $3.0 million, to $104.9 million for the twelve months
ended July 31, 1997 from $101.9 million for the twelve months ended July 31,
1996. However, as a percentage of net sales, operating expenses decreased to
16.5% for the twelve months ended July 31, 1997 from 17.6% for the twelve
months ended July 31, 1996. Operating expenses for the twelve months ended
July 31, 1996 included $1.6 million representing the write-down of intangible
assets, $0.5 million for costs associated with the merger with Mountain
People's and $1.1 million for costs associated with the grant of stock options
under the Company's 1996 Stock Option Plan. Excluding this charge, the
Company's total operating expenses for the twelve months ended July 31, 1996
would have been $98.8 million, or 17.0% of net sales. The decrease in total
operating expenses as a percentage of net sales was attributable to the
Company's absorption of fixed expenses and overhead over a larger sales base.
Operating Income. Operating income increased $6.6 million, or approximately
42.6%, to $22.3 million for the twelve months ended July 31, 1997 from $15.7
million for the twelve months ended July 31, 1996. As a percentage of net
sales, operating income increased to 3.5% for the twelve months ended July 31,
1997 from 2.7% for the twelve months ended July 31, 1996. Excluding the
charges discussed above, operating income for the twelve months ended July 31,
1996 would have been $18.8 million, or 3.2% of net sales.
Other (Income)/Expense. Total other expense, net, decreased by $2.0 million,
or approximately 27.6%, to $5.3 million for the twelve months ended July 31,
1997 from $7.3 million for the twelve months ended July 31, 1996. The decrease
was primarily attributable to lower interest payments for the twelve months
ended July 31, 1997 resulting from the use of the proceeds of the Company's
initial public offering to repay debt. As a result, interest expense decreased
to $6.0 million for the twelve months ended July 31, 1997 from $7.7 million
for the twelve months ended July 31, 1996.
Income Taxes. The Company's effective income tax rate was 39.0% and 43.8%
for the twelve months ended July 31, 1997 and 1996, respectively. Stow Mills
was taxed as an S Corporation prior to the merger with the Company. Had Stow
Mills been a C corporation, the Company's effective tax rates would have been
41.3% and 49.6% for the twelve months ended July 31, 1997 and 1996,
respectively. The effective rates were higher than the federal statutory rate
primarily due to nondeductible amortization, especially the write-off of the
intangible assets in the twelve months ended July 31, 1996, as well as the
impact of state and local income taxes.
Net Income. As a result of the foregoing, the Company's income before
extraordinary item for the twelve months ended July 31, 1997 was $10.4
million. In November 1996, the Company completed its initial public offering
of stock, the net proceeds of which were used to repay debt. In connection
with the Company's early repayment of debt from the proceeds of its initial
public offering, the Company recorded an extraordinary loss of $1.6 million
($0.9 million net of taxes) for the twelve months ended July 31, 1997. Net
income for the twelve months ended July 31, 1997 was $9.5 million. Net income
for the twelve months ended July 31, 1996 was $4.7 million. Net income for the
year included a charge of $1.3 million net of taxes.
NINE MONTHS ENDED JULY 31, 1996 COMPARED TO NINE MONTHS ENDED JULY 31, 1995
Net Sales. The Company's net sales increased 38.0%, or $121.2 million, to
$439.8 million for the nine months ended July 31, 1996 from $318.6 million for
the nine months ended July 31, 1995. The increase in net sales was primarily
due to additional sales of $74.5 million attributable to Nutrasource and
Rainbow, whose operations were included for the entire nine-month period in
1996. Sales of $6.5 million were attributable to two months of operations of
Nutrasource during the comparable 1995 period. The remainder of the increase
was also attributable to increased sales by the Company to existing customers,
including net sales attributable to new products offered by the Company and
net sales to new customers in existing geographic distribution areas as well
as new geographic areas not formerly served by the Company.
<PAGE>
Gross Profit. The Company's gross profit increased 33.4%, or $22.4 million,
to $89.7 million for the nine months ended July 31, 1996 from $67.3 million
for the nine months ended July 31, 1995. The Company's gross profit as a
percentage of net sales decreased to 20.4% for the nine months ended July 31,
1996 from 21.1% for the nine months ended July 31, 1995. The decrease in the
gross profit as a percentage of net sales was primarily due to the lower-
margin business of the Company's recently acquired distributors and to the
increase in net sales during fiscal 1996 attributable to super natural chains,
which tend to buy in larger quantities and to qualify for greater volume
discounts.
Operating Expenses. The Company's total operating expenses increased 31.3%,
or $18.1 million, to $75.9 million for the nine months ended July 31, 1996
from $57.8 million for the nine months ended July 31, 1995. As a percentage of
net sales, operating expenses decreased to 17.2% for the nine months ended
July 31, 1996 from 18.1% for the nine months ended July 31, 1995. Total
operating expenses for the nine months ended July 31, 1996 included a non-cash
charge of $1.1 million related to the grant of options under the Company's
1996 Stock Option Plan and a charge of $0.5 million representing costs
associated with the Mountain People's merger. Excluding the charges discussed
above, the Company's total operating expenses would have been $74.4 million,
or 16.9% of net sales, for the nine months ended July 31, 1996. The decrease
in total operating expenses as a percentage of net sales was primarily
attributable to the Company's increased absorption of overhead and fixed
expenses over a larger sales base. In addition, the Company achieved increased
operating efficiencies through the implementation of new information and
warehouse management systems in its Connecticut and Georgia facilities.
Operating Income. Operating income increased $4.4 million, or 45.8%, to
$13.9 million for the nine months ended July 31, 1996 from $9.5 million for
the nine months ended July 31, 1995. As a percentage of net sales, operating
income increased to 3.2% for the nine months ended July 31, 1996 from 3.0% in
the nine months ended July 31, 1995. Excluding the charges discussed above,
operating income would have been $15.4 million, or 3.5% of net sales, for the
nine months ended July 31, 1996.
Other Income/(Expense). The $1.8 million increase in interest expense for
the nine months ended July 31, 1996 compared to the nine months ended July 31,
1995 was primarily attributable to the indebtedness incurred in connection
with the purchase of the Company's Connecticut facility in August 1995 and the
acquisitions of Nutrasource and Rainbow, along with an increase in borrowings
under the Company's revolving lines of credit to fund increasing inventory and
accounts receivable balances related to the Company's increased operating
volume.
Income Taxes. The Company's effective income tax rates were 34.6% and 38.0%
for the nine months ended July 31, 1996 and 1995, respectively. Stow Mills was
taxed as an S Corporation prior to the merger with the Company. Had Stow Mills
been a C corporation, the Company's effective tax rates would have been 40.6%
and 40.0% for the nine months ended July 31, 1996 and 1995, respectively. The
effective rates were higher than the federal statutory rate due to
nondeductible costs associated with the merger with Mountain People's and
state and local income taxes.
Net Income. As a result of the foregoing, the Company's net income increased
by 52.7%, or $1.9 million, to $5.5 million for the nine months ended July 31,
1996 from $3.6 million for the nine months ended July 31, 1995. Excluding the
$1.1 million of charges (net of taxes) related to the granting of options
under the 1996 Stock Option Plan and the costs associated with the Mountain
People's merger, net income would have been $7.1 million, or 1.6% of net
sales, for the nine months ended July 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and growth primarily
from cash flows from operations, borrowings under its credit facility, seller
financing of acquisitions, operating and capital leases, trade payables, bank
indebtedness and the sale of debt and equity securities. Primary uses of
capital have been acquisitions, expansion of plant and equipment and
investment in accounts receivable and inventory.
<PAGE>
Net cash (used in) provided by operations was $(5.5) million, $1.9 million
and $(0.5) million for the six months ended January 31, 1998, the year ended
July 31, 1997 and the nine months ended July 31, 1996, respectively. The
Company's increase in cash used in operations for the six months ended January
31, 1998 related to increased investments in accounts receivable and inventory
and a decrease in accounts payable, all in the ordinary course of business.
The recent increases in inventory levels relate to supporting increased sales
with wider product assortment combined with the Company's ability to capture
purchasing efficiency opportunities in excess of total carrying costs. The
decrease in accounts payable is the result of accelerating payments to capture
early payment discounts in excess of the Company's cost of capital. Excluding
the merger expenses, net cash used in operations for the first six months of
1998 would have been $1.4 million. The Company's working capital at January
31, 1998 was $57.4 million.
Net cash used in investing activities was $4.5 million, $3.8 million and
$8.6 million for the six months ended January 31, 1998, the year ended July
31, 1997 and the nine months ended July 31, 1996, respectively. Investing
activities included primarily capital expenditures related to the purchase of
material handling equipment and the continued upgrade of existing management
information systems. During the nine months ended July 31, 1996, the Company
also used capital to purchase and expand its Connecticut distribution
facility. The Company's capital expenditures were primarily funded from senior
bank indebtedness, including term loans.
Cash provided by financing activities was $12.5 million, $2.0 million and
$9.3 million for the six months ended January 31, 1998, the year ended July
31, 1997 and the nine months ended July 31, 1996, respectively. During fiscal
1997, the Company issued 2.9 million shares of its common stock in its initial
public offering, which resulted in net proceeds to the Company of $35.5
million. The proceeds were used to repay indebtedness of the Company. The
Company also utilized proceeds from long-term debt of $8.6 million, $12.5
million and $6.5 million for the six months ended January 31, 1998, the year
ended July 31, 1997 and the nine months ended July 31, 1996, respectively.
In October 1997, the Company amended its credit agreement with its bank to
increase the amount of the facility from $50 million to $100 million, to
increase the limit on inventory advances to $50 million and the advance rate
to 60%, to establish a term loan of $6.6 million and to increase the aggregate
amount of real estate acquisition loans and real estate term loans to $20
million. The agreement also provides for the bank to syndicate the credit
facility to other banks and lending institutions. The credit facility was used
to repay existing indebtedness of Stow Mills owing to the Company's bank and
will be used for general operating capital needs. Interest under the facility,
except the portion related to the mortgage commitments, accrues at the
Company's option at the New York Prime Rate or 1.00% above the bank's London
Interbank Offered Rate (LIBOR), and the Company has the option to fix the rate
for all or a portion of the debt for a period up to 180 days. Interest on the
mortgage facility will accrue at 1.25% above the bank's LIBOR rate, although
the Company has the option to fix the rate for a period of five years at a
rate of 1.25% above the five-year rate for U.S. Treasury Notes. The Company
has pledged all of its assets as collateral for its obligations under the
credit agreement. As of January 31, 1998, the Company's outstanding borrowings
under the credit agreement totaled $38.6 million. The credit agreement expires
on July 31, 2002.
The Company expects to spend approximately $25 million over the next five
years in capital expenditures to fund the expansion of existing facilities,
upgrade information systems and technology and update its material handling
equipment. Included in this amount are $3 to $5 million in capital
expenditures in the 1998 and 1999 calendar years for the Company's Year 2000
upgrade and new warehouse management system, including new hardware and
installation.
Management believes that the Company will have adequate capital resources
and liquidity to meet its borrowing obligations, fund all required capital
expenditures and pursue its business strategy, with the exception of any major
acquisitions which may be made by the Company, through fiscal 2000. The
Company's capital resources and liquidity are expected to be provided by cash
flow from operations and borrowings under the credit facility and capital and
operating leases.
<PAGE>
IMPACT OF INFLATION
Historically, the Company has been able to pass along inflation-related
increases. Consequently, inflation has not had a material impact upon the
results of the Company's operations or profitability.
SEASONALITY
Generally, the Company does not experience any material seasonality.
However, the Company's sales and operating results may vary significantly from
quarter to quarter due to factors such as changes in the Company's operating
expenses, management's ability to execute the Company's operating and growth
strategies, personnel changes, demand for natural products, supply shortages
and general economic conditions.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS") No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for disclosing
information about an entity's capital structure. This statement is effective
for periods ending after December 15, 1997. The Company is in compliance with
this standard.
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This statement is effective for
fiscal years beginning after December 15, 1997 and requires reclassification
of financial statements for earlier periods provided for comparative purposes.
The Company will comply with the required presentation in fiscal 1999.
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for reporting operating segments of publicly
traded business enterprises in annual and interim financial statements and
requires that those enterprises report selected information about operating
segments. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business," but retains the requirement to report information
about major customers. This statement also amends SFAS No. 94, "Consolidation
of All Majority-Owned Subsidiaries." SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997 and requires
that comparative information for earlier years be restated. The Company has
not yet determined what impact, if any, this standard will have on its
financial statement presentation.
The Financial Accounting Standards Board recently issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits."
This statement standardizes disclosure requirements for pensions and other
postretirement benefits, and is effective for fiscal years beginning after
December 15, 1997. This statement does not apply to the Company as the Company
does not currently sponsor any defined benefit plans.
YEAR 2000 ISSUES
The Company's financial accounting systems are Year 2000 compliant. The
Company's Eastern Region and its Chicago facility are not currently Year 2000
compliant. The Company is currently reviewing its operational business systems
to ensure Year 2000 compliance and to enhance its business systems
functionality to achieve operating efficiencies and customer service
improvements. The Company plans to purchase packaged software to address Year
2000 issues when available. The Company expects to incur $3 to $5 million in
expenditures in the 1998 and 1999 calendar years for its Year 2000 upgrade and
new warehouse management systems, including new hardware and installation.
However, there can be no assurance that the systems of other companies on
which the Company's systems rely also will be timely converted or that any
such failure to convert by another company would not have a material adverse
effect on the Company's business, financial condition or results of
operations.
<PAGE>
EXHIBIT 99.3
UNITED NATURAL FOODS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES:
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Income...................................... F-4
Consolidated Statements of Stockholders' Equity........................ F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United Natural Foods, Inc.:
We have audited the accompanying consolidated balance sheets of United Natural
Foods, Inc. and subsidiaries as of July 31, 1996 and 1997 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year ended October 31, 1995, for the nine months ended July 31, 1996, and for
the year ended July 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Natural Foods, Inc. and subsidiaries as of July 31, 1996 and 1997 and the
results of their operations and their cash flows for the year ended October
31, 1995, for the nine months ended July 31, 1996, and for the year ended July
31, 1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Providence, Rhode Island
April 15, 1998
F-2
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, 1996 JULY 31, 1997 JANUARY 31, 1998
------------- ------------- ----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 749 $ 952 $ 3,458
Accounts receivable, net of
allowance of $1,411 and $2,283
for 1996 and 1997,
respectively................... 40,042 42,952 49,581
Notes receivable, trade......... 360 866 908
Inventories..................... 63,761 71,509 78,035
Prepaid expenses................ 2,133 4,110 3,568
Deferred income taxes........... 796 1,032 1,032
-------- -------- --------
Total current assets........ 107,841 121,421 136,582
-------- -------- --------
Property and equipment, net....... 33,218 32,412 32,723
-------- -------- --------
<CAPTION>
<S> <C> <C> <C>
Other assets:
Notes receivable, trade, net.... 1,068 995 1,274
Goodwill, net of accumulated
amortization of $556 and $791
for 1996 and 1997,
respectively................... 8,096 7,579 8,453
Covenants not to compete, net of
accumulated amortization of
$711 and $1,552 for 1996 and
1997, respectively............. 1,117 592 512
Other, net...................... 1,003 1,562 793
-------- -------- --------
Total assets................ $152,343 $164,561 $180,337
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQ-
UITY
Current liabilities:
Notes payable................... $ 50,251 $ 27,222 $ 38,603
Current installments of long-
term debt...................... 5,102 3,016 1,426
Current installments of
obligations under capital
leases......................... 526 681 151
Accounts payable................ 30,013 30,536 31,962
Accrued expenses................ 8,192 6,488 6,613
Income taxes payable............ 304 377 419
-------- -------- --------
Total current liabilities... 94,388 68,320 79,174
Long-term debt, excluding current
installments..................... 27,374 20,411 21,803
Notes payable to Stow
officers/stockholders............ 5,483 -- --
Deferred income taxes............. 407 678 678
Obligations under capital leases,
excluding current installments... 1,251 1,236 1,113
-------- -------- --------
Total liabilities........... 128,903 90,645 102,768
-------- -------- --------
Stockholders' equity:
Preferred stock, $.01 par value:
authorized 5,000 shares;
none issued or outstanding .... -- -- --
Common stock, $.01 par value:
authorized 25,000 shares;
issued 13,691 and outstanding
13,671 in 1996;
issued 17,377 and outstanding
17,357 in 1997;................ 137 174 174
Additional paid-in capital...... 6,592 51,842 50,007
Stock warrants.................. 3,200 -- --
Unallocated shares of Employee
Stock Ownership Plan (ESOP).... (3,074) (2,910) (2,829)
Retained earnings............... 16,629 24,854 30,261
Treasury stock, 20 shares at
cost........................... (44) (44) (44)
-------- -------- --------
Total stockholders' equity.. 23,440 73,916 77,569
-------- -------- --------
Total liabilities and
stockholders' equity....... $152,343 $164,561 $180,337
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31,
NINE
YEAR ENDED MONTHS ENDED YEAR ENDED
OCTOBER 31, JULY 31, JULY 31,
1995 1996 1997 1997 1998
----------- ------------ ---------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............... $458,849 $439,842 $634,825 $306,575 $351,359
Cost of sales........... 363,757 350,130 507,547 244,536 280,862
-------- -------- -------- -------- --------
Gross profit........... 95,092 89,712 127,278 62,039 70,497
-------- -------- -------- -------- --------
Operating expenses...... 81,355 75,059 103,885 52,148 55,577
Merger expenses......... -- -- -- -- 4,064
Amortization of
intangibles............ 2,426 793 1,060 530 505
-------- -------- -------- -------- --------
Total operating
expenses.............. 83,781 75,852 104,945 52,678 60,146
-------- -------- -------- -------- --------
Operating income....... 11,311 13,860 22,333 9,361 10,351
-------- -------- -------- -------- --------
Other expense (income):
Interest expense....... 5,462 5,524 5,481 3,268 2,273
Interest expense on
notes payable to Stow
officers/stockholders.. 507 363 495 240 -
Other, net............. (428) (360) (679) (301) (349)
-------- -------- -------- -------- --------
Total other expense.... 5,541 5,527 5,297 3,207 1,924
-------- -------- -------- -------- --------
Income before income
taxes and
extraordinary item.... 5,770 8,333 17,036 6,154 8,427
Income taxes............ 2,953 2,883 6,636 2,571 4,855
-------- -------- -------- -------- --------
Income before
extraordinary item.... 2,817 5,450 10,400 3,583 3,572
Extraordinary item--loss
on early extinguishment
of debt, net of income
tax benefit of $662 -- -- 933 933 --
-------- -------- -------- -------- --------
Net income............. $ 2,817 $ 5,450 $ 9,467 $ 2,650 $ 3,572
======== ======== ======== ======== ========
Pro forma additional
income tax expense
(Unaudited)............ 75 499 401 6 320
-------- -------- -------- -------- --------
Pro forma income before
extraordinary item
(Unaudited)............ $ 2,742 $ 4,951 $ 9,999 $ 3,577 $ 3,252
======== ======== ======== ======== ========
Per share data (Basic):
Income before
extraordinary item..... $ 0.21 $ 0.40 $ 0.64 $ 0.23 $ 0.21
Extraordinary item, net
of income tax benefit.. -- -- 0.06 0.06 --
-------- -------- -------- -------- --------
Net income............. $ 0.21 $ 0.40 $ 0.58 $ 0.17 $ 0.21
======== ======== ======== ======== ========
Pro forma income before
extraordinary item
(Unaudited)............ $ 0.20 $ 0.36 $ 0.61 $ 0.23 $ 0.19
======== ======== ======== ======== ========
Weighted average basic
shares of common
stock.................. 13,691 13,687 16,367 15,394 17,357
======== ======== ======== ======== ========
Per share data
(Diluted):
Income before
extraordinary item..... $ 0.19 $ 0.37 $ 0.63 $ 0.22 $ 0.20
Extraordinary item, net
of income tax benefit.. -- -- 0.06 0.06 --
-------- -------- -------- -------- --------
Net income............. $ 0.19 $ 0.37 $ 0.57 $ 0.16 $ 0.20
======== ======== ======== ======== ========
Pro forma income before
extraordinary item
(Unaudited)............ $ 0.18 $ 0.33 $ 0.60 $ 0.22 $ 0.18
======== ======== ======== ======== ========
Weighted average diluted
shares of common
stock.................. 14,858 14,853 16,553 16,125 17,654
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNALLOCATED
OUTSTANDING ADDITIONAL SHARES OF TOTAL
NUMBER COMMON PAID-IN STOCK EMPLOYEE STOCK RETAINED TREASURY STOCKHOLDERS'
OF SHARES STOCK CAPITAL WARRANTS OWNERSHIP PLAN EARNINGS STOCK EQUITY
----------- ------ ---------- -------- -------------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at October 31,
1994.................... 13,691 $137 $ 4,285 $3,200 $(3,359) $10,001 $-- $14,264
Allocation of shares to
ESOP................... -- -- -- -- 163 -- -- 163
Distributions to Stow
officers/stockholders.. -- -- -- -- -- (127) -- (127)
Transfer of
undistributed earnings
of S Corporation to
additional paid-in
capital................ -- -- 87 -- -- (87) -- --
Net income.............. -- -- -- -- -- 2,817 -- 2,817
------ ---- ------- ------ ------- ------- ---- -------
Balances at October 31,
1995.................... 13,691 137 4,372 3,200 (3,196) 12,604 -- 17,117
Allocation of shares to
ESOP................... -- -- -- -- 122 -- -- 122
Purchase of treasury
stock.................. (20) -- -- -- -- -- (44) (44)
Stock options .......... -- -- 1,056 -- -- -- -- 1,056
Distributions to Stow
officers/stockholders.. -- -- -- -- -- (261) -- (261)
Transfer of
undistributed earnings
of S Corporation to
additional paid-in
capital................ -- -- 1,164 -- -- (1,164) -- --
Net income.............. -- -- -- -- -- 5,450 -- 5,450
------ ---- ------- ------ ------- ------- ---- -------
Balances at July 31,
1996.................... 13,671 137 6,592 3,200 (3,074) 16,629 (44) 23,440
Issuance of common
stock.................. 2,900 29 35,481 -- -- -- -- 35,510
Exercise of stock
warrants............... 786 8 3,192 (3,200) -- -- -- --
Allocation of shares to
ESOP................... -- -- -- -- 164 -- -- 164
Distributions to Stow
officers/stockholders.. -- -- -- -- -- (611) -- (611)
Capital contribution.... 6,043 -- -- -- 6,043
Effect of change in year
end.................... -- -- -- -- -- (97) -- (97)
Transfer of
undistributed earnings
of S Corporation to
additional paid-in
capital................ -- -- 534 -- -- (534) -- --
Net income.............. -- -- -- -- -- 9,467 -- 9,467
------ ---- ------- ------ ------- ------- ---- -------
Balances at July 31,
1997.................... 17,357 174 51,842 -- (2,910) 24,854 (44) 73,916
Allocation of shares to
ESOP (Unaudited)....... -- -- -- -- 81 -- -- 81
Transfer of
undistributed loss of
S Corporation to
additional paid-in
capital (Unaudited).... -- -- (1,835) -- -- 1,835 -- --
Net income (Unaudited).. -- -- -- -- -- 3,572 -- 3,572
------ ---- ------- ------ ------- ------- ---- -------
Balances at January 31,
1998 (Unaudited)........ 17,357 $174 $50,007 $ -- $(2,829) $30,261 $(44) $77,569
====== ==== ======= ====== ======= ======= ==== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31,
NINE
YEAR ENDED MONTHS ENDED YEAR ENDED
OCTOBER 31, 1995 JULY 31, 1996 JULY 31, 1997 1997 1998
---------------- ------------- ------------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income.............. $ 2,817 $5,450 $ 9,467 $ 2,650 $ 3,572
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Extraordinary loss on
early extinguishment
of debt, net of tax
benefit............... -- -- 933 933 --
Depreciation,
amortization and
write-off of
intangible assets..... 5,640 4,052 5,609 2,996 2,957
Loss (gain) on
disposals of property
and equipment......... (32) 34 9 6 (1)
Accretion of original
issue discount........ 530 459 153 153 --
Compensation expense
related to stock
options............... -- 1,056 -- -- --
Deferred income taxes.. 330 (270) (5) (101) --
Provision for doubtful
accounts.............. 763 647 2,112 1,529 704
Changes in assets and
liabilities, net of
acquired companies:
Accounts receivable.... (7,383) (4,073) (3,782) (6,898) (7,954)
Inventory.............. (12,029) (8,181) (7,748) (4,858) (6,015)
Prepaid expenses....... (240) (761) (1,977) 33 542
Refundable income
taxes................. -- -- -- (306) --
Other assets........... 1,990 362 (1,299) (207) 97
Notes receivable,
trade................. (265) (204) (434) 38 (321)
Accounts payable....... 6,493 (1,694) 523 5,491 1,075
Accrued expenses....... 614 2,418 (1,704) (1,883) 379
Income taxes payable... (247) 195 73 358 (552)
------- ------ ------- -------- -------
Net cash provided (used
in) by operating
activities............ (1,019) (510) 1,930 (66) (5,517)
------- ------ ------- -------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Payments for purchases
of subsidiaries, net of
cash acquired.......... (8,673) (900) -- -- (2,698)
Proceeds from disposals
of property and
equipment.............. 161 53 111 72 259
Capital expenditures.... (10,348) (7,791) (3,875) (2,461) (2,022)
------- ------ ------- -------- -------
Net cash used in
investing activities... (18,860) (8,638) (3,764) (2,389) (4,461)
------- ------ ------- -------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net (repayments)
borrowings under note
payable................ 15,305 9,429 (23,029) (17,033) 11,381
Repayments of long-term
debt................... (2,861) (5,954) (22,276) (16,162) (6,798)
Proceeds from long-term
debt................... 9,604 6,490 12,529 805 8,584
Principal payments of
capital lease
obligations............ (252) (388) (646) (251) (683)
Payment of financing
costs.................. (321) -- -- -- --
Proceeds from issuance
of common stock, net... -- -- 35,510 35,510 --
Purchase of treasury
stock.................. -- (44) -- -- --
Net borrowings on notes
payable to Stow
officers/stockholders.. (1,574) 25 560 561 --
Cash distributions paid
to Stow
officers/stockholders.. (127) (277) (611) (445) --
------- ------ ------- -------- -------
Net cash provided by
financing activities... 19,774 9,281 2,037 2,985 12,484
------- ------ ------- -------- -------
NET CHANGE IN CASH AND
CASH EQUIVALENTS....... (105) 133 203 530 2,506
Cash and cash
equivalents at
beginning of period.... 721 616 749 1,282 952
------- ------ ------- -------- -------
Cash and cash
equivalents at end of
period................. $ 616 $ 749 $ 952 $ 1,812 $ 3,458
======= ====== ======= ======== =======
</TABLE>
F-6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest................................. $4,834 $ 4,073 $5,895 $3,406 $ 2,298
====== ======= ====== ====== =======
Income taxes............................. $2,919 $ 2,544 $5,534 $2,503 $ 4,612
====== ======= ====== ====== =======
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
In 1995, the Company purchased substantially all of the assets of one retail
store and one wholesale distributor, and the capital stock of another wholesale
distributor for $6,725. In conjunction with these acquisitions, liabilities
were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired: $21,315
Cash paid: 6,725
-------
Liabilities assumed and debt issued: $14,590
=======
</TABLE>
In 1996 and 1997, the Company incurred capital lease obligations of
approximately $582 and $786, respectively.
See notes to consolidated financial statements.
F-7
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996 AND 1997
(INFORMATION AS OF JANUARY 31, 1998 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS
United Natural Foods, Inc. and Subsidiaries (the Company) is a distributor
and retailer of natural products. The Company sells its products throughout
the United States. For purposes of segment reporting, the Company considers
its operations to be within a single industry.
(B) BASIS OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
(C) CASH EQUIVALENTS
Cash equivalents at January 31, 1998 consist of highly liquid investment
instruments with original maturities of three months or less.
(D) INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital leases is
stated at the present value of minimum lease payments at the inception of the
lease. Depreciation and amortization are principally provided under the
straight-line method over the estimated useful lives.
(F) INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(G) INTANGIBLE ASSETS
Intangible assets consist principally of goodwill and covenants not to
compete. Goodwill represents the excess purchase price over fair value of net
assets acquired in connection with purchase business combinations and is being
amortized on the straight-line method not exceeding forty years. Covenants not
to compete are stated at cost and are amortized using the straight-line method
over the lives of the respective agreements, generally five years.
The Company evaluates impairment of intangible assets annually, or more
frequently if events or changes in circumstances indicate that carrying
amounts may no longer be recoverable. Impairment losses are determined
F-8
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
based upon the excess of carrying amounts over expected future cash flows
(undiscounted) of the underlying business. The assessment of the
recoverability of intangible assets will be impacted if estimated future cash
flows are not achieved.
In fiscal 1995, the Company wrote off approximately $1.6 million in
intangible assets, primarily goodwill, upon evaluating impairment of the
underlying business of certain of its retail operations. The impairment was
indicated by projected cash flow losses caused by increased competition at one
location and a change in demographics for the other affected location. This
amount is included in "Amortization of Intangibles" in the 1995 Consolidated
Statement of Income.
(H) REVENUE RECOGNITION AND TRADE RECEIVABLES
The Company records revenue upon shipment of products. Revenues are recorded
net of applicable sales discounts. The Company's sales are with customers
located throughout the United States. The Company had one customer in 1997,
Whole Foods Market, Inc. that provided 10% or more of the Company's revenue,
and no such customers in 1996 or 1995. Total sales to this customer were
approximately $89 million in 1997.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash,
accounts receivable, accounts payable and accrued expenses approximate fair
value due to the short-term nature of these instruments. The carrying value of
notes receivable, long-term debt and capital lease obligations approximate
fair value based on the instruments' interest rate, terms, maturity date, and
collateral, if any, in comparison to the Company's incremental borrowing rate
for similar financial instruments.
(J) CHANGE IN FISCAL YEAR
Effective November 1, 1995, the Company elected to change its fiscal year
end from October 31 to July 31. The consolidated statements of income and cash
flows for the nine months ended July 31, 1996 are not necessarily indicative
of results that would be expected for a full year.
On October 31, 1997, a subsidiary of the Company completed its merger with
Stow Mills, Inc. and Subsidiary and Hendrickson Partners ("Stow"), wherein
Stow became a wholly-owned subsidiary of the Company. Prior to this merger,
Stow's fiscal year ended December 31. In recording this merger, Stow's
combined financial statements for the fiscal year ended December 31, 1996 have
been restated to the nine months ended September 27, 1996. As permitted by the
rules and regulations of the Securities and Exchange Commission, Stow's nine
months ended September 27, 1996 and fiscal year ended December 31, 1995 have
been combined with the Company's nine months ended July 31, 1996 and fiscal
year ended October 31, 1995, respectively.
As a result, Stow's two-month period ended September 27, 1996, has been
included in the consolidated financial statements in both the year ended July
31, 1997 and the nine months ended July 31, 1996. Stow's unaudited results of
operations for this two-month period included net sales, operating income and
net income of approximately $31.0 million, $0.5 million and $0.1 million,
respectively. Stow did not pay any dividends during this two-month period. The
consolidated statements of stockholders' equity include an adjustment in 1997
to reduce the Company's retained earnings for the net income of Stow for this
two-month period.
(K) ACCOUNTING CHANGES
Effective November 1, 1995, the Company changed its method of accounting for
certain inventories from the last-in, first-out (LIFO) method to the first-in,
first-out (FIFO) method. Due to a number of recent
F-9
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
acquisitions, the Company's subsidiaries were accounting for inventories on
varying methods (LIFO, FIFO) and using different calculation methodologies for
LIFO. In order to conform all the Company's inventories to the same valuation
method and to enhance the comparability of the Company's financial results
with other publicly traded entities, the conforming change to FIFO was made,
which was deemed preferable for these reasons. This change has been applied
retroactively and financial statements of prior periods have been restated.
(L) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(M) NOTES RECEIVABLE, TRADE
The Company issues notes receivable, trade to certain customers under two
basic circumstances, inventory purchases for initial store openings and
overdue accounts receivable. Initial store opening notes are generally
receivable over a period not to exceed twelve months. The overdue accounts
receivable notes may extend for periods greater than one year. All notes are
issued at a market interest rate and contain certain guarantees and collateral
assignments in favor of the Company.
(N) EMPLOYEE BENEFIT PLANS
The Company sponsors various defined contribution plans that cover
substantially all employees. Pursuant to certain stock incentive plans, the
Company has granted stock options to key employees and to non-employee
directors. The Company accounts for stock option grants using the intrinsic
value based method.
(O) EARNINGS PER SHARE
During fiscal 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Under the
provisions of SFAS No. 128, basic earnings per share replaces primary earnings
per share and the dilutive effect of stock options are excluded from the
calculation. Fully diluted earnings per share are replaced by diluted earnings
per share, and included the dilutive effect of stock options using the treasury
stock method. All earnings per share information included in these financial
statements has been restated to conform to the requirements of SFAS No. 128. For
purposes of the diluted earnings per share calculation, outstanding stock
options and stock warrants are considered common stock equivalents, using the
treasury stock method. The number of shares used in all calculations has been
adjusted to reflect a fifty-five-for-one stock split effective August 30, 1996.
A reconciliation of the weighted average number of shares outstanding used
in the computation of the basic and diluted earnings per share for the year
ended October 31, 1995, nine months ended July 31, 1996, the year ended July
31, 1997 and the six months ended January 31, 1998 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS SIX MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED ENDED
OCTOBER 31, JULY 31, JULY 31, JANUARY 31, JANUARY 31,
1995 1996 1997 1997 1998
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(in thousands)
Weighted average basic
shares of common stock 13,691 13,687 16,367 15,394 17,357
Effect of dilutive stock
options 1,167 1,166 186 731 297
------ ------ ------ ------ ------
Weighted average diluted
shares of common stock 14,858 14,853 16,553 16,125 17,654
====== ====== ====== ====== ======
</TABLE>
F-10
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1996, the Company completed a public offering of its common
stock. Proceeds from the sale of 2.9 million shares were used to repay
outstanding bank indebtedness. Assuming the aforementioned sale of common
stock and repayment of debt occurred effective August 1, 1996, unaudited
supplementary income before extraordinary item per basic common and diluted
common share for the year ended July 31, 1997 would have been $0.62 based upon
17.4 million and 17.5 million weighted average basic common and diluted common
shares, respectively.
(P) PRO FORMA ADDITIONAL INCOME TAX EXPENSE (UNAUDITED)
Stow was organized as an S corporation for Federal income tax purposes prior
to the merger. Pro forma income tax expense reflects Federal income tax
applied to taxable income at a rate of 35% for Stow for all periods prior to
the effective date of the merger.
(2) ACQUISITIONS
SUBSEQUENT EVENTS
During February 1998, the Company acquired substantially all the assets of
Hershey Import Co., Inc. ("Hershey"), a business specializing in the
international trading, roasting and packaging of nuts, seeds, dried fruit and
snack items, for approximately $7.5 million. Hershey had sales of $20.8 million
for its most recent fiscal year ending June 30, 1997.
On October 31, 1997, a subsidiary of the Company completed its merger with
Stow wherein Stow became a wholly-owned subsidiary of the Company. The merger
with Stow was accounted for as a pooling of interests and, accordingly, all
financial information included is reported as though the companies had been
combined for all periods presented. The Company issued 4,978,280 shares, which
represented 29% of the Company's Common Stock after the merger in exchange for
all of the outstanding common stock of Stow. Net sales for the year ended
October 31, 1995, nine months ended July 31, 1996, year ended July 31, 1997,
and quarter ended October 31, 1997 for the Company excluding Stow were
approximately $283.3 million, $286.4 million, $421.7 million and $118.8
million (unaudited), respectively. Net income for the year ended October 31,
1995, nine months ended July 31, 1996, year ended July 31, 1997, and quarter
ended October 31, 1997 for the Company excluding Stow was approximately $2.6
million, $4.0 million, $8.3 million and $1.4 million (unaudited),
respectively. Net sales for the year ended October 31, 1995, nine months ended
July 31, 1996, year ended July 31, 1997, and quarter ended October 31, 1997
for Stow were approximately $175.5 million, $153.4 million, $213.1 million and
$56.9 million (unaudited), respectively. Net income (loss) for the year ended
October 31, 1995, nine months ended July 31, 1996, year ended July 31, 1997,
and quarter ended October 31, 1997 for Stow was approximately $.2 million,
$1.4 million, $1.1 million and ($1.7) million (unaudited), respectively.
FISCAL 1996
In February 1996, Cornucopia Natural Foods, Inc. (CNF) (predecessor company)
and Mountain People's Warehouse, Inc. (MPW) merged in a business combination
accounted for as a pooling of interests and CNF changed its name to United
Natural Foods, Inc. CNF issued 3,213,100 shares, which represented
approximately 37% of the common stock of CNF after the merger, in exchange for
all of the outstanding common stock of MPW. The financial statements for all
periods presented reflect the merger. Net sales for fiscal 1995 and the
quarter ended January 31, 1996 for CNF were $145.6 million and $48.7 million
(unaudited), respectively. Net income for fiscal 1995 and the quarter ended
January 31, 1996 for CNF was $0.9 million and $1.0 million (unaudited),
respectively. Net sales for fiscal 1995 and the quarter ended January 31, 1996
for MPW were $137.7 million and $43.6 million (unaudited), respectively. Net
income for fiscal 1995 and the quarter ended January 31, 1996 for MPW $1.7
million and $0.1 million (unaudited), respectively.
F-11
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FISCAL 1995
During fiscal 1995, the Company acquired substantially all of the assets of
one natural products retailer, SunSplash Market, Inc. (in April 1995), one
wholesale distributor, Prem Mark, Inc. (the predecessor business to Rainbow
Natural Foods, Inc.) (in July 1995) and the capital stock of another wholesale
distributor, Nutrasource, Inc. (in May 1995), in business combinations
accounted for as purchases. The results of operations of these acquisitions
have been included in the accompanying financial statements since the dates of
the acquisitions. The total cash paid and debt issued for these acquisitions
was approximately $12.5 million, which exceeded the fair value of the net
assets acquired by approximately $6.3 million. This excess of purchase price
over the net assets acquired has been recorded as goodwill, and is being
amortized over thirty years.
In connection with these acquisitions, the Company executed covenants not to
compete and consulting agreements totaling approximately $0.5 million to be
amortized using the straight-line method over the lives of the respective
agreements, generally five years.
(3) STOCK OPTION PLAN
The Company implemented Statement of Financial Accounting Standards No. 123,
"Accounting for Stock- Based Compensation," during fiscal 1997. While SFAS No.
123 established financial accounting and reporting standards for stock-based
employee compensation plans using a fair value method of accounting, it allows
companies to continue to measure compensation using the intrinsic value method
of accounting as prescribed in APB Opinion No. 25 (APB No. 25), "Accounting
for Stock Issued to Employees." The Company will continue to use its present
APB No. 25 accounting treatment for stock-based compensation. If the fair
value method of accounting had been used, net income would have been $3.8
million and $9.3 million for 1996 and 1997, respectively, basic earnings per
share would have been $0.28 and $0.57 for 1996 and 1997, respectively, and
diluted earnings per share would have been $0.26 and $0.56 for 1996 and 1997,
respectively. The weighted average grant date fair value of options granted
during 1996 and 1997 was $6.47 and $5.84 per option, respectively. The fair
value of each option grant was estimated using the Black-Sholes Option Pricing
Model with the following weighted average assumptions for 1997 and 1996: a
dividend yield of 0.0%, an expected volatility of 46.5%, a risk free interest
rate of 6.07% and an expected life of 8 years. The effects of applying SFAS
No. 123 in this pro forma disclosure are not indicative of future amounts.
On July 29, 1996, the Board of Directors adopted, and on July 31, 1996 the
stockholders approved, the 1996 Stock Option Plan which provides for grants of
stock options to employees, officers, directors and others. These options are
intended to qualify as incentive stock options within the meaning of Section
422 of the Internal Revenue Code or options not intended to qualify as
incentive stock options ("non-statutory stock options"). A total of 1,375,000
shares of common stock may be issued upon the exercise of options granted
under the 1996 Stock Option Plan.
In 1996, as consideration for their services on the Company's Board of
Directors, four employee-directors were awarded non-statutory stock options to
purchase an aggregate of 324,500 shares of common stock under the Company's
1996 Stock Option Plan at an exercise price of $6.38 per share, which vested
immediately. In addition, one non-employee director was awarded a non-
statutory stock option to purchase 16,500 shares of common stock under the
1996 Stock Option Plan at an exercise price of $9.64 per share which vests
after three years. Incentive stock options to purchase an aggregate of 297,000
shares of common stock were also granted to several employees at not less than
the fair value at the date of grant, with vesting at various rates generally
over the next five years. Compensation expense of approximately $1.1 million
was charged to operations in fiscal 1996 related to the employee-director
stock options.
F-12
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the stock option activity for the six months
ended January 31, 1998, fiscal 1997 and fiscal 1996.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
1996
Outstanding at beginning of year.................... -- --
Granted............................................. 638,000 $ 8.11
Exercised........................................... -- --
Canceled............................................ -- --
------- ------
Outstanding at end of year.......................... 638,000 $ 8.11
======= ======
Options exercisable at year end..................... 353,739 $ 6.61
======= ======
1997
Outstanding at beginning of year.................... 638,000 $ 8.11
Granted............................................. 16,500 $ 9.64
Exercised........................................... -- --
Canceled............................................ -- --
------- ------
Outstanding at end of year.......................... 654,500 $ 8.14
======= ======
Options exercisable at year end..................... 382,978 $ 6.80
======= ======
1998 (UNAUDITED)
Outstanding at beginning of period.................. 654,500 $ 8.14
Granted............................................. 247,346 $20.59
Exercised........................................... -- --
Canceled............................................ -- --
------- ------
Outstanding at end of period........................ 901,846 $11.56
======= ======
Options exercisable at period end................... 393,987 $ 7.17
======= ======
</TABLE>
The option to purchase 901,846 shares of common stock outstanding at January
31, 1998 had exercise prices and remaining contractual lives as follows:
<TABLE>
<CAPTION>
REMAINING
EXERCISE PRICE SHARES CONTRACTUAL LIFE
<C> <S> <C> <C>
$6.38....................................... 324,500 9 Years
$9.64....................................... 247,500 9 Years
$10.60...................................... 82,500 4 Years
(Unaudited) $20.25.......................... 205,807 10 Years
(Unaudited) $22.28.......................... 41,539 5 Years
</TABLE>
(4) NOTES PAYABLE
The Company entered into a line of credit and term loan agreement (see note
5) with a bank effective February 20, 1996. The agreement has had three
subsequent amendments effective March 1997, July 1997 and October 1997. In
October 1997, the Company amended the agreement with its bank to increase the
amount of the facility from $50 million to $100 million, to increase the limit
on inventory advances to $50 million and the advance rate to 60%, to establish
a term loan of $6.6 million and to increase the aggregate amount of real
estate
F-13
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
acquisition loans and real estate term loans to $20 million. The agreement
also provides for the bank to syndicate the credit facility to other banks and
lending institutions. The credit facility was used to repay existing
indebtedness of Stow owing to the Company's bank at the date of the merger and
is used for general operating capital needs. Interest under the facility,
except the portion related to the mortgage commitments, accrues at the
Company's option at the New York Prime Rate (8.25% and 8.50% at July 31, 1996
and 1997, respectively) or 1.00% above the bank's London Interbank Offered
Rate (LIBOR), and the Company has the option to fix the rate for all or a
portion of the debt for a period up to 180 days. Interest on the mortgage
facility will accrue at 1.25% above the bank's LIBOR rate, although the
Company has the option to fix the rate for a period of five years at a rate of
1.25% above the five-year U.S Treasury Note rate. At July 31, 1996 and 1997,
the weighted average interest rate on the line of credit was 7.84% and 6.98%,
respectively. The Company has pledged all of its assets as collateral for its
obligations under the credit agreement. As of July 31, 1997, the Company's
outstanding borrowings under the credit agreement totaled $6.3 million. The
credit agreement expires on July 31, 2002 and contains certain restrictive
covenants. The Company was in compliance with its restrictive covenants at
July 31, 1997.
In connection with the amendment to the Company's credit agreement with its
bank as noted above, an Agency and Interlender Agreement was entered into by
the Company, its bank and two additional participating banks effective
December 1, 1997. This agreement states, among other things, that the
Company's primary bank will participate in this credit facility with the other
banks.
At July 31, 1996, Stow had a revolving line of credit with a bank to borrow
up to $25 million due June 30, 1999. The line was increased, per the terms of
the agreement, to $28 million at July 1, 1997. Borrowings under the line were
limited to qualified accounts receivable and inventory, as defined. The
maximum borrowing base available at July 31, 1997 was approximately $24
million which was limited by the letters of credit of approximately $0.7
million. The Company had approximately $2.4 million available under the line
on July 31, 1997. This line of credit bore interest at the bank's prime rate
(8.50% at July 31, 1997), or the London Interbank Offered Rate (5.6875% at
July 31, 1997) plus 150 to 200 basis points or some combination thereof, as
defined, and was secured by substantially all of the assets of Stow. At July
31, 1996 and 1997, the weighted average interest rate on the line of credit
was 7.93% and 7.98%, respectively. Under the terms of the line of credit, the
Company was required to, among other things, maintain certain financial
covenants, as defined. In addition, the agreement contained certain
restrictions on the sale or disposition of Company assets. At July 31, 1996
and 1997, the Company was either in compliance with such covenants or such
events of noncompliance were waived by the bank. This line of credit was
repaid in full and canceled as of October 31, 1997.
Notes payable to Stow officers/stockholders totaling $5.5 million at July
31, 1996 were due on demand and carried interest at 8.25%. The noteholders
waived rights to collect these notes through December 31, 1997, and
accordingly, that portion of the notes has been classified as long-term in the
accompanying combined balance sheets. These long-term notes were subordinated
to all bank debt. The total outstanding balance of the notes was contributed
to capital as of June 30, 1997.
(5) LONG-TERM DEBT
Long-term debt consisted of the following: (dollars in thousands)
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1996 1997
-------- --------
<S> <C> <C>
Note payable to limited partnership, secured, with inter-
est ranging from 8% to 12% per annum payable quarterly,
repaid in November 1996................................. $4,744 --
Term loan for employee stock ownership plan, secured by
stock of the Company, due $14 monthly plus interest at
10%, balance due May 1, 2015............................ 3,074 $2,910
</TABLE>
F-14
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1996 1997
-------- --------
<S> <C> <C>
Real estate term loan payable to bank, secured by land
and building, refinanced in July 1997................... 5,775 25
Term loan payable to former owners of acquired business,
secured by substantially all assets of subsidiary, re-
paid in November 1996................................... 2,785 --
Term loan payable to bank, secured by substantially all
assets of the Company, with monthly principal payments
of $50 through July 2002 and the remaining principal due
on July 31, 2002, interest at bank's prime plus 0.25% or
at 2.25% above the LIBOR rate........................... 4,702 12,000
Installment notes secured by equipment, payable in
monthly installments through 2002 at interest rates
ranging from 7.43% to 11.82%............................ 1,958 2,320
Other notes payable to former owners of acquired busi-
nesses and former stockholders of subsidiaries, maturing
at various dates through February 2002 at interest rates
ranging from 6% to 10%.................................. 3,165 528
Notes payable to bank, secured by automobiles, including
interest ranging from 6.25% to 7.25%, primarily due over
three years............................................. 54 34
Note payable to bank, secured by mortgage, payable in
monthly installments through 2001 of $6, carrying inter-
est at bank's prime plus 0.5%........................... 301 263
Note payable to bank, secured by mortgage, payable in
monthly installments of $39, carrying interest at bank's
prime plus 0.75%, due October 2017...................... 4,397 4,336
Note payable to agency, secured by land and building,
payable in monthly installments of $3, carrying interest
at 8.25%, due October 2001.............................. 120 102
Note payable to agency, secured by land and building,
payable in monthly installments of $1, carrying interest
at 12%, due March 2001.................................. 27 23
Note payable to agency, secured by land and building,
payable in monthly installments of $2, carrying interest
at 10.57%, due September 2007........................... 146 141
Term note payable to bank, secured by substantially all
assets of Stow, payable in monthly installments of $44,
carrying interest at bank's prime plus 0.5%, due Decem-
ber 1998................................................ 1,228 745
------- -------
32,476 23,427
Less: current installments............................... 5,102 3,016
------- -------
Long-term debt, excluding current installments........... $27,374 $20,411
======= =======
</TABLE>
The Company entered into a Note and Warrant Purchase Agreement (the
Agreement) with a limited partnership (the Purchaser) on November 17, 1993.
Under the Agreement, the Company issued to the Purchaser a Senior Note in the
principal amount of $6.5 million and a Common Stock Purchase Warrant for
1,166,660 shares of the common stock of the Company. The Senior Note was
repaid in full in November 1996 upon receipt of the proceeds from the initial
public offering. The loss on the early retirement of debt has been reflected
as an extraordinary item of $933, net of the income tax benefit of $662. This
loss represents the charge off of the remaining original issue discount at the
date of repayment. The Purchaser exercised stock warrants to purchase 785,730
shares of common stock during fiscal 1997 at a price of $.01 per share, with
the remaining stock warrants repurchased by the Company. Interest on the
Senior Note ranged from 8% to 12% per annum.
Certain debt agreements contain restrictive covenants. At July 31, 1997, the
Company was either in compliance with such covenants or such events of
noncompliance were waived by the counterparty.
F-15
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate maturities of long-term debt for the next five years and
thereafter are as follows at July 31, 1997:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
1998.................. $ 3,016
1999.................. 1,814
2000.................. 1,403
2001.................. 1,209
2002.................. 9,930
Thereafter............ 6,055
-------
$23,427
=======
</TABLE>
(6) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at July 31, 1996 and 1997:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES (YEARS) 1996 1997
------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Land................................. $ 1,070 $ 1,070
Building............................. 20-40 18,441 18,642
Leasehold improvements............... 5-30 4,776 5,894
Warehouse equipment.................. 5-20 10,363 10,625
Office equipment..................... 3-10 6,945 7,439
Motor vehicles....................... 3-5 4,691 5,217
Equipment under capital leases....... 5 2,344 3,299
Construction in progress............. 337 196
----------- -----------
48,967 52,382
Less accumulated depreciation and
amortization........................ 15,749 19,970
----------- -----------
Net property and equipment......... $ 33,218 $ 32,412
=========== ===========
</TABLE>
(7) CAPITAL LEASES
The Company leases computer, office and warehouse equipment under capital
leases expiring in various years through 2002. The assets and liabilities
under capital leases are recorded at the lower of the present value of the
minimum lease payments or the fair value of the assets. The assets are
depreciated over the lower of their related lease terms or their estimated
productive lives.
Minimum future lease payments under capital leases as of July 31, 1997 for
each of the next five fiscal years and in the aggregate are:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31 AMOUNT
(IN THOUSANDS)
<S> <C>
1998...................... $ 813
1999...................... 616
2000...................... 498
2001...................... 146
2002 and thereafter....... 120
------
Total minimum lease
payments............... 2,193
Less: Amount representing
interest................. 276
------
Present value of net
minimum lease
payments............... 1,917
Less: current
installments............. 681
------
Capital lease
obligations, excluding
current installments... $1,236
======
</TABLE>
F-16
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES
The Company leases various facilities under operating lease agreements with
varying terms. Most of the leases contain renewal options and purchase options
at several specific dates throughout the terms of the leases.
The Company also leases equipment under master lease agreements. Payment
under these agreements will continue for a period of four years. The equipment
lease agreements contain covenants concerning the maintenance of certain
financial ratios. The Company was in compliance with its covenants at July 31,
1997.
Future minimum annual fixed payments required under non-cancelable operating
leases having an original term of more than one year as of July 31, 1997 are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998.......................... $ 4,228
1999.......................... 3,676
2000.......................... 3,036
2001.......................... 1,988
2002.......................... 1,821
-------
$14,749
=======
</TABLE>
Rent and other lease expense for the year ended October 31, 1995, the nine
months ended July 31, 1996 and the year ended July 31, 1997 totaled
approximately $5.8 million, $5.2 million and $7.1 million, respectively.
Outstanding commitments as of July 31, 1997 for the purchase of inventory
were approximately $9.5 million. The Company had outstanding letters of credit
of approximately $1.1 million at July 31, 1997.
The Company may from time to time be involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
(9) SALARY REDUCTION/PROFIT SHARING PLANS
The Company has several salary reduction/profit sharing plans, generally
called "401(k) Plans" (the Plans), covering various employee groups. Under
these types of Plans the employees may choose to reduce their compensation and
have these amounts contributed to the Plans on their behalf. In order to
become a participant in the Plans, employees must meet certain eligibility
requirements as described in the respective Plan's document. In addition to
amounts contributed to the Plans by employees, the Company makes contributions
to the Plans on behalf of the employees. The Company contributions to the
Plans were approximately $0.4 million, $0.4 million and $0.6 million for the
year ended October 31, 1995, for the nine months ended July 31, 1996 and for
the year ended July 31, 1997, respectively.
F-17
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) INCOME TAXES
Total Federal and state income tax expense consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Fiscal year ended October 31, 1995:
U.S. Federal..................................... $2,079 $ 302 $2,381
State and local.................................. 544 28 572
------ ----- ------
$2,623 $ 330 $2,953
====== ===== ======
Nine months ended July 31, 1996:
U.S. Federal..................................... $2,428 $(255) $2,173
State and local.................................. 725 (15) 710
------ ----- ------
$3,153 $(270) $2,883
====== ===== ======
Fiscal year ended July 31, 1997:
From continuing operations
U.S. Federal................................... $4,839 $ 19 $4,858
State and local................................ 1,802 (24) 1,778
------ ----- ------
6,641 (5) 6,636
------ ----- ------
Extraordinary item
U.S. Federal................................... (542) -- (542)
State and local................................ (120) -- (120)
------ ----- ------
(662) -- (662)
------ ----- ------
$5,979 $ (5) $5,974
====== ===== ======
</TABLE>
Total income tax expense was different than the amounts computed using the
United States statutory income tax rate (approximately 34% for 1995 and 1996
and 35% for fiscal 1997) applied to income before income taxes and
extraordinary item as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
OCTOBER 31, JULY 31, JULY 31,
1995 1996 1997
----------- ----------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense... $1,964 $2,849 $5,405
State and local income tax, net of
Federal income tax benefit....... 377 467 1,078
Effect of entities not taxed for
Federal income tax............... (75) (499) (401)
Merger related expenses........... -- 156 --
Non-deductible expenses........... 20 70 42
Non-deductible amortization....... 479 5 16
Other, net........................ 188 (165) (166)
------ ------ ------
$2,953 $2,883 $5,974
====== ====== ======
</TABLE>
F-18
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets and deferred tax liabilities at July
31, 1996 and 1997 are presented below:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Inventories, principally due to additional costs inven-
toried for tax purposes................................ $ 421 $ 460
Rents deducted for book purposes in excess of tax....... 28 22
Financing costs......................................... 25 25
Intangible assets....................................... 221 301
Deferred compensation................................... 401 411
Accrued vacation........................................ 59 77
Accounts receivable, principally due to allowances for
uncollectible accounts................................. 281 202
Other................................................... 165 --
------ -------
Total gross deferred tax assets....................... 1,601 1,498
Less valuation allowance.................................. -- --
------ -------
Net deferred tax assets............................... 1,601 1,498
------ -------
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation........................................... 537 571
Reserve for LIFO inventory method....................... 675 523
Other................................................... -- 50
------ -------
Total deferred tax liabilities........................ 1,212 1,144
------ -------
Net deferred tax assets................................... $ 389 $ 354
====== =======
Current deferred income tax assets........................ $ 796 $ 1,032
Non-current deferred income tax liabilities............... (407) (678)
------ -------
$ 389 $ 354
====== =======
</TABLE>
In assessing the recoverability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Due to the fact that the Company has
sufficient taxable income in the federal carryback period and anticipates
sufficient future taxable income over the periods which the deferred tax
assets are deductible, the ultimate realization of deferred tax assets for
Federal and state tax purposes appears more likely than not.
(11) EMPLOYEE STOCK OWNERSHIP PLAN
The Company adopted the CNF Employee Stock Ownership Plan (the Plan) for the
purpose of acquiring outstanding shares of the Company for the benefit of
eligible employees. The Plan was effective as of November 1, 1988 and has
received notice of qualification by the Internal Revenue Service.
In connection with the adoption of the Plan, a Trust was established to hold
the shares acquired. On November 1, 1988, the Trust purchased 40% of the
outstanding Common Stock of the Company at a price of $4,080,000. The trustees
funded this purchase by issuing promissory notes to the initial stockholders,
with the ESOT shares pledged as collateral. These notes bear interest at 10%
and are payable through May 2015. As the debt is repaid, shares are released
from collateral and allocated to active employees, based on the proportion of
debt service paid in the year.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans," in
F-19
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
November 1993. The statement provides guidance on employers' accounting for
ESOPs and is required to be applied to shares purchased by ESOPs after
December 31, 1992, that have not been committed to be released as of the
beginning of the year of adoption. In accordance with SOP 93-6, the Company
elected not to adopt the guidance in SOP 93-6 for the shares held by the ESOP,
all of which were purchased prior to December 31, 1992. The debt of the ESOP
is recorded as debt and the shares pledged as collateral are reported as
unearned ESOP shares in the Supplemental Consolidated Balance Sheets. During
1995, 1996 and 1997 contributions totaling approximately $0.5 million, $0.4
million and $0.5 million, respectively, were made to the Trust. Of these
contributions, approximately $0.3 million, $0.2 million and $0.3 million,
respectively, represented interest.
The ESOP shares were classified as follows:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Allocated shares........................................... 484 550
Shares released for allocation............................. 66 88
Shares distributed to employees............................ (20) (88)
Unreleased shares.......................................... 1,650 1,562
----- -----
Total ESOP shares........................................ 2,180 2,112
===== =====
</TABLE>
The fair value of unreleased shares was approximately $37.5 million at July
31, 1997. Employees have the option of putting their shares back to the
Company upon leaving employment. This option will remain available until the
shares held by the Trust are registered.
(12) STOCK SPLIT
In connection with the Company's initial public offering of shares of common
stock, on August 30, 1996, the Board of Directors adopted, and the
stockholders approved, an amendment to the Company's certificate of
incorporation increasing the number of authorized shares of common stock from
0.2 million to 25.0 million and stating the par value of such shares as $0.01,
and the Company effected a fifty-five-for-one split of its issued and
outstanding common stock. All share, option and warrant and per share data
presented in the accompanying consolidated financial statements have been
restated to reflect the increased number of authorized and outstanding shares
of common stock.
F-20
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly operating results and share data.
Quarterly information shown below has been adjusted from amounts reported on
any Form 10-Q previously filed by the Company to reflect the acquisition of
Stow. There were no dividends paid or declared by the Company during fiscal
year 1996, the twelve months ended 1997 and the six months ended January 31,
1998 and the Company anticipates that it will continue to retain earnings for
use in its business and not pay cash dividends in the foreseeable future. The
comparable fiscal year 1996 information has been created by combining actual
fiscal 1996 results with the fourth quarter results for fiscal 1995.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL YEAR
-------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1996
Net sales................... $140,207 $142,560 $149,053 $148,229 $580,049
Gross profit................ 27,831 29,334 30,287 30,091 117,543
Income before income taxes.. 14 2,659 3,323 2,351 8,347
Net income (loss)........... (755) 1,940 2,054 1,456 4,695
Per common share
Income (Loss)
Basic..................... $ (0.06) $ 0.14 $ 0.15 $ 0.11 $ 0.34
Diluted................... $ (0.05) $ 0.13 $ 0.14 $ 0.10 $ 0.32
Weighted average basic
shares outstanding......... 13,691 13,691 13,691 13,678 13,687
Weighted average diluted
shares outstanding......... 14,858 14,858 14,858 14,844 14,855
1997
Net sales................... $146,659 $160,409 $158,890 $168,867 $634,825
Gross profit................ 29,649 32,396 31,647 33,586 127,278
Income before income taxes
and extraordinary item..... 2,346 3,814 5,446 5,430 17,036
Extraordinary item.......... -- 933 -- -- 933
Net income.................. 1,292 1,364 3,377 3,434 9,467
Per common share
Income before extraordinary
item
Basic..................... $ 0.09 $ 0.13 $ 0.19 $ 0.20 $ 0.64
Diluted................... $ 0.09 $ 0.13 $ 0.19 $ 0.20 $ 0.63
Weighted average basic
shares outstanding......... 13,671 17,116 17,357 17,357 16,367
Weighted average diluted
shares outstanding......... 14,976 17,274 17,539 17,601 16,553
</TABLE>
<TABLE>
<CAPTION>
SIX
FIRST SECOND MONTHS
1998 -------- -------- --------
<S> <C> <C> <C>
Net sales....................................... $173,383 $177,976 $351,359
Gross profit.................................... 34,189 36,308 70,497
Income before income taxes...................... 1,293 7,134 8,427
Net income(loss)................................ (628) 4,200 3,572
Per common share Income (loss)
Basic........................................ $ (0.04) $ 0.24 $ 0.21
Diluted...................................... $ (0.04) $ 0.24 $ 0.20
Weighted average basic shares outstanding....... 17,357 17,357 17,357
Weighted average diluted shares outstanding..... 17,649 17,659 17,654
</TABLE>
F-21
<PAGE>
EXHIBIT 99.4
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United Natural Foods, Inc.:
Under date of April 15, 1998, we reported on the consolidated balance sheets of
United Natural Foods, Inc. and subsidiaries as of July 31, 1996 and 1997 and the
related consolidated statements of income, stockholders' equity and cash flows
for the year ended October 31, 1995, for the nine months ended July 31, 1996,
and for the year ended July 31, 1997, included herein. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related financial statement schedule. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Providence, Rhode Island
April 15, 1998
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
-----------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS PERIOD
----------- --------- -------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
(in thousands)
Bad Debt Allowance
Year ended July 31, 1997 $1,411 $2,191 - $1,319 $2,283
Nine months ended July 31, 1996 1,408 740 - 737 1,411
Year ended October 31, 1995 708 858 $83 241 1,408
</TABLE>
(1) Represents the beginning bad debt allowance for Nutrasource, Inc. and Prem
Mark, Inc.
