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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-21531
UNITED NATURAL FOODS, INC.
(Exact name of Registrant as Specified in Its Charter)
DELAWARE 05-0376157
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
260 LAKE ROAD
DAYVILLE, CT 06241
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number, Including Area Code: (860) 779-2800
___________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No ___
---
As of March 13, 1998, there were 17,356,705 shares of the Registrant's Common
Stock, $0.01 par value per share, outstanding.
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UNITED NATURAL FOODS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 1997 and
January 31, 1998
Consolidated Statements of Income for the three months and
six months ended January 31, 1997 and January 31, 1998
Consolidated Statements of Cash Flows for the six months ended
January 31, 1997 and January 31, 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31, 1997 JANUARY 31, 1998
------------- ----------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 952,498 $ 3,457,686
Accounts receivable, net of allowance 42,952,127 49,580,967
Notes receivable, trade 866,160 908,043
Inventories 71,508,896 78,034,786
Prepaid expenses 4,109,945 3,568,397
Deferred income taxes 1,031,767 1,031,767
-------------- ---------------------
Total current assets 121,421,393 136,581,646
-------------- ---------------------
Property & equipment, net 32,412,128 32,722,554
-------------- ---------------------
Other assets:
Notes receivable, trade 995,398 1,274,486
Goodwill, net 7,579,408 8,453,358
Covenants not to compete, net 591,665 511,930
Other, net 1,560,583 792,937
-------------- ---------------------
Total assets $ 164,560,575 $ 180,336,911
============== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable $ 27,221,690 $ 38,602,765
Current installments of long-term debt 3,016,218 1,425,549
Current installment of obligations under capital leases 680,533 151,002
Accounts payable 30,535,786 31,961,690
Accrued expenses 6,298,682 6,296,402
Income taxes payable 377,322 419,047
Other 190,667 318,150
-------------- ---------------------
Total current liabilities 68,320,898 79,174,605
Long-term debt, excluding current installments 26,453,762 21,802,750
Deferred income taxes 677,560 677,560
Obligations under capital leases, excluding current installments 1,235,928 1,112,987
-------------- ---------------------
Total liabilities 96,688,148 102,767,902
-------------- ---------------------
Stockholders' equity:
Common stock, $.01 par value, authorized 25,000,000 shares;
issued 17,377,110 and outstanding 17,356,705 173,771 173,771
Additional paid-in capital 45,702,244 51,745,339
Unallocated shares of ESOP (2,910,400) (2,828,800)
Retained earnings 24,951,266 28,523,153
Treasury stock, 20,405 shares at cost (44,454) (44,454)
-------------- ---------------------
Total stockholders' equity 67,872,427 77,569,009
-------------- ---------------------
Total liabilities and stockholders' equity $ 164,560,575 $ 180,336,911
=============== =====================
See notes to consolidated fianancial statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
----------- -----------
1997 1998 1997 1998
---- ---- ---- ----
Net sales $ 160,272,203 $ 177,975,654 $ 306,575,184 $ 351,358,640
Cost of sales 127,879,281 141,667,506 244,535,898 280,861,361
---------------- -------------- --------------- --------------
Gross profit 32,392,922 36,308,148 62,039,286 70,497,279
---------------- -------------- --------------- --------------
Operating expenses 27,073,200 27,917,446 52,148,227 55,576,899
Merger expenses - - - 4,063,912
Amortization of intangibles 264,679 244,956 530,356 505,019
---------------- -------------- --------------- --------------
Total operating expenses 27,337,879 28,162,402 52,678,583 60,145,830
---------------- -------------- --------------- --------------
Operating income 5,055,043 8,145,746 9,360,703 10,351,449
---------------- -------------- --------------- --------------
Other expense (income):
Interest expense 1,397,311 1,191,968 3,508,216 2,273,137
Other, net (153,252) (180,467) (301,626) (348,460)
---------------- -------------- --------------- --------------
Total other expense 1,244,059 1,011,501 3,206,590 1,924,677
---------------- -------------- --------------- --------------
Income before income taxes and extraordinary item 3,810,984 7,134,245 6,154,113 8,426,772
Income taxes 1,516,949 2,934,061 2,570,854 4,854,885
---------------- -------------- --------------- --------------
Income before extraordinary item 2,294,035 4,200,184 3,583,259 3,571,887
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit of $661,822 932,929 - 932,929 -
---------------- -------------- --------------- --------------
Net income $ 1,361,106 $ 4,200,184 $ 2,650,330 $ 3,571,887
================ ============== =============== ==============
Pro forma additional income tax expense 42,257 - 6,377 320,098
---------------- -------------- --------------- --------------
Pro forma net income before extraordinary item $ 2,251,778 $ 4,200,184 $ 3,576,882 $ 3,251,789
================ ============== =============== ==============
Per share data (basic):
Income before extraordinary item $ 0.13 $ 0.24 $ 0.23 $ 0.21
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit of $661,822 0.05 $ - $ 0.06 $ -
---------------- -------------- --------------- --------------
Net income $ 0.08 $ 0.24 $ 0.17 $ 0.21
================ ============== =============== ==============
Pro forma net income before extraordinary item $ 0.13 $ 0.24 $ 0.23 $ 0.19
================ ============== =============== ==============
Weighted average basic shares of common stock 17,116,331 17,356,705 15,393,653 17,356,705
================ ============== =============== ==============
Per share data (diluted):
Income before extraordinary item $ 0.13 $ 0.24 $ 0.23 $ 0.20
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit of $661,822 0.05 - 0.06 -
---------------- -------------- --------------- --------------
Net income $ 0.08 $ 0.24 $ 0.17 $ 0.20
================ ============== =============== ==============
Pro forma net income before extraordinary item $ 0.13 $ 0.24 $ 0.23 $ 0.19
================ ============== =============== ==============
Weighted average diluted shares of common stock 17,389,505 17,797,639 15,657,943 17,787,612
================ ============== =============== ==============
See notes to consolidated financial statements.
Pro forma income tax expense to reflect Stow as though it were C corporation for
all periods presented is calculated as follows: Total income tax expense plus
Stow pretax income multiplied by 35% (note fiscal 1998 adds back merger expenses
as well before calculating tax expense for Stow since merger expenses are
nondeductible for tax purposes).
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JANUARY 31,
-----------
1997 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,650,330 $ 3,571,887
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,995,949 2,956,708
Loss (gain) on disposals of property & equipment 5,946 (1,042)
Accretion of original issue discount 152,847 -
Deferred income tax benefit (100,597) -
Provision for doubtful accounts 1,528,950 704,032
Increase in accounts receivable (6,897,585) (7,954,381)
Increase in inventory (4,858,312) (6,014,629)
Decrease in prepaid expenses 32,793 541,549
Increase in refundable income taxes (305,803) -
(Increase) decrease in other assets (207,266) 96,658
Decrease (increase) in notes receivable, trade 37,553 (320,971)
Increase in accounts payable 5,490,954 1,074,507
(Decrease) increase in accrued expenses (1,882,764) 379,467
Increase (decrease) in income taxes payable 358,309 (551,607)
Net cash used in operating activities ------------- --------------
(65,767) (5,517,822)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of new businesses - (2,697,261)
Proceeds from disposals of property and equipment 71,531 258,685
Capital expenditures (2,460,783) (2,022,165)
Net cash used in investing activities ------------- --------------
(2,389,252) (4,460,741)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under note payable (17,033,148) 11,381,075
Repayments on long-term debt (16,160,308) (6,798,584)
Proceeds from long-term debt 804,807 8,584,408
Principal payments of capital lease obligations (251,174) (683,148)
Proceeds from issuance of common stock, net 35,509,500 -
Net borrowings on Stow Mills stockholder loans 560,529 -
Dividends paid to Stow Mills stockholders (25,470) -
Cash distributions to Hendrickson partners (420,000) -
Net cash provided by financing activities ------------- --------------
2,984,736 12,483,751
------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 529,717 2,505,188
Cash and cash equivalents at beginning of period 1,282,471 952,498
------------- --------------
Cash and cash equivalents at end of period $ 1,812,188 $ 3,457,686
============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,406,282 $ 2,298,333
============= ==============
Income taxes $ 2,502,825 $ 4,612,289
============= ==============
See notes to consolidated financial statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements ("financial statements")
include the accounts of United Natural Foods, Inc. and its wholly owned
subsidiaries (the "Company"). The Company is a distributor and retailer of
natural foods and related products.
On October 31, 1997, a subsidiary of the Company completed its merger with Stow
Mills, Inc. ("Stow") wherein Stow became a wholly owned subsidiary of the
Company. The merger with Stow was accounted for as a pooling of interests and,
accordingly, all financial information included is reported as though the
companies had been combined for all periods reported. Net sales for the quarters
ended January 31 and October 31, 1997 and for the six months ended January 31,
1997 for the Company excluding Stow were approximately $103.4 million, $116.5
million, and $202.9 million, respectively. Net income for the quarters ended
January 31 and October 31, 1997 and for the six months ended January 31, 1997
for the Company excluding Stow was $1.3 million, $1.2 million and $2.6 million,
respectively. Net sales for the quarters ended January 31 and October 31, 1997
and for the six months ended January 31, 1997 for Stow were $57.0 million, $56.9
million and $104.2 million, respectively. Net income (loss) for the quarters
ended January 31 and October 31, 1997 for Stow was $0.1 million and $(1.8)
million, respectively. Net income for the six months ended January 31, 1997 for
Stow was less than $0.1 million.
The financial statements have been prepared pursuant to rules and regulations of
the Securities and Exchange Commission for interim financial information,
including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally required in
complete financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In the opinion of
management, these financial statements include all adjustments necessary for a
fair presentation of the results of operations for the interim periods
presented. The results of operations for interim periods, however, may not be
indicative of the results that may be expected for a full year.
Certain fiscal 1997 balances have been reclassified to conform to the fiscal
1998 presentation.
1. CASH EQUIVALENTS
Cash equivalents consist of highly liquid investment instruments with original
maturities of three months or less.
2. TRADE ACCOUNTS RECEIVABLE
An allowance for doubtful accounts is deducted from trade accounts receivable in
the accompanying financial statements. The allowance for doubtful accounts was
$2,411,379 at July 31, 1997 and $2,116,801 at January 31, 1998.
4. NOTE PAYABLE
In October 1997, the Company amended its credit agreement with its bank to
increase the amount of the facility from $50 million to $100 million, to
increase the limit on inventory advances to $50 million and the advance rate to
60%, to establish a term loan of $6.6 million and to increase the aggregate
amount of real estate acquisition loans and real estate term loans to $20
million. The agreement also provides for the bank to syndicate the credit
facility to other banks and lending institutions. The credit facility was
used to repay existing indebtedness of Stow owing to the Company's bank and will
be used for general operating capital needs.
Interest under the facility, except the portion related to the mortgage
commitments, accrues at the Company's option at the New York Prime Rate or 1.00%
above the bank's London Interbank Offered Rate (LIBOR), and the Company has the
option to fix the rate for all or a portion of the debt for a period up to 180
days. Interest on the mortgage facility will accrue at 1.25% above the bank's
LIBOR rate, although the Company has the option to fix the rate for a period of
five years at a rate of 1.25% above the five-year U.S Treasury Note rate. The
Company has pledged all of its assets as collateral for its obligations under
the credit agreement. As of January 31, 1998, the Company's outstanding
borrowings under the credit agreement totaled $38.6 million. The credit
agreement expires on July 31, 2002, and contains certain restrictive covenants.
The Company was in compliance with its restrictive covenants at January 31,
1998.
In connection with the amendment to the Company's credit agreement with its bank
as above, an Agency and Interlender Agreement was entered into by the Company,
its bank and two additional participating banks effective December 1, 1997. This
agreement states, among other things, that the Company's primary bank will
participate in this credit facility with the other banks.
5. PRO FORMA NET INCOME
Stow was subject to taxation as an S corporation until the merger on October 31,
1997. For pro forma disclosure purposes, income tax adjustments were assumed in
order to reflect results as if Stow had been subject to taxation as a C
corporation for periods prior to the merger.
6. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common stock
or potential common stock. The statement replaces the presentation of primary
EPS with a presentation of basic EPS. The statement also requires a dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. This statement is effective for periods ending
after December 15, 1997. The Company has calculated earnings per share under the
standard for all periods presented.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND AND OTHER INFORMATION
United Natural Foods, Inc. (the "Company") is one of only two national
distributors of natural foods and related products in the United States. On
October 31, 1997, a subsidiary of the Company completed its merger with Stow
Mills, Inc. ("Stow"), whereupon Stow became a wholly owned subsidiary of the
Company. Upon consummation of the merger, Stow became subject to taxation as C
corporation. The merger with Stow was accounted for as a pooling of interests
and, accordingly, all financial information included herein is reported as
though the companies had been combined for all periods reported.
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company cautions
that a number of important factors could cause the Company's actual results for
fiscal 1998 and beyond to differ materially from those expressed in any forward-
looking statements made by, or on behalf of, the Company. See "Certain Factors
That May Affect Future Results" under this item for a discussion of these
factors.
QUARTER ENDED JANUARY 31, 1997 COMPARED TO QUARTER ENDED JANUARY 31, 1998
- -------------------------------------------------------------------------
The following table is derived from the Company's consolidated statements
of income.
QUARTER ENDED
JANUARY 31,
(Dollars in millions) 1997 1998
---- ----
% OF NET % OF NET
$$$ SALES $$$ SALES
-------- ---------- -------- ---------
Net sales $160.3 100.0% $178.0 100.0%
Cost of sales 127.9 79.8% 141.7 79.6%
----------- ----------- --------- ------------
Gross profit 32.4 20.2% 36.3 20.4%
----------- ----------- --------- ------------
Operating expenses 27.1 16.9% 27.9 15.7%
Amortization of intangibles 0.2 0.1% 0.3 0.1%
----------- ----------- --------- ------------
Total operating expenses 27.3 17.0% 28.2 15.8%
----------- ----------- --------- ------------
Operating income 5.1 3.2% 8.1 4.6%
----------- ----------- --------- ------------
Other expense (income):
Interest expense 1.4 1.0% 1.3 0.7%
Other, net (0.1) (0.1%) (0.3) (0.1%)
----------- ----------- --------- ------------
Total other expense 1.3 0.9% 1.0 0.6%
----------- ----------- --------- ------------
Income before income taxes and
extraordinary item 3.8 2.3% 7.1 4.0%
Income taxes 1.5 0.9% 2.9 1.6%
----------- ----------- --------- ------------
Income before extraordinary item 2.3 1.4% 4.2 2.4%
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit 0.9 0.6% - -
----------- ----------- --------- ------------
Net income $ 1.4 0.8% $ 4.2 2.4%
=========== =========== ========= ============
Net Sales. The Company's net sales increased approximately 11.0%, or
$17.7 million, to $178.0 million for the quarter ended January 31, 1998 from
$160.3 million for the quarter ended January 31, 1997. The overall increase in
net sales was primarily attributable to increased sales to existing customers,
sales to
new accounts in existing geographic areas and the introduction of new products
not previously offered by the Company.
Historical information for Stow includes twelve and fourteen week periods
for the quarters ended October 31, 1996 and January 31, 1997, respectively.
Accordingly, net sales of approximately $4.2 million have been included in
Stow's amounts for the quarter ended January 31, 1997 which would have been
included in the quarter ended October 31, 1996 had Stow been on the Company's
financial calendar at the time. Therefore, the increase in net sales for the
quarter ended January 31, 1998 as adjusted to comparable weeks would have been
14.1%. The previously reported increase in net sales for the quarter ended
October 31, 1997 of 18.5% would have been 15.2% subsequent to this adjustment.
The increase in income before extraordinary item for the quarter ended January
31, 1998 as adjusted for the above-mentioned item would have been $2.0 million.
The previously reported decrease in net income for the quarter ended October 31,
1997 would have been $2.0 million subsequent to this adjustment.
Gross Profit. The Company's gross profit increased approximately 12.0%,
or $3.9 million, to $36.3 million for the quarter ended January 31, 1998 from
$32.4 million for the quarter ended January 31, 1997. The Company's gross
profit as a percentage of net sales increased to 20.4% for the quarter ended
January 31, 1998 from 20.2% for the quarter ended January 31, 1997. The
increase in gross profit as a percentage of net sales resulted partially from
greater purchasing efficiencies resulting from the integration of Stow,
partially offset by increased sales to existing customers under the Company's
volume discount program.
Operating Expenses. The Company's total operating expenses increased
approximately 3.3%, or $0.9 million, to $28.2 million for the quarter ended
January 31, 1998 from $27.3 million for the quarter ended January 31, 1997. As
a percentage of net sales, operating expenses decreased to 15.8% for the quarter
ended January 31, 1998 from 17.0% for the quarter ended January 31, 1997. The
decrease in total operating expenses as a percentage of net sales was primarily
attributable to the Company's ability to leverage its overhead and realize
synergies from recent acquisitions.
Included in operating expenses for the quarter ended January 31, 1997 were
Stow officer salaries totaling $1.0 million in excess of the contractual
agreements entered into in connection with the merger with Stow. Excluding
these excess amounts, operating expenses for the quarter ended January 31, 1997
would have been $26.3 million, or 16.4% of net sales.
Operating Income. Operating income increased $3.0 million, or
approximately 58.8%, to $8.1 million for the quarter ended January 31, 1998 from
$5.1 million for the quarter ended January 31, 1997. As a percentage of net
sales, operating income increased to 4.6% in the quarter ended January 31, 1998
from 3.2% in the quarter ended January 31, 1997.
Other (Income)/Expense. The $0.3 million decrease in other expense in the
quarter ended January 31, 1998 compared to the quarter ended January 31, 1997
was primarily attributable to the reduction in interest expense as a result of
the debt consolidation related to the Stow merger. The Stow debt was repaid with
proceeds from the Company's credit facility, which bears interest at a lower
rate.
Income Taxes. The Company's effective income tax rates were 41.1% and 39.8%
for the quarters ended January 31, 1998 and 1997, respectively. The effective
rates were higher than the federal statutory rate primarily due to state and
local income taxes. The increase in the effective rate was primarily
attributable to increased earnings in higher state tax jurisdictions.
Net Income. As a result of the foregoing, the Company's income before
extraordinary item increased by $1.9 million to $4.2 million, or 2.4% of net
sales, for the quarter ended January 31, 1998 from $2.3 million, or 1.4% of net
sales, in the quarter ended January 31, 1997.
9
SIX MONTHS ENDED JANUARY 31, 1997 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1998
- -------------------------------------------------------------------------------
The following table is derived from the Company's consolidated statements
of income.
SIX MONTHS ENDED
JANUARY 31,
----------------
(Dollars in millions) 1997 1998
------- ------
% OF NET % OF NET
$$$ SALES $$$ SALES
------------ --------- ---------- ---------
Net sales $306.6 100.0% $351.4 100.0%
Cost of sales 244.5 79.7% 280.9 79.9%
------------ --------- ---------- ---------
Gross profit 62.1 20.3% 70.5 20.1%
------------ --------- ---------- ---------
Operating expenses 52.1 17.0% 55.6 15.8%
Merger expenses - - 4.1 1.2%
Amortization of intangibles 0.6 0.2% 0.4 0.1%
------------ --------- ---------- ---------
Total operating expenses 52.7 17.2% 60.1 17.1%
------------ --------- ---------- ---------
Operating income 9.4 3.1% 10.4 3.0%
------------ --------- ---------- ---------
Other expense (income):
Interest expense 3.5 1.2% 2.3 0.7%
Other, net (0.3) (0.1%) (0.3) (0.1%)
------------ --------- ---------- ---------
Total other expense 3.2 1.1% 2.0 0.6%
------------ --------- ---------- ---------
Income before income taxes and
extraordinary item 6.2 2.0% 8.4 2.4%
Income taxes 2.6 0.8% 4.8 1.4%
------------ --------- ---------- ---------
Income before extraordinary item 3.6 1.2% 3.6 1.0%
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit 0.9 0.3% - -
------------ --------- ---------- ---------
Net income $ 2.7 0.9% $ 3.6 1.0%
============ ========= ========== =========
Net Sales. The Company's net sales increased approximately 14.6%, or
$44.8 million, to $351.4 million for the six months ended January 31, 1998 from
$306.6 million for the six months ended January 31, 1997. The overall increase
in net sales was primarily attributable to increased sales to existing
customers, sales to new accounts in existing geographic areas and the
introduction of new products not previously offered by the Company.
Gross Profit. The Company's gross profit increased approximately 13.5%,
or $8.4 million, to $70.5 million for the six months ended January 31, 1998 from
$62.1 million for the six months ended January 31,
10
1997. The Company's gross profit as a percentage of net sales decreased to 20.1%
for the six months ended January 31, 1998 from 20.3% for the six months ended
January 31, 1997. The decrease in gross profit as a percentage of net sales
resulted partially from the comparatively lower gross margin contribution from
Stow's operations in the first quarter of fiscal 1998 prior to the effective
date of the merger. Also, as in prior periods, increased sales to existing
customers under the Company's volume discount program resulted in a further
reduction in gross margin. These factors were partially offset by purchasing
efficiencies gained with the integration with Stow in the second quarter of
fiscal 1998.
Operating Expenses. The Company's total operating expenses increased
approximately 14.0%, or $7.4 million, to $60.1 million for the six months ended
January 31, 1998 from $52.7 million for the six months ended January 31, 1997.
As a percentage of net sales, operating expenses decreased to 17.1% for the six
months ended January 31, 1998 from 17.2% for the six months ended January 31,
1997. Excluding merger costs of $4.1 million, the Company's total operating
expenses during the first six months of the current fiscal year would have been
$56.0 million, or 15.9% of net sales, representing an increase of $3.3 million,
or 6.3% over the comparable prior period. The decrease in total operating
expenses as a percentage of net sales was primarily attributable to the
Company's ability to leverage its overhead and realize synergies from recent
acqisitions. Additionally, because of the October 31, 1997 effective date of the
Stow merger, resulting operational efficiencies were not realized in the first
quarter of fiscal 1998.
Included in operating expenses for the six months ended January 31, 1998
and 1997 were Stow officer salaries totaling $0.7 million and $1.8 million,
respectively, in excess of the contractual agreements entered into in connection
with the merger with Stow. Excluding these excess amounts, operating expenses
for the six months ended January 31, 1998 and 1997 would have been $59.4
million, or 16.9% of net sales, and $50.9 million, or 16.6% of net sales,
respectively.
Operating Income. Operating income increased $1.0 million, or
approximately 10.6%, to $10.4 million for the six months ended January 31, 1998
from $9.4 million for the six months ended January 31, 1997. As a percentage of
net sales, operating income was 3.0% and 3.1% in the six months ended January
31, 1998 and 1997, respectively. Excluding the merger costs and Stow officer
salaries noted above, operating income would have been $15.2 million, or 4.3% of
net sales and $11.2 million, or 3.6% of net sales, for the six months ended
January 31, 1998 and 1997, respectively.
Other (Income)/Expense. The $1.2 million decrease in other expense in the
six months ended January 31, 1998 compared to the six months ended January 31,
1997 was primarily attributable to the reduction in interest expense relating to
the repayment of Stow debt with proceeds from the Company's credit facility,
which bears interest at a lower rate. In addition, the proceeds from the
Company's initial public offering were used to repay debt.
Income Taxes. The Company's effective income tax rates were 57.1% and 41.9%
for the six months ended January 31, 1998 and 1997, respectively. The effective
rates were higher than the federal statutory rate primarily due to nondeductible
merger costs incurred during the first quarter of fiscal 1998 and state and
local income taxes.
Net Income. As a result of the foregoing, the Company's net income
increased by $0.9 million to $3.6 million for the six months ended January 31,
1998 from $2.7 million in the six months ended January 31, 1997. Excluding the
$4.1 million in merger costs and $0.9 million extraordinary item (net of tax)
related to the early extinguishment of debt, net income would have been $7.7
million, or 2.2% of net sales, and $3.6 million, or 1.2% of net sales, for the
six months ended January 31, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and growth primarily
from cash flows from operations, borrowings under its credit facility, seller
financing of acquisitions, operating and capital leases, trade payables, bank
indebtedness and the sale or exchange of equity securities. Primary uses of
capital have been acquisitions, expansion of property and equipment and
investment in accounts receivable and inventory.
In connection with the consummation of the merger with Stow, the former
Stow shareholders contributed to equity the promissory notes issued to them by
Stow in exchange for shares of Stow stock.
Net cash used in operations was $5.5 million and $0.1 million for the six
months ended January 31, 1998 and 1997, respectively. The increase in cash used
in operations relates to increased investments in accounts receivable and
inventory and a decrease in accounts payable, all in the ordinary course of
11
business. The 19% increase in accounts receivable results from increased volume.
The increase in inventory relates to supporting increased sales combined with
gaining purchasing efficiencies. The decrease in accounts payable is the result
of accelerating payments to capture early payment discounts in excess of the
Company's cost of capital. Excluding the merger expenses, net cash used in
operations for fiscal 1998 would have been $1.4 million. The Company's working
capital at January 31, 1998 was $57.4 million.
Net cash used in investing activities was $4.5 million and $2.4 million for
the six months ended January 31, 1998 and 1997, respectively. Investing
activities included primarily capital expenditures related to the purchase of
material handling equipment and the continued upgrade of existing management
information systems. In addition, investing activities in the six months ended
January 31, 1998 included the acquisition of two natural foods retail stores.
The capital expenditures were primarily funded from senior bank indebtedness,
including term loans.
Net cash provided by financing activities was $12.5 million and $3.0
million for the six months ended January 31, 1998 and 1997, respectively. The
increase in net cash provided for the six months ended January 31, 1998 compared
to the comparable prior period resulted primarily from proceeds from borrowings
under the Company's credit facility and from long-term debt.
In October 1997, the Company amended its credit agreement with its bank to
increase the amount of the facility from $50 million to $100 million, to
increase the limit on inventory advances to $50 million and the advance rate to
60%, to establish a term loan of $6.6 million and to increase the aggregate
amount of real estate acquisition loans and real estate term loans to $20
million. The agreement also provides for the bank to syndicate the credit
facility to other banks and lending institutions. The credit facility was used
to repay existing indebtedness of Stow owing to the Company's bank and will be
used for general operating capital needs. Interest under the facility, except
the portion related to the mortgage commitments, accrues at the Company's option
at the New York Prime Rate or 1.00% above the bank's London Interbank Offered
Rate (LIBOR), and the Company has the option to fix the rate for all or a
portion of the debt for a period up to 180 days. Interest on the mortgage
facility will accrue at 1.25% above the bank's LIBOR rate, although the Company
has the option to fix the rate for a period of five years at a rate of 1.25%
above the five-year rate for U.S Treasury Notes. The Company has pledged all of
its assets as collateral for its obligations under the credit agreement. As of
January 31, 1998, the Company's outstanding borrowings under the credit
agreement totaled $38.6 million. The credit agreement expires on July 31, 2002.
In connection with this amendment, an Agency and Interlender Agreement was
entered into by the Company, its bank and two additional participating banks
effective December 1, 1997. This agreement states, among other things, that the
Company's primary bank will participate in this credit facility with the other
banks.
The Company expects to spend approximately $25 million over the next five
years in capital expenditures to fund the expansion of existing facilities,
upgrade information systems and technology and to update its material handling
equipment. Management believes that it will have adequate capital resources and
liquidity to meets its debt obligations and to fund its planned capital
expenditures and operate its business for the foreseeable future.
IMPACT OF INFLATION
Historically, the Company has been able to pass along inflation-related
increases. Consequently, inflation has not had a material impact upon the
results of the Company's operations or profitability.
SEASONALITY
Generally, the Company does not experience any material seasonality.
However, the Company's sales and operating results may vary significantly from
quarter to quarter due to factors such as changes in the Company's operating
expenses, management's ability to execute the Company's operating and growth
strategies, personnel changes, demand for natural products, supply shortages and
general economic conditions.
12
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued SFAS No. 129,
"Disclosure of Information about Capital Structure." This statement establishes
standards for disclosing information about an entity's capital structure. This
statement is effective for periods ending after December 15, 1997. The Company
is in compliance with this standard.
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This statement is effective for fiscal
years beginning after December 15, 1997 and requires reclassification of
financial statements for earlier periods provided for comparative purposes. The
Company will comply with the required presentation in fiscal 1999.
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for reporting operating segments of publicly
traded business enterprises in annual and interim financial statements and
requires those enterprises report selected information about operating segments.
This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business," but retains the requirement to report information about major
customers. This statement also amends SFAS No. 94, "Consolidation of All
Majority-Owned Subsidiaries." SFAS No. 131 is effective for financial statements
for fiscal years beginning after December 15, 1997 and requires that comparative
information for earlier years be restated. The Company has not yet determined
what impact, if any, this standard will have on its financial statement
presentation.
YEAR 2000 ISSUES
The Company's Western Region and a portion of its Central Region employ
operating systems functioning on a Julian calendar thereby achieving Year 2000
compliance. In addition, the Company's financial accounting systems are Year
2000 compliant. The Company's Eastern Region and its Chicago facility are not
currently Year 2000 compliant. The Company is currently reviewing its systems in
order to ensure Year 2000 compliance and to enhance its business systems
functionality to achieve operating efficiencies and customer service
improvements. The Company will purchase packaged software to address Year 2000
issues when available. The Company expects to incur $3 - $5 million in cash
expenditures in the 1998 and 1999 calendar years for its Year 2000 upgrade and
new warehouse management system, including new hardware and installation.
However, there can be no assurance that the systems of other companies on which
the Company's systems rely also will be timely converted or that any such
failure to convert by another company would not have an adverse effect on the
Company's systems.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time. Any statements contained herein (including without limitations
statements to the effect that the Company or its management "believes,"
"expects," "anticipates," "plans" and similar expressions) that are not
statements of historical fact should be considered forward-looking statements.
Results of operations in any past period should not be considered indicative of
the results to be expected for future periods. Fluctuations in operating
results may also result in fluctuations in the price of the Company's common
stock.
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, continued demand for current
products offered by the Company, the success of the
13
Company's acquisition strategy, competitive pressures, general economic
conditions, the success of new product introductions and government regulation.
A significant portion of the Company's historical growth has been achieved
through acquisitions of or mergers with other distributors of natural products.
The Company recently acquired or merged with four large regional distributors of
natural products. The successful and timely integration of these acquisitions
and mergers is critical to future operating and financial performance of the
Company. While the integration of these acquisitions and mergers with the
Company's existing operations has begun, the Company believes that the
integration will not be substantially completed until the end of calendar 1998.
The integration will require, among other things, coordination of
administrative, sales and marketing, distribution, and accounting and finance
functions and expansion of information and warehouse management systems among
the Company's regional operations. The integration process could divert the
attention of management, and any difficulties or problems encountered in the
transition process could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, the
process of combining the companies could cause the interruption of, or loss of
momentum in, the activities of the respective businesses, which could have an
adverse effect on their combined operations.
The Company is currently experiencing a period of growth which could place
a significant strain on its management and other resources. The Company's
business has grown significantly in size and complexity over the past several
years. The growth in the size of the Company's business and operations has
placed and is expected to continue to place a significant strain on the
Company's management. The Company's future growth is limited in part by the
size and location of its distribution centers. There can be no assurance that
the Company will be able to successfully expand its existing distribution
facilities or open new distribution facilities in new or existing markets to
facilitate growth. In addition, the Company's growth strategy to expand its
market presence includes possible additional acquisitions. To the extent the
Company's future growth includes acquisitions, there can be no assurance that it
will successfully identify suitable acquisition candidates, consummate and
integrate such potential acquisitions or expand into new markets.
The Company operates in highly competitive markets, and its future success
will be largely dependent on its ability to provide quality products and
services at competitive prices. The Company's competition comes from a variety
of sources, including other distributors of natural products as well as
specialty grocery and mass market grocery distributors. There can be no
assurance that the mass market grocery distributors will not increase their
emphasis on natural products and more directly compete with the Company or that
new competitors will not enter the market.
The grocery distribution industry generally is characterized by relatively
high volume with relatively low profit margins. The continuing consolidation of
retailers in the natural products industry and the emergence of natural products
supermarket chains may have an adverse effect on the Company's profit margins in
the future as more customers qualify for greater volume discounts offered by the
Company. The grocery industry is also sensitive to national and regional
economic conditions, and the demand for product supply may be adversely affected
from time to time by economic downturns.
14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company (the "Annual Meeting") held
on December 19, 1997, the stockholders of the Company considered and voted upon
two proposals:
1) That Barclay McFadden, III, Kevin T. Michel and Richard S. Youngman be
elected as Class I directors for the ensuing three years and Thomas B.
Simone be elected as a Class II director for the ensuing year. The results
of the voting were as follows for each nominee: (i) 10,845,120 votes FOR,
and (ii) 3,950 votes WITHHELD. There were no broker non-votes.
2) That the selection of KPMG Peat Marwick LLP as the Corporation's
independent public accountants for the fiscal year ending July 31, 1998 be
ratified. The results of the voting were as follows: (i) 10,847,170 votes
FOR, (ii) 1,550 votes AGAINST and (iii) 350 votes ABSTAINING. There were no
broker non-votes.
The number of shares of Common Stock outstanding and entitled to vote at the
Annual Meeting was 17,356,705, and 10,849,070 shares were represented in person
or by proxy.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
The exhibits listed in the Exhibit Index immediately preceding such Exhibits are
filed as part of this Quarterly Report on Form 10-Q.
b) Reports on Form 8-K.
On November 12, 1997, the Company filed a Current Report on Form 8-K dated
October 31, 1997 announcing under Item 2 (Acquisition or Disposition of Assets)
the completion of its acquisition of Stow Mills, Inc. pursuant to an Agreement
and Plan of Reorganization, and presenting under Item 7 (Financial Statements,
Pro Forma Financial Information and Exhibits) the following information:
Stow Mills, Inc. and Hendrickson Partners Combined Balance Sheets as of December
31, 1996 and 1995.
Stow Mills, Inc. and Hendrickson Partners Combined Statements of Operations,
Stockholders' Equity and Cash Flows for the Years Ended December 31, 1996, 1995
and 1994.
United Natural Foods, Inc. Unaudited Pro Forma Condensed Combined Balance Sheet
as of April 30, 1997.
United Natural Foods, Inc. Unaudited Pro Forma Condensed Combined Statements of
Operations for the Years Ended October 31, 1994 and 1995 and the Nine Months
Ended July 31, 1996 and April 30, 1997.
15
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.29 Employment Agreement for Robert Cirulnick
10.30 Employment Agreement for Richard S. Youngman
10.31 Termination Agreement for Steven Townsend
10.32 Addendum to Incentive Stock Option Agreement for Steven H. Townsend
11 Computation of Earnings Per Share
27 Financial Data Schedule