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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-21531
UNITED NATURAL FOODS, INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware 05-0376157
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
260 Lake Road
Dayville, CT 06241
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number, Including Area Code: (860) 779-2800
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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
--- ---
As of December 11, 1998, there were 18,175,218 shares of the Registrant's Common
Stock, $0.01 par value per share, outstanding.
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<PAGE>
UNITED NATURAL FOODS, INC.
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1998 and July 31, 1998 3
Consolidated Statements of Income for the three months ended October 31,
1998 and 1997 4
Consolidated Statements of Cash Flows for the three months ended October
31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 7-15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
(In thousands, except per share amounts) October 31, 1998 July 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,455 $ 1,393
Accounts receivable, net of allowance of $2,102 and $1,780,
respectively 57,591 48,078
Notes receivable, trade 693 705
Inventories 100,538 91,119
Prepaid expenses 4,143 3,209
Deferred income taxes 1,732 1,540
Refundable income taxes 437 165
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Total current assets 166,589 146,209
Property & equipment, net 47,436 44,434
Other assets:
Notes receivable, trade, net 915 1,170
Goodwill, net 28,095 19,136
Covenants not to compete, net 550 613
Other, net 721 680
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Total assets $ 244,306 $ 212,242
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit $ 51,892 $ 36,608
Current installments of long-term debt 5,375 3,309
Current installments of obligations under capital leases 334 488
Accounts payable 37,426 32,017
Accrued expenses 11,479 8,219
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Total current liabilities 106,506 80,641
Long-term debt, excluding current installments 26,116 25,081
Deferred income taxes 1,698 1,370
Obligations under capital leases, excluding current installments 762 764
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Total liabilities 135,082 107,856
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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 and outstanding 18,175 at October 31, 1998
issued 18,184 and outstanding 18,175 at July 31, 1998 182 182
Additional paid-in capital 67,193 67,440
Unallocated shares of ESOP (2,706) (2,747)
Retained earnings 44,555 39,776
Treasury stock, 9 shares at July 31, 1998, at cost -- (265)
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Total stockholders' equity 109,224 104,386
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Total liabilities and stockholders' equity $ 244,306 $ 212,242
================== =================
</TABLE>
See notes to consolidated financial statements.
3
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UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
(In thousands, except per share data) 1998 1997
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<S> <C> <C>
Net sales $ 199,889 $ 173,383
Cost of sales 157,275 139,194
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Gross profit 42,614 34,189
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Operating expenses 32,825 27,659
Merger expenses -- 4,064
Amortization of intangibles 286 260
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Total operating expenses 33,111 31,983
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Operating income 9,503 2,206
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Other expense (income):
Interest expense 1,516 1,081
Other, net (176) (168)
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Total other expense 1,340 913
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Income before income taxes 8,163 1,293
Income taxes 3,384 1,921
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Net income (loss) $ 4,779 $ (628)
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Pro forma additional income tax expense -- 320
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Pro forma net income (loss) $ 4,779 $ (948)
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Per share data (basic):
Net income (loss) $ 0.26 $ (0.04)
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Pro forma net income (loss) $ 0.26 $ (0.05)
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Weighted average basic shares of common stock 18,175 17,357
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Per share data (diluted):
Net income (loss) $ 0.26 $ (0.04)
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Pro forma net income (loss) $ 0.26 $ (0.05)
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Weighted average diluted shares of common stock 18,537 17,649
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</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
(In thousands) 1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,779 $ (628)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,696 1,380
Loss on disposals of property & equipment (5) (12)
Deferred income tax benefit 78 --
Provision for doubtful accounts 477 132
Changes in assets and liabilities, net of acquired companies:
Accounts receivable (6,986) (5,940)
Inventory (8,884) (6,917)
Prepaid expenses (735) 933
Refundable income taxes (387) --
Other assets 569 874
Notes receivable, trade 266 (407)
Accounts payable 4,318 8,171
Accrued expenses 1,085 2,733
Income taxes payable -- 911
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Net cash (used in) provided by operating activities (3,729) 1,230
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CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of subsidiaries, net of cash acquired (8,888) (1,359)
Proceeds from disposals of property and equipment 31 125
Capital expenditures (1,599) (971)
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Net cash used in investing activities (10,456) (2,205)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under note payable 15,285 7,240
Repayments on long-term debt (900) (6,151)
Principal payments of capital lease obligations (156) (555)
Other 18 --
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Net cash provided by financing activities 14,247 534
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NET INCREASE (DECREASE) IN CASH 62 (441)
Cash at beginning of period 1,393 952
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Cash at end of period $ 1,455 $ 511
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,263 $ 1,115
========== ==========
Income taxes $ 3,826 $ 892
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</TABLE>
In the quarters ended October 31, 1998 and 1997, the Company incurred no capital
lease obligations.
See notes to consolidated financial statements.
5
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements ("financial statements")
include the accounts of United Natural Foods, Inc. and its wholly owned
subsidiaries (the "Company"). The Company is a distributor and retailer of
natural foods and related products.
On October 31, 1997, a subsidiary of the Company completed its merger with Stow
Mills, Inc. ("Stow Mills") wherein Stow Mills 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. Net sales for the quarter
ended October 31, 1997 for the Company excluding Stow were approximately $116.5
million. Net income for the quarter ended October 31, 1997 for the Company
excluding Stow was $1.2 million. Net sales for the quarter ended October 31,
1997 for Stow were $56.9 million. Net loss for the quarter ended October 31,
1997 for Stow was $1.8 million.
The financial statements have been prepared pursuant to rules and regulations of
the Securities and Exchange Commission for interim financial information,
including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally required in
complete financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In the opinion of
management, these financial statements include all adjustments necessary for a
fair presentation of the results of operations for the interim periods
presented. The results of operations for interim periods, however, may not be
indicative of the results that may be expected for a full year.
Certain fiscal 1998 balances have been reclassified to conform to the fiscal
1999 presentation.
2. INTEREST RATE SWAP AGREEMENT
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.
3. PRO FORMA NET INCOME
Stow Mills was subject to taxation as an S corporation until the merger on
October 31, 1997. For pro forma disclosure purposes, income tax adjustments were
assumed in order to reflect results as if Stow Mills had been subject to
taxation as a C corporation for periods prior to the merger.
4. EARNINGS PER SHARE
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:
<TABLE>
<CAPTION>
Three Months Ended
October 31,
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Basic weighted average shares outstanding 18,175 17,357
Net effect of dilutive stock options based upon the treasury
stock method using the average stock price 362 292
---------- ----------
Diluted weighted average shares outstanding 18,537 17,649
========== ==========
</TABLE>
6
<PAGE>
5. ACQUISITION
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 approximately $11 million, including $9.1
million of goodwill. Albert's had sales of $47.8 million for its most recent
fiscal year ended December 31, 1997. This acquisition has been accounted for as
a purchase and, accordingly, all financial information has been included since
the date of acquisition.
6. COMPREHENSIVE INCOME
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. The Company's comprehensive income is equal to net
income for all periods presented.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
United Natural Foods, Inc. (the "Company") is the leading independent national
distributor of natural foods and related products in the United States. In
recent years, the Company has increased sales to existing and new customers
through the acquisition of or merger with natural products distributors, the
opening of distribution centers in new geographic areas, the expansion of
existing distribution centers and the continued growth of the natural products
industry in general. Through these efforts, management believes that the Company
has been able to broaden its geographic penetration, expand its customer base,
enhance and diversify its product selections and increase its market share. The
Company's distribution operations are divided into three principal regions:
Cornucopia Natural Foods, Inc. ("Cornucopia") and Stow Mills, Inc. ("Stow
Mills") in the Eastern Region, Rainbow Natural Foods, Inc. ("Rainbow") in the
Central Region and Mountain People's Warehouse, Inc. ("Mountain People's") in
the Western Region. Through its subsidiary, the Natural Retail Group ("NRG"),
the Company also owns and operates 16 retail natural products stores located in
the eastern United States. The Company's retail strategy for NRG is to
selectively acquire existing natural products stores that meet the Company's
strict criteria in areas such as sales growth, profitability, growth potential
and store management. Management believes the Company's retail business serves
as a natural complement to its distribution business enabling the Company to
develop new marketing programs and improve customer service.
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. The Company has made
considerable expenditures in connection with the expansion of its facilities,
including 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.
7
<PAGE>
Recent Acquisitions
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 produce, for approximately $11 million. Albert's had sales of $47.8
million for its most recent fiscal year ended December 31, 1997.
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 for its most
recent fiscal year ended June 30, 1997.
The acquisitions of Albert's and Hershey have been accounted for as purchases
and, accordingly, all financial information has been included since the
respective dates of acquisition.
The merger of the Company with Stow Mills in October 1997 has been accounted for
as a pooling of interests and, accordingly, all information included herein is
reported as though United Natural and Stow Mills had been combined for all
periods reported.
Results Of Operations
The following table presents, for the periods indicated, certain income and
expense items expressed as a percentage of net sales:
Quarter Ended
October 31,
1998 1997
-------------------
Net sales 100.0% 100.0%
Cost of sales 78.7% 80.3%
------ ------
Gross profit 21.3% 19.7%
------ ------
Operating expenses 16.4% 16.0%
Merger expenses -- 2.3%
Amortization of intangibles 0.1% 0.1%
------ ------
Total operating expenses 16.6% 18.4%
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Operating income 4.8% 1.3%
------ ------
Other expense (income):
Interest expense 0.8% 0.6%
Other, net -0.1% -0.1%
------ ------
Total other expense 0.7% 0.5%
------ ------
Income before income taxes 4.1% 0.7%
Income taxes 1.7% 1.1%
------ ------
Net income 2.4% -0.4%
====== ======
8
<PAGE>
Quarter Ended October 31, 1998 Compared To Quarter Ended October 31, 1997
Net Sales.
The Company's net sales increased approximately 15.3%, or $26.5 million, to
$199.9 million for the quarter ended October 31, 1998 from $173.4 million for
the the quarter ended October 31, 1997. The overall increase in net sales was
primarily attributable to increased sales to existing customers, the sale of new
product offerings and newly acquired businesses.
Gross Profit.
The Company's gross profit increased approximately 24.6%, or $8.4 million, to
$42.6 million for the quarter ended October 31, 1998 from $34.2 million for the
quarter ended October 31, 1997. The Company's gross profit as a percentage of
net sales increased to 21.3% for the quarter ended October 31, 1998 from 19.7%
for the quarter ended October 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 3.5%, or $1.1
million, to $33.1 million for the quarter ended October 31, 1998 from $32.0
million for the quarter ended October 31, 1997. As a percentage of net sales,
operating expenses decreased to 16.6% for the quarter ended October 31, 1998
from 18.4% for the quarter ended October 31, 1997. Excluding merger costs of
$4.1 million, the Company's total operating expenses for the quarter ended
October 31, 1997 would have been $27.9 million, or 16.1% of net sales, resulting
in an increase for the quarter ended October 31, 1998 of $5.2 million, or 18.6%,
over the comparable prior period. The increase in the Company's operating
expenses as a percentage of net sales, excluding merger costs, is primarily due
to increased information technology expenditures and the growth of the retail
business, which generally has higher operating expenses as a percentage of net
sales than the distribution business.
Operating Income.
Operating income increased $7.3 million, to $9.5 million for the quarter ended
October 31, 1998 from $2.2 million for the quarter ended October 31, 1997. As a
percentage of net sales, operating income increased to 4.8% in the quarter ended
October 31, 1998 from 1.3% in the comparable 1997 period. Excluding the merger
costs noted above, operating income for the quarter ended October 31, 1997 would
have been $6.3 million, or 3.6% of net sales, resulting in an increase for the
quarter ended October 31, 1998 of $3.2 million, or 51.6%, over the comparable
prior period.
Other (Income)/Expense.
The $0.4 million increase in other expense in the quarter ended October 31, 1998
compared to the quarter ended October 31, 1997 was primarily attributable to an
increase in interest expense relating to the higher level of debt in the first
quarter of fiscal 1999 used to fund working capital investments and newly
acquired businesses.
Income Taxes.
The Company's effective income tax rates were 41.5% and 148.6% for the quarters
ended October 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 for the first fiscal
quarter of 1998.
9
<PAGE>
Net Income.
As a result of the foregoing, the Company's net income increased by $5.4 million
to $4.8 million, or 2.4% of net sales, for the quarter ended October 31, 1998
from a loss of $0.6 million in the quarter ended October 31, 1997. Excluding the
$4.1 million in merger costs in the first quarter of fiscal 1998, net income
would have been $3.4 million, or 2.0% of net sales, resulting in an increase for
the quarter ended October 31, 1998 of $1.3 million, or 39.1%, over the
comparable prior period.
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 (used in) provided by operations was $(3.7) million and $1.2 million
for the quarters ended October 31, 1998 and 1997, respectively. Excluding merger
expenses of $4.1 million, net cash provided by operations in the first quarter
of fiscal 1998 would have been $5.3 million. The Company's cash used in
operations in the first quarter of fiscal 1999 related primarily to investments
in accounts receivable and inventory in the ordinary course of business. The
increases in inventory levels relate to supporting increased sales with wider
product assortment combined with the Company's ability to capture purchasing
efficiency opportunities in excess of total carrying costs. The Company's cash
provided by operations in the first quarter of 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 Company's working capital at October 31, 1998 was $60.1
million.
Net cash used in investing activities was $10.5 million and $2.2 million for the
quarters ended October 31, 1998 and 1997, respectively. Investing activities in
both years were primarily for the acquisition of new businesses and the
continued upgrade of existing management information systems.
Cash provided by financing activities was $14.2 million and $0.5 million for the
quarters ended October 31, 1998 and 1997, respectively. The Company had net
borrowings on its line of credit of $15.3 million and $7.2 million during the
first quarter of fiscal 1999 and fiscal 1998, respectively, and paydowns of
long-term obligations of $1.1 million and $6.7 million, respectively.
The Company expects to spend approximately $45 million over the next five years
in capital expenditures to fund the expansion of existing facilities, upgrade
information systems and technology and update its material handling equipment.
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
10
<PAGE>
strategies, personnel changes, demand for natural products, supply shortages and
general economic conditions.
Recently Issued Financial Accounting Standards
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
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. 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.
The Company believes that the Western Region's critical IT infrastructure
components and embedded chips are Year 2000 compliant. The Western Region has
made the minimal changes necessary for its IT infrastructure to operate in a
Year 2000 environment. The Western Region 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 Western Region 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 Central Region completed all Year 2000 simulation
testing by the end of
11
<PAGE>
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.
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 Mills business systems prior to the end of
the first calendar quarter of 1999. Also, the surviving Eastern 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 its
operations off these existing systems and on to the surviving Stow Mills system
during the first calendar quarter of 1999. The Eastern Region's phone system is
also not Year 2000 compliant and will be upgraded by July 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 systems 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. Albert's will make remaining minor coding
changes to be Year 2000 compliant by the end of March 1999.
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 has sent information requests to all its
customers in order to compile a database of the Year 2000 status and plans for
of all customers.
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, substantially 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 Quarterly Report on Form 10-Q and presented
12
<PAGE>
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.
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 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 Markets, Inc. ("Whole Foods") and Wild
Oats Markets, Inc. ("Wild Oats"), is important to the
13
<PAGE>
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.
The Company is currently undergoing its first audit by the Internal Revenue
Service ("IRS"). The IRS is investigating the Company's 1996 and 1995 fiscal
years and is also examining pre-acquisition books and records of certain
acquired subsidiaries. As this is the first IRS audit experienced by the
Company, which also includes an audit of pre-acquisition results of
subsidiaries, the Company is not yet able to determine the amount of financial
impact, if any, that may result at the conclusion of the audit. Significant
audit adjustments could negatively impact the Company's reported earnings.
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 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.
In order to maintain its profit margins, the Company relies on strategic
investment buying initiatives, such as discounted bulk purchases, which require
spending significant amounts of working capital. In the event that capital
market turmoil significantly increased the Company's cost of capital or the
ability to borrow funds or raise equity capital, the Company could suffer
reduced profit margins and be unable to grow its business organically or through
acquisitions, which could have a material adverse effect on the Company's
business, financial condition or results of operations.
14
<PAGE>
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 September 30, 1998, the Company's executive officers and directors, and
their affiliates, and the ESOT will beneficially own in the aggregate
approximately 59% 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.
As of September 30, 1998, approximately 170 employees, representing
approximately 6.5% of the Company's approximately 2,600 employees, were union
members. In the past, the Company has 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 3. 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
The exhibits listed in the Exhibit Index immediately preceding such exhibits are
filed as part of this Quarterly Report on Form 10-Q.
b) Reports on Form 8-K.
On September 11, 1998, the Company filed a Current Report on Form 8-K dated
September 3, 1998 announcing under Item 5 (Other Events) a press release
containing results for the fourth quarter and year ended July 31, 1998, as well
as a press release stating that it has entered into an a definitive agreement to
acquire 100% of the outstanding stock of Albert's Organics, Inc., and presenting
under Item 7 (Financial Statements, Pro Forma Financial Information and
Exhibits) the following information:
EXHIBITS.
99.1 Press release dated September 3, 1998.
99.2 Consolidated Statements of Income of United Natural Foods, Inc. for the
quarter and year ended July 31, 1998 (unaudited).
99.3 Press release dated September 10, 1998.
Exhibit Index
Exhibit No. Description Page
- ----------- ----------- ----
27 Financial Data Schedule 17
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED NATURAL FOODS, INC.
/s/ Robert T. Cirulnick
---------------------------
Robert T. Cirulnick
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: December 11, 1998
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 1998
AND THE CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 1,455
<SECURITIES> 0
<RECEIVABLES> 60,386
<ALLOWANCES> (2,102)
<INVENTORY> 100,538
<CURRENT-ASSETS> 166,589
<PP&E> 72,378
<DEPRECIATION> 24,942
<TOTAL-ASSETS> 244,306
<CURRENT-LIABILITIES> 106,506
<BONDS> 26,878
0
0
<COMMON> 182
<OTHER-SE> 109,042
<TOTAL-LIABILITY-AND-EQUITY> 244,306
<SALES> 199,889
<TOTAL-REVENUES> 199,889
<CGS> 157,275
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<OTHER-EXPENSES> 0
<LOSS-PROVISION> 477
<INTEREST-EXPENSE> 1,516
<INCOME-PRETAX> 8,163
<INCOME-TAX> 3,384
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