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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, 1999
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 $142,653,734, based upon the closing price of the registrant's
common stock on the Nasdaq National Market on October 5, 1999. The number of
shares of the registrant's common stock, $0.01 par value, outstanding as of
October 5, 1999 was 18,259,678.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in December 1999 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
Page
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PART I.
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 25
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 42
Part III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 42
Signatures 44
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PART I.
ITEM 1. BUSINESS
United Natural Foods, Inc. ("UNFI")is the leading independent national
distributor of natural foods and related products in the United States. We are
the primary supplier to a majority of our 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. We serve more than 6,500 customers in 47 states,
including independent natural products retailers, super natural chains and
conventional supermarkets, and are the primary distributor to the two largest
super natural chains, Whole Foods Markets, Inc. ("Whole Foods") and Wild Oats
Markets, Inc. ("Wild Oats"). We also own and operate 11 retail natural products
stores which complement our distribution business. Our strategy is to continue
to capitalize on our leading market position and strong industry trends to
enhance our position as the leading independent national distributor to the
natural products industry. For the twelve months ended July 31, 1999, we
generated net sales and operating income of $857.0 million and $26.8 million,
respectively, representing compound annual growth rates of 20.0% and 26.1%,
respectively, from the twelve months ended October 31, 1994.
We have achieved our market leadership position through a strategy
consisting of both strong internal growth and acquisitions. Since 1985, we have
successfully completed 14 acquisitions of distributors and suppliers, including
Stow Mills Inc. ("Stow Mills"), Hershey Import Co., Inc. ("Hershey") and
Albert's Organics, Inc. ("Albert's"), and 11 acquisitions of retail stores,
significantly expanding our distribution network, product offering and customer
base. On October 31, 1997, we merged with Stow Mills, a regional natural
products distributor serving the Northeast and Midwest regions of the United
States. On February 11, 1998, we 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, we acquired
substantially all of the outstanding stock of Albert's, a wholesale distributor
of organic produce. In managing our growth strategy, we have captured the
benefits of our national scale, while utilizing a regional approach to managing
our business, taking advantage of the strong customer loyalty developed by our
regional divisions which have formed the foundation of the Company. As a result
of our national expansion, we have organized our distribution operations into
four principal units: United Natural Foods in the Eastern Region (previously
Cornucopia Natural Foods, Inc. and Stow Mills, Inc.) Rainbow Natural Foods, Inc.
("Rainbow") in the Central Region, Mountain People's Warehouse ("Mountain
People's")in the Western Region and Alberts Organics in various markets in the
United States.
NATURAL PRODUCTS INDUSTRY
According to the March 1999 Nutrition Business Journal, a leading industry
publication, aggregate growth in wholesale sales of natural food manufacturers
was 13% in 1998. We believe 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 June 1999 Natural Foods Merchandiser, the natural products
retailing sector is highly fragmented, with over 9,000 independent natural
products retailers in operation in 1998 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, 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
We believe we benefit from a number of significant competitive advantages
including:
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o MARKET LEADER WITH A NATIONWIDE PRESENCE. As a result of our nationwide
presence, we believe we are one of the few distributors capable of serving
both local and regional customers as well as the rapidly growing super
natural chains. We believe we have significant advantages over smaller,
regional natural products distributors as a result of our 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 to enhance productivity and customer service; and (iv)
provide superior customer service on a national scale.
o LOW-COST OPERATOR. We believe that we are well positioned to provide value
added distribution services to our customers at attractive prices while
also providing superior customer service. In addition to our volume
purchasing power advantage, a critical component of our position as a
low-cost provider is our management of warehouse and distribution costs,
primarily as a result of utilizing larger distribution centers within each
of our geographic regions and integrating our facilities through our
nationwide interregional logistics network. In addition, we have made
significant investment in transportation equipment and information
technology to enable us to serve our customers.
o EXPANDING BASE OF PREMIER CUSTOMER RELATIONSHIPS. We serve more than 6,500
customers in 47 states. We have developed long-standing customer
relationships that we believe are among the strongest in the industry. We
have 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.
o EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. Our management
team has extensive experience in the natural products industry and has been
successful in identifying, consummating and integrating multiple
acquisitions. Since 1985, we have successfully completed 14 acquisitions of
distributors and suppliers, including Stow Mills, Hershey and Albert's, and
11 acquisitions of retail stores. In addition, our executive officers and
directors, and their affiliates, and the Employee Stock Ownership Trust
("ESOT") beneficially own in the aggregate approximately 47% of the
Company's Common Stock. Accordingly, senior management and employees have
significant incentive to continue to generate strong growth in operating
results in the future.
GROWTH STRATEGY
Our growth strategy is to maintain and enhance our position as the leading
independent national distributor to the natural products industry. Key elements
of our strategy include:
o INCREASE MARKET SHARE OF THE RAPIDLY GROWING NATURAL PRODUCTS INDUSTRY. Our
strategy is to continue to increase our leading market share of the rapidly
growing natural products industry by significantly expanding our customer
base, increasing our share of existing customers' business and continuing
to expand and further penetrate new distribution territories.
o EXPAND CUSTOMER BASE. We have expanded substantially the number of
customers served to more than 6,500 as of July 31, 1999. We plan to
continue to expand our coverage of the highly fragmented natural products
industry by cultivating new customer relationships within the industry and
by developing other channels of distribution such as traditional
supermarkets, mass market outlets, Internet retailers, institutional
foodservice providers, hotels and gourmet stores.
o INCREASE MARKET SHARE OF EXISTING CUSTOMERS' BUSINESS. We seek to become
the primary supplier for a majority of our customers by offering the
broadest product offering in the industry at the most competitive prices.
Since 1993, we have expanded our product offering from approximately 14,000
to more than 26,000 SKUs as of July 31, 1999. Additionally, we have
launched a number of private label programs that present to us and our
customers higher margins than many of our existing product offerings. As a
result we believe we have become the primary distributor to the majority of
our natural products customer base.
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o CONTINUE TO EXPAND AND PENETRATE INTO NEW CHANNELS OF DISTRIBUTION. Since
1993 we have increased the aggregate size of our distribution centers from
approximately 660,000 square feet to approximately 1,400,000 square feet
and the number of states served from 25 to 47. We 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. We
currently have no agreements or understandings with regard to any material
acquisitions.
o CONTINUE TO IMPROVE EFFICIENCY OF NATIONWIDE DISTRIBUTION NETWORK. We
continually seek to improve our operating results by integrating our
nationwide network utilizing the best practices within the industry and
within each of the regions that have formed the foundation of UNFI. This
focus on achieving improved economies of scale in purchasing, warehousing,
transportation and general and administrative functions has resulted in
improvements in operating margins, which increased from 2.5% in fiscal 1994
to 3.6% (excluding restructuring costs) in fiscal 1999, although our
operating margin (excluding restructuring costs) in the fourth quarter of
fiscal 1999 was 0.0% due to computer and related issues arising from the
consolidation of operations in the Eastern Region. We believe that there
are additional opportunities for margin improvement from our best practices
programs.
o CONTINUE TO PROVIDE THE LEADING DISTRIBUTION SOLUTION. Our strategy is to
continue to provide the leading distribution solution to the natural
products industry through our national presence, regional responsiveness,
high customer service focus and breadth of product offering. We offer our
customers a selection of inventory management, merchandising, marketing,
promotional and event management services to increase sales and enhance
customer satisfaction. The marketing services, many of which are
supplier-sponsored, include monthly and seasonal flier programs, in-store
signage and assistance in product display, all in order to assist our
customers in increasing their sales.
PRODUCTS
Our extensive selection of high-quality natural products enables us to
provide a primary source of supply to a diverse base of customers whose product
needs vary significantly. We distribute 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, fresh produce and perishables, and frozen foods. Our
private label products address certain preferences of customers that are not
otherwise being met by other suppliers.
We evaluate more than 10,000 potential new products each year based on both
existing and anticipated trends in consumer preferences and buying patterns. Our
buyers regularly attend regional natural, organic, specialty, ethnic and gourmet
products shows to review the latest products that are likely to be of interest
to retailers and consumers. We also actively solicit suggestions for new
products from our customers. We make the majority of our new product decisions
at the regional level. We believe that our decentralized purchasing practices
allow our regional buyers to react quickly to changing consumer preferences and
to evaluate new products and new product categories regionally. Additionally,
many of the new products that we offer are marketed on a regional basis or in
our own retail stores prior to being offered nationally, which enables us to
evaluate local consumer reaction to the products without incurring significant
inventory risk.
SUPPLIERS
We purchase our products from approximately 1,800 suppliers. The majority
of our vendors are based in the United States, but we source products from
suppliers throughout Europe, Asia, South America, Africa and Australia. We
believe that the reason natural products suppliers seek distribution of their
products through UNFI is because we provide access to a large and growing
customer base, distribute the majority of the suppliers' products and support
their marketing programs. Substantially all product categories that we
distribute are available from a number of suppliers and therefore we are not
dependent on any single source of supply for any product category. Our largest
supplier accounted for approximately 4.7% of total purchases in fiscal 1999.
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We are well positioned to respond to regional and local customer
preferences for natural products by decentralizing the majority of our
purchasing decisions for all products except bulk commodities. We believe that
regional buyers are best suited to identify and to respond to local demands and
preferences. Although each of our regions is responsible for placing their own
orders and can select the products that they believe will most appeal to their
customers, each region is required to participate in Company-wide purchasing
programs that enable us to take advantage of our consolidated purchasing power.
For example, we have positioned ourselves as the largest purchaser of
organically grown bulk products in the natural products industry by centralizing
our purchase of nuts, seeds, grains, flours and dried foods.
Our purchasing staff cooperates closely with vendors to provide new and
existing products. The suppliers assist in training our account and customer
service representatives in marketing new products, identifying industry trends
and coordinating advertising and other promotions.
We maintain a comprehensive quality control assurance program. All of the
products we sell that are represented as "organic" are required to be certified
as such by an independent third-party agency. We maintain 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 to us before they are
approved as a supplier. Additionally, we have 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 that
we offer to ensure that all products meet current FDA requirements. We believe
that we are the only natural products distributor which has performed such an
audit to date.
CUSTOMERS
We market our products to more than 6,500 customers located in 47 states.
We maintain long-standing customer relationships with independent natural
products retailers, including super natural chains, and have continued to
emphasize our relationships with new customers, such as conventional
supermarkets, Internet retailers and other mass market outlets, and gourmet
stores, all of which are continually increasing their natural product offerings.
Among our wholesale customers are leading super natural chains doing business as
Whole Foods (including Bread and Circus, Fresh Fields, and Nature's Heartland),
Wild Oats, Nature's Fresh!, Northwest, Wild Harvest and conventional supermarket
chains such as Wegman's, Stop and Shop, Shaws/Star Market, Quality Food Centers
(QFC), Hannaford, Pathmark and Kroger.
We believe that we are the primary supplier to the majority of our
customers. Whole Foods accounted for approximately 17% and 16% of the Company's
net sales in fiscal 1999 and 1998, respectively. Wild Oats accounted for
approximately 11% and 9% of our net sales in fiscal 1999 and 1998, respectively.
No other customer accounted for more than 10% of our net sales in fiscal 1999.
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SALES
We have historically maintained an order fill rate that exceeds on average
95% (excluding products unavailable from the supplier), which we believe is one
of the highest order fill rates in the natural products distribution industry.
The fill rate has averaged approximately 75% to 80% in the Eastern Region during
the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000 due to
difficulties encountered relating to consolidation of operations in that region.
We believe that our high fill rates are attributable to our experienced
purchasing department and sophisticated warehousing, inventory control and
distribution systems. We offer next-day delivery service to a majority of our
active customers and offer multiple deliveries each week to our largest
customers. We believe 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
We have 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.
We offer multiple monthly flier programs 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 our in-house marketing department utilizing modern
digital photography and contain detailed product descriptions and pricing
information. Additionally, 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 programs are 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 our monthly flier programs, we offer 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
We maintain twelve distribution centers. These facilities consist of an
aggregate of approximately 1.4 million square feet of space, the largest
capacity of any distributor in the natural products industry. We have recently
leased a new facility in Auburn, Washington which, at 200,000 square feet is
twice the size of our former distribution center in Seattle. Our Chesterfield
facility is currently offered for sale. We expect to complete the transfer the
current Chesterfield volume to other facilities during fiscal 2000. See Item 2 -
Properties for information on our distribution centers.
We have carefully chosen the sites for our distribution centers to provide
direct access to our regional markets. This proximity allows us to reduce our
transportation costs compared to competitors that seek to service their
customers from locations that are often hundreds of miles away. We believe that
we incur lower inbound freight expense than our regional competitors because our
national presence allows us to buy full and partial truckloads of products.
Whenever necessary we can backhaul between our distribution centers and
satellite staging facilities using our own trucks. Many of our competitors must
employ outside consolidation services and pay higher carrier transportation fees
to move products from other regions. Additionally, we can redistribute
overstocks and inventory imbalances at one distribution center to another
distribution center to ensure products are sold prior to their expiration date.
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Products are delivered to our distribution centers primarily by our leased
fleet of trucks, contract carriers and the suppliers themselves. We lease most
of our trucks from Ryder Truck Leasing, which in some cases maintains facilities
on our premises for the maintenance and service of these vehicles. Other trucks
are leased from regional firms that offer competitive services.
We ship 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
We have made a significant investment in information and warehouse
management systems. We continually evaluate and upgrade our management
information systems based on the best practices in the distribution industry and
at our 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. Warehouse workers use hand-held radio frequency
devices to process customer orders by scanning the UPC bar code as the product
is removed from its assigned slot. Similarly, customer returns are processed by
scanning the UPC bar codes. We also employ a management information system that
enables us to lower our inbound transportation costs by making optimum use of
our 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.
RETAIL OPERATIONS
The Company's Natural Retail Group ("NRG") currently owns and operates 11
retail natural products stores located in Florida, Maryland, Massachusetts and
New York. Our retail strategy is to selectively acquire existing stores that
meet our strict criteria in categories such as sales and profitability, growth
potential, merchandising and management. Generally, we will not purchase stores
that directly compete with primary retail customers of our distribution
business. We believe our retail stores have a number of advantages over their
competitors, including the financial strength and marketing expertise provided
by the Company, the purchasing power resulting from group purchasing by stores
within NRG and the breadth of their product selection. Our 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.
Acting as a distributor to our retail stores is an advantageous position
for us and includes 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 enables us to better serve our distribution
customers. Additionally, as the primary natural products distributor to our
retail locations, we expect to realize significant economies of scale and
operating and buying efficiencies. As an operator of retail stores, we also have
the ability to test market select products prior to offering them nationally. We
can then evaluate consumer reaction to the product without incurring significant
inventory risk. We are able to test new marketing and promotional programs
within our 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 consolidationand
the emergence of large competitors. Our major national competitor is Tree of
Life Distribution, Inc. (a subsidiary of Koninklijke Bolswessanen N.V.) and our
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. We also compete with numerous
smaller
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regional and local distributors of ethnic, Kosher, gourmet and other specialty
foods. Additionally, we compete 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 us 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 we have and may be
better established in their markets. There can be no assurance that our current
or potential competitors will not provide services comparable or superior to
those that we provide or adapt more quickly than we are able 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 our customers will increase distribution to their own
retail facilities. Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could materially adversely
affect our business, financial condition or results of operations.
We believe that distributors in the natural products industry compete
principally on product quality and depth of inventory selection, price and
quality of customer service. Although we believe we currently compete
effectively with respect to each of these factors, there can be no assurance
that we will be able to maintain our competitive position against current and
potential competitors.
Our retail stores compete against other natural products outlets,
conventional supermarkets and specialty stores. We believe that retailers of
natural products compete principally on product quality and selection, price,
knowledge of personnel and convenience of location.
EMPLOYEES
As of April 30, 1999 we had approximately 2,600 full- and part- time
employees. An aggregate of approximately 160 of the employees at our Seattle,
Washington and Rahway, New Jersey facilities are covered by a collective
bargaining agreement. We have never experienced a work stoppage by its unionized
employees. We believe that its relationship with our employees is good.
ITEM 2. PROPERTIES
We maintain twelve distribution centers. These facilities consist of an
aggregate of approximately 1.4 million square feet of space, the largest
capacity of any distributor in the natural products industry. We have recently
leased a new facility in Auburn, Washington which, at 200,000 square feet is
twice the size of our former distribution center in Seattle. Our Chesterfield
facility is currently offered for sale. We expect to complete the transfer the
current Chesterfield volume to other facilities during fiscal 2000.
SIZE LEASE
LOCATION (IN SQUARE FEET) EXPIRATION
Atlanta, Georgia............................... 175,000 March 2001
Auburn, California............................. 150,000 Owned
Auburn, Washington............................. 200,000 March 2009
Bridgeport, New Jersey......................... 35,700 Owned
Chesterfield, New Hampshire.................... 126,500 Owned
Chicago, Illinois.............................. 80,000 February 2000
Dayville, Connecticut.......................... 245,000 Owned
Denver, Colorado............................... 180,800 July 2013
Kealeakua, Hawaii.............................. 16,300 October 2002
Los Angeles, California........................ 30,900 February 2000
New Oxford, Pennsylvania....................... 127,000 May 2003
Winterhaven, Florida........................... 10,600 October 2000
We also rent facilities to operate 11 retail stores along the east coast
and a 38,000 square foot processing and manufacturing facility in Rahway, New
Jersey.
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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, 1999.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The executive officers and directors of the Company and their ages as of
October 29, 1999 are as follows:
NAME AGE POSITION
Norman A. Cloutier(1)(2)...... 46 Chairman of the Board and Chief Executive
Officer
Michael S. Funk(2)............ 45 Vice Chairman of the Board, President of the
Company and President of the Company's
Western Region
Richard S. Youngman........... 48 Director and Vice President of Business
Development of the Company
Daniel V. Atwood.............. 41 Secretary of the Board, Vice President of
the Company and President of NRG
Kevin T. Michel............... 42 Interim Chief Financial Officer and
Treasurer, Secretary and Director of the
Company
Gordon Barker(1)(3)........... 53 Director
Joseph M. Cianciolo(1)(3)..... 60 Director
Thomas B. Simone(1)(3)........ 57 Director
Richard J. Williams........... 38 Director
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(1) Member of the Audit Committee.
(2) Member of the Nominating Committee.
(3) Member of the Compensation Committee.
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 Warehouse (currently the Company's Western Region). Mr. Funk has served
on the Board of Directors since February 1996.
Richard S. Youngman has been the Vice President of Business Development
since March 1999. Mr. Youngman had previously served as President of the
Company's Eastern Region from October 1997 until March 1999. Mr. Youngman was
the President and a director of Stow Mills and its predecessor company from 1979
until October 1997. 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 super natural chain. Mr. Atwood
served on the Board of Directors from August 1988 to December 1997.
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Kevin T. Michel has been the Executive Vice President of the Company's
Western Region since March 1999 and interim Chief Financial Officer and
Treasurer since August 1999. Mr. Michel served as President of the Company's
Central Region from January 1998 until March 1999. Mr. Michel served as Chief
Financial Officer of Mountain People's Warehouse from January 1995 until
December 1997. Mr. Michel has served on the Board of Directors since February
1996.
Gordon Barker was appointed as a Director on the Board of Directors in
September 1999. Mr. Barker was employed for 30 years at PayLess Drug Stores
(subsequently renamed ThriftyPayLess Drug Stores). While at the company Mr.
Barker rose from Pharmacist, through several levels of management, ultimately
leading the company as its CEO/President. Currently Mr. Barker is serving on the
following Boards of Directors: Gart/Sportsmart Sporting Goods, Infinity Towers,
NuMedics Inc., and Allure Inc.
Joseph M. Ciancolo was appointed as a Director on the Board of Directors in
September 1999. Mr. Cianciolo will also serve as Chairman of the Audit Committee
and as a member of the Compensation Committee. Mr. Cianciolo was the Managing
Partner of KPMG LLP, Providence, Rhode Island Office from June 1990 until June
1999. Prior to his appointment as managing partner, Mr. Cianciolo served as the
engagement partner from 1970 - 1999 for various manufacturing and distribution
companies, health, beauty and restaurant chains, and a manufacturer of
electronic devices.
Thomas B. Simone has served on the Board of Directors since October 1996.
Mr. Simone serves as Chairman of the Compensation Committee and as a member of
the Audit Committee. 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 until April 1994, Mr.
Simone was President of McKesson Drug Company. Mr. Simone also serves on the
Board of Directors of ECO-DENT International, Inc.
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.
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 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
Fiscal 1999 High Low
----------- ---- ---
First Quarter $29.500 $19.000
Second Quarter 29.250 22.500
Third Quarter 29.750 17.750
Fourth Quarter 29.250 17.250
On July 31, 1999 United Natural had 49 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.
11
<PAGE>
We have never declared or paid any cash dividends on our capital stock. We
anticipate that all of our earnings in the foreseeable future will be retained
to finance the continued growth and development of our business and we have no
current intention to pay cash dividends. Our future dividend policy will depend
on 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. Our existing revolving line of
credit agreement prohibits the declaration or payment of cash dividends to our
stockholders without the written consent of the bank during the term of the
credit agreement and until all of our obligations 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 years ended
July 31, 1997, 1998 and 1999, and under the caption Consolidated Balance Sheet
Data at July 31, 1996, 1997, 1998 and 1999, are derived from the consolidated
financial statements of the Company, which financial statements have been
audited by KPMG LLP, independent certified public accountants. The selected
consolidated financial data presented below under the caption Consolidated
Statement of Income Data with respect to the years ended October 31, 1995 and
July 31, 1996 and under the caption Consolidated Balance Sheet Data at October
31, 1995 are derived from 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.
12
<PAGE>
Consolidated Statement of Income Data
<TABLE>
<CAPTION>
Year Ended
October 31, Year Ended July 31,
(In thousands, except per share data) 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $458,849 $580,049 $634,825 $728,910 $856,998
Cost of sales 363,757 462,506 507,547 578,575 680,301
Gross profit 95,092 117,543 127,278 150,335 176,697
Operating expenses 81,355 99,261 103,885 116,042 144,937
Merger and restructuring expenses -- -- -- 4,064 3,869
Amortization of intangibles 2,426 2,616 1,060 1,185 1,075
Total operating expenses 83,781 101,877 104,945 121,291 149,881
Operating income 11,311 15,666 22,333 29,044 26,816
Other expense (income):
Interest expense 5,969 7,730 5,976 5,157 5,700
Other, net (428) (411) (679) (778) (2,477)
Total other expense 5,541 7,319 5,297 4,379 3,223
Income before income taxes and extraordinary item 5,770 8,347 17,036 24,665 23,593
Income taxes 2,953 3,652 6,636 11,580 10,126
Extraordinary item -- -- 933 -- --
Net income $ 2,817 $ 4,695 $ 9,467 $ 13,085 $ 13,467
Per share data (Basic):
Income before extraordinary item $ 0.21 $ 0.34 $ 0.64 $ 0.75 $ 0.74
Extraordinary item, net of income tax benefit -- -- 0.06 -- --
Net income $ 0.21 $ 0.34 $ 0.58 $ 0.75 $ 0.74
Weighted average basic shares of common stock 13,691 13,688 16,367 17,467 18,196
Per share data (Diluted):
Income before extraordinary item $ 0.19 $ 0.32 $ 0.63 $ 0.74 $ 0.73
Extraordinary item, net of income tax benefit -- -- 0.06 -- --
Net income per share (diluted) $ 0.19 $ 0.32 $ 0.57 $ 0.74 $ 0.73
Weighted average diluted shares of common stock 14,858 14,855 16,553 17,798 18,537
<CAPTION>
As of
October 31, As of July 31,
Consolidated Balance Sheet Data: (In thousands) 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 26,983 $ 13,453 $ 53,101 $ 65,568 $ 73,825
Total assets $134,508 $152,343 $164,561 $212,242 $237,901
Total debt and capital leases $ 48,890 $ 34,108 $ 21,647 $ 25,845 $ 25,791
Total stockholders' equity $ 17,117 $ 23,440 $ 73,916 $104,386 $118,581
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are the leading independent national distributor of natural foods and related
products in the United States. In recent years, our sales to existing and new
customers have increased 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, we believe
that we have been able to broaden our geographic penetration, expand our
customer base, enhance and diversify our product selections and increase our
market share. Our distribution operations are divided into four principal units:
United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods,
Inc. and Stow Mills, Inc.), Rainbow Natural Foods, Inc. in the Central Region,
Mountain People's Warehouse, Inc. in the Western Region and Albert's Organics in
various markets in the United States. Through our subsidiary, the Natural Retail
Group, we also own and operate a number of retail natural products stores
located in the eastern United States. Our retail strategy is to selectively
acquire existing natural products stores that meet our strict criteria in areas
such as sales growth, profitability, growth potential and store management. We
believe our retail business serves as a natural complement to our distribution
business enabling us to develop new marketing programs and improve customer
service.
We are 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, our continued
growth has created the need for expansion of existing facilities to achieve
maximum operating efficiencies and to assure adequate space for future needs.
While operating margins may be affected in periods in which these expenses are
incurred, over the long term, we expect to benefit from the increased absorption
of our expenses over a larger sales base. We have incurred considerable expenses
in connection with the consolidation of operations in the Eastern Region, and
expect these expenses to continue into fiscal 2000. These expenses consist of
restructuring costs, including additional depreciation, severance and retention
expenses, and the cost of moving inventory, as well as additional temporary
expenses for information technology, inventory management and redundant staffing
and transportation. We have also made considerable expenditures in connection
with the expansion of our facilities, including the relocation of our Denver,
Colorado distribution center and the expansion of refrigerated and frozen space
at our Auburn, California and Atlanta, Georgia facilities. Additionally, our
Seattle, Washington facility was relocated to a larger facility in Auburn,
Washington during the third quarter of fiscal 1999.
Our net sales consist primarily of sales of natural products to retailers
adjusted for customer volume discounts, returns and allowances. The principal
components of our cost of sales include the amount paid to manufacturers and
growers for product sold, plus the cost of transportation necessary to bring the
product to our distribution facilities. Operating expenses include salaries and
wages, employee benefits (including payments under our Employee Stock Ownership
Plan), warehousing and delivery, selling, occupancy, administrative,
depreciation, merger expenses and amortization expense. Other expenses include
gain on the sale of retail stores, interest on outstanding indebtedness,
interest income and miscellaneous income and expenses.
Our operating results for the fourth quarter of fiscal 1999 were negatively
impacted by computer and related issues arising from the continuing
consolidation of Eastern Region operations. The consolidation resulted in
increased operating expenses, a lower gross margin and lower sales than prior
quarters in the Eastern Region. We had a net loss of $(0.08) per share for the
fourth quarter of fiscal 1999. Excluding restructuring costs of approximately
$1.6 million for the quarter, net loss per share was $(0.03). The computer and
related issues arising from the continuing consolidation of Eastern Region
operations have continued into fiscal 2000 and we expect our operating results
to continue to be negatively impacted.
14
<PAGE>
Recent Acquisitions
On September 30, 1998, we acquired substantially all of the outstanding stock of
Albert's Organics, Inc., a business specializing in the purchase, sale and
distribution of produce and other perishable items, for $10.8 million to $12
million, predicated upon the future performance of the acquired business,
including $9.1 million of goodwill which we are amortizing over 40 years. The
final price will be determined by March 2000. Albert's had sales of $47.8
million for the fiscal year ended December 31, 1997 and provides us with
additional expertise in the purchasing of produce and other perishable items.
Albert's also enables us to avail ourselves of a number of cross-selling
opportunities, which will be mutually beneficial to both businesses. The
acquisition of Albert's has been accounted for as a purchase and, accordingly,
all financial information has been included since the date of acquisition.
Our merger 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:
Year Ended July 31,
------------------------
1999 1998 1997
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.4% 79.4% 80.0%
------ ------ ------
Gross profit 20.6% 20.6% 20.0%
------ ------ ------
Operating expenses 16.9% 15.9% 16.4%
Merger and restructuring expenses 0.5% 0.6% --
Amortization of intangibles 0.1% 0.2% 0.2%
------ ------ ------
Total operating expenses 17.5% 16.6% 16.5%
------ ------ ------
Operating income 3.1% 4.0% 3.5%
------ ------ ------
Other expense (income):
Interest expense 0.7% 0.7% 0.9%
Other, net -0.3% -0.1% -0.1%
------ ------ ------
Total other expense (income) 0.4% 0.6% 0.8%
------ ------ ------
Income before income taxes and
extraordinary item 2.8% 3.4% 2.7%
Income taxes 1.2% 1.6% 1.0%
------ ------ ------
Income before extraordinary item 1.6% 1.8% 1.7%
Extraordinary item - Loss on early
extinguishment of debt, net of tax -- -- 0.1%
------ ------ ------
Net income 1.6% 1.8% 1.5%
====== ====== ======
15
<PAGE>
TWELVE MONTHS ENDED JULY 31, 1999 COMPARED TO TWELVE MONTHS ENDED JULY 31, 1998
Net Sales.
Our net sales increased approximately 17.6%, or $128.1 million, to $857.0
million for the year ended July 31, 1999 from $728.9 million for the year ended
July 31, 1998. The overall increase in net sales was attributable to increased
sales to existing customers, the sale of new product offerings and the newly
acquired Albert's Organics business. Excluding Albert's Organics, our most
recent acquisition, our net sales growth would have been 11.4% over the prior
year comparable period.
Gross Profit.
Gross profit increased approximately 17.5%, or $26.4 million, to $176.7 million
for the year ended July 31, 1999 from $150.3 million for the year ended July 31,
1998. Gross profit as a percentage of net sales was consistent at 20.6% for both
years.
Operating Expenses.
Total operating expenses increased approximately 23.6%, or $28.6 million, to
$149.9 million for year ended July 31, 1999 from $121.3 million for the year
ended July 31, 1998. As a percentage of net sales, operating expenses increased
to 17.5% for year ended July 31, 1999 from 16.6% for the year ended July 31,
1998. Excluding fiscal 1999 restructuring costs of $3.9 million and fiscal 1998
merger costs of $4.1 million, total operating expenses for the years ended July
31, 1999 and 1998 would have been $146.0 million, or 17.0% of net sales, and
$117.2 million, or 16.1% of net sales, respectively, resulting in an increase
for the year ended July 31, 1999 of $28.8 million, or 24.6%, over the comparable
prior period. The increase in operating expenses as a percentage of net sales,
excluding restructuring and merger costs, is primarily due to increased
information technology expenditures and additional business integration costs
for redundant staffing and training related to the migration of the business
from the Chesterfield, New Hampshire facility to the Dayville, Connecticut
facility.
Operating Income.
Operating income decreased $2.2 million to $26.8 million for the year ended July
31, 1999 from $29.0 million for the year ended July 31, 1999. As a percentage of
net sales, operating income decreased to 3.1% in the year ended July 31, 1998
from 4.0% in the comparable 1998 period. Excluding the restructuring and merger
costs noted above, operating income for the year ended July 31, 1999 and 1998
would have been $30.7 million, or 3.6% of net sales, and $33.1 million, or 4.5%
of net sales, respectively, resulting in a decrease for year ended July 31, 1999
of $2.4 million, or 7.3%, versus the comparable prior period.
Other (Income)/Expense.
The $1.2 million decrease in other expense in the year ended July 31, 1999
compared to the year ended July 31, 1998 was primarily attributable to the $1.4
million gain on the sale of four retail stores in April 1999, partially offset
by an increase in interest expense relating to the higher level of debt in
fiscal 1999 used to fund working capital investments and the Albert's
acquisition. This increase in interest expense was partially offset by a
decrease in our average interest rate on debt.
Income Taxes.
Our effective income tax rates were 42.9% and 46.9% for the year ended July 31,
1999 and 1998, respectively. The effective rate for 1999 was higher than the
federal statutory rate primarily due to state and local income taxes and the
settlement of an IRS audit for $0.3 million. The effective rate for 1998 was
higher than the federal statutory rate primarily due to state and local income
taxes and non-deductible merger expenses incurred in the first quarter of fiscal
1998, partially offset by Stow Mills being an S Corporation prior to the merger
and, as such, having no federal tax expense for the first fiscal quarter of
1998.
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<PAGE>
Net Income.
As a result of the foregoing, net income increased by $0.4 million to $13.5
million, or 1.6% of net sales, for the year ended July 31, 1999 from $13.1
million in the year ended July 31, 1998. Excluding the $3.9 million in
restructuring costs ($2.3 million, net of tax), the $1.4 million gain on the
sale of four retail stores ($0.8 million, net of tax) and the $0.3 million IRS
settlement in the third quarter of fiscal 1999, and the $4.1 million in merger
costs in fiscal 1998, net income would have been $15.2 million, or 1.8% of net
sales, and $17.1 million, or 2.4% of net sales, respectively, resulting in an
decrease for the year ended July 31, 1999 of $1.9 million, or 11.3%, over the
comparable prior period.
TWELVE MONTHS ENDED JULY 31, 1998 COMPARED TO TWELVE MONTHS ENDED JULY 31, 1997
Net Sales.
Our 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 existing customers, sales to new accounts in
existing geographic areas and the introduction of new products not previously
offered.
Gross Profit.
Our 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. Our 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, partially offset by increased sales to
existing customers under our volume discount program.
Operating Expenses.
Our 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, our 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
our ability to leverage our 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 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 first six months of
fiscal 1998 relating to the repayment of Stow Mills' debt with proceeds from our
credit facility, which bears interest at a lower rate. In addition, the proceeds
from our secondary public offering in June 1998 were used to repay debt.
17
<PAGE>
Income Taxes.
Our 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, our 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, 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.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations and growth primarily from cash flows
from operations, borrowings under our credit facility, seller financing of
acquisitions, operating and capital leases, trade payables, bank indebtedness
and the sale of equity and debt securities. Primary uses of capital have been
acquisitions, expansion of plant and equipment and investment in accounts
receivable and inventory.
Net cash provided by operations was $8.3 million, $4.5 million and $1.9 million
for the years ended July 31, 1999, 1998 and 1997, respectively. Excluding merger
expenses of $4.1 million, net cash provided by operations in fiscal 1998 would
have been $8.6 million. Cash provided by operations in fiscal 1999 related
primarily to cash collected from customers net of cash paid to vendors,
partially offset by investments in accounts receivable in the ordinary course of
business. Working capital at July 31, 1999 was $73.8 million.
Net cash used in investing activities was $6.9 million, $34.7 million and $3.8
million for the years ended July 31, 1999, 1998 and 1997, respectively.
Investing activities in fiscal 1999 and 1998 were primarily for the acquisition
of new businesses and investing activities for all three years included the
continued upgrade of existing management information systems. Net cash used in
investing activities in fiscal 1999 was partially offset by proceeds from the
sale of four retail stores in April 1999.
Cash provided by financing activities was $0.1 million, $30.6 million and $2.0
million for the years ended July 31, 1999, 1998 and 1997, respectively. We
increased borrowings on our line of credit by $4.5 million during fiscal 1999,
which was mostly offset by debt repayments totaling $4.3 million. The primary
financing activities in fiscal 1998 were net proceeds of $17.2 million from the
issuance of common stock and proceeds of $14.4 million from long-term debt
incurred. Net borrowings on our line of credit during fiscal 1998 of $9.4
million were offset by repayments of long-term debt totaling $9.5 million. The
primary financing activities in fiscal 1997 were net proceeds of $35.5 million
from the issuance of common stock and proceeds of $12.5 million from long-term
debt incurred. The primary use of these proceeds was a net paydown of our line
of credit totaling $ 23.0 million and repayments of long-term debt totaling
$22.3 million.
We expect 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 our material handling equipment.
In October 1998, we entered into an interest rate swap agreement. The agreement
provides for us 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.
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<PAGE>
IMPACT OF INFLATION
Historically, the Company has been able to pass along inflation-related
increases. Consequently, inflation has not had a material impact upon the
results of the Company's operations or profitability.
SEASONALITY
Generally, the Company does not experience any material seasonality. However,
the Company's sales and operating results may vary significantly from quarter to
quarter due to factors such as changes in the Company's operating expenses,
management's ability to execute the Company's operating and growth strategies,
personnel changes, demand for natural products, supply shortages and general
economic conditions.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board 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. We adopted this standard in fiscal
1999.
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 as we do 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, 2000.
We believe this standard will not have a material impact on our financial
statement presentation.
Year 2000 Issues
The following information constitutes "Year 2000 Readiness Disclosure" under the
Year 2000 Information and Readiness Disclosure Act of 1998.
We have completed an assessment of most of our internal exposure to the year
2000 issue. We continue to assess our customer and vendor exposure. Generally,
we believe we have "Year 2000" exposure in three areas:
o our information technology infrastructure, including computer
operating systems and applications,
o microprocessors and other electronic devices -- "embedded chips" --
included as components of non-computer equipment, and
o computer systems used by third parties, including our customers and
suppliers.
The information technology infrastructure and embedded chips are being addressed
on a regional level. The third parties are being evaluated centrally on a
company-wide basis. We have completed our assessment of our information
technology infrastructure, and are in the process of completing our evaluation
of all microprocessors and other electronic devices, third-party vendors and
customers.
19
<PAGE>
Our Western Region
We believe that our western region's critical information technology
infrastructure components and embedded chips are year 2000 compliant. Our
Western Region does not utilize two digit date coding logic, and we have
successfully tested hardware, operating system and applications software
simulating post year 2000 dates. We have tested our microprocessors and other
electronic devices and have completed implementing changes designed to achieve
year 2000 compliance. The Seattle facility's phone system was replaced for other
business reasons during the third quarter of fiscal 1999 and is year 2000
compliant.
Our Central Region
We believe our central region's critical information technology infrastructure
components and embedded chips are also year 2000 compliant. Our central region
does not employ two digit date coding logic and has simulated year 2000 dates in
tests of its hardware and operating systems as well as selected applications
software. We have completed all year 2000 simulation testing. We have also
completed an independent third-party review of our central region's operating
system and critical information technology applications software code which has
indicated that they are year 2000 compliant. The Denver facility's telephone
system was replaced in October 1999 and is now Year 2000 compliant. All other
significant information technology infrastructure components and embedded chips
either have been modified or, if not year 2000 compliant, have been retired.
Our Eastern Region
Our Eastern Region information technology department has been focused on a
business recovery strategy to normalize operations, which were disrupted as a
result of the conversion to the Stow Mills system in our Atlanta and Dayville
facilities. A new management team has been appointed to continue the recovery
process and address year 2000 compliance. The primary business operation systems
in the Eastern Region are:
BIP - Utilized by all four Eastern Region warehouses to accept customer
orders, place purchase orders with our vendors and maintain inventory
controls.
BAKO - Warehouse management system used in Chesterfield and New Oxford.
CWMS - Warehouse management system used in Dayville and Atlanta.
Down to Earth - accounting software.
BIP, BAKO and CWMS are currently being re-evaluated for year 2000 compliance.
Many critical components, including all hardware and network equipment, have
been successfully tested. The remaining components are undergoing testing for
compliance. We may not achieve comprehensive testing and remediation for the
systems prior to January 2000. However, substantially all the systems are
currently handling dates beyond January 1, 2000.
We have assembled a team of IT professionals both from within and outside the
company who are familiar with our systems in an effort to successfully resolve
any year 2000 issues in a timely manner if testing and remediation are not
completed by year-end. If we are unable to resolve these issues by January 1,
2000, we expect to manually perform certain functions performed by the affected
systems until the issues are resolved. This could adversely affect our ability
to fill and process customer orders which could result in a reduction in our
revenues and net income. In addition, any additional costs incurred to address
these problems could adversely impact our operating earnings and net income.
The Down to Earth accounting software is developed and supported by an outside
vendor. The vendor has represented to us that the software has been tested and
is year 2000 compliant. The system has successfully accepted dates beyond
January 1, 2000.
Our EDI software, which enables us to communicate electronically with some of
our customers, including receiving orders, is not compliant and must be upgraded
to become year 2000 compliant. We are working with our EDI vendor, and expect to
complete the upgrade before year-end. If this system is not upgraded, we expect
to process these orders manually.
20
<PAGE>
Microprocessors and other electronic devices used in the Eastern Region have
been tested and are year 2000 compliant.
The telephone systems in Atlanta and New Oxford are year 2000 compliant. The
telephone systems in Dayville and Chesterfield are not compliant and are
scheduled to be replaced in November 1999.
Retail Stores
All but one of our cash registers are year 2000 compliant. We plan to replace
the last register by November 1999. We believe all other critical information
technology infrastructure and embedded chips are year 2000 compliant.
Albert's Organics, Inc. and Hershey Import Co., Inc.
Our Hershey business has turned back its system clock to simulate 1990 to avoid
Year 2000 issues. We have simulated year 2000 system clock dates for the
Albert's systems and made the code changes required to make these systems year
2000 compliant.
Our Suppliers and Customers
We have sent written requests for year 2000 information to substantially all
suppliers. We are currently reviewing the responses received and have sent
second requests to the top suppliers making up at least 80% of our purchases. We
have also compiled a database of all customers regarding their year 2000 status
and plans for remediation and have sent both initial and follow-up information
requests. Substantially all responses received from both suppliers and customers
indicate they are Year 2000 compliant or will be by January 1, 2000.
Expenditures
We are in the process of updating our systems for business functionality reasons
and have adopted a systems strategy of staying current with state of the art
systems technology. We are also 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. We have significantly increased our information technology
expenditures to execute our systems strategy that includes any immaterial
incremental amounts to achieve year 2000 compliance. We therefore believe that
we will have spent an incremental amount of less than $0.4 million on year 2000
remediation over what we would have spent to execute our going forward systems
strategy. We spent on information technology systems and support approximately
$7 million, $4 million and $3 million in fiscal 1999, 1998 and 1997,
respectively.
Potential Risks
The dates on which we believe we will be year 2000 compliant are based on our
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 we are 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 our business, financial condition and results of operations. We have not yet
established a contingency plan in the event of non-compliance by any parties. We
are developing regional contingency plans for any critical business applications
and expect to have such plans completed by the end of November 1999.
Certain Factors That May Affect Future Results
If any of the events described below actually occur, our business, financial
condition, or results of operations could be materially adversely affected. This
Form 10-K contains
21
<PAGE>
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in such forward-looking
statements as a result of a variety of factors, including those set forth in the
following risk factors and elsewhere in, or incorporated by reference into, this
Form 10-K.
Our business could be adversely affected if we are unable to integrate our
acquisitions and mergers
A significant portion of our historical growth has been achieved through
acquisitions of or mergers with other distributors of natural products. United
Natural merged with Stow Mills in October 1997. The successful and timely
integration of this merger is critical to our future operating and financial
performance. The integration will require, among other things:
o the integration of computer systems onto a single systems platform;
o the optimization of delivery routes;
o coordination of administrative, distribution and finance functions;
and
o the integration of personnel.
The integration process has and could continue to divert the attention of
management, and any further difficulties or problems encountered in the
transition process could continue to have a material adverse effect on our
business, financial condition or results of operations. In addition, the process
of combining the companies has and could continue to 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 United Natural will retain key employees of Stow Mills or that we
will realize any of the other anticipated benefits of the Stow Mills merger.
We announced plans during fiscal 1999 to close our Chesterfield, New Hampshire
distribution center and to consolidate its operations with our Dayville,
Connecticut and New Oxford, Pennsylvania facilities. We began transferring sales
operations from the Chesterfield facility to our Dayville facility during June
of 1999 and the process is still ongoing. There continue to be numerous risks
involved with this consolidation of operations including, among other things:
o we have had and may continue to have difficulty retaining drivers
currently employed at our Chesterfield facility or hiring a sufficient
number of new drivers at our Dayville and New Oxford facilities to
handle the increased sales volume at those facilities;
o we have had and may continue to have difficulty retaining warehouse
employees at our Chesterfield facility or hiring a sufficient number
of new warehouse employees at our Dayville and New Oxford facilities
to handle the increased sales volume at those facilities;
o we have lost and may continue to lose business;
o our operating costs have increased and may continue to increase
because of the expenses involved in closing the Chesterfield facility
and consolidating its operations into the operations in place at the
Dayville and New Oxford facilities;
o our Dayville and New Oxford facilities have had and may continue to
have difficulty accommodating the increased sales volume; and
o construction delays in the expansion of the New Oxford facility could
delay the realization of savings.
The occurrence of any of these events could have a material adverse effect on
our business, financial condition or results of operations.
22
<PAGE>
We may have difficulty in managing our growth
The growth in the size of our business and operations has placed and is expected
to continue to place a significant strain on our management. Our future growth
is limited in part by the size and location of our distribution centers. There
can be no assurance that we will be able to successfully expand our existing
distribution facilities or open new distribution facilities in new or existing
markets to facilitate growth. In addition, our growth strategy to expand our
market presence includes possible additional acquisitions. To the extent our
future growth includes acquisitions, there can be no assurance that we will
successfully identify suitable acquisition candidates, consummate and integrate
such potential acquisitions or expand into new markets. Our ability to compete
effectively and to manage future growth, if any, will depend on our ability to
continue to implement and improve operational, financial and management
information systems on a timely basis and to expand, train, motivate and manage
our work force. There can be no assurance that our personnel, systems,
procedures and controls will be adequate to support our operations. Our
inability to manage our growth effectively could have a material adverse effect
on our business, financial condition or results of operations.
We have significant competition from a variety of sources
We operate in highly competitive markets, and our future success will be largely
dependent on our ability to provide quality products and services at competitive
prices. Our competition comes from a variety of sources, including other
distributors of natural products as well as specialty grocery and mass market
grocery distributors. There can be no assurance that mass market grocery
distributors will not increase their emphasis on natural products and more
directly compete with us or that new competitors will not enter the market.
These distributors may have been in business longer than us, may have
substantially greater financial and other resources than us and may be better
established in their markets. There can be no assurance that our current or
potential competitors will not provide services comparable or superior to those
provided by us or adapt more quickly than United Natural to evolving industry
trends or changing market requirements. It is also possible that alliances among
competitors may develop and rapidly acquire significant market share or that
certain of our customers will increase distribution to their own retail
facilities. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
our business, financial condition or results of operations. There can be no
assurance that we will be able to compete effectively against current and future
competitors.
We depend heavily on our principal customers
Our ability to maintain close, mutually beneficial relationships with our top
two customers, Whole Foods Market, Inc. and Wild Oats Markets, Inc., is
important to the ongoing growth and profitability of our business. Whole Foods
Market, Inc. and Wild Oats Markets, Inc. accounted for approximately 17% and
11%, respectively, of our net sales during the fiscal year ended July 31, 1999.
As a result of this concentration of our customer base, the loss or cancellation
of business from either of these customers, including from increased
distribution to their own facilities, could materially and adversely affect our
business, financial condition or results of operations. We sell products under
purchase orders, and we generally have no agreements with or commitments from
our customers for the purchase of products. No assurance can be given that our
customers will maintain or increase their sales volumes or orders for the
products supplied by us or that we will be able to maintain or add to our
existing customer base.
Our profit margins may decrease due to consolidation in the grocery industry
The grocery distribution industry generally is characterized by relatively high
volume with relatively low profit margins. The continuing consolidation of
retailers in the natural products industry and the emergence of super natural
chains may reduce our profit margins in the future as more customers qualify for
greater volume discounts.
Our industry is sensitive to economic downturns
The grocery industry is also sensitive to national and regional economic
conditions, and the demand for our products may be adversely affected from time
to time by economic downturns. In addition, our operating results are
particularly sensitive to, and may be materially adversely affected by:
23
<PAGE>
o difficulties with the collectibility of accounts receivable,
o difficulties with inventory control,
o competitive pricing pressures, and
o unexpected increases in fuel or other transportation-related costs.
There can be no assurance that one or more of such factors will not materially
adversely affect our business, financial condition or results of operations.
We are dependent on a number of key executives
Management of our business is substantially dependent on the services of Norman
A. Cloutier, Chairman of the Board and Chief Executive 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 our business,
financial condition or results of operations.
Our operating results are subject to significant fluctuations
Our net sales and operating results may vary significantly from period to period
due to:
o changes in our operating expenses,
o management's ability to execute our business and growth strategies,
o personnel changes,
o demand for natural products,
o supply shortages,
o general economic conditions,
o changes in customer preferences and demands for natural products,
including levels of enthusiasm for health, fitness and environmental
issues,
o fluctuation of natural product prices due to competitive pressures,
o lack of an adequate supply of high-quality agricultural products due
to poor growing conditions, natural disasters or otherwise,
o volatility in prices of high-quality agricultural products resulting
from poor growing conditions, natural disasters or otherwise, and
o future acquisitions, particularly in periods immediately following the
consummation of such acquisition transactions while the operations of
the acquired businesses are being integrated into our operations.
Due to the foregoing factors, we believe that period-to-period comparisons of
our operating results may not necessarily be meaningful and that such
comparisons cannot be relied upon as indicators of future performance.
We are subject to significant governmental regulation
Our business is highly regulated at the federal, state and local levels and our
products and distribution operations require various licenses, permits and
approvals. In particular:
o our products are subject to inspection by the U.S. Food and Drug
Administration,
o our warehouse and distribution facilities are subject to inspection by
the U.S. Department of Agriculture and state health authorities, and
24
<PAGE>
o our 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 we intend to do business could have a material adverse
effect on our business, financial condition or results of operations.
Our officers and directors and the employee stock ownership trust have
significant voting power.
As of January 31, 1999, our executive officers and directors, and their
affiliates, and the United Natural Foods Employee Stock Ownership Trust
beneficially owned in the aggregate approximately 47% of United Natural's common
stock. Accordingly, these stockholders, if acting together, would have the
ability to elect our directors and may have the ability to determine the outcome
of corporate actions requiring stockholder approval, irrespective of how other
stockholders may vote. This concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of United Natural.
Union-organizing activities could cause labor relations difficulties
As of May 31, 1999, approximately 160 employees, representing approximately 6%
of our approximately 2,600 employees, were union members. We have in the past
been the focus of union-organizing efforts. As we increase our employee base and
broaden our distribution operations to new geographic markets, our increased
visibility could result in increased or expanded union-organizing efforts.
Although we have not experienced a work stoppage to date, if additional
employees were to unionize, we could be subject to work stoppages and increases
in labor costs, either of which could materially adversely affect our business,
financial condition or results of operations.
Access to capital and the cost of that capital
In order to maintain our profit margins, we rely on strategic investment buying
initiatives, such as discounted bulk purchases, which require spending
significant amounts of working capital. In the event that capital market turmoil
significantly increased our cost of capital or the ability to borrow funds or
raise equity capital, we could suffer reduced profit margins and be unable to
grow our business organically or through acquisitions, which could have a
material adverse effect on our business, financial condition or results of
operations.
Our systems may not all be Year 2000 compliant by January 1, 2000
As discussed above, our systems may not all be Year 2000 compliant by January 1,
2000. This could result in being unable to accept, process and invoice orders
which could have a material adverse effect on our business, financial condition
and 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.
25
<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
Page
----
United Natural Foods, Inc. and Subsidiaries:
Independent Auditors' Report........................................ 27
Consolidated Balance Sheets......................................... 28
Consolidated Statements of Income................................... 29
Consolidated Statements of Stockholders' Equity..................... 30
Consolidated Statements of Cash Flows............................... 31
Notes to Consolidated Financial Statements.......................... 32-41
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United Natural Foods, Inc.:
We have audited the accompanying consolidated balance sheets of United
Natural Foods, Inc. and Subsidiaries as of July 31, 1999 and 1998 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended July 31, 1999. 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, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
KPMG LLP
Providence, Rhode Island
September 3, 1999
27
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except per share amounts) JULY 31, JULY 31,
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,845 $ 1,393
Accounts receivable, net of allowance of $2,297 and $1,780, respectively 60,612 48,078
Notes receivable, trade 1,096 705
Inventories 90,725 91,119
Prepaid expenses 5,660 3,209
Deferred income taxes 1,765 1,540
Refundable income taxes 3,939 165
--------- ---------
Total current assets 166,642 146,209
--------- ---------
Property & equipment, net 43,784 44,434
--------- ---------
Other assets:
Notes receivable, trade, net 333 1,170
Goodwill, net of accumulated amortization of $1,853 and $1,237, respectively 26,250 19,136
Covenants not to compete, net of accumulated amortization of $365 and $450, respectively 328 613
Other, net 564 680
--------- ---------
Total assets $ 237,901 $ 212,242
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 41,154 $ 36,608
Current installments of long-term debt 3,682 3,309
Current installment of obligations under capital leases 833 488
Accounts payable 33,442 32,017
Accrued expenses 13,706 8,219
--------- ---------
Total current liabilities 92,817 80,641
Long-term debt, excluding current installments 24,370 25,081
Deferred income taxes 712 1,370
Obligations under capital leases, excluding current installments 1,421 764
--------- ---------
Total liabilities 119,320 107,856
--------- ---------
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 18,249 at July 31, 1999
issued 18,184 and outstanding 18,175 at July 31, 1998 182 182
Additional paid-in capital 67,740 67,440
Unallocated shares of Employee Stock Ownership Plan (2,584) (2,747)
Retained earnings 53,243 39,776
Treasury stock, 9 shares at July 31, 1998, at cost -- (265)
--------- ---------
Total stockholders' equity 118,581 104,386
--------- ---------
Total liabilities and stockholders' equity $ 237,901 $ 212,242
========= =========
</TABLE>
See notes to consolidated financial statements
28
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
(In thousands, except per share data) 1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Net sales $ 856,998 $ 728,910 $ 634,825
Cost of sales 680,301 578,575 507,547
--------- --------- ---------
Gross profit 176,697 150,335 127,278
--------- --------- ---------
Operating expenses 144,937 116,042 103,885
Merger and restructuring expenses 3,869 4,064 --
Amortization of intangibles 1,075 1,185 1,060
--------- --------- ---------
Total operating expenses 149,881 121,291 104,945
--------- --------- ---------
Operating income 26,816 29,044 22,333
--------- --------- ---------
Other expense (income):
Interest expense 5,700 5,157 5,481
Interest expense on notes to Stow officers/stockholders -- -- 495
Other, net (2,477) (778) (679)
--------- --------- ---------
Total other expense 3,223 4,379 5,297
--------- --------- ---------
Income before income taxes and extraordinary item 23,593 24,665 17,036
Income taxes 10,126 11,580 6,636
--------- --------- ---------
Income before extraordinary item 13,467 13,085 10,400
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit of $662 -- -- 933
--------- --------- ---------
Net income $ 13,467 $ 13,085 $ 9,467
========= ========= =========
Pro forma additional income tax expense (unaudited) -- 320 401
--------- --------- ---------
Pro forma net income before extraordinary item (unaudited) $ 13,467 $ 12,765 $ 9,999
========= ========= =========
Per share data (basic):
Income before extraordinary item $ 0.74 $ 0.75 $ 0.64
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit -- -- 0.06
--------- --------- ---------
Net income $ 0.74 $ 0.75 $ 0.58
========= ========= =========
Pro forma net income before extraordinary item (unaudited) $ 0.74 $ 0.73 $ 0.61
========= ========= =========
Weighted average basic shares of common stock 18,196 17,467 16,367
========= ========= =========
Per share data (diluted):
Income before extraordinary item $ 0.73 $ 0.74 $ 0.63
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit -- -- 0.06
--------- --------- ---------
Net income $ 0.73 $ 0.74 $ 0.57
========= ========= =========
Pro forma net income before extraordinary item (unaudited) $ 0.73 $ 0.72 $ 0.60
========= ========= =========
Weighted average diluted shares of common stock 18,537 17,798 16,553
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unallocated
Outstanding Additional Shares of Total
Number Common Paid-in Stock Employee Stock Retained Treasury Stockholders'
(In thousands) of Shares Stock Capital Warrants Ownership Plan Earnings Stock Equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at July 31, 1996 13,671 $137 $ 6,592 $ 3,200 $(3,074) $ 16,629 $ (44) $ 23,440
Issuance of common stock
(note 1(n)) 2,900 29 35,481 -- -- -- -- 35,510
Exercise of stock warrants (note 5) 786 8 3,192 (3,200) -- -- -- --
Allocation of shares to
ESOP -- -- -- -- 164 -- -- 164
Distributions to Stow
officers/stockholders -- -- -- -- -- (611) -- (611)
Capital contribution -- -- 6,043 -- -- -- -- 6,043
Effect of change in year end -- -- -- -- -- (97) -- (97)
Transfer of undistributed earnings
to additional paid-in-capital -- -- 534 -- -- (534) -- --
Net income -- -- -- -- -- 9,467 -- 9,467
---------------------------------------------------------------------------------------------
Balances at July 31, 1997 17,357 174 51,842 -- (2,910) 24,854 (44) 73,916
Allocation of shares to
ESOP -- -- -- -- 163 -- -- 163
Transfer of undistributed loss to
additional paid-in-capital -- -- (1,837) -- -- 1,837 -- --
Issuance of common stock, net 818 8 17,479 -- -- -- (265) 17,222
Retirement of treasury stock -- -- (44) -- -- -- 44 --
Net income -- -- -- -- -- 13,085 -- 13,085
---------------------------------------------------------------------------------------------
Balances at July 31, 1998 18,175 $182 $ 67,440 $ -- $(2,747) $ 39,776 $(265) $ 104,386
Allocation of shares to
ESOP -- -- -- -- 163 -- -- 163
Other -- -- 19 -- -- -- -- 19
Issuance of common stock 74 -- 546 -- -- -- -- 546
Retirement of treasury stock -- -- (265) -- -- -- 265 --
Net income -- -- -- -- -- 13,467 -- 13,467
---------------------------------------------------------------------------------------------
Balances at July 31, 1999 18,249 $182 $ 67,740 $ -- $(2,584) $ 53,243 $ -- $ 118,581
=============================================================================================
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31,
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,467 $ 13,085 $ 9,467
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary loss on early extinguishment of debt, net of tax benefit -- -- 933
Depreciation and amortization 9,205 6,068 5,609
Gain on sale of business (1,397) -- --
(Gain) loss on disposals of property & equipment (195) 80 9
Accretion of original issue discount -- -- 153
Deferred income tax (benefit) expense (941) 184 (5)
Provision for doubtful accounts 1,995 2,462 2,112
Changes in assets and liabilities, net of acquired companies:
Accounts receivable (11,524) (5,911) (3,782)
Inventory (460) (14,111) (7,748)
Prepaid expenses (2,319) 1,175 (1,977)
Refundable income taxes (3,889) (165) --
Other assets 771 1,085 (1,299)
Notes receivable, trade 445 (71) (434)
Accounts payable 334 732 523
Accrued expenses 2,805 307 (1,704)
Income taxes payable -- (377) 73
-------- -------- --------
Net cash provided by operating activities 8,297 4,543 1,930
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of subsidiaries, net of cash acquired (8,888) (20,029) --
Proceeds from sale of business 7,086 -- --
Proceeds from disposals of property and equipment 1,477 545 111
Capital expenditures (6,610) (15,209) (3,875)
-------- -------- --------
Net cash used in investing activities (6,935) (34,693) (3,764)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under note payable 4,546 9,386 (23,029)
Repayments on long-term debt (4,337) (9,482) (22,276)
Proceeds from long-term debt -- 14,445 12,529
Principal payments of capital lease obligations (683) (980) (646)
Proceeds from issuance of common stock, net 564 17,222 35,510
Net borrowings on Stow Mills stockholder loans -- -- 560
Cash distributions to Stow officers/stockholders -- -- (611)
-------- -------- --------
Net cash provided by financing activities 90 30,591 2,037
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,452 441 203
Cash and cash equivalents at beginning of period 1,393 952 749
-------- -------- --------
Cash and cash equivalents at end of period $ 2,845 $ 1,393 $ 952
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,540 $ 4,897 $ 5,895
======== ======== ========
Income taxes $ 15,273 $ 11,938 $ 5,534
======== ======== ========
</TABLE>
In 1999, 1998 and 1997, the Company incurred capital lease obligations of
approximately $1,686, $316 and $582, respectively.
See notes to consolidated financial statements.
31
<PAGE>
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.
(b) Basis of Consolidation
The accompanying financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
(c) Cash Equivalents
Cash equivalents 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 and Other Long-Lived 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 long-lived 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 long-lived 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 two
customers in 1999, Whole Foods Market, Inc. and Wild Oats Markets, Inc.,
who provided 10% or more of the Company's revenue. Total net sales to Whole
Foods and Wild Oats in 1999 were approximately $143 million and $90
million, respectively. Whole Foods was the only customer in 1998 and 1997
who provided 10% or more of the Company's revenue. Total net sales to Whole
Foods were approximately $120 million and $89 million in 1998 and 1997,
respectively.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(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) Merger with Stow Mills
On October 31, 1997, 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.
(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 earnings per share replaces primary
earnings per share and the dilutive effect of stock options are excluded
from the calculation. Fully diluted earnings per share are replaced by
diluted earnings per share, and 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.
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 JULY 31,
(In thousands, except per share data) 1999 1998 1997
------ ------ ------
Basic weighted average shares outstanding 18,196 17,467 16,367
Net effect of dilutive stock options based
upon the treasury stock method 341 331 186
------ ------ ------
Diluted weighted average shares outstanding 18,537 17,798 16,553
====== ====== ======
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
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
Fiscal 1999
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. The final price will be determined
by March 2000. Albert's had sales of $47.8 million (unaudited) for its most
recent fiscal year ending December 31, 1997. This acquisition was accounted for
as a purchase with goodwill of approximately $9.1 million being amortized on a
straight-line basis over 40 years.
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. This acquisition was accounted
for as a purchase with goodwill of approximately $6.3 million being amortized on
a straight-line basis over 40 years.
On October 31, 1997, 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 and the year ended July 31 1997 for the
Company excluding Stow were approximately $116.5 million (unaudited) and $421.7
million, respectively. Net income for the quarter ended October 31, 1997 and the
year ended July 31, 1997 for the Company excluding Stow was $1.2 million
(unaudited) and $8.3 million, respectively. Net sales for the quarter ended
October 31, 1997 and the year ended July 31, 1997 for Stow were $56.9 million
(unaudited) and $213.1, respectively. Net (loss) income for the quarter ended
October 31, 1997 and the year ended July 31, 1997 for Stow was $(1.8) million
(unaudited) and $1.1 million, respectively.
(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 $11.9 million, $12.1
million and $9.3 million for 1999, 1998 and 1997, respectively, basic earnings
per share would have been $0.65, $0.69 and $0.57 for 1999, 1998 and 1997,
respectively, and diluted earnings per share would have been $0.64, $0.68 and
$0.56 for 1999, 1998 and 1997, respectively. The weighted average grant date
fair value of options granted during 1999, 1998 and 1997 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 1999, 1998 and
1997: 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 66.0%, 60.9% and 46.5% for
1999, 1998 and 1997, respectively. The effects of applying SFAS No. 123 in this
pro forma disclosure are not necessarily 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 2,000,000 shares of
common stock may be issued upon the exercise of options granted under the 1996
Stock Option Plan.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes the stock option activity for the fiscal
years ended July 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ -----------------
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 989,346 $13.02 654,500 $ 8.14 638,000 $ 8.11
Granted 80,000 $21.37 392,346 $21.47 16,500 $ 9.64
Exercised (74,087) $ 7.38 (27,500) $ 9.64 -- --
Forfeited (10,000) $20.25 (30,000) $20.25 -- --
------- ------- -------
Outstanding at end of year 985,259 $14.05 989,346 $13.02 654,500 $ 8.14
======= ======= =======
Options exercisable at year-end 490,913 $ 9.32 392,107 $ 7.38 382,978 $ 6.80
Weighted average fair value of
options granted during the year:
Exercise price equals stock price $ 15.54 $ 14.92 $ 5.85
Exercise price exceeds stock price -- $ 10.03 --
Stock price exceeds exercise price -- -- --
</TABLE>
The 985,259 options outstanding at July 31, 1999 had exercise prices and
remaining contractual lives as follows:
Exercise Price Number Remaining Contractual Life
-------------- ------ --------------------------
$6.38 255,750 7 Years
$9.64 220,000 7 Years
$10.60 82,500 2 Years
$20.25 205,917 8 Years
$20.06 35,000 10 Years
$21.38 30,000 10 Years
$22.28 41,092 3 Years
$24.19 100,000 8 Years
$24.38 15,000 9 Years
(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 four
subsequent amendments effective March 1997, July 1997, October 1997 and July
1999. 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 (8.25% at July 31, 1999 and
8.50% at July 31, 1998 and 1997) or 1.00% above the bank's London Interbank
Offered Rate ("LIBOR", 5.18% and 5.65625% at July 31, 1999 and 1998,
respectively), 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. The Company opted to pay 1.00%
above LIBOR for substantially all of fiscal 1999. Interest on approximately $6.2
million of the mortgage facility accrues at 7.36%, with the remainder to accrue
at 1.25% above the bank's LIBOR rate, although the Company has the option to fix
the variable portion for a period of five years at a rate of 1.25% above the
five-year U.S Treasury Note rate. At July 31, 1999 and 1998, the weighted
average interest rate on the line of credit was 6.23% and 6.66%, respectively.
The Company has pledged all of its assets as collateral for its obligations
under the credit agreement. As of July 31, 1999, the Company's outstanding
borrowings under the credit agreement totaled $63.4 million. The credit
agreement expires on July 31, 2002 and contains certain restrictive covenants.
The Company was not in compliance with one of its restrictive covenants at July
31, 1999 and was granted a waiver of this covenant by the bank.
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.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Notes payable to Stow officers/stockholders totaling $5.5 million at July
31, 1996 were due on demand and carried interest at 8.25%. The noteholders
waived rights to collect these notes through December 31, 1997, and accordingly,
that portion of the notes has been classified as long-term in the accompanying
combined balance sheets. These long-term notes were subordinated to all bank
debt. The total outstanding balance of the notes was contributed to capital as
of June 30, 1997.
(5) LONG-TERM DEBT
Long-term debt consisted of the following: (dollars in thousands)
<TABLE>
<CAPTION>
July 31, July 31,
1999 1998
---- ----
<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............................................................... $ 2,584 $ 2,734
Term loan payable to bank, secured by substantially all assets of the
Company, due $235 quarterly plus interest at 1.25% above LIBOR, balance
due July 31, 2002.......................................................... 4,955 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.......... 6,215 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 7.71%... 11,090 11,693
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 5.35% to 10%.................. 1,578 1,233
Real estate term loans payable to bank and others, secured by building and
other assets, with 15 year amortization due monthly and interest at 5%
and 8.55%, balance due July 31, 2002...................................... 1,630 --
Miscellaneous other notes payable............................................. -- 235
-------------------------
28,052 28,390
Less: current installments.................................................... 3,682 3,309
-------------------------
Long-term debt, excluding current installments................................ $ 24,370 $ 25,081
=========================
</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. The Company was not
in compliance with one of its restrictive covenants at July 31, 1999 and was
granted a waiver of this covenant by the bank.
36
<PAGE>
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, 1999:
(dollars in thousands)
2000.............. $ 3,682
2001.............. 2,114
2002.............. 20,162
2003.............. 163
2004.............. 163
Thereafter........ 1,768
-------
$28,052
=======
(6) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at July 31, 1999 and
1998:
<TABLE>
<CAPTION>
Estimated
Useful
(dollars in thousands) Lives (Years) 1999 1998
------------- ---- ----
<S> <C> <C>
Land ............................................. $ 1,535 $ 1,349
Building.......................................... 20-40 26,797 24,684
Leasehold improvements............................ 5-30 7,282 9,129
Warehouse equipment............................... 5-20 19,177 18,458
Office equipment.................................. 3-10 6,629 5,166
Motor vehicles.................................... 3-5 5,468 5,128
Equipment under capital leases.................... 5 3,758 2,851
Construction in progress.......................... 1,851 1,297
------- -------
72,497 68,062
Less accumulated depreciation and amortization.... 28,713 23,628
------- -------
Net property and equipment................... $43,784 $44,434
======= =======
</TABLE>
(7) CAPITAL LEASES
The Company leases computer, office and warehouse equipment under capital
leases expiring in various years through 2004. 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, 1999 for
each of the next five fiscal years and in the aggregate are:
Year ended July 31 (In thousands) Amount
- ------------------ -------
2000 ........................................................ $ 962
2001 ........................................................ 706
2002 ........................................................ 501
2003 ........................................................ 253
2004 and thereafter............................................. 98
-------
Total minimum lease payments............................... 2,520
Less: Amount representing interest.............................. 266
-------
Present value of net minimum lease payments................ 2,254
Less: current installments...................................... 833
-------
Capital lease obligations, excluding current installments.. $ 1,421
=======
(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,
1999.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Future minimum annual fixed payments required under non-cancelable
operating leases having an original term of more than one year as of July 31,
1999 are as follows:
(In thousands)
2000........................... $ 7,738
2001........................... 6,326
2002........................... 4,844
2003........................... 3,491
2004........................... 2,538
2005 and thereafter............ 12,948
--------
$ 37,885
========
Rent and other lease expense for the years ended July 31, 1999, 1998 and
1997 totaled approximately $7.2 million, $17.5 million and $7.1 million,
respectively.
Outstanding commitments as of July 31, 1999 for the purchase of inventory
were approximately $5.7 million. The Company had outstanding letters of credit
of approximately $2.4 million at July 31, 1999.
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 $1.0 million, $0.8 million and $0.6 million for the years ended
July 31, 1999, 1998 and 1997, respectively.
(10) INCOME TAXES
Total Federal and state income tax expense consists of the following:
(In thousands) Current Deferred Total
------- -------- -----
Fiscal year ended July 31, 1999:
U.S. Federal....................... $ 9,447 $(811) $ 8,636
State and local.................... 1,619 (129) 1,490
------- ----- -------
$11,066 $(940) $10,126
======= ===== =======
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
======= ===== =======
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Total income tax expense was different than the amounts computed using the
United States statutory income tax rate (35%) 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) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense ......................... $ 8,258 $ 8,633 $ 5,505
State and local income tax, net of Federal income tax
benefit ................................................ 968 1,736 1,078
Effect of entities not taxed for Federal income tax ....... -- 383 (401)
Rate differential ......................................... -- -- (100)
Merger related expenses ................................... -- 491 --
Non-deductible expenses ................................... 155 84 42
Non-deductible amortization ............................... 79 15 16
Other, net ................................................ 666 238 (166)
------- ------- -------
$10,126 $11,580 $ 5,974
======= ======= =======
</TABLE>
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,
1999 and 1998 are presented below:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Inventories, principally due to additional costs inventoried for tax
purposes ............................................................. $ 958 $ 1,338
Intangible assets ....................................................... -- 242
Compensation and benefit related ........................................ 792 705
Accounts receivable, principally due to allowances for uncollectible
accounts ............................................................. 382 174
Other ................................................................... 136 61
------- -------
Total gross deferred tax assets .................................... 2,268 2,520
Less valuation allowance ..................................................... -- --
------- -------
Net deferred tax assets ............................................ 2,268 2,520
------- -------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation ..... 495 1,255
Reserve for LIFO inventory method ....................................... 611 994
Intangible assets ....................................................... 21 --
Other ................................................................... 88 101
------- -------
Total deferred tax liabilities ..................................... 1,215 2,350
------- -------
Net deferred tax assets ...................................................... $ 1,053 $ 170
======= =======
Current deferred income tax assets ........................................... $ 1,765 $ 1,540
Non-current deferred income tax liabilities .................................. (712) (1,370)
------- -------
$ 1,053 $ 170
======= =======
</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 UNF 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.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 1999, 1998 and 1997 contributions totaling approximately
$0.4 million, $0.4 million and $0.5 million, respectively, were made to the
Trust. Of these contributions, approximately $0.3 million each year represented
interest.
The ESOP shares were classified as follows:
July 31, July 31,
(In thousands) 1999 1998
---- ----
Allocated shares.................... 726 638
Shares released for allocation...... 88 88
Shares distributed to employees..... (261) (164)
Unreleased shares................... 1,386 1,474
----- -----
Total ESOP shares.............. 1,939 2,036
===== =====
The fair value of unreleased shares was approximately $26.0 million at July
31, 1999.
(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.
(13) BUSINESS SEGMENTS
The Company has several operating segments aggregated under the
distribution segment, which is the Company's only reportable segment. These
operating segments have similar products and services, customer types,
distribution methods and historical margins. The distribution segment is engaged
in independent national distribution of natural foods and related products in
the United States. Other operating segments include the retail segment, which
engages in the sale of natural foods and related products to the general public
through retail storefronts on the east coast of the United States, and a segment
engaging in trading, roasting and packaging of nuts, seeds, dried fruit and
snack items. These other operating segments do not meet the quantitative
thresholds for reportable segments and are therefore included in an "other"
caption in the segment information. The "other" caption also includes corporate
expenses that are not allocated to operating segments.
Following is business segment information for the periods indicated:
Distribution Other Eliminations Consolidated
1999
Revenue $806,013 $ 72,860 $ (21,875) $856,998
Operating Income $ 26,242 $ 422 $ 152 $ 26,816
Amortization and Depreciation $ 7,819 $ 1,386 $ - $ 9,205
Capital Expenditures $ 7,354 $ 942 $ - $ 8,296
Assets $357,401 $ 18,824 $(138,324) $237,901
1998
Revenue $691,389 $ 49,977 $ (12,456) $728,910
Operating Income $ 29,454 $ (544) $ 134 $ 29,044
Amortization and Depreciation $ 4,931 $ 1,137 $ - $ 6,068
Capital Expenditures $ 14,107 $ 1,417 $ - $ 15,524
Assets $252,716 $ 30,845 $ (71,319) $212,242
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Distribution Other Eliminations Consolidated
1997
Revenue $614,177 $ 28,271 $ (7,623) $634,825
Operating Income $ 21,689 $ 738 $ (94) $ 22,333
Amortization and Depreciation $ 4,833 $ 776 $ -- $ 5,609
Capital Expenditures $ 3,639 $ 436 $ -- $ 4,075
Assets $169,368 $ 7,569 $ (12,376) $164,561
(14) RESTRUCTURING COSTS
In connection with the consolidation of operations in the Eastern Region,
we accrued employee severance expenses and employee retention expenses of $0.8
million and $0.7 million, respectively, and recorded incremental depreciation of
$2.4 million for the year ended July 31, 1999. Less than $0.2 million of the
retention and severance expenses had been paid as of July 31, 1999 with the
remaining amounts expected to be paid during fiscal 2000. The incremental
depreciation was to reduce the book value of the Chesterfield, New Hampshire
facility, which is being held for sale, to its estimated net realizable value.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly operating results and share data. There were
no dividends paid or declared during 1999 and 1998, and the Company anticipates
that it will continue to retain earnings for use in its business and not pay
cash dividends in the foreseeable future.
<TABLE>
<CAPTION>
(In thousands except per share data) First Second Third Fourth Full Year
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Net sales $199,889 $215,748 $226,892 $214,469 $856,998
Gross profit 42,614 46,208 47,939 39,936 176,697
Income before income taxes 8,163 8,405 9,350 (2,325) 23,593
Net income (loss) 4,779 4,916 5,119 (1,347) 13,467
Per common share income (loss)
Basic: $ 0.26 $ 0.27 $ 0.28 $ (0.07) $ 0.74
Diluted: $ 0.26 $ 0.27 $ 0.28 $ (0.07) $ 0.73
Weighted average basic
shares outstanding 18,175 18,175 18,183 18,249 18,196
Weighted average diluted
shares outstanding 18,537 18,538 18,512 18,249 18,537
Market Price
High 29 1/2 29 1/4 29 3/4 29 1/4 29 3/4
Low 19 22 1/2 17 3/4 17 1/4 17 1/4
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
</TABLE>
41
<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 1999 (the "1999 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 1999 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 1999 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 1999 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
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.
42
<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.
On August 18, 1999, the Company filed a Current Report on Form 8-K
dated August 12, 1999 announcing under Item 5 (Other Events) a press release
regarding the resignation of the Chief Financial Officer and a director and the
appointment of an interim Chief Financial Officer, and presenting under Item 7
(Financial Statements, Pro-Forma Financial Information and Exhibits) the
following information:
EXHIBITS
99 Press Release dated August 12, 1999.
43
<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/ KEVIN T. MICHEL
-----------------------------
Kevin T. Michel
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: October 29, 1999
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, 1999
- ----------------------- (Principal Executive Officer)
Norman A. Cloutier
/s/ MICHAEL S. FUNK Vice Chairman of the Board and President October 29, 1999
- -----------------------
Michael S. Funk
/s/ KEVIN T. MICHEL Chief Financial Officer and Director October 29, 1999
- ----------------------- (Principal Financial and Accounting Officer)
Kevin T. Michel
/s/ JOSEPH M. CIANCIOLO Director October 29, 1999
- -----------------------
Joseph M. Cianciolo
Director October 29, 1999
- -----------------------
Richard J. Williams
/s/ THOMAS B. SIMONE Director October 29, 1999
- -----------------------
Thomas B. Simone
Director October 29, 1999
- -----------------------
Gordon D. Barker
/s/ RICHARD S. YOUNGMAN Director October 29, 1999
- -----------------------
Richard S. Youngman
</TABLE>
44
<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.
10.7*+ Employment Agreement between the Registrant, Mountain People's and
Michael S. Funk, dated February 20, 1996.
10.8*+ Non-competition Agreement between the Registrant and Norman A.
Cloutier, dated November 16, 1993.
10.9* 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.
10.10* Purchase and Sale Agreement between the Registrant and O.M. Killingly
Investment Company, dated March 31, 1995.
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* Lease, dated July 29, 1995, between Prem Mark, Inc. and the
Registrant.
10.14* Lease, dated July 12, 1990, between the Registrant and Sylvan and
Stanford Makover Joint Venture, as amended.
45
<PAGE>
Exhibit
No. Description
10.15* 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.
10.16*+ 1996 Employee Stock Purchase Plan.
10.17*** First Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated March 1, 1997.
10.18**** Second Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated July 1, 1997.
10.19xx Third Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated October 31, 1997.
10.20**** Lease dated July 11, 1997 between AmberJack, Ltd. and the Registrant.
10.21x+ Employment Agreement for Robert Cirulnick
10.22x+ Employment Agreement for Richard S. Youngman
10.23x+ Termination Agreement for Steven Townsend
10.24x+ Addendum to Incentive Stock Option Agreement for Steven H. Townsend
10.25xx Third Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated October 31, 1997.
10.26xx 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.
10.27 Fourth Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated July 31, 1999.
10.28 Lease dated August, 1998 between Valley Centre I, L.L.C. and the
Registrant.
21 Subsidiaries of the Registrant.
23 Consent of KPMG LLP.
27 Financial Data Schedule
Schedule II - Valuation and Qualifying Accounts and Report of
Independent Accountants thereon.
* 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.
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United Natural Foods, Inc.:
Under date of September 3, 1999, we reported on the consolidated balance sheets
of United Natural Foods, Inc. and subsidiaries as of July 31, 1999 and 1998 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended July 31, 1999, as
contained in the annual report on Form 10-K for the year 1999. 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 3, 1999 KPMG LLP
47
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
(in thousands)
Bad Debt Allowance
Year ended July 31, 1999 $1,780 $1,995 $1,478 $2,297
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
48
EXHIBIT 10.27
UNITED NATURAL FOODS, NC.
260 LAKE ROAD
DAYVILLE, CONNECTICUT 06241
As of July 31, 1999
FLEET CAPITAL CORPORATION
200 Glastonbury Boulevard
Glastonbury, Connecticut 06033
Re: Fourth Amendment to Amended and Restated Loan Agreement
Ladies and Gentlemen:
Reference is made to the Amended and Restated Loan and Security Agreement
dated February 20, 1996 as amended ("Loan Agreement") and all promissory notes,
mortgages, guaranties, agreements, documents and instruments entered into by
United Natural Foods, Inc., Mountain People's Warehouse Incorporated, Natural
Retail Group, Inc., Rainbow Natural Foods, Inc., Nutrasource, Inc., Stow Mills,
Inc. and RB Acquisition L.L.C. (collectively, the "Borrowers") and any other
person or obligor pursuant thereto (collectively, the "Loan Documents") with or
for the benefit of Fleet Capital Corporation ("Agent" or "FCC") and the
financial institutions identified under the caption "Lenders" on the signature
page to that Agency and Interlender Agreement dated as of December 1, 1997 (the
"Interlender Agreement"). Except as otherwise defined herein, capitalized terms
used herein shall have the meanings given them in the Loan Agreement. This
Fourth Amendment to Loan Agreement is referred to as the "Fourth Amendment".
1. Background. The Borrowers have requested that the Lenders waive the
Borrowers' noncompliance on July 31, 1999 with Section 8.3.4 of the Loan
Agreement and agree to amend such Section.
2. Waiver. The Lenders waive Borrowers' non-compliance with Section 8.3.4.
as of July 31, 1999.
3. Amendments to the Loan Agreement. Subject to the satisfaction of the
terms and conditions hereof, Lenders and Borrowers agree that the Loan Agreement
be deleted in its entirety and the following substituted in its place:
"8.3.4. Cash Flow. Achieve Cash Flow of not less than $1,000,000 at
each fiscal quarter end for the period of the prior four consecutive
fiscal quarters of the Borrowers."
4 Representations and Warranties.
To induce Lenders to enter into this Fourth Amendment, each Borrower
warrants, represents and covenants to the Lenders and Agent that
(a) Organization and Qualification. Each Borrower is a corporation
duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. Each Borrower is duly
qualified or is authorized to do business and is in good standing as a
foreign corporation or limited liability company in all states and
jurisdictions in which the failure of such Borrower to be so qualified
<PAGE>
would have a material adverse effect on the financial condition,
business or properties of such Borrower.
(b) Corporate Power and Authority. Each Borrower is duly authorized
and empowered to enter into, execute, deliver and perform this Fourth
Amendment and each of the Loan Documents to which it is a party. The
execution, delivery and performance of this Fourth Amendment and each
of the other Loan Documents have been duly authorized by all necessary
corporate action and do not and will not (i) require any consent or
approval of the shareholders or members of a Borrower; (ii) contravene
any Borrower's charter, by-laws or operating agreement; (iii) violate,
or cause Borrower to be in default under, any provision of any law,
rule, regulation, order, writ, judgment, injunction, decree,
determination or award in effect having applicability to any Borrower;
(iv) result in a breach of or constitute a default under any indenture
or loan or credit agreement or any other agreement, lease or
instrument to which any Borrower is a party or by which Borrower's
Properties may be bound or affected; or (v) result in, or require, the
creation or imposition of any Lien (other than Permitted Liens) upon
or with respect to any of the Properties now owned or hereafter
acquired by Borrower.
(c) Legally Enforceable Agreement. This Fourth Amendment and each of
the other Loan Documents when delivered under this Fourth Amendment
will be, a legal, valid and binding obligation of each Borrower,
enforceable against each Borrower in accordance with its respective
terms.
(d) No Material Adverse Change. Since the date of the last financial
statements provided by the Borrowers to the Lenders, there has been no
material adverse change in the condition, financial or otherwise, of
any Borrower as shown on the Consolidated balance sheet as of such
date and no change in the aggregate value of the Collateral, except
changes in the ordinary course of business, none of which individually
or in the aggregate has been materially adverse.
(e) Continuous Nature of Representations and Warranties. Each
representation and warranty contained in the Loan Agreement and the
other Loan Documents remains accurate, complete and not misleading in
any material respect on the date of this Fourth Amendment, except for
representations and warranties that explicitly relate to an earlier
date and changes in the nature of any Borrower's business or
operations that would render the information in any exhibit attached
thereto either inaccurate, incomplete or misleading, so long as such
changes were disclosed in the Form S-1 Registration Statement of UNF
as filed with the Securities and Exchange Commission on September 4,
1996, as amended, in the amended Exhibits attached hereto or Lenders
have consented to such changes or such changes are expressly permitted
by the Loan Agreement.
5. Conditions Precedent.
Notwithstanding any other provision of this Fourth Amendment or any of
the other Loan Documents, and without affecting in any manner the rights of
Lenders under the other sections of this Fourth Amendment, this Fourth Amendment
shall not be effective as to Lenders unless and until each of the following
conditions has been and continues to be satisfied (the "Fourth Amendment Closing
Date"):
2
<PAGE>
(a) Documentation. Lenders shall have received, in form and substance
satisfactory to Lenders and their counsel, a duly executed copy of this Fourth
Amendment, together with such additional documents, instruments, opinions of
Borrowers' counsel and certificates as FCC and its counsel shall require in
connection therewith, all in form and substance satisfactory to Lenders and
their counsel.
(b) No Default. No Default or Event of Default shall exist except as
previously disclosed to and consented to by Lenders
(c) No Litigation. Except as previously disclosed to and consented to
by Lender, no action, proceeding, investigation, regulation or legislation shall
have been instituted, threatened or proposed before any court, governmental
agency or legislative body to enjoin, restrain or prohibit, or to obtain damages
in respect of, or which is related to or arises out of the Loan Agreement or
this Fourth Amendment or the consummation of the transactions contemplated
thereby or hereby.
6. Acknowledgment of Obligations.
Each Borrower hereby (1) reaffirms and ratifies all of the promises, agreements,
covenants and obligations to Lenders under or in respect of the Loan Agreement
and other Loan Documents as amended hereby and (2) acknowledges that it is
unconditionally liable for the punctual and full payment of all Obligations,
including, without limitation, all charges, fees, expenses and costs (including
reasonable attorneys' fees and expenses) under the Loan Documents, as amended
hereby, and that it has no defenses, counterclaims or setoffs with respect to
full, complete and timely payment and performance of all Obligations.
7. Confirmation of Liens.
Each Borrower acknowledges, confirms and agrees that the Loan Documents, as
amended hereby, are effective to grant to Agent and to Lenders duly perfected,
valid and enforceable first priority security interests and liens in the
Collateral described therein and that the locations for such Collateral
specified in the Loan Documents have not changed. Each Borrower further
acknowledges and agrees that all Obligations of such Borrower are and shall be
secured by the Collateral.
8. Miscellaneous.
Except as set forth herein, the undersigned confirms and agrees that the Loan
Documents remain in full force and effect without amendment or modification of
any kind. Each Borrower hereby acknowledges its obligation to pay to Lenders'
and Agent's reasonable attorneys' fees and costs incurred in connection with
this Fourth Amendment, as set forth in the Loan Agreement. The execution and
delivery of this Fourth Amendment by Lenders and Agent shall not be construed as
a waiver by Lenders of any Default or Event of Default under the Loan Documents.
This Fourth Amendment, together with the Loan Agreement and other Loan
Documents, constitutes the entire agreement between the parties with respect to
the subject matter hereof and supersedes all prior dealings, correspondence,
conversations or communications between the parties with respect to the subject
matter hereof. This Fourth Amendment and the transactions hereunder shall be
deemed to be consummated in the State of Connecticut and shall be governed by
and interpreted in accordance with the laws of that state. This Fourth Amendment
and the agreements, instruments and documents entered into pursuant hereto or in
connection herewith shall be "Loan Documents" under and as defined in the Loan
Agreement.
3
<PAGE>
EACH BORROWER HEREBY WAIVES SUCH RIGHTS AS IT MAY HAVE TO NOTICE AND/OR HEARING
UNDER ANY APPLICABLE FEDERAL OR STATE LAWS INCLUDING, WITHOUT LIMITATION,
CONNECTICUT GENERAL STATUTES SECTIONS 52-278A, ET-SEQ., AS AMENDED, PERTAINING
TO THE EXERCISE BY AGENT AND/OR LENDERS OF SUCH RIGHTS AS THE AGENT AND/OR
LENDERS MAY HAVE INCLUDING, BUT NOT LIMJTED TO, THE RIGHT TO SEEK PREJUDGMENT
REMEDIES AND/OR DEPRIVE BORROWERS OF OR AFFECT THE USE OF OR POSSESSION OR
ENJOYMENT OF BORROWERS' PROPERTY PRIOR TO THE RENDITION OF A FINAL JUDGMENT
AGAINST A BORROWER. EACH BORROWER FURTHER WAIVES ANY RIGHT IT MAY HAVE TO
REQUIRE AGENT AND/OR LENDERS TO PROVIDE A BOND OR OTHER SECURITY AS A
PRECONDITION TO OR IN CONNECTION WITH ANY PREJUDGMENT REMEDY SOUGHT BY AGENT
AND/OR LENDERS.
[remainder of page left intentionally blank]
4
<PAGE>
Executed under seal on the date set forth above.
ATTEST: UNITED NATURAL FOODS, INC.
By: /s/ Kevin T. Michel
Name: Kevin T. Michel
Title: Chief Financial Officer
ATTEST: MOUNTAIN PEOPLE'S WAREHOUSE, INC.
By: /s/ Kevin T. Michel
Name: Kevin T. Michel
Title: Chief Financial Officer
ATTEST: NATURAL RETAIL GROUP, INC.
By: /s/ Kevin T. Michel
Name: Kevin T. Michel
Title: Chief Financial Officer
ATTEST: NUTRASOURCE, INC.
By: /s/ Kevin T. Michel
Name: Kevin T. Michel
Title: Chief Financial Officer
ATTEST: RAINBOW NATURAL FOODS, INC.
By: /s/ Kevin T. Michel
Name: Kevin T. Michel
Title: Chief Financial Officer
ATTEST: STOW MILLS, INC.
By: /s/ Kevin T. Michel
Name: Kevin T. Michel
Title: Chief Financial Officer
ATTEST: RB ACQUISITION, L.L.C.
By: /s/ Kevin T. Michel
Name: Kevin T. Michel
Title: Chief Financial Officer
5
<PAGE>
Accepted in Glastonbury, Connecticut on September 10, 1999
FLEET CAPITAL CORPORATION, as Agent
By: /s/Howard Handman
Name: Howard Handman
Title: Senior Vice President
FLEET CAPITAL CORPORATION, as a Lender
By: /s/Howard Handman
Name: Howard Handman
Title: Senior Vice President
FIRST UNION NATIONAL BANK OF CONNECTICUT, as a Lender
By: /s/ Stephen T. Doresh
Name: Stephen T. Doresh
Title: Vice President
NATIONS BANK, N A., as a Lender
By:
Name:
Title:
6
EXHIBIT 10.28
LEASE AGREEMENT
Basic Lease Information
Lease Date: August 3, 1998
Lessor: Valley Centre I, L.L.C.
Lessor's Address: 1109 First Avenue, Suite 500
Seattle, WA 98104
Lessee: United Natural Foods, Inc.,
a Delaware corporation
Lessee's Address: 12745 Earhart Avenue
Auburn, CA 95602
Park: Valley Centre Corporate Park
Lot: The tax parcel on which the Building is
located (Exhibit A), which is legally
described in Exhibit A-1.
Building: The approximate 320,710 square foot building
to be constructed on the Lot by Lessor in
which the Premises will be located.
Premises: Approximately 204,804 square feet as outlined
in red on Exhibit A.
Premises Address: To Be Determined
Auburn, Washington
Term: ten (10) years commencing on. the
Commencement Date defined in Section 2,
subject to extension as provided in Section
30.
Early Occupancy Date: Twelve (12) weeks prior to the anticipated
completion of Lessor's Work defined in
Section 2.
Base Rent Schedule: Month 1: $ 0
Month 2 through 36: $ 62,762
Month 37-60: $ 65,931
Month 61-96; $ 69,577
Months 97-120 $ 74,955
<PAGE>
Lessee's Share of Operating Expenses: 58.58%
Lessee's Share of Tax Expense: 58.58%
Lessee's Share of Common Utility Expenses: 58.58%
Permitted Uses: Any lawful purpose including general
office, receiving, storing, shipping,
assembly, light manufacturing, and selling
products, materials and merchandise made
and/or distributed by Lessee.
Insurance Amount: Bodily injury limit of not less than
$1,000,000.00 per occurrence. Property damage
limit of not less than $1,000,000.00 per
occurrence.
Parking Spaces: Lessee's pro rata share of the common area
parking at the Premises which shall include
not fewer than 120 spaces.
Exhibits: Exhibit A - Premises
Exhibit B - Work Letter
Exhibit C - Exclusion From Operating Expenses
Exhibit D - Rules and Regulations
(ii)
<PAGE>
LEASE AGREEMENT
This Lease is made and entered into as of the Lease Date included in the
Basic Lease Information as set forth on pages (i) and (ii). The Basic Lease
Information is incorporated by reference herein, and the Basic Lease Information
and this Lease are and shall be construed as a single instrument.
1. Premises:
Lessor hereby leases to Lessee upon the terms and conditions contained herein
the Premises, together with (a) any and all easements, appurtenances, rights,
privileges and benefits now or hereafter belonging thereto or commonly enjoyed
therewith and (b) the right to use in common with Lessor and other lessees of
the Park, the Common Areas (defined below).
2. Commencement Date: The Term and the obligation to pay Rent shall commence on
the date (the "Commencement Date") which is the earlier of (a) the date of
Substantial Completion (as defined in Section 4.E) of Lessor's Work (defined
below) or (b) the date on which Lessee commences business in the ordinary course
in the Premises, and terminate on the date (the "Expiration Date") which is ten
(10) years after the Commencement Date or, if the Commencement Date is not the
first day of a month, on the tenth anniversary of the last day of the month in
which the Commencement Date occurs. Lessor shall permit Lessee to occupy the
Premises on the Early Occupancy Date at Lessee's risk in order to perform
Lessee's Work (defined in the Work Letter) attached hereto as Exhibit B and
incorporated by reference herein) and, to the extent
<PAGE>
permitted under applicable laws, to deliver inventory to the Premises. Occupancy
by Lessee prior to the Commencement Date shall be subject to the terms of this
Lease, except Sections 3, 5, 7 and 10. References to the "Term of this Lease"
shall mean the original term as provided in this Section 2 and any Additional
Term (defined below) pursuant to Section 30.
3. Rent: Beginning on the Commencement Date, Lessee
shall pay to Lessor, without prior notice or demand, the Base Rent shown in the
Basic Lease Information, payable in advance at Lessor's address shown in the
Basic Lease Information on the first day of each month throughout the term of
the Lease. The term "Rent" as used in this Lease shall mean the Base Rent and
Lessee's share of Operating Expenses and Tax Expenses and Utilities as specified
in Sections 5.A, 5.B, and 6 of this Lease.
4. Construction:
A. Lessor's Work. Lessor, at its cost and expense, shall be responsible
for the construction of the Building and Common Areas and other improvements
(collectively, "Lessor's Work") as provided in the Work Letter.
B. Lessee's Work. Lessee, at its cost and expense shall be responsible for
the construction of Lessee's Work as defined in the Work Letter.
C. Redecoration Allowance. On the fifth anniversary of the Commencement
Date and on the first day of each Additional Term if this Lease remains in
effect, Lessor shall pay Lessee $40,000 to
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defray Lessee's costs of redecorating and refurbishing the Premises.
D. Completion of Construction. Lessor shall promptly commence and
diligently proceed to complete Lessor's Work on or before March 1, 1999 (the
"Anticipated Completion Date"). If Substantial Completion has not occurred on or
before April 30, 1999, Lessee shall have the right at any time thereafter to
terminate this Lease upon not less than thirty (30) days prior written notice to
Lessor, as Lessee's sole and exclusive remedy for Lessor's failure to
substantially complete Lessor's Work by such date, unless during such period,
Substantial Completion shall have occurred. In addition, if Substantial
Completion has not occurred on or before April 30, 1999, and (a) if Lessee is
required to reimburse or pay to a Sublessee Holdover Rent (as defined in each
Sublease), Lessor shall reimburse Lessee for all such amounts and (b) if a
Sublease (defined below) is terminated by a Sublessee or Lessee, Lessor shall
pay to Lessee all amounts which would have been paid to Lessee under the
applicable Sublease. All amounts payable to Lessee pursuant to this Section 4.E
shall be paid within ten (10) days of written request accompanied by reasonable
evidence of the amounts payable.
E. Substantial Completion. For purposes of this Lease, the term
"Substantial Completion" means completion of Lessor's Work in accordance with
the Work Letter as certified by (i) the architect for the Building, except
so-called "punch list" items not exceeding $37,500, in the aggregate, the
failure of which to complete does
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not interfere with Lessee's use of the Premises and Common Areas, and (ii) the
delivery of a certificate of occupancy by appropriate public officials having
jurisdiction confirming Lessee's right to occupy and use the Premises and Common
Areas in accordance with applicable laws, or if such certificate is not
available by reason of uncompleted Lessee's Work, other written evidence that
such certificate will be issued upon completion of Lessee's Work in accordance
with applicable laws.
F. Common Areas. For purposes of this Lease, the term "Common Areas" shall
mean and include, but not be limited to, any and all parking areas, roads,
streets, drives, passageways, sidewalks, landscaped areas, ramps, walkways,
entrances and exits, curb-cuts, lighting equipment, surface drainage facilities,
traffic control signs, fences, retaining walls, and other common areas and
improvements from time to time located on the Lot or in the Park. Without
Lessee's prior written consent, Lessor or its lessees shall not construct any
building, structure or improvement in those portions of the Lot and Park
designated as "NO BUILD AREA" on Exhibit A.
5. Expenses:
A. Operating Expenses. In addition to the Rent set forth in Section 3,
Lessee shall pay its share, which is defined in the Basic Lease Information, of
all Operating Expenses. "Operating Expenses" are defined as the all reasonable
amounts reasonably incurred and paid by Lessor in connection with the ownership,
maintenance, repair and operation of the Premises, the Building and
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the Park, and where applicable, of the Lot, except Operating Expenses shall not
include any of the amounts described in Exhibit C.
Operating Expenses may include, but are not limited to:
(a) Lessor's cost of non-structural repairs to and maintenance of
the roof and exterior walls of the Building, including patching of the roof and
roof membrane;
(b) Lessor's cost of maintaining the outside paved area, landscaping
and other common areas of the Park;
(c) Lessor's annual cost of all risk and other insurance including
earthquake endorsements for the Building and the Park and rental loss insurance;
(d) Lessor's cost of modifications to the Building occasioned by any
rules, laws or regulations effective subsequent to the Commencement Date;
(e) Lessor's cost of modifications to the Building occasioned by any
rules, laws or regulations arising from Lessee's use of the Premises regardless
of when such rules, laws or regulations became effective, excluding such costs
relating to Lessor's Work on account of rules, laws and regulations in effect as
of the time such work is performed;
(f) Lessor's cost of preventative maintenance contracts including,
but not limited to, contracts for elevator systems and heating, ventilation and
air conditioning systems, with bi-monthly service;
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(g) Lessor's cost of security and fire protection services for the
Park, if in Lessor's sole discretion such services are provided; and
(h) Reasonable management fees and expenses and reasonable
accounting fees and expenses.
B. Tax Expenses. In addition to the Rent set forth in Section 3, Lessee
shall pay its share, which is defined in the Basic Lease Information, of all
real property taxes applicable to the land and improvements included within the
Park. The term "Tax Expense" means and includes any form of tax, assessment,
general assessment, special assessment, lien, levy, bond obligation, license
fee, license tax, tax or excise on rent, or any other levy, charge or expense,
together with any statutory interest thereon, (individually and collectively,
the "Impositions"), now or hereafter imposed or required by any authority having
the direct or indirect power to tax, including any federal, state, county or
city government or any school, agricultural, lighting, drainage or other
improvement or special assessment district thereof, (individually and
collectively, the "Governmental Agencies") on any interest of Lessor or Lessee
or both (including any legal or equitable interest of Lessor or its mortgagee,
if any) in the Premises or the Building or the Park, including without
limitation:
(a) any Impositions upon, allocable to or measured by the area of
the Premises or the Building or the Park, or the rental payable hereunder,
including without limitation, any gross income tax or excise tax levied by any
Governmental Agencies with respect
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to the receipt of such rental (except any business and occupation taxes imposed
on Lessor's gross income);
(b) any Impositions upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair or use or occupancy by
Lessee of the Premises or any portion thereof;
(c) any Impositions upon or with respect to the building equipment
and personal property used in connection with the operation and maintenance of
the Building or the Park or upon or with respect to the furniture, fixtures and
decorations in the common areas of the Building or the Park;
(d) any Impositions upon this Lease or this transaction or any
document to which Lessee is a party creating or transferring an interest or an
estate in the Premises;
(e) any Impositions by Governmental Agencies (whether or not such
impositions constitute tax receipts) in substitution, partially or totally, of
any impositions now or previously included within the definition of real
property taxes, including those calculated to increase tax increments to
Governmental Agencies and to pay for such services as fire protection, water
drainage, street, sidewalk and road maintenance, refuse removal or other
governmental services formerly provided without charge to property owners or
occupants; or
(f) any and all reasonable costs, including without limitation, the
fees of attorneys, tax consultants and experts, reasonably incurred by Lessor in
negotiating or contesting the
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amount of such real property taxes in formal or informal proceedings before the
Governmental Agency imposing such real property taxes; provided, however, that
Impositions shall in no event include (i) Lessor's general income, inheritance,
estate, gift, franchise or transfer taxes, (ii) Impositions separately assessed
and directly attributable to particular improvements for the benefit of, or
owned by, other lessees of the Park or (iii) penalties, interest or late charges
on account of Lessor's failure to pay any of the Impositions, except to the
extent caused by Lessee's failure to pay its share of Impositions as provided in
this Section 7.B.
C. Payment of Expenses. Lessor shall estimate the Operating Expenses and
Tax Expense for the calendar year in which the Lease commences. Commencing on
the Commencement Date, one-twelfth (1/12th) of this estimate shall be paid by
Lessee to Lessor on the first day of each month of the remaining months of the
calendar year. Thereafter, Lessor may estimate such expenses as of the beginning
of each calendar year and require Lessee to pay one-twelfth (1/12th) of such
estimated amount as additional Rent hereunder on the first day of each month.
Not later than March 31 of the following calendar year, or as soon thereafter as
reasonably possible, including the year following the year in which this Lease
terminates, Lessor shall furnish Lessee with a true and correct accounting of
actual Operating Expenses and Tax Expense, and within thirty (30) days of
Lessor's delivery of such accounting, Lessee shall pay to Lessor, the amount of
any underpayment.
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Notwithstanding the foregoing, failure by Lessor to give such accounting by such
date shall not constitute a waiver of Lessor of its right to collect Lessee's
share of any underpayment. Lessor shall credit the amount of any overpayment by
Lessee toward the next estimated monthly installment(s) falling due, or where
the term of the Lease has expired, refund the amount of overpayment to Lessee.
D. Limitation. Notwithstanding the foregoing, in no event shall the
aggregate amount of Lessee's share of Operating Expenses and Tax Expense during
the first thirty-six (36) months of the Term exceed $405,803.52.
6. Utilities: Lessee shall pay the cost of all water, sewer use and connection
fees, gas, heat, electricity, telephone and other utilities billed or metered
separately to Lessee, except the cost of constructing utility lines and
installing utility meters included in Lessor's Work. For utility fees or use
charges that are not billed separately to Lessee, Lessee shall pay the amount
which Lessor reasonably determines by survey, separate meter or similar means is
attributable to Lessee's use of the Premises. In addition, Lessee shall within
fifteen (15) days after receiving a bill from Lessor pay Lessor its share, which
is described on page 1, of any common area utility costs.
7. Late Charges: Lessee acknowledges that late payment by Lessee to Lessor of
Rent, Lessee's share of Operating Expenses, Tax Expenses, utility costs or other
sums due hereunder, will cause Lessor to incur costs not contemplated by this
Lease and the exact
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amount of such costs are extremely difficult and impracticable to fix. Such
costs, include without limitation, processing and accounting charges, and late
charges that may be imposed on Lessor by the terms of any note secured by any
encumbrance against the Premises. Therefore, in the event any installment of
Rent or other sum remains unpaid for more than five (5) days from the date due,
upon Lessor's written request made within thirty (30) days of the date payment
was due, Lessee shall pay Lessor, a late charge of five percent (5%) of the
overdue amount; provided, however, that Lessor shall give one (1) written notice
during each year before assessing such late charge. The parties agree that this
late charge represents a fair and reasonable estimate of the costs that Lessor
will incur by reason of late payment by Lessee. Acceptance of any late charge
without concurrent or prior payment of the overdue amount shall not constitute a
waiver of Lessee's default with respect to the overdue amount, nor prevent
Lessor from exercising any of the other rights and remedies available to Lessor.
8. Use of Premises: The Premises are to be used for the uses stated in the Basic
Lease Information and for no other purposes without Lessor's prior written
consent. Lessee shall not do or permit anything to be done in or about the
Premises nor keep or bring anything therein which will increase the existing
rate of or affect any policy of fire or other insurance upon the Building or any
of its contents, or cause a cancellation of any insurance policy. Lessee shall
not do or permit anything to be done in or
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about the Premises which will unreasonably obstruct or interfere with the rights
of other tenants or occupants of the Building or other buildings in the Park or
injure or unreasonably annoy other tenants or use or allow the Premises to be
used for any improper, immoral, unlawful or objectionable purpose, nor shall
Lessee cause, maintain or permit any nuisance in, on or about the Premises.
Lessee shall not damage or deface or otherwise commit or suffer to be committed
any waste in or upon the Premises. Lessee shall honor the terms of all
covenants, conditions and restrictions relating to the Park listed in Exhibit D
hereto. Lessee shall honor the rules and regulations attached to and made a part
of this Lease and any other reasonable regulations of the Lessor related to
parking and the operation of the Building. All such rules and regulations shall
be uniformly applied and enforced.
9. Alterations and Additions: Lessee shall not install any signs, fixtures or
improvements to the Premises (collectively, "Alterations") without the prior
written consent of Lessor, which consent shall not be unreasonably withheld,
delayed or conditioned; provided, however, that Lessee shall make no structural
alterations and shall make no roof penetrations without Lessor's consent in
Lessor's sole discretion except as provided below. Lessor acknowledges that
Lessee may wish to expand freezer and cooler areas and equipment. Lessor agrees
that it will not unreasonably withhold its consent to such expansion provided
the structural integrity of the Building is maintained and the work is of a
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quality consistent with Lessee's Work. Lessor expressly consents to Lessee's
Work. Lessee shall keep the Premises and the property on which the Premises are
situated free from any liens arising out of any work performed, materials
furnished or obligations incurred by or on behalf of Lessee. Prior to the
commencement of Alterations involving a cost of more than Two Hundred Thousand
Dollars ($200,000), Lessor may require Lessee to post a completion bond for up
to 125% of the cost of the work. Lessee shall have the right to contest the
correctness or validity of any such lien if,within thirty (30) days of demand by
Lessor, it procures and records a lien release bond issued by a responsible
corporate surety in an amount sufficient to satisfy statutory requirements
therefor in the State of Washington. Lessee shall promptly pay or cause to be
paid all sums awarded to the claimant on its suit, and, in any event, before any
execution is issued with respect to any judgment obtained by the claimant in its
suit or before such judgment becomes a lien on the Premises, whichever is
earlier. Upon termination of this Lease, Lessee shall remove all signs,
fixtures, furniture and furnishings and if requested by Lessor, remove any
improvements made by Lessee (including freezers and coolers included in Lessee's
Work) and repair any damage caused by the installation or removal of such signs,
fixtures, furniture, furnishings and improvements and leave Premises in as good
condition as they were at the time of the commencement of this Lease, excepting
for reasonable wear and tear and damage by fire or casualty. Notwithstanding the
foregoing, Lessee may, without
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Lessor's consent, install and replace its trade fixtures and equipment and make
interior, non-structural alterations to the Premises.
10. Repairs and Maintenance: Lessee shall, at Lessee's sole cost and expense,
maintain the Premises in the condition delivered, reasonable wear and tear and
damage by fire or other casualty excepted, and in clean and safe condition.
Lessee shall keep the sidewalks, loading areas, driveways and other areas
immediately adjacent to the Premises free from rubbish and other debris. Lessee,
at its sole cost and expense, shall repair to its prior condition any damage to
the Premises caused by Lessee or its employees, agents, invitees, licensees or
contractors. Without limiting the generality of the foregoing, Lessee shall be
solely responsible for maintaining and repairing all plumbing, lighting,
electrical wiring and equipment within the Premises and interior walls. Lessee
shall repair and maintain the heating, ventilation and air conditioning ("HVAC")
systems for the Premises pursuant to a maintenance contract with a recognized
HVAC contractor.
Except for repairs rendered necessary by the negligence of Lessee, its
agents, employees and contractors, Lessor shall maintain, repair and replace, if
necessary, in good condition, reasonable wear and tear excepted, the roof,
foundations and exterior walls of the Building (exclusive of glass and exterior
doors within the Premises), utility and sewer pipes outside the Premises and all
parking areas, sidewalks, driveways and other Common Areas and to keep the
Common Areas in a neat, clean, safe,
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good and orderly condition. Lessor shall be responsible for the removal of all
snow and ice from the Common Areas. Except as otherwise provided in Section 5.A,
costs incurred by Lessor pursuant to this Section 10 shall be Operating
Expenses.
Except for normal maintenance and repair of the items outlined above,
Lessee shall have no right of access to or install any device on the roof of the
Building nor make any penetrations of the roof of the Building without the
express prior written consent of Lessor, except as set forth in the last
paragraph of Section 9. 11. Insurance: A. Lessee shall at all times during the
term of this Lease, and at its sole cost and expense, maintain workers
compensation insurance and comprehensive general liability insurance against
liability for bodily injury and property damage by reason of the use and
occupancy of the Premises by Lessee, its Authorized Representative (defined
below) and its invitees, with liability limits as set forth in the Basic Lease
Information with such insurance naming Lessor and any mortgagee of Lessor as an
additional insured and including such endorsements as may be reasonably required
by Lessor. In no event shall the limits of said policy or policies be considered
as limiting the liability of Lessee under this Lease.
All insurance required to be carried by Lessee under this Lease shall: (i)
be issued by insurance companies authorized to do business in the State of
Washington with a rating of A/VI or better as rated in the most recent edition
of Best's Insurance Reports; (ii) be issued as a primary policy, and (iii)
contain an
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endorsement requiring thirty (30) days' prior written notice from the insurance
company to both parties, and, if requested by Lessor, to Lessor's lender, before
cancellation or change in the coverage, scope, or amount of any policy. Each
policy or a certificate of the policy, together with evidence of payment of
premiums, shall be deposited with Lessor on or before the Commencement Date, and
on renewal of the policy not less than ten (10) days before the expiration of
the term of the policy.
B. Lessor shall at all times during the term of the Lease maintain
comprehensive general liability insurance on the Park (including the Building)
against liability for bodily injury and property damage with liability limits as
set forth in the Basic Lease Information. Lessor shall also maintain with
respect to the Park (including the Building) fire insurance with "all risk"
endorsements, including flood and earthquake, in an amount not less than the
full replacement cost thereof. All such insurance shall be issued by companies
and otherwise meet the standards set forth in the second paragraph of Section
11A.
12. Indemnity and Limitation of Liability:
A. Generally. Lessee agrees to save and hold Lessor harmless and indemnify
Lessor from and against all liabilities, charges and expenses (including
reasonable attorneys' fees, costs of court and expenses necessary in the
prosecution or defense of any litigation) by reason of injury to person or
property (a) occurring in, on or about the Premises resulting from the acts or
omissions of Lessee, its Authorized Representatives, its customers or invitees
and (b)
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occurring in, on or about the Building or the Park resulting from the acts or
omissions of Lessee or its Authorized Representatives. Lessor agrees to save and
hold Lessee harmless and indemnify Lessee from and against all liabilities,
charges and expenses (including reasonable attorneys' fees, costs of court and
expenses necessary in the prosecution or defense of any litigation) by reason of
injury to person or property occurring in, on or about the Premises or the
Building or the Park resulting from the acts or omissions of Lessor or its
Authorized Representatives. A party's obligation under this Section to indemnify
and hold the other party harmless shall be limited to the sum that exceeds the
amount of insurance proceeds, if any, received by the party being indemnified.
B. Concurrent Negligence of Lessor and Lessee. Notwithstanding Section
12.A above, in the event of concurrent negligence of Lessee, or its Authorized
Representatives, on the one hand, and that of Lessor, or its Authorized
Representatives, on the other hand, which concurrent negligence results in
damage to any persons or property occurring in, on or about the Premises or the
Building or the Park, either party's obligation to indemnify the other party as
set forth in Section 12.A shall be limited to the extent of the negligence of
the indemnifying party, or its authorized representatives, including the
indemnifying party's proportional share of costs and attorneys' fees incurred in
connection with any claims, actions or proceedings brought with respect to such
damage.
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C. Waiver of Worker's Compensation Immunity. The indemnification
obligations contained in this Section shall not be limited by any worker's
compensation, benefit or disability laws, and each indemnifying party hereby
waives (solely for the benefit of the indemnified party) any immunity that said
indemnifying party may have under the Industrial Insurance Act, Title 51 RCW and
similar worker's compensation, benefit or disability laws.
D. Provisions Specifically Negotiated. LESSOR AND LESSEE ACKNOWLEDGE BY
THEIR EXECUTION OF THIS LEASE THAT EACH OF THE INDEMNIFICATION PROVISIONS OF
THIS LEASE (SPECIFICALLY INCLUDING BUT NOT LIMITED THOSE RELATING TO WORKER'S
COMPENSATION BENEFITS AND LAWS) WAS SPECIFICALLY NEGOTIATED AND AGREED TO BY
LESSOR AND LESSEE.
E. Exemption of Lessor from Liability. Except as provided in Section 4.D,
and except for damage resulting from the negligence of Lessor or its Authorized
Representatives or as a result of any misrepresentation, breach of warranty or
failure to perform its obligations hereunder, Lessor shall not be liable to
Lessee for any damage to Lessee or Lessee's property, for any injury to or loss
of Lessee's business or for any damage or injury to any person from any cause.
F. Definitions. The term "Authorized Representatives" means any
shareholder, director, officer, partner, agent, employee or independent
contractor of either party.
13. Assignment and Subleasing:
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A. Lessee shall not assign or transfer this Lease or sublet more than
thirty percent (30%) of the Premises except to a Permitted Transferee (defined
below) without the written consent of Lessor, which shall not be unreasonably
withheld. If Lessee seeks to sublet or assign all or any portion of the Premises
for which Lessor's consent is required, Lessee shall give written notice (the
"Transfer Notice") together with a copy of the proposed sublease or assignment
agreement and all agreements collateral thereto, to Lessor at least thirty (30)
days prior to the commencement of the sublease or assignment. If Lessor has not
given Lessee written notice of its objection to the proposed assignment or
sublease within fifteen (15) days of receipt of the Transfer Notice, Lessor
shall be deemed to have consented thereto. Each permitted assignee or sublessee
shall assume and be deemed to assume this Lease and shall be and remain liable
jointly and severally with Lessee for payment of Rent and for the due
performance of, and compliance with all the terms, covenants, conditions and
agreements herein contained on Lessee's part to be performed or complied with,
for the term of this Lease. In the event of any sublease or assignment of all or
any portion of the Premises for which Lessor's consent is required where the
Rent reserved in the sublease or assignment exceeds the sum of (a) the Rent or
pro rata portion of the Rent, as the case may be, for such space reserved in the
Lease and (b) amounts payable by Lessee under the Current Lease not reimbursed
by a Sublessee, Lessee shall pay the Lessor monthly, as additional Rent, at the
same time as the monthly installments of Rent
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hereunder, one-half (1/2) of the excess of the Rent reserved in the sublease
over the Rent reserved in this Lease applicable to the sublease space.
B. For purposes of this Lease, the term "Permitted Transferee" means a
corporation or other business entity which controls, is controlled by, or is
under common control with, Lessee, and the term "control" means the ownership of
a majority of the outstanding voting stock or similar equity interest of such
corporation or other entity.
14. Subrogation: Subject to the approval of their respective insurers, Lessor
and Lessee hereby mutually waive their respective rights of recovery against
each other from any insured loss. Each party shall obtain any special
endorsements, if required by their insurer, to evidence compliance with the
aforementioned waiver.
15. Ad Valorem Taxes: Lessee shall pay before delinquent all taxes assessed
against the personal property of the Lessee and all taxes attributable to any
leasehold improvements made by Lessee.
16. Subordination; Landlord's Waiver:
A. This Lease is and shall be prior to any mortgage or deed of trust (a
"Mortgage") recorded after the date of this Lease affecting the Premises, the
Building, the Park or the Lot. If, however, a lender requires that this Lease be
subordinate to any Mortgage, this Lease shall be subordinate to that Mortgage if
Lessor first obtains from the lender a written agreement reasonably acceptable
to Lessee that provides substantially the following:
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"As long as Lessee performs its obligations under this Lease, no
foreclosure of, deed given in lieu of foreclosure of or sale under the
mortgage, and no steps or procedures taken under the mortgage, shall
affect Lessee's rights under this Lease."
Lessee shall attorn to any purchaser at any foreclosure sale, or to any
grantee or transferee designated in any deed given in lieu of foreclosure.
Lessee shall execute the written agreement and any other documents reasonably
required by the lender to accomplish the purposes of this Section.
B. Lessor agrees to pay and perform as and when due each of its
obligations under each Mortgage.
C. Lessor agrees to execute and deliver from time to time such documents
and instruments reasonably requested by Lessee's lenders waiving any security
interest of Lessor in any of Lessee's property, permitting such lender to enter
the Premises to enforce its rights against Lessee and including other customary
provisions; provided such agreement (i) requires lender to repair any damage to
the Premises caused in connection therewith and to pay Rent during any period of
occupancy and (ii) does not permit such lender to occupy the Premises for more
than sixty (60) days.
17. Right of Entry: Lessee grants Lessor or its agents the right to enter the
Premises at all reasonable times after twenty-four (24) hours notice for
purposes of inspection, exhibition, repair and alteration. Lessor shall at all
times have and retain a key with which to unlock all the doors in, upon and
about the Premises, excluding Lessee's vaults and safes, and Lessor shall have
the right to use any and all reasonable means Lessor deems necessary to
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enter the Premises in an emergency. Lessor shall also have the right to place
"for rent" and/or "for sale" signs on the outside of the Premises during the
last six (6) months of the term of this Lease. Lessee hereby waives any claim
from damages or for any injury or inconvenience to or interference with Lessee's
business, or any other loss occasioned thereby except for any claim for any of
the foregoing arising out of the negligent acts or omissions of Lessor or its
authorized representatives.
18. Estoppel Certificate: Upon the reasonable request of either party, at any
time or from time to time, Lessor and Lessee agree to execute, acknowledge and
deliver to the other, within twenty (20) days after request, a written
instrument, duly executed and acknowledged, (a) certifying that this Lease has
not been modified and is in full force and effect or, if there has been a
modification of this Lease, that this Lease is in full force and effect as
modified, stating such modifications, (b) specifying the dates to which the Rent
and other amounts have been paid, (c) stating whether or not, to the knowledge
of the party executing such instrument, the other party hereto is in default
and, if such party is in default, stating the nature of such default and (d)
stating whether or not, to the knowledge of the party executing such instrument,
there are then existing any set-offs or defenses against the enforcement of any
of the obligations hereunder upon the part of Lessor or Lessee, as the case may
be, to be performed or complied with and, if so, specifying the same. Any such
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statement may be conclusively relied upon by any prospective purchaser or
encumbrance of the Premises. Lessee's failure to deliver such statement within
such time shall be conclusive upon the Lessee that (x) this Lease is in full
force and effect, without modification except as may be represented by Lessor;
(y) there are no uncured defaults in the Lessor's performance, and (z) not more
than one month's rent has been paid in advance.
19. Lessee's Default: The occurrence of any one or more of the following events
shall constitute a default and breach of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by the Lessee.
(b) The failure by Lessee to make any payment of Rent or any other
payment required hereunder after receiving ten (10) days written notice that
Lessee has failed to make such payment by the date said payment is due.
(c) The failure of Lessee to observe, perform or comply with any of
the conditions or provisions of this Lease for a period of thirty (30) days
after written notice, or such additional time as may be reasonably required to
remedy the same by appropriate action promptly commenced and diligently
continued.
(d) Lessee becoming the subject of any bankruptcy (including
reorganization or arrangement proceedings pursuant to any bankruptcy act) or
insolvency proceeding whether voluntary or involuntary.
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(e) The use or storage by Lessee of Hazardous Materials on the
Premises other than as permitted by the provisions of Section 27 of this Lease
for a period of thirty (30) days after written notice or such additional time as
may be reasonably necessary to remedy the same by appropriate action promptly
commenced and diligently continued.
20. Remedies for Lessee's Default: In the event of Lessee's default or breach of
the Lease, Lessor may terminate Lessee's right to possession of the Premises by
any lawful means in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In addition, the
Lessor shall have the immediate right of re-entry, and if this right of re-entry
is exercised following abandonment of the Premises by Lessee, Lessor may
consider any personal property belonging to Lessee and left on the Premises to
also have been abandoned.
If Lessee breaches this Lease and abandons the property before the end of
the term, or if Lessee's right to possession is terminated by Lessor because of
a breach of the Lease, then in either such case, Lessor shall be entitled to
recover from Lessee all damages incurred by Lessor by reason of Lessee's default
including without limitation thereto, the following: (i) the worth at the time
of award of any unpaid Rent which had been earned at the time of such
termination; plus (ii) the worth at the time of award of the amount by which the
unpaid Rent which would have been earned after termination until the time of
award exceeds the amount
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of such rental loss that Lessee proves could have been reasonably avoided; plus
(iii) the worth at the time of award of the amount by which the unpaid Rent for
the balance of the Term after the time of award exceeds the amount of such
rental loss that is proved could be reasonably avoided; plus (iv) any other
amount necessary to compensate Lessor for all the detriment proximately caused
by Lessee's failure to perform its obligations under this Lease or which in the
ordinary course of things would be likely to result therefrom, including without
limitation, any reasonable costs or expenses incurred by Lessor in (A) retaking
possession of the Premises, including reasonable attorney fees therefor, (B)
maintaining or preserving the Premises after such default, (C) preparing the
Premises for reletting to a new Lessee, including repairs or necessary
alterations to the Premises for such reletting, (D) leasing commissions, and (E)
any other costs reasonably necessary or appropriate to relet the Premises; plus
(v) at Lessor's election, such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable state law. Upon
any such re-entry Lessor shall have the right to make any reasonable repairs,
alterations or modifications to the Premises, which Lessor in its reasonable
discretion deems necessary. As used in Subsection 20(i) the "worth at the time
of award" is computed by allowing interest at the rate of twelve percent (12%)
per year from the date of default. As used in Subsections 20(ii) and 20(iii) the
"worth at the time of award" is
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computed by discounting such amounts at the discount rate of twelve percent
(12%) per year.
The foregoing remedies are not exclusive; they are cumulative in addition
to any remedies now or later allowed by law or to any equitable remedies Lessor
may have, and to any remedies Lessor may have under bankruptcy laws or laws
affecting creditor's rights generally.
The waiver by Lessor of any breach of any term of this Lease shall not be
deemed a waiver of such term or of any subsequent breach thereof.
21. Holding Over: If Lessee holds possession of the Premises after the Term of
this Lease with Lessor's consent, Lessee shall become a tenant from month to
month upon the terms specified at a monthly Rent of one hundred twenty-five
percent (125%) of the Rent due on the last month of the Lease Term, payable in
advance on or before the first day of each month. All options, if any, granted
under the terms of this Lease shall be deemed terminated and be of no effect
during said month to month tenancy. Lessee shall continue in possession until
such tenancy shall be terminated by either Lessor or Lessee giving written
notice of termination to the other party at least thirty (30) days prior to the
effective date of termination.
22. Lessor's Default: Lessee agrees to give any holder of a deed of trust
encumbering the Premises and of which Lessee has actual notice ("Trust Deed
Holders"), by certified mail, a copy of any notice of default served upon the
Lessor by Lessee, provided that
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prior to such notice Lessee has been notified in writing (by way of actual
delivery of Notice of Assignment of Rents and Leases, or otherwise) of the
address of such Trust Deed Holder. Lessee further agrees that if Lessor shall
have failed to cure such default within the time, if any, provided for in this
Lease, then the Trust Deed Holders shall have an additional thirty (30) days
within which to cure such default or, if such default cannot be cured within
that time, then such additional time as may be necessary, if the Trust Deed
Holder has commenced and is diligently pursuing the remedies necessary to cure
such default (including but not limited to commencement of foreclosure
proceedings, if necessary to effect such cure), in which event this Lease shall
not be terminated while such remedies are being so diligently pursued. The
failure by Lessee to give any notice to a Trust Deed Holder pursuant to this
Section 22 shall not in any way release or limit Lessor's obligations to Lessee.
23. Sale of Premises: In the event of a sale of the Building and Lot (including
the Common Areas) and the assumption in writing by the purchaser of all
obligations of Lessor hereunder arising after such sale, Lessor shall have no
liability to Lessee on account of obligations of Lessor arising after such sale.
The foregoing shall not release Lessor of any obligations on account of acts or
events occurring prior to such sale.
24. Waiver: No delay or omission in the exercise of any right or remedy of
Lessor on any default by Lessee shall impair such a right of remedy or be
construed as a waiver. The subsequent acceptance
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of Rent by Lessor after breach by Lessee of any covenant or term of this Lease
shall not be deemed a waiver of such breach, other than a waiver of timely
payment for the particular Rent payment involved, and shall not prevent Lessor
from maintaining an unlawful detainer or other action based on such breach. No
payment by Lessee or receipt by Lessor of a lesser amount than the monthly Rent
and other sums due hereunder shall be deemed to be other than on account of the
earliest Rent or other sums due, nor shall any endorsement or statement on any
check or accompanying any check or payment be deemed an accord and satisfaction;
and Lessor may accept such check or payment without prejudice to Lessor's right
to recover the balance of such Rent or other sum or pursue any other remedy
provided in this Lease.
25. Casualty Damage: If the Premises or any part thereof shall be damaged by
fire or other casualty (a "Casualty"), Lessee shall give prompt written notice
thereof to Lessor. In case of Substantial Damage (described below), each of
Lessor and Lessee may, at its option, terminate this Lease as of the date of
such damage by notifying the other in writing of such termination within thirty
(30) days after the date of such damage. If this Lease is not terminated by
Lessor or Lessee, Lessor shall promptly commence to repair and restore the
Building and shall proceed with reasonable diligence to restore the Building and
the Premises within two hundred ten (210) days from the date of the Casualty
(except that Lessor shall not be responsible for delays outside its control) to
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substantially the same condition in which it was immediately prior to the
happening of the casualty, except that Lessor shall not be required to rebuild,
repair or replace any part of Lessee's furniture, furnishings or fixtures and
equipment removable by Lessee or, except to the extent of insurance proceeds
available therefor, any improvements installed by Lessee under the provisions of
this Lease. Lessor shall not be liable for any inconvenience or annoyance to
Lessee, injury to the business of Lessee, loss of use of any part of the
Premises by the Lessee or loss of Lessee's personal property resulting in any
way from such damage or the repair thereof. If this Lease is not terminated as
provided above, there shall be an appropriate abatement of Rent and other
amounts payable hereunder from the date of such damage until restoration
thereof, according to the extent to which Lessee is unable to use the Premises
and Common Areas in the ordinary course of its business. For purposes of this
Lease, "Substantial Damage" means damage or destruction to (a) the Building or
the Premises which, in the reasonable opinion of Lessor's independent architect
or engineer, cannot be repaired both (i) within two hundred ten (210) days from
the date of the Casualty and (ii) more than ninety (90) days prior to the
expiration of the term of this Lease, including any Additional Term the option
for which shall have been exercised or (b) the Common Areas which, in the
reasonable opinion of Lessee, materially interferes with the conduct of Lessee's
business and which cannot be repaired within the period set forth in clause (a).
Notwithstanding the foregoing, Lessor shall not in any event be
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required to spend for such work an amount in excess of the insurance proceeds
actually received by Lessor as a result of fire or other casualty. If Lessor is
unable to restore the Building and Premises to substantially their condition
prior to such casualty because insurance proceeds are not available, Lessee may
terminate this Lease.
26. Condemnation: If more than fifteen percent (15%) of the Premises is taken
for any public or quasi-public purpose of any lawful government power or
authority or sold to a governmental entity to prevent such taking, Lessee or
Lessor may terminate this Lease as of the date when physical possession of the
Premises is taken by the taking authority. If any portion of the Common Areas
designated as "Access and Parking" on Exhibit A which, in the reasonable opinion
of Lessee, materially interferes with the conduct of Lessee's business in the
ordinary course is so taken or sold and Lessor is unable to provide within a
reasonable time an alternative reasonably acceptable to Lessee, Lessee may
terminate this Lease as of the date when physical possession of such Common
Areas is taken by the taking authority. Lessee shall not because of such taking
assert any claim against Lessor or the taking authority for any compensation
because of such taking, and Lessor shall be entitled to receive the portion of
the award attributable to the Lot and Building without deduction for any estate
or interest of Lessee, and Lessee shall be entitled to receive the portion of
the award attributable to Lessee's furniture, fixtures
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and equipment and for business interruption. If this Lease is not terminated by
Lessor or Lessee, Lessor shall promptly proceed to restore the Premises,
Building or Common Areas to substantially the same condition prior to such
partial taking, allowing for the reasonable effects of such taking, and a
proportionate allowance shall be made to Lessee for the Rent and a reduction in
Lessee's share of other amounts shall be made, in each case corresponding to the
time during which, and to the part of the Premises of which, Lessee is deprived
and to the extent of the permanent interference with Lessee's business on
account of such taking and restoration. Lessor shall not be required to spend
funds for restoration in excess of the amount received by Lessor as compensation
awarded.
27. Environmental Matters/Hazardous Materials:
A. Hazardous Materials Disclosure Certificate. Concurrently with executing
this Lease, and within thirty (30) days of each anniversary of the Commencement
Date during the Term of this Lease, Lessee shall execute, and deliver to Lessor,
the Hazardous Materials Disclosure Certificate (the "HazMat Certificate") in
substantially the form attached hereto as Exhibit__, and any other reasonably
necessary documents as requested by Lessor.
B. Definition of Hazardous Materials. As used in this Lease, the term
Hazardous Materials shall mean and include (a) any hazardous or toxic wastes,
materials or substances, and other pollutants or contaminants, which are or
become regulated by any Environmental Laws; (b) petroleum, petroleum byproducts,
crude oil or any fraction thereof; (c) asbestos; (d) polychlorinated
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biphenyls; (e) radioactive materials; (f) any other material or substance
displaying toxic, reactive, ignitable or corrosive characteristics, as all such
terms are used in their broadest sense, and are defined or become defined by any
Environmental Law (defined below); or (g) any materials which cause a nuisance
upon or waste to the Premises, the Building, the Lot, the Park or any portion of
any of the foregoing.
C. Prohibition; Environmental Laws. Subject to the remaining provisions of
this Section 29, Lessee shall be entitled to use and store only those Hazardous
Materials that are necessary for Lessee's business and to the extent disclosed
in the HazMat Certificate, provided that such usage and storage is only to the
extent of the quantities of Hazardous Materials as specified in the then
applicable HazMat Certificate and provided further that such usage and storage
is in full compliance with any and all local, state and federal environmental,
health and/or safety-related laws, statutes, orders, standards, courts'
decisions, ordinances, rules and regulations (as interpreted by judicial and
administrative decisions), decrees, directives, guidelines, permits or permit
conditions, currently existing and as amended, enacted, issued or adopted in the
future which are or become applicable to Lessee or all or any portion of the
Premises (collectively, the "Environmental Laws"). Lessee agrees that any
changes to the type and/or quantities of Hazardous Materials specified in the
most recent HazMat Certificate may be implemented only with the prior written
consent of Lessor, which consent shall not be unreasonably
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withheld. The HazMat Certificate need not disclose minor quantities of cleaning
solvents, office products and similar materials used in the ordinary course of
business ("Excluded Materials"). Lessee shall not be entitled nor permitted to
install any tanks under, on or about the Premises for the storage of Hazardous
Materials without the express written consent of Lessor, which may be given or
withheld in Lessor's sole discretion. Lessor shall have the right at all times
during the Term of this Lease at reasonable times and upon reasonable notice to
(i) inspect the Premises, (ii) conduct tests and investigations to determine
whether Lessee is in compliance with the provisions of this Section 27 and (iii)
request lists of all Hazardous Materials used, stored or otherwise located on,
under or about the Premises, the Common Areas and/or the parking lots (to the
extent the Common Areas and/or parking lots are not considered part of the
Premises), except such lists need not include Excepted Materials or fuel and
similar materials in motor vehicles. The cost of all such inspections, tests and
investigations shall be borne solely by Lessor.
D. Lessee's Environmental Obligations. Lessee shall give to Lessor
immediate verbal and follow-up written notice of any spills, releases,
discharges, disposals, emissions, migrations, removals or transportation of
Hazardous Materials in violation of or required to be reported under
Environmental Laws on, under or about the Premises, or in any Common Areas or
parking lots (to the extent
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such areas are not considered part of the Premises). Lessee covenants and
warrants to promptly investigate, clean up, remove, restore and otherwise
remediate (including, without limitation, preparation of any feasibility studies
or reports and the performance of any and all closures) any spill, release,
discharge, disposal, emission, migration or transportation of Hazardous
Materials arising from or related to the intentional or negligent acts or
omissions of Lessee or Lessee's Representatives at Lessee's sole cost and
expense. Any such investigation, clean up, removal, restoration and other
remediation shall only be performed after Lessee has obtained Lessor's prior
written consent, which consent shall not be unreasonably withheld so long as
such actions would not potentially have a material adverse long-term or
short-term effect on the Premises, the Building, the Lot or the Park, or any
portion of any of the foregoing. Notwithstanding the foregoing, Lessee shall be
entitled to respond immediately to an emergency without first obtaining Lessor's
prior written consent. Lessee, at its sole cost and expense, shall conduct and
perform, or cause to be conducted and performed, all closures as required by any
Environmental Laws or any agencies or other governmental authorities having
jurisdiction thereof. If Lessee fails to so promptly investigate, clean up,
remove, restore, provide closure or otherwise so remediate as required by this
paragraph, Lessor may, but without obligation to do so, take any and all steps
necessary to rectify the same and Lessee shall promptly reimburse Lessor, upon
demand, for all reasonable costs and expenses to Lessor of
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performing investigation, clean up, removal, restoration, closure and
remediation work. All such work undertaken by Lessee, as required herein, shall
be performed in such a manner so as to enable Lessor to make full economic use
of the Premises, the Building, the Lot and the Park for lawful commercial
purposes after the satisfactory completion of such work.
E. Lessee's Environmental Indemnity. In addition to Lessee's obligations
set forth above, Lessee agrees to, and shall, protect, indemnify, defend (with
counsel reasonably acceptable to Lessor) and hold Lessor and Lessor's lenders,
partners, property management company (if other than Lessor), agents, directors,
officers, employees, representatives, contractors, shareholders, successors and
assigns and each of their respective partners, directors, employees,
representatives, agents, contracts, shareholders, successors and assigns
harmless from and against any and all claims, judgments, damages, penalties,
fines, liabilities, losses (including, without limitation, diminution in value
of the Premises, the Building, the Lot, the Park, or any portion of any of the
foregoing, damages for the loss of or restriction on the use of rentable or
usable space), suits, administrative proceedings and costs (including, but not
limited to, reasonable attorneys' and consultant fees and court costs) arising
at any time during or after the Term of this Lease in connection with or related
to, directly or indirectly, the use, presence, transportation, storage,
disposal, migration, removal, spill, release or discharge of Hazardous Materials
on, in or about the Premises, or in any Common
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Areas or parking lots (to the extent such areas are not considered part of the
Premises) as a result (directly or indirectly) of the intentional or negligent
acts or omissions of Lessee or Lessee's Authorized Representatives. Neither the
written consent of Lessor to the presence of Hazardous Materials on, under or
about the Premises nor the strict compliance by Lessee with all Environmental
Laws shall excuse Lessee and Lessee's officers and directors from its
obligations of indemnification pursuant hereto.
F. Lessor's Environmental Indemnity. Lessor agrees to, and shall, protect,
indemnify, defend (with counsel acceptable to Lessee) and hold Lessee and
Lessee's partners, agents, directors, officers, employees, representatives,
contractors, shareholders, successors and assigns and each of their respective
partners, directors, employees, representatives, agents, contractors,
shareholders, successors and assigns harmless from and against any and all
claims, judgments, damages, penalties, fines, liabilities, losses, suits,
administrative proceedings and costs (including, but not limited to, attorneys'
and consultant fees and court costs) arising at any time during or after the
Term of this Lease in connection with or related to, directly or indirectly, the
use, presence, transportation, storage, disposal, migration, removal, spill,
release or discharge of Hazardous Materials on, in or about the Premises, or in
any Common Areas or parking lots (to the extent such areas are not considered
part of the Premises) as a result (directly or indirectly) of the intentional or
negligent acts or omissions of Lessor or Lessor's Authorized Representatives.
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In addition, Lessor expressly agrees that Lessor shall protect, indemnify,
defend and hold Lessee and Lessee's partners, agents, directors, officers,
employees, representatives, contractors, shareholders, successors and assigns
harmless for any and all claims, judgments, damages, penalties, fines,
liabilities, losses, suits, administrative proceedings and costs arising at any
time during or after the term of this Lease related to, directly or indirectly,
any of the contamination and/or hazardous substances located on the Premises or
in any Common Areas or parking lots prior to execution of this Lease, including
the contamination and/or hazardous substances identified in the "Remedial Action
Summary and Site Closure Request, Former Sewage Lagoon Site, Auburn Washington",
dated February 25, 1998, by GeoEngineers, or any of the studies and/or reports
referenced in that document.
G. Lessor's Obligations. Lessor represents, warrants and agrees that,
except as set forth in the Remedial Action Summary and Site Closure Request
dated February 25, 1998 submitted by GeoEngineers, Inc. to the Washington
Department of Ecology:
(a) Lessor has not, and to the best of Lessor's knowledge no other
party, has used, generated, manufactured, produced, stored, released, discharged
or disposed of on, under or about the Premises or transported to or from the
Premises any Hazardous Material, except for any Hazardous Material used in the
ordinary operation, repair and maintenance of the Premises and Building.
(b) Lessor will not use, generate, manufacture, produce, store,
release, discharge or dispose of on, under or about the
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Premises or transport to or from the Premises any Hazardous Material, except for
any Hazardous Material used in the ordinary operation, repair and maintenance of
the Premises and Building.
(c) Lessor has not, and to the best of Lessor's knowledge no other
party has, removed any underground storage tanks from the Premises, and no
underground storage tanks are located on the Premises.
(d) Lessor will give prompt written notice to Lessee of:
(1) any proceeding or inquiry by any governmental authority
known to Lessor with respect to the presence of any Hazardous Material on the
Premises or relating to any loss or injury resulting from any Hazardous Material
not caused by Lessee;
(2) any action filed in State or Federal Court by any third
party against Lessor or the Premises relating to any loss or injury resulting
from any Hazardous Material; and
(3) Lessor's discovery as evidenced by receipt of written
notice from any governmental authority or agency or by receipt of any
environment report from a third party of any occurrence or condition on the
Premises that could cause the Premises or any part thereof to be subject to any
restrictions on occupancy or use of the Premises under any environmental law.
The provisions of Section 40D shall not apply to the obligations of Lessor
or in any way limit the obligations of Lessor set forth in this Section 27G.
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H. Survival. Lessee's and Lessor's obligations and liabilities pursuant to
the provisions of this Section 27 shall survive the expiration or earlier
termination of this Lease.
28. Right to Audit: Lessee shall have the right to inspect and audit Lessor's
books and records relating to actual Operating Expenses and Tax Expenses. Such
inspection and audit shall be conducted by Lessee during normal business hours
at the principal place of business of Lessor's Agent or such other place of
business of Lessor in the Seattle, Washington, area at which such books and
records shall be kept in the ordinary course of business. If Lessee does not
give Lessor notice of its intent to conduct such an inspection and audit within
twelve (12) months of the date on which Lessor furnished Lessee with a statement
for a calendar year during the Term, then such statement shall conclusively be
deemed to be true and correct and Lessee shall have no further right to audit
Lessor's books and records relating to actual Operating Expenses and Tax
Expenses for such calendar year. If it shall be determined as a result of such
audit that the Statement overstated the actual Operating Expenses and Tax
Expenses, then Lessor shall immediately pay to Lessee an amount equal to
Lessee's share of the amount by which the actual Operating Expenses and Tax
Expenses were overstated. In addition, if the statement overstated the actual
Operating Expenses and Tax Expenses by four percent (4%) or more, then Lessor
shall pay to Lessee the reasonable and necessary fees and costs incurred by
Lessee in conducting such audit. Any information gained by Lessee from such
inspection and audit shall
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be confidential and shall not be disclosed other than to carry out the purpose
hereof.
29. First Refusal - Lease: If Lessor intends to offer any unoccupied space in
the Building (the "Option Space") for lease to a prospective tenant (the
"Prospective Lease"), it will so advise Lessee in writing the ("Offer Notice").
The Offer Notice shall include all of the material terms and conditions
(including allowances and free rent) on which Lessor is willing to lease the
Option Space to the Prospective Lessee. Lessee shall have five (5) business days
within which to elect in writing to lease the Option Space on terms and
conditions set forth in the Offer Notice. If Lessee exercises its rights under
this Section 29, Lessee and Lessor shall enter into a new lease or an amendment
to this Lease reflecting the leasing of the Option Space on such terms.
30. Extension:
A. Lessee shall have the options to renew this Lease for three (3)
successive additional terms of five (5) years each (each an "Additional Term")
on the same terms and conditions as are provided herein except that (a) Rent for
each Additional Term shall be determined in accordance with the provisions of
Section 30.C and (b) there shall be no additional option to renew or extend this
Lease.
B. Each such option shall be exercised by Lessee by written notice (the
"Extension Notice") to Lessor at least six (6) months before the expiration of
the original or prior Additional Term. Any termination of this Lease by Lessor
in accordance with the
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terms hereof shall automatically terminate such options without further act by
Lessor. It shall be a condition to the exercise of such second and third options
that the prior option shall have been validly exercised.
C. The Rent for each Additional Term shall be an amount (the "FMV Rent")
equal to the then fair market value of comparable space in the Kent Valley,
Washington area (including Kent and Auburn, Washington) for each such Additional
Term as determined below, but in no event less than the Rent then payable for
the then current Term of this Lease. Within thirty (30) days of its receipt of
the Extension Notice for an Additional Term, Lessor shall deliver to Lessee
notice ("Lessor's Rental Notice") of Lessor's estimate of the FMV Rent for the
Premises for the applicable Additional Term. If Lessor and Lessee cannot agree
on the FMV Rent within fourteen (14) days of Lessee's receipt of Lessor's Rental
Notice (the "Rental Notice Date"), the parties shall, within thirty (30) days
after the Rental Notice Date, select a single appraiser who will determine the
FMV Rent. If the parties cannot agree on a single appraiser, then each party
will select an appraiser within said thirty (30) days, and such two (2)
appraisers will select a third appraiser within seven (7) days of the date of
the selection of such two (2) appraisers. The appraisers so selected shall all
be members of the American Institute of Real Estate Appraisers, and in the case
of the third appraiser chosen by the other two (2) appraisers, shall not have
acted in any capacity for either Lessor or Lessee within five (5) years of such
appraiser's selection.
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The three (3) appraisers shall render their decision as to the FMV Rent for the
Premises for the applicable Additional Term, and a decision by a majority of the
appraisers shall be binding upon Lessor and Lessee. The costs of the foregoing
appraisers will be borne equally by Lessor and Lessee.
31. Parking. Lessee shall have the use of the number of undesignated
parking spaces set forth in the Basic Lease Information. Lessor agrees to use
its reasonable best efforts to provide such parking adjacent to the Building.
32. Lessor's Title: If at the time of recording by Lessee of a notice or
memorandum of lease there shall be any mortgage or mortgages affecting the
Premises or the Park, or any portion thereof, Lessor shall obtain and deliver to
Lessee within thirty (30) days after the date of such recording, an Agreement
with respect to such mortgage or mortgages (in accordance with the provisions of
Section 16.A). Lessee shall have the right, within thirty (30) days after the
date of this Lease, at Lessee's cost and expense (except as hereinafter
provided), to obtain a commitment for leasehold title insurance from a title
insurance company of Lessee's selection, committing to insure Lessee's leasehold
interest under this Lease. Lessor's will cooperate with Lessee with regard to
such title insurance commitment, including using reasonable efforts (i) to cause
such commitment to be issued by any title insurance company that may have issued
a title insurance policy to Lessor, and (ii) to procure any "simultaneous issue"
rate
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(or similar discount) for the benefit of Lessee in conjunction with the issuance
of any other title insurance policy on the Park. 33. Quiet Enjoyment:
Lessor covenants and agrees that Lessee, upon performance of its
obligations under this Lease, shall peaceably and quietly hold and enjoy the
Premises and shall have the rights to the Common Areas as provided for herein,
throughout the Term of this Lease.
34. Lessee's Right to Cure:
If Lessor shall be in default hereunder, which default shall continue for
thirty (30) days after written notice thereof from Lessee, then, in addition to
any other right or remedy of Lessee under this Lease or otherwise, Lessee shall
have the right, but not the obligation, to cure such default, in which event
Lessor shall pay to Lessee, upon demand, the reasonable cost thereof plus
interest (as hereinafter provided) from the date of such cure by Lessee to the
date of reimbursement to Lessee; provided, however, if such default is not
susceptible of being cured within a period of thirty (30) days then, as long as
Lessor shall commence the curing thereof within such time and shall proceed
continuously with due diligence to cure the same, Lessee shall not have such
right. If Lessor shall not reimburse Lessee as provided herein, Lessee, after
the entering of a judgment in favor of Lessee in the Superior Court for King
County, Washington or by the United States District Court for the Western
District of Washington, shall have the right to deduct such amount to be
reimbursed from any installment or installments of Rent or other charges due or
becoming due under
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this Lease. If in Lessee's reasonable judgment an emergency shall exist, the
thirty (30) day period shall be shortened to such reduced period, following
notice, as shall be reasonable in the circumstances prior to Lessee curing such
default; and Lessee's notice, in such an event, may be given by fax transmission
or other substitute means of writing.
35. Payment of Costs:
A. Lessor acknowledges that Lessee currently is the lessee under a certain
lease dated as of August 23, 1989 (the "Current Lease") of space at 4005 Sixth
Avenue South, Seattle, Washington (the "Current Space") between the Executors of
the Estate of A.H. Spear ("Spear") and Lessee (as successor to NutraSource) and
that Lessee has entered into negotiations to sublease (a "Sublease" or the
"Subleases") the Current Space to one or more persons (a "Sublessee" or the
"Sublessees"). Lessor agrees to reimburse Lessee for the payment of fifty
percent (50%) of the Subleasing Costs (defined below), up to a maximum payment
by Lessor of $100,000. Payments by Lessor shall be made within ten (10) days
following written request by Lessee (but in no event prior to August 31, 1998)
setting forth in reasonable detail the amounts of Subleasing Costs paid by
Lessee.
B. For purposes of this Lease, the term "Subleasing Costs" means all
reasonable costs, typical fees and expenses incurred or payable by Lessee in
connection with the Subleases, including (a) rent and other charges and payments
payable under the Current Lease in excess of those received by Lessee under the
Subleases, (b)
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costs of demising walls, tenant improvements and similar work to the Current
Space necessary for such subleasing or required under the Subleases and (c)
brokerage fees relating to such subleasing.
36. Tax Incentives:
Lessor expressly acknowledges and agrees that Lessee would not enter into
this Lease unless the Washington state sales and use tax exemption provided by
RCW 82.08.820 and RCW 82.12.820 (the "Warehouse Tax Exemption") is available for
Lessor's Work, Lessee's Work and other equipment and property to be installed by
Lessee. Lessor shall take no action which would result in the loss or
unavailability of the Warehouse Tax Exemption. Lessor and Lessee shall cooperate
in filing quarterly applications for remittance with the Washington Department
of Revenue, together with all other applications for refunds, reports, returns
and other documents and keeping and disclosing all records and information
necessary to take advantage of the Warehouse Tax Exemption and all other
available state and local tax incentive programs. Lessor shall assign to Lessee
the right to receive all tax refunds available to Lessor under the Warehouse Tax
Exemption. If such assignment is not permitted, Lessor shall pay to Lessee,
within ten (10) days of receipt, all tax refunds received by Lessor under the
Warehouse Tax Exemption.
37. Reduction in Premises:
If within forty-five (45) days of the date hereof, Lessee has not received
written assurances reasonably acceptable to it confirming that the Warehouse Tax
Exemption and the full benefit
44
<PAGE>
thereunder relating to the Park (exclusive of buildings other than the Building)
will be available exclusively for the benefit of Lessee, Lessee may elect to
reduce the size of the Premises to approximately 160,000 square feet in
accordance with revisions to Lessor's Plans (defined in the Work Letter)
reasonably acceptable to Lessor and Lessee. In such event, the Rent and Lessee's
share of Operating Expenses, Tax Expense and utilities shall be reduced in
proportion to the reduction in the size of the Premises. Lessor and Lessee shall
cooperate in good faith in carrying out the provisions of this Section 37.C and
shall execute and deliver such amendments to this Lease and other documents and
instruments as may be reasonably requested in connection therewith.
38. Special Termination: Notwithstanding anything to the contrary
contained herein, in the event the Commencement Date has not occurred on or
before August 1, 1999 (the "Outside Commencement Date") through no fault of
Lessor or its Authorized Representatives, either Lessor or Lessee may terminate
this Lease upon written notice to the other within thirty (30) days of the
Outside Commencement Date, upon which all obligations of Lessor and Lessee shall
terminate and be of no further force or effect.
39. Financial Statements: In the event Lessee is not required to file
reports under the Securities and Exchange Act of 1934, as amended, within ten
(10) days after Lessor's request Lessee shall deliver to Lessor the then current
financial statements of Lessee (including interim periods following the end of
the last fiscal year for which annual statements are available) which statements
45
<PAGE>
shall be prepared or compiled by a certified public accountant and shall present
fairly the financial condition of Lessee at such dates and the result of its
operations and changes in its financial positions for the periods ended on such
dates. Lessee shall be required to comply with this provision only in the event
Lessor is contemplating a sale or re-financing of the property and so notifies
Lessee in writing. Lessor agrees that it will use its reasonable best efforts to
keep such financial statements confidential and will not disclose the same
except to its lenders or prospective purchasers (other than entities which are
competitors of Lessee).
40. General Provisions:
A. Time. Time is of the essence in this Lease and with respect to
each and all of its provisions in which performance is a factor.
B. Successors and Assigns. The covenants and conditions herein
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
C. Recordation. Lessor agrees to execute, acknowledge and deliver a
short form or memorandum of this Lease for recording purposes promptly upon the
prior written request of Lessee.
D. Lessor's Personal Liability. Except as provided in Section 27G,
the liability of Lessor (which, for purposes of this Lease, shall include Lessor
and the owner of the Building if other than Lessor) to Lessee for any default by
Lessor under the terms of
46
<PAGE>
this Lease shall be limited to the actual interest of Lessor and its present or
future partners in the Park, including proceeds of insurance and rents and
profits (collectively, "Lessor's Interest"), and Lessee agrees to look solely to
Lessor's Interest for the recovery of any judgment against Lessor, it being
intended that Lessor shall not be personally liable for any judgment or
deficiency. The liability of Lessor under this Lease is limited to liability on
account of acts and circumstances occurring during its actual period of
ownership of title to the Building, and Lessor shall be released from liability
upon transfer of title to the Building and the assumption in writing by the
transferee of all obligations of Lessor hereunder.
E. Separability. Any provisions of this Lease which shall prove to
be invalid, void or illegal shall in no way affect, impair or invalidate any
other provisions hereof and such other provision shall remain in full force and
effect.
F. Choice of Law. This Lease shall be governed by the laws of the
State of Washington.
G. Attorney's Fees. In the event any legal action is brought to
enforce or interpret the provisions of this Lease, the prevailing party therein
shall be entitled to recover all costs and expenses including reasonable
attorneys' fees.
H. Entire Agreement. This Lease supersedes any prior agreements and
contains the entire agreement of the parties on matters covered. No other
agreement, statement or promise made by
47
<PAGE>
any party that is not in writing and signed by all parties to this Lease shall
be binding.
I. Warranty of Authority. Each person executing this agreement on
behalf of a party represents and warrants that (1) such person is duly and
validly authorized to do so on behalf of the entity it purports to so bind, and
(2) if such party is a partnership, corporation or trustee, that such
partnership, corporation or trustee has full right and authority to enter into
this Lease and perform all of its obligations hereunder.
J. Notices. All notices and demands required or permitted to be sent
to the Lessor or Lessee shall be in writing and shall be sent by United States
mail, postage prepaid, certified or by personal delivery or by overnight
courier, addressed to Lessor at c/o Martin Smith Inc., 1109 First Avenue, Suite
500, Seattle, Washington 98101, Attention: H. Martin Smith III, or to Lessee at
the Premises and c/o United Natural Foods, Inc., 260 Lake Road, Dayville,
Connecticut 06241, Attention: Chief Financial Officer, and 12745 Earhart Avenue,
Auburn, California 95602 or to such other place(s) as such party may designate
in a notice to the other party given as provided herein. Notice shall be deemed
given upon the earlier of actual receipt or the third day following deposit in
the United States mail.
K. Interlineation. The use of underlining or strikeouts within the
Lease is for reference purposes only. No other meaning or emphasis is intended
by this use, nor should any be inferred.
48
<PAGE>
L. Consent. Except as otherwise expressly provided in this Lease,
whenever it is necessary under the terms of this Lease for either party to
obtain the consent or approval of the other party, such consent or approval
shall not be unreasonably withheld or delayed, and all such determinations shall
be made on a reasonable basis and in a reasonable manner.
M. Force Majeure. In any case where either party hereto is required
to do any act, delays caused by or resulting from Acts of god, war, civil
commotion, fire, flood or other casualty, labor difficulties, shortages of
labor, materials or equipment, government regulations, unusually severe weather,
or other causes beyond such party's reasonable control shall not be counted in
determining the time during which work shall be completed, whether such time be
designated by a fixed date, a fixed time or a "reasonable time", and such time
shall be deemed to be extended by the period of such delay.
(the next page is the signature page)
49
<PAGE>
IN WITNESS WHEREOF, this Lease is executed on the date and year first
written above.
LESSOR: LESSEE:
Valley Centre I, L.L.C.,
a Washington Limited
Liability Company UNITED NATURAL FOODS, INC.,
a Delaware corporation
By:________________________ By:___________________________
Its:_______________________ Its:__________________________
STATE OF WASHINGTON
COUNTY OF ____________
On this ____ day of August, 1998, before me personally appeared
_________________________, to me known to be the _________________ of Valley
Centre I, L.L.C. and executed the within and foregoing instrument, and
acknowledged said instrument to be the free and voluntary act and deed of said
limited liability company, for the uses and purposes therein mentioned, and on
oath stated that (s)he was authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereunder set my hand and affixed my official
seal the day and year first above written.
_____________________________
(Signature)
_____________________________
(Typed or printed name)
NOTARY PUBLIC in and for the
State of Washington, residing at
______________________________
My appointment expires:
______________________________
50
<PAGE>
STATE OF WASHINGTON
COUNTY OF ____________
On this ____ day of August, 1998, before me personally appeared
_________________________, to me known to be the _________________ of United
Natural Foods, Inc. and executed the within and foregoing instrument, and
acknowledged said instrument to be the free and voluntary act and deed of said
corporation, for the uses and purposes therein mentioned, and on oath stated
that (s)he was authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereunder set my hand and affixed my official
seal the day and year first above written.
_____________________________
(Signature)
_____________________________
(Typed or printed name)
NOTARY PUBLIC in and for the
State of Washington, residing at
______________________________
My appointment expires:
______________________________
51
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
The Health Hut, Inc. New York
Mountain People's Warehouse Incorporated California
Natural Retail Group, Inc. Delaware
Nutrasource, Inc. Washington
Rainbow Natural Foods, Inc. Colorado
GEM Acquisition Corporation Delaware
Stow Mills, Inc. New Hampshire
Nature's Finest, Inc. Florida
Hershey Imports, Inc. New Jersey
Mother Earth, Inc. Florida
Albert's Organics , Inc. California
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 3, 1999, relating to the consolidated balance
sheets of United Natural Foods, Inc. and Subsidiaries as of July 31, 1999 and
1998 and the related consolidated statements of income, stockholders' equity and
cash flows for each of the years in the three-year period ended July 31, 1999,
and the related schedule, which reports appear in the July 31, 1999 annual
report on Form 10-K of United Natural Foods, Inc.
Providence, Rhode Island /s/ KPMG LLP
October 28, 1999 ------------
KPMG LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONSOLIDATED STATEMENTS OF INCOME FOR THEYEAR ENDED JULY 31, 1999 AND THE
CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 2,845
<SECURITIES> 0
<RECEIVABLES> 64,005
<ALLOWANCES> 2,297
<INVENTORY> 90,725
<CURRENT-ASSETS> 166,871
<PP&E> 72,497
<DEPRECIATION> 28,713
<TOTAL-ASSETS> 238,130
<CURRENT-LIABILITIES> 93,104
<BONDS> 25,791
0
0
<COMMON> 182
<OTHER-SE> 118,399
<TOTAL-LIABILITY-AND-EQUITY> 238,130
<SALES> 856,998
<TOTAL-REVENUES> 856,998
<CGS> 680,301
<TOTAL-COSTS> 680,301
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,995
<INTEREST-EXPENSE> 5,700
<INCOME-PRETAX> 23,593
<INCOME-TAX> 10,126
<INCOME-CONTINUING> 13,467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,467
<EPS-BASIC> 0.74
<EPS-DILUTED> 0.73
</TABLE>
