================================================================================ 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 April 30, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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) 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 June 11, 1997, there were 12,378,425 shares of the Registrant's Common Stock, $0.01 par value per share, outstanding. ================================================================================
UNITED NATURAL FOODS, INC. FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 1997 TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of July 31, 1996 and April 30, 1997 Consolidated Statements of Income for the three months and nine months ended April 30, 1996 and April 30, 1997 Consolidated Statements of Cash Flows for the nine months ended April 30, 1996 and April 30, 1997 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures
PART I. FINANCIAL INFORMATION Item 1. Financial Statements UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (UNAUDITED) JULY 31, 1996 APRIL 30, 1997 ------------- -------------- ASSETS ------ <S> <C> <C> Current assets: Cash $51,255 $20,619 Accounts receivable, net of allowance 25,657,156 30,454,789 Notes receivable, trade 360,137 675,126 Inventories 38,667,548 48,619,416 Prepaid expenses 1,691,548 1,793,734 Deferred income taxes 796,216 1,002,577 ------------- -------------- Total current assets 67,223,860 82,566,261 ------------- -------------- Property & equipment, net 20,603,663 20,511,115 ------------- -------------- Other assets: Notes receivable, trade 1,067,697 873,627 Goodwill, net 7,977,316 7,626,869 Covenants not to compete, net 1,236,313 752,073 Other, net 635,290 693,490 ------------- -------------- Total assets $98,744,139 $113,023,435 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Notes payable $30,112,868 $15,525,182 Current installments of long-term debt 4,086,795 1,915,727 Current installment of obligations under capital leases 357,404 438,611 Accounts payable 17,139,406 19,381,731 Accrued expenses 4,978,331 4,251,509 Income taxes payable 303,513 1,143,905 Other 158,149 161,118 ------------- -------------- Total current liabilities 57,136,466 42,817,783 Long-term debt, excluding current installments 22,170,855 9,770,079 Deferred income taxes 407,346 158,647 Obligations under capital leases, excluding current installments 847,918 943,944 ------------- -------------- Total liabilities 80,562,585 53,690,453 ------------- -------------- Stockholders' equity: Common stock, $.01 par value, authorized 25,000,000 shares; issued 8,713,100 and outstanding 8,692,695 shares for 1996 and issued 12,398,830 and outstanding 12,378,425 shares for 1997 87,131 123,988 Additional paid-in capital 1,383,511 40,056,154 Stock warrants 3,200,000 - Unallocated shares of ESOP (3,073,600) (2,951,200) Retained earnings 16,628,966 22,148,494 Treasury stock, 20,405 shares at cost (44,454) (44,454) ------------- -------------- Total stockholders' equity 18,181,554 59,332,982 ------------- -------------- ------------- -------------- Total liabilities and stockholders' equity $98,744,139 $113,023,435 ============= ============== </TABLE> See notes to consolidated financial statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> (UNAUDITED) (UNAUDITED) ----------- ----------- THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, --------- --------- 1996 1997 1996 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $96,432,295 $108,132,374 $ 283,537,354 $311,038,311 Cost of sales 76,213,615 85,733,368 224,928,448 246,621,679 -------------- -------------- -------------- -------------- Gross profit 20,218,680 22,399,006 58,608,906 64,416,632 -------------- -------------- -------------- -------------- Operating expenses 15,936,990 16,757,940 47,839,678 50,203,028 Amortization of intangibles 267,195 264,678 2,345,991 795,034 -------------- -------------- -------------- -------------- Total operating expenses 16,204,185 17,022,618 50,185,669 50,998,062 -------------- -------------- -------------- -------------- Operating income 4,014,495 5,376,388 8,423,237 13,418,570 -------------- -------------- -------------- -------------- Other expense (income): Interest expense 1,294,543 520,157 3,853,579 2,564,713 Other, net (59,223) (61,957) (154,987) (204,317) -------------- -------------- -------------- -------------- Total other expense 1,235,320 458,200 3,698,592 2,360,396 -------------- -------------- -------------- -------------- Income before income taxes and extraordinary item 2,779,175 4,918,188 4,724,645 11,058,174 Income taxes 1,227,152 2,036,236 2,694,089 4,605,717 -------------- -------------- -------------- -------------- Income before extraordinary item 1,552,023 2,881,952 2,030,556 6,452,457 Extraordinary item-loss on early extinguishment of debt, net of income tax benefit of $661,822 - - - 932,929 -------------- -------------- -------------- -------------- Net income $1,552,023 $2,881,952 $2,030,556 $5,519,528 ============== ============== ============== ============== Income per share of common stock before extraordinary item $ 0.15 $ 0.23 $ 0.20 $ 0.57 ============== ============== ============== ============== Extraordinary item $ - $ - $ - $ 0.08 ============== ============== ============== ============== Net income per share of common stock $ 0.15 $ 0.23 $ 0.20 $ 0.49 ============== ============== ============== ============== Weighted average shares of common stock 10,134,693 12,677,035 10,134,693 11,331,810 ============== ============== ============== ============== </TABLE> See notes to consolidated financial statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> (UNAUDITED) ----------- NINE MONTHS ENDED APRIL 30, --------- 1996 1997 ---- ---- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,030,558 $5,519,528 Adjustments to reconcile net income to net cash used in operating activities: Extraordinary loss on early extinguishment of debt, net of tax benefit - 932,929 Depreciation, amortization and write-off of intangibles 4,797,363 3,317,291 (Gain) loss on disposals of property & equipment 37,301 (13,511) Accretion of original issue discount 438,195 152,847 Deferred income taxes (benefit) 105,244 (455,060) Provision for doubtful accounts 1,020,663 1,687,889 Increase in accounts receivable (4,449,731) (6,485,522) Increase in inventory (8,005,926) (9,951,868) Increase in prepaid expenses (556,162) (102,186) (Increase) decrease in other assets 102,358 (303,089) Increase in notes receivable, trade (236,542) (120,919) Increase in accounts payable 4,675,398 2,242,325 Decrease in accrued expenses (1,124,734) (723,853) Increase in income taxes payable 531,495 840,392 ------------- -------------- Net cash used in operating activities (633,522) (3,462,807) ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposals of property and equipment 96,100 75,412 Capital expenditures (12,860,238) (2,632,234) ------------- -------------- Net cash used in investing activities (12,764,138) (2,556,822) ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under note payable 4,668,963 (14,587,686) Repayments on long-term debt (4,363,812) (15,100,664) Proceeds from long-term debt 13,375,579 528,820 Principal payments of capital lease obligations (347,012) (360,977) Proceeds from issuance of common stock, net - 35,509,500 ------------- -------------- Net cash provided by financing activities 13,333,718 5,988,993 ------------- -------------- NET DECREASE IN CASH (63,942) (30,636) Cash at beginning of period 286,242 51,255 ------------- -------------- Cash at end of period $222,300 $20,619 ============= ============== Supplemental disclosures of cash flow information: - -------------------------------------------------- Cash paid during the period for: Interest $3,560,143 $2,810,316 ============= ============== Income taxes $2,313,904 $3,312,525 ============= ============== </TABLE> See notes to consolidated financial statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QUARTER ENDED APRIL 30, 1997 (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. 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. The balance sheet as of July 31, 1996 has been derived from the audited financial statements as of and for the nine months ended July 31, 1996. Effective November 1, 1995, the Company elected to change its fiscal year end from October 31 to July 31. Operating results for fiscal 1995 have been presented for interim periods that coincide with the new fiscal year. 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 1996 balances have been reclassified to conform to the 1997 presentation. 2. SALE OF COMMON STOCK The Company completed an initial public offering of 2,900,000 shares of its common stock (the "Offering") on November 6, 1996 at a price of $13.50 per share. The Company's Common Stock began trading on November 1, 1996 on the Nasdaq National Market under the ticker symbol "UNFI." The proceeds received by the Company from the Offering totaled $35,509,500 after deducting underwriting discounts and commissions and offering expenses. The Company used the proceeds to repay certain indebtedness consisting of (i) $20,836,918 due to Fleet Capital Corporation under a revolving line of credit that would have matured on July 31, 1998 and bore interest at a rate of 0.25% over New York Prime or 2.25% over LIBOR; (ii) $6,504,059 due to Triumph Connecticut Limited Partnership (Triumph) (including the remaining original issue discount of approximately $1.6 million ($.9 million net of tax) which is recorded as an extraordinary item in the second quarter) under a Senior Note (the "Triumph Note") that would have matured on October 31, 1998 and immediately before repayment bore interest at a rate of 10%; (iii) $4,469,556 due to Fleet Capital Corporation under a term loan that would have matured on July 31, 1998 and bore interest at a rate of 0.25% over New York Prime; (iv) $2,846,069 due to Prem Mark, Inc. under a term note issued in connection with the Rainbow Natural Foods, Inc. acquisition that would have matured on July 31, 1998 and bore interest at a rate of 10%; and (v) $852,898 due under certain notes that would have matured between 1998 and 2002 and bore interest at rates ranging from 0.5% to 1.0% over New York Prime issued by Natural Retail Group, Inc. in connection
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. SALE OF COMMON STOCK (Continued) with the acquisition of certain retail natural products stores. Accrued interest through the date of payment (i.e., November 6, 1996) is included in the above amounts. On November 6, 1996, in connection with the Offering, Triumph exercised its warrant to purchase 1,166,660 shares of the Company's Common Stock at an exercise price of $.01 per share. Based upon the provisions of the Triumph Note, the Company then repurchased 380,930 of such shares at a purchase price of $.01 per share. The following table summarizes the changes in stockholders' equity for the nine months ended April 30, 1997 and reflects the issuance and sale by the Company of 2,900,000 shares of Common Stock at a public offering price of $13.50 per share. The net proceeds therefrom (after deducting the underwriting discounts and commissions and offering expenses) were used to repay the indebtedness noted above, including the remaining original issue discount of approximately $1.6 million ($.9 million net of tax) which has been recorded as an extraordinary item in the quarter ended January 31, 1997. <TABLE> <CAPTION> Unallocated Shares of Employee Additional Stock Common Paid-in Stock Ownership Retained Treasury Stockholders' Stock Capital Warrants Plan Earnings Stock Equity ----- ------- -------- ---- -------- ----- ------ <S> <C> <C> <C> <C> <C> <C> <C> Balances at July 31, 1996 $ 87,131 $ 1,383,511 $3,200,000 $(3,073,600) $16,628,966 $(44,454) $18,181,554 Issuance of 2,900,000 shares of common stock at $13.50 per share, net of expenses of issuance 29,000 35,480,500 - - - - 35,509,500 Exercise of stock warrants 7,857 3,192,143 (3,200,000) - - - - Allocation of shares to Employee Stock Ownership Plan - - - 122,400 - - 122,400 Net income for the nine months ended April 30, 1997 - - - - 5,519,528 - 5,519,528 -------- ----------- -- ----------- ----------- --------- ----------- Balances at April 30, 1997 $123,988 $40,056,154 $0 $(2,951,200) $22,148,494 $(44,454) $59,332,982 ======== =========== == =========== =========== ========= =========== </TABLE> 3. 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 $1,277,755 at July 31, 1996 and $2,565,644 at April 30, 1997.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. COMMITMENTS AND CONTINGENCIES The Company entered into a $1 million leasing arrangement with Mellon US Leasing effective October 1, 1996. The Company leased computer equipment with a cost of approximately $461,000 under the lease line through the nine months ended April 30, 1997. The Company extended its $1 million leasing arrangement with Citizens Leasing Corporation effective January 31, 1997 for a one-year period. The Company had not drawn down on this facility as of April 30, 1997. 5. STOCK OPTIONS The Company is required to adopt Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123), effective July 31, 1997. Statement 123 requires financial statement disclosure about stock-based employee compensation arrangements. As allowed by Statement 123, the Company intends to continue to account for employee stock-based compensation using the "Intrinsic Value Based Method." The Company does not believe the adoption of Statement 123 will have a material impact on its operating results. 6. NET INCOME PER SHARE OF COMMON STOCK Net income per share of common stock is calculated using the weighted average number of common shares outstanding during the period, and the net additional number of shares which would be issuable upon the exercise of stock options, assuming the Company used the proceeds received upon exercise of the options to purchase shares at market value (treasury stock method). Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common and common equivalent shares issued during the twelve-month period prior to the date of the initial filing of the Company's Registration Statement on Form S-1 have been included in the calculation, using the treasury stock method, as if they were outstanding for all periods presented. Fair market value for the purpose of this calculation was the daily weighted average per share price of the Company's Common Stock. Accounting Principles Board Opinion 15 requires presentation of supplementary net income per share of common stock in the event shares of common stock are sold for cash and a portion or all of the proceeds are used to retire debt. Assuming that the Company's initial public offering of Common Stock and repayment of debt with the proceeds thereof, including the extraordinary expense of approximately $1.6 million ($.9 million net of tax) resulting from the charge-off of the remaining original issue discount upon repayment of the Triumph Note as described in Note 2 above, had occurred effective August 1, 1996, supplementary per share data for the nine months ended April 30, 1997 would have been as follows: <TABLE> <S> <C> Income per share of common stock before extraordinary item $0.51 Extraordinary item (0.07) ------ Net income per share of common stock $0.44 ===== Supplementary weighted average shares of common stock 12,670,732 ========== </TABLE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 6. NET INCOME PER SHARE OF COMMON STOCK (Continued) No dividends were declared or paid during the nine months ended April 30, 1997. 7. NOTE PAYABLE In March 1997, the Company amended its $50 million credit agreement with its bank to provide for working capital, mortgages and term loans. In connection with this facility, the Company has the ability to borrow up to $10 million for acquisitions. Interest under the facility accrues at the Company's option at 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 April 30, 1997, the Company's outstanding borrowings under the credit agreement totaled $15.5 million. The credit agreement expires on July 31, 2002. 8. 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. The Company has calculated basic and diluted EPS under the provisions of SFAS No. 128. In performing this calculation, basic and diluted EPS were equal to primary and fully diluted EPS.
ITEM 2 Management 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. In November 1996, the Company sold 2,900,000 shares of Common Stock in an initial public offering which generated $35.5 million of net cash proceeds to the Company. The Company used the proceeds to reduce its long-term debt and other amounts owed under its revolving line of credit. In February 1996, a subsidiary of the Company merged with and into Mountain Peoples Warehouse, Inc. (Mountain Peoples) whereupon Mountain Peoples became a wholly owned subsidiary of the Company. The merger with Mountain Peoples 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. In May 1995, prior to its merger with the Company, Mountain Peoples acquired Nutrasource, Inc. (Nutrasource), a distributor of natural foods in the Pacific Northwest region. In July 1995, the Company acquired Rainbow Natural Foods Inc. (Rainbow), a distributor of natural foods in the Rocky Mountains and Plains regions. These two acquisitions were accounted for under the purchase method of accounting, and accordingly, all the financial information for Nutrasource and Rainbow have been included since their respective dates of acquisition. 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 1997 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements involve a number of risks and uncertainties including, but not limited to, continued demand for current products, the success of new product introductions, the success of the Company's acquisition strategy, competitive pressures, general economic conditions, and possible regulatory matters. The Company cannot assure that it will be able to anticipate or respond timely to changes in any of the factors listed above, which could adversely affect the operating results in one or more fiscal quarters. 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. See "Certain Factors That May Affect Future Results." Quarter Ended April 30, 1997 Compared to Quarter Ended April 30, 1996 --------------------------------------------------------------------- The following table presents certain items from the Company's consolidated statements of income, and such amounts as a percentage of net sales, for the periods indicated in millions, except the percentages.
THREE MONTHS ENDED APRIL 30, <TABLE> <CAPTION> 1996 1997 ---- ---- $$$ % $$$ % --- - --- - <S> <C> <C> <C> <C> Net Sales $ 96.4 100.0% $ 108.1 100.0% Cost of sales 76.2 79.0% 85.7 79.3% -------- -------- -------- -------- Gross profit 20.2 21.0% 22.4 20.7% -------- -------- -------- -------- Operating expenses 15.9 16.5% 16.7 15.5% Amortization of intangibles 0.3 0.3% 0.3 0.2% -------- -------- -------- -------- Total operating expenses 16.2 16.8% 17.0 15.7% -------- -------- -------- -------- Operating income 4.0 4.2% 5.4 5.0% -------- -------- -------- -------- Other expense (income): Interest expense 1.3 1.3% 0.5 0.5% Other, net (0.1) (0.1%) (0.1) (0.1%) -------- -------- -------- -------- Total other expense 1.2 1.2% 0.4 0.4% -------- -------- -------- -------- Income before income taxes and extraordinary item 2.8 3.0% 5.0 4.6% Income taxes 1.2 1.3% 2.1 2.0% -------- -------- -------- -------- Income before extraordinary item 1.6 1.7% 2.9 2.6% Extraordinary item - loss on early extinguishment debt, net of income tax benefit - 0.0% - 0.0% -------- -------- -------- -------- Net income $ 1.6 1.7% $ 2.9 2.6% ======== ======== ======== ======== </TABLE>
Net Sales. The Company's net sales increased approximately 12.1%, or $11.7 million, to $108.1 million for the three months ended April 30, 1997 from $96.4 million for the three months ended April 30, 1996. The increase in net sales was primarily attributable to increased sales by the Company to existing customers and the introduction of new products not formerly offered by the Company. The Company also realized an increase in net sales as a result of sales to new customers in existing geographic areas. Gross Profit. The Company's gross profit increased approximately 10.9%, or $2.2 million, to $22.4 million for the three months ended April 30, 1997 from $20.2 million for the three months ended April 30, 1996. The Company's gross profit as a percentage of net sales decreased to 20.7% for the three months ended April 30, 1997 from 21.0% for the three months ended April 30 1996. The decrease in gross profit as a percentage of net sales was primarily attributable to the Company's increased sales to existing customers, which resulted in greater discounts being earned by these customers through the Company's volume discount program. Operating Expenses. The Company's total operating expenses increased approximately 4.9%, or $0.8 million, to $17.0 million for the three months ended April 30, 1997 from $16.2 million for the three months ended April 30, 1996. However, as a percentage of net sales, operating expenses decreased to 15.7% for the three months ended April 30, 1997 from 16.8% for the three months ended April 30, 1996. In the third quarter of fiscal 1996, the Company incurred a non-recurring charge of $0.5 million associated with the merger with Mountain Peoples. Excluding this non-recurring charge, total operating expenses would have been $15.7 million, or 16.3% of net sales for the third quarter of fiscal 1996. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the Company's increased absorption of fixed expenses and overhead over a larger sales base. In addition, the Company achieved increased operating efficiencies through the continued integration of its acquisitions. Operating Income. Operating income increased $1.4 million, or approximately 33.9%, to $5.4 million for the three months ended April 30, 1997 from $4.0 million for the three months ended April 30, 1996. As a percentage of net sales, operating income increased to 5.0% in the three months ended April 30, 1997 from 4.2% in the three months ended April 30, 1996. Excluding the non-recurring charge of $0.5 million associated with the merger with Mountain Peoples, total operating income in the three months ended April 30, 1996 would have been $4.5 million, or 4.7% of net sales.
Other Income/(Expense). Other expense, net decreased $0.7 million, or approximately 62.9%, to $0.5 million for the three months ended April 30, 1997 from $1.2 million for the three months ended April 30, 1996. The decrease was primarily attributable to lower interest payments in the three months ended April 30, 1997 resulting from the use of the proceeds of the initial public offering to repay debt. Income Taxes. The Company's effective income tax rate was 41.4% and 44.2% for the three months ended April 30, 1997 and April 30, 1996, respectively. The effective rates were higher than the federal statutory rate primarily due to state and local taxes for the three months ended April 30, 1997 and April 30, 1996, respectively. Net Income. As a result of the foregoing, the Company's net income increased by $1.3 million to $2.9 million for the three months ended April 30, 1997 from $1.6 million for the three months ended April 30, 1996. Excluding the non-recurring charge of $0.5 million ($0.3 million net of taxes) associated with the merger with Mountain Peoples, net income in the three months ended April 30, 1996 would have been $1.9 million. Nine Months Ended April 30, 1997 Compared to Nine Months Ended April 30, 1996 ----------------------------------------------------------------------------- The following table presents certain items from the Company's consolidated statements of income, and such amounts as a percentage of net sales, for the periods indicated in millions, except the percentages.
NINE MONTHS ENDED APRIL 30, <TABLE> <CAPTION> 1996 1997 ---- ---- $$$ % $$$ % --- - --- - <S> <C> <C> <C> <C> Net Sales $ 283.5 100.0% $ 311.0 100.0% Cost of sales 224.9 79.3% 246.6 79.3% -------- -------- -------- -------- Gross profit 58.6 20.7% 64.4 20.7% -------- -------- -------- -------- Operating expenses 47.9 16.9% 50.2 16.1% Amortization of intangibles 2.3 0.8% 0.8 0.3% -------- -------- -------- -------- Total operating expenses 50.2 17.7% 51.0 16.4% -------- -------- -------- -------- Operating income 8.4 3.0% 13.4 4.3% -------- -------- -------- -------- Other expense (income): Interest expense 3.9 1.4% 2.6 0.8% Other, net (0.2) (0.1%) (0.2) (0.1%) -------- -------- -------- -------- Total other expense 3.7 1.3% 2.4 0.7% -------- -------- -------- -------- Income before income taxes and extraordinary item 4.7 1.7% 11.0 3.6% Income taxes 2.7 1.0% 4.6 1.5% -------- -------- -------- -------- Income before extraordinary item 2.0 0.7% 6.4 2.1% Extraordinary item - loss on early extinguishment debt, net of income tax benefit - 0.0% 0.9 0.3% -------- -------- -------- -------- Net income $ 2.0 0.7% $ 5.5 1.8% ======== ======== ======== ======== </TABLE>
Net Sales. The Company's net sales increased approximately 9.7%, or $27.5 million, to $311.0 million for the nine months ended April 30, 1997 from $283.5 million for the nine months ended April 30, 1996. The increase in net sales was primarily attributable to increased volume by the Company to existing customers and the introduction of new products not formerly offered by the Company. The Company also realized an increase in net sales as a result of sales to new customers in existing geographic areas. The Company believes that sales were negatively impacted by winter storms in the Northwest region during the second quarter of fiscal 1997. Gross Profit. The Company's gross profit increased approximately 9.9%, or $5.8 million, to $64.4 million for the nine months ended April 30, 1997 from $58.6 million for the nine months ended April 30, 1996. The Company's gross profit as a percentage of net sales held constant at 20.7% for both nine-month periods. Operating Expenses. The Company's total operating expenses increased approximately 1.6%, or $0.8 million, to $51.0 million for the nine months ended April 30, 1997 from $50.2 million for the nine months ended April 30, 1996. However, as a percentage of net sales, operating expenses decreased to 16.4% for the for the nine months ended April 30, 1997 from 17.7% for the nine months ended April 30, 1996. Operating expenses for the nine months ended April 30, 1997 included a charge of $0.4 million related to the replenishment of the Allowance for Doubtful Accounts resulting from the charge-off of a customer receivable when that customer filed for Chapter 11 bankruptcy in September 1996. This customer accounted for less than 1% of total Company sales in fiscal 1996. Excluding this charge, operating expenses would have been $50.6 million, or 16.3% of net sales. Operating expenses for the nine months ended April 30, 1996 included a non-recurring charge of $1.6 million for the write-down of intangible assets. The Company continually evaluates its intangible assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". In addition, the Company had a non-recurring charge of $0.5 million for costs associated with the merger with Mountain Peoples. Excluding these non- recurring charges, the Company's total operating expenses would have been $48.1 million, or 17.0% of net sales, for the nine months ended April 30, 1996. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the Company's increased absorption of fixed expenses and overhead over a larger sales base. In addition, the Company achieved increased operating efficiencies through the continued integration of its acquisitions. Operating Income. Operating income increased $5.0 million, or approximately 59.3%, to $13.4 million for the nine months ended April 30, 1997 from $8.4 million for the nine months ended April 30, 1996. As a percentage of net sales, operating income increased to 4.3% for the nine months ended April 30, 1997 from 3.0% for the nine months ended April 30, 1996.
Excluding the $0.4 million charge discussed above for the nine months ended April 30, 1997 and the $2.1 million in non-recurring charges for the nine months ended April 30, 1996, operating income would have been $13.8 million, or 4.4% of net sales, for the nine months ended April 30, 1997, and $10.5 million, or 3.7% of net sales, for the nine months ended April 30, 1996. Other Income/(Expense). Other expense, net decreased approximately 36.2%, or $1.3 million, to $2.4 million for the nine months ended April 30, 1997 from $3.7 million for the nine months ended April 30, 1996. The decrease was primarily attributable to lower interest payments in the nine months ended April 30, 1997 resulting from the use of the proceeds of the initial public offering to repay debt. Income Taxes. The Company's effective income tax rate was 41.6% and 57.0% for the nine months ended April 30, 1997 and 1996, respectively. The effective rate at April 30, 1997 was higher than the federal statutory rate primarily due to state and local taxes. The effective rate at April 30, 1996 was higher than the federal statutory rate primarily due to nondeductible goodwill amortization, especially the write-off of the intangible assets in the nine months ended April 30, 1996, as well as state and local income taxes. Net Income. As a result of the foregoing, the Company's net income increased by $3.5 million to $5.5 million for the nine months ended April 30, 1997 from $2.0 million for the nine months ended April 30, 1996. Excluding the $2.0 million ($1.2 million net of taxes) in non-recurring charges discussed above for the nine months ended April 30, 1997 and the $2.1 million ($1.5 million net of taxes) in non-recurring charges for the nine months ended April 30, 1996, net income would have been $6.7 million for the nine months ended April 30, 1997 and $3.5 million for the nine months ended April 30, 1996. Liquidity and Capital Resources - ------------------------------- In November 1996, the Company sold 2,900,000 shares of Common Stock in an initial public offering which generated $35.5 million of net cash proceeds to the Company. The Company used the net proceeds to reduce its long-term debt and amounts owed under its revolving line of credit. In March 1997, the Company amended its $50 million credit agreement with its bank to provide for working capital, mortgages and term loans. In connection with this facility, the Company has the ability to borrow up to $10 million for acquisitions. Interest under the credit facility accrues at the Company's option at 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 of 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. The Company has pledged all of its assets as collateral for its obligations under the credit agreement. As of April 30, 1997, the Company's outstanding borrowings under the credit agreement totaled
$15.5 million. The credit agreement expires on July 31, 2002. Historically, the Company has financed its operations and growth primarily with cash flows generated from operations, borrowings under its credit facility, seller financing from acquisitions, operating and capital leases and normal trade credit terms. The Company finances its investment in inventory and accounts receivable principally with its credit facility and trade accounts payable. The Company's cash used in operations was ($3.5 million) and ($0.6 million) for the nine months ended April 30, 1997 and April 30, 1996, respectively. The decrease in cash generated from operations for the nine months ended April 30, 1997 relates primarily to the increases in inventory and accounts receivable necessary to support sales growth, increases in inventory related to building expansions in Connecticut and changes in accrued expense. On April 30, 1997, the Company had working capital of $39.8 million. Cash used in investing activities was $2.6 million and $12.8 million for the nine months ended April 30, 1997 and April 30, 1996, respectively. The 1997 period includes the purchase of material handling equipment, tractors and trailers and the development and implementation of new management information systems. The 1996 period includes the purchase of the Company's Connecticut distribution facility and the related purchase of material handling equipment. Capital expenditures were primarily funded from senior bank indebtedness, term loans, and cash provided from operating activities. The Company's cash flows generated from financing activities were $6.0 million and $13.3 million for the nine months ended April 30, 1997 and April 30, 1996, respectively. During the nine months ended April 30, 1997, cash from financing activities consisted of the proceeds from the issuance of common stock, a portion of which was used to repay long-term debt, notes payable and the expenses associated with the initial public offering. During the nine months ended April 30, 1996, net cash provided by financing activities included proceeds from the long-term debt used to purchase the Connecticut distribution facility. On October 1, 1996, the Company entered into a $1 million leasing arrangement with Mellon Bank/US Leasing. The leasing facility has been used for the purchase of management information systems and material handling equipment. As of April 30, 1997, the Company's outstanding balance under the capital lease totaled $461,000. On January 31, 1997, the Company extended its $1 million leasing arrangement with Citizens Leasing Corporation for a one-year period. The leasing facility will be used for the purchase of management information systems and material handling equipment. As of April 30, 1997, the Company had not drawn down on this facility. The Company currently expects to make aggregate capital expenditures of approximately $7.0 million for fiscal 1998 and 1999 to fund the expansion of its existing facilities, to upgrade its management information systems and to expand and replace its material handling equipment.
Management believes that the Company will have adequate capital resources and liquidity to meet its borrowing obligations, fund all required capital expenditures and to operate its business through fiscal 1999. Seasonality - ----------- Generally, the Company's operating results have not reflected any material seasonal variations, although 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, product shortages and general economic conditions. 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. 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 Company's acquisition strategy, competitive pressures, general economic conditions, the success of new product introductions and governmental 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 three large regional distributors of natural products. The successful and timely integration of these acquisitions and merger is critical to the future operating and financial performance of the Company. While the integration of these acquisitions and merger with the Company's existing operations has begun, the Company believes that the integration will not be substantially completed until the end of calendar 1997. 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 a 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 the Company 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.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED NATURAL FOODS, INC. /s/ Steven Townsend ----------------------------- Steven Townsend Chief Financial Officer (Principal Financial and Accounting Officer) Dated: June 13, 1997
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits The exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of this Quarterly Report on Form 10-Q. b) Reports on Form 8-K. The Company did not file any Current Reports on Form 8-K during the quarter covered by this Report.
EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> First Amendment to Amended and Restated Loan Agreement 10 with Fleet Capital Corporation, dated March 1, 1997 11 Computation of Earnings Per Share 27 Financial Data Schedule </TABLE>