-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PcCnpUPMZ339n3sb+TnumvdMs7BqxVcCogUlRfoBRlkn7wjpQAudtfKQs4quYWiR eO1/HtNy1kTleRaPs9omjA== 0001005477-99-005891.txt : 19991216 0001005477-99-005891.hdr.sgml : 19991216 ACCESSION NUMBER: 0001005477-99-005891 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED NATURAL FOODS INC CENTRAL INDEX KEY: 0001020859 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 050376157 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21531 FILM NUMBER: 99775009 BUSINESS ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 BUSINESS PHONE: 8607792800 MAIL ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 000-21531 UNITED NATURAL FOODS, INC. (Exact name of Registrant as Specified in Its Charter) Delaware 05-0376157 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 260 Lake Road Dayville, CT 06241 (Address of Principal Executive Offices, Including Zip Code) Registrant's Telephone Number, Including Area Code: (860) 779-2800 ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes |X| No |_| As of December 7, 1999, there were 18,259,678 shares of the Registrant's Common Stock, $0.01 par value per share, outstanding. ================================================================================ UNITED NATURAL FOODS, INC. FORM 10-Q FOR THE QUARTER ENDED OCTOBER 31, 1999 TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of October 31, 1999 and July 31, 1999 3 Consolidated Statements of Operations for the quarter ended October 31, 1999 and 1998 4 Consolidated Statements of Cash Flows for the quarter ended October 31, 1999 and 1998 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-16 Item 3. Quantitative and Qualitative Disclosure About Market Risk 16-17 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 PART I. FINANCIAL INFORMATION Item 1. Financial Statements UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited) ----------- (In thousands, except per share amounts) OCTOBER 31, 1999 JULY 31, 1999 ---------------- ------------- ASSETS Current assets: Cash $ 4,798 $ 2,845 Accounts receivable, net of allowance of $2,706 and $2,297, respectively 72,130 60,612 Notes receivable, trade 999 1,096 Inventories 101,909 90,725 Prepaid expenses 6,491 5,660 Deferred income taxes 1,966 1,765 Refundable income taxes 4,985 3,939 --------- --------- Total current assets 193,278 166,642 --------- --------- Property & equipment, net 43,672 43,784 --------- --------- Other assets: Notes receivable, trade, net 340 333 Goodwill, net 26,047 26,250 Covenants not to compete, net 287 328 Other, net 1,010 564 --------- --------- Total assets $ 264,634 $ 237,901 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - line of credit $ 50,583 $ 41,154 Current installments of long-term debt 3,671 3,682 Current installment of obligations under capital leases 717 833 Accounts payable 45,723 33,442 Accrued expenses 19,677 13,706 --------- --------- Total current liabilities 120,371 92,817 Long-term debt, excluding current installments 23,840 24,370 Deferred income taxes 1,311 712 Obligations under capital leases, excluding current installments 1,408 1,421 --------- --------- Total liabilities 146,930 119,320 --------- --------- Stockholders' equity: Preferred stock, $.01 par value, authorized 5,000 shares, none issued and outstanding -- -- Common stock, $.01 par value, authorized 50,000 shares, issued and outstanding 18,260 at October 31, 1999; issued and outstanding 18,249 at July 31, 1999 183 182 Additional paid-in capital 67,839 67,740 Unallocated shares of ESOP (2,543) (2,584) Retained earnings 52,225 53,243 --------- --------- Total stockholders' equity 117,704 118,581 --------- --------- Total liabilities and stockholders' equity $ 264,634 $ 237,901 ========= =========
See notes to consolidated financial statements. 3 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED OCTOBER 31, ----------- (In thousands, except per share data) 1999 1998 ---- ---- Net sales $ 218,455 $ 199,889 Cost of sales 178,003 157,275 --------- --------- Gross profit 40,452 42,614 --------- --------- Operating expenses 40,610 32,825 Amortization of intangibles 347 286 --------- --------- Total operating expenses 40,957 33,111 --------- --------- Operating (loss) income (505) 9,503 --------- --------- Other expense (income): Interest expense 1,267 1,516 Other, net (75) (176) --------- --------- Total other expense (income) 1,192 1,340 --------- --------- (Loss) income before income (benefit) taxes (1,697) 8,163 Income (benefit) taxes (679) 3,384 --------- --------- Net (loss) income $ (1,018) $ 4,779 ========= ========= Per share data (basic): Net (loss) income $ (0.06) $ 0.26 ========= ========= Weighted average basic shares of common stock 18,260 18,175 ========= ========= Per share data (diluted): Net (loss) income $ (0.06) $ 0.26 ========= ========= Weighted average diluted shares of common stock 18,260 18,537 ========= =========
See notes to consolidated financial statements. 4 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
QUARTER ENDED OCTOBER 31, ----------------- (In thousands) 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (1,018) $ 4,779 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 1,873 1,696 Loss (gain) on disposals of property & equipment 46 (5) Deferred income tax benefit 398 78 Provision for doubtful accounts 438 477 Changes in assets and liabilities, net of acquired companies: Accounts receivable (11,955) (6,986) Inventory (11,184) (8,884) Prepaid expenses (831) (735) Refundable income taxes (1,046) (387) Other assets (406) 569 Notes receivable, trade 90 266 Accounts payable 12,280 4,318 Accrued expenses 5,971 1,085 -------- -------- Net cash used in operating activities (5,344) (3,729) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchases of subsidiaries, net of cash acquired -- (8,888) Proceeds from disposals of property and equipment 1 31 Capital expenditures (1,436) (1,599) -------- -------- Net cash used in investing activities (1,435) (10,456) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under note payable 9,430 15,285 Repayments on long-term debt (545) (900) Principal payments of capital lease obligations (256) (156) Proceeds from exercise of stock options 99 -- Other 4 18 -------- -------- Net cash provided by financing activities 8,732 14,247 -------- -------- NET INCREASE IN CASH 1,953 62 Cash at beginning of period 2,845 1,393 -------- -------- Cash at end of period $ 4,798 $ 1,455 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,177 $ 1,263 ======== ======== Income taxes $ 141 $ 3,826 ======== ========
In the quarter ended October 31, 1999, the Company incurred $127 of capital lease obligations. See notes to consolidated financial statements. 5 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1999 (UNAUDITED) 1. BASIS OF PRESENTATION Our accompanying consolidated financial statements include the accounts of United Natural Foods, Inc. and our wholly owned subsidiaries. We are a distributor and retailer of natural foods and related products. The financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally required in complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In our opinion, these financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for interim periods, however, may not be indicative of the results that may be expected for a full year. 2. INTEREST RATE SWAP AGREEMENT 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 at LIBOR plus 1%, thereby fixing our effective rate at 6%. The five year term of the swap agreement may be extended to seven years at the option of the counterparty. 3. RESTRUCTURING COSTS In connection with the consolidation of operations in the Eastern Region, we recorded 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. Approximately $0.6 million of the retention and severance expenses had been paid as of October 31, 1999 with most of the remaining amounts expected to be paid during the remainder of fiscal 2000. The incremental depreciation was to reduce the book value of the Chesterfield, New Hampshire facility, which was being held for sale, to its estimated net realizable value. Due to continuing difficulties in the consolidation, our management decided in December 1999 to keep our Chesterfield facility open for the foreseeable future. We will resume depreciating the remaining net book value of the Chesterfield facility in December 1999 for approximately $50,000 per quarter. 4. EARNINGS PER SHARE Following is a reconciliation of the basic and diluted number of shares used in computing earnings per share: Quarter Ended October 31, (In thousands) 1999 1998 ------ ------ Basic weighted average shares outstanding 18,260 18,175 Net effect of dilutive stock options based upon the treasury stock method -- 362 ------ ------ Diluted weighted average shares outstanding 18,260 18,537 ====== ====== There were no dilutive stock options for the quarter ended October 31, 1999 because the Company reported a net loss. 5. 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 national distribution of natural 6 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 Quarter Ended October 31, 1999 Revenue $ 208,813 $ 14,240 $ (4,598) $ 218,455 Operating Income (loss) $ 176 $ (661) $ (20) $ (505) Amortization and Depreciation $ 1,575 $ 298 $ -- $ 1,873 Capital Expenditures $ 1,252 $ 184 $ -- $ 1,436 Assets $ 388,340 $ 13,475 $(137,181) $ 264,634 Quarter Ended October 31, 1998 Revenue $ 186,135 $ 19,267 $ (5,513) $ 199,889 Operating Income $ 9,493 $ 36 $ (26) $ 9,503 Amortization and Depreciation $ 1,321 $ 375 $ -- $ 1,696 Capital Expenditures $ 1,403 $ 196 $ -- $ 1,599 Assets $ 357,553 $ 31,960 $(145,207) $ 244,306
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We are a leading 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 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 made considerable capital expenditures and incurred considerable expenses 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. 7 We have incurred considerable expenses in connection with the planned consolidation of operations in the Eastern Region, which was to have resulted in the closure of our Chesterfield, New Hampshire facility. These expenses consist of the cost of moving inventory, as well as additional temporary expenses for information technology, inventory management and redundant staffing and transportation. Our operating results for the fourth quarter of fiscal 1999 and first quarter of fiscal 2000 were negatively impacted by computer and related issues arising from the 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. Due to the continuing difficulties in the consolidation, our management decided in December 1999 to keep our Chesterfield facility open for the foreseeable future. We expect that the increased operating expenses, lower gross margin and lower sales than prior quarters in the Eastern Region will continue throughout much of fiscal 2000. 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, and amortization expense. Other expenses include interest on outstanding indebtedness, interest income and miscellaneous income and expenses. Recent Acquisitions On September 30, 1998, we acquired substantially all of the outstanding stock of Albert's Organics, 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. 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. Results of Operations The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales: Quarter Ended October 31, 1999 1998 ------------------- Net sales 100.0% 100.0% Cost of sales 81.5% 78.7% ----- ----- Gross profit 18.5% 21.3% ----- ----- Operating expenses 18.6% 16.4% Amortization of intangibles 0.2% 0.1% ----- ----- Total operating expenses 18.7% 16.6% ----- ----- Operating (loss) income -0.2% 4.8% ----- ----- Other expense (income): Interest expense 0.6% 0.8% Other, net -- -0.1% ----- ----- Total other expense (income) 0.5% 0.7% ----- ----- (Loss) income before income (benefit) taxes -0.8% 4.1% Income (benefit) taxes -0.3% 1.7% ----- ----- Net (loss) income -0.5% 2.4% ===== ===== 8 Quarter Ended October 31, 1999 Compared To Quarter Ended October 31, 1998 Net Sales. Our net sales increased approximately 9.3%, or $18.6 million, to $218.5 million for the quarter ended October 31, 1999 from $199.9 million for the quarter ended October 31, 1998. The overall increase in net sales was attributable to increased sales to existing customers, the sale of new product offerings and the inclusion of a full quarter of Albert's Organics sales. Net sales for the first quarter of fiscal 1998 included only one month of Albert's sales. These increases were partially offset by a decrease in net sales from the Natural Retail Group due to the sale of four stores in April 1999. Excluding Albert's August 1999 and September 1999 sales and the Natural Retail Group's first quarter of fiscal 1998 sales by the sold stores, sales increased approximately 7.6% for the quarter ended October 31, 1999 over the comparable prior year period. These growth rates are lower than in past quarters. The major factors contributing to our lower growth rates were increased out of stocks in the Eastern Region and loss of customers in the Eastern Region to other suppliers. Gross Profit. Our gross profit decreased approximately 5.1%, or $2.2 million, to $40.5 million for the quarter ended October 31, 1999 from $42.6 million for the quarter ended October 31, 1998. Our gross profit as a percentage of net sales decreased to 18.5% for the quarter ended October 31, 1999 from 21.3% for the quarter ended October 31, 1998. The decrease in gross profit as a percentage of net sales resulted primarily from ongoing difficulties with the Eastern Region consolidation, as well as an increased percentage of sales to existing customers under our volume discount program and the divestiture of four retail stores, which have higher gross margins than our distribution business. Difficulties in the Eastern Region which impacted our margin include higher than normal levels of customer returns and allowances, pricing errors, inventory shrink and higher inbound transportation costs for expedited shipments. Operating Expenses. Our total operating expenses increased approximately 23.7%, or $7.8 million, to $41.0 million for the quarter ended October 31, 1999 from $33.1 million for the quarter ended October 31, 1998. As a percentage of net sales, operating expenses increased to 18.7% for the quarter ended October 31, 1999 from 16.6% for the quarter ended October 31, 1998. The increase in operating expenses as a percentage of net sales was primarily due to the continuing difficulties in the Eastern Region and increased costs in all regions for insurance and fuel. We incurred approximately $3 million in the Eastern Region in redundant labor expenses and approximately $0.6 million for temporary storage and rental equipment. Our company-wide insurance and fuel expenses have increased approximately $1 million compared to the comparable prior year period. Operating (Loss) Income. Operating income decreased $10.0 million, to a loss of $(0.5) million for the quarter ended October 31, 1999 from income of $9.5 million for the quarter ended October 31, 1998. Other (Income)/Expense. The $0.1 million decrease in other expense in the quarter ended October 31, 1999 compared to the quarter ended October 31, 1998 was primarily attributable to slightly lower interest expense, reflecting a lower level of debt in the first quarter of fiscal 2000. Income (Benefit) Taxes. Our effective income (benefit) tax rates were (40.0)% and 41.5% for the quarters ended October 31, 1999 and 1998, respectively. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes. 9 Net (Loss) Income. As a result of the foregoing, net income decreased $5.8 million, to a loss of $(1.0) million for the quarter ended October 31, 1999, compared to net income of $4.8 million in the quarter ended October 31, 1998. 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 used in operations was $5.3 million and $3.7 million for the quarter ended October 31, 1999 and 1998, respectively. Cash used in operations in the first quarter of fiscal 2000 related primarily to investments in inventory in the ordinary course of business and an increase in accounts receivable. Days sales outstanding for the quarter ended October 31, 1999 has increased to approximately 30 days from approximately 26 days at July 31,1999. We are allocating additional resources to collection efforts to decrease our days sales outstanding. The increases in inventory levels relate to supporting increased sales with wider product assortment combined with our ability to capture purchasing efficiency opportunities in excess of total carrying costs. These items were partially offset by increases in accounts payable and accrued expenses. Cash used in operations in the first quarter of fiscal 1999 was due primarily to cash investments in accounts receivable and inventory in the ordinary course of business, partially offset by cash collected from customers net of cash paid to vendors and an increase in accounts payable. Working capital at October 31, 1999 was $72.9 million. Net cash used in investing activities was $1.4 million and $10.5 million for the quarters ended October 31, 1999 and 1998, respectively. Investing activities in the quarter ended October 31, 1999 were for capital expenditures. Investing activities in the quarter ended October 31, 1998 were primarily for the acquisition of new businesses and the continued upgrade of existing management information systems. Cash provided by financing activities was $8.7 million and $14.2 million for the quarters ended October 31, 1999 and 1998, respectively. We increased borrowings on our line of credit by $9.4 million and $15.3 million during the first quarters of fiscal 2000 and fiscal 1999, respectively, and repaid long-term obligations in the amount of $0.8 million and $1.1 million, respectively. 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. IMPACT OF INFLATION Historically, the Company has been able to pass along inflation-related increases. Consequently, inflation has not had a material impact upon the results of the Company's operations or profitability. SEASONALITY Generally, the Company does not experience any material seasonality. However, the Company's sales and operating results may vary significantly from quarter to quarter due to factors such as changes in the Company's operating expenses, management's ability to execute the Company's operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS The Financial Accounting Standards Board recently issued 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. 10 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. 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 planned 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 11 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 income 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. Microprocessors and other electronic devices used in the Eastern Region have been tested and are Year 2000 compliant. The telephone systems in all Eastern Region locations are Year 2000 compliant. Retail Stores All of our cash registers are Year 2000 compliant. 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 have been 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 immaterial incremental amount 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 $1.9 million, $7 million, $4 million and $3 million in the quarter ended October 31, 1999 and fiscal 1999, 1998 and 1997, respectively. 12 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. 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-Q contains 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-Q. 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 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. Due to the continuing difficulties of the consolidation, our new management decided in December 1999 to keep our Chesterfield facility open for the foreseeable future. There are numerous risks involved with keeping the Chesterfield facility open and the transfer of sales to the Dayville facility which has already occurred, 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, New Oxford and Chesterfield 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, New Oxford and Chesterfield 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 13 in continuing to operate the Chesterfield facility and consolidating certain of its operations into the operations in place at the Dayville facility; o our Dayville facility has had and may continue to have, along with our Chesterfield facility, 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. 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. 14 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: 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 Michael S. Funk, Chief Executive Officer, Richard S. Youngman, President, and other key management employees. Norman A. Cloutier, our former Chairman of the Board and Chief Executive Officer, resigned these positions on December 6, 1999. Loss of the services of any additional 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 15 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 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 September 30, 1999, our executive officers and directors, and their affiliates, and the United Natural Foods Employee Stock Ownership Trust beneficially owned in the aggregate approximately 36% 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 3. Quantitative and Qualitative Disclosure About Market Risk We are exposed to market risk from interest rate fluctuations because we use variable rate debt to finance working capital requirements. We have entered into an interest rate swap agreement which manages that risk by fixing $60 16 million of our variable debt at a rate of 6% through October 2003. We do not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require further disclosure under this item. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Quarterly Report on Form 10-Q. b) Reports on Form 8-K. On December 8, 1999, the Company filed a Current Report on Form 8-K dated December 6, 1999 announcing under Item 5 (Other Events) a press release regarding (1) the election of Michael S. Funk as Chief Executive Officer, (2) the election of Richard S. Youngman as President, (3) the election of Kevin T. Michel as Vice President and Chief Financial Officer, (4) the election of Thomas B. Simone as Chairman of the Board of Directors and (5) the resignation of Norman A. Cloutier as Chief Executive Officer and Chairman of the Board of Directors, and presenting under Item 7 (Financial Statements, Pro-Forma Financial Information and Exhibits) the following information: EXHIBITS Press Release dated December 6, 1999 Exhibit Index Exhibit No. Description Page - ----------- ----------- ---- 27 Financial Data Schedule 19 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED NATURAL FOODS, INC. /s/ Kevin T. Michel ----------------------------- Kevin T. Michel Chief Financial Officer (Principal Financial and Accounting Officer) Dated: December 15, 1999 18 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS JUL-31-2000 OCT-31-1999 4,798 0 75,835 2,706 101,909 193,278 73,605 29,933 264,634 120,371 25,248 0 0 183 117,521 264,634 218,455 218,455 178,003 178,003 0 438 1,267 (1,697) (679) (1,018) 0 0 0 (1,018) (0.06) (0.06)
-----END PRIVACY-ENHANCED MESSAGE-----