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

FORM 10-K
(Mark One)
[X]|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for fiscal year ended July 31, 19981999
or
[ ]|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.

Commission File Number: 000-1020859

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

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X|X| No --- ---|_|

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

The aggregate market value of the common stock held by non-affiliates of the
registrant was $404,398,601,$142,653,734, based upon the closing price of the registrant's
common stock on the Nasdaq National Market on October 16, 1998.5, 1999. The number of
shares of the registrant's common stock, $0.01 par value, outstanding as of
October 29, 19985, 1999 was 18,175,218.18,259,678.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in December 19981999 are incorporated herein by reference
into Part III of this report.

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1

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

Page

PART I.

Item 1. Business 3

Item 2. Properties 11

Item 3. Legal Proceedings 11

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

PART II.

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

Item 6. Selected Financial Data 13

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

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

Item 8. Financial Statements and Supplementary Data 28

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

Part III

Item 10. Directors and Executive Officers of the Registrant 47

Item 11. Executive Compensation 47

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

Item 13. Certain Relationships and Related Transactions 47

Part IV

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

Page
----
PART I.

Item 1. Business 3

Item 2. Properties 9

Item 3. Legal Proceedings 10

Item 4. Submission of Matters to a Vote of Security Holders 10

PART II.

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 11

Item 6. Selected Financial Data 12

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14

Item 7A. Quantitative and Qualitative Disclosure About Market Risk 25

Item 8. Financial Statements and Supplementary Data 26

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 42

Part III

Item 10. Directors and Executive Officers of the Registrant 42

Item 11. Executive Compensation 42

Item 12. Security Ownership of Certain Beneficial Owners and Management 42

Item 13. Certain Relationships and Related Transactions 42

Part IV

Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 42

Signatures 44

PART I.

ITEM 1. BUSINESS

United Natural Foods, Inc. ("United Natural" or the "Company"UNFI")is the leading independent national
distributor of natural foods and related products in the United States. The Company isWe are
the primary supplier to a majority of itsour customers, offering more than 26,000
high-quality natural products consisting of groceries and general merchandise,
nutritional supplements, bulk and foodservice products, personal care items,
perishables and frozen foods. The Company servesWe serve more than 6,500 customers in 4647 states,
including independent natural products retailers, super natural chains and
conventional supermarkets, and isare the primary distributor to the two largest
super natural chains, Whole Foods Markets, Inc. ("Whole Foods") and Wild Oats
Markets, Inc. ("Wild Oats"). The
CompanyWe also ownsown and operates 16operate 11 retail natural products
stores which complement itsour distribution business. The Company'sOur strategy is to continue
to capitalize on itsour leading market position and strong industry trends to
enhance itsour position as the leading independent national distributor to the
natural products industry. For the twelve months ended July 31, 1998, the Company1999, we
generated net sales and operating income of $728.9$857.0 million and $29.0$26.8 million,
respectively, representing compound annual growth rates of 20.7%20.0% and 37.0%26.1%,
respectively, from the twelve months ended October 31, 1994.

The Company hasWe have achieved itsour market leadership position through a strategy
consisting of both strong internal growth and acquisitions. Since 1985, the
Company haswe have
successfully completed 2014 acquisitions of distributors suppliers
and retail stores,suppliers, including
Stow Mills Inc. ("Stow Mills"), Hershey Import Co., Inc. ("Hershey") and
Albert's Organics, Inc. ("Albert's"), and 11 acquisitions of retail stores,
significantly expanding the Company'sour distribution network, product offering and customer
base. On October 31, 1997, the Companywe merged with Stow Mills, a regional natural
products distributor serving the Northeast and Midwest regions of the United
States. The Company believes that the Stow Mills merger will generate
significant benefits, including: (i) increased market share and distribution
capacity, particularly in the Midwest; (ii) improved purchasing power; (iii)
enhanced product offerings; (iv) improved distribution logistics and operating
efficiencies; and (v) significant opportunities for the reduction of selling,
general and administrative expenses. On February 11, 1998, the Companywe acquired the assets of Hershey, a business
specializing in the international trading, roasting and packaging of nuts,
seeds, dried fruits and snack items. On September 30, 1998, the Companywe acquired
substantially all of the outstanding stock of Albert's, a wholesale distributor
of organic produce. In managing itsour growth strategy, the Company has successfullywe have captured the
benefits of itsour national scale, while utilizing a regional approach to managing
itsour business, taking advantage of the strong customer loyalty developed by itsour
regional divisions which have formed the foundation of the Company. As a result
of itsour national expansion, the Company haswe have organized itsour distribution operations into
three
geographic regions:four principal units: United Natural Foods in the Eastern Region (previously
Cornucopia Natural Foods, Inc. ("Cornucopia") and Stow Mills, in the Eastern Region,Inc.) Rainbow Natural Foods, Inc.
("Rainbow") in the Central Region, and Mountain People's Warehouse ("Mountain
People's")in the Western Region. The Company believes that this combination of national distribution
economies combined with a regional operating focus has beenRegion and Alberts Organics in various markets in the
cornerstone of
its successful operating strategy.United States.

NATURAL PRODUCTS INDUSTRY

According to The Natural Foods Merchandiser,the March 1999 Nutrition Business Journal, a leading industry
publication, theaggregate growth in wholesale sales of natural products industry has achieved a compound annual growth rate of
21% from 1992 to 1996, growing from $5.3 billion to $11.5 billion. The Company
believesfood manufacturers
was 13% in 1998. We believe that this growth reflects a broadening of the
natural products consumer base which is being driven by several factors,
including an increasing awareness of the link between diet and health, healthier
eating patterns, increasing concern regarding food purity and safety and greater
environmental awareness.

According to Thethe June 1999 Natural Foods Merchandiser, the natural products
retailing sector is highly fragmented, with over 6,7009,000 independent natural
products retailers in operation in 19961998 and continuing to grow annually.
Although the natural products industry sector remains fragmented, natural
products supermarkets continue to increase their market share of total natural
products sales as they expand into additional geographic markets and acquire
smaller independent competitors. In addition, conventional supermarkets and mass
market outlets have also begun to increase their emphasis on the sale of natural
products as the sector gains appeal. Moreover, 3
as consumer demand for natural
products has grown, an increasing number of national, regional and local natural
products have become available as more suppliers and producers have entered the
market.

COMPETITIVE ADVANTAGES

The Company believes it benefitsWe believe we benefit from a number of significant competitive advantages
which include:

.including:

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

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

.o EXPANDING BASE OF PREMIER CUSTOMER RELATIONSHIPS. The Company servesWe serve more than 6,500
customers in 4647 states. The Company hasWe have developed long-standing customer
relationships that it believeswe believe are among the strongest in the industry. The Company hasWe
have also been the primary supplier to each of the industry's two largest
super natural chains, Whole Foods and Wild Oats, for more than ten years.

.o EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY STAKE. The Company'sOur management
team has extensive experience in the natural products industry and has been
successful in identifying, consummating and integrating multiple
acquisitions. Since 1985, the Company haswe have successfully completed 2014 acquisitions of
distributors suppliers and retail stores,suppliers, including Stow Mills, Hershey and Albert's, and
Hershey.11 acquisitions of retail stores. In addition, the Company'sour executive officers and
directors, and their affiliates, and the Employee Stock Ownership Trust
("ESOT") beneficially own in the aggregate approximately 62.0%47% of the
Company's Common Stock. Accordingly, the Company's senior management and employees have
significant incentive to continue to generate strong growth in operating
results in the future.

GROWTH STRATEGY

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

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

.o EXPAND EXISTING CUSTOMER BASE. The Company hasWe have expanded substantially the number of
customers served to more than 6,500 as of July 31, 1998. The Company plans1999. We plan to
continue to expand itsour coverage of the highly fragmented natural products
industry by cultivating new customer relationships within the industry as well as inand
by developing other channels of businessdistribution such as traditional
supermarkets, mass market outlets, Internet retailers, institutional
foodservice providers, hotels and gourmet stores.

.o INCREASE ITSMARKET SHARE OF EXISTING CUSTOMERS' DISTRIBUTION NEEDS. The
Company seeksBUSINESS. We seek to become
the primary supplier for a majority of its
customers' needsour customers by offering the
broadest product offering in the industry at the most competitive prices.
Since 1993, the Company has
significantlywe have expanded itsour product offering from approximately 14,000
products to more than 26,000 SKUs as of July 31, 1998. In addition, the
Company has1999. Additionally, we have
launched a number of highly successful private label programs which offer both the Companythat present to us and itsour
customers higher margins than many of the Company'sour existing product offerings. As a
result the
Company believes it haswe believe we have become the primary distributor to the majority of
itsour natural products customer base.

o CONTINUE TO EXPAND AND PENETRATE INTO NEW DISTRIBUTION TERRITORIES.CHANNELS OF DISTRIBUTION. Since
1993 the Company haswe have increased the aggregate size of itsour distribution centers from
approximately 660,000 square feet to approximately 1,300,0001,400,000 square feet
and the number of states served from 25 to 46. The Company47. We will continue to
selectively evaluate opportunities to acquire (i) distributors to fill in
existing markets and expand into new markets and (ii) suppliers to expand
margins through vertical integration and brand differentiation. The CompanyWe
currently hashave no agreements or understandings with regard to any material
acquisitions.

.o CONTINUE TO IMPROVE EFFICIENCY OF NATIONWIDE DISTRIBUTION NETWORK. The
CompanyWe
continually seeksseek to improve itsour operating results by integrating itsour
nationwide network utilizing the best practices within the industry and
within each of the regions that have formed the foundation of the Company.UNFI. This
focus on achieving improved economies of scale in purchasing, warehousing,
transportation and general and administrative functions has resulted in
significant improvements in operating margins, which increased from 2.5% in fiscal 1994
to 5.0%3.6% (excluding restructuring costs) in fiscal 1999, although our
operating margin (excluding restructuring costs) in the fourth quarter ended July 31, 1998,
excluding relocationof
fiscal 1999 was 0.0% due to computer and start-up costs forrelated issues arising from the
new expanded Denver
distribution and Central Region headquarters facility. Management believesconsolidation of operations in the Eastern Region. We believe that there
are additional opportunities for margin improvement from itsour best practices
programs.

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

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

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

PRODUCTS

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

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

SUPPLIERS

The Company purchases itsWe purchase our products from approximately 1,800 active
suppliers. Although theThe majority
of the Company's suppliersour vendors are based in the United States, the Company regularly sourcesbut we source products from
vendorssuppliers throughout Europe, Asia, South America, Africa and Australia. Management believesWe
believe that the reason natural products suppliers seek distribution of their
products through the
CompanyUNFI is because it provideswe provide access to a large and growing
customer base, distributesdistribute the majority of the suppliers' products and supports the
suppliers'support
their marketing programs. Substantially all product categories distributed by the Companythat we
distribute are available from a number of suppliers and the
Company istherefore we are not
dependent on any single source of supply for any product category. The Company'sOur largest
supplier accounted for approximately 3.8%4.7% of total purchases in calendar 1997.

The Company hasfiscal 1999.

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

The Company'sfoods.

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

6
our account and customer
service representatives in marketing new products, identifying industry trends
and coordinating advertising and other promotions.

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

CUSTOMERS

The Company markets itsWe market our products to more than 6,500 customers located in 4647 states.
The Company maintainsWe maintain long-standing customer relationships with independent natural
products retailers, including super natural chains, and hashave continued to
emphasize itsour relationships with new customers, such as conventional
supermarkets, Internet retailers and other mass market outlets, as
well asand gourmet
stores, all of which are continually increasing their natural product offerings.
Among the Company'sour wholesale customers are leading super natural chains doing business as
Whole Foods (including Bread and Circus, Fresh Fields, and Fresh Fields)Nature's Heartland),
Wild Oats, Nature's Fresh, Northwest!Fresh!, Nature's Heartland andNorthwest, Wild Harvest and conventional supermarket
chains such as Carr's, CityWegman's, Stop and Shop, Shaws/Star Market,
Harris Teeter, King Soopers, Kroger, Path Mark, Quality Food Centers
(QFC), Shaws, Star MarketHannaford, Pathmark and Stop and Shop.

Management believesKroger.

We believe that the Company iswe are the primary supplier to the majority of itsour
customers. Whole Foods accounted for approximately 16%17% and 14%16% of the Company's
net sales in fiscal 1999 and 1998, respectively. Wild Oats accounted for
approximately 11% and 1997,9% of our net sales in fiscal 1999 and 1998, respectively.
No other customer accounted for more than 10% of the Company'sour net sales in fiscal 1998.

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

PERCENTAGE OF
NET SALES
-------------
1996 1997

TYPE OF CUSTOMER
Independent Natural Products Stores........................................ 53.8% 55.5%
Super Natural Chains....................................................... 31.5 31.1
Conventional Supermarkets.................................................. 9.3 8.9
Miscellaneous/Other........................................................ 5.4 4.5
---- ----
100.0% 100.0%
====== ======
1999.

SALES

The Company maintainsWe have historically maintained an order fill rate that exceeds on average exceeds
95% (excluding products unavailable from the supplier), which the Company believeswe believe is one
of the highest order fill rates in the natural products distribution industry.
The Company believesfill rate has averaged approximately 75% to 80% in the Eastern Region during
the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000 due to
difficulties encountered relating to consolidation of operations in that itsregion.
We believe that our high fill rates can be attributedare attributable to itsour experienced
purchasing department and sophisticated warehousing, inventory control and
distribution systems. The Company offersWe offer next-day delivery service to a majority of itsour
active customers and offersoffer multiple deliveries each week 7
to itsour largest
customers. The Company believesWe believe that customer loyalty is dependent upon outstanding
customer service to ensure accurate fulfillment of orders, timely product
delivery, low prices and a high level of product marketing support.

MARKETING

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

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

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

DISTRIBUTION

The Company maintains 13We maintain twelve distribution centers located in Atlanta, Georgia;
Auburn, California; Bridgeport, New Jersey; Chesterfield, New Hampshire;
Chicago, Illinois; Dayville, Connecticut; Denver, Colorado; Kealeakua, Hawaii;
Los Angeles, California; New Oxford, Pennsylvania; Rahway, New Jersey; Seattle,
Washington and Winterhaven, Florida.centers. These facilities consist of an
aggregate of more than 1,300,000approximately 1.4 million square feet of space, the largest
capacity of any distributor in the natural products industry. The Company hasWe have recently
leased a new facility in ColoradoAuburn, Washington which, at 180,800200,000 square feet is
twice the size of itsour former facility. The Company intendsdistribution center in Seattle. Our Chesterfield
facility is currently offered for sale. We expect to replace its 40,000 square foot auxiliary
storage facility in Sacramento, California with a 75,000 square foot storage
facility located adjacentcomplete the transfer the
current Chesterfield volume to its Auburn, Californiaother facilities during fiscal 2000. See Item 2 -
Properties for information on our distribution center. The
Company recently signed a lease for a new distribution facility currently under
construction in Auburn, Washington.

SIZE LEASE
LOCATION (IN SQUARE FEET) EXPIRATION

The Company hascenters.

We have carefully chosen the sites for itsour distribution centers to provide
direct access to itsour regional markets. This proximity allows the
Companyus to reduce itsour
transportation costs compared to competitors that seek to service their
customers from locations that are often hundreds of miles away. The Company believesWe believe that
it incurswe incur lower inbound freight expense than itsour regional competitors because itsour
national presence allows itus to buy full and partial truckloads of products which, ifproducts.
Whenever necessary itwe can backhaul using
the Company's own trucks between itsour distribution centers and
satellite staging facilities.facilities using our own trucks. Many of the Company'sour competitors must
employ outside consolidation services and pay higher carrier transportation fees
to move products from other regions. In addition,Additionally, we can redistribute
overstocks and inventory imbalances at one distribution center may be redistributed by the Company to another
distribution center whereto ensure products may beare sold prior to their expiration date.

7
Products are delivered to the Company'sour distribution centers primarily by itsour leased
fleet of trucks, contract carriers and the suppliers themselves. The Company leasesWe lease most
of itsour trucks from Ryder Truck Leasing, which in some cases maintains facilities
on some of the Company'sour premises for the maintenance and service of these vehicles, and a lesser number of itsvehicles. Other trucks
are leased from regional firms that offer competitive services.

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

TECHNOLOGY

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

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

RETAIL OPERATIONS

The Company's Natural Retail Group ("NRG") currently owns and operates 1611
retail natural products stores located in Connecticut, Florida, Maryland, Massachusetts and
New York. The Company'sOur retail strategy is to selectively acquire existing stores that
meet the Company'sour strict criteria in categories such as sales and profitability, growth
potential, merchandising and management. Generally, the Companywe will not purchase stores
that directly compete with primary retail customers of itsour distribution
business. The
Company believes itsWe believe our retail stores have a number of advantages over their
competitors, including the financial strength and marketing expertise provided

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

As bothActing as a distributor to itsour retail stores is an advantageous position
for us and a retailer, a number of
advantages are made available to the Company, includingincludes the ability to: (i)control the purchases made by these
stores; (ii) expand the number of high-
growth,high-growth, high-margin product categories
such as produce and prepared foods within these stores; and (iii) keep current
with the retail marketplace which allows itenables us to better serve itsour distribution
customers. In addition,Additionally, as the primary natural products distributor to itsour
retail locations, the Company
expectswe expect to realize significant economies of scale and
operating and buying efficiencies. As an operator of retail stores, the Companywe also hashave
the ability to test market select products prior to offering them nationally,
which allows the Company tonationally. We
can then evaluate consumer reaction to the product without incurring significant
inventory risk. The Company isWe are able to test new marketing and promotional programs
within itsour stores prior to offering them to a broader customer base.

COMPETITION

The natural products distribution industry is highly competitive. The
industry has been characterized in recent years by significant consolidation
andconsolidationand
the emergence of large competitors. The Company'sOur major national competitor is Tree of
Life Distribution, Inc. (a subsidiary of Koninklijke Bolswessanen N.V.) and itsour
major regional competitors are Nature's Best, Inc. in the western United States,
Northeast Cooperative in the eastern United States and Blooming Prairie
Cooperative Warehouse in the Midwestern states. The CompanyWe also competescompete with numerous
smaller

regional and local distributors of ethnic, Kosher, gourmet and other specialty
foods. In
addition, the Company competesAdditionally, we compete with national, regional and local distributors
of conventional groceries and, to a lesser extent, companies that distribute to
their own retail facilities. There can be no assurance that distributors of
conventional groceries will not increase their emphasis on natural products and
more directly compete with the Companyus or that new competitors will not enter the market.
Many of these distributors may have been in business longer, may have
substantially greater financial and other resources than the Companywe have and may be
better established in their markets. There can be no assurance that the Company'sour current
or potential competitors will not provide services comparable or superior to
those provided by the Companythat we provide or adapt more quickly than the Companywe are able to evolving
industry trends or changing market requirements. It is also possible that
alliances among competitors may emerge and rapidly acquire significant market
share or that certain of the Company'sour customers will increase distribution to their own
retail facilities. Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could materially adversely
affect the Company'sour business, financial condition or results of operations.

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

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

10
EMPLOYEES

As of SeptemberApril 30, 1998, the Company1999 we had approximately 2,4422,600 full- and part- time
employees. The Company has in the past been the focus of union-organizing
efforts. An aggregate of approximately 90160 of the employees at the Company'sour Seattle,
Washington and Rahway, New Jersey facilities are covered by a collective
bargaining agreements. United Natural hasagreement. We have never experienced a work stoppage by its unionized
employees. United Natural believesWe believe that its relationship with itsour employees is good.

ITEM 2. PROPERTIES

SIZE LEASE
LOCATION (IN SQUARE FEET) EXPIRATION
Atlanta, Georgia............................... 175,000 March 2001
Auburn, California distribution center. The
Company recently signed a lease for a new distribution facility currently under
construction inCalifornia............................. 150,000 Owned
Auburn, Washington.

SIZE LEASE
LOCATION (IN SQUARE FEET) EXPIRATION

Atlanta, Georgia....................... 175,000 March 1999
Auburn, California..................... 150,000 Owned
Bridgeport, New Jersey................. 36,700 Owned
Chesterfield, New Hampshire............ 126,500 Owned
Chicago, Illinois...................... 80,000 December 2000
Dayville, Connecticut.................. 245,000 Owned
Denver, Colorado....................... 180,800 July 2013
Kealeakua, Hawaii...................... 16,300 October 2002
Los Angeles, California................ 31,000 June 1999
New Oxford, Pennsylvania............... 127,000 May 2003
Rahway, New Jersey..................... 38,000 March 2002
Seattle, Washington.................... 100,000 February 2001
Winterhaven, Florida................... 10,500Washington............................. 200,000 March 2009
Bridgeport, New Jersey......................... 35,700 Owned
Chesterfield, New Hampshire.................... 126,500 Owned
Chicago, Illinois.............................. 80,000 February 2000
Dayville, Connecticut.......................... 245,000 Owned
Denver, Colorado............................... 180,800 July 2013
Kealeakua, Hawaii.............................. 16,300 October 2002
Los Angeles, California........................ 30,900 February 2000
New Oxford, Pennsylvania....................... 127,000 May 2003
Winterhaven, Florida........................... 10,600 October 2000

The CompanyWe also rentsrent facilities to operate its 1611 retail stores along the east coast.coast
and a 38,000 square foot processing and manufacturing facility in Rahway, New
Jersey.

ITEM 3. LEGAL PROCEEDINGS.

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

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

There were no matters submitted to a vote of the security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year ended July 31, 1998.1999.

EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

The executive officers and directors of the Company and their ages as of
October 29, 19981999 are as follows:

NAME AGE POSITION

Norman A. Cloutier(1)(2)...... 44 Chairman of the Board and Chief Executive
Officer
Michael S. Funk(2)............ 44 Vice Chairman of the Board, President of the
Company and President of the Company's
Western Region
Robert T. Cirulnick........... 43NAME AGE POSITION
Norman A. Cloutier(1)(2)...... 46 Chairman of the Board and Chief Executive
Officer
Michael S. Funk(2)............ 45 Vice Chairman of the Board, President of the
Company and President of the Company's
Western Region
Richard S. Youngman........... 48 Director and Vice President of Business
Development of the Company
Daniel V. Atwood.............. 41 Secretary of the Board, Vice President of
the Company and President of NRG
Kevin T. Michel............... 42 Interim Chief Financial Officer and
Treasurer,
Richard S. Youngman........... 47 President of the Company's Eastern Region,
Assistant Secretary and Director of the
Company
Gordon Barker(1)(3)........... 53 Director
Joseph M. Cianciolo(1)(3)..... 60 Director
Thomas B. Simone(1)(3)........ 57 Director
Richard J. Williams........... 38 Director of the
Company
Daniel V. Atwood.............. 40 President of NRG, Vice President and
Secretary of the Company
Kevin T. Michel............... 40 President of the Company's Central Region,
Assistant Treasurer and Director of the
Company
Barclay McFadden, III......... 48 Director
Thomas B. Simone(1)(3)........ 56 Director
Steven H. Townsend............ 45 Director
Richard J. Williams(1)(3)..... 37 Director

- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Nominating Committee.
(3) Member of the Compensation Committee.

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

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

Robert T. CirulnickRichard S. Youngman has been Chief Financial Officerthe Vice President of Business Development
since March 1999. Mr. Youngman had previously served as President of the
Company since
February 1998.Company's Eastern Region from October 1997 until March 1999. Mr. Cirulnick served in various financial capacities with
PepsiCo, Inc. from September 1985 through February 1998, including Vice
President, Controller of Frito-Lay, Inc., a subsidiary of PepsiCo, from August
1994 to February 1998. Mr. Cirulnick was the Chief Financial Officer and
Director of Finance and Administration for Smith's Food Group, a joint venture
company between PepsiCo and General Mills from May 1993 through August 1994.
Mr. Cirulnick was a Certified Public Accountant with KPMG Peat Marwick LLP
from June 1980 to September 1985, where he served in various audit and tax
capacities.

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

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

10
Kevin T. Michel has been the Executive Vice President of the Company's
Western Region since March 1999 and interim Chief Financial Officer and
Treasurer since August 1999. Mr. Michel served as President of the Company's
Central Region sincefrom January 1998.1998 until March 1999. Mr. Michel served as Chief
Financial Officer of Mountain People's Warehouse from January 1995 until
December 1997. From January 1992 until
January 1995, Mr. Michel held several different accounting and finance
positions at Mountain People's. From March 1991 until December 1991, Mr.
Michel was the sole proprietor of a restaurant. Mr. Michel has served on the Board of Directors since February
1996.

Barclay McFadden, IIIGordon Barker was the Chief Executive Officer andappointed as a director of Stow
Mills and its predecessor company from 1976 until October 1997. Mr. McFadden
servesDirector on the Board of Directors in
September 1999. Mr. Barker was employed for 30 years at PayLess Drug Stores
(subsequently renamed ThriftyPayLess Drug Stores). While at the company Mr.
Barker rose from Pharmacist, through several levels of First Vermont Bankmanagement, ultimately
leading the company as its CEO/President. Currently Mr. Barker is serving on the
following Boards of Directors: Gart/Sportsmart Sporting Goods, Infinity Towers,
NuMedics Inc., and Allure Inc.

Joseph M. Ciancolo was appointed as a number of
charitable organizations. Mr. McFadden has servedDirector on the Board of Directors since December 1997.in
September 1999. Mr. Cianciolo will also serve as Chairman of the Audit Committee
and as a member of the Compensation Committee. Mr. Cianciolo was the Managing
Partner of KPMG LLP, Providence, Rhode Island Office from June 1990 until June
1999. Prior to his appointment as managing partner, Mr. Cianciolo served as the
engagement partner from 1970 - 1999 for various manufacturing and distribution
companies, health, beauty and restaurant chains, and a manufacturer of
electronic devices.

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

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

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

PART II.

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

The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "UNFI." The United Natural Common Stock began trading on the Nasdaq
National Market on November 1, 1996. The following table sets forth for the
periods indicated the high and low sale prices per share of United Natural
Common Stock on the Nasdaq National Market:

Fiscal 1997 High Low
------- -------

Second Quarter $17.500 $12.500

Third Quarter 17.000 13.000

Fourth Quarter 24.375 15.000

Fiscal 1998 High Low
------- -------Fiscal 1998 High Low
----------- ---- ---
First Quarter $26.750 $19.250
Second Quarter 27.125 19.750
Third Quarter 30.688 23.750
Fourth Quarter 33.375 22.500

Fiscal 1999 High Low
----------- ---- ---
First Quarter $29.500 $19.000
Second Quarter 29.250 22.500
Third Quarter 29.750 17.750
Fourth Quarter 29.250 17.250

On July 31, 19981999 United Natural had 5049 stockholders of record. The number
of record holders may not be representative of the number of beneficial holders
because many shares are held by depositories, brokers or other nominees.

The Company has11

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

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below under the caption
Consolidated Statement of Income Data with respect to the fiscal year ended
October 31, 1995, the nine months ended July 31, 1996, and the fiscal years ended
July 31, 1997, 1998 and 1998,1999, and under the caption Consolidated Balance Sheet
Data at July 31, 1996, 1997, 1998 and 1998,1999, are derived from the consolidated
financial statements of the Company, which financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected
consolidated financial data presented below under the caption Consolidated
Statement of Income Data with respect to the nine monthsyears ended JulyOctober 31, 1995 and
the twelve months ended July 31, 1996 and under the caption Consolidated Balance Sheet Data at October
31, 1995 are derived from

13
the unaudited consolidated financial statements of the
Company that have been prepared on the same basis as the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for such periods. The historical results are not
necessarily indicative of results to be expected for any future period. The
following selected consolidated financial data should be read in conjunction
with and are qualified by reference to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K.

1412

Consolidated Statement of Income Data

YEAR ENDED OCTOBER NINE MONTHS ENDED TWELVE MONTHS ENDEDYear Ended
October 31, JULY 31, JULYYear Ended July 31,
(In thousands, except per share data) 1994 1995 1995 1996 1996 1997 1998 STATEMENT OF OPERATIONS DATA: ---- ----1999
---- ---- ---- ---- ----

Statement of Operations Data:
Net sales $359,881 $458,849 $318,642 $439,842 $580,049 $634,825 $728,910 $856,998
Cost of sales 285,339 363,757 251,381 350,130 462,506 507,547 578,575 680,301

Gross profit 74,542 95,092 67,261 89,712 117,543 127,278 150,335 176,697
Operating expenses 65,080 81,355 57,154 75,059 99,261 103,885 116,042 144,937
Merger and restructuring expenses - - - - - --- -- -- 4,064 3,869
Amortization of intangibles 538 2,426 602 793 2,616 1,060 1,185 1,075

Total operating expenses 65,618 83,781 57,756 75,852 101,877 104,945 121,291 149,881

Operating income 8,924 11,311 9,505 13,860 15,666 22,333 29,044 26,816
Other expense (income):
Interest expense 4,391 5,969 4,127 5,887 7,730 5,976 5,157 5,700
Other, net (226) (428) (377) (360) (411) (679) (778) (2,477)
Total other expense 4,165 5,541 3,750 5,527 7,319 5,297 4,379 3,223
Income before income taxes and extraordinary item 4,759 5,770 5,755 8,333 8,347 17,036 24,665 23,593
Income taxes 2,022 2,953 2,185 2,883 3,652 6,636 11,580 10,126
Extraordinary item - - - - --- -- 933 --- --
Net income $ 2,737 $ 2,817 $ 3,570 $ 5,450 $ 4,695 $ 9,467 $ 13,085 $ 13,467

Per share data (Basic):

Income before extraordinary item $ 0.20 $ 0.21 $ 0.26 $ 0.40 $ 0.34 $ 0.64 $ 0.75 $ 0.74

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

Net income $ 0.20 $ 0.21 $ 0.26 $ 0.40 $ 0.34 $ 0.58 $ 0.75 $ 0.74

Weighted average basic shares of common stock 13,691 13,691 13,691 13,687 13,688 16,367 17,467 18,196

Per share data (Diluted):

Income before extraordinary item $ 0.18 $ 0.19 $ 0.24 $ 0.37 $ 0.32 $ 0.63 $ 0.74 $ 0.73

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

Net income per share (diluted) $ 0.18 $ 0.19 $ 0.24 $ 0.37 $ 0.32 $ 0.57 $ 0.74 $ 0.73

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

14,855 16,553 17,798 18,537

AS OF OCTOBERAs of
October 31, AS OF JULYAs of July 31,
1994Consolidated Balance Sheet Data: (In thousands) 1995 1996 1997 1998 1999
---- ---- ---- ---- ----

Working capital $24,713 $ 26,983 $ 13,453 $ 53,101 $ 65,568 $ 73,825
Total assets $91,442 $134,508 $152,343 $164,561 $212,242 $237,901
Total debt and capital leases $34,327 $ 48,890 $ 34,108 $ 21,647 $ 25,845 $ 25,791
Total stockholders' equity $14,266$ 17,117 $ 17,11723,440 $ 23,440 $ 73,916 $104,386 $118,581

1613

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

United Natural Foods, Inc. isOverview

We are the leading independent national distributor of natural foods and related
products in the United States. In recent years, the
Company has increasedour sales to existing and new
customers have increased through the acquisition of or merger with natural
products distributors, the opening of distribution centers in new geographic
areas, the expansion of existing distribution centers and the continued growth
of the natural products industry in general. Through these efforts, management believeswe believe
that the Company haswe have been able to broaden itsour geographic penetration, expand itsour
customer base, enhance and diversify itsour product selections and increase itsour
market share. The
Company'sOur distribution operations are divided into threefour principal regions:
Cornucopia and Stow Millsunits:
United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods,
Inc. and Stow Mills, Inc.), Rainbow Natural Foods, Inc. in the Central Region,
and Mountain People's Warehouse, Inc. in the Western Region.Region and Albert's Organics in
various markets in the United States. Through NRG,our subsidiary, the CompanyNatural Retail
Group, we also ownsown and operates 16operate a number of retail natural products stores
located in the eastern United States. The Company'sOur retail strategy for NRG is to selectively
acquire existing natural products stores that meet the Company'sour strict criteria in areas
such as sales growth, profitability, growth potential and store management. Management believes the Company'sWe
believe our retail business serves as a natural complement to itsour distribution
business.

The Company isbusiness 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, the Company'sour 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, the Company expectswe expect to benefit from the increased absorption
of itsour expenses over a larger sales base. In recent years,We have incurred considerable expenses
in connection with the Company hasconsolidation of operations in the Eastern Region, and
expect these expenses to continue into fiscal 2000. These expenses consist of
restructuring costs, including additional depreciation, severance and retention
expenses, and the cost of moving inventory, as well as additional temporary
expenses for information technology, inventory management and redundant staffing
and transportation. We have also made considerable expenditures in connection
with the expansion of itsour facilities, including the expansion of its distribution center and
headquarters in Dayville, Connecticut, the relocation of itsour Denver,
Colorado distribution center and the expansion of refrigerated and frozen space
at itsour Auburn, California and Atlanta, Georgia facilities. The Company'sAdditionally, our
Seattle, Washington facility was relocated to a larger facility in Auburn,
Washington during the third quarter of fiscal 1999.

Our net sales consist primarily of sales of natural products to retailers
adjusted for customer volume discounts, returns and allowances and, to
a lesser extent, sales from its natural products stores.allowances. The principal
components of the Company'sour cost of sales include the amount paid to manufacturers and
growers for product sold, plus the cost of transportation necessary to bring the
product to the Company'sour distribution facilities. Operating expenses include salaries and
wages, employee benefits (including payments under the Company'sour Employee Stock Ownership
Plan), warehousing and delivery, selling, occupancy, administrative,
depreciation, merger expenses and amortization expense. Other expenses include
gain on the sale of retail stores, interest payments on outstanding indebtedness,
interest income and miscellaneous income and expenses.

RECENT ACQUISITIONSOur operating results for the fourth quarter of fiscal 1999 were negatively
impacted by computer and related issues arising from the continuing
consolidation of Eastern Region operations. The consolidation resulted in
increased operating expenses, a lower gross margin and lower sales than prior
quarters in the Eastern Region. We had a net loss of $(0.08) per share for the
fourth quarter of fiscal 1999. Excluding restructuring costs of approximately
$1.6 million for the quarter, net loss per share was $(0.03). The computer and
related issues arising from the continuing consolidation of Eastern Region
operations have continued into fiscal 2000 and we expect our operating results
to continue to be negatively impacted.

Recent Acquisitions

On September 30, 1998, the Companywe acquired substantially all of the outstanding stock of
Albert's Organics, Inc., a wholesale distributorbusiness specializing in the purchase, sale and
distribution of organic produce and other perishable items, for between $10.8 and $12.0 million contingent onto $12
million, predicated upon the future performance.performance of the acquired business,
including $9.1 million of goodwill which we are amortizing over 40 years. The
final price will be determined by March 2000. Albert's had sales of $47.8
million for its most recentthe fiscal year endingended December 31, 1997.

During February 1998,1997 and provides us with
additional expertise in the Company acquired substantiallypurchasing 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 assetsdate of Hershey, an international trading, roasting and packaging business of nuts,
seeds, dried fruit and snack items, for approximately $10.5 million. Hershey had
sales of $20.8 million for its most recent fiscal year ending June 30, 1997.

The mergers of the Companyacquisition.

Our merger with Mountain People's in February 1996 and Stow Mills in October 1997 have eachhas been accounted for as a pooling
of interests and, accordingly, all information included herein is reported as
though United Natural Mountain People's and Stow Mills had been combined for all periods reported.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, certain income and
expense items expressed as a percentage of net sales:

----------------------------------------
TWELVE MONTHS ENDED JULY 31,
----------------------------------------
1998 1997 1996
---- ---- ----

Net sales 100.0% 100.0% 100.0%

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

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

Operating expenses 15.9% 16.4% 17.2%

Merger expenses 0.6% - -

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

Other expense (income):
Interest expense 0.7% 0.9% 1.3%
Other, net -0.1%Year Ended July 31,
------------------------
1999 1998 1997
------ ------ ------

Net sales 100.0% 100.0% 100.0%
Cost of sales 79.4% 79.4% 80.0%
------ ------ ------
Gross profit 20.6% 20.6% 20.0%
------ ------ ------

Operating expenses 16.9% 15.9% 16.4%
Merger and restructuring expenses 0.5% 0.6% --
Amortization of intangibles 0.1% 0.2% 0.2%
------ ------ ------
Total operating expenses 17.5% 16.6% 16.5%
------ ------ ------

Operating income 3.1% 4.0% 3.5%
------ ------ ------

Other expense (income):
Interest expense 0.7% 0.7% 0.9%
Other, net -0.3% -0.1% -0.1%
------ ------ ------
Total other expense (income) 0.4% 0.6% 0.8% 1.3%
------ ------ ------

Income before income taxes and
extraordinary item 2.8% 3.4% 2.7% 1.4%

Income taxes 1.2% 1.6% 1.0% 0.6%
------ ------ ------

Income before extraordinary item 1.6% 1.8% 1.7% 0.8%

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

Net income 1.6% 1.8% 1.5% 0.8%
====== ====== ======

TWELVE MONTHS ENDED JULY 31, 1999 COMPARED TO TWELVE MONTHS ENDED JULY 31, 1998

Net Sales.

Our net sales increased approximately 17.6%, or $128.1 million, to $857.0
million for the year ended July 31, 1999 from $728.9 million for the year ended
July 31, 1998. The overall increase in net sales was attributable to increased
sales to existing customers, the sale of new product offerings and the newly
acquired Albert's Organics business. Excluding Albert's Organics, our most
recent acquisition, our net sales growth would have been 11.4% over the prior
year comparable period.

Gross Profit.

Gross profit increased approximately 17.5%, or $26.4 million, to $176.7 million
for the year ended July 31, 1999 from $150.3 million for the year ended July 31,
1998. Gross profit as a percentage of net sales was consistent at 20.6% for both
years.

Operating Expenses.

Total operating expenses increased approximately 23.6%, or $28.6 million, to
$149.9 million for year ended July 31, 1999 from $121.3 million for the year
ended July 31, 1998. As a percentage of net sales, operating expenses increased
to 17.5% for year ended July 31, 1999 from 16.6% for the year ended July 31,
1998. Excluding fiscal 1999 restructuring costs of $3.9 million and fiscal 1998
merger costs of $4.1 million, total operating expenses for the years ended July
31, 1999 and 1998 would have been $146.0 million, or 17.0% of net sales, and
$117.2 million, or 16.1% of net sales, respectively, resulting in an increase
for the year ended July 31, 1999 of $28.8 million, or 24.6%, over the comparable
prior period. The increase in operating expenses as a percentage of net sales,
excluding restructuring and merger costs, is primarily due to increased
information technology expenditures and additional business integration costs
for redundant staffing and training related to the migration of the business
from the Chesterfield, New Hampshire facility to the Dayville, Connecticut
facility.

Operating Income.

Operating income decreased $2.2 million to $26.8 million for the year ended July
31, 1999 from $29.0 million for the year ended July 31, 1999. As a percentage of
net sales, operating income decreased to 3.1% in the year ended July 31, 1998
from 4.0% in the comparable 1998 period. Excluding the restructuring and merger
costs noted above, operating income for the year ended July 31, 1999 and 1998
would have been $30.7 million, or 3.6% of net sales, and $33.1 million, or 4.5%
of net sales, respectively, resulting in a decrease for year ended July 31, 1999
of $2.4 million, or 7.3%, versus the comparable prior period.

Other (Income)/Expense.

The $1.2 million decrease in other expense in the year ended July 31, 1999
compared to the year ended July 31, 1998 was primarily attributable to the $1.4
million gain on the sale of four retail stores in April 1999, partially offset
by an increase in interest expense relating to the higher level of debt in
fiscal 1999 used to fund working capital investments and the Albert's
acquisition. This increase in interest expense was partially offset by a
decrease in our average interest rate on debt.

Income Taxes.

Our effective income tax rates were 42.9% and 46.9% for the year ended July 31,
1999 and 1998, respectively. The effective rate for 1999 was higher than the
federal statutory rate primarily due to state and local income taxes and the
settlement of an IRS audit for $0.3 million. The effective rate for 1998 was
higher than the federal statutory rate primarily due to state and local income
taxes and non-deductible merger expenses incurred in the first quarter of fiscal
1998, partially offset by Stow Mills being an S Corporation prior to the merger
and, as such, having no federal tax expense for the first fiscal quarter of
1998.

Net Income.

As a result of the foregoing, net income increased by $0.4 million to $13.5
million, or 1.6% of net sales, for the year ended July 31, 1999 from $13.1
million in the year ended July 31, 1998. Excluding the $3.9 million in
restructuring costs ($2.3 million, net of tax), the $1.4 million gain on the
sale of four retail stores ($0.8 million, net of tax) and the $0.3 million IRS
settlement in the third quarter of fiscal 1999, and the $4.1 million in merger
costs in fiscal 1998, net income would have been $15.2 million, or 1.8% of net
sales, and $17.1 million, or 2.4% of net sales, respectively, resulting in an
decrease for the year ended July 31, 1999 of $1.9 million, or 11.3%, over the
comparable prior period.

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

Net Sales.

The Company'sOur net sales increased approximately 14.8%, or $94.1 million, to $728.9 million
for the twelve months ended July 31, 1998 from $634.8 million for the twelve
months ended July 31, 1997. The overall increase in net sales was primarily
attributable to increased sales to 18
existing customers, sales to new accounts in
existing geographic areas and the introduction of new products not previously
offered by the Company. The
acquisitions of Hershey and eight retail stores during fiscal 1998 also
contributed to the increase in sales.offered.

Gross Profit.

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

Operating Expenses.

The Company'sOur total operating expenses increased approximately 15.6%, or $16.3 million, to
$121.3 million for the twelve months ended July 31, 1998 from $104.9 million for
the twelve months ended July 31, 1997. As a percentage of net sales, operating
expenses increased to 16.6% for the twelve months ended July 31, 1998 from 16.5%
for the twelve months ended July 31, 1997. Excluding merger costs of $4.1
million and relocation and start-up costs of $0.7 million for the new expanded
Denver distribution and Central Region headquarters facility, the
Company'sour total
operating expenses for the twelve months ended July 31, 1998 would have been
$116.6 million, or 16.0% of net sales, representing an increase of $11.6
million, or 11.1%, over the comparable prior period. The decrease in total
operating expenses as a percentage of net sales was primarily attributable to
the Company'sour ability to leverage itsour overhead and realize synergies from recent
acquisitions.

Operating Income.

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

Other (Income)/Expense.

The $0.9 million decrease in other expense in the twelve months ended July 31,
1998 compared to the twelve months ended July 31, 1997 was primarily
attributable to the reduction in interest expense in the last ninefirst six months of
fiscal 1998 relating to the repayment of Stow Mills' debt with proceeds from the
Company'sour
credit facility, which bears interest at a lower rate. In addition, approximately $17.3 million inthe proceeds
from the Company's June 1998our secondary public offering in June 1998 were used to repay debt.

17
Income Taxes.

The Company'sOur effective income tax rates were 46.9% and 39.0% for the twelve months ended
July 31, 1998 and 1997, respectively. The effective rates were higher than the
federal statutory rate primarily due to nondeductible merger costs incurred
during the first quarter of fiscal 1998 and state and local income taxes,
partially offset by the fact that Stow Mills was an S Corporation prior to the
merger and, as such, had no federal tax expense.

Net Income.

As a result of the foregoing, the Company'sour net income increased by $3.6 million to $13.1
million for the twelve months ended July 31, 1998 from $9.5 million in the
twelve months ended July 31, 1997. Excluding the $4.1 million in merger costs
and the $0.7 million($million ($0.4 million,

19
net of taxes) in fiscal 1998 and $0.9
million extraordinary item (net of taxes) related to the early extinguishment of
debt in fiscal 1997, net income would have been $17.5 million (representing an
increase of 68.5% over the prior period), or 2.4% of net sales, and $10.4
million, or 1.6% of net sales, for the twelve months ended July 31, 1998 and
1997, respectively.

TWELVE MONTHS ENDED JULY 31, 1997 COMPARED TO TWELVE MONTHS ENDED JULY 31, 1996

Net Sales.

The Company's net sales increased approximately 9.4%, or $54.8 million, to
$634.8 million for the twelve months ended July 31, 1997 from $580.0 million for
the twelve months ended July 31, 1996. Net sales for Stow Mills during the
period increased at a lower rate than net sales for the Company's other regions.
The increase in net sales was primarily attributable to increased sales by the
Company to its existing customers, sales to new customers, increased sales
attributable to the introduction of new products not formerly offered by the
Company and increased market penetration in existing geographic territories.

Gross Profit.

The Company's gross profit increased approximately 8.3%, or $9.8 million, to
$127.3 million for the twelve months ended July 31, 1997 from $117.5 million for
the twelve months ended July 31, 1996. The Company's gross profit as a
percentage of net sales decreased to 20.0% for the twelve months ended July 31,
1997 from 20.3% for the twelve months ended July 31, 1996. The decrease in gross
profit as a percentage of net sales resulted primarily from increased sales to
existing customers that earned greater discounts under the Company's volume
discount program.

Operating Expenses.

The Company's total operating expenses increased approximately 3.0%, or $3.0
million, to $104.9 million for the twelve months ended July 31, 1997 from $101.9
million for the twelve months ended July 31,1996. However, as a percentage of
net sales, operating expenses decreased to 16.5% for the twelve months ended
July 31, 1997 from 17.6% for the twelve months ended July 31, 1996. Operating
expenses for the twelve months ended July 31, 1996 included $1.6 million
representing the write-down of intangible assets, $0.5 million for costs
associated with the merger with Mountain People's and $1.1 million for costs
associated with the grant of stock options under the Company's 1996 Stock Option
Plan. Excluding this charge, the Company's total operating expenses for the
twelve months ended July 31, 1996 would have been $98.8 million, or 17.0% of net
sales. The decrease in total operating expenses as a percentage of net sales was
attributable to the Company's absorption of fixed expenses and overhead over a
larger sales base.

Operating Income.

Operating income increased $6.6 million, or approximately 42.6%, to $22.3
million for the twelve months ended July 31, 1997 from $15.7 million for the
twelve months ended July 31, 1996. As a percentage of net sales, operating
income increased to 3.5% for the twelve months ended July 31,1997 from 2.7% for
the twelve months ended July 31, 1996. Excluding the charges discussed above,
operating income for the twelve months ended July 31,1996 would have been $18.8
million, or 3.2% of net sales.

Other (Income)/Expense.

Total other expense, net, decreased by $2.0 million, or approximately 27.6%, to
$5.3 million for the twelve months ended July 31,1997 from $7.3 million for the
twelve months ended July 31, 1996. The decrease was primarily attributable to
lower interest payments for the twelve months ended July 31, 1997 resulting from
the use of the proceeds of the Company's initial public offering to repay debt.
As a result, interest expense decreased to $6.0 million for the twelve months
ended July 31, 1997 from $7.7 million for the twelve months ended July 31, 1996.

Income Taxes.

The Company's effective income tax rate was 39.0% and 43.8% for the twelve
months ended July 31, 1997 and 1996, respectively. Stow Mills was taxed as an S
Corporation prior to the merger with the Company. Had Stow Mills been a C
corporation, the Company's effective tax rates would have been 41.3% and 49.6%
for the twelve months ended July 31, 1997 and 1996,respectively. The effective
rates were higher than the federal statutory rate primarily due to nondeductible
amortization, especially the write-off of the intangible assets in the twelve
months ended July 31, 1996, as well as the impact of state and local income
taxes.

Net Income.

As a result of the foregoing, the Company's income before extraordinary item for
the twelve months ended July 31, 1997 was $10.4 million. In November 1996, the
Company completed its initial public offering of stock, the net proceeds of
which were used to repay debt. In connection with the Company's early repayment
of debt from the proceeds of its initial public offering, the Company recorded
an extraordinary loss of $1.6 million($0.9 million net of taxes) for the twelve
months ended July 31, 1997. Net income for the twelve months ended July 31, 1997
was $9.5 million. Net income for the twelve months ended July 31, 1996 was $4.7
million. Net income for the year included a charge of $1.3 million net of taxes.

LIQUIDITY AND CAPITAL RESOURCES

The CompanyWe have historically has financed its operations and growth primarily from cash flows
from operations, borrowings under itsour credit facility, seller financing of
acquisitions, operating and capital leases, trade payables, bank indebtedness
and the sale of debtequity and equitydebt securities. Primary uses of capital have been
acquisitions, expansion of plant and equipment and investment in accounts
receivable and inventory.

Net cash provided by (used in) operations was $8.3 million, $4.5 million $1.9 million and $(0.5)$1.9 million
for the years ended July 31, 1999, 1998 and 1997, and the nine months
ended July 31, 1996, respectively. Excluding merger
expenses of $4.1 million, net cash provided by operations in fiscal 1998 would
have been $8.6 million. The
Company's cashCash provided by operations in fiscal 1998, excluding merger expenses,
is due1999 related
primarily to cash collected from customers net income plus depreciation and amortization,of cash paid to vendors,
partially offset by investments in accounts receivable and inventory in the ordinary course of
business. The increase in inventory levels relates to supporting increased sales
with wider product assortment combined with the Company's ability to capture
purchasing efficiency opportunities in excess of total carrying costs. The
Company's workingWorking capital at July 31, 19981999 was $64.9$73.8 million.

Net cash used in investing activities was $6.9 million, $34.7 million $3.8 million and $8.6$3.8
million for the years ended July 31, 1999, 1998 and 1997, and the nine months ended
July 31, 1996, respectively.
Investing activities in fiscal 1999 and 1998 were primarily for the acquisition
of new businesses the purchase of the Auburn, California warehouse
and Western Region Headquarters facility, and the purchase of a warehouse, as
well asinvesting activities for all three years included the
continued upgrade of existing management information systems. InvestingNet cash used in
investing activities in 1997 included primarily capital expenditures related tofiscal 1999 was partially offset by proceeds from the
purchasesale of material handling equipment and the continued upgrade of
existing management information systems. The Company's capital expenditures were
primarily funded from senior bank indebtedness, including term loans.four retail stores in April 1999.

Cash provided by financing activities was $0.1 million, $30.6 million $2.0 million and $9.3$2.0
million for the years ended July 31, 1999, 1998 and 1997, and the nine months ended
July 31, 1996, respectively. DuringWe
increased borrowings on our line of credit by $4.5 million during fiscal 1999,
which was mostly offset by debt repayments totaling $4.3 million. The primary
financing activities in fiscal 1998 the Company issued 800,000 shares of
its common stock forwere net proceeds of $17.2 million. Also in 1998,million from the
Company
had net borrowingissuance of common stock and proceeds of $14.4 million from long-term debt
incurred. Net borrowings on itsour line of credit during fiscal 1998 of $9.4
million were offset by repayments of long-term debt totaling $9.5 million. The
primary financing activities in fiscal 1997 were net proceeds of $35.5 million
from the issuance of common stock and proceeds of $12.5 million from long-
termlong-term
debt incurred. The primary use of $14.4 million. During fiscal 1997, the Company issued 2.9 million
sharesthese proceeds was a net paydown of its common stock in its initial public offering, which resulted in net
proceeds to the Companyour line
of $35.5 million. The proceeds were used to repay
indebtedness of the Company.

In October 1997, the Company amended its credit agreement with its bank to
increase the amount of the facility from $50 million to $100 million, to
increase the limit on inventory advances to $50totaling $ 23.0 million and the advance rate to
60%, to establish a term loanrepayments of $6.6 million and to

increase the aggregate amount of real estate acquisition loans and real estate
term loans to $20long-term debt totaling
$22.3 million.

The agreement also provides for the bank to syndicate
the credit facility to other banks and lending institutions. The credit facility
was used to repay existing indebtedness of Stow Mills owing to the Company's
bank and is used for general operating capital needs. Interest under the
facility, except the portion related to the mortgage commitments, accrues at the
Company's option at the New York Prime Rate or 1.00% above the bank's London
Interbank Offered Rate (LIBOR), and the Company has the option to fix the rate
for all or a portion of the debt for a period up to 180 days. Interest on the
mortgage facility will accrue at 1.25% above the bank's LIBOR rate, although the
Company has the option to fix the rate for a period of five years at a rate of
1.25% above the five-year rate for U.S. Treasury Notes. The Company has pledged
all of its assets as collateral for its obligations under the credit agreement.
As of July 31, 1998, the Company's outstanding borrowings under the credit
agreement totaled $60.8 million. The credit agreement expires on July 31, 2002.

The Company expectsWe expect to spend approximately $45 million over the next five years in capital
expenditures to fund the expansion of existing facilities, purchase
new facilities, upgrade information
systems and technology and update itsour material handling equipment.

Included in this amount is $5 million in capital
expenditures in the 1998 and 1999 calendar years for the Company's systems
upgrade and new warehouse management system, including new hardware and
installation.

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

IMPACT OF INFLATION

Historically, the Company has been able to pass along inflation-related
increases. Consequently, inflation has not had a material impact upon the
results of the Company's operations or profitability.

SEASONALITY

Generally, the Company does not experience any material seasonality. However,
the Company's sales and operating results may vary significantly from quarter to
quarter due to factors such as changes in the Company's operating expenses,
management's ability to execute the Company's operating and growth strategies,
personnel changes, demand for natural products, supply shortages and general
economic conditions.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 129, "Disclosure of Information about Capital
Structure." This statement establishes standards for disclosing information
about an entity's capital structure. This statement is effective for periods
ending after December 15, 1997. The Company is in compliance with this standard.

The Financial Accounting Standards Board issued SFAS No. 130,"Reporting
Comprehensive Income." This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. This statement is effective for fiscal years
beginning after December 15, 1997 and requires reclassification of financial
statements for earlier periods provided for comparative purposes. The Company
will comply with the required presentation in fiscal 1999.

The Financial Accounting Standards Board issued SFAS No. 131,"Disclosures "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for reporting operating segments of publicly traded business
enterprises in annual and interim financial statements and requires that those
enterprises report selected information about operating segments. This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business," but
retains the requirement to report information about major customers. This
22

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,We adopted this standard will have on its financial statement
presentation.in fiscal
1999.

The Financial Accounting Standards Board issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This statement
standardizes disclosure requirements for pensions and other postretirement
benefits, and is effective for fiscal years beginning after December 15, 1997.
This statement does not apply to the Company as the Company doeswe do not currently sponsor any defined benefit
plans.

The Financial Accounting Standards Board recently issued SFAS NoNo. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments, and
is effective for fiscal quarters of fiscal years beginning after June 15, 1999.
The Company has not yet determined what impact, if any,2000.
We believe this standard will not have a material impact on itsour financial
statement presentation.

YEARYear 2000 ISSUESIssues

The Company is currently infollowing information constitutes "Year 2000 Readiness Disclosure" under the
processYear 2000 Information and Readiness Disclosure Act of assessing its1998.

We have completed an assessment of most of our internal exposure to the Yearyear
2000 issue,issue. We continue to assess our customer and has established a comprehensive response to thatvendor exposure. Generally,
the Company haswe believe we have "Year 2000" exposure in three areas:

i) the Company'so our information technology ("IT") infrastructure, including computer
operating systems and applications,

ii)o microprocessors and other electronic devices -- "embedded chips" --
included as components of non-computer equipment, ("embedded chips") and

iii)o computer systems used by third parties, including our customers and
suppliers of the
Company.suppliers.

The ITinformation technology infrastructure and embedded chips are being addressed
on a regional level. The third parties are being evaluated centrally. The Company hascentrally on a
company-wide basis. We have completed itsour assessment of its ITour information
technology infrastructure, and isare in the process of completing itsour evaluation
of all microprocessors and other electronic devices, and third-party vendors and
customers.

The Company believes19

Our Western Region

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

The Company believes thecompliant.

Our Central Region'sRegion

We believe our central region's critical ITinformation technology infrastructure
components and embedded chips are also Yearyear 2000 compliant. The CentralOur central region
does not employ two digit date coding logic and has simulated Yearyear 2000 system clock dates in
tests of its hardware and operating systems as well as selected applications
software. The Company anticipates thatWe have completed all Yearyear 2000 simulation testing will be completed by the end of November 1998. The Company hastesting. We have also
recently
completed an independent third-party review of the Central Region'sour central region's operating
system and critical ITinformation 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 compliance.compliant. All other
ITsignificant information technology infrastructure components and embedded chips
either have been modified will be modified before January 1, 1999, or, if not Yearyear 2000 compliant, will be retired before July 1, 1999.

Thehave been retired.

Our Eastern Region

is currently reviewing the results of a third-party audit of
its Year 2000 systems code for both the Cornucopia and Stow Mills systems. TheOur Eastern Region is ininformation technology department has been focused on a
business recovery strategy to normalize operations, which were disrupted as a
result of the process of movingconversion to one system for operational
efficiency reasons. Thethe Stow Mills system will become a hybrid ofin our Atlanta and Dayville
facilities. A new management team has been appointed to continue the best
functionality components of each system. The Stow Mills systems require a number
of code changes to achieve full Yearrecovery
process and address year 2000 compliance. The Company expectsprimary business operation systems
in the existingEastern Region are:

BIP - Utilized by all four Eastern Region warehouses to accept customer
orders, place purchase orders with our vendors and maintain inventory
controls.

BAKO - Warehouse management system used in Chesterfield and New Oxford.

CWMS - Warehouse management system used in Dayville and Atlanta.

Down to Earth - accounting software.

BIP, BAKO and CWMS are currently being re-evaluated for year 2000 compliance.
Many critical components, including all hardware and network equipment, have
been successfully tested. The remaining components are undergoing testing for
compliance. We may not achieve comprehensive testing and remediation for the
systems prior to January 2000. However, substantially all the systems are
currently handling dates beyond January 1, 2000.

We have assembled a team of IT professionals both from within and outside the
company who are familiar with our systems in an effort to successfully resolve
any year 2000 issues in a timely manner if testing and remediation are not
completed by year-end. If we are unable to resolve these issues by January 1,
2000, we expect to manually perform certain functions performed by the affected
systems until the issues are resolved. This could adversely affect our ability
to fill and process customer orders which could result in a reduction in our
revenues and net income. In addition, any additional costs incurred to address
these problems could adversely impact our operating earnings and net income.

The Down to Earth accounting software is developed and supported by an outside
vendor. The vendor has represented to us that the software has been tested and
is year 2000 compliant. The system has successfully accepted dates beyond
January 1, 2000.

Our EDI software, which enables us to communicate electronically with some of
our customers, including receiving orders, is not compliant and must be upgraded
to a Yearbecome year 2000 compliant version duringcompliant. We are working with our EDI vendor, and expect to
complete the first calendar quarter of 1999. In addition, all codeupgrade before year-end. If this system is expectednot upgraded, we expect
to be Year
2000 compliant forprocess these orders manually.

Microprocessors and other electronic devices used in the surviving Stow business systems prior to the end of the
first calendar quarter of 1999. Also, the surviving EastEastern Region systems clock
will be moved forward simulating the Year 2000 prior to the end of March 1999.
The existing Cornucopia (Dayville, Connecticuthave
been tested and Atlanta, Georgia) systems are not Yearyear 2000 compliant.

The Company is expectedtelephone systems in Atlanta and New Oxford are year 2000 compliant. The
telephone systems in Dayville and Chesterfield are not compliant and are
scheduled to move off these existing
systems and onbe replaced in November 1999.

Retail Stores

All but one of our cash registers are year 2000 compliant. We plan to replace
the surviving Stow Mills system during the first calendar
quarter oflast register by November 1999. AllWe believe all other ITcritical information
technology infrastructure components and embedded chips have
been modified, will be modified before the end of December 1998, or if notare 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 compliant, will be retired before July 1, 1999.

The Company is inissues. We have simulated year 2000 system clock dates for the
process of installing new Point of SaleAlbert's systems in its
retail storesand made the code changes required to enable more sophisticated promotions and improved business
controls. The current Point of Sale or cash registers are not all Yearmake these systems year
2000 compliant.

The Company plans toOur Suppliers and Customers

We have the Year 2000 compliant Point of Sale
systems or compliant cash registers in place on or before July 1999. The Company
is in the process of evaluating a solution for the Hershey business, which is
not currently Year 2000 compliant.

The Company has sent written requests for Yearyear 2000 information to substantially all
suppliers. The Company isWe are currently reviewing the responses received and preparing to sendhave sent
second requests to the top suppliers making up at least 80% of the company'sour purchases. The Company isWe
have also compilingcompiled a database of all customers regarding their Yearyear 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 send information requestsbe by the end of November 1998.

The Company isJanuary 1, 2000.

Expenditures

We are in the process of updating itsour systems for business functionality reasons
and hashave adopted a going forward systems strategy of staying current with state of the art
systems technology. Furthermore, the Company isWe are also in the process of integrating acquisitions to
achieve customer service and operating efficiency improvements, which require
common state of the art systems technology. Accordingly, all business systems
changes would be performed regardless of the Yearyear 2000 issue both from a timing
and cost perspective. The Company therefore
believes that it has spent and is spending an immaterial incremental amount on
Year 2000 remediation over what it would spend to execute its going forward
systems strategy. The Company hasWe have significantly increased its ITour information technology
expenditures to execute itsour systems strategy whichthat includes any immaterial
incremental amounts to achieve Yearyear 2000 compliance. The Company expectsWe therefore believe that
we will have spent an incremental amount of less than $0.4 million on year 2000
remediation over what we would have spent to spendexecute our going forward systems
strategy. We spent on ITinformation technology systems and support approximately
$6$7 million, in fiscal 1999 and spent approximately $4 million and $3 million in fiscal 1999, 1998 and 1997,
respectively.

Potential Risks

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

Certain Factors That May Affect Future Results

If any of the first calendar quarterevents described below actually occur, our business, financial
condition, or results of 1999.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

The following important factors, among others,operations could causebe materially adversely affected. This
Form 10-K contains

forward-looking statements that involve risks and uncertainties. Our actual
results tocould differ materially from those indicated byanticipated in such forward-looking
statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time. Any statements contained herein (including without limitations
statements to the effect that the Company or its management "believes,"
"expects," "anticipates," "plans" and similar expressions) that are not
statementsas a result of historical fact should be considered forward-looking statements.
Resultsa variety 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 fluctuationsfactors, including those set forth in the
price of the Company's common stock.

A number of uncertainties exist thatfollowing risk factors and elsewhere in, or incorporated by reference into, this
Form 10-K.

Our business could affect the Company's future operating
results, including, without limitation, continued demand for current products
offered by the Company, the success of the Company's acquisition strategy,
competitive pressures, general economic conditions, the success of new product
introductionsbe adversely affected if we are unable to integrate our
acquisitions and government regulation.mergers

A significant portion of the Company'sour historical growth has been achieved through
acquisitions of or mergers with other distributors of natural products. The CompanyUnited
Natural merged with Stow Mills in October 1997. The successful and timely
integration of this merger is critical to theour future operating and financial
performance of the Company. The Company believes that the
integration of Stow Mills will not be substantially completed until mid
calendar 1999.performance. The integration will require, among other things,things:

o the integration of computer systems onto a single systems platform;

o the optimization of delivery routes;

o coordination of administrative, distribution and finance functions,functions;
and

o the integration of personnel and expansion of information and warehouse management systems among
the Company's regional operations.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 the Company'sour
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 the CompanyUnited Natural will retain key employees of Stow Mills or that the Companywe
will realize any of the other anticipated benefits of the Stow Mills merger.

We announced plans during fiscal 1999 to close our Chesterfield, New Hampshire
distribution center and to consolidate its operations with our Dayville,
Connecticut and New Oxford, Pennsylvania facilities. We began transferring sales
operations from the Chesterfield facility to our Dayville facility during June
of 1999 and the process is still ongoing. There continue to be numerous risks
involved with this consolidation of operations including, among other things:

o we have had and may continue to have difficulty retaining drivers
currently employed at our Chesterfield facility or hiring a sufficient
number of new drivers at our Dayville and New Oxford facilities to
handle the increased sales volume at those facilities;

o we have had and may continue to have difficulty retaining warehouse
employees at our Chesterfield facility or hiring a sufficient number
of new warehouse employees at our Dayville and New Oxford facilities
to handle the increased sales volume at those facilities;

o we have lost and may continue to lose business;

o our operating costs have increased and may continue to increase
because of the expenses involved in closing the Chesterfield facility
and consolidating its operations into the operations in place at the
Dayville and New Oxford facilities;

o our Dayville and New Oxford facilities have had and may continue to
have difficulty accommodating the increased sales volume; and

o construction delays in the expansion of the New Oxford facility could
delay the realization of savings.

The occurrence of any of these events could have a material adverse effect on
our business, financial condition or results of operations.

We may have difficulty in managing our growth

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

The Company operatesWe have significant competition from a variety of sources

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

25
evolving industry
trends or changing market requirements. It is also possible that alliances among
competitors may develop and rapidly acquire significant market share or that
certain of the Company'sour customers will increase distribution to their own retail
facilities. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
the Company'sour business, financial condition or results of operations. There can be no
assurance that the Companywe will be able to compete effectively against current and future
competitors.

TheWe depend heavily on our principal customers

Our ability of the Company to maintain close, mutually beneficial relationships with itsour top
two customers, Whole Foods Market, Inc. and Wild Oats Markets, Inc., is
important to the ongoing growth and profitability of itsour business. Whole Foods
the Company's
largest customer,Market, Inc. and Wild Oats Markets, Inc. accounted for approximately 16%17% and
11%, respectively, of the Company'sour net sales during the fiscal year ended July 31, 1998.1999.
As a result of this concentration of the Company'sour customer base, the loss or cancellation
of business from either of these customers, including from increased
distribution to their own facilities, could materially and adversely affect the Company'sour
business, financial condition or results of operations. The Company's sales are made pursuant toWe sell products under
purchase orders, and therefore the Companywe generally hashave no agreements with or commitments from
itsour customers for the purchase of products. No assurance can be given that the Company'sour
customers will maintain or increase their sales volumes or orders for the
products supplied by the Companyus or that the Companywe will be able to maintain or add to itsour
existing customer base.

Our profit margins may decrease due to consolidation in the grocery industry

The grocery distribution industry generally is characterized by relatively high
volume with relatively low profit margins. The continuing consolidation of
retailers in the natural products industry and the emergence of super natural
chains may have an adverse effect on the Company'sreduce our profit margins in the future as more customers qualify for
greater volume discounts offered by
the Company.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 supplied by the Company may be adversely affected from time
to time by economic downturns. In addition, the Company'sour operating results are
particularly sensitive to, and may be materially adversely affected by,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 the Company'sour business, financial condition or results of operations.

We are dependent on a number of key executives

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

The Company'sOur operating results are subject to significant fluctuations

Our net sales and operating results may vary significantly from period to period
due to factors such asto:

o changes in the Company'sour operating expenses,

o management's ability to execute the Company'sour business and growth strategies,

o personnel changes,

o demand for natural products,

o supply shortages,

ando general economic conditions. Both the Company's distribution and retail businesses are
dependent upon consumerconditions,

o changes in customer preferences and demands for natural products,
including levels of enthusiasm for health, fitness and environmental
issues. Furthermore,
the future operating performanceissues,

o fluctuation of the Company is directly influenced by natural product prices which can be volatile and fluctuate accordingdue to competitive pressures. Apressures,

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, could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, there can
be no assurance that anyand

o future acquisitions, by the Company will not have an
adverse

effect on the Company's business, financial condition or results of operations, particularly in periods immediately following the
consummation of such acquisition transactions while the operations of
the acquired businesses are being integrated into the Company'sour operations.

Due to the foregoing factors, the
Company believeswe believe that period-to-period comparisons of
itsour operating results may not necessarily be meaningful and that such
comparisons cannot be relied upon as indicators of future performance.

The Company'sWe are subject to significant governmental regulation

Our business is highly regulated at the federal, state and local levels and itsour
products and distribution operations require various licenses, permits and
approvals. In particular, the Company'sparticular:

o our products are subject to inspection by the U.S. Food and Drug
Administration,

itso our warehouse and distribution facilities are subject to inspection by
the U.S. Department of Agriculture and state health authorities, and

its24

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 the Company intendswe intend to do business could have a material adverse
effect on the Company'sour business, financial condition or results of operations.

Our officers and directors and the employee stock ownership trust have
significant voting power.

As of JulyJanuary 31, 1998, the Company's1999, our executive officers and directors, and their
affiliates, and the ESOT willUnited Natural Foods Employee Stock Ownership Trust
beneficially ownowned in the aggregate approximately 62.0%47% of the Company's Common Stock.United Natural's common
stock. Accordingly, these stockholders, if acting together, would have the
ability to elect the Company'sour directors and may have the ability to determine the outcome
of corporate actions requiring stockholder approval, irrespective of how other
stockholders of the Company may vote. This concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of the Company. See "Management" and "Principal
and Selling Stockholders."United Natural.

Union-organizing activities could cause labor relations difficulties

As of JulyMay 31, 1998,1999, approximately 90160 employees, representing approximately 4%6%
of the Company's 2,442our approximately 2,600 employees, were union members. The Company is currently,
and hasWe have in the past
been the focus of union-organizing efforts. As the Company
increases itswe increase our employee base and
broadens itsbroaden our distribution operations to new geographic markets, itsour increased
visibility could result in increased or expanded union-organizing efforts.
Although the Company haswe have not experienced a work stoppage to date, if additional
employees of the Company were to unionize, the Companywe could be subject to work stoppages and increases
in labor costs, either of which could materially adversely affect the Company'sour business,
financial condition or results of operations.

Access to capital and the cost of that capital

In order to maintain our profit margins, we rely on strategic investment buying
initiatives, such as discounted bulk purchases, which require spending
significant amounts of working capital. In the event that capital market turmoil
significantly increased our cost of capital or the ability to borrow funds or
raise equity capital, we could suffer reduced profit margins and be unable to
grow our business organically or through acquisitions, which could have a
material adverse effect on our business, financial condition or results of
operations.

Our systems may not all be Year 2000 compliant by January 1, 2000

As discussed above, our systems may not all be Year 2000 compliant by January 1,
2000. This could result in being unable to accept, process and invoice orders
which could have a material adverse effect on our business, financial condition
and results of operations.

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

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

2725

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

INDEX TO FINANCIAL STATEMENTS

Page
----

United Natural Foods, Inc. and Subsidiaries:

Independent Auditors' Report........................................ 29Page
----
United Natural Foods, Inc. and Subsidiaries:

Independent Auditors' Report........................................ 27

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

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

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

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

Notes to Consolidated Financial Statements.......................... 34-46
28

Consolidated Statements of Income................................... 29

Consolidated Statements of Stockholders' Equity..................... 30

Consolidated Statements of Cash Flows............................... 31

Notes to Consolidated Financial Statements.......................... 32-41

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of United
Natural Foods, Inc. and Subsidiaries as of July 31, 19981999 and 19971998 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended July 31, 1998 and 1997 and for the nine months ended July 31, 1996.1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Natural Foods, Inc. and Subsidiaries as of July 31, 19981999 and 19971998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 1998 and 1997 and for the nine months ended July 31, 19961999 in conformity with generally accepted
accounting principles.

/s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP

Providence, Rhode Island
September 1, 1998

293, 1999

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts) JULY 31, 1998 JULY 31,
1997
------------- -------------1999 1998
--------- ---------
ASSETS
------

Current assets:
Cash and cash equivalents $ 1,3932,845 $ 9521,393
Accounts receivable, net of allowance of $2,297 and $1,780, and 2,283, respectively 60,612 48,078 42,952
Notes receivable, trade 1,096 705
866
Inventories 90,725 91,119 71,509
Prepaid expenses 5,660 3,209 4,110
Deferred income taxes 1,765 1,540 1,032
Refundable income taxes 3,939 165
--
-------- ----------------- ---------
Total current assets 166,642 146,209
121,421
-------- ----------------- ---------
Property & equipment, net 43,784 44,434
32,412
-------- ----------------- ---------
Other assets:
Notes receivable, trade, net 333 1,170 995
Goodwill, net of accumulated amortization of $1,853 and $1,237, and $791,
respectively 26,250 19,136 7,579
Covenants not to compete, net of accumulated amortization of $365 and $450, and $1,552, respectively 328 613 592
Other, net 564 680
1,562
======== ========--------- ---------
Total assets $212,242 $164,561
======== ========$ 237,901 $ 212,242
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 36,60841,154 $ 27,22236,608
Current installments of long-term debt 3,682 3,309
3,016
Current installmentsinstallment of obligations under capital leases 833 488 681
Accounts payable 33,442 32,017 30,536
Accrued expenses 13,706 8,219
6,488
Income taxes payable -- 377
-------- ----------------- ---------
Total current liabilities 92,817 80,641 68,320

Long-term debt, excluding current installments 24,370 25,081 20,411
Deferred income taxes 712 1,370 678
Obligations under capital leases, excluding current installments 1,421 764
1,236
-------- ----------------- ---------
Total liabilities 119,320 107,856
90,645
-------- ----------------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 5,000 shares; none issued or outstanding - --- --
Common stock, $.01 par value, authorized 25,000 shares;
issued and outstanding 18,249 at July 31, 1999
issued 18,184 and outstanding 18,175 at July 31, 1998 issued 17,377 and outstanding 17,357 at July 31, 1997 182 174182
Additional paid-in capital 67,740 67,440 51,842
Unallocated shares of Employee Stock Ownership Plan (2,584) (2,747) (2,910)
Retained earnings 53,243 39,776 24,854
Treasury stock, 9 and 20 shares respectively,at July 31, 1998, at cost -- (265)
(44)
-------- ----------------- ---------
Total stockholders' equity 118,581 104,386
73,916
-------- ----------------- ---------
Total liabilities and stockholders' equity $212,242 $164,561
======== ========$ 237,901 $ 212,242
========= =========

See notes to consolidated financial statements.

30statements

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED NINE MONTHS
JULY 31, ENDED JULY 31,
----------------------------- ---------------
(In thousands, except per share data) 1999 1998 1997
1996
---- --------- ----- ----

Net sales $728,910 $634,825 $439,842$ 856,998 $ 728,910 $ 634,825
Cost of sales 680,301 578,575 507,547
350,130
-------- -------- ----------------- --------- ---------
Gross profit 176,697 150,335 127,278
89,712
-------- -------- ----------------- --------- ---------

Operating expenses 144,937 116,042 103,885
75,059

Merger and restructuring expenses 3,869 4,064 - ---
Amortization of intangibles 1,075 1,185 1,060
793
-------- -------- ----------------- --------- ---------
Total operating expenses 149,881 121,291 104,945
75,852
-------- -------- ----------------- --------- ---------

Operating income 26,816 29,044 22,333
13,860
-------- -------- ----------------- --------- ---------

Other expense (income):
Interest expense 5,700 5,157 5,481 5,524
Interest expense on notes to Stow officers/stockholders --- -- 495 363
Other, net (2,477) (778) (679)
(360)
-------- -------- ----------------- --------- ---------
Total other expense 3,223 4,379 5,297
5,527
-------- -------- ----------------- --------- ---------

Income before income taxes and extraordinary item 23,593 24,665 17,036
8,333
Income taxes 10,126 11,580 6,636
2,883

-------- -------- ----------------- --------- ---------
Income before extraordinary item 13,467 13,085 10,400 5,450

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

Pro forma additional income tax expense (unaudited) -- 320 401
499
-------- -------- ----------------- --------- ---------
Pro forma net income before extraordinary item (unaudited) $ 13,467 $ 12,765 $ 9,999
$ 4,951
======== ======== ================= ========= =========

Per share data (basic):
Income before extraordinary item $ 0.74 $ 0.75 $ 0.64 $ 0.40
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit of $662 --- -- 0.06
-
======== ======== ========--------- --------- ---------
Net income $ 0.74 $ 0.75 $ 0.58
$ 0.40
======== ======== ================= ========= =========

Pro forma net income before extraordinary item (unaudited) $ 0.74 $ 0.73 $ 0.61
$ 0.36
======== ======== ================= ========= =========

Weighted average basic shares of common stock 18,196 17,467 16,367
13,687
======== ======== ================= ========= =========

Per share data (diluted):
Income before extraordinary item $ 0.73 $ 0.74 $ 0.63 $ 0.37
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit of $662 --- -- 0.06
-
======== ======== ========--------- --------- ---------
Net income $ 0.73 $ 0.74 $ 0.57
$ 0.37
======== ======== ================= ========= =========

Pro forma net income before extraordinary item (unaudited) $ 0.73 $ 0.72 $ 0.60
$ 0.33
======== ======== ================= ========= =========

Weighted average diluted shares of common stock 18,537 17,798 16,553
14,853
======== ======== ================= ========= =========

See notes to consolidated financial statements.

3129

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTSSTATEMENT OF STOCKHOLDERS' EQUITY

UNALLOCATED
OUTSTANDING ADDITIONAL SHARES OF
NUMBER COMMON PAID-IN STOCK EMPLOYEE STOCKUnallocated
Outstanding Additional Shares of Total
Number Common Paid-in Stock Employee Stock Retained Treasury Stockholders'
(In thousands) OF SHARES STOCK CAPITAL WARRANTS OWNERSHIP PLAN
---------- ------ --------- -------- --------------of Shares Stock Capital Warrants Ownership Plan Earnings Stock Equity
---------------------------------------------------------------------------------------------

Balances at October 31, 1995 13,691 137 4,372 3,200 (3,196)
Allocation of shares to ESOP - - - - 122
Purchase of treasury stock (20) - - - -
Stock options (note 3) - - 1,056 - -
Distributions to Stow
officers/stockholders - - - - -
Transfer of undistributed earnings to
additional paid-in-capital - - 1,164 - -
Net income - - - - -
----------------------------------------------------------------------------

Balances at July 31, 1996 13,671 137$137 $ 6,592 $ 3,200 (3,074)$(3,074) $ 16,629 $ (44) $ 23,440
Issuance of common stock
(note 1(n)) 2,900 29 35,481 - --- -- -- -- 35,510
Exercise of stock warrants (note 5) 786 8 3,192 (3,200) --- -- -- --
Allocation of shares to
ESOP - - - --- -- -- -- 164 -- -- 164
Distributions to Stow
officers/stockholders - - - - --- -- -- -- -- (611) -- (611)
Capital contribution -- -- 6,043 --- -- -- -- 6,043
Effect of change in year end - - - - --- -- -- -- -- (97) -- (97)
Transfer of undistributed earnings
to additional paid-in-capital - --- -- 534 - --- -- (534) -- --
Net income - - - - -
------------------------------------------------------------------------------ -- -- -- -- 9,467 -- 9,467
---------------------------------------------------------------------------------------------
Balances at July 31, 1997 17,357 174 51,842 --- (2,910) 24,854 (44) 73,916
Allocation of shares to
ESOP - - - --- -- -- -- 163 -- -- 163
Transfer of undistributed loss to
additional paid-in-capital - --- -- (1,837) - --- -- 1,837 -- --
Issuance of common stock, net 818 8 17,479 - --- -- -- (265) 17,222
Retirement of treasury stock net - --- -- (44) --- -- -- 44 --
Net income - - - - -
------------------------------------------------------------------------------ -- -- -- -- 13,085 -- 13,085
---------------------------------------------------------------------------------------------
Balances at July 31, 1998 18,175 $ 182$182 $ 67,440 $ --- $(2,747) $ (2,747)
============================================================================

TOTAL
RETAINED TREASURY STOCKHOLDERS'
(In thousands) EARNINGS STOCK EQUITY
-------- -------- ------------

Balances at October 31, 1995 12,604 - 17,11739,776 $(265) $ 104,386
Allocation of shares to
ESOP - - 122
Purchase-- -- -- -- 163 -- -- 163
Other -- -- 19 -- -- -- -- 19
Issuance of common stock 74 -- 546 -- -- -- -- 546
Retirement of treasury stock - (44) (44)
Stock options (note 3) - - 1,056
Distributions to Stow
officers/stockholders (261) - (261)
Transfer of undistributed earnings to
additional paid-in-capital (1,164) - --- -- (265) -- -- -- 265 --
Net income 5,450 - 5,450
------------------------------------------ -- -- -- -- 13,467 -- 13,467
---------------------------------------------------------------------------------------------
Balances at July 31, 1996 16,629 (44) 23,440
Issuance of common stock (note 1(n)) - - 35,510
Exercise of stock warrants - - -
Allocation of shares to ESOP - - 164
Distributions to Stow
officers/stockholders (611) - (611)
Capital contribution - - 6,043
Effect of change in year end (97) - (97)
Transfer of undistributed earnings to
additional paid-in-capital (534) - -
Net income 9,467 - 9,467
----------------------------------------

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

Balances at July 31, 19981999 18,249 $182 $ 39,77667,740 $ (265)-- $(2,584) $ 104,386
========================================53,243 $ -- $ 118,581
=============================================================================================

See notes to consolidated financial statements.

3230

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED
NINE MONTHS
JULY 31,
ENDED JULY 31,
---------------------------- --------------
(In thousands) 1999 1998 1997 1996
---- ---- ----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,467 $ 13,085 $ 9,467 $ 5,450
Adjustments to reconcile net income to net cash provided by
(used in)
operating activities:
Extraordinary loss on early extinguishment of debt, net of tax benefit --- -- 933 -
Depreciation and amortization 9,205 6,068 5,609
4,052
LossGain on sale of business (1,397) -- --
(Gain) loss on disposals of property & equipment (195) 80 9 34
Accretion of original issue discount --- -- 153 459
Compensation expense related to stock options - - 1,056
Deferred income tax benefit(benefit) expense (941) 184 (5) (270)
Provision for doubtful accounts 1,995 2,462 2,112 647
Changes in assets and liabilities, net of acquired companies:
Accounts receivable (11,524) (5,911) (3,782)
(4,073)
Inventory (460) (14,111) (7,748)
(8,181)
Prepaid expenses (2,319) 1,175 (1,977) (761)
Refundable income taxes (3,889) (165) - ---
Other assets 771 1,085 (1,299) 362
Notes receivable, trade 445 (71) (434)
(204)
Accounts payable 334 732 523
(1,694)
Accrued expenses 2,805 307 (1,704) 2,418
Income taxes payable -- (377) 73
195
-------- ------- --------------- --------
Net cash provided by (used in) operating activities 8,297 4,543 1,930
(510)
-------- ------- --------------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of subsidiaries, net of cash acquired (8,888) (20,029) - (900)--
Proceeds from sale of business 7,086 -- --
Proceeds from disposals of property and equipment 1,477 545 111
53
Capital expenditures (6,610) (15,209) (3,875)
(7,791)
-------- ------- --------------- --------
Net cash used in investing activities (6,935) (34,693) (3,764)
(8,638)
-------- ------- --------------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under note payable 4,546 9,386 (23,029) 9,429
Repayments on long-term debt (4,337) (9,482) (22,276) (5,954)
Proceeds from long-term debt -- 14,445 12,529 6,490
Principal payments of capital lease obligations (683) (980) (646) (388)
Proceeds from issuance of common stock, net 564 17,222 35,510 -
Purchase of treasury stock - - (44)
Net borrowings on Stow Mills stockholder loans --- -- 560 25
Cash distributions to Stow officers/stockholders --- -- (611)
(277)
-------- ------- --------------- --------
Net cash provided by financing activities 90 30,591 2,037
9,281
-------- ------- --------------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,452 441 203 133
Cash and cash equivalents at beginning of period 1,393 952 749
616
======== ======= =======-------- -------- --------
Cash and cash equivalents at end of period $ 2,845 $ 1,393 $ 952
$ 749
======== ======= =============== ========
Supplemental disclosures of cash flow information:
- -------------------------------------------------
Cash paid during the period for:
Interest $ 5,540 $ 4,897 $ 5,895
$ 4,073
======== ======= =============== ========
Income taxes $ 15,273 $ 11,938 $ 5,534
$ 2,544
======== ======= =============== ========

In 1999, 1998 1997 and 1996,1997, the Company incurred capital lease obligations of
approximately $1,686, $316 $582 and $786,$582, respectively.

See notes to consolidated financial statements.

3331

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SIGNIFICANT ACCOUNTING POLICIES

(a) Nature of Business

United Natural Foods, Inc. and Subsidiaries (the Company) is a
distributor and retailer of natural products. The Company sells its
products throughout the United States. For purposes of segment reporting under the requirements of
Statement of Financial Accounting Standards No 14, the Company considers its
operations to be within a single industry.

(b) Basis of Consolidation

The accompanying financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.

Cash equivalents consist of highly liquid investment instruments with
original maturities of three months or less.

(d) Inventories

Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method.

(e) Property and Equipment

Property and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments at the
inception of the lease. Depreciation and amortization are principally
provided under the straight-line method over the estimated useful lives.

(f) Income Taxes

The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

(g) Intangible Assets and Other Long-Lived Assets

Intangible assets consist principally of goodwill and covenants not to
compete. Goodwill represents the excess purchase price over fair value of
net assets acquired in connection with purchase business combinations and
is being amortized on the straight-line method not exceeding forty years.
Covenants not to compete are stated at cost and are amortized using the
straight-line method over the lives of the respective agreements, generally
five years.

The Company evaluates impairment of intangiblelong-lived assets annually, or
more frequently if events or changes in circumstances indicate that
carrying amounts may no longer be recoverable. Impairment losses are
determined based upon the excess of carrying amounts over expected future
cash flows (undiscounted) of the underlying business. The assessment of the
recoverability of intangiblelong-lived assets will be impacted if estimated future
cash flows are not achieved.

(h) Revenue Recognition and Trade Receivables

The Company records revenue upon shipment of products. Revenues are
recorded net of applicable sales discounts. The Company's sales are with
customers located throughout the United States. The Company had one customertwo
customers in 1998 and
1997,

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)1999, Whole Foods Market, Inc. and Wild Oats Markets, Inc.,
who provided 10% or more of the Company's revenue, and
no such customers in 1996.revenue. Total net sales to thisWhole
Foods and Wild Oats in 1999 were approximately $143 million and $90
million, respectively. Whole Foods was the only customer in 1998 and 1997
who provided 10% or more of the Company's revenue. Total net sales to Whole
Foods were approximately $120 million and $89 million in 1998 and 1997,
respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(i) Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments including
cash, accounts receivable, accounts payable, and accrued expenses
approximate fair value due to the short-term nature of these instruments.
The carrying value of notes receivable, long-term debt and capital lease
obligations approximate fair value based on the instruments' interest rate,
terms, maturity date, and collateral, if any, in comparison to the
Company's incremental borrowing rate for similar financial instruments.

(j) Change in Fiscal Year

Effective November 1, 1995, the Company elected to change its fiscal year end
from October 31 to July 31. The consolidated results of operations and cash
flows for the nine months ended July 31, 1996 are not necessarily indicative of
results that would be expected for a full year.Merger with Stow Mills

On October 31, 1997, a subsidiary of the Company completed its merger with Stow Mills,
Inc. and Subsidiary and Hendrickson Partners ("Stow") wherein Stow became a
wholly-owned subsidiary of the Company. Prior to this merger, Stow's fiscal
year ended December 31. As permitted by the rules and regulations of the
Securities and Exchange Commission, Stow's nine months ended September 27, 1996
have been combined with the Company's nine months ended July 31, 1996.

As a result, Stow's two-month period ended September 27, 1996, has been
included in the consolidated financial statements in both the year ended July
31, 1997 and the nine months ended July 31, 1996. Stow's unaudited results of
operations for this two-month period included net sales, operating income and
net income of approximately $31.0 million, $0.5 million and $0.1 million,
respectively. Stow did not pay any dividends during this period. The
consolidated statements of stockholders' equity include an adjustment in 1997 to
reduce the Company's retained earnings for the net income of Stow for this two-
month period.

(k) Use of Estimates

Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.

(l) Notes Receivable, Trade

The Company issues notes receivable, trade to certain customers under
two basic circumstances, inventory purchases for initial store openings and
overdue accounts receivable. Initial store opening notes are generally
receivable over a period not to exceed twelve months. The overdue accounts
receivable notes may extend for periods greater than one year. All notes
are issued at a market interest rate and contain certain guarantees and
collateral assignments in favor of the Company.

(m) Employee Benefit Plans

The Company sponsors various defined contribution plans that cover
substantially all employees. Pursuant to certain stock incentive plans, the
Company has granted stock options to key employees and to non-employee
directors. The Company accounts for stock option grants using the intrinsic
value based method.

(n) Earnings Per Share

During fiscal 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Under
the provisions of SFAS No. 128, basic eaningsearnings per share replaces primary
earnings per share and the dilutive effect of stock options are excluded
from the calculation. Fully diluted earnings per share are replaced by
diluted earnings per share, and include the dilutive effect of stock
options using the treasury stock method. All earnings per share information
included in these financial statements has been restated to conform to the
requirements of SFAS No. 128. For purposes of the diluted earnings per
share calculation, outstanding stock options and stock warrants are
considered common stock equivalents, using the treasury stock method.

The number of shares used in all calculations has been
adjusted to reflect a fifty-five-for-one stock split effective August 30, 1996.

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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

YEAR ENDED NINE MONTHS
JULY 31, ENDED JULY 31,
--------------------- -------------
(In thousands, except per share data) 1998 1997 1996
-------- -------- -------------

Basic weighted average shares outstanding 17,467 16,367 13,687

Net effect of dilutive stock options based
upon the treasury stock method 331 186 1,166
-------- -------- -------------
Diluted weighted average shares outstanding 17,798 16,553 14,853
======== ======== =============
YEAR ENDED JULY 31,
(In thousands, except per share data) 1999 1998 1997
------ ------ ------

Basic weighted average shares outstanding 18,196 17,467 16,367

Net effect of dilutive stock options based
upon the treasury stock method 341 331 186

------ ------ ------
Diluted weighted average shares outstanding 18,537 17,798 16,553
====== ====== ======

In November 1996, the Company completed a public offering of its
common stock. Proceeds from the sale of 2.9 million shares were used to
repay outstanding bank indebtedness. Assuming the aforementioned sale of
common stock and repayment of debt occurred effective August 1, 1996,
unaudited supplementary income before extraordinary item per basic common
and diluted common share for the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

year ended July 31, 1997 would have been $0.62, based upon 17.4 million and
17.5 million weighted average basic common and diluted common shares,
respectively.

(o) Pro Forma Additional Income Tax Expense (Unaudited)

Stow was organized as an S corporation for Federal income tax purposes
prior to the merger. Pro forma income tax expense reflects Federal income
tax applied to taxable income at a rate of 35% for Stow for all periods
prior to the effective date of the merger.

(2) ACQUISITIONS

Subsequent EventFiscal 1999

On September 30, 1998, the Company acquired substantially all of the
outstanding stock of Albert's Organics, Inc. ("Albert's"), a wholesale
distributor of organic vegetables and fruits, for $10.8 million to $12.0
million, contingent upon future performance. The final price will be determined
by March 2000. Albert's had sales of $47.8 million (unaudited) for its most
recent fiscal year ending December 31, 1997. This acquisition was accounted for
as a purchase with goodwill of approximately $9.1 million being amortized on a
straight-line basis over 40 years.

Fiscal 1998

During February 1998, the Company acquired substantially all the assets of
Hershey Import Co., Inc. ("Hershey"), an international trading, roasting and
packaging business of nuts, seeds, dried fruit and snack items, for
approximately $10.5 million. Hershey had sales of $20.8 million (unaudited) for
its most recent fiscal year ending June 30, 1997. Goodwill resulting from this
transaction isThis acquisition was accounted
for as a purchase with goodwill of approximately $6.3 million being amortized on
a straight-line basis over 40 years.

On October 31, 1997, a subsidiary of the Company completed its merger with Stow wherein
Stow became a wholly-owned subsidiary of the Company. The merger with Stow was
accounted for as a pooling of interests and, accordingly, all financial
information included is reported as though the companies had been combined for
all periods reported. The Company issued 4,978,280 shares, which represented
approximately 29% of the Company's common stock after the merger. Net sales for
the quarter ended October 31, 1997 and the year ended July 31 1997
and the nine months ended July 31, 1996 for the
Company excluding Stow were approximately $116.5 million (unaudited), and $421.7 million and $286.4
million, respectively. Net income for the quarter ended October 31, 1997 and the
year ended July 31, 1997 and the nine months ended July 31, 1996 for the Company excluding Stow was $1.2 million
(unaudited), and $8.3 million and $4.0 million, respectively. Net sales for the quarter ended
October 31, 1997 and the year ended July 31, 1997 and the nine months ended July 31, 1996 for Stow were $56.9 million
(unaudited), and $213.1, million and $153.4 million,

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) respectively. Net (loss) income for the quarter ended
October 31, 1997 and the year ended July 31, 1997 and the nine months ended July 31, 1996 for Stow was $(1.8) million
(unaudited), and $1.1 million, and $1.4 million, respectively.

Fiscal 1996

In February 1996, Cornucopia Natural Foods, Inc. (CNF) (predecessor company)
and Mountain People's Warehouse, Inc. (MPW) merged in a business combination
accounted for as a pooling of interests. CNF issued 3,213,100 shares, which
represented approximately 37% of the common stock of CNF after the merger, in
exchange for all of the outstanding common stock of MPW. CNF changed its name to
United Natural Foods, Inc. The financial statements for all periods presented
reflect the merger. Net sales for the quarter ended January 31, 1996 for CNF
were $48.7 million (unaudited). Net income for the quarter ended January 31,
1996 for CNF was $1.0 million (unaudited). Net sales for the quarter ended
January 31, 1996 for MPW were $43.6 million (unaudited). Net income for the
quarter ended January 31, 1996 for MPW was $0.1 million (unaudited).

(3) STOCK OPTION PLAN

The Company implemented Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," during fiscal 1997. While SFAS
No. 123 established financial accounting and reporting standards for stock-based
employee compensation plans using a fair value method of accounting, it allows
companies to continue to measure compensation using the intrinsic value method
of accounting as prescribed in APB Opinion No. 25 (APB No. 25), "Accounting for
Stock Issued to Employees." The Company will continue to use its present APB No.
25 accounting treatment for stock-based compensation. If the fair value method
of accounting had been used, net income would have been $11.9 million, $12.1
million and $9.3 million for 1999, 1998 and $3.8 million for 1998, 1997, and 1996, respectively, basic earnings
per share would have been $0.65, $0.69 and $0.57 for 1999, 1998 and $0.28 for 1998, 1997, and 1996,
respectively, and diluted earnings per share would have been $0.64, $0.68 and
$0.56 for 1999, 1998 and $0.26 for 1998, 1997, and 1996, respectively. The weighted average grant date
fair value of options granted during 1999, 1998 1997 and 19961997 is shown below. The
fair value of each option grant was estimated using the Black-Sholes Option
Pricing Model with the following weighted average assumptions for 1999, 1998 1997 and
1996:1997: a dividend yield of 0.0%, a risk free interest rate of 6.07% and an
expected life of 8 years. The expected volatility was 66.0%, 60.9% for 1998 and 46.5% for
1999, 1998 and 1997, and 1996.respectively. The effects of applying SFAS No. 123 in this
pro forma disclosure are not necessarily indicative of future amounts.

On July 29, 1996, the Board of Directors adopted, and on July 31, 1996 the
stockholders approved, the 1996 Stock Option Plan which provides for grants of
stock options to employees, officers, directors and others. These options are
intended to qualify as incentive stock options within the meaning of Section 422
of the Internal Revenue Code or options not intended to qualify as incentive
stock options (''non-statutory("non-statutory stock options''options"). A total of 1,375,0002,000,000 shares of
common stock may be issued upon the exercise of options granted under the 1996
Stock Option Plan.

In fiscal 1996, as consideration for their services on the Company's Board of
Directors, four employee-directors were awarded a total of 324,500 non-statutory
stock options under the Company's 1996 Stock Option Plan at an exercise price of
$6.38 per share which vested immediately. Compensation expense of approximately
$1.1 million was charged to operations in fiscal 1996 related to these stock
options.

3734

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)STATEMENTS - CONTINUED

The following table summarizes the stock option activity for the fiscal
years ended July 31, 1999, 1998 1997 and 1996.1997.

1999 1998 1997
1996
------------------------- ------------------------- -------------------------------------------- ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ---------- ------------- ---------- ------------- ---------------- ----- ------ ----- ------ -----

Outstanding at beginning of year 654,500 $ 8.14 638,000 $ 8.11 -- --
Granted 392,346 $21.47 16,500 $ 9.64 638,000 $ 8.11
Exercised (27,500) $ 9.64 -- -- -- --
Forfeited (30,000) $20.25 -- -- -- --
------------- ---------- ------------- ---------- ------------- ----------
Outstanding at end of year 989,346 $13.02 654,500 $ 8.14 638,000 $ 8.11
============= ========== ============= ========== ============= ==========Granted 80,000 $21.37 392,346 $21.47 16,500 $ 9.64
Exercised (74,087) $ 7.38 (27,500) $ 9.64 -- --
Forfeited (10,000) $20.25 (30,000) $20.25 -- --
------- ------- -------
Outstanding at end of year 985,259 $14.05 989,346 $13.02 654,500 $ 8.14
======= ======= =======

Options exercisable at year-end 490,913 $ 9.32 392,107 $ 7.38 382,978 $ 6.80 353,739 $ 6.61

Weighted average fair value of
options granted during the year:
Exercise price equals stock price $14.92 $ 5.8515.54 $ 14.92 $ 5.85
Exercise price exceeds stock price $10.03 -- $ 3.8910.03 --
Stock price exceeds exercise price -- -- $ 6.74--

The 989,346985,259 options outstanding at July 31, 19981999 had exercise prices and
remaining contractual lives as follows:

Exercise Price Number Remaining Contractual Life
- -------------- -------- --------------------------

$ 6.38 324,500 8 Years
$ 9.64 220,000 8 Years
$10.60 82,500 3 Years
$20.25 221,254Exercise Price Number Remaining Contractual Life
-------------- ------ --------------------------
$6.38 255,750 7 Years
$9.64 220,000 7 Years
$10.60 82,500 2 Years
$20.25 205,917 8 Years
$20.06 35,000 10 Years
$21.38 30,000 10 Years
$22.28 41,092 3 Years
$24.19 100,000 8 Years
$24.38 15,000 9 Years
$22.28 41,092 4 Years
$24.19 100,000 9 Years

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(4) NOTES PAYABLE

The Company entered into a line of credit and term loan agreement (see note
5) with a bank effective February 20, 1996. The agreement has had threefour
subsequent amendments effective March 1997, July 1997, October 1997 and October 1997.July
1999. In October 1997, the Company amended the agreement with its bank to
increase the amount of the facility from $50 million to $100 million, to
increase the limit on inventory advances to $50 million and the advance rate to
60%, to establish a term loan of $6.6 million and to increase the aggregate
amount of real estate acquisition loans and real estate term loans to $20
million. The agreement also provides for the bank to syndicate the credit
facility to other banks and lending institutions. The credit facility was used
to repay existing indebtedness of Stow owing to the Company's bank at the date
of the merger and is used for general operating capital needs. Interest under
the facility, except the portion related to the mortgage commitments, accrues at
the Company's option at the New York Prime Rate (8.50%(8.25% at July 31, 1999 and
8.50% at July 31, 1998 and 1997) or 1.00% above the bank's London Interbank
Offered Rate ("LIBOR", 5.18% and 5.65625% at July 31, 1998)1999 and 1998,
respectively), and the Company has the option to fix the rate for all or a
portion of the debt for a period up to 180 days. The Company opted to pay 1.00%
above LIBOR for substantially all of fiscal 1999. Interest on approximately $6.2
million of the mortgage facility willaccrues at 7.36%, with the remainder to accrue
at 1.25% above the bank's LIBOR rate, although the Company has the option to fix
the ratevariable portion for a period of five years at a rate of 1.25% above the
five-year U.S Treasury Note rate. At July 31, 19981999 and 1997,1998, the weighted
average interest rate on the line of credit was 6.66%6.23% and 6.98%6.66%, respectively.
The Company has pledged all of its assets as collateral for its obligations
under the credit agreement. As of July 31, 1998,1999, the Company's outstanding
borrowings under the credit agreement totaled $60.8$63.4 million. The credit
agreement expires on July 31, 2002 and contains certain restrictive covenants.
The Company was not in compliance with one of its restrictive covenants at July
31, 1998.1999 and was granted a waiver of this covenant by the bank.

In connection with the amendment to the Company's credit agreement with its
bank as noted above, an Agency and Interlender Agreement was entered into by the
Company, its bank and two additional participating banks effective December 1,
1997. This agreement states, among other things, that the Company's primary bank
will participate in this credit facility with the other banks.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

At July 31, 1996, Stow had a revolving line of credit with a bank to borrow
up to $25 million due June 30, 1999. The line was increased, per the terms of
the agreement, to $28 million at July 1, 1997. Borrowings under the line were
limited to qualified accounts receivable and inventory, as defined. The maximum
borrowing base available at July 31, 1997 was approximately $24 million which is
limited by the letters of credit of approximately $0.7 million. Stow had
approximately $2.4 million available under the line on July 31, 1997. This line
of credit bore interest at the bank's prime rate (8.50% at July 31, 1997), or
the London Interbank Offered Rate (5.6875% at July 31, 1997) plus 150 to 200
basis points or some combination thereof, as defined, and was secured by
substantially all of the assets of Stow. At July 31, 1997, the weighted average
interest rate on the line of credit was 7.98%. Under the terms of the line of
credit, the Company was required to, among other things, maintain certain
financial covenants, as defined. In addition, the agreement contained certain
restrictions on the sale or disposition of Company assets. This line of credit
was repaid in full and canceled as of October 31, 1997.

Notes payable to Stow officers/stockholders totaling $5.5 million at July
31, 1996 were due on demand and carried interest at 8.25%. The noteholders
waived rights to collect these notes through December 31, 1997, and accordingly,
that portion of the notes has been classified as long-term in the accompanying
combined balance sheets. These long-term notes were subordinated to all bank
debt. The total outstanding balance of the notes was contributed to capital as
of June 30, 1997.

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(5) LONG-TERM DEBT

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

JULYJuly 31, JULYJuly 31,
1999 1998
1997
----------- --------------- ----

Term loan for employee stock ownership plan, secured by stock of the
Company, due $14 monthly plus interest at 10%, balance due
May 1, 2015..................................................................2015............................................................... $ 2,7342,584 $ 2,9102,734

Term loan payable to bank, secured by substantially all assets of the
Company, due $235 quarterly plus interest at 1.25% above LIBOR, balance
due July 31, 2002.........2002.......................................................... 4,955 5,895 --

Real estate term loan payable to bank, secured by land and building,
due $28 monthly plus interest at 7.36%, balance due July 31, 2002............2002.......... 6,215 6,600 --

Term loan payable to bank, secured by substantially all assets of the
Company, with monthly principal payments of $50 through July
2002 and the remaining principal due on July 31, 2002, interest at bank's prime plus 0.25% or at 2.25% above the LIBOR rate.....................7.71%... 11,090 11,693 12,000

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

Other notes payable to former owners of acquired businesses and former
stockholders of subsidiaries, maturing at various dates through
February 2002 at interest rates ranging from 6%5.35% to 10%......................................... 1,578 1,233

528

NoteReal estate term loans payable to bank and others, secured by mortgage, payable inbuilding and
other assets, with 15 year amortization due monthly installments
of $39, carryingand interest at bank's prime plus 0.75%5%
and 8.55%, repaid in 1998.........balance due July 31, 2002...................................... 1,630 -- 4,336

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

Term note payable to bank, secured by substantially all assets of Stow,
payable in monthly installments of $44, carrying interest at bank's
prime plus 0.5%, repaid in 1998.............................................. -- 745
----------- -----------235
-------------------------
28,052 28,390 23,427
Less: current installments.....................................................installments.................................................... 3,682 3,309
3,016
----------- ------------------------------------
Long-term debt, excluding current installments.................................installments................................ $ 24,370 $ 25,081
$ 20,411
=========== ====================================

The Company entered into a Note and Warrant Purchase Agreement (the
Agreement) with a limited partnership (the Purchaser) on November 17, 1993.
Under the Agreement, the Company issued to the Purchaser a Senior Note in the
principal amount of $6.5 million and a Common Stock Purchase Warrant for
1,166,660 shares of the common stock of the Company. The Senior Note was repaid
in full in November 1996 upon receipt of the proceeds from the initial public
offering. The loss on the early retirement of debt has been reflected as an
extraordinary item of $933, net of the income tax benefit of $662. This loss
represents the charge off of the remaining original issue discount at the date
of repayment. The Purchaser exercised stock warrants to purchase 785,730 shares
of common stock during fiscal 1997 at a price of $.01 per share, with the
remaining stock warrants repurchased by the Company.

Certain debt agreements contain restrictive covenants. At July 31, 1998, theThe Company was not
in compliance with such covenants.

40one of its restrictive covenants at July 31, 1999 and was
granted a waiver of this covenant by the bank.

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)STATEMENTS - CONTINUED

Aggregate maturities of long-term debt for the next five years and thereafter
are as follows at July 31, 1998:

(dollars in thousands)

1999.............. $ 3,309
2000.............. 2,100
2001.............. 2,045
2002.............. 18,753
2003.............. 177
Thereafter........ 2,006
-------
$28,3901999:

(dollars in thousands)
2000.............. $ 3,682
2001.............. 2,114
2002.............. 20,162
2003.............. 163
2004.............. 163
Thereafter........ 1,768
-------
$28,052
=======

(6) PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at July 31, 19981999 and
1997:1998:

ESTIMATED USEFULEstimated
Useful
(dollars in thousands) LIVES (YEARS)Lives (Years) 1999 1998
1997
---------------- -------- --------------------- ---- ----

Land...............................................Land ............................................. $ 1,535 $ 1,349
$ 1,070
Building...........................................Building.......................................... 20-40 26,797 24,684 18,642
Leasehold improvements............................ 5-30 7,282 9,129
5,894
Warehouse equipment................................equipment............................... 5-20 19,177 18,458
10,625
Office equipment...................................equipment.................................. 3-10 6,629 5,166
7,439
Motor vehicles.....................................vehicles.................................... 3-5 5,468 5,128 5,217
Equipment under capital leases.....................leases.................... 5 3,758 2,851 3,299
Construction in progress...........................progress.......................... 1,851 1,297
196
-------- --------------- -------
72,497 68,062 52,382
Less accumulated depreciation and amortization.....amortization.... 28,713 23,628
19,970
-------- --------------- -------
Net property and equipment...................... $ 44,434 $ 32,412
======== ========equipment................... $43,784 $44,434
======= =======

(7) CAPITAL LEASES

The Company leases computer, office and warehouse equipment under capital
leases expiring in various years through 2003.2004. The assets and liabilities under
capital leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the assets. The assets are depreciated over
the lower of their related lease terms or their estimated productive lives.

Minimum future lease payments under capital leases as of July 31, 19981999 for
each of the next five fiscal years and in the aggregate are:

YEAR ENDED JULY 31 (In thousands) AMOUNT
- ------------------ --------------

1999............................................. $ 568
2000............................................. 530
2001............................................. 241
2002............................................. 38
2003 and thereafter.............................. 14
------
Total minimum lease payments.................. 1,391
Less: Amount representing interest............... 139
------
Present value of net minimum lease payments... 1,252
Less: current installments....................... 488
------
Capital lease obligations, excluding current
installments................................ $ 764
======

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)Year ended July 31 (In thousands) Amount
- ------------------ -------
2000 ........................................................ $ 962
2001 ........................................................ 706
2002 ........................................................ 501
2003 ........................................................ 253
2004 and thereafter............................................. 98
-------
Total minimum lease payments............................... 2,520
Less: Amount representing interest.............................. 266
-------
Present value of net minimum lease payments................ 2,254
Less: current installments...................................... 833
-------
Capital lease obligations, excluding current installments.. $ 1,421
=======

(8) COMMITMENTS AND CONTINGENCIES

The Company leases various facilities under operating lease agreements with
varying terms. Most of the leases contain renewal options and purchase options
at several specific dates throughout the terms of the leases.

The Company also leases equipment under master lease agreements. Payment
under these agreements will continue for a period of four years. The equipment
lease agreements contain covenants concerning the maintenance of certain
financial ratios. The Company was in compliance with its covenants at July 31,
1998.1999.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Future minimum annual fixed payments required under non-cancelable
operating leases having an original term of more than one year as of July 31,
19981999 are as follows:

(In thousands)

1999..................... $ 3,916
2000..................... 3,370
2001..................... 2,732
2002..................... 2,656
2003..................... 2,569
2004 and thereafter ..... 8,608
-------
$23,851
=======
(In thousands)
2000........................... $ 7,738
2001........................... 6,326
2002........................... 4,844
2003........................... 3,491
2004........................... 2,538
2005 and thereafter............ 12,948
--------
$ 37,885
========

Rent and other lease expense for the years ended July 31, 1999, 1998 and
1997 and
the nine months ended July 31, 1996 totaled approximately $7.2 million, $17.5 million $7.1
million and $5.2$7.1 million,
respectively.

Outstanding commitments as of July 31, 19981999 for the purchase of inventory
were approximately $6.4$5.7 million. The Company had outstanding letters of credit
of approximately $2.1$2.4 million at July 31, 1998.1999.

The Company may from time to time be involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.

(9) SALARY REDUCTION/PROFIT SHARING PLANS

The Company has several salary reduction/profit sharing plans, generally
called "401(k) Plans" (the Plans), covering various employee groups. Under these
types of Plans the employees may choose to reduce their compensation and have
these amounts contributed to the Plans on their behalf. In order to become a
participant in the Plans, employees must meet certain eligibility requirements
as described in the respective Plan's document. In addition to amounts
contributed to the Plans by employees, the Company makes contributions to the
Plans on behalf of the employees. The Company contributions to the Plans were
approximately $1.0 million, $0.8 million $0.6 million and $0.4$0.6 million for the years ended
July 31, 1999, 1998 and 1997, and for the nine months ended July 31, 1996,
respectively.

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(10) INCOME TAXES

Total Federal and state income tax expense consists of the following:

(In thousands) CURRENT DEFERRED TOTAL
------- -------- -------

Fiscal year ended July 31, 1998:
U.S. Federal................................. $ 8,736 $ 173 $ 8,909
State and local.............................. 2,660 11 2,671
------- -------- -------
$11,396 $ 184 $11,580
======= ======== =======
Fiscal year ended July 31, 1997:
From continuing operations
U.S. Federal................................. $ 4,839 $ 19 $ 4,858
State and local.............................. 1,802 (24) 1,778
------- -------- -------
6,641 (5) 6,636
------- -------- -------
Extraordinary item
U.S. Federal................................. (542) -- (542)
State and local.............................. (120) -- (120)
------- -------- -------
(662) -- (662)
------- -------- -------
$ 5,979 $ (5) $ 5,974
======= ======== =======
Nine months ended July 31, 1996:
U.S. Federal................................. $ 2,428 $(255) $ 2,173
State and local.............................. 725 (15) 710
------- -------- -------
$ 3,153 $(270) $ 2,883
======= ========(In thousands) Current Deferred Total
------- -------- -----
Fiscal year ended July 31, 1999:
U.S. Federal....................... $ 9,447 $(811) $ 8,636
State and local.................... 1,619 (129) 1,490
------- ----- -------
$11,066 $(940) $10,126
=======
===== =======
Fiscal year ended July 31, 1998:
U.S. Federal....................... $ 8,736 $ 173 $ 8,909
State and local.................... 2,660 11 2,671
------- ----- -------
$11,396 $ 184 $11,580
======= ===== =======
Fiscal year ended July 31, 1997:
From continuing operations
U.S. Federal....................... $ 4,839 $ 19 $ 4,858
State and local.................... 1,802 (24) 1,778
------- ----- -------
6,641 (5) 6,636
------- ----- -------
Extraordinary item
U.S. Federal....................... (542) -- (542)
State and local.................... (120) -- (120)
------- ----- -------
(662) -- (662)
------- ----- -------
$ 5,979 $ (5) $ 5,974
======= ===== =======

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

JULYJuly 31, JULYJuly 31, JULYJuly 31,
(In thousands) 1999 1998 1997
1996
-------- -------- ------------ ---- ----

Computed "expected" tax expense....................expense ......................... $ 8,258 $ 8,633 $ 5,505 $ 2,849
State and local income tax, net of Federal income tax
benefit......................................benefit ................................................ 968 1,736 1,078 467
Effect of entities not taxed for Federal income tax...............................................tax ....... -- 383 (401)
(499)
Rate differential..................................differential ......................................... -- -- (100)
--
Merger related expenses............................expenses ................................... -- 491 --
156
Non-deductible expenses............................expenses ................................... 155 84 42
70
Non-deductible amortization........................amortization ............................... 79 15 16
5
Other, net.........................................net ................................................ 666 238 (166)
(165)
-------- -------- --------------- ------- -------
$10,126 $11,580 $ 5,974
$ 2,883
======== ======== =============== ======= =======

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets and deferred tax liabilities at July 31,
19981999 and 19971998 are presented below:

(In thousands) 1999 1998
1997
------ ---------- ----

Deferred tax assets:
Inventories, principally due to additional costs inventoried for tax
purposes.................................................... $1,338 $460purposes ............................................................. $ 958 $ 1,338
Intangible assets.................................................assets ....................................................... -- 242 301
Compensation and benefit related..................................related ........................................ 792 705 488
Accounts receivable, principally due to allowances for uncollectible
accounts..........................................accounts ............................................................. 382 174
202
Other.............................................................Other ................................................................... 136 61
47
------ ------------- -------
Total gross deferred tax assets..............................assets .................................... 2,268 2,520 1,498
Less valuation allowance.............................................allowance ..................................................... -- --
------ ------------- -------
Net deferred tax assets......................................assets ............................................ 2,268 2,520
1,498
------ ------------- -------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation....................................................depreciation ..... 495 1,255 571
Reserve for LIFO inventory method.................................method ....................................... 611 994
523
Other.............................................................Intangible assets ....................................................... 21 --
Other ................................................................... 88 101
50
------ ------------- -------
Total deferred tax liabilities...............................liabilities ..................................... 1,215 2,350
1,144
------ ------------- -------
Net deferred tax assets..............................................assets ...................................................... $ 1,053 $ 170
$ 354
====== ============= =======

Current deferred income tax assets................................... $1,540 $1,032assets ........................................... $ 1,765 $ 1,540
Non-current deferred income tax liabilities..........................liabilities .................................. (712) (1,370)
(678)
------ ------------- -------
$ 1,053 $ 170
$ 354
====== ============= =======

In assessing the recoverability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Due to the fact that the Company has
sufficient taxable income in the federal carryback period and anticipates
sufficient future taxable income over the periods which the deferred tax assets
are deductible, the ultimate realization of deferred tax assets for Federal and
state tax purposes appears more likely than not.

(11) EMPLOYEE STOCK OWNERSHIP PLAN

The Company adopted the CNFUNF Employee Stock Ownership Plan (the Plan) for
the purpose of acquiring outstanding shares of the Company for the benefit of
eligible employees. The Plan was effective as of November 1, 1988 and has
received notice of qualification by the Internal Revenue Service.

In connection with the adoption of the Plan, a Trust was established to
hold the shares acquired. On November 1, 1988, the Trust purchased 40% of the
outstanding Common Stock of the Company at a price of $4,080,000. The trustees
funded this purchase by issuing promissory notes to the initial stockholders,
with the ESOT shares pledged as collateral. These notes bear interest at 10% and
are payable through May 2015. As the debt is repaid, shares are released from
collateral and allocated to active employees, based on the proportion of debt
service paid in the year.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position 93-6, ''Employers'"Employers'
Accounting for Employee Stock Ownership Plans,''" in November 1993. The statement
provides guidance on employers' accounting for ESOPs and is required to be
applied to shares purchased by ESOPs after December 31, 1992, that have not been
committed to be released as of the beginning of the year of adoption. In
accordance with SOP 93-6, the Company elected not to adopt the guidance in SOP
93-6 for the shares held by the ESOP, all of which were purchased prior to
December 31, 1992. The debt of the ESOP is recorded as debt and the shares
pledged as collateral are reported as unearned ESOP shares in the Consolidated
Balance Sheets. During 1999, 1998 1997 and 19961997 contributions totaling approximately
$0.4 million, $0.5$0.4 million and $0.4$0.5 million,

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) respectively, were made to the
Trust. Of these contributions, approximately $0.3 million $0.3 million and $0.2 million, respectively,each year represented
interest.

The ESOP shares were classified as follows:

JULY 31, JULY 31,
(In thousands) 1998 1997
---------- ----------

Allocated shares................. 638 550
Shares released for allocation... 88 88
Shares distributed to employees.. (164) (88)
Unreleased shares................ 1,474 1,562
---------- ----------
Total ESOP shares............. 2,036 2,112
========== ==========
July 31, July 31,
(In thousands) 1999 1998
---- ----
Allocated shares.................... 726 638
Shares released for allocation...... 88 88
Shares distributed to employees..... (261) (164)
Unreleased shares................... 1,386 1,474
----- -----
Total ESOP shares.............. 1,939 2,036
===== =====

The fair value of unreleased shares was approximately $41.0$26.0 million at July
31, 1998.1999.

(12) STOCK SPLIT

In connection with the Company's initial public offering of shares of
common stock, on August 30, 1996, the Board of Directors adopted, and the
stockholders approved, an amendment to the Company's certificate of
incorporation increasing the number of authorized shares of common stock from
0.2 million to 25.0 million and stating the par value of such shares as $0.01,
and the Company effected a fifty-five-for-one split of its issued and
outstanding common stock. All share, option and warrant and per share data
presented in the accompanying consolidated financial statements have been
restated to reflect the increased number of authorized and outstanding shares of
common stock.

45(13) BUSINESS SEGMENTS

The Company has several operating segments aggregated under the
distribution segment, which is the Company's only reportable segment. These
operating segments have similar products and services, customer types,
distribution methods and historical margins. The distribution segment is engaged
in independent national distribution of natural foods and related products in
the United States. Other operating segments include the retail segment, which
engages in the sale of natural foods and related products to the general public
through retail storefronts on the east coast of the United States, and a segment
engaging in trading, roasting and packaging of nuts, seeds, dried fruit and
snack items. These other operating segments do not meet the quantitative
thresholds for reportable segments and are therefore included in an "other"
caption in the segment information. The "other" caption also includes corporate
expenses that are not allocated to operating segments.

Following is business segment information for the periods indicated:

Distribution Other Eliminations Consolidated

1999
Revenue $806,013 $ 72,860 $ (21,875) $856,998
Operating Income $ 26,242 $ 422 $ 152 $ 26,816
Amortization and Depreciation $ 7,819 $ 1,386 $ - $ 9,205
Capital Expenditures $ 7,354 $ 942 $ - $ 8,296
Assets $357,401 $ 18,824 $(138,324) $237,901

1998
Revenue $691,389 $ 49,977 $ (12,456) $728,910
Operating Income $ 29,454 $ (544) $ 134 $ 29,044
Amortization and Depreciation $ 4,931 $ 1,137 $ - $ 6,068
Capital Expenditures $ 14,107 $ 1,417 $ - $ 15,524
Assets $252,716 $ 30,845 $ (71,319) $212,242

UNITED NATURAL FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(13)STATEMENTS - CONTINUED

Distribution Other Eliminations Consolidated

1997
Revenue $614,177 $ 28,271 $ (7,623) $634,825
Operating Income $ 21,689 $ 738 $ (94) $ 22,333
Amortization and Depreciation $ 4,833 $ 776 $ -- $ 5,609
Capital Expenditures $ 3,639 $ 436 $ -- $ 4,075
Assets $169,368 $ 7,569 $ (12,376) $164,561

(14) RESTRUCTURING COSTS

In connection with the consolidation of operations in the Eastern Region,
we accrued employee severance expenses and employee retention expenses of $0.8
million and $0.7 million, respectively, and recorded incremental depreciation of
$2.4 million for the year ended July 31, 1999. Less than $0.2 million of the
retention and severance expenses had been paid as of July 31, 1999 with the
remaining amounts expected to be paid during fiscal 2000. The incremental
depreciation was to reduce the book value of the Chesterfield, New Hampshire
facility, which is being held for sale, to its estimated net realizable value.

(15) QUARTERLY FINANCIAL DATA (UNAUDITED)

Following is a summary of quarterly operating results and share data. Certain
quarterly information shown below has been adjusted from amounts reported on any
Form 10-Q previously filed by the Company to reflect the acquisition of Stow.
There were
no dividends paid or declared during 19981999 and 1997,1998, and the Company anticipates
that it will continue to retain earnings for use in its business and not pay
cash dividends in the foreseeable future.

(In thousands except per share data) First Second Third Fourth Full Year
share data)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1999
Net sales $199,889 $215,748 $226,892 $214,469 $856,998
Gross profit 42,614 46,208 47,939 39,936 176,697
Income before income taxes 8,163 8,405 9,350 (2,325) 23,593
Net income (loss) 4,779 4,916 5,119 (1,347) 13,467
Per common share income (loss)
Basic: $ 0.26 $ 0.27 $ 0.28 $ (0.07) $ 0.74
Diluted: $ 0.26 $ 0.27 $ 0.28 $ (0.07) $ 0.73
Weighted average basic
shares outstanding 18,175 18,175 18,183 18,249 18,196
Weighted average diluted
shares outstanding 18,537 18,538 18,512 18,249 18,537
Market Price
High 29 1/2 29 1/4 29 3/4 29 1/4 29 3/4
Low 19 22 1/2 17 3/4 17 1/4 17 1/4
1998
- ----
Net sales $173,383 $177,976 $187,581 $189,970 $728,910
Gross profit 34,189 36,308 39,381 40,457 150,335
Income before income taxes 1,293 7,134 8,737 7,501 24,665
Net income (loss) (628) 4,200 5,079 4,434 13,085
Per common share income (loss)
Basic: $(0.04) $0.24 $0.29 $0.25 $0.75$ (0.04) $ 0.24 $ 0.29 $ 0.25 $ 0.75
Diluted: $(0.04) $0.24 $0.29 $0.25 $0.74
Weighted average basic
shares outstanding 17,357 17,357 17,369 17,784 17,467
Weighted average diluted
shares outstanding 17,649 17,659 17,750 18,153 17,798

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

1997
- ----
Net sales $146,659 $160,409 $158,890 $168,867 $634,825
Gross profit 29,649 32,396 31,647 33,586 127,278
Income before income taxes
and extraordinary item 2,346 3,814 5,446 5,430 17,036
Extraordinary item - 933 - - 933
Net income 1,292 1,364 3,377 3,434 9,467

Per common share
Income before
extraordinary item
Basic: $0.09 $0.13 $0.19 $0.20 $0.64
Diluted: $0.09 $0.13 $0.19 $0.20 $0.63$ (0.04) $ 0.24 $ 0.29 $ 0.25 $ 0.74
Weighted average basic
shares outstanding 13,671 17,116 17,357 17,357 16,36717,369 17,784 17,467
Weighted average diluted
shares outstanding 14,976 17,274 17,539 17,601 16,55317,649 17,659 17,750 18,153 17,798
Market Price
High - 1726 3/4 27 1/2 17 248 30 11/16 33 3/8 2433 3/8
Low - 1219 1/4 19 3/4 23 3/4 22 1/2 13 15 1219 1/24

4641

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is contained in part under the
caption "Executive Officers and Directors of the Registrant" in PART I hereof,
and the remainder is contained in the Company's Proxy Statement for its Annual
Meeting of Stockholders to be held in December 19981999 (the "1998"1999 Proxy Statement")
under the captions "PROPOSAL 1 ELECTION OF DIRECTORS" and "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" and is incorporated herein by this
reference.

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

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is contained under the captions
"Director Compensation," "Compensation of Executive Officers" and "Compensation
Committee Interlocks and Insider Participation" in the 19981999 Proxy Statement and
is incorporated herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is contained in the 19981999 Proxy
Statement under the caption "Stock Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is contained under the caption
"Certain Transactions" in the 19981999 Proxy Statement and is incorporated herein by
this reference.

PART IV

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

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

--------------------------------------------

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

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

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

Independent Auditor's Report on Financial Statement Schedule.

4742

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

(b) Reports on Form 8-K.

-------------------

None.

48On August 18, 1999, the Company filed a Current Report on Form 8-K
dated August 12, 1999 announcing under Item 5 (Other Events) a press release
regarding the resignation of the Chief Financial Officer and a director and the
appointment of an interim Chief Financial Officer, and presenting under Item 7
(Financial Statements, Pro-Forma Financial Information and Exhibits) the
following information:

EXHIBITS

99 Press Release dated August 12, 1999.

SIGNATURES

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

UNITED NATURAL FOODS, INC.

/s/ RobertKEVIN T. CirulnickMICHEL
-----------------------------
RobertKevin T. CirulnickMichel
Chief Financial Officer
(Principal Financial and Accounting Officer)

Dated: October 29, 19981999

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

Name Title Date
- --------------------------- ------------------------------------------------- -------------------- ----- ----

/s/ NORMAN A. CLOUTIER Chairman of the Board and Chief Executive Officer October 29, 19981999
- --------------------------------------------- (Principal Executive Officer)
Norman A. Cloutier

/s/ MICHAEL S. FUNK Vice Chairman of the Board and President October 29, 19981999
- ------------------------------------------
Michael S. Funk

/s/ ROBERTKEVIN T. CIRULNICKMICHEL Chief Financial Officer and Director October 29, 19981999
- --------------------------------------------- (Principal Financial and Accounting Officer)
RobertKevin T. CirulnickMichel

/s/ BARCALY MCFADDEN, IIIJOSEPH M. CIANCIOLO Director October 29, 19981999
- --------------------
Barcaly McFadden, III

/s/ KEVIN T. MICHEL-----------------------
Joseph M. Cianciolo

Director October 29, 1998
- -------------------
Kevin T. Michel

Director1999
- -----------------------
Richard J. Williams

/s/ THOMAS B. SIMONE Director October 29, 19981999
- --------------------
/s/-----------------------
Thomas B. Simone

/s/ STEVEN H. TOWNSEND Director October 29, 19981999
- --------------------
Steven H. Townsend-----------------------
Gordon D. Barker

/s/ RICHARD S. YOUNGMAN Director October 29, 19981999
- -------------------------------------------
Richard S. Youngman

INDEPENDENT AUDITORS' REPORT

The Board of Directors
United Natural Foods, Inc.:

Under date of September 1, 1998, we reported on the consolidated balance sheets
of United Natural Foods, Inc. and subsidiaries as of July 31, 1998 and 1997 and
the related consolidated statements of income, stockholders' equity and cash
flows for the years ended July 31, 1998 and 1997 and for the nine months ended
July 31, 1996, as contained in the annual report on Form 10-K for the year 1998.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits.

In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

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

KPMG Peat Marwick LLP

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS

ADDITIONS
----------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ---------------------- --------- ---------- ---------- ----------

(in thousands)
Bad Debt Allowance

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

Year ended July 31, 1997 1,411 2,191 1,319 2,283

Nine months ended July 31, 1996 1,408 740 737 1,411

EXHIBIT INDEX

EXHIBIT
- ---------
NO. DESCRIPTION
- --------- -------------------------------------------------------------------Exhibit
No. Description

2** Agreement and Plan of Reorganization by and among the Registrant, GEM
Acquisition Corp., Stow Mills, Inc., Barclay McFadden and Richard S.
Youngman, dated as of June 23, 1997, and amended and restated as of
August 8, 1997.1997

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

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

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

10.1* Amended and Restated Employee Stock Ownership Plan.

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

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

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

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

10.6*+ 1996 Stock Option Plan.

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

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

10.9*10.8*+ Non-competition Agreement between the Registrant and Norman A.
Cloutier, dated November 16, 1993.

10.10*10.9* Amended and Restated Loan and Security Agreement among the Registrant,
Mountain People's, Natural Retail Group, Inc., Rainbow, Nutrasource,
Inc. and Fleet Capital Corporation, dated February 20, 1996.

10.10* Purchase and Sale Agreement between the Registrant and O.M. Killingly
Investment Company, dated March 31, 1995.

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

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

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

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

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

10.16*10.14* Lease, dated July 12, 1990, between the Registrant and Sylvan and
Stanford Makover Joint Venture, as amended.

10.17*45

Exhibit
No. Description

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

10.18*10.16*+ 1996 Employee Stock Purchase Plan.

10.19*10.17*** First Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated March 1, 1997.

10.20*10.18**** Second Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated July 1, 1997.

10.21*10.19xx Third Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated October 31, 1997.

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

10.22x+10.21x+ Employment Agreement for Robert Cirulnick

10.23x+10.22x+ Employment Agreement for Richard S. Youngman

10.24x+10.23x+ Termination Agreement for Steven Townsend

10.25x+10.24x+ Addendum to Incentive Stock Option Agreement for Steven H. Townsend

10.26xx10.25xx Third Amendment to Amended and Restated Loan Agreement between
United Natural Foods, Inc. andwith Fleet
Capital Corporation, dated October 31, 1997

10.27xx1997.

10.26xx Agency and Interlender Agreement between United Natural Foods, Inc.
and Fleet Capital Corporation, First Union National Bank and
Nationsbank, N.A., dated December 1, 19971997.

10.27 Fourth Amendment to Amended and Restated Loan Agreement with Fleet
Capital Corporation, dated July 31, 1999.

10.28 Lease dated August, 1998 between Valley Centre I, L.L.C. and the
Registrant.

21 Subsidiaries of the Registrant.

23 Consent of KPMG Peat Marwick LLP.

27 Financial Data Schedule.Schedule

Schedule II - Valuation and Qualifying Accounts and Report of
Independent Accountants thereon.

* Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-11349).
** Incorporated by reference to an Annex to the Registrant's Proxy
Statement dated October 15, 1997 with respect to the Special Meeting
of Stockholders dated October 30, 1997.
*** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1997.
**** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended July 31, 1997.
x Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1998.
xx Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended October 31, 1997.
+ Management contract or compensatory plan or arrangement filed in
response to Item 14(a)(3) of the instructions to Form 10-K.

INDEPENDENT AUDITORS' REPORT

The Board of Directors
United Natural Foods, Inc.:

Under date of September 3, 1999, we reported on the consolidated balance sheets
of United Natural Foods, Inc. and subsidiaries as of July 31, 1999 and 1998 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended July 31, 1999, as
contained in the annual report on Form 10-K for the year 1999. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.

Providence, Rhode Island
September 3, 1999 KPMG LLP

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS

ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD

(in thousands)
Bad Debt Allowance

Year ended July 31, 1999 $1,780 $1,995 $1,478 $2,297

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

Year ended July 31, 1997 $1,411 $2,191 $1,319 $2,283