================================================================================ 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 January 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 000-21531 UNITED NATURAL FOODS, INC. (Exact name of Registrant as Specified in Its Charter) DELAWARE 05-0376157 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 260 LAKE ROAD DAYVILLE, CT 06241 (Address of Principal Executive Offices, Including Zip Code) Registrant's Telephone Number, Including Area Code: (860) 779-2800 ___________________ 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 March 13, 1998, there were 17,356,705 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 JANUARY 31, 1998 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of July 31, 1997 and January 31, 1998 Consolidated Statements of Income for the three months and six months ended January 31, 1997 and January 31, 1998 Consolidated Statements of Cash Flows for the six months ended January 31, 1997 and January 31, 1998 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures
PART I. FINANCIAL INFORMATION Item 1. Financial Statements UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (UNAUDITED) JULY 31, 1997 JANUARY 31, 1998 ------------- ---------------- <S> <C> <C> ASSETS ------ Current assets: Cash and cash equivalents $ 952,498 $ 3,457,686 Accounts receivable, net of allowance 42,952,127 49,580,967 Notes receivable, trade 866,160 908,043 Inventories 71,508,896 78,034,786 Prepaid expenses 4,109,945 3,568,397 Deferred income taxes 1,031,767 1,031,767 -------------- --------------------- Total current assets 121,421,393 136,581,646 -------------- --------------------- Property & equipment, net 32,412,128 32,722,554 -------------- --------------------- Other assets: Notes receivable, trade 995,398 1,274,486 Goodwill, net 7,579,408 8,453,358 Covenants not to compete, net 591,665 511,930 Other, net 1,560,583 792,937 -------------- --------------------- Total assets $ 164,560,575 $ 180,336,911 ============== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Notes payable $ 27,221,690 $ 38,602,765 Current installments of long-term debt 3,016,218 1,425,549 Current installment of obligations under capital leases 680,533 151,002 Accounts payable 30,535,786 31,961,690 Accrued expenses 6,298,682 6,296,402 Income taxes payable 377,322 419,047 Other 190,667 318,150 -------------- --------------------- Total current liabilities 68,320,898 79,174,605 Long-term debt, excluding current installments 26,453,762 21,802,750 Deferred income taxes 677,560 677,560 Obligations under capital leases, excluding current installments 1,235,928 1,112,987 -------------- --------------------- Total liabilities 96,688,148 102,767,902 -------------- --------------------- Stockholders' equity: Common stock, $.01 par value, authorized 25,000,000 shares; issued 17,377,110 and outstanding 17,356,705 173,771 173,771 Additional paid-in capital 45,702,244 51,745,339 Unallocated shares of ESOP (2,910,400) (2,828,800) Retained earnings 24,951,266 28,523,153 Treasury stock, 20,405 shares at cost (44,454) (44,454) -------------- --------------------- Total stockholders' equity 67,872,427 77,569,009 -------------- --------------------- Total liabilities and stockholders' equity $ 164,560,575 $ 180,336,911 =============== ===================== </TABLE> See notes to consolidated fianancial statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JANUARY 31, JANUARY 31, ----------- ----------- 1997 1998 1997 1998 ---- ---- ---- ---- <S> <C> Net sales $ 160,272,203 $ 177,975,654 $ 306,575,184 $ 351,358,640 Cost of sales 127,879,281 141,667,506 244,535,898 280,861,361 ---------------- -------------- --------------- -------------- Gross profit 32,392,922 36,308,148 62,039,286 70,497,279 ---------------- -------------- --------------- -------------- Operating expenses 27,073,200 27,917,446 52,148,227 55,576,899 Merger expenses - - - 4,063,912 Amortization of intangibles 264,679 244,956 530,356 505,019 ---------------- -------------- --------------- -------------- Total operating expenses 27,337,879 28,162,402 52,678,583 60,145,830 ---------------- -------------- --------------- -------------- Operating income 5,055,043 8,145,746 9,360,703 10,351,449 ---------------- -------------- --------------- -------------- Other expense (income): Interest expense 1,397,311 1,191,968 3,508,216 2,273,137 Other, net (153,252) (180,467) (301,626) (348,460) ---------------- -------------- --------------- -------------- Total other expense 1,244,059 1,011,501 3,206,590 1,924,677 ---------------- -------------- --------------- -------------- Income before income taxes and extraordinary item 3,810,984 7,134,245 6,154,113 8,426,772 Income taxes 1,516,949 2,934,061 2,570,854 4,854,885 ---------------- -------------- --------------- -------------- Income before extraordinary item 2,294,035 4,200,184 3,583,259 3,571,887 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $661,822 932,929 - 932,929 - ---------------- -------------- --------------- -------------- Net income $ 1,361,106 $ 4,200,184 $ 2,650,330 $ 3,571,887 ================ ============== =============== ============== Pro forma additional income tax expense 42,257 - 6,377 320,098 ---------------- -------------- --------------- -------------- Pro forma net income before extraordinary item $ 2,251,778 $ 4,200,184 $ 3,576,882 $ 3,251,789 ================ ============== =============== ============== Per share data (basic): Income before extraordinary item $ 0.13 $ 0.24 $ 0.23 $ 0.21 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $661,822 0.05 $ - $ 0.06 $ - ---------------- -------------- --------------- -------------- Net income $ 0.08 $ 0.24 $ 0.17 $ 0.21 ================ ============== =============== ============== Pro forma net income before extraordinary item $ 0.13 $ 0.24 $ 0.23 $ 0.19 ================ ============== =============== ============== Weighted average basic shares of common stock 17,116,331 17,356,705 15,393,653 17,356,705 ================ ============== =============== ============== Per share data (diluted): Income before extraordinary item $ 0.13 $ 0.24 $ 0.23 $ 0.20 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $661,822 0.05 - 0.06 - ---------------- -------------- --------------- -------------- Net income $ 0.08 $ 0.24 $ 0.17 $ 0.20 ================ ============== =============== ============== Pro forma net income before extraordinary item $ 0.13 $ 0.24 $ 0.23 $ 0.19 ================ ============== =============== ============== Weighted average diluted shares of common stock 17,389,505 17,797,639 15,657,943 17,787,612 ================ ============== =============== ============== </TABLE> See notes to consolidated financial statements. Pro forma income tax expense to reflect Stow as though it were C corporation for all periods presented is calculated as follows: Total income tax expense plus Stow pretax income multiplied by 35% (note fiscal 1998 adds back merger expenses as well before calculating tax expense for Stow since merger expenses are nondeductible for tax purposes).
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JANUARY 31, ----------- 1997 1998 ---- ---- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,650,330 $ 3,571,887 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,995,949 2,956,708 Loss (gain) on disposals of property & equipment 5,946 (1,042) Accretion of original issue discount 152,847 - Deferred income tax benefit (100,597) - Provision for doubtful accounts 1,528,950 704,032 Increase in accounts receivable (6,897,585) (7,954,381) Increase in inventory (4,858,312) (6,014,629) Decrease in prepaid expenses 32,793 541,549 Increase in refundable income taxes (305,803) - (Increase) decrease in other assets (207,266) 96,658 Decrease (increase) in notes receivable, trade 37,553 (320,971) Increase in accounts payable 5,490,954 1,074,507 (Decrease) increase in accrued expenses (1,882,764) 379,467 Increase (decrease) in income taxes payable 358,309 (551,607) Net cash used in operating activities ------------- -------------- (65,767) (5,517,822) ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of new businesses - (2,697,261) Proceeds from disposals of property and equipment 71,531 258,685 Capital expenditures (2,460,783) (2,022,165) Net cash used in investing activities ------------- -------------- (2,389,252) (4,460,741) ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings under note payable (17,033,148) 11,381,075 Repayments on long-term debt (16,160,308) (6,798,584) Proceeds from long-term debt 804,807 8,584,408 Principal payments of capital lease obligations (251,174) (683,148) Proceeds from issuance of common stock, net 35,509,500 - Net borrowings on Stow Mills stockholder loans 560,529 - Dividends paid to Stow Mills stockholders (25,470) - Cash distributions to Hendrickson partners (420,000) - Net cash provided by financing activities ------------- -------------- 2,984,736 12,483,751 ------------- -------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 529,717 2,505,188 Cash and cash equivalents at beginning of period 1,282,471 952,498 ------------- -------------- Cash and cash equivalents at end of period $ 1,812,188 $ 3,457,686 ============= ============== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3,406,282 $ 2,298,333 ============= ============== Income taxes $ 2,502,825 $ 4,612,289 ============= ============== </TABLE> See notes to consolidated financial statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1998 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements ("financial statements") include the accounts of United Natural Foods, Inc. and its wholly owned subsidiaries (the "Company"). The Company is a distributor and retailer of natural foods and related products. On October 31, 1997, a subsidiary of the Company completed its merger with Stow Mills, Inc. ("Stow") 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. Net sales for the quarters ended January 31 and October 31, 1997 and for the six months ended January 31, 1997 for the Company excluding Stow were approximately $103.4 million, $116.5 million, and $202.9 million, respectively. Net income for the quarters ended January 31 and October 31, 1997 and for the six months ended January 31, 1997 for the Company excluding Stow was $1.3 million, $1.2 million and $2.6 million, respectively. Net sales for the quarters ended January 31 and October 31, 1997 and for the six months ended January 31, 1997 for Stow were $57.0 million, $56.9 million and $104.2 million, respectively. Net income (loss) for the quarters ended January 31 and October 31, 1997 for Stow was $0.1 million and $(1.8) million, respectively. Net income for the six months ended January 31, 1997 for Stow was less than $0.1 million. The financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally required in complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of management, these financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for interim periods, however, may not be indicative of the results that may be expected for a full year. Certain fiscal 1997 balances have been reclassified to conform to the fiscal 1998 presentation. 1. CASH EQUIVALENTS Cash equivalents consist of highly liquid investment instruments with original maturities of three months or less. 2. TRADE ACCOUNTS RECEIVABLE An allowance for doubtful accounts is deducted from trade accounts receivable in the accompanying financial statements. The allowance for doubtful accounts was $2,411,379 at July 31, 1997 and $2,116,801 at January 31, 1998. 4. NOTE PAYABLE In October 1997, the Company amended its credit agreement with its bank to increase the amount of the facility from $50 million to $100 million, to increase the limit on inventory advances to $50 million and the advance rate to 60%, to establish a term loan of $6.6 million and to increase the aggregate amount of real estate acquisition loans and real estate term loans to $20 million. The agreement also provides for the bank to syndicate the credit facility to other banks and lending institutions. The credit facility was used to repay existing indebtedness of Stow owing to the Company's bank and will be used for general operating capital needs. Interest under the facility, except the portion related to the mortgage commitments, accrues at the Company's option at the New York Prime Rate or 1.00% above the bank's London Interbank Offered Rate (LIBOR), and the Company has the option to fix the rate for all or a portion of the debt for a period up to 180 days. Interest on the mortgage facility will accrue at 1.25% above the bank's LIBOR rate, although the Company has the option to fix the rate for a period of five years at a rate of 1.25% above the five-year U.S Treasury Note rate. The Company has pledged all of its assets as collateral for its obligations under the credit agreement. As of January 31, 1998, the Company's outstanding borrowings under the credit agreement totaled $38.6 million. The credit agreement expires on July 31, 2002, and contains certain restrictive covenants. The Company was in compliance with its restrictive covenants at January 31, 1998. In connection with the amendment to the Company's credit agreement with its bank as 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. 5. PRO FORMA NET INCOME Stow was subject to taxation as an S corporation until the merger on October 31, 1997. For pro forma disclosure purposes, income tax adjustments were assumed in order to reflect results as if Stow had been subject to taxation as a C corporation for periods prior to the merger.
6. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. The statement replaces the presentation of primary EPS with a presentation of basic EPS. The statement also requires a dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. This statement is effective for periods ending after December 15, 1997. The Company has calculated earnings per share under the standard for all periods presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND AND OTHER INFORMATION United Natural Foods, Inc. (the "Company") is one of only two national distributors of natural foods and related products in the United States. On October 31, 1997, a subsidiary of the Company completed its merger with Stow Mills, Inc. ("Stow"), whereupon Stow became a wholly owned subsidiary of the Company. Upon consummation of the merger, Stow became subject to taxation as C corporation. The merger with Stow was accounted for as a pooling of interests and, accordingly, all financial information included herein is reported as though the companies had been combined for all periods reported. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cautions that a number of important factors could cause the Company's actual results for fiscal 1998 and beyond to differ materially from those expressed in any forward- looking statements made by, or on behalf of, the Company. See "Certain Factors That May Affect Future Results" under this item for a discussion of these factors. QUARTER ENDED JANUARY 31, 1997 COMPARED TO QUARTER ENDED JANUARY 31, 1998 - ------------------------------------------------------------------------- The following table is derived from the Company's consolidated statements of income. <TABLE> <CAPTION> QUARTER ENDED JANUARY 31, (Dollars in millions) 1997 1998 ---- ---- % OF NET % OF NET $$$ SALES $$$ SALES -------- ---------- -------- --------- <S> <C> <C> <C> <C> Net sales $160.3 100.0% $178.0 100.0% Cost of sales 127.9 79.8% 141.7 79.6% ----------- ----------- --------- ------------ Gross profit 32.4 20.2% 36.3 20.4% ----------- ----------- --------- ------------ Operating expenses 27.1 16.9% 27.9 15.7% Amortization of intangibles 0.2 0.1% 0.3 0.1% ----------- ----------- --------- ------------ Total operating expenses 27.3 17.0% 28.2 15.8% ----------- ----------- --------- ------------ Operating income 5.1 3.2% 8.1 4.6% ----------- ----------- --------- ------------ Other expense (income): Interest expense 1.4 1.0% 1.3 0.7% Other, net (0.1) (0.1%) (0.3) (0.1%) ----------- ----------- --------- ------------ Total other expense 1.3 0.9% 1.0 0.6% ----------- ----------- --------- ------------ Income before income taxes and extraordinary item 3.8 2.3% 7.1 4.0% Income taxes 1.5 0.9% 2.9 1.6% ----------- ----------- --------- ------------ Income before extraordinary item 2.3 1.4% 4.2 2.4% Extraordinary item - loss on early extinguishment of debt, net of income tax benefit 0.9 0.6% - - ----------- ----------- --------- ------------ Net income $ 1.4 0.8% $ 4.2 2.4% =========== =========== ========= ============ </TABLE> Net Sales. The Company's net sales increased approximately 11.0%, or $17.7 million, to $178.0 million for the quarter ended January 31, 1998 from $160.3 million for the quarter ended January 31, 1997. The overall increase in net sales was primarily attributable to increased sales to existing customers, sales to
new accounts in existing geographic areas and the introduction of new products not previously offered by the Company. Historical information for Stow includes twelve and fourteen week periods for the quarters ended October 31, 1996 and January 31, 1997, respectively. Accordingly, net sales of approximately $4.2 million have been included in Stow's amounts for the quarter ended January 31, 1997 which would have been included in the quarter ended October 31, 1996 had Stow been on the Company's financial calendar at the time. Therefore, the increase in net sales for the quarter ended January 31, 1998 as adjusted to comparable weeks would have been 14.1%. The previously reported increase in net sales for the quarter ended October 31, 1997 of 18.5% would have been 15.2% subsequent to this adjustment. The increase in income before extraordinary item for the quarter ended January 31, 1998 as adjusted for the above-mentioned item would have been $2.0 million. The previously reported decrease in net income for the quarter ended October 31, 1997 would have been $2.0 million subsequent to this adjustment. Gross Profit. The Company's gross profit increased approximately 12.0%, or $3.9 million, to $36.3 million for the quarter ended January 31, 1998 from $32.4 million for the quarter ended January 31, 1997. The Company's gross profit as a percentage of net sales increased to 20.4% for the quarter ended January 31, 1998 from 20.2% for the quarter ended January 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, partially offset by increased sales to existing customers under the Company's volume discount program. Operating Expenses. The Company's total operating expenses increased approximately 3.3%, or $0.9 million, to $28.2 million for the quarter ended January 31, 1998 from $27.3 million for the quarter ended January 31, 1997. As a percentage of net sales, operating expenses decreased to 15.8% for the quarter ended January 31, 1998 from 17.0% for the quarter ended January 31, 1997. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the Company's ability to leverage its overhead and realize synergies from recent acquisitions. Included in operating expenses for the quarter ended January 31, 1997 were Stow officer salaries totaling $1.0 million in excess of the contractual agreements entered into in connection with the merger with Stow. Excluding these excess amounts, operating expenses for the quarter ended January 31, 1997 would have been $26.3 million, or 16.4% of net sales. Operating Income. Operating income increased $3.0 million, or approximately 58.8%, to $8.1 million for the quarter ended January 31, 1998 from $5.1 million for the quarter ended January 31, 1997. As a percentage of net sales, operating income increased to 4.6% in the quarter ended January 31, 1998 from 3.2% in the quarter ended January 31, 1997. Other (Income)/Expense. The $0.3 million decrease in other expense in the quarter ended January 31, 1998 compared to the quarter ended January 31, 1997 was primarily attributable to the reduction in interest expense as a result of the debt consolidation related to the Stow merger. The Stow debt was repaid with proceeds from the Company's credit facility, which bears interest at a lower rate. Income Taxes. The Company's effective income tax rates were 41.1% and 39.8% for the quarters ended January 31, 1998 and 1997, respectively. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes. The increase in the effective rate was primarily attributable to increased earnings in higher state tax jurisdictions. Net Income. As a result of the foregoing, the Company's income before extraordinary item increased by $1.9 million to $4.2 million, or 2.4% of net sales, for the quarter ended January 31, 1998 from $2.3 million, or 1.4% of net sales, in the quarter ended January 31, 1997. 9
SIX MONTHS ENDED JANUARY 31, 1997 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1998 - ------------------------------------------------------------------------------- The following table is derived from the Company's consolidated statements of income. <TABLE> <CAPTION> SIX MONTHS ENDED JANUARY 31, ---------------- (Dollars in millions) 1997 1998 ------- ------ % OF NET % OF NET $$$ SALES $$$ SALES ------------ --------- ---------- --------- <S> <C> <C> <C> <C> Net sales $306.6 100.0% $351.4 100.0% Cost of sales 244.5 79.7% 280.9 79.9% ------------ --------- ---------- --------- Gross profit 62.1 20.3% 70.5 20.1% ------------ --------- ---------- --------- Operating expenses 52.1 17.0% 55.6 15.8% Merger expenses - - 4.1 1.2% Amortization of intangibles 0.6 0.2% 0.4 0.1% ------------ --------- ---------- --------- Total operating expenses 52.7 17.2% 60.1 17.1% ------------ --------- ---------- --------- Operating income 9.4 3.1% 10.4 3.0% ------------ --------- ---------- --------- Other expense (income): Interest expense 3.5 1.2% 2.3 0.7% Other, net (0.3) (0.1%) (0.3) (0.1%) ------------ --------- ---------- --------- Total other expense 3.2 1.1% 2.0 0.6% ------------ --------- ---------- --------- Income before income taxes and extraordinary item 6.2 2.0% 8.4 2.4% Income taxes 2.6 0.8% 4.8 1.4% ------------ --------- ---------- --------- Income before extraordinary item 3.6 1.2% 3.6 1.0% Extraordinary item - loss on early extinguishment of debt, net of income tax benefit 0.9 0.3% - - ------------ --------- ---------- --------- Net income $ 2.7 0.9% $ 3.6 1.0% ============ ========= ========== ========= </TABLE> Net Sales. The Company's net sales increased approximately 14.6%, or $44.8 million, to $351.4 million for the six months ended January 31, 1998 from $306.6 million for the six months ended January 31, 1997. The overall increase in net sales was primarily attributable to increased sales to existing customers, sales to new accounts in existing geographic areas and the introduction of new products not previously offered by the Company. Gross Profit. The Company's gross profit increased approximately 13.5%, or $8.4 million, to $70.5 million for the six months ended January 31, 1998 from $62.1 million for the six months ended January 31, 10
1997. The Company's gross profit as a percentage of net sales decreased to 20.1% for the six months ended January 31, 1998 from 20.3% for the six months ended January 31, 1997. The decrease in gross profit as a percentage of net sales resulted partially from the comparatively lower gross margin contribution from Stow's operations in the first quarter of fiscal 1998 prior to the effective date of the merger. Also, as in prior periods, increased sales to existing customers under the Company's volume discount program resulted in a further reduction in gross margin. These factors were partially offset by purchasing efficiencies gained with the integration with Stow in the second quarter of fiscal 1998. Operating Expenses. The Company's total operating expenses increased approximately 14.0%, or $7.4 million, to $60.1 million for the six months ended January 31, 1998 from $52.7 million for the six months ended January 31, 1997. As a percentage of net sales, operating expenses decreased to 17.1% for the six months ended January 31, 1998 from 17.2% for the six months ended January 31, 1997. Excluding merger costs of $4.1 million, the Company's total operating expenses during the first six months of the current fiscal year would have been $56.0 million, or 15.9% of net sales, representing an increase of $3.3 million, or 6.3% over the comparable prior period. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the Company's ability to leverage its overhead and realize synergies from recent acqisitions. Additionally, because of the October 31, 1997 effective date of the Stow merger, resulting operational efficiencies were not realized in the first quarter of fiscal 1998. Included in operating expenses for the six months ended January 31, 1998 and 1997 were Stow officer salaries totaling $0.7 million and $1.8 million, respectively, in excess of the contractual agreements entered into in connection with the merger with Stow. Excluding these excess amounts, operating expenses for the six months ended January 31, 1998 and 1997 would have been $59.4 million, or 16.9% of net sales, and $50.9 million, or 16.6% of net sales, respectively. Operating Income. Operating income increased $1.0 million, or approximately 10.6%, to $10.4 million for the six months ended January 31, 1998 from $9.4 million for the six months ended January 31, 1997. As a percentage of net sales, operating income was 3.0% and 3.1% in the six months ended January 31, 1998 and 1997, respectively. Excluding the merger costs and Stow officer salaries noted above, operating income would have been $15.2 million, or 4.3% of net sales and $11.2 million, or 3.6% of net sales, for the six months ended January 31, 1998 and 1997, respectively. Other (Income)/Expense. The $1.2 million decrease in other expense in the six months ended January 31, 1998 compared to the six months ended January 31, 1997 was primarily attributable to the reduction in interest expense relating to the repayment of Stow debt with proceeds from the Company's credit facility, which bears interest at a lower rate. In addition, the proceeds from the Company's initial public offering were used to repay debt. Income Taxes. The Company's effective income tax rates were 57.1% and 41.9% for the six months ended January 31, 1998 and 1997, respectively. The effective rates were higher than the federal statutory rate primarily due to nondeductible merger costs incurred during the first quarter of fiscal 1998 and state and local income taxes. Net Income. As a result of the foregoing, the Company's net income increased by $0.9 million to $3.6 million for the six months ended January 31, 1998 from $2.7 million in the six months ended January 31, 1997. Excluding the $4.1 million in merger costs and $0.9 million extraordinary item (net of tax) related to the early extinguishment of debt, net income would have been $7.7 million, or 2.2% of net sales, and $3.6 million, or 1.2% of net sales, for the six months ended January 31, 1998 and 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company historically has financed its operations and growth primarily from cash flows from operations, borrowings under its credit facility, seller financing of acquisitions, operating and capital leases, trade payables, bank indebtedness and the sale or exchange of equity securities. Primary uses of capital have been acquisitions, expansion of property and equipment and investment in accounts receivable and inventory. In connection with the consummation of the merger with Stow, the former Stow shareholders contributed to equity the promissory notes issued to them by Stow in exchange for shares of Stow stock. Net cash used in operations was $5.5 million and $0.1 million for the six months ended January 31, 1998 and 1997, respectively. The increase in cash used in operations relates to increased investments in accounts receivable and inventory and a decrease in accounts payable, all in the ordinary course of 11
business. The 19% increase in accounts receivable results from increased volume. The increase in inventory relates to supporting increased sales combined with gaining purchasing efficiencies. The decrease in accounts payable is the result of accelerating payments to capture early payment discounts in excess of the Company's cost of capital. Excluding the merger expenses, net cash used in operations for fiscal 1998 would have been $1.4 million. The Company's working capital at January 31, 1998 was $57.4 million. Net cash used in investing activities was $4.5 million and $2.4 million for the six months ended January 31, 1998 and 1997, respectively. Investing activities included primarily capital expenditures related to the purchase of material handling equipment and the continued upgrade of existing management information systems. In addition, investing activities in the six months ended January 31, 1998 included the acquisition of two natural foods retail stores. The capital expenditures were primarily funded from senior bank indebtedness, including term loans. Net cash provided by financing activities was $12.5 million and $3.0 million for the six months ended January 31, 1998 and 1997, respectively. The increase in net cash provided for the six months ended January 31, 1998 compared to the comparable prior period resulted primarily from proceeds from borrowings under the Company's credit facility and from long-term debt. In October 1997, the Company amended its credit agreement with its bank to increase the amount of the facility from $50 million to $100 million, to increase the limit on inventory advances to $50 million and the advance rate to 60%, to establish a term loan of $6.6 million and to increase the aggregate amount of real estate acquisition loans and real estate term loans to $20 million. The agreement also provides for the bank to syndicate the credit facility to other banks and lending institutions. The credit facility was used to repay existing indebtedness of Stow owing to the Company's bank and will be used for general operating capital needs. Interest under the facility, except the portion related to the mortgage commitments, accrues at the Company's option at the New York Prime Rate or 1.00% above the bank's London Interbank Offered Rate (LIBOR), and the Company has the option to fix the rate for all or a portion of the debt for a period up to 180 days. Interest on the mortgage facility will accrue at 1.25% above the bank's LIBOR rate, although the Company has the option to fix the rate for a period of five years at a rate of 1.25% above the five-year rate for U.S Treasury Notes. The Company has pledged all of its assets as collateral for its obligations under the credit agreement. As of January 31, 1998, the Company's outstanding borrowings under the credit agreement totaled $38.6 million. The credit agreement expires on July 31, 2002. In connection with this amendment, 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. The Company expects to spend approximately $25 million over the next five years in capital expenditures to fund the expansion of existing facilities, upgrade information systems and technology and to update its material handling equipment. Management believes that it will have adequate capital resources and liquidity to meets its debt obligations and to fund its planned capital expenditures and operate its business for the foreseeable future. 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. 12
NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board recently issued SFAS No. 129, "Disclosure of Information about Capital Structure." This statement establishes standards for disclosing information about an entity's capital structure. This statement is effective for periods ending after December 15, 1997. The Company is in compliance with this standard. The Financial Accounting Standards Board recently issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. This statement is effective for fiscal years beginning after December 15, 1997 and requires reclassification of financial statements for earlier periods provided for comparative purposes. The Company will comply with the required presentation in fiscal 1999. The Financial Accounting Standards Board recently issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting operating segments of publicly traded business enterprises in annual and interim financial statements and requires those enterprises report selected information about operating segments. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business," but retains the requirement to report information about major customers. This statement also amends SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries." SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997 and requires that comparative information for earlier years be restated. The Company has not yet determined what impact, if any, this standard will have on its financial statement presentation. YEAR 2000 ISSUES The Company's Western Region and a portion of its Central Region employ operating systems functioning on a Julian calendar thereby achieving Year 2000 compliance. In addition, the Company's financial accounting systems are Year 2000 compliant. The Company's Eastern Region and its Chicago facility are not currently Year 2000 compliant. The Company is currently reviewing its systems in order to ensure Year 2000 compliance and to enhance its business systems functionality to achieve operating efficiencies and customer service improvements. The Company will purchase packaged software to address Year 2000 issues when available. The Company expects to incur $3 - $5 million in cash expenditures in the 1998 and 1999 calendar years for its Year 2000 upgrade and new warehouse management system, including new hardware and installation. However, there can be no assurance that the systems of other companies on which the Company's systems rely also will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Quarterly Report on Form 10-Q and presented elsewhere by management from time to time. Any statements contained herein (including without limitations statements to the effect that the Company or its management "believes," "expects," "anticipates," "plans" and similar expressions) that are not statements of historical fact should be considered forward-looking statements. Results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of the Company's common stock. A number of uncertainties exist that could affect the Company's future operating results, including, without limitation, continued demand for current products offered by the Company, the success of the 13
Company's acquisition strategy, competitive pressures, general economic conditions, the success of new product introductions and government regulation. A significant portion of the Company's historical growth has been achieved through acquisitions of or mergers with other distributors of natural products. The Company recently acquired or merged with four large regional distributors of natural products. The successful and timely integration of these acquisitions and mergers is critical to future operating and financial performance of the Company. While the integration of these acquisitions and mergers with the Company's existing operations has begun, the Company believes that the integration will not be substantially completed until the end of calendar 1998. The integration will require, among other things, coordination of administrative, sales and marketing, distribution, and accounting and finance functions and expansion of information and warehouse management systems among the Company's regional operations. The integration process could divert the attention of management, and any difficulties or problems encountered in the transition process could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, the process of combining the companies could cause the interruption of, or loss of momentum in, the activities of the respective businesses, which could have an adverse effect on their combined operations. The Company is currently experiencing a period of growth which could place a significant strain on its management and other resources. The Company's business has grown significantly in size and complexity over the past several years. The growth in the size of the Company's business and operations has placed and is expected to continue to place a significant strain on the Company's management. The Company's future growth is limited in part by the size and location of its distribution centers. There can be no assurance that the Company will be able to successfully expand its existing distribution facilities or open new distribution facilities in new or existing markets to facilitate growth. In addition, the Company's growth strategy to expand its market presence includes possible additional acquisitions. To the extent the Company's future growth includes acquisitions, there can be no assurance that it will successfully identify suitable acquisition candidates, consummate and integrate such potential acquisitions or expand into new markets. The Company operates in highly competitive markets, and its future success will be largely dependent on its ability to provide quality products and services at competitive prices. The Company's competition comes from a variety of sources, including other distributors of natural products as well as specialty grocery and mass market grocery distributors. There can be no assurance that the mass market grocery distributors will not increase their emphasis on natural products and more directly compete with the Company or that new competitors will not enter the market. 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 natural products supermarket chains may have an adverse effect on the Company's profit margins in the future as more customers qualify for greater volume discounts offered by the Company. The grocery industry is also sensitive to national and regional economic conditions, and the demand for product supply may be adversely affected from time to time by economic downturns. 14
PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders of the Company (the "Annual Meeting") held on December 19, 1997, the stockholders of the Company considered and voted upon two proposals: 1) That Barclay McFadden, III, Kevin T. Michel and Richard S. Youngman be elected as Class I directors for the ensuing three years and Thomas B. Simone be elected as a Class II director for the ensuing year. The results of the voting were as follows for each nominee: (i) 10,845,120 votes FOR, and (ii) 3,950 votes WITHHELD. There were no broker non-votes. 2) That the selection of KPMG Peat Marwick LLP as the Corporation's independent public accountants for the fiscal year ending July 31, 1998 be ratified. The results of the voting were as follows: (i) 10,847,170 votes FOR, (ii) 1,550 votes AGAINST and (iii) 350 votes ABSTAINING. There were no broker non-votes. The number of shares of Common Stock outstanding and entitled to vote at the Annual Meeting was 17,356,705, and 10,849,070 shares were represented in person or by proxy. 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 November 12, 1997, the Company filed a Current Report on Form 8-K dated October 31, 1997 announcing under Item 2 (Acquisition or Disposition of Assets) the completion of its acquisition of Stow Mills, Inc. pursuant to an Agreement and Plan of Reorganization, and presenting under Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) the following information: Stow Mills, Inc. and Hendrickson Partners Combined Balance Sheets as of December 31, 1996 and 1995. Stow Mills, Inc. and Hendrickson Partners Combined Statements of Operations, Stockholders' Equity and Cash Flows for the Years Ended December 31, 1996, 1995 and 1994. United Natural Foods, Inc. Unaudited Pro Forma Condensed Combined Balance Sheet as of April 30, 1997. United Natural Foods, Inc. Unaudited Pro Forma Condensed Combined Statements of Operations for the Years Ended October 31, 1994 and 1995 and the Nine Months Ended July 31, 1996 and April 30, 1997. 15
EXHIBIT INDEX ------------- <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION - ----------- ----------- <S> <C> 10.29 Employment Agreement for Robert Cirulnick 10.30 Employment Agreement for Richard S. Youngman 10.31 Termination Agreement for Steven Townsend 10.32 Addendum to Incentive Stock Option Agreement for Steven H. Townsend 11 Computation of Earnings Per Share 27 Financial Data Schedule </TABLE>