UNITED NATURAL FOODS INC, 10-K, 1998-10-29

UNITED NATURAL FOODS INC
10-K, 1998-10-29
GROCERIES, GENERAL LINE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for fiscal year ended July 31, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.

Commission File Number: 000-1020859

UNITED NATURAL FOODS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware 05-0376157
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

260 Lake Road
Dayville, CT 06241
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (860) 779-2800

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:

Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the common stock held by non-affiliates of the
registrant was $404,398,601, based upon the closing price of the registrant's
common stock on the Nasdaq National Market on October 16, 1998. The number of
shares of the registrant's common stock, $0.01 par value, outstanding as of
October 29, 1998 was 18,175,218.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in December 1998 are incorporated herein by reference
into Part III of this report.

===============================================================================

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UNITED NATURAL FOODS, INC.
FORM 10-K
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
PART I.

Item 1. Business 3

Item 2. Properties 11

Item 3. Legal Proceedings 11

Item 4. Submission of Matters to a Vote of Security Holders 11

PART II.

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 13

Item 6. Selected Financial Data 13

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17

Item 7A. Quantitative and Qualitative Disclosure About Market Risk 27

Item 8. Financial Statements and Supplementary Data 28

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 47

Part III

Item 10. Directors and Executive Officers of the Registrant 47

Item 11. Executive Compensation 47

Item 12. Security Ownership of Certain Beneficial Owners and Management 47

Item 13. Certain Relationships and Related Transactions 47

Part IV

Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 47

</TABLE>

Signatures
<PAGE>

PART I.

ITEM 1. BUSINESS

United Natural Foods, Inc. ("United Natural" or the "Company")is the leading
independent national distributor of natural foods and related products in the
United States. The Company is the primary supplier to a majority of its
customers, offering more than 26,000 high-quality natural products consisting of
groceries and general merchandise, nutritional supplements, bulk and foodservice
products, personal care items, perishables and frozen foods. The Company serves
more than 6,500 customers in 46 states, including independent natural products
retailers, super natural chains and conventional supermarkets, and is the
primary distributor to the two largest super natural chains, Whole Foods
Markets, Inc. ("Whole Foods") and Wild Oats Markets, Inc. ("Wild Oats"). The
Company also owns and operates 16 retail natural products stores which
complement its distribution business. The Company's strategy is to continue to
capitalize on its leading market position and strong industry trends to enhance
its position as the leading independent national distributor to the natural
products industry. For the twelve months ended July 31, 1998, the Company
generated net sales and operating income of $728.9 million and $29.0 million,
respectively, representing compound annual growth rates of 20.7% and 37.0%,
respectively, from the twelve months ended October 31, 1994.

The Company has achieved its market leadership position through a strategy
consisting of both strong internal growth and acquisitions. Since 1985, the
Company has successfully completed 20 acquisitions of distributors, suppliers
and retail stores, including Stow Mills Inc. ("Stow Mills"), Hershey Import Co.,
Inc. ("Hershey") and Albert's Organics, Inc. ("Albert's"), significantly
expanding the Company's distribution network, product offering and customer
base. On October 31, 1997, the Company merged with Stow Mills, a regional
natural products distributor serving the Northeast and Midwest regions of the
United States. The Company believes that the Stow Mills merger will generate
significant benefits, including: (i) increased market share and distribution
capacity, particularly in the Midwest; (ii) improved purchasing power; (iii)
enhanced product offerings; (iv) improved distribution logistics and operating
efficiencies; and (v) significant opportunities for the reduction of selling,
general and administrative expenses. On February 11, 1998, the Company acquired
the assets of Hershey, a business specializing in the international trading,
roasting and packaging of nuts, seeds, dried fruits and snack items. On
September 30, 1998, the Company acquired substantially all of the outstanding
stock of Albert's, a wholesale distributor of organic produce. In managing its
growth strategy, the Company has successfully captured the benefits of its
national scale, while utilizing a regional approach to managing its business,
taking advantage of the strong customer loyalty developed by its regional
divisions which have formed the foundation of the Company. As a result of its
national expansion, the Company has organized its operations into three
geographic 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 ("Mountain People's")in the Western
Region. The Company believes that this combination of national distribution
economies combined with a regional operating focus has been the cornerstone of
its successful operating strategy.

NATURAL PRODUCTS INDUSTRY

According to The Natural Foods Merchandiser, a leading industry publication, the
natural products industry has achieved a compound annual growth rate of
21% from 1992 to 1996, growing from $5.3 billion to $11.5 billion. The Company
believes that this growth reflects a broadening of the natural products consumer
base which is being driven by several factors, including an increasing awareness
of the link between diet and health, healthier eating patterns, increasing
concern regarding food purity and safety and greater environmental awareness.

According to The Natural Foods Merchandiser, the natural products retailing
sector is highly fragmented, with over 6,700 independent natural products
retailers in operation in 1996 and continuing to grow annually. Although the
natural products industry sector remains fragmented, natural products
supermarkets continue to increase their market share of total natural products
sales as they expand into additional geographic markets and acquire smaller
independent competitors. In addition, conventional supermarkets and mass market
outlets have also begun to increase their emphasis on the sale of natural
products as the sector gains appeal. Moreover,

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as consumer demand for natural products has grown, an increasing number of
national, regional and local natural products have become available as more
suppliers and producers have entered the market.

COMPETITIVE ADVANTAGES

The Company believes it benefits from a number of significant competitive
advantages which include:

. MARKET LEADER WITH A NATIONWIDE PRESENCE. As a result of its nationwide
presence, the Company believes it is one of the few distributors capable of
serving both local and regional customers as well as the rapidly growing
super natural chains. The Company believes it has significant advantages
over smaller, regional natural products distributors as a result of its
ability to: (i) derive significant economies of scale in operating and
distribution expenses; (ii) benefit from increased purchasing power and
breadth of product offering; (iii) make significant investments in advanced
technology and equipment, which will enhance productivity and customer
service; and (iv) provide superior customer service on a national scale.

. LOW-COST OPERATOR. The Company believes that it is well positioned to
provide value added distribution services to its customers at attractive
prices while also providing superior customer service. In addition to its
volume purchasing power advantage, a critical component of the Company's
position as a low-cost provider is its effective management of warehouse
and distribution costs, primarily as a result of utilizing larger
distribution centers within each of its geographic regions and integrating
its facilities through its nationwide interregional logistics network. In
addition, the Company has made significant investment in transportation
equipment and information technology to enable it to more efficiently serve
its customers.

. EXPANDING BASE OF PREMIER CUSTOMER RELATIONSHIPS. The Company serves more
than 6,500 customers in 46 states. The Company has developed long-standing
customer relationships that it believes are among the strongest in the
industry. The Company has also been the primary supplier to each of the
industry's two largest super natural chains, Whole Foods and Wild Oats, for
more than ten years.

. EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. The Company's
management team has extensive experience in the natural products industry and
has been successful in identifying, consummating and integrating multiple
acquisitions. Since 1985, the Company has successfully completed 20
acquisitions of distributors, suppliers and retail stores, including Stow
Mills, Albert's and Hershey. In addition, the Company's executive officers
and directors, and their affiliates, and the Employee Stock Ownership Trust
("ESOT") beneficially own in the aggregate approximately 62.0% of the
Company's Common Stock. Accordingly, the Company's senior management and
employees have significant incentive to continue to generate strong growth in
operating results in the future.

GROWTH STRATEGY

The Company's growth strategy is to maintain and enhance its position as the
leading independent national distributor to the natural products industry. Key
elements of the Company's strategy include:

. INCREASE MARKET SHARE OF THE RAPIDLY GROWING NATURAL PRODUCTS INDUSTRY. The
Company's strategy is to continue to increase its leading market share of
the rapidly growing natural products industry by significantly expanding
its customer base, increasing its share of existing customers' business and
continuing to expand and further penetrate new distribution territories.

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. EXPAND EXISTING CUSTOMER BASE. The Company has expanded substantially
the number of customers served to more than 6,500 as of July 31,
1998. The Company plans to continue to expand its coverage of the highly
fragmented natural products industry by cultivating new customer
relationships within the industry as well as in developing channels of
business such as traditional supermarkets, mass market outlets, Internet
retailers, institutional foodservice providers, hotels and gourmet
stores.

. INCREASE ITS SHARE OF EXISTING CUSTOMERS' DISTRIBUTION NEEDS. The
Company seeks to become the primary supplier for a majority of its
customers' needs by offering the broadest product offering in the
industry at the most competitive prices. Since 1993, the Company has
significantly expanded its product offering from approximately 14,000
products to more than 26,000 as of July 31, 1998. In addition, the
Company has launched a number of highly successful private label
programs, which offer both the Company and its customers higher margins
than many of the Company's existing product offerings. As a result the
Company believes it has become the primary distributor to the majority of its
natural products customer base.

. CONTINUE TO EXPAND AND PENETRATE INTO NEW DISTRIBUTION TERRITORIES.
Since 1993, the Company has increased the aggregate size of
its distribution centers from approximately 660,000 square feet to
approximately 1,300,000 square feet and the number of states served from
25 to 46. The Company will continue to selectively evaluate
opportunities to acquire (i) distributors to fill in existing markets
and expand into new markets and (ii) suppliers to expand margins through
vertical integration and brand differentiation. The Company currently
has no agreements or understandings with regard to any material
acquisitions.

. CONTINUE TO IMPROVE EFFICIENCY OF NATIONWIDE DISTRIBUTION NETWORK. The
Company continually seeks to improve its operating results by integrating
its nationwide network utilizing the best practices within the industry and
within each of the regions that have formed the foundation of the Company.
This focus on achieving improved economies of scale in purchasing,
warehousing, transportation and general and administrative functions has
resulted in significant improvements in operating margins, which increased
from 2.5% in fiscal 1994 to 5.0% in the quarter ended July 31, 1998,
excluding relocation and start-up costs for the new expanded Denver
distribution and Central Region headquarters facility. Management believes
that there are additional opportunities for margin improvement from its best
practices programs.

. CAPITALIZE ON THE BENEFITS OF THE STOW MILLS MERGER. With the Stow Mills
merger in October 1997, the Company significantly expanded its customer
base, distribution capacity and product offering. The merger is expected to
generate significant benefits, including: (i) increased market share and
distribution capacity, particularly in the Midwest; (ii) improved
purchasing power; (iii) enhanced product offerings; (iv) improved
distribution logistics and operating efficiencies; and (v) significant
opportunities for the reduction of redundant selling, general and
administrative expenses. As a result, management expects the Stow Mills
merger to offer significant opportunities for future sales growth together
with opportunities for further margin improvement.

. CONTINUE TO PROVIDE THE LEADING DISTRIBUTION SOLUTION. The Company's
strategy is to continue to provide the leading distribution solution to the
natural products industry through its national scale, regional
responsiveness, high customer service focus and breadth of product
offering. The Company offers its customers a selection of inventory
management, merchandising, marketing, promotional and event management
services to increase customer sales and enhance customer satisfaction and a

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broad range of marketing services, many of which are supplier-sponsored,
including monthly and seasonal flier programs, in-store signage and
assistance in product display, all in order to assist its customers in
increasing sales.

PRODUCTS

The Company's extensive selection of high-quality natural products enables
it to provide a primary source of supply to a diverse base of customers whose
product needs vary significantly. The Company distributes more than 26,000
high-quality natural products, consisting of national brand, regional brand,
private label and master distribution products in six product categories
consisting of grocery and general merchandise, nutritional supplements, bulk
and foodservice products, personal care items, perishables and frozen foods.
The Company's private label products address certain preferences of customers
that are not otherwise being met by other suppliers.

The Company evaluates more than 10,000 potential new products each year
based on existing and anticipated trends in consumer preferences and buying
patterns. Since 1992, the Company has introduced an average of 350 new
products each month, while discontinuing approximately 150 less successful
products. The Company's buyers regularly attend regional natural, organic,
specialty, ethnic and gourmet products shows to review the latest product
introductions that are likely to be of interest to retailers and consumers.
The Company also actively solicits suggestions for new products from its
customers. The Company makes the majority of its new product decisions at the
regional level. The Company believes that its decentralized purchasing
practices allow its regional purchasers to react quickly to changing consumer
preferences and to evaluate new products and new product categories regionally.
In addition, many of the new products offered by the Company are marketed on a
regional basis or in the Company's own retail stores prior to being offered
nationally, which enables the Company to evaluate local consumer reaction to the
products without incurring significant inventory risk.

SUPPLIERS

The Company purchases its products from approximately 1,800 active
suppliers. Although the majority of the Company's suppliers are based in the
United States, the Company regularly sources products from vendors throughout
Europe, Asia, South America, Africa and Australia. Management believes that
natural products suppliers seek distribution of their products through the
Company because it provides access to a large and growing customer base,
distributes the majority of the suppliers' products and supports the
suppliers' marketing programs. Substantially all product categories
distributed by the Company are available from a number of suppliers and the
Company is not dependent on any single source of supply for any product
category. The Company's largest supplier accounted for approximately 3.8% of
total purchases in calendar 1997.

The Company has positioned itself to respond to regional and local customer
preferences for natural products by decentralizing the majority of its
purchasing decisions for all products except bulk commodities. The Company
believes that regional buyers are best suited to identify and to respond to
local demands and preferences. Although each of the Company's regions is
responsible for placing its own orders and can select the products that it
believes will most appeal to its customers, each region is required to
participate in Company-wide purchasing programs that enable it to take
advantage of the Company's consolidated purchasing power. For example, the
Company has positioned itself as the largest purchaser of organically grown
bulk products in the natural products industry by centralizing its purchase of
nuts, seeds, grains, flours and dried fruits.

The Company's purchasing staff cooperates closely with suppliers to provide
new and existing products. The suppliers assist in training the Company's

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account and customer service representatives in marketing new products,
identifying industry trends and coordinating advertising and other promotions.

The Company maintains a comprehensive quality control assurance program. All
products sold by the Company and represented as "organic" are required to be
certified as such by an independent third-party agency. The Company maintains
current certification affidavits on all organic commodities and produce in
order to verify the authenticity of the product. All potential vendors of
organic products are required to provide such third-party certification before
they are approved as a supplier to the Company. In addition, the Company has
secured the services of counsel specializing in Food and Drug Administration
("FDA") matters to audit all labels, packaging, ingredient lists and product
claims relating to products offered by the Company to ensure that all products
meet current FDA requirements. The Company believes that it is the only
natural products distributor which has performed such an audit to date.

CUSTOMERS

The Company markets its products to more than 6,500 customers located in 46
states. The Company maintains long-standing customer relationships with
independent natural products retailers, including super natural chains, and has
continued to emphasize its relationships with new customers, such as
conventional supermarkets, Internet retailers and other mass market outlets, as
well as gourmet stores, all of which are continually increasing their natural
product offerings. Among the Company's wholesale customers are leading super
natural chains doing business as Whole Foods (including Bread and Circus and
Fresh Fields), Wild Oats, Nature's Fresh, Northwest!, Nature's Heartland and
Wild Harvest and conventional supermarket chains such as Carr's, City Market,
Harris Teeter, King Soopers, Kroger, Path Mark, Quality Food Centers (QFC),
Shaws, Star Market and Stop and Shop.

Management believes that the Company is the primary supplier to the majority of
its customers. Whole Foods accounted for approximately 16% and 14% of the
Company's net sales in fiscal 1998 and 1997, respectively. No other customer
accounted for more than 10% of the Company's net sales in fiscal 1998.

The following table sets forth the types of customers served by the Company
and the approximate percentage of its net sales generated by each category for
calendar 1996 and 1997.

<TABLE>
<CAPTION>
PERCENTAGE OF
NET SALES
-------------
1996 1997
<S> <C> <C>
TYPE OF CUSTOMER
Independent Natural Products Stores........................................ 53.8% 55.5%
Super Natural Chains....................................................... 31.5 31.1
Conventional Supermarkets.................................................. 9.3 8.9
Miscellaneous/Other........................................................ 5.4 4.5
---- ----
100.0% 100.0%
====== ======
</TABLE>

SALES

The Company maintains an order fill rate that on average exceeds 95% (excluding
products unavailable from the supplier), which the Company believes is one of
the highest order fill rates in the natural products distribution industry.
The Company believes that its high fill rates can be attributed to its
experienced purchasing department and sophisticated warehousing, inventory
control and distribution systems. The Company offers next-day delivery service
to a majority of its active customers and offers multiple deliveries each week

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to its largest customers. The Company believes that customer loyalty is
dependent upon outstanding customer service to ensure accurate fulfillment of
orders, timely product delivery, low prices and a high level of product
marketing support.

MARKETING

The Company has developed a variety of supplier-sponsored marketing services
that cater to a broad range of retail formats. These programs are designed to
educate consumers, profile suppliers and increase sales for retailers, the
majority of which do not have the resources necessary to conduct such
marketing programs independently.

The Company offers a monthly flier program featuring the logo and address of
the participating retailer imprinted on a flier advertising approximately 200
sale items which is distributed by the retailer to its customers. The color
fliers are designed by the Company's in-house marketing department utilizing
modern digital photography and contain detailed product descriptions and
pricing information. In addition, each flier generally includes detailed
information on selected vendors, recipes, product features and a comparison of
the characteristics of a natural product with a similar mass market product.
The monthly flier program is structured to pass through to the retailer the
benefit of company negotiated discounts and advertising allowances. The
program also provides retailers with posters, window banners and shelf tags to
coincide with each month's promotions.

In addition to its monthly flier program, the Company offers thematic custom
and seasonal consumer fliers that are used to promote items associated with a
particular cause or season, such as environmentally sensitive products for
Earth Day or foods and gifts particularly popular during the holiday season.
The Company also (i) offers in-store signage and promotional materials,
including shopping bags and end-cap displays, (ii) provides assistance with
planning and setting up product displays and (iii) advises on pricing
decisions to enable its customers to respond to local competition.

DISTRIBUTION

SIZE LEASE
LOCATION (IN SQUARE FEET) EXPIRATION
<S> <C> <C>
Atlanta, Georgia....................... 175,000 March 1999
Auburn, California..................... 150,000 Owned
Bridgeport, New Jersey................. 36,700 Owned
Chesterfield, New Hampshire............ 126,500 Owned
Chicago, Illinois...................... 80,000 December 2000
Dayville, Connecticut.................. 245,000 Owned
Denver, Colorado....................... 180,800 July 2013
Kealeakua, Hawaii...................... 16,300 October 2002
Los Angeles, California................ 31,000 June 1999
New Oxford, Pennsylvania............... 127,000 May 2003
Rahway, New Jersey..................... 38,000 March 2002
Seattle, Washington.................... 100,000 February 2001
Winterhaven, Florida................... 10,500 October 2000
</TABLE>

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The Company has carefully chosen the sites for its distribution centers to
provide direct access to its regional markets. This proximity allows the
Company to reduce its transportation costs compared to competitors that seek
to service their customers from locations that are often hundreds of miles
away. The Company believes that it incurs lower inbound freight expense than
its regional competitors because its national presence allows it to buy full
and partial truckloads of products which, if necessary, it can backhaul using
the Company's own trucks between its distribution centers and satellite
staging facilities. Many of the Company's competitors must employ outside
consolidation services and pay higher carrier transportation fees to move
products from other regions. In addition, overstocks and inventory imbalances
at one distribution center may be redistributed by the Company to another
distribution center where products may be sold prior to their expiration date.

Products are delivered to the Company's distribution centers primarily by
its leased fleet of trucks, contract carriers and the suppliers themselves.
The Company leases most of its trucks from Ryder Truck Leasing, which
maintains facilities on some of the Company's premises for the maintenance and
service of these vehicles, and a lesser number of its trucks from regional
firms that offer competitive services.

The Company ships orders for supplements or for items that are destined for
areas outside regular delivery routes through the United Parcel Service and
other independent carriers. Deliveries to areas outside the continental United
States are shipped by ocean-going containers on a weekly basis.

TECHNOLOGY

The Company has made a significant investment in information and warehouse
management systems. The Company continually evaluates and upgrades its
management information systems based on the best practices in the distribution
industry and at its regional operations in order to make the systems more
efficient, cost effective and responsive to customer needs. These systems
include radio frequency-based inventory control, paperless receiving,
engineered labor standards, computer-assisted order processing and slot
locator/retrieval assignment systems. At the receiving docks, warehouse
workers attach computer-generated, preprinted locator tags to inbound
products. These tags contain the expiration date, locations, quantity, lot
number and other information in bar code format. To process customer orders,
warehouse workers use hand-held radio frequency devices to scan the UPC bar
code as a product is removed from its assigned slot. Similarly, customer
returns are processed by scanning the UPC bar codes. The Company also employs
a management information system that enables it to lower its inbound
transportation costs by making optimum use of its own fleet of trucks or by
consolidating deliveries into full truckloads. Orders from multiple suppliers
and multiple distribution centers are consolidated into single truckloads for
efficient use of available vehicle capacity and return-haul trips.

The Company has recently begun installation of Oracle-based Warehouse Management
Systems (WMS). The Company expects to realize continued customer service
improvements as a result of this investment and anticipates that the WMS will be
operational in six of its distribution centers by the end of calendar 1999.

RETAIL OPERATIONS

The Company's Natural Retail Group ("NRG") currently owns and operates 16 retail
natural products stores located in Connecticut, Florida, Maryland,
Massachusetts and New York. The Company's retail strategy is to selectively
acquire existing stores that meet the Company's strict criteria in categories
such as sales and profitability, growth potential, merchandising and
management. Generally, the Company will not purchase stores that directly
compete with primary retail customers of its distribution business. The
Company believes its retail stores have a number of advantages over their
competitors, including the financial strength and marketing expertise provided

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by the Company, the purchasing power resulting from group purchasing by stores
within NRG and the breadth of their product selection. The Company's strategy
for future retail growth is to identify and acquire additional retail stores
as opportunities arise and to focus on increased sales of higher margin
nutritional supplements while maintaining emphasis on the sale of organic
produce and delicatessen and bakery products and consumer education.

As both a distributor to its retail stores and a retailer, a number of
advantages are made available to the Company, including the ability to: (i)
control the purchases made by these stores; (ii) expand the number of high-
growth, high-margin product categories such as produce and prepared foods
within these stores; and (iii) keep current with the retail marketplace which
allows it to better serve its distribution customers. In addition, as the
primary natural products distributor to its retail locations, the Company
expects to realize significant economies of scale and operating and buying
efficiencies. As an operator of retail stores, the Company also has the
ability to test market select products prior to offering them nationally,
which allows the Company to evaluate consumer reaction to the product without
incurring significant inventory risk. The Company is able to test new
marketing and promotional programs within its stores prior to offering them to
a broader customer base.

COMPETITION

The natural products distribution industry is highly competitive. The
industry has been characterized in recent years by significant consolidation
and the emergence of large competitors. The Company's major national
competitor is Tree of Life Distribution, Inc. (a subsidiary of Koninklijke
Bolswessanen N.V.) and its major regional competitors are Nature's Best, Inc.
in the western United States, Northeast Cooperative in the eastern United
States and Blooming Prairie Cooperative Warehouse in the Midwestern states.
The Company also competes with numerous smaller regional and local
distributors of ethnic, Kosher, gourmet and other specialty foods. In
addition, the Company competes with national, regional and local distributors
of conventional groceries and, to a lesser extent, companies that distribute
to their own retail facilities. There can be no assurance that distributors of
conventional groceries will not increase their emphasis on natural products
and more directly compete with the Company or that new competitors will not
enter the market. Many of these distributors may have been in business longer,
may have substantially greater financial and other resources than the Company
and may be better established in their markets. There can be no assurance that
the Company's current or potential competitors will not provide services
comparable or superior to those provided by the Company or adapt more quickly
than the Company to evolving industry trends or changing market requirements.
It is also possible that alliances among competitors may emerge and rapidly
acquire significant market share or that certain of the Company's customers
will increase distribution to their own retail facilities. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, financial condition or results of operations.

The Company believes that distributors in the natural products industry
compete principally on product quality and depth of inventory selection, price
and quality of customer service. Although the Company believes it currently
competes effectively with respect to each of these factors, there can be no
assurance that the Company will be able to maintain its competitive position
against current and potential competitors.

The Company's retail stores compete against other natural products outlets,
conventional supermarkets and specialty stores. The Company believes that
retailers of natural products compete principally on product quality and
selection, price, knowledge of personnel and convenience of location.

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EMPLOYEES

As of September 30, 1998, the Company had approximately 2,442 full- and part-
time employees. The Company has in the past been the focus of union-organizing
efforts. An aggregate of approximately 90 employees at the Company's Seattle,
Washington and Rahway, New Jersey facilities are covered by collective
bargaining agreements. United Natural has never experienced a work stoppage by
its unionized employees. United Natural believes that its relationship with its
employees is good.

ITEM 2. PROPERTIES

The Company maintains 13 distribution centers located in Atlanta, Georgia;
Auburn, California; Bridgeport, New Jersey; Chesterfield, New Hampshire;
Chicago, Illinois; Dayville, Connecticut; Denver, Colorado; Kealeakua, Hawaii;
Los Angeles, California; New Oxford, Pennsylvania; Rahway, New Jersey; Seattle,
Washington and Winterhaven, Florida. These facilities consist of an aggregate of
more than 1,300,000 square feet of space, the largest capacity of any
distributor in the natural products industry. The Company has leased a new
facility in Colorado which, at 180,800 square feet, is twice the size of its
former facility. The Company intends to replace its 40,000 square foot auxiliary
storage facility in Sacramento, California with a 75,000 square foot storage
facility located adjacent to its Auburn, California distribution center. The
Company recently signed a lease for a new distribution facility currently under
construction in Auburn, Washington.
<TABLE>
<CAPTION>
SIZE LEASE
LOCATION (IN SQUARE FEET) EXPIRATION
<S> <C> <C>
Atlanta, Georgia....................... 175,000 March 1999
Auburn, California..................... 150,000 Owned
Bridgeport, New Jersey................. 36,700 Owned
Chesterfield, New Hampshire............ 126,500 Owned
Chicago, Illinois...................... 80,000 December 2000
Dayville, Connecticut.................. 245,000 Owned
Denver, Colorado....................... 180,800 July 2013
Kealeakua, Hawaii...................... 16,300 October 2002
Los Angeles, California................ 31,000 June 1999
New Oxford, Pennsylvania............... 127,000 May 2003
Rahway, New Jersey..................... 38,000 March 2002
Seattle, Washington.................... 100,000 February 2001
Winterhaven, Florida................... 10,500 October 2000
</TABLE>
The Company also rents facilities to operate its 16 retail stores along the east
coast.

ITEM 3. LEGAL PROCEEDINGS.

From time to time, the Company is involved in routine litigation which
arises in the ordinary course of its business. There are no pending material
legal proceedings to which the Company is a party or to which the property of
the Company is subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of the security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year ended July 31, 1998.

EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

The executive officers and directors of the Company and their ages as of
October 29, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Norman A. Cloutier(1)(2)...... 44 Chairman of the Board and Chief Executive
Officer
Michael S. Funk(2)............ 44 Vice Chairman of the Board, President of the
Company and President of the Company's
Western Region
Robert T. Cirulnick........... 43 Chief Financial Officer and Treasurer
Richard S. Youngman........... 47 President of the Company's Eastern Region,
Assistant Secretary and Director of the
Company
Daniel V. Atwood.............. 40 President of NRG, Vice President and
Secretary of the Company
Kevin T. Michel............... 40 President of the Company's Central Region,
Assistant Treasurer and Director of the
Company
Barclay McFadden, III......... 48 Director
Thomas B. Simone(1)(3)........ 56 Director
Steven H. Townsend............ 45 Director
Richard J. Williams(1)(3)..... 37 Director
</TABLE>
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Nominating Committee.
(3) Member of the Compensation Committee.

11
<PAGE>

Norman A. Cloutier founded the Company in 1978. Mr. Cloutier has been
Chairman of the Board and Chief Executive Officer of the Company since its
inception. Mr. Cloutier served as President of the Company from its inception
until October 1996. Mr. Cloutier previously operated a natural products retail
store in Coventry, Rhode Island from 1977 to 1978.

Michael S. Funk has been Vice Chairman of the Board of the Company since
February 1996 and President of the Company since October 1996. Mr. Funk served
as Executive Vice President of the Company from February 1996 until October
1996. Since its inception in July 1976, Mr. Funk has been President of
Mountain People's (currently the Company's Western Region). Mr. Funk has
served on the Board of Directors since February 1996.

Robert T. Cirulnick has been Chief Financial Officer of the Company since
February 1998. Mr. Cirulnick served in various financial capacities with
PepsiCo, Inc. from September 1985 through February 1998, including Vice
President, Controller of Frito-Lay, Inc., a subsidiary of PepsiCo, from August
1994 to February 1998. Mr. Cirulnick was the Chief Financial Officer and
Director of Finance and Administration for Smith's Food Group, a joint venture
company between PepsiCo and General Mills from May 1993 through August 1994.
Mr. Cirulnick was a Certified Public Accountant with KPMG Peat Marwick LLP
from June 1980 to September 1985, where he served in various audit and tax
capacities.

Richard S. Youngman was the President and a director of Stow Mills and its
predecessor company from 1979 until October 1997. In October 1997, Mr.
Youngman became Chief Executive Officer of Stow Mills and President of the
Company's Eastern Region. Mr. Youngman has served on the Board of Directors
since December 1997.

Daniel V. Atwood has been President of NRG and Vice President of the Company
since August 1995. Mr. Atwood was Vice President-Marketing of the Company from
January 1984 to August 1995. From 1979 to 1982, Mr. Atwood was a Store Manager
at Bread & Circus Supermarkets, a supernatural chain. Mr. Atwood served on the
Board of Directors from August 1988 to December 1997.

Kevin T. Michel has been President of the Company's Central Region since
January 1998. Mr. Michel served as Chief Financial Officer of Mountain
People's from January 1995 until December 1997. From January 1992 until
January 1995, Mr. Michel held several different accounting and finance
positions at Mountain People's. From March 1991 until December 1991, Mr.
Michel was the sole proprietor of a restaurant. Mr. Michel has served on the
Board of Directors since February 1996.

Barclay McFadden, III was the Chief Executive Officer and a director of Stow
Mills and its predecessor company from 1976 until October 1997. Mr. McFadden
serves on the Board of Directors of First Vermont Bank and a number of
charitable organizations. Mr. McFadden has served on the Board of Directors
since December 1997.

Thomas B. Simone has served on the Board of Directors since October 1996. Since
April 1994, Mr. Simone has served as President and Chief Executive Officer of
Simone & Associates, a healthcare and natural products investment and consulting
company since April 1994. From February 1991 to April 1994, Mr. Simone was
President of McKesson Drug Company. Mr. Simone also has served on the Board of
Directors of ECO-DENT International, Inc. and IBV Technologies, Inc. since April
1994.

Steven H. Townsend served as Vice President--Finance and Administration of
the Company from 1983 to February 1998 and Chief Financial Officer of the
Company from August 1988 to February 1998. From 1980 to 1983, Mr. Townsend was
Director of Finance for the Town of Mansfield, Connecticut. Mr. Townsend has
served on the Board of Directors since August 1988.

Richard J. Williams has been a Managing Director of Triumph Capital Group,
Inc. since March 1990. Mr. Williams has served on the Board of Directors since
November 1993. Mr. Williams also serves on the Board of Directors of Outsource
International, Inc.

12
<PAGE>

PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "UNFI."

The United Natural Common Stock began trading on the Nasdaq National Market on
November 1, 1996. The following table sets forth for the periods indicated the
high and low sale prices per share of United Natural Common Stock on the Nasdaq
National Market:

Fiscal 1997 High Low
------- -------
<S> <C> <C>
Second Quarter $17.500 $12.500

Third Quarter 17.000 13.000

Fourth Quarter 24.375 15.000

Fiscal 1998 High Low
------- -------
First Quarter $26.750 $19.250

Second Quarter 27.125 19.750

Third Quarter 30.688 23.750

Fourth Quarter 33.375 22.500
</TABLE>

On July 31, 1998 United Natural had 50 stockholders of record. The number of
record holders may not be representative of the number of beneficial holders
because many shares are held by depositories, brokers or other nominees.

The Company has never declared or paid any cash dividends on its capital
stock. The Company anticipates that all of its earnings in the foreseeable
future will be retained to finance the continued growth and development of its
business and has no current intention to pay cash dividends. The Company's
future dividend policy will depend on the Company's earnings, capital
requirements and financial condition, requirements of the financing agreements
to which the Company is then a party and other factors considered relevant by
the Board of Directors. The Company's existing revolving line of credit
agreement prohibits the declaration or payment of cash dividends to the
Company's stockholders without the written consent of the bank during the term
of the credit agreement and until all obligations of the Company under the
credit agreement have been met.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below under the caption
Consolidated Statement of Income Data with respect to the fiscal year ended
October 31, 1995, the nine months ended July 31, 1996, and the fiscal years
ended July 31, 1997 and 1998, and under the caption Consolidated Balance Sheet
Data at July 31, 1996, 1997 and 1998, are derived from the consolidated
financial statements of the Company, which financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
selected consolidated financial data presented below under the caption
Consolidated Statement of Income Data with respect to the nine months ended July
31, 1995 and the twelve months ended July 31, 1996 are derived from

13
<PAGE>

the unaudited consolidated financial statements of the Company that have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for such
periods. The historical results are not necessarily indicative of results to be
expected for any future period. The following selected consolidated financial
data should be read in conjunction with and are qualified by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K.

14
<PAGE>

Consolidated Statement of Income Data
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER NINE MONTHS ENDED TWELVE MONTHS ENDED
31, JULY 31, JULY 31,
(In thousands, except per share data) 1994 1995 1995 1996 1996 1997 1998
STATEMENT OF OPERATIONS DATA: ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $359,881 $458,849 $318,642 $439,842 $580,049 $634,825 $728,910
Cost of sales 285,339 363,757 251,381 350,130 462,506 507,547 578,575

Gross profit 74,542 95,092 67,261 89,712 117,543 127,278 150,335
Operating expenses 65,080 81,355 57,154 75,059 99,261 103,885 116,042
Merger expenses - - - - - - 4,064
Amortization of intangibles 538 2,426 602 793 2,616 1,060 1,185

Total operating expenses 65,618 83,781 57,756 75,852 101,877 104,945 121,291

Operating income 8,924 11,311 9,505 13,860 15,666 22,333 29,044
Other expense (income):
Interest expense 4,391 5,969 4,127 5,887 7,730 5,976 5,157
Other, net (226) (428) (377) (360) (411) (679) (778)
Total other expense 4,165 5,541 3,750 5,527 7,319 5,297 4,379
Income before income taxes and extraordinary
item 4,759 5,770 5,755 8,333 8,347 17,036 24,665
Income taxes 2,022 2,953 2,185 2,883 3,652 6,636 11,580
Extraordinary item - - - - - 933 -
Net income $ 2,737 $ 2,817 $ 3,570 $ 5,450 $ 4,695 $ 9,467 $ 13,085

Per share data (Basic):

Income before extraordinary item $ 0.20 $ 0.21 $ 0.26 $ 0.40 $ 0.34 $ 0.64 $ 0.75

Extraordinary item, net of income
tax benefit - - - - - 0.06 -

Net income $ 0.20 $ 0.21 $ 0.26 $ 0.40 $ 0.34 $ 0.58 $ 0.75

Weighted average basic shares of common
stock 13,691 13,691 13,691 13,687 13,688 16,367 17,467

Per share data (Diluted):

Income before extraordinary item $ 0.18 $ 0.19 $ 0.24 $ 0.37 $ 0.32 $ 0.63 $ 0.74

Extraordinary item, net of income tax
benefit - - - - - 0.06 -

Net income per share (diluted) $ 0.18 $ 0.19 $ 0.24 $ 0.37 $ 0.32 $ 0.57 $ 0.74

Weighted average diluted shares of
common stock 14,804 14,858 14,858 14,853 14,855 16,553 17,798

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF JULY 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $24,713 $ 26,983 $ 13,453 $ 53,101 $ 65,568
Total assets $91,442 $134,508 $152,343 $164,561 $212,242
Total debt and capital leases $34,327 $ 48,890 $ 34,108 $ 21,647 $ 25,845
Total stockholders' equity $14,266 $ 17,117 $ 23,440 $ 73,916 $104,386
</TABLE>

16
<PAGE>

ITEM 7. 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 and Stow Mills in the Eastern Region, Rainbow in the Central Region
and Mountain People's in the Western Region. Through 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, interest income and miscellaneous income and expenses.

RECENT ACQUISITIONS

On September 30, 1998, the Company acquired substantially all of the outstanding
stock of Albert's, a wholesale distributor of organic produce, for between $10.8
and $12.0 million contingent on future performance. Albert's had sales of $47.8
million for its most recent fiscal year ending December 31, 1997.

During February 1998, the Company acquired substantially all the assets of
Hershey, an international trading, roasting and packaging business of nuts,
seeds, dried fruit and snack items, for approximately $10.5 million. Hershey had
sales of $20.8 million for its most recent fiscal year ending June 30, 1997.

The mergers of the Company with Mountain People's in February 1996 and Stow
Mills in October 1997 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.

17
<PAGE>

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>
----------------------------------------
TWELVE MONTHS ENDED JULY 31,
----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%

Cost of sales 79.4% 80.0% 79.7%
------ ------ ------

Gross profit 20.6% 20.0% 20.3%
------ ------ ------

Operating expenses 15.9% 16.4% 17.2%

Merger expenses 0.6% - -

Amortization of
intangibles 0.2% 0.2% 0.4%
------ ------ ------
Total operating expenses 16.6% 16.5% 17.6%
------ ------ ------
Operating income 4.0% 3.5% 2.7%
------ ------ ------

Other expense (income):
Interest expense 0.7% 0.9% 1.3%
Other, net -0.1% -0.1% -0.1%
------ ------ ------

Total other expense 0.6% 0.8% 1.3%
------ ------ ------

Income before income taxes and extraordinary item 3.4% 2.7% 1.4%

Income taxes 1.6% 1.0% 0.6%
------ ------ ------
Income before extraordinary item 1.8% 1.7% 0.8%

Extraordinary item - Loss on early extinguishment
debt (less applicable income taxes) - 0.1% -

------ ------ ------
Net income 1.8% 1.5% 0.8%
====== ====== ======
</TABLE>

TWELVE MONTHS ENDED JULY 31, 1998 COMPARED TO TWELVE MONTHS ENDED JULY 31, 1997

Net Sales.

The Company's net sales increased approximately 14.8%, or $94.1 million, to
$728.9 million for the twelve months ended July 31, 1998 from $634.8 million for
the twelve months ended July 31, 1997. The overall increase in net sales was
primarily attributable to increased sales to

18
<PAGE>

existing customers, sales to new accounts in existing geographic areas and the
introduction of new products not previously offered by the Company. The
acquisitions of Hershey and eight retail stores during fiscal 1998 also
contributed to the increase in sales.

Gross Profit.

The Company's gross profit increased approximately 18.1%, or $23.1 million, to
$150.3 million for the twelve months ended July 31, 1998 from $127.3 million for
the twelve months ended July 31, 1997. The Company's gross profit as a
percentage of net sales increased to 20.6% for the twelve months ended July 31,
1998 from 20.0% for the twelve months ended July 31, 1997. The increase in gross
profit as a percentage of net sales resulted partially from greater purchasing
efficiencies resulting from the integration of Stow Mills and inbound freight
efficiencies, partially offset by increased sales to existing customers under
the Company's volume discount program.

Operating Expenses.

The Company's total operating expenses increased approximately 15.6%, or $16.3
million, to $121.3 million for the twelve months ended July 31, 1998 from $104.9
million for the twelve months ended July 31, 1997. As a percentage of net sales,
operating expenses increased to 16.6% for the twelve months ended July 31, 1998
from 16.5% for the twelve months ended July 31, 1997. Excluding merger costs of
$4.1 million and relocation and start-up costs of $0.7 million for the new
expanded Denver distribution and Central Region headquarters facility, the
Company's total operating expenses for the twelve months ended July 31, 1998
would have been $116.6 million, or 16.0% of net sales, representing an increase
of $11.6 million, or 11.1%, 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.

Operating Income.

Operating income increased $6.7 million, or approximately 30.1%, to $29.0
million for the twelve months ended July 31, 1998 from $22.3 million for the
twelve months ended July 31, 1997. As a percentage of net sales, operating
income increased to 4.0% in the twelve months ended July 31, 1998 from 3.5% in
the comparable 1997 period. Excluding the merger costs and relocation and start-
up costs noted above, operating income for the twelve months ended July 31, 1998
would have been $33.8 million (representing an increase of 51.2% over the prior
year period), or 4.6% of net sales.

Other (Income)/Expense.

The $0.9 million decrease in other expense in the twelve months ended July 31,
1998 compared to the twelve months ended July 31, 1997 was primarily
attributable to the reduction in interest expense in the last nine months of
fiscal 1998 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,
approximately $17.3 million in proceeds from the Company's June 1998 secondary
public offering were used to repay debt.

Income Taxes.

The Company's effective income tax rates were 46.9% and 39.0% for the twelve
months ended July 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 $3.6 million
to $13.1 million for the twelve months ended July 31, 1998 from $9.5 million in
the twelve months ended July 31, 1997. Excluding the $4.1 million in merger
costs and the $0.7 million($0.4 million,

19
<PAGE>

net of taxes) 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 $17.5 million (representing an increase of 68.5% over the prior
period), or 2.4% of net sales, and $10.4 million, or 1.6% of net sales, for the
twelve months ended July 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.

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.

20
<PAGE>

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.

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.

Net cash provided by (used in) operations was $4.5 million, $1.9 million and
$(0.5) million for the years ended July 31, 1998 and 1997, and the nine months
ended July 31, 1996, respectively. Excluding merger expenses of $4.1 million,
net cash provided by operations in fiscal 1998 would have been $8.6 million. The
Company's cash provided by operations in fiscal 1998, excluding merger expenses,
is due primarily to net income plus depreciation and amortization, offset by
investments in accounts receivable and inventory in the ordinary course of
business. The increase in inventory levels relates 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
Company's working capital at July 31, 1998 was $64.9 million.

Net cash used in investing activities was $34.7 million, $3.8 million and $8.6
million for the years ended July 31, 1998 and 1997, and the nine months ended
July 31, 1996, respectively. Investing activities in 1998 were primarily for the
acquisition of new businesses, the purchase of the Auburn, California warehouse
and Western Region Headquarters facility, and the purchase of a warehouse, as
well as the continued upgrade of existing management information systems.
Investing activities in 1997 included primarily capital expenditures related to
the purchase of material handling equipment and the continued upgrade of
existing management information systems. The Company's capital expenditures were
primarily funded from senior bank indebtedness, including term loans.

Cash provided by financing activities was $30.6 million, $2.0 million and $9.3
million for the years ended July 31, 1998 and 1997, and the nine months ended
July 31, 1996, respectively. During 1998, the Company issued 800,000 shares of
its common stock for net proceeds of $17.2 million. Also in 1998, the Company
had net borrowing on its line of credit of $9.4 million and proceeds from long-
term debt of $14.4 million. 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.

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

21
<PAGE>

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 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 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 July 31, 1998, the Company's outstanding borrowings under the credit
agreement totaled $60.8 million. The credit agreement expires on July 31, 2002.

The Company expects to spend approximately $45 million over the next five years
in capital expenditures to fund the expansion of existing facilities, purchase
new facilities, upgrade information systems and technology and update its
material handling equipment. Included in this amount is $5 million in capital
expenditures in the 1998 and 1999 calendar years for the Company's systems
upgrade and new warehouse management system, including new hardware and
installation.

In October 1998, the Company entered into an interest rate swap agreement. The
agreement provides for the Company to pay interest for a five year period at a
fixed rate of 5% on a notional principal amount of $60 million while receiving
interest for the same period at the LIBOR rate on the same notional principal
amount. The swap has been entered into as a hedge against LIBOR interest rate
movements on current and anticipated variable rate indebtedness totaling $60
million. The five year term of the swap agreement may be extended to seven years
at the option of the counterparty.

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 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 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 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

<PAGE>

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 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.

The Financial Accounting Standards Board recently issued SFAS No 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments, and
is effective for fiscal quarters of fiscal years beginning after June 15, 1999.
The Company has not yet determined what impact, if any, this standard will have
on its financial statement presentation.

YEAR 2000 ISSUES

The Company is currently in the process of assessing its exposure to the Year
2000 issue, and has established a comprehensive response to that exposure.
Generally, the Company has "Year 2000" exposure in three areas: i) the Company's
information technology ("IT") infrastructure, including computer operating
systems and applications, ii) microprocessors and other electronic devices
included as components of non-computer equipment ("embedded chips") and iii)
computer systems used by third parties, including customers and suppliers of the
Company. The IT infrastructure and embedded chips are being addressed on a
regional level. The third parties are being evaluated centrally. The Company has
completed its assessment of its IT infrastructure, and is in the process of
completing its evaluation of all microprocessors and other electronic devices,
and third-party vendors and customers.

The Company believes that the Western Region's critical IT infrastructure
components and embedded chips are Year 2000 compliant. The Company has made the
minimal changes necessary for its IT infrastructure to operate in a Year 2000
environment. The Company does not utilize two digit date coding logic, and has
successfully tested hardware, operating system, and applications software
simulating post Year 2000 systems clock dates. The Company has tested its
microprocessors and other electronic devises and is in the process of making any
necessary modifications rendering them year 2000 compliant. The Company expects
that the Western Region's microprocessors and other electronic devices will be
Year 2000 compliant by February, 1999, except for the replacement of the Seattle
facility's phone system which is scheduled for replacement for other business
reasons in July 1999. All critical IT infrastructure components and embedded
chips have been tested and work properly for the year 2000 and beyond.
Additionally, a third-party review has been conducted to understand the Western
Region's Year 2000 progress and communicate matters that came to their attention
regarding such progress.

The Company believes the Central Region's critical IT infrastructure components
and embedded chips are also Year 2000 compliant. The Central region does not
employ two digit date coding logic and has simulated Year 2000 system clock
dates in tests of its hardware and operating systems as well as selected
applications software. The Company anticipates that all Year 2000 simulation
testing will be completed by the end of November 1998. The Company has also
recently completed an independent third-party review of the Central Region's
operating system and critical IT applications software code which has indicated
Year 2000 compliance. All other IT infrastructure components and embedded chips
have been modified, will be modified before January 1, 1999, or if not Year 2000
compliant will be retired before July 1, 1999.

23
<PAGE>

The Eastern Region is currently reviewing the results of a third-party audit of
its Year 2000 systems code for both the Cornucopia and Stow Mills systems. The
Eastern Region is in the process of moving to one system for operational
efficiency reasons. The Stow Mills system will become a hybrid of the best
functionality components of each system. The Stow Mills systems require a number
of code changes to achieve full Year 2000 compliance. The Company expects the
existing operating system to be upgraded to a Year 2000 compliant version during
the first calendar quarter of 1999. In addition, all code is expected to be Year
2000 compliant for the surviving Stow business systems prior to the end of the
first calendar quarter of 1999. Also, the surviving East Region systems clock
will be moved forward simulating the Year 2000 prior to the end of March 1999.
The existing Cornucopia (Dayville, Connecticut and Atlanta, Georgia) systems are
not Year 2000 compliant. The Company is expected to move off these existing
systems and on to the surviving Stow Mills system during the first calendar
quarter of 1999. All other IT infrastructure components and embedded chips have
been modified, will be modified before the end of December 1998, or if not Year
2000 compliant, will be retired before July 1, 1999.

The Company is in the process of installing new Point of Sale systems in its
retail stores to enable more sophisticated promotions and improved business
controls. The current Point of Sale or cash registers are not all Year 2000
compliant. The Company plans to have the Year 2000 compliant Point of Sale
systems or compliant cash registers in place on or before July 1999. The Company
is in the process of evaluating a solution for the Hershey business, which is
not currently Year 2000 compliant.

The Company has sent written requests for Year 2000 information to substantially
all suppliers. The Company is currently reviewing the responses received and
preparing to send second requests to the top suppliers making up at least 80% of
the company's purchases. The Company is also compiling a database of all
customers regarding their Year 2000 status and plans for remediation and will
send information requests by the end of November 1998.

The Company is in the process of updating its systems for business functionality
reasons and has adopted a going forward systems strategy of staying current with
state of the art systems technology. Furthermore, the Company is in the process
of integrating acquisitions to achieve customer service and operating efficiency
improvements, which require common state of the art systems technology.
Accordingly, all business systems changes would be performed regardless of the
Year 2000 issue both from a timing and cost perspective. The Company therefore
believes that it has spent and is spending an immaterial incremental amount on
Year 2000 remediation over what it would spend to execute its going forward
systems strategy. The Company has significantly increased its IT expenditures to
execute its systems strategy which includes any immaterial incremental amounts
to achieve Year 2000 compliance. The Company expects to spend on IT systems and
support approximately $6 million in fiscal 1999 and spent approximately $4
million and $3 million in fiscal 1998 and 1997 respectively.

The dates on which the Company believes it will be Year 2000 compliant are based
on management's plans for work to be performed and best estimates which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results may differ
materially from those anticipated. If the Company is unsuccessful in completing
remediation of non-compliant systems, correcting embedded chips or if customers
or suppliers cannot rectify their Year 2000 issues, it could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has not yet established a contingency plan in the event
of non-compliance by any parties and has a timeline to prepare such contingency
plans for any critical application falling behind schedule after the completion
of the first calendar quarter of 1999.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time. Any statements contained herein (including without limitations
statements to the effect that the Company or its management "believes,"
"expects," "anticipates," "plans" and similar expressions) that are not
statements of historical fact should be considered forward-looking statements.
Results of operations in any past period should not be considered indicative of
the results to be expected for future periods. Fluctuations in operating results
may also result in fluctuations in the price of the Company's common stock.

24
<PAGE>

A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, continued demand for current products
offered by the Company, the success of the Company's acquisition strategy,
competitive pressures, general economic conditions, the success of new product
introductions and government regulation.

A significant portion of the Company's historical growth has been achieved
through acquisitions of or mergers with other distributors of natural
products. The Company merged with Stow Mills in October 1997. The successful
and timely integration of this merger is critical to the future operating and
financial performance of the Company. The Company believes that the
integration of Stow Mills will not be substantially completed until mid
calendar 1999. The integration will require, among other things, coordination
of administrative, distribution and finance functions, the integration of
personnel and expansion of information and warehouse management systems among
the Company's regional operations. The integration process could divert the
attention of management, and any difficulties or problems encountered in the
transition process could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, the
process of combining the companies could cause the interruption of, or a loss
of momentum in, the activities of the respective businesses, which could have
an adverse effect on their combined operations. There can be no assurance that
the Company will retain key employees of Stow Mills or that the Company will
realize any of the other anticipated benefits of the Stow Mills merger.

The growth in the size of the Company's business and operations has placed
and is expected to continue to place a significant strain on the Company's
management. The Company's future growth is limited in part by the size and
location of its distribution centers. There can be no assurance that the
Company will be able to successfully expand its existing distribution
facilities or open new distribution facilities in new or existing markets to
facilitate growth. In addition, the Company's growth strategy to expand its
market presence includes possible additional acquisitions. To the extent the
Company's future growth includes acquisitions, there can be no assurance that
the Company will successfully identify suitable acquisition candidates,
consummate and integrate such potential acquisitions or expand into new
markets. The Company's ability to compete effectively and to manage future
growth, if any, will depend on its ability to continue to implement and
improve operational, financial and management information systems on a timely
basis and to expand, train, motivate and manage its work force. There can be
no assurance that the Company's personnel, systems, procedures and controls
will be adequate to support the Company's operations. The inability of the
Company to manage its growth effectively could have a material adverse effect
on its business, financial condition or results of operations.

The Company operates in highly competitive markets, and its future success
will be largely dependent on its ability to provide quality products and
services at competitive prices. The Company's competition comes from a variety
of sources, including other distributors of natural products as well as
specialty grocery and mass market grocery distributors. There can be no
assurance that mass market grocery distributors will not increase their
emphasis on natural products and more directly compete with the Company or
that new competitors will not enter the market. These distributors may have
been in business longer than the Company, may have substantially greater
financial and other resources than the Company and may be better established
in their markets. There can be no assurance that the Company's current or
potential competitors will not provide services comparable or superior to
those provided by the Company or adapt more quickly than the Company to

25
<PAGE>

evolving industry trends or changing market requirements. It is also possible
that alliances among competitors may develop and rapidly acquire significant
market share or that certain of the Company's customers will increase
distribution to their own retail facilities. Increased competition may result in
price reductions, reduced gross margins and loss of market share, any of which
could materially adversely affect the Company's business, financial condition or
results of operations. There can be no assurance that the Company will be able
to compete effectively against current and future competitors.

The ability of the Company to maintain close, mutually beneficial relationships
with its top two customers, Whole Foods and Wild Oats, is important to the
ongoing growth and profitability of its business. Whole Foods, the Company's
largest customer, accounted for approximately 16% of the Company's net sales
during the fiscal year ended July 31, 1998. As a result of this concentration of
the Company's customer base, the loss or cancellation of business from either of
these customers, including from increased distribution to their own facilities,
could materially and adversely affect the Company's business, financial
condition or results of operations. The Company's sales are made pursuant to
purchase orders and therefore the Company generally has no agreements with or
commitments from its customers for the purchase of products. No assurance can be
given that the Company's customers will maintain or increase their sales volumes
or orders for the products supplied by the Company or that the Company will be
able to maintain or add to its existing customer base.

The grocery distribution industry generally is characterized by relatively
high volume with relatively low profit margins. The continuing consolidation
of retailers in the natural products industry and the emergence of super
natural chains may have an adverse effect on the Company's profit margins in
the future as more customers qualify for greater volume discounts offered by
the Company. The grocery industry is also sensitive to national and regional
economic conditions, and the demand for products supplied by the Company may
be adversely affected from time to time by economic downturns. In addition,
the Company's operating results are particularly sensitive to, and may be
materially adversely affected by, difficulties with the collectibility of
accounts receivable, inventory control, competitive pricing pressures and
unexpected increases in fuel or other transportation-related costs. There can
be no assurance that one or more of such factors will not materially adversely
affect the Company's business, financial condition or results of operations.

Management of the Company's business is substantially dependent on the services
of Norman A. Cloutier, the Company's Chairman of the Board and Chief Executive
Officer, Robert T. Cirulnick, the Company's Chief Financial Officer, and other
key management employees. Loss of the services of such officers or any other key
management employee could have a material adverse effect on the Company's
business, financial condition or results of operations.

The Company's net sales and operating results may vary significantly from period
to period due to factors such as changes in the Company's operating expenses,
management's ability to execute the Company's business and growth strategies,
personnel changes, demand for natural products, supply shortages and general
economic conditions. Both the Company's distribution and retail businesses are
dependent upon consumer preferences and demands for natural products, including
levels of enthusiasm for health, fitness and environmental issues. Furthermore,
the future operating performance of the Company is directly influenced by
natural product prices, which can be volatile and fluctuate according to
competitive pressures. A lack of an adequate supply of high-quality agricultural
products or volatility in prices resulting from poor growing conditions, natural
disasters or otherwise, could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, there can
be no assurance that any future acquisitions by the Company will not have an
adverse

26
<PAGE>

effect on the Company's business, financial condition or results of operations,
particularly in periods immediately following the consummation of such
transactions, while the operations of the acquired businesses are being
integrated into the Company's operations. Due to the foregoing factors, the
Company believes that period-to-period comparisons of its operating results may
not necessarily be meaningful and that such comparisons cannot be relied upon as
indicators of future performance.

The Company's business is highly regulated at the federal, state and local
levels and its products and distribution operations require various licenses,
permits and approvals. In particular, the Company's products are subject to
inspection by the U.S. Food and Drug Administration, its warehouse and
distribution facilities are subject to inspection by the U.S. Department of
Agriculture and state health authorities, and its trucking operations are
regulated by the U.S. Department of Transportation and the U.S. Federal Highway
Administration. The loss or revocation of any existing licenses, permits or
approvals or the failure to obtain any additional licenses, permits or approvals
in new jurisdictions where the Company intends to do business could have a
material adverse effect on the Company's business, financial condition or
results of operations.

As of July 31, 1998, the Company's executive officers and directors, and their
affiliates, and the ESOT will beneficially own in the aggregate approximately
62.0% of the Company's Common Stock. Accordingly, these stockholders, if acting
together, would have the ability to elect the Company's directors and may have
the ability to determine the outcome of corporate actions requiring stockholder
approval, irrespective of how other stockholders of the Company may vote. This
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of the Company. See "Management" and "Principal
and Selling Stockholders."

As of July 31, 1998, approximately 90 employees, representing approximately 4%
of the Company's 2,442 employees, were union members. The Company is currently,
and has in the past been, the focus of union-organizing efforts. As the Company
increases its employee base and broadens its distribution operations to new
geographic markets, its increased visibility could result in increased or
expanded union-organizing efforts. Although the Company has not experienced a
work stoppage to date, if additional employees of the Company were to unionize,
the Company could be subject to work stoppages and increases in labor costs,
either of which could materially adversely affect the Company's business,
financial condition or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The Company does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments which would require
disclosure under this item.

27
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements listed below are filed as part of this Annual Report on
Form 10-K.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
United Natural Foods, Inc. and Subsidiaries:

Independent Auditors' Report........................................ 29

Consolidated Balance Sheets......................................... 30

Consolidated Statements of Income................................... 31

Consolidated Statements of Stockholders' Equity..................... 32

Consolidated Statements of Cash Flows............................... 33

Notes to Consolidated Financial Statements.......................... 34-46
</TABLE>

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
United Natural Foods, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of United Natural
Foods, Inc. and Subsidiaries as of July 31, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended July 31, 1998 and 1997 and for the nine months ended July 31, 1996.
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, 1998 and 1997 and the
results of their operations and their cash flows for the years ended July 31,
1998 and 1997 and for the nine months ended July 31, 1996 in conformity with
generally accepted accounting principles.

/s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP

Providence, Rhode Island
September 1, 1998

29
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except per share amounts) JULY 31, 1998 JULY 31, 1997
------------- -------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,393 $ 952
Accounts receivable, net of allowance of $1,780 and 2,283, respectively 48,078 42,952
Notes receivable, trade 705 866
Inventories 91,119 71,509
Prepaid expenses 3,209 4,110
Deferred income taxes 1,540 1,032
Refundable income taxes 165 --
-------- --------
Total current assets 146,209 121,421
-------- --------
Property & equipment, net 44,434 32,412
-------- --------
Other assets:
Notes receivable, trade, net 1,170 995
Goodwill, net of accumulated amortization of $1,237 and $791,
respectively 19,136 7,579
Covenants not to compete, net of accumulated amortization of
$450 and $1,552, respectively 613 592
Other, net 680 1,562
======== ========
Total assets $212,242 $164,561
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 36,608 $ 27,222
Current installments of long-term debt 3,309 3,016
Current installments of obligations under capital leases 488 681
Accounts payable 32,017 30,536
Accrued expenses 8,219 6,488
Income taxes payable -- 377
-------- --------
Total current liabilities 80,641 68,320

Long-term debt, excluding current installments 25,081 20,411
Deferred income taxes 1,370 678
Obligations under capital leases, excluding current installments 764 1,236
-------- --------
Total liabilities 107,856 90,645
-------- --------

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 18,184 and outstanding 18,175 at July 31, 1998
issued 17,377 and outstanding 17,357 at July 31, 1997 182 174
Additional paid-in capital 67,440 51,842
Unallocated shares of Employee Stock Ownership Plan (2,747) (2,910)
Retained earnings 39,776 24,854
Treasury stock, 9 and 20 shares, respectively, at cost (265) (44)
-------- --------
Total stockholders' equity 104,386 73,916
-------- --------
Total liabilities and stockholders' equity $212,242 $164,561
======== ========
</TABLE>

See notes to consolidated financial statements.

30
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
JULY 31, ENDED JULY 31,
----------------------------- ---------------
(In thousands, except per share data) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $728,910 $634,825 $439,842

Cost of sales 578,575 507,547 350,130
-------- -------- --------
Gross profit 150,335 127,278 89,712
-------- -------- --------
Operating expenses 116,042 103,885 75,059

Merger expenses 4,064 - -

Amortization of intangibles 1,185 1,060 793
-------- -------- --------
Total operating expenses 121,291 104,945 75,852
-------- -------- --------
Operating income 29,044 22,333 13,860
-------- -------- --------
Other expense (income):
Interest expense 5,157 5,481 5,524
Interest expense on notes to Stow officers/stockholders - 495 363
Other, net (778) (679) (360)
-------- -------- --------
Total other expense 4,379 5,297 5,527
-------- -------- --------
Income before income taxes and
extraordinary item 24,665 17,036 8,333
Income taxes 11,580 6,636 2,883

-------- -------- --------
Income before extraordinary item 13,085 10,400 5,450

Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit of $662 - 933 -
======== ======== ========
Net income $ 13,085 $ 9,467 $ 5,450
======== ======== ========

Pro forma additional income tax expense (unaudited) 320 401 499
-------- -------- --------
Pro forma net income before extraordinary item (unaudited) $ 12,765 $ 9,999 $ 4,951
======== ======== ========
Per share data (basic):

Income before extraordinary item $ 0.75 $ 0.64 $ 0.40

Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit of $662 - 0.06 -
======== ======== ========
Net income $ 0.75 $ 0.58 $ 0.40
======== ======== ========
Pro forma net income before extraordinary item (unaudited) $ 0.73 $ 0.61 $ 0.36
======== ======== ========
Weighted average basic shares of common stock 17,467 16,367 13,687
======== ======== ========
Per share data (diluted):

Income before extraordinary item $ 0.74 $ 0.63 $ 0.37

Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit of $662 - 0.06 -
======== ======== ========
Net income $ 0.74 $ 0.57 $ 0.37
======== ======== ========

Pro forma net income before extraordinary item (unaudited) $ 0.72 $ 0.60 $ 0.33
======== ======== ========
Weighted average diluted shares of common stock 17,798 16,553 14,853
======== ======== ========
</TABLE>

See notes to consolidated financial statements.

31
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNALLOCATED
OUTSTANDING ADDITIONAL SHARES OF
NUMBER COMMON PAID-IN STOCK EMPLOYEE STOCK
(In thousands) OF SHARES STOCK CAPITAL WARRANTS OWNERSHIP PLAN
---------- ------ --------- -------- --------------
<S> <C> <C> <C> <C> <C>
Balances at October 31, 1995 13,691 137 4,372 3,200 (3,196)
Allocation of shares to ESOP - - - - 122
Purchase of treasury stock (20) - - - -
Stock options (note 3) - - 1,056 - -
Distributions to Stow
officers/stockholders - - - - -
Transfer of undistributed earnings to
additional paid-in-capital - - 1,164 - -
Net income - - - - -
----------------------------------------------------------------------------

Balances at July 31, 1996 13,671 137 6,592 3,200 (3,074)
Issuance of common stock
(note 1(n)) 2,900 29 35,481 - -
Exercise of stock warrants 786 8 3,192 (3,200) -
Allocation of shares to ESOP - - - - 164
Distributions to Stow
officers/stockholders - - - - -
Capital contribution 6,043 -
Effect of change in year end - - - - -
Transfer of undistributed earnings to
additional paid-in-capital - - 534 - -
Net income - - - - -
----------------------------------------------------------------------------

Balances at July 31, 1997 17,357 174 51,842 - (2,910)
Allocation of shares to ESOP - - - - 163
Transfer of undistributed loss to
additional paid-in-capital - - (1,837) - -
Issuance of common stock, net 818 8 17,479 - -
Retirement of treasury stock, net - - (44) -
Net income - - - - -
----------------------------------------------------------------------------

Balances at July 31, 1998 18,175 $ 182 $ 67,440 $ - $ (2,747)
============================================================================
<CAPTION>
TOTAL
RETAINED TREASURY STOCKHOLDERS'
(In thousands) EARNINGS STOCK EQUITY
-------- -------- ------------
<S> <C> <C> <C>
Balances at October 31, 1995 12,604 - 17,117
Allocation of shares to ESOP - - 122
Purchase of treasury stock - (44) (44)
Stock options (note 3) - - 1,056
Distributions to Stow
officers/stockholders (261) - (261)
Transfer of undistributed earnings to
additional paid-in-capital (1,164) - -
Net income 5,450 - 5,450
----------------------------------------

Balances at July 31, 1996 16,629 (44) 23,440
Issuance of common stock (note 1(n)) - - 35,510
Exercise of stock warrants - - -
Allocation of shares to ESOP - - 164
Distributions to Stow
officers/stockholders (611) - (611)
Capital contribution - - 6,043
Effect of change in year end (97) - (97)
Transfer of undistributed earnings to
additional paid-in-capital (534) - -
Net income 9,467 - 9,467
----------------------------------------

Balances at July 31, 1997 24,854 (44) 73,916
Allocation of shares to ESOP - - 163
Transfer of undistributed loss to
additional paid-in-capital 1,837 - -
Issuance of common stock - (265) 17,222
Retirement of treasury stock - 44 -
Net income 13,085 - 13,085
----------------------------------------

Balances at July 31, 1998 $ 39,776 $ (265) $ 104,386
========================================

</TABLE>
See notes to consolidated financial statements.

32
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
JULY 31, ENDED JULY 31,
---------------------------- --------------
(In thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 13,085 $ 9,467 $ 5,450
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 -
Depreciation and amortization 6,068 5,609 4,052
Loss on disposals of property & equipment 80 9 34
Accretion of original issue discount - 153 459
Compensation expense related to stock options - - 1,056
Deferred income tax benefit 184 (5) (270)
Provision for doubtful accounts 2,462 2,112 647
Changes in assets and liabilities, net of acquired companies:
Accounts receivable (5,911) (3,782) (4,073)
Inventory (14,111) (7,748) (8,181)
Prepaid expenses 1,175 (1,977) (761)
Refundable income taxes (165) - -
Other assets 1,085 (1,299) 362
Notes receivable, trade (71) (434) (204)
Accounts payable 732 523 (1,694)
Accrued expenses 307 (1,704) 2,418
Income taxes payable (377) 73 195
-------- ------- -------
Net cash provided by (used in) operating activities 4,543 1,930 (510)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of subsidiaries, net of cash acquired (20,029) - (900)
Proceeds from disposals of property and equipment 545 111 53
Capital expenditures (15,209) (3,875) (7,791)
-------- ------- -------
Net cash used in investing activities (34,693) (3,764) (8,638)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under note payable 9,386 (23,029) 9,429
Repayments on long-term debt (9,482) (22,276) (5,954)
Proceeds from long-term debt 14,445 12,529 6,490
Principal payments of capital lease obligations (980) (646) (388)
Proceeds from issuance of common stock, net 17,222 35,510 -
Purchase of treasury stock - - (44)
Net borrowings on Stow Mills stockholder loans - 560 25
Cash distributions to Stow officers/stockholders - (611) (277)
-------- ------- -------
Net cash provided by financing activities 30,591 2,037 9,281
-------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 441 203 133
Cash and cash equivalents at beginning of period 952 749 616
======== ======= =======
Cash and cash equivalents at end of period $ 1,393 $ 952 $ 749
======== ======= =======
Supplemental disclosures of cash flow information:
- -------------------------------------------------
Cash paid during the period for:
Interest $ 4,897 $ 5,895 $ 4,073
======== ======= =======
Income taxes $ 11,938 $ 5,534 $ 2,544
======== ======= =======
</TABLE>
In 1998, 1997 and 1996, the Company incurred capital lease obligations of
approximately $316, $582 and $786, respectively.

See notes to consolidated financial statements.

33
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 under the requirements of
Statement of Financial Accounting Standards No 14, 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.

Cash equivalents 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 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.

(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 1998 and
1997,

34
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Whole Foods Market, Inc., who provided 10% or more of the Company's revenue, and
no such customers in 1996. Total net sales to this customer were approximately
$120 million and $89 million in 1998 and 1997, respectively.

(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 results of operations 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. As permitted by the rules and regulations of the
Securities and Exchange Commission, Stow's nine months ended September 27, 1996
have been combined with the Company's nine months ended July 31, 1996.

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 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) 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.

(l) 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.

(m) 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.

(n) 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 eanings 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 include 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.

35
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

A reconciliation of the weighted average number of shares outstanding used in
the computation of the basic and diluted earnings per share for all periods
presented follows:

YEAR ENDED NINE MONTHS
JULY 31, ENDED JULY 31,
--------------------- -------------
(In thousands, except per share data) 1998 1997 1996
-------- -------- -------------
<S> <C> <C> <C>
Basic weighted average shares outstanding 17,467 16,367 13,687

Net effect of dilutive stock options based
upon the treasury stock method 331 186 1,166
-------- -------- -------------
Diluted weighted average shares outstanding 17,798 16,553 14,853
======== ======== =============
</TABLE>

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.

(o) 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 Event

On September 30, 1998, the Company acquired substantially all of the
outstanding stock of Albert's Organics, Inc. ("Albert's"), a wholesale
distributor of organic vegetables and fruits, for $10.8 million to $12.0 million
contingent upon future performance. Albert's had sales of $47.8 million
(unaudited) for its most recent fiscal year ending December 31, 1997.

Fiscal 1998

During February 1998, the Company acquired substantially all the assets of
Hershey Import Co., Inc. ("Hershey"), an international trading, roasting and
packaging business of nuts, seeds, dried fruit and snack items, for
approximately $10.5 million. Hershey had sales of $20.8 million (unaudited) for
its most recent fiscal year ending June 30, 1997. Goodwill resulting from this
transaction is being amortized over 40 years.

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 reported. The Company issued 4,978,280 shares, which
represented approximately 29% of the Company's common stock after the merger.
Net sales for the quarter ended October 31, 1997, the year ended July 31 1997,
and the nine months ended July 31, 1996 for the Company excluding Stow were
approximately $116.5 million (unaudited), $421.7 million and $286.4 million,
respectively. Net income for the quarter ended October 31, 1997, the year ended
July 31, 1997, and the nine months ended July 31, 1996 for the Company excluding
Stow was $1.2 million (unaudited), $8.3 million and $4.0 million, respectively.
Net sales for the quarter ended October 31, 1997, the year ended July 31, 1997,
and the nine months ended July 31, 1996 for Stow were $56.9 million (unaudited),
$213.1 million and $153.4 million,

36
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

respectively. Net (loss) income for the quarter ended October 31, 1997, the year
ended July 31, 1997, and the nine months ended July 31, 1996 for Stow was $(1.8)
million (unaudited), $1.1 million and $1.4 million, 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. 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. CNF changed its name to
United Natural Foods, Inc. The financial statements for all periods presented
reflect the merger. Net sales for the quarter ended January 31, 1996 for CNF
were $48.7 million (unaudited). Net income for the quarter ended January 31,
1996 for CNF was $1.0 million (unaudited). Net sales for the quarter ended
January 31, 1996 for MPW were $43.6 million (unaudited). Net income for the
quarter ended January 31, 1996 for MPW was $0.1 million (unaudited).

(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 $12.1 million, $9.3
million and $3.8 million for 1998, 1997 and 1996, respectively, basic earnings
per share would have been $0.69, $0.57 and $0.28 for 1998, 1997 and 1996,
respectively, and diluted earnings per share would have been $0.68, $0.56 and
$0.26 for 1998, 1997 and 1996, respectively. The weighted average grant date
fair value of options granted during 1998, 1997 and 1996 is shown below. The
fair value of each option grant was estimated using the Black-Sholes Option
Pricing Model with the following weighted average assumptions for 1998, 1997 and
1996: a dividend yield of 0.0%, a risk free interest rate of 6.07% and an
expected life of 8 years. The expected volatility was 60.9% for 1998 and 46.5%
for 1997 and 1996. 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 fiscal 1996, as consideration for their services on the Company's Board of
Directors, four employee-directors were awarded a total of 324,500 non-statutory
stock options under the Company's 1996 Stock Option Plan at an exercise price of
$6.38 per share which vested immediately. Compensation expense of approximately
$1.1 million was charged to operations in fiscal 1996 related to these stock
options.

37
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes the stock option activity for the fiscal years
ended July 31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 654,500 $ 8.14 638,000 $ 8.11 -- --
Granted 392,346 $21.47 16,500 $ 9.64 638,000 $ 8.11
Exercised (27,500) $ 9.64 -- -- -- --
Forfeited (30,000) $20.25 -- -- -- --
------------- ---------- ------------- ---------- ------------- ----------
Outstanding at end of year 989,346 $13.02 654,500 $ 8.14 638,000 $ 8.11
============= ========== ============= ========== ============= ==========
Options exercisable at year-end 392,107 $ 7.38 382,978 $ 6.80 353,739 $ 6.61

Weighted average fair value of
options granted during the year:
Exercise price equals stock price $14.92 $ 5.85 $ 5.85
Exercise price exceeds stock price $10.03 -- $ 3.89
Stock price exceeds exercise price -- -- $ 6.74
</TABLE>

The 989,346 options outstanding at July 31, 1998 had exercise prices and
remaining contractual lives as follows:

<TABLE>
<CAPTION>
Exercise Price Number Remaining Contractual Life
- -------------- -------- --------------------------
<S> <C> <C>
$ 6.38 324,500 8 Years
$ 9.64 220,000 8 Years
$10.60 82,500 3 Years
$20.25 221,254 9 Years
$22.28 41,092 4 Years
$24.19 100,000 9 Years
</TABLE>

38
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(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 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 (8.50% at July 31, 1998 and 1997) or 1.00% above the bank's
London Interbank Offered Rate ("LIBOR", 5.65625% at July 31, 1998), 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, 1998 and 1997, the weighted average interest rate on the
line of credit was 6.66% 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, 1998, the Company's outstanding borrowings under the credit agreement
totaled $60.8 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, 1998.

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.

In October 1998, the Company entered into an interest rate swap agreement.
The agreement provides for the Company to pay interest for a five year period at
a fixed rate of 5% on a notional principal amount of $60 million while receiving
interest for the same period at the LIBOR rate on the same notional principal
amount. The swap has been entered into as a hedge against LIBOR interest rate
movements on current and anticipated variable rate indebtedness totaling $60
million. The five year term of the swap agreement may be extended to seven
years at the option of the counterparty.

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 is
limited by the letters of credit of approximately $0.7 million. Stow 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, 1997, the weighted average
interest rate on the line of credit was 7.98%. 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. 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.

39
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(5) LONG-TERM DEBT

Long-term debt consisted of the following: (dollars in thousands)

<TABLE>
<CAPTION>
JULY 31, JULY 31,
1998 1997
----------- -----------
<S> <C> <C>
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.................................................................. $ 2,734 $ 2,910

Term loan payable to bank, secured by substantially all assets of the Company
due $235 quarterly plus interest at LIBOR, balance due July 31, 2002......... 5,895 --

Real estate term loan payable to bank, secured by land and building,
due $28 monthly plus interest at 7.36%, balance due July 31, 2002............ 6,600 --

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..................... 11,693 12,000

Installment notes secured by equipment, payable in monthly installments
through 2002 at interest rates ranging from 7.43% to 11.82%.................. 100 2,320

Other notes payable to former owners of acquired businesses and former
stockholders of subsidiaries, maturing at various dates through
February 2002 at interest rates ranging from 6% to 10%....................... 1,233 528

Note payable to bank, secured by mortgage, payable in monthly installments
of $39, carrying interest at bank's prime plus 0.75%, repaid in 1998......... -- 4,336

Miscellaneous other notes payable............................................. 135 588

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%, repaid in 1998.............................................. -- 745
----------- -----------
28,390 23,427
Less: current installments..................................................... 3,309 3,016
----------- -----------
Long-term debt, excluding current installments................................. $ 25,081 $ 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.

Certain debt agreements contain restrictive covenants. At July 31, 1998, the
Company was in compliance with such covenants.

40
<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, 1998:

<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
1999.............. $ 3,309
2000.............. 2,100
2001.............. 2,045
2002.............. 18,753
2003.............. 177
Thereafter........ 2,006
-------
$28,390
=======
</TABLE>

(6) PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at July 31, 1998 and 1997:

<TABLE>
<CAPTION>
ESTIMATED USEFUL
(dollars in thousands) LIVES (YEARS) 1998 1997
---------------- -------- --------
<S> <C> <C> <C>
Land............................................... $ 1,349 $ 1,070
Building........................................... 20-40 24,684 18,642
Leasehold improvements............................ 5-30 9,129 5,894
Warehouse equipment................................ 5-20 18,458 10,625
Office equipment................................... 3-10 5,166 7,439
Motor vehicles..................................... 3-5 5,128 5,217
Equipment under capital leases..................... 5 2,851 3,299
Construction in progress........................... 1,297 196
-------- --------
68,062 52,382
Less accumulated depreciation and amortization..... 23,628 19,970
-------- --------
Net property and equipment...................... $ 44,434 $ 32,412
======== ========
</TABLE>

(7) CAPITAL LEASES

The Company leases computer, office and warehouse equipment under capital
leases expiring in various years through 2003. 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, 1998 for
each of the next five fiscal years and in the aggregate are:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31 (In thousands) AMOUNT
- ------------------ --------------
<S> <C>
1999............................................. $ 568
2000............................................. 530
2001............................................. 241
2002............................................. 38
2003 and thereafter.............................. 14
------
Total minimum lease payments.................. 1,391
Less: Amount representing interest............... 139
------
Present value of net minimum lease payments... 1,252
Less: current installments....................... 488
------
Capital lease obligations, excluding current
installments................................ $ 764
======
</TABLE>

41
<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, 1998.

Future minimum annual fixed payments required under non-cancelable operating
leases having an original term of more than one year as of July 31, 1998 are as
follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1999..................... $ 3,916
2000..................... 3,370
2001..................... 2,732
2002..................... 2,656
2003..................... 2,569
2004 and thereafter ..... 8,608
-------
$23,851
=======
</TABLE>

Rent and other lease expense for the years ended July 31, 1998 and 1997, and
the nine months ended July 31, 1996 totaled approximately $17.5 million, $7.1
million and $5.2 million, respectively.

Outstanding commitments as of July 31, 1998 for the purchase of inventory were
approximately $6.4 million. The Company had outstanding letters of credit of
approximately $2.1 million at July 31, 1998.

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 $0.8 million, $0.6 million and $0.4 million for the years ended
July 31, 1998 and 1997, and for the nine months ended July 31, 1996,
respectively.

42
<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>
(In thousands) CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Fiscal year ended July 31, 1998:
U.S. Federal................................. $ 8,736 $ 173 $ 8,909
State and local.............................. 2,660 11 2,671
------- -------- -------
$11,396 $ 184 $11,580
======= ======== =======
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
======= ======== =======
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
======= ======== =======
</TABLE>

Total income tax expense was different than the amounts computed using the
United States statutory income tax rate (35% for fiscal 1998 and 1997 and
approximately 34% for 1996) applied to income before income taxes and
extraordinary item as a result of the following:

<TABLE>
<CAPTION>
JULY 31, JULY 31, JULY 31,
(In thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense.................... $ 8,633 $ 5,505 $ 2,849
State and local income tax, net of Federal income
tax benefit...................................... 1,736 1,078 467
Effect of entities not taxed for Federal income
tax............................................... 383 (401) (499)
Rate differential.................................. -- (100) --
Merger related expenses............................ 491 -- 156
Non-deductible expenses............................ 84 42 70
Non-deductible amortization........................ 15 16 5
Other, net......................................... 238 (166) (165)
-------- -------- --------
$11,580 $ 5,974 $ 2,883
======== ======== ========
</TABLE>

43
<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,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
------ ------
<S> <C> <C>
Deferred tax assets:
Inventories, principally due to additional costs inventoried for
tax purposes.................................................... $1,338 $460
Intangible assets................................................. 242 301
Compensation and benefit related.................................. 705 488
Accounts receivable, principally due to allowances for
uncollectible accounts.......................................... 174 202
Other............................................................. 61 47
------ ------
Total gross deferred tax assets.............................. 2,520 1,498
Less valuation allowance............................................. -- --
------ ------
Net deferred tax assets...................................... 2,520 1,498
------ ------
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation.................................................... 1,255 571
Reserve for LIFO inventory method................................. 994 523
Other............................................................. 101 50
------ ------
Total deferred tax liabilities............................... 2,350 1,144
------ ------
Net deferred tax assets.............................................. $ 170 $ 354
====== ======
Current deferred income tax assets................................... $1,540 $1,032
Non-current deferred income tax liabilities.......................... (1,370) (678)
------ ------
$ 170 $ 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 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 Consolidated
Balance Sheets. During 1998, 1997 and 1996 contributions totaling approximately
$0.4 million, $0.5 million and $0.4 million,

44
<PAGE>

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

respectively, were made to the Trust. Of these contributions, approximately $0.3
million, $0.3 million and $0.2 million, respectively, represented interest.

The ESOP shares were classified as follows:

JULY 31, JULY 31,
(In thousands) 1998 1997
---------- ----------
<S> <C> <C>
Allocated shares................. 638 550
Shares released for allocation... 88 88
Shares distributed to employees.. (164) (88)
Unreleased shares................ 1,474 1,562
---------- ----------
Total ESOP shares............. 2,036 2,112
========== ==========
</TABLE>

The fair value of unreleased shares was approximately $41.0 million at
July 31, 1998.

(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.

45
<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. Certain
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 during 1998 and 1997, 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.

<TABLE>
<CAPTION>
(In thousands except per First Second Third Fourth Full Year
share data)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
- ----
Net sales $173,383 $177,976 $187,581 $189,970 $728,910
Gross profit 34,189 36,308 39,381 40,457 150,335
Income before income taxes 1,293 7,134 8,737 7,501 24,665
Net income (loss) (628) 4,200 5,079 4,434 13,085

Per common share income
(loss)
Basic: $(0.04) $0.24 $0.29 $0.25 $0.75
Diluted: $(0.04) $0.24 $0.29 $0.25 $0.74
Weighted average basic
shares outstanding 17,357 17,357 17,369 17,784 17,467
Weighted average diluted
shares outstanding 17,649 17,659 17,750 18,153 17,798

Market Price
High 26 3/4 27 1/8 30 11/16 33 3/8 33 3/8
Low 19 1/4 19 3/4 23 3/4 22 1/2 19 1/4

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
Market Price
High - 17 1/2 17 24 3/8 24 3/8
Low - 12 1/2 13 15 12 1/2

</TABLE>

46
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is contained in part under the caption
"Executive Officers and Directors of the Registrant" in PART I hereof, and the
remainder is contained in the Company's Proxy Statement for its Annual Meeting
of Stockholders to be held in December 1998 (the "1998 Proxy Statement") under
the captions "PROPOSAL 1 ELECTION OF DIRECTORS" and "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE" and is incorporated herein by this reference.

Officers are elected on an annual basis and serve at the discretion of the
Board of Directors.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is contained under the captions "Director
Compensation," "Compensation of Executive Officers" and "Compensation Committee
Interlocks and Insider Participation" in the 1998 Proxy Statement and is
incorporated herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is contained in the 1998 Proxy Statement
under the caption "Stock Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is contained under the caption
"Certain Transactions" in the 1998 Proxy Statement and is incorporated herein by
this reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed as a part of this Form 10-K
--------------------------------------------

1. Financial Statements. The Financial Statements listed in
--------------------
the Index to Financial Statements in Item 8 hereof are filed as
part of this Annual Report on Form 10-K.

2. Financial Statement Schedules. Schedule II Valuation and
-----------------------------
Qualifying Accounts is filed as part of this Annual Report on Form 10-K
immediately preceding the exhibit index.

All other schedules are omitted, since the required information
is not present or is not present in amounts sufficient to require
submission of the schedule or because the information required is
included in the consolidated financial statements and notes
thereto.

Independent Auditor's Report on Financial Statement Schedule.

47
<PAGE>

3. Exhibits. The Exhibits listed in the Exhibit Index
--------
immediately preceding such Exhibits are filed as part of this
Annual Report on Form 10-K.

(b) Reports on Form 8-K.
-------------------

None.

48
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

UNITED NATURAL FOODS, INC.

/s/ Robert T. Cirulnick
-----------------------------
Robert T. Cirulnick
Chief Financial Officer
(Principal Financial and Accounting Officer)

Dated: October 29, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Name Title Date
- --------------------------- ------------------------------------------------- ----------------
<S> <C> <C>
/s/ NORMAN A. CLOUTIER Chairman of the Board and Chief Executive Officer October 29, 1998
- ---------------------- (Principal Executive Officer)
Norman A. Cloutier

/s/ MICHAEL S. FUNK Vice Chairman of the Board and President October 29, 1998
- -------------------
Michael S. Funk

/s/ ROBERT T. CIRULNICK Chief Financial Officer October 29, 1998
- ---------------------- (Principal Financial and Accounting Officer)
Robert T. Cirulnick

/s/ BARCALY MCFADDEN, III Director October 29, 1998
- --------------------
Barcaly McFadden, III

/s/ KEVIN T. MICHEL Director October 29, 1998
- -------------------
Kevin T. Michel

Director
- -----------------------
Richard J. Williams

/s/ THOMAS B. SIMONE Director October 29, 1998
- --------------------
/s/ Thomas B. Simone

/s/ STEVEN H. TOWNSEND Director October 29, 1998
- --------------------
Steven H. Townsend

/s/ RICHARD S. YOUNGMAN Director October 29, 1998
- --------------------
Richard S. Youngman
</TABLE>

49
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
United Natural Foods, Inc.:

Under date of September 1, 1998, we reported on the consolidated balance sheets
of United Natural Foods, Inc. and subsidiaries as of July 31, 1998 and 1997 and
the related consolidated statements of income, stockholders' equity and cash
flows for the years ended July 31, 1998 and 1997 and for the nine months ended
July 31, 1996, as contained in the annual report on Form 10-K for the year 1998.
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.

Providence, Rhode Island
September 1, 1998 /s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP

<PAGE>

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
----------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ---------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(in thousands)
Bad Debt Allowance

Year ended July 31, 1998 $2,283 $2,462 $2,965 $1,780

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

</TABLE>

<PAGE>

EXHIBIT INDEX

EXHIBIT
- ---------
NO. DESCRIPTION
- --------- -------------------------------------------------------------------

2** Agreement and Plan of Reorganization by and among the Registrant,
GEM Acquisition Corp., Stow Mills, Inc., Barclay McFadden and
Richard S. Youngman, dated as of June 23, 1997, and amended and
restated as of August 8, 1997.

3.1* Amended and Restated Certificate of Incorporation of the Registrant.

3.2* Amended and Restated By-Laws of the Registrant.

4*+ Specimen Certificate for shares of Common Stock, $.01 par value, of
the Registrant.

10.1* Amended and Restated Employee Stock Ownership Plan.

10.2* ESOT Loan Agreement among Norman A. Cloutier, Steven H. Townsend,
Daniel V. Atwood, Theodore Cloutier and the Employee Stock Ownership
Plan and Trust, dated November 1, 1988, as amended.

10.3* Stock Pledge Agreement between the Employee Stock Ownership Trust
and Steven H. Townsend, Trustee for Norman A. Cloutier, Steven H.
Townsend, Daniel V. Atwood and Theodore Cloutier, dated November 1,
1988, as amended.

10.4* Trust Agreement between Norman A. Cloutier, Steven H. Townsend,
Daniel V. Atwood, Theodore Cloutier and Steven H. Townsend as
Trustee, dated November 1, 1988.

10.5* Guaranty Agreement between the Registrant and Steven H. Townsend as
Trustee for Norman A. Cloutier, Steven H. Townsend, Daniel V. Atwood
and Theodore Cloutier, dated November 1, 1988.

10.6*+ 1996 Stock Option Plan.

<PAGE>

10.7* Registration Rights Agreement between the Registrant and Triumph,
dated November 17, 1993.

10.8*+ Employment Agreement between the Registrant, Mountain People's and
Michael S. Funk, dated February 20, 1996.

10.9*+ Non-competition Agreement between the Registrant and Norman A.
Cloutier, dated November 16, 1993.

10.10* Amended and Restated Loan and Security Agreement among the
Registrant, Mountain People's, Natural Retail Group, Inc., Rainbow,
Nutrasource, Inc. and Fleet Capital Corporation, dated February 20,
1996.

10.11* Real Estate Term Note between the Registrant and Shawmut Capital
Corporation (now Fleet Capital Corporation), dated September 8,
1995.

10.12* Distribution Agreement between Mountain People's Wine Distributing,
Inc., and Mountain People's, dated August 23, 1994.

10.13* Secured Promissory Note between Michael S. Funk and Mountain
People's, dated November 28, 1995.

10.14* Lease, dated January 21, 1992, between Panattoni-Catlin Joint
Venture and Souza Revocable Trust and Mountain People's, as amended.

10.15* Lease, dated July 29, 1995, between Prem Mark, Inc. and the
Registrant.

10.16* Lease, dated July 12, 1990, between the Registrant and Sylvan and
Stanford Makover Joint Venture, as amended.

10.17* Lease, dated August 23, 1989, between the Registrant and Bradley
Spear and Seattle First National Bank, co-executors of the estate of
A.H. Spear.

10.18*+ 1996 Employee Stock Purchase Plan.

10.19*** First Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated March 1, 1997.

10.20**** Second Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated July 1, 1997.

10.21**** Lease dated July 11, 1997 between AmberJack, Ltd. and the
Registrant.

10.22x+ Employment Agreement for Robert Cirulnick

10.23x+ Employment Agreement for Richard S. Youngman

10.24x+ Termination Agreement for Steven Townsend

10.25x+ Addendum to Incentive Stock Option Agreement for Steven H. Townsend

<PAGE>

10.26xx Third Amendment to Amended and Restated Loan Agreement between
United Natural Foods, Inc. and Fleet Capital Corporation, dated
October 31, 1997

10.27xx Agency and Interlender Agreement between United Natural Foods, Inc.
and Fleet Capital Corporation, First Union National Bank and
Nationsbank, N.A., dated December 1, 1997

21 Subsidiaries of the Registrant.

23 Consent of KPMG Peat Marwick LLP.

27 Financial Data Schedule.

* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-11349).

** Incorporated by reference to an Annex to the Registrant's Proxy Statement
dated October 15, 1997 with respect to the Special Meeting of Stockholders
dated October 30, 1997.

*** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1997.

**** Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended July 31, 1997.

x Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1998.

xx Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1997.

+ Management contract or compensatory plan or arrangement filed in response
to Item 14(a)(3) of the instructions to Form 10-K.

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
<S> <C>
Cheese & Stuff, Inc. Connecticut

Food For Thought Natural Foods Market, Inc. Connecticut

The Health Hut, Inc. New York

Mountain People's Warehouse Incorporated California

Natural Retail Group, Inc. Delaware

NATUREWORKS, Inc Florida

Nutrasource, Inc. Washington

Rainbow Natural Foods, Inc. Colorado

GEM Acquisition Corporation Delaware

Stow Mills, Inc. New Hampshire

Nature's Finest, Inc. Florida

Sweetwater, Inc. Connecticut

Hershey Imports, Inc. New Jersey

Mother Earth, Inc. Florida
</TABLE>

<PAGE>

Exhibit 23

ACCOUNTANTS' CONSENT

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 September 1, 1998, relating to the consolidated balance
sheets of United Natural Foods, Inc. and Subsidiaries as of July 31, 1998 and
1997 and the related consolidated statements of income, stockholders' equity and
cash flows for the years ended July 31, 1998 and 1997 and for the nine months
ended July 31, 1996, and the related schedule, which reports appear in the July
31, 1998 annual report on Form 10-K of United Natural Foods, Inc.

Providence, Rhode Island /s/ KPMG Peat Marwick LLP
October 28, 1998 KPMG Peat Marwick LLP

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED JULY 31, 1998 AND THE
CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 1,393
<SECURITIES> 0
<RECEIVABLES> 50,563
<ALLOWANCES> 1,780
<INVENTORY> 91,119
<CURRENT-ASSETS> 146,209
<PP&E> 68,062
<DEPRECIATION> 23,628
<TOTAL-ASSETS> 212,242
<CURRENT-LIABILITIES> 80,641
<BONDS> 25,845
0
0
<COMMON> 182
<OTHER-SE> 104,204
<TOTAL-LIABILITY-AND-EQUITY> 212,242
<SALES> 728,910
<TOTAL-REVENUES> 728,910
<CGS> 578,575
<TOTAL-COSTS> 578,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,462
<INTEREST-EXPENSE> 5,157
<INCOME-PRETAX> 24,665
<INCOME-TAX> 11,580
<INCOME-CONTINUING> 13,085
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,085
<EPS-PRIMARY> $0.75
<EPS-DILUTED> $0.74

</TABLE>