UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended __November 2, 2002___
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number: 33-63372
NUTRITIONAL SOURCING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 65-0415593
------------------------------------ -----------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
1300 N.W. 22nd Street
Pompano Beach, Florida 33069
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (954) 977-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 NO X
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES NO X
No voting stock of the Registrant is held by non-affiliates of the
Registrant.
Indicate by check mark whether the registrant has filed all documents and
Reports required to be filed by Section 12, 13, or 15(d) of the Securities
and Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by the Court. YES ___ NO X_
Number of shares of the Registrant's Common Stock, $ .10 par value
outstanding as of July 25, 2003 -- 200.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
ITEM 1. BUSINESS
Name of the Registrant
Nutritional Sourcing Corporation was known as Pueblo Xtra International,
Inc. until July 22, 2002. Effective that date its name was changed to
Nutritional Sourcing Corporation ("NSC").
Financial Restructuring and Proceedings Under Chapter 11 of the United States
Bankruptcy Code
On September 24, 2002 NSC voluntarily consented to the entry of an order
for relief under Chapter 11 of the Bankruptcy Code by filing a Consent to
Entry of Order For Relief Under Chapter 11 in the United States Bankruptcy
Court For The District of Delaware (the "Court"). The Court ordered such
relief on September 27, 2002 (Case No: 02-12550 (PJW)). This action by NSC
was in response to an involuntary petition filed in the Court by certain
creditors of NSC under title 11, United States Code (the "Chapter 11 Case").
The creditors' actions were taken as a result of NSC not paying the
August 1, 2002 interest payment on its $177.3 million in notes outstanding
which were due in August of 2003. The interest was not paid as a result of
NSC's operating subsidiaries not paying interest they owed to NSC; this non-
payment was consented to by the operating subsidiaries' lender banks.
The relief under the Chapter 11 Case pertained to NSC only, not its
operating subsidiaries. However, the bank debt of the operating
subsidiaries, which was guaranteed by NSC, was due on February 1, 2003.
On January 30, 2003 a new bank lender assumed the existing bank debt and
committed to lend the operating subsidiaries additional funds at the time NSC
emerged from bankruptcy. The new bank lender also obtained the guarantee of
NSC.
On June 5, 2003, NSC emerged from bankruptcy pursuant to an April 30,
2003 confirmation order from the Court.
The impact of the Chapter 11 Case on NSC's operations for the year ended
November 2, 2002 and its financial condition as of that date are disclosed in
the consolidated financial statements and related footnotes included in Item
15 of this Form 10-K.
The impact, including new bank debt and issuance of new Notes, of the
financial restructuring and emergence from proceedings under Chapter 11 of
the United States Bankruptcy Code, both of which occurred subsequent to
November 2, 2002, are discussed in more detail in NOTE 16 - SUBSEQUENT EVENTS
of the footnotes to the consolidated financial statements included in Item 15
of this Form 10-K.
General
Unless otherwise specified statements herein are as of November 2, 2002
or for the period or periods then ended.
The Company is a Delaware holding company that owns all of the membership
units of Pueblo International, LLC and all the common stock of Pueblo
Entertainment, Inc., both Delaware companies. Throughout this report, unless
the context otherwise requires, "Company" refers to NSC together with its
subsidiaries. Further, throughout this report Pueblo International, LLC,
together with its subsidiaries, is referred to as Pueblo and Pueblo
Entertainment, Inc. is referred to as Pueblo Entertainment. Pueblo
Entertainment was organized on January 28, 2001 to own and operate the video
rental store assets in Puerto Rico. Prior to that date those assets were
owned and operated by Pueblo International, Inc. Pueblo International, Inc.
was converted to a Delaware limited liability company on November 4, 2001
and its name was changed to Pueblo International, LLC. Pueblo owns all of
the common stock of FLBN Corporation ("FLBN") formerly Xtra Super Food
Centers, Inc., the subsidiary that operates the Company's supermarkets and
video rental stores in the U.S. Virgin Islands. The name change to FLBN
Corporation became effective on March 27, 2003.
Pueblo, which was founded in 1955 with the opening of the first
mainland-style supermarkets in Puerto Rico, is one of the leading supermarket
chains in the Commonwealth of Puerto Rico and the Territory of the U.S.
Virgin Islands. In addition, the Company, through its ownership of Pueblo and
Pueblo Entertainment, is the leading operator of video rental outlets in
Puerto Rico and the U.S. Virgin Islands through its franchise rights with
Blockbuster, Inc. ("BI"). As of November 2, 2002, the Company operated 41
supermarkets in Puerto Rico and 6 supermarkets in the U.S. Virgin Islands. As
of November 2, 2002, the Company also operated 39 video rental stores in
Puerto Rico and 2 video rental stores in the U.S. Virgin Islands.
On November 2, 2001 the Company and its subsidiaries changed their
fiscal year end from the Saturday closest to January 31 to the Saturday
closest to October 31. Consequently, the comparable period of the prior year
being reported in this Annual Report on Form 10-K is the forty
weeks ended November 3, 2001.
On July 28, 1993, the Company acquired all of the outstanding shares of
common stock of Pueblo for an aggregate purchase price of $283.6 million plus
transaction costs (hereinafter referred to as the "Acquisition"). Pursuant
to the Acquisition, Pueblo became a wholly-owned subsidiary of the Company.
The Acquisition has been accounted for under the purchase method effective
July 31, 1993 as discussed in the goodwill section of NOTE 1 to the notes to
the Company's consolidated financial statements included in Item 15 of this
Form 10-K.
Business of the Company
Supermarket Industry Overview
The top four chains in the retail grocery industry in Puerto Rico
account for approximately 75% of total industry sales, with the remainder
divided among smaller chains and numerous independent operations. Total
supermarket chain sales in calendar year 2001 were approximately $2.3
billion, a significant portion of which was attributable to the more densely
populated greater San Juan metropolitan area, where the larger chains are
concentrated. The grocery industry in less populated parts of the island is
characterized by smaller family-run operations with limited selection and
less competitive prices. No major U.S. supermarket chains have established
operations in the Puerto Rico grocery market, although a number of national
general merchandise chains have significant Puerto Rican operations.
Wal-Mart purchased one of the top four chains, Supermercados Amigo, effective
December 5, 2002. Amigo divested 6 of its stores to another party and
Wal-Mart has indicated it intends to operate the remaining chain of 30 stores
as Amigo stores. Wal-Mart also operates Sam's Clubs, Wal-Mart Supercenters
and Wal-Mart stores on the island of Puerto Rico. National warehouse clubs
and mass merchandisers, which have entered the Puerto Rico and U.S. Virgin
Islands markets since 1990 offering various bulk grocery and general
merchandise items, have increased pricing pressures on grocery retailers
including the Company.
Puerto Rico
The Company operates its supermarkets under the names Pueblo and
PuebloXtra with emphasis on service, variety and high quality products at
competitive prices. In Puerto Rico, the Company has a grocery retailing
market share of approximately 21%. During the 52 weeks ended November 2,
2002, the Company's stores in Puerto Rico averaged approximately 40,485 gross
square feet and generated an average of approximately $442 of sales per
selling square foot.
U.S. Virgin Islands
During the 52 weeks ended November 2, 2002, the six supermarkets in the
U.S. Virgin Islands averaged 34,367 gross square feet and generated an
average of approximately $400 of sales per selling square foot. The Company
estimates a U.S. Virgin Islands grocery retailing market share of
approximately 36%.
Video Operations
The Company has operated franchised video rental locations in Puerto
Rico since 1989 and in the U.S. Virgin Islands since 1993 and operated 41
video rental locations in Puerto Rico and the U.S. Virgin Islands as of
November 2, 2002. In Puerto Rico, the Company operates 16 video rental
outlets that are in the same buildings as its supermarkets and 23
free-standing video rental stores, most of which are adjacent to its
supermarkets. In the U.S. Virgin Islands, the Company operates two video
rental stores. The Company's free-standing video rental stores average
approximately 5,343 gross square feet, while the Company's video rental
outlets that are in the same building as its supermarkets average
approximately 4,108 gross square feet. In order to increase customer traffic
in its supermarkets, the Company's typical video rental outlet that is in the
same building as its supermarket has a separate entrance but its principal
exit leads into the supermarket. In addition, the Company is able to take
advantage of cross-marketing opportunities with its supermarket operations,
including promotional video rental and merchandising offers.
The Company's Video Rental Operations are currently the largest major
video chain operating in Puerto Rico and the U.S. Virgin Islands. In the
last several years Video Avenue has opened 16 stores in Puerto Rico in
competition with the Company. Each of the Company's free-standing video
rental locations carries an average of approximately 10,000 tapes dedicated
to video rental whereas its video rental locations that are in the same
building as its supermarkets average approximately 8,600 tapes. Each
location also offers for sale a selection of recorded and blank video tapes,
music compact discs, video game cartridges, self-activated cellular phones,
prepaid phone cards, accessories, and snack food products. For promotions of
its Video Rental Division operations, the Company primarily utilizes print,
television, radio, billboards and in-store signage. The Company's franchisor
also provides product and support services to the Company. These include,
among other things, marketing programs and computer software.
The Company's successful development of its video rental franchise has
been the result of its ability to leverage its knowledge of Puerto Rico and
existing market and retailing expertise. The Company's knowledge of real
estate and its existing portfolio of desirable supermarket locations has
enabled it to obtain attractive, high traffic locations for its Video Rental
Operations. The Company continues to evaluate expansion opportunities in
its markets.
Each video rental location is subject to a Franchise Agreement with the
Company's franchisor that provides the right for such location to conduct
video rental operations for a 20-year period.
Store Composition
Since the Acquisition through November 2, 2002, the Company made capital
expenditures of approximately $124.9 million in its supermarket operations in
Puerto Rico and the U.S. Virgin Islands, including the opening of six new
supermarkets, the acquisition of one new supermarket and the remodeling of 39
existing supermarkets. In the same period, the Company made capital
expenditures totaling approximately $11.0 million in its Video Rental
Division operations. The history of store openings, closings and remodelings,
beginning with fiscal 1999, is set forth in the table below:
40 Weeks
Fiscal Ended Fiscal Year
Year November 3, ---------------------
2002 2001 2001 2000 1999
---- ---- ---- ---- ----
Stores in Operation:
At beginning of year . . . . . . . 89 91 93 94 94
Stores opened:
Supermarkets . . . . . . . . . - - - - 1
video rental stores . . . . . . - - 1 - 1
Stores closed:
Puerto Rico - Supermarket . . . 1 - 2 - 1*
Puerto Rico - video rental . . - 2 1 1 1*
---- ---- ---- ---- ----
At end of year . . . . . . . . . 88 89 91 93 94
==== ==== ==== ==== ====
Remodels . . . . . . . . . . . . . 2 2 8 9 2
==== ==== ==== ==== ====
Store Composition at Year-End:
By division:
Supermarkets . . . . . . . . 47 48 48 50 50
video rental stores . . . . 41 41 43 43 44
---- ---- ---- ---- ----
Total 88 89 91 93 94
==== ==== ==== ==== ====
By location:
Puerto Rico . . . . . . . . 80 81 83 85 86
U.S. Virgin Islands . . . . 8 8 8 8 8
---- ---- ---- ---- ----
Total 88 89 91 93 94
==== ==== ==== ==== ====
* Closed as a result of Hurricane Georges; will not be reopened.
On November 20, 2002, subsequent to the year ended November 2, 2002, the
Company opened one new supermarket and one new video rental outlet in the
Isla Verde section of Carolina, Puerto Rico.
Supermarket Purchasing and Distribution
The Company's buying staff actively purchases products from distributors,
as well as directly from the producer or manufacturer. The Company generally
controls shipping from the point of purchase in an effort to reduce costs and
control delivery times. The Company currently buys approximately 57% of its
total dollar volume of product purchases directly from manufacturers and is
seeking to increase this percentage to reduce costs and to obtain improved
payment terms.
The Company owns a full-line distribution center in greater San Juan with
approximately 300,000 square feet. The only facility of its type on the
island with both refrigerated and freezer capacity, the San Juan distribution
center has capacity to store approximately 1.5 million cases of assorted
products and serves as the Company's central distribution center for the
island. The distribution center is equipped with a computerized tracking
system which is integrated with the Company's purchasing, inventory
management and shipping systems. This system enables the Company to make
rapid procurement decisions, optimize inventory levels and increase labor
productivity. During the fiscal year ended November 2, 2002, this facility
provided approximately 56% of the goods (measured by purchase cost) supplied
to the Company's stores in Puerto Rico.
Supermarket Merchandising
General
The Company's merchandising strategies integrate one-stop shopping
convenience, premium quality products, attractive pricing and effective
advertising and promotions. The Company reinforces its merchandising
strategies with friendly and efficient service, effective promotional
programs, in-store activities, and both brand name and high quality private
label product offerings.
Product Offerings
Over the past several years management greatly increased the number of
items offered, analyzed the preferences of its customers, and then eliminated
certain low demand items. The Company expanded its supermarket stock keeping
units ("SKUs") from approximately 23,000 to approximately 67,000.
Management believes the Company's supermarkets offer the greatest product
variety within their market areas, as its competitors generally lack the
sales volume, store size and procurement efficiencies to stock and
merchandise the wide variety of products and services offered by the Company.
The Company's management believes the convenience and quality of its
specialty department products contribute to customer satisfaction.
The following table sets forth the mix of products sold (as measured in
sales dollars) in the Company's supermarkets for the fiscal periods indicated:
Fiscal Fiscal
Year 40 Weeks Year
Ended Ended Ended
November 2, November 3, January 27,
Product Category 2002 2001 2001
----------- ----------- -----------
Grocery . . . . . . . . . . . . 43.3% 43.8% 45.2%
Health/Beauty Care/General Merchandise 8.1 8.2 8.2
Dairy . . . . . . . . . . . . . . 18.6 18.6 17.8
Meat/Seafood . . . . . . . . . . . 16.0 15.7 15.1
Produce . . . . . . . . . . . . . . 9.2 9.1 9.1
Deli/Bakery . . . . . . . . . . . . 4.8 4.6 4.6
------ ------ ------
Total . . . . . . . . . . . . 100.0% 100.0% 100.0%
====== ====== ======
Pricing
As one of the largest grocery store chain operators in its markets, the
Company is able to take advantage of volume purchase discounts and shipping
efficiencies to offer competitive pricing at its supermarkets. The Company
utilizes circulars distributed as inserts in newspapers and in its stores to
emphasize special offers. The frequency of circular distribution varies from
weekly in some periods to every other week in other periods.
Private Label
During fiscal 1998 the Company began selling Pueblo brand private label
grocery, dairy, and frozen food items in its supermarkets. As of November 2,
2002, the Company continued to have approximately 274 SKUs of manufactured
Pueblo brand items offered in its supermarkets. Product selection seeks to
achieve quality that is equal to or better than competitive national brand
products and sourcing that will enhance gross margin.
Historically, the Company utilized only Food Club - manufactured private
label products through the Company's membership with Topco Associates, Inc.
Utilization of these products has not been discontinued and is intended to be
expanded. Rather, product offerings among Pueblo private label products,
Food Club private label products and national brands are chosen on the basis
of quality, cost, gross margin and sales volume in order to offer what
management believes is the best selection and value to its customers.
The Company's private label program consists of the products discussed
in the two preceding paragraphs as well as Pueblo private label products sold
in its bakery and deli departments and a variety of brand labels sold
exclusively at its supermarkets. During the fiscal year ended November 2,
2002 private label sales were approximately 13.5% of total supermarket sales.
Category Management
During fiscal 1998, the Company implemented a category management system
designed to combine traditional buying, reordering and pricing functions
under the leadership of corporate level category merchandisers. The system
allows the Company to assign profit management to the individual responsible
for a product category. The Company's management believes such a system
improves sales, optimizes inventory levels, reduces purchase costs and
thereby enhances gross profit and operating profit margins.
Advertising and Promotion
The Company primarily utilizes newspaper, radio, television and in-store
advertising in Puerto Rico and the U.S. Virgin Islands. The Company's
grocery operations run multi-page newspaper inserts and full-page color
advertisements.
In March of 2001, the Company introduced the new "PuebloCard" to its
customers in Puerto Rico and the U.S. Virgin Islands. The PuebloCard serves
many functions, including enhancing customer loyalty, through providing
discounts available only to customers using the card, check cashing services,
and target marketing.
All advertising is created and designed through the Company's
wholly-owned advertising agency, CaribAd, Inc. (dba "Adteam"). Adteam, based
in Puerto Rico, develops promotional programs for all of the Company's
markets, thereby providing advertising cost advantages over the Company's
competitors.
Competition
The grocery retailing business is extremely competitive. Competition is
based primarily on price, quality of goods and service, convenience and
product mix. The number and type of competitors, and the degree of
competition experienced by individual stores, vary by location.
The Company competes with local food chains, such as Supermercados
Amigo, Supermercados Grande, Supermercados Econo, Mr. Special Supermarkets,
Plaza Gigante Supermarkets, and Supermercados Selecto in Puerto Rico, and
Plaza Extra and Cost-U-Less in the U. S. Virgin Islands, as well as numerous
independent operations throughout Puerto Rico and the U.S. Virgin Islands.
In addition, several warehouse clubs and mass merchandisers, such as Sam's
Club, Wal-Mart, Kmart (including its Big K format), Costco and Walgreens,
have opened new locations in Puerto Rico and the U.S. Virgin Islands.
Although the Company's Video Rental Operations constitute the largest
video chain in Puerto Rico and the U.S. Virgin Islands, the Company competes
with 16 Video Avenue stores, numerous local independent video retailers, and
mass merchandisers in the category of sell thru movie and games video. In
addition, the Company's video rental stores compete against cable,
television, satellite broadcasting, movie theaters, the Internet, and other
forms of entertainment.
Management Information Systems
The Company believes high levels of automation and technology are
essential to its operations and has invested considerable resources in
computer hardware, systems applications and networking capabilities. These
systems integrate all major aspects of the Company's business, including the
monitoring of store sales, inventory control, merchandise planning, labor
utilization, distribution and financial reporting.
All of the Company's stores are equipped with state-of-the-art point of
sale terminals with full price look-up capabilities that capture sales at the
time of transaction down to the SKU level through the use of bar-code
scanners. These scanners facilitate customer check-out and provide, by
store, valuable stock-replenishment information for buyers and financial
information used by management. Similar scanning technology is used by each
store to electronically record goods received and orders generated. To
provide the best service possible, the Company has installed a labor
scheduling system that schedules optimal staffing based on sales, customer
traffic and defined service objectives. In addition, the Company has
installed software to monitor cash register check out transactions, by
cashier, according to type and frequency in order to improve check out
operations and reduce inventory shrinkage. The Company's management
information systems at its Video Rental Operations are state-of-the art
systems which are licensed to the Company by its franchisor.
Employees
As of November 2, 2002, the Company had approximately 4,650 employees
(full- and part-time), of whom approximately 3,700 were employed at the
supermarket level, 500 at the administrative and financial services offices
and distribution center and 450 by the Video Rental Division. Approximately
66% of the Company's supermarket employees were employed on a part-time basis
and approximately 3,275 store employees were represented by a nonaffiliated
collective bargaining organization under a four year contract expiring in
July 2006. The Company considers its relations with its employees to be good.
Trademarks, Tradenames and Service Marks
The Company owns certain trademarks, tradenames and service marks used
in its business, which are registered with the U.S. Patent and Trademark
Office, and the appropriate governmental authorities in Florida, Puerto Rico,
the U. S. Virgin Islands, and selected foreign jurisdictions. The Company
believes that its trademarks, tradenames, and service marks, including
Pueblo, PuebloXtra, and Xtra, are valuable assets due to the fact that brand
name recognition and logos are important considerations in the Company's
consumer markets. As a franchisee, the Company has exclusive rights to use
the franchisor's trademark in its specified franchise territories.
Regulation
Compliance by the Company with federal, state and local environmental
protection laws has not had, and is not expected to have, a material effect
on capital expenditures, earnings or the competitive position of the Company.
Risk Factors
Supermarket Industry
The retail grocery industry is extremely competitive and is characterized
by high inventory turnover and narrow profit margins. The Company's results
of operations are therefore, sensitive to, and may be materially adversely
impacted by, among other things, competitive pricing, promotional pressures
and additional store openings by competitors. The Company competes with
national, regional and local supermarkets, warehouse club stores, drug
stores, convenience stores, discount merchandisers and other local retailers
in the market areas it serves. Competition with these outlets is based on
price, store location, advertising and promotion, product mix, quality and
service. Some of these competitors may have greater financial resources,
lower merchandise acquisition costs and lower operating expenses than the
Company, and the Company may be unable to compete successfully in the future.
Video Operations
The Company's video rental franchise faces significant competition and
risks associated with technological obsolescence, and the Company may be
unable to compete effectively. The home video and home video game industries
are highly competitive. The Company competes with local, regional and
national video retail stores, and with mass merchants, specialty retailers,
supermarkets, pharmacies, convenience stores, bookstores, mail order
operations, online stores and other retailers, as well as with noncommercial
sources, such as libraries. As a result of direct competition with others,
pricing strategies for videos and video games is a significant competitive
factor in the Company's video rental business. The Company's home video and
home video game businesses also compete with other forms of entertainment,
including cinema, television, sporting events and family entertainment
centers. If the Company does not compete effectively with competitors in the
home video industry or the home video game industry or with providers of
other forms of entertainment, its revenues and/or its profit margin could
decline and its business, financial condition, liquidity and results of
operations could be adversely affected.
Geographic Considerations; Regulation
The Company is concentrated in the densely populated greater San Juan
metropolitan area of Puerto Rico and in the U.S. Virgin Islands. As a result,
the Company is vulnerable to economic downturns in those regions, as well as
natural and other catastrophic events, such as hurricanes and earthquakes,
that may impact those regions. These events may adversely affect the
Company's sales which may lead to lower earnings, or even losses, and may
also adversely affect its future growth and expansion. Further, since the
Company is concentrated on three islands, opportunities for future store
expansion may be limited, which may adversely affect its business and results
of operations. Additionally, the Company is subject to governmental
regulations that impose obligations and restrictions and may increase its
costs.
Reemergence from Bankruptcy
As discussed in greater detail in Financial Restructuring and
Proceedings Under Chapter 11 of the United States Bankruptcy Code and in NOTE
16 - SUBSEQUENT EVENTS - in the notes to the Company's consolidated financial
statements included in Item 15 of this Form 10-K, the Company recently
emerged from bankruptcy and has a substantial amount of indebtedness and debt
service obligations, which could adversely affect its financial and
operational flexibility and increase its vulnerability to adverse conditions.
The Company could incur substantial additional indebtedness in the future,
including indebtedness that would be secured by its assets. If the
Company increases its indebtedness, the related risks that it now faces
could intensify. For example, it could:
- require the Company to dedicate an increased portion of its cash
flow to payments on its indebtedness;
- limit the Company's ability to borrow additional funds;
- increase the Company's vulnerability to general adverse economic
and industry conditions;
- limit the Company's ability to fund future working capital, capital
expenditures and other general corporate requirements;
- limit the Company's flexibility in planning for, or reacting to,
changes in its business and the industry in which it operates or
taking advantage of potential business opportunities;
- limit the Company's ability to execute its business strategy
successfully; and
- place the Company at a potential competitive disadvantage in its
industry.
Company is Highly Leveraged
The Company's ability to satisfy its indebtedness obligations will
depend on its financial and operating performance, which may fluctuate
significantly from quarter to quarter and is subject to economic, industry
and market conditions and to risks related to its business and other factors
beyond its control. The Company cannot provide assurance that its business will
generate sufficient cash flow from operations or that future borrowings will
be available to it in amounts sufficient to enable it to pay its indebtedness
or to fund its other liquidity needs. Further, as NSC is a holding Company,
indebtedness at the NSC level is effectively subordinated to indebtedness and
other obligations at the operating subsidiary level. See Iten 7 MANAGEMENTS'
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and
NOTE 16 - SUBSEQUENT EVENTS - to the consolidated financial statements
included in Item 15 of this Form 10-K.
Market Risk
In addition to the foregoing, the market price of the Company's debt
securities may be significantly affected by change in market rates of
interest, yields obtainable from investments in comparable securities, credit
ratings assigned to the Company's debt securities by third parties and
perceptions regarding its ability to pay its obligations on its debt
securities.
ITEM 2. PROPERTIES
The following table sets forth information as of November 2, 2002 with
respect to the owned and leased stores and support facilities used by Pueblo
in its business:
Owned (1) Leased Total
----------------- ----------------- ----------------
No. Gross Sq. Ft. No. Gross Sq. Ft. No. Gross Sq. Ft
--- ------------- --- ------------- --- ------------
Supermarkets . . . . . . . 6 273,000 41 1,593,000 47 1,866,000
Video rental stores . . . 3 17,000 38 183,000 41 200,000
Distribution center & offices 1 300,000 1 13,000 2 313,000
(1) For four of the owned stores the Company owns the building and leases
the land. Three of these are in Puerto Rico and one is in the U.S. Virgin
Islands.
The majority of the Company's supermarket operations are conducted on
leased premises which have initial terms generally ranging from 20 to 25
years. The lease terms typically contain renewal options allowing the
Company to extend the lease term in five to ten year increments. The leases
provide for fixed monthly rental payments subject to various periodic
adjustments. The leases often require the Company to pay percentage annual
rent and certain expenses related to the premises such as insurance, taxes
and maintenance. See NOTE 6 - LEASES of the notes to the Company's
consolidated financial statements included in Item 15 of this Form 10-K.
The Company does not anticipate any difficulties in renewing its leases
as they expire.
The construction of new owned facilities and remodeling of existing
facilities are financed principally with internally generated funds. All
owned properties of Pueblo were pledged as collateral (by a pledge of the
assets of the Company's subsidiaries) under the Company's bank credit
agreement dated as of April 29, 1997 (the "April 1997 Bank Credit Agreement")
with a syndicate of banks (see NOTE 5 - DEBT in the notes to the Company's
consolidated financial statements included in Item 15 of this Form 10-K).
See also NOTE 16 - SUBSEQUENT EVENTS in the notes to the Company's
consolidated financial statements included in Item 15 of this Form 10-K for a
description of the Company's current financings.
The Company owns its general offices, which includes the supermarket and
Video Rental Division offices and the distribution center located in
Carolina, Puerto Rico (near San Juan), and leases its administrative offices
located in Pompano Beach, Florida.
The Company's management believes that its properties are adequately
maintained and sufficient for its business needs.
ITEM 3. LEGAL PROCEEDINGS
On September 24, 2002 NSC voluntarily consented to the entry of
an order for relief under Chapter 11 of the Bankruptcy Code by filing a
Consent to Entry of Order For Relief Under Chapter 11 in the United States
Bankruptcy Court For The District of Delaware (the "Court"). The Court
ordered such relief on September 27, 2002 (Case No: 02-12550 (PJW)). This
action by NSC was in response to an involuntary petition filed in the
Court by certain creditors of NSC under title 11, United States Code (the
"Chapter 11 Case").
At November 2, 2002, the Company was party to a number of legal
proceedings involving claims for money damages arising in the ordinary course
of conducting its business which are either covered by insurance or are
within the Company's self-insurance program, and in a number of other
proceedings which are not deemed material. Management believes there were no
material contingencies as of November 2, 2002. It is not possible to
determine the ultimate outcome of these matters; however, management is of
the opinion that the final resolution of any threatened or pending litigation
at such date is not likely to have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
52 weeks ended November 2, 2002.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Market Information
There is no established public trading market for the Company's common
equity.
Holders
The Company is a wholly-owned subsidiary of PXC&M Holdings, Inc., a
Delaware corporation ("Holdings"). Shares of Holdings are indirectly
beneficially owned by a trust primarily for the benefit of the family of
Gustavo Cisneros, and a trust primarily for the benefit of the family of
Ricardo Cisneros, with each trust having a 50% indirect beneficial ownership
interest in the shares of Holdings. These trusts are referred to herein as
the "Principal Shareholders." Messrs. Gustavo and Ricardo Cisneros disclaim
beneficial ownership of the shares.
Dividends
No cash dividends have been declared on the common stock since NSC's
inception. Certain restrictive covenants in the April 1997 Bank Credit
Agreement imposed limitations on the declaration or payment of dividends by
NSC. Additionally, dividend payments by Pueblo and Pueblo Entertainment to
NSC were restricted under the terms of the April 1997 Bank Credit Agreement.
The April 1997 Bank Credit Agreement, however, provided that so long as no
default or event of default (as defined in the April 1997 Bank Credit
Agreement) exists, or would exist as a result, Pueblo was permitted to pay
cash dividends to NSC in an aggregate amount necessary to pay interest on
NSC's 9.5% Senior Notes due 2003 (the "Notes") and NSC's 9.5% Series C Notes
due 2003 (the "Series C Senior Notes") then due and payable in accordance
with the terms thereof. See Notes 1, 5, 8, 9, and 16 to the Company's
consolidated financial statements included in Item 15 of this Form 10-K for a
discussion of the Notes and Series C Senior Notes, issuance of new 10.125%
Senior Secured Notes to the Holders, and the replacement of the April 1997
Bank Credit Agreement.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except average sales per selling square
foot amounts)
Fiscal
Year 40 Weeks Fiscal Year Ended
Ended Ended -------------------------------------
November 2, November 3, January 27, January 29, January 30,
2002 2001 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Operating Statement Data
Net sales $588,179 $433,342 $622,050 $674,145 $784,774
Cost of goods sold 396,239 290,997 423,755 456,143 528,395
--------- --------- --------- --------- ---------
Gross profit 191,940 142,345 198,295 218,002 256,379
Selling, general and admin-
istrative expenses 154,371 116,541 165,667 163,785 172,964
Gain on insurance settlement(1) (14,693) - (2,464) (15,066) -
Store Closings:
Exit costs (2) 246 - 685 - -
Write down of impaired
assets (2) - - 3,534 - -
Depreciation and amortization 28,260 22,671 34,142 31,632 36,529
--------- --------- --------- --------- ---------
Operating profit (loss) 23,756 3,133 (3,269) 37,651 46,886
Interest expense-debt and
capital lease
obligations (8) (20,946) (18,376) (28,830) (30,371) (29,556)
Interest and investment
income, net 291 415 2,500 2,750 1,379
Loss on sale of real
property (3) - - - (1,291) -
Reorganization items (3a) (995) - - - -
Gain on early extinguishment
of debt (4) - - 33,867 - -
-------- ---------- -------- ---------- ---------
(Loss) Income before Income
Tax 2,106 (14,828) 4,268 8,739 18,709
Income tax (expense) benefit (2,785) 6,612 (1,573) (4,015) (9,832)
--------- --------- --------- --------- ---------
Net (loss) income $ (679) $ (8,216) $ 2,695 $ 4,724 $ 8,877
========= ========= ========= ========== =========
As of
-------------------------------------------------------------------
November 2, November 3, January 27, January 29, January 30,
2002 2001 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Balance Sheet Data
Cash and cash equivalents (5) $17,992 $ 2,169 $34,833 $95,711 $55,500
Working capital (deficit) (4,718) 252 (6,899) 22,214 1,578
Property and equipment, net 102,847 111,227 118,598 122,263 129,860
Total assets 398,725 394,159 434,790 521,564 507,002
Total debt and capital
lease obligations (9) 220,526 218,277 218,047 283,705 276,032
Stockholder's equity 34,706 35,385 43,601 40,906 36,182
See notes to Selected Financial Data at the end of this Item 6.
Fiscal
Year 40 Weeks Fiscal Year Ended
Ended Ended --------------------------------------
November 2, November 3, January 27, January 29, January 30,
2002 2001 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Certain Financial Ratios
and Other Data
EBITDA (as defined) (6) *** $52,016 $25,804 $34,407 $69,283 $83,415
Cash flow (used in) provided
by investing activities (3) (7,352) (5,240) (17,249) 1,077 (8,209)
Cash flow provided by (used
in)financing activities 1,376 (503) (31,685) (576) (591)
Cash flow provided by (used
in) operating activities 21,779 (26,921) (11,944) 39,710 35,530
Capital expenditures 7,391 5,271 17,452 21,650 * 15,271
EBITDA (as defined) margin (6) 8.8% 6.0% 5.5% 10.3% 10.6%
Debt to EBITDA (as defined) 4.24:1 6.65:1** 6.34:1 4.09:1 3.30:1
* Excludes replacements of approximately $13.1 million as a result of damages from Hurricane
Georges.
** For comparison purposes, this ratio was computed using the EBITDA for the trailing 52 week
period.
*** Includes a gain from the Hurricane Georges insurance claim of $14,693, $2,464, and $15,066
for the fiscal years ended November 2, 2002, January 27, 2001, and January 29, 2000,
respectively.
40 Weeks
Fiscal Ended Fiscal Year
Year November 3, ----------------------------
2002 2001 2001 2000 1999
----------- ----------- -------- -------- --------
RETAIL FOOD DIVISION DATA
Puerto Rico
Number of stores (at fiscal year-end) 41 42 42 44 44
Average sales per store (7) $ 12,125 $ 8,698 $ 11,943 $ 12,901 $ 14,804
Average selling square footage 29,393 28,895 28,149 28,243 27,179
Average sales per selling square foot (7) $ 442 $ 319 $ 452 $ 491 $ 590
Total sales $500,624 $365,311 $522,059 $567,658 $650,816
Same store sales % change 4.1% (7.6)% (7.6)% (13.1)% (17.8)%
U.S. Virgin Islands
Number of stores (at fiscal year-end) 6 6 6 6 6
Average sales per store (7) $ 7,729 $ 5,916 $ 8,085 $ 8,364 $ 11,326
Average selling square footage 19,421 19,421 19,421 19,421 19,421
Average sales per selling square foot (7) $ 400 $ 305 $ 414 $ 427 $ 580
Total sales $ 46,376 $ 35,497 $ 48,509 $ 50,185 $ 67,958
Same store sales % change (1.0)% (4.5)% (3.3)% (26.2)% (21.7)%
VIDEO RENTAL DIVISION DATA
Video Rental Stores
Number of stores (at fiscal year-end) 41 41 43 43 44
Average sales per store (7) $ 973 $ 702 $ 1,000 $ 1,146 $ 1,381
Average weekly sales $ 781 $ 740 $ 837 $ 962 $ 1,184
Total sales $ 39,893 $ 29,421 $ 42,954 $ 49,920 $60,972
Same store sales % change (0.5)% (7.8)% (13.5)% (18.6)% 10.8%
See notes to Selected Financial Data at the end of this Item 6.
NOTES TO SELECTED FINANCIAL DATA
(1) The Company realized a gain from an insurance settlement relating to
Hurricane Georges on the excess of replacement costs over book value of
assets replaced that were damaged by the storm.
(2) The Company recorded a charge of $0.7 million and $0.2 million for the
estimated carrying costs of stores that were closed for the fiscal years
ended January 27, 2001 and November 2, 2002, respectively, and $3.5
million for the write down of related assets for the fiscal year ended
January 27, 2001.
(3) The Company received $35.5 million in cash and incurred a loss in a
sale/leaseback of real estate.
(3a) Restructuring items during the fiscal year ended November 2, 2002
consist primarily of the costs of the Company's and its noteholders'
financial and legal professionals advising the parties on matters
pertaining to the Company's Chapter 11 proceedings.
(4) The fiscal year ended January 27, 2001 amount relates to a gain on early
extinguishment of debt.
(5) Highly liquid investments purchased with a maturity of three months or
less are considered cash equivalents.
(6) EBITDA (as defined) represents earnings before interest, taxes,
depreciation, amortization, the loss on sale/leaseback transaction,
sundry, the write down of impaired assets, and reorganization items.
EBITDA (as defined) is not intended to represent cash flow from
operations as defined by accounting principles generally accepted in the
United States of America and should not be considered as an alternative
to net income (loss) as an indication of the Company's operating
performance or to cash flows as a measure of liquidity. EBITDA (as
defined) is included as it is the basis upon which the Company assesses
its financial performance. EBITDA (as defined) margin represents EBITDA
(as defined) divided by net sales. Included below is a reconciliation of
Operating profit (loss) to EBITDA:
Fiscal
Year 40 Weeks Fiscal Year Ended
Ended Ended -------------------------------------
November 2, November 3, January 27, January 29, January 30,
2002 2001 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Operating profit (loss) $23,756 $ 3,133 $(3,269) $37,651 $46,886
Add:
Write down of impaired
assets (2) - - 3,534 - -
Depreciation and amortization 28,260 22,671 34,142 31,632 36,529
----------- ----------- ----------- ----------- -----------
EBITDA (as defined) $52,016 $25,804 $34,407 $69,283 $83,415
=========== =========== =========== =========== ===========
(7) For all periods presented, average sales are weighted for the period of
time each store is open during the period.
(8) The fiscal year ended November 2, 2002 amount does not include
contractual interest expense on pre-petition debt totaling approximately
$2.7 million for the period from September 4, 2002 through November 2,
2002.
(9) The balance as of November 2, 2002 includes the carrying value of the
Notes and Series C Senior Notes totaling approximately $176.2 million,
which are included as Liabilities Subject to Compromise in the Company's
consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company was organized in 1993 to acquire Pueblo in the Acquisition.
In connection with the Acquisition, the Company incurred significant
indebtedness and recorded significant goodwill. Following the Acquisition,
the Company continued an existing operating strategy designed to expand its
supermarket penetration through new supermarket openings in Puerto Rico and
Florida and new video rental locations in Puerto Rico. The number of the
Company's supermarkets in Puerto Rico and the U.S. Virgin Islands grew from
46 to 47 and the number of the Company's video rental locations (including
conversions) grew from 20 to 41, in each case measured from the Acquisition
through the end of the fiscal year ending November 2, 2002. During the
fiscal year ended November 2, 2002, the Company closed one under-performing
supermarket in Puerto Rico, reducing the number of supermarkets to 47. On
November 2, 2001 the Company changed its fiscal year end from the Saturday
closest to January 31 to the Saturday closest to October 31. Consequently,
the fiscal period being reported as the prior year's numbers in this Annual
Report on Form 10-K is the 40 weeks ended November 3, 2001.
Throughout this time period, the Company's markets have been affected by
an increasing level of competition from local supermarket chains, independent
supermarkets, warehouse club stores, mass merchandisers, department stores,
discount drug stores and convenience stores. Warehouse club stores and mass
merchandisers, which began entering the Puerto Rico and U.S. Virgin Islands
markets in 1990 offering various grocery and general merchandise items, have
increased pricing pressures on grocery retailers including the Company. In
addition, low inflation in food prices in recent years has made it difficult
for the Company and other grocery store operators to increase prices and has
intensified the competitive environment by causing such retailers to
emphasize promotional activities and discount pricing to maintain or gain
market share.
The Company's focus from the date of Acquisition through the end of
fiscal 1997 on new supermarket development rather than supermarket
operations, as well as the effects of increased competition, resulted in
declines in both net sales and same store sales and in consolidated operating
results.
In October 1995, William T. Keon, III was named President and Chief
Executive Officer of the Company. Following his arrival at the Company, Mr.
Keon conducted a thorough review of the Company's operating business
practices and its financial performance. As a result of such review, the
Company determined in January 1996 to discontinue its retail operations in
the competitive Florida market in order to focus on its core markets where it
has a stronger competitive position and greater profit opportunities. In
fiscal 1996, management also began to take several other actions designed to
improve the financial performance of the Company, including the closing of
two under-performing supermarkets in Puerto Rico, an increase in the
Company's advertising expenditures in Puerto Rico, and the conversion of six
Pueblo Video Clubs into in-store Video Rental Division outlets. Throughout
fiscal 1997 and fiscal 1998, the Company completed its conversion of Pueblo
Video Clubs into Video Rental Division outlets. During fiscal 1998 Mr. Keon
put a new management team in place which embarked on converting the Puerto
Rico and U. S. Virgin Islands supermarkets to "combo" stores which offer
expanded grocery items, a wide selection of health and beauty care products
and general merchandise. In addition, services such as banks and private
postal services were added to many of the supermarkets. Management also
embarked on a program to remodel the supermarkets and open new stores where
appropriate. A total of twenty-five supermarkets were remodeled from fiscal
1997 through November 2, 2002. Although the remodeling program was delayed
in the latter part of fiscal 1999, and the early part of fiscal 2000, due to
the business interruption as a result of Hurricane Georges, the Company
continued the program in fiscal 2000. From fiscal 2000 through the end of
fiscal 2002 the Company completed 27 remodels (nine in fiscal 2000, eight in
fiscal 2001, two during the 40 weeks ended November 3, 2001 and two in fiscal
2002).
During the same period, from fiscal 1997 through November 2, 2002, the
Company constructed two new supermarkets and two new video rental stores.
One of the supermarkets and one of the video rental stores were opened during
fiscal 1999. The remaining supermarket and video rental store were
constructed during fiscal 2002 but were not opened as of November 2, 2002.
These stores were opened on November 20, 2002.
NSC has no operations of its own, and its only assets are its equity
interests in Pueblo and Pueblo Entertainment and intercompany notes issued to
NSC by its subsidiaries in connection with its investment of the net proceeds
of the 9.5% Senior Notes (the "Notes") and the 9.5% Series C Senior Notes Due
2003 (the "Series C Senior Notes"). NSC has no source of cash to meet its
obligations, including its obligations under the Notes and the Series C
Senior Notes, other than payments by its subsidiaries on such intercompany
notes, which are restricted and effectively subordinated to Pueblo's
obligations under the April 1997 Bank Credit Agreement, and dividends from
its subsidiaries. The April 1997 Bank Credit Agreement contains an exception
to the restriction on the payment of dividends which provides that so long as
no default or event of default (as defined in the April 1997 Bank Credit
Agreement) exists, or would exist as a result thereof, Pueblo is permitted to
pay cash dividends to the Company in an aggregate amount necessary to pay
interest on the Notes and the Series C Senior Notes then due and payable in
accordance with the terms thereof.
On September 24, 2002 NSC voluntarily consented to the entry of an order
for relief under Chapter 11 of the Bankruptcy Code by filing a Consent to
Entry of Order For Relief Under Chapter 11 in the United States Bankruptcy
Court For The District of Delaware (the "Court"). The Court ordered such
relief on September 27, 2002 (Case No: 02-12550 (PJW)). This action by NSC
was in response to an involuntary petition filed in the Court by certain
creditors of NSC under title 11, United States Code (the "Chapter 11 Case").
The creditors' actions were taken as a result of NSC not paying the
August 1, 2002 interest payment on its $177.3 million in notes outstanding
which were due in August of 2003. The interest was not paid as a result of
NSC's operating subsidiaries not paying interest they owed to NSC; this non-
payment was consented to by the operating subsidiaries' lender banks.
The relief under the Chapter 11 Case pertained to NSC only, not to its
operating subsidiaries. However, the bank debt of the operating
subsidiaries, which was guaranteed by NSC, was due on February 1, 2003.
On January 30, 2003 a new bank lender assumed the existing bank debt and
committed to lend the operating subsidiaries additional funds at the time NSC
emerged from bankruptcy. The new bank lender also obtained the guarantee of
NSC.
On June 5, 2003, NSC emerged from bankruptcy pursuant to an April 30,
2003 confirmation order from the Court.
The impact of the Chapter 11 Case on NSC's operations for the year ended
November 2, 2002 and its financial condition as of that date are disclosed in
the Company's consolidated financial statements and related footnotes
included in Item 15 of this Form 10-K.
The impact of the financial restructuring and emergence from proceedings
under Chapter 11 of the United States Bankruptcy Code, both of which occurred
subsequent to November 2, 2002, are discussed in more detail in NOTE 16 -
SUBSEQUENT EVENTS of the footnotes to the Company's consolidated financial
statements included in Item 15 of this Form 10-K.
Hurricane Georges
Hurricane Georges struck all of the Company's operating facilities on
September 20 and 21, 1998. All of the Company's stores, with the exception
of two, were reopened. During fiscal year 2000, the Company settled the
property portion of its hurricane insurance claims for approximately $42.0
million. As a result the Company recorded gains associated with the property
settlement during fiscal 2000 and 2001 of $15.1 million and $2.5 million,
respectively ($9.2 million and $1.5 million, respectively, net of applicable
income tax).
The Company's insurance also includes business interruption coverage
which provides for reimbursement for lost profits as a result of the storm.
On December 1, 2000 the Company submitted to its insurance carriers a $69.4
million proof of loss for business interruption losses to its grocery stores
and video outlets in Puerto Rico and the U.S. Virgin Islands (the "claim")
as a result of Hurricane Georges. The claim was based on the Company's
management's estimate of the impact the storm had on its business from the
time the storm occurred through September 9, 2000, which was, in management's
opinion, the end of the applicable indemnity period. The claim was settled
in July of 2002 for $18.2 million after a prolonged appraisal process
(similar to an arbitration process). The settlement resulted in recording a
gain, during fiscal 2002, of $14.7 million, net of claim and appraisal
expenses of $3.5 million.
Results of Operations
52 Weeks Ended November 2, 2002 vs. 52 Weeks Ended November 3, 2001
As of November 2, 2002, the Company operated a total of 47 supermarkets
and 41 video rental locations in Puerto Rico and the U. S. Virgin Islands.
During the fiscal year ended November 2, 2002, the Company closed one of its
supermarkets in Puerto Rico. Additionally, the Company continued its
reengineering including the remodeling process scheduled for its stores.
Total sales for the 52 weeks ended November 2, 2002 were $588.2 million
versus $576.6 million in the comparable period of the prior year, an
increase of 2.0%. For the comparable 52 week periods, same store sales were
$586.1 million for the year ended November 2, 2002 versus $570.0 million for
the prior year, an increase of 2.8%. "Same stores" are defined as those
stores that were open as of the beginning of both periods and remained open
through the end of the periods. Same store sales in the Retail Food Division
increased 3.1% for the 52 weeks ended November 2, 2002 as compared to the
same period of the prior year. The principal factors contributing to the
increase in same store sales in the Retail Food Division, despite continued
growth in competition, were the Company's PuebloCard and the Company's
repositioning efforts, both beginning in March of 2001. Video Rental
Division same store sales decreased 0.5% for the 52 weeks as compared to the
same period in the prior year due to a decline in the number of new movie
releases and in customer response to new releases for both rental and sell-
through videos.
Gross profit for the 52 weeks ended November 2, 2002 was $191.9 million
versus $187.9 million for the comparable period of the prior year, an
increase of $4.0 million. Gross profit for the Retail Food Division was
$160.2 million for the 52 weeks ended November 2, 2002 compared to $156.4
million for the comparable period of the prior year, a $3.8 million increase.
The $3.8 million increase in gross profit for the Retail Food Division was a
result of the increase in sales. Gross profit for the Retail Food Division
was 29.2% of sales in both the 52 weeks ended November 3, 2001 and the 52
weeks ended November 2, 2002. The gross profit for the Video Rental Division
for the 52 weeks ended November 2, 2002 was $31.7 million versus $31.5
million for the comparable period of the prior year, an increase of $0.2
million. The gross profit rate for the Video Rental Division increased by
0.2%, to 79.6% in the 52 weeks ended November 2, 2002. The increase in the
gross profit rate was a result of an increase in video rentals, which have a
higher gross margin rate than product sales, as a percentage of total Video
Rental Division sales.
Selling, general and administrative expenses were $154.4 million for the
52 weeks ended November 2, 2002 compared to $155.1 million for the comparable
period of the prior year. The decrease of $0.7 million in the 52 weeks ended
November 2, 2002 from the comparable period of the prior year was a result of
cost reductions implemented in April of 2001.
Depreciation and Amortization was $28.3 million for the 52 weeks ended
November 2, 2002 compared to $30.9 million for the comparable period of the
prior year, a decrease of $2.6 million. This decrease was primarily a result
of reduced capital expenditures.
Interest expense, net of interest income, decreased by $2.6 million
between the 52 weeks ended November 2, 2002 and the comparable period of the
prior year primarily as a result of the Company discontinuing to record
interest expense on the Company's 9.5% Senior Notes and Series C Senior notes
as of the date of the voluntary petition for Chapter 11, and by lower
interest rates on the Company's $32.0 million in borrowings under the
Company's revolving credit facility.
Restructuring items during the fiscal year ended November 2, 2002
consisted primarily of the costs of financial and legal professionals
providing financial and legal services to both the Company and the Company's
noteholders on matters pertaining to the Company's Chapter 11 proceedings.
Income tax expense for the 52 weeks ended November 2, 2002 was $2.8
million compared to a benefit of $9.8 million in the comparable period of the
prior year, an increase of $12.6 million. The effective rates for the 52
weeks ended November 2, 2002 and the comparable period of the prior year were
132.2% and 46.0%, respectively. Variances in the effective tax rates were
primarily due to the relationship of items of permanent difference between
(Loss) Income Before Income Taxes for financial reporting purposes and pretax
income for income tax return reporting purposes to (Loss) Income Before
Income Taxes.
Net loss for the 52 weeks ended November 2, 2002 was $0.7 million, an
improvement of $10.8 million from the net loss in the comparable period of
the prior year. Net loss for the 52 weeks ended November 3, 2001 was $11.5
million. During the 52 weeks ended November 2, 2002, the Company recorded
reorganization cost of approximately $1.0 million. Also, during the 52 weeks
ended November 2, 2002 the Company recorded a $14.7 million pre-tax gain
from the settlement of the Company's business interruption insurance
claim as a result of Hurricane Georges which occurred in September of
1998. The impact on net income is a gain of approximately $6.8 million, net
of income taxes.
40 Weeks ended November 3, 2001 vs. 40 Weeks ended November 4, 2000
As of November 3, 2001, the Company operated a total of 48 supermarkets
and 41 video rental locations in Puerto Rico and the U.S. Virgin Islands.
During the fiscal period ended November 3, 2001, the Company closed two of its
video rental stores in Puerto Rico. Additionally, the Company continued its
reengineering including the remodeling process scheduled for all of its
stores.
Total sales for the 40 weeks ended November 3, 2001 were $433.3 million
versus $478.8 million for the 40 weeks ended November 4, 2000, a decrease
of 9.5%. For the comparable 40 week periods, same store sales were
$432.7 million for the 40 weeks ended November 3, 2001 versus $470.9 million
for the 40 weeks ended November 4, 2000, a decline of 8.1%. "Same stores"
are defined as those stores that were open as of the beginning of both
periods and remained open through the end of the periods. Same store sales
in the Retail Food Division declined 8.1% for the 40 weeks ended November 3,
2001 as compared to the 40 weeks ended November 4, 2000. The principal
factors contributing to the decline in same store sales in the Retail Food
Division were increased competition and weakness in the economy in both
Puerto Rico and the U.S. Virgin Islands. Video Rental Division same
store sales decreased 7.8% for the 40 weeks ended November 3, 2001, as
compared to the 40 weeks ended November 4, 2000.
Gross profit for the 40 weeks ended November 3, 2001 was $142.3 million
versus $152.7 million for the 40 weeks ended November 4, 2000, a decline
of $10.4 million. Gross profit for the Retail Food Division was $119.0
million for the 40 weeks ended November 3, 2001 compared to $127.8 million
for the 40 weeks ended November 4, 2000, a $8.8 million decline. The $8.8
million decline in gross profit for the Retail Food Division was a result of
the decline in sales and was offset by a 0.9% increase in the rate of gross
profit, from 28.6% of sales in the 40 weeks ended November 4, 2000 to 29.5%
of sales in the 40 weeks ended November 3, 2001. The primary reason for the
improvement in the rate of gross profit was the impact of the Company's
loyalty program, which began in March of 2001. In addition to providing
loyal customers with enhanced values, the program provides the Company the
ability to improve control of its promotional programs. The program is based
on the PuebloCard which identifies the card holder as a member of the program
and the special pricing the card holder is entitled to on the specific
item(s) being checked out. Currently, Pueblo is the only supermarket
retailer offering such a program in Puerto Rico and the U.S. Virgin Islands.
The gross profit for the Video Rental Division for the 40 weeks ended
November 3, 2001 was $23.4 million versus $25.0 million for the 40 weeks
ended November 4, 2000, a decline of $1.6 million. The gross profit rate for
the Video Rental Division increased by 1.7%, to 79.5% in the 40 weeks ended
November 3, 2001. The increase in the gross profit rate was a result of an
increase in video rental sales, which have a higher gross margin rate than
product sales, as a percentage of total Video Rental Division sales.
Selling, general and administrative expenses were $116.5 million for the
40 weeks ended November 3, 2001 compared to $127.1 million for the 40 weeks
ended November 4, 2000. The decrease of $10.6 million in the 40 weeks ended
November 3, 2001 from the 40 weeks ended November 4, 2000, was a result of
the decline in sales and cost reductions implemented in April of 2001.
Depreciation and Amortization was $22.7 million for the 40 weeks ended
November 3, 2001 compared to $25.9 million for the 40 weeks ended November 4,
2000, a decrease of $3.2 million. This decrease was primarily a result
of the write off, during the 40 weeks ended November 4, 2000, of property,
plant and equipment that had been replaced during fiscal years 2001 and 2000
when the majority of the Company's remodels were completed.
Interest expense, net of interest income, decreased by $3.1 million
between the 40 weeks ended November 3, 2001 and the 40 weeks ended November
4, 2002 primarily as a result of the Company's purchase of $87.7 million
principal amount of its Notes and Series C Senior Notes which occurred on
October 2, 2000. This reduction was partially offset by interest on $30.0
million in borrowings under the Company's revolving credit facility.
Income tax benefit for the 40 weeks ended November 3, 2001 was $6.6
million compared to income tax expense of $4.8 million for the 40 weeks ended
November 4, 2000, an increase of $11.4 million. The income tax expense for
the 40 weeks ended November 4, 2000 included the impact of a $13.3 million
income tax provision related to the Company's extraordinary gain on the
purchase of $87.7 million principal amount of its Notes and Series C Senior
Notes. The effective rates for the 40 weeks ended November 3, 2001 and the
40 weeks ended November 4, 2000 were 44.6% and 44.4%, respectively. Variances
in the effective tax rate were a result of variances in tax rates among the
tax jurisdictions in which the Company operates and the results of operations
in those specific jurisdictions.
Net loss for the 40 weeks ended November 3, 2001 was $8.2 million, a
decrease of $14.2 million from the net income for the 40 weeks ended November
4, 2000. Net income for the 40 weeks ended November 4, 2000 was $6.0
million. The 40 weeks ended November 4, 2000 include a $20.6 million
extraordinary gain, net of applicable income taxes, from early extinguishment
of the Company's debt. The 40 weeks ended November 4, 2000 also include a
charge of $2.7 million, net of applicable income taxes, pertaining to the
write-down of assets of stores closed and a $1.5 million gain, net of
applicable income taxes, related to the final accounting for the property
damaged by Hurricane Georges in September of 1998.
Liquidity and Capital Resources
The Company's financial restructuring and proceedings under Chapter 11
of the United States Bankruptcy Code are discussed below and in the General
section of the Management's Discussion and Analysis and footnotes 1, 5, 8, 9,
and 16 to the consolidated financial statements included in Item 15 of this
Form 10-K.
Historically Company operations, along with its available credit
facility, have provided adequate liquidity for the Company's operational
needs.
As to cash provided or used during fiscal 2002 the following pertains:
As of November 2, 2002, the Company had borrowings of $32.0 million
under its April 1997 Revolving Credit Facility. The weighted average per
annum interest rate on these borrowings for the 52 weeks ended November 2,
2002 and November 3, 2001 was 5.927% and 8.930%, respectively. After giving
effect to outstanding standby letters of credit in the amount of $3.9
million, as of November 2, 2002, the borrowing availability on a revolving
basis under the terms of the April 1997 Bank Credit Agreement was $2.1
million.
Cash provided by operating activities was $21.8 million during the 52
weeks ended November 2, 2002 compared to $2.8 million in the comparable
period of the prior year. The improvement is a result of a decline in net
loss from operations, including the gain from settling the business
interruption portion of the insurance claim that resulted from hurricane
Georges, and a decrease in cash used for components of working capital
including the impact of not making the $8.4 million interest payment due on
the Company's notes on August 1, 2002.
Net cash used in investing activities was $7.4 million and $6.5 million
in the 52 weeks ended November 2, 2002 and the comparable period of the prior
year, respectively. The increase is a result of an increase in the
purchases of property and equipment during the 52 weeks ended November 2,
2002 as compared to the comparable period of the prior year due to the
construction of a new supermarket and a new video rental outlet during the
year. These two stores opened subsequent to November 2, 2002, on November 20,
2002.
Net cash provided by financing activities was $1.4 million for the 52
weeks ended November 2, 2002 while net cash used in financing activities was
$0.8 million in the comparable period of the prior year. During the 52 weeks
ended November 2, 2002, the Company borrowed an additional $2.0 million, net,
under its revolving credit facility.
On May 23, 2003 the Company's operating subsidiaries entered into a new
Loan and Security Agreement, and the Company entered into an Amended and
Restated Guarantor General Security Agreement (collectively the "May 2003
Bank Agreement") with the lender thereunder (the "2003 Bank Lender"). The
initial term of the May 2003 Bank Agreement expires June 22, 2008 and will
continue on a year-to-year basis unless sooner terminated. The borrowers
granted the 2003 Bank Lender a security interest in all assets, tangible and
intangible, owned or hereafter acquired or existing as collateral. In
addition, the May 2003 Bank Agreement is collateralized by a pledge of the
capital stock of, and inter-company notes issued by the Company's operating
subsidiaries and by the capital stock of the Company.
The Company is required, under the terms of the May 2003 Bank Agreement,
to meet certain financial covenants including minimum consolidated net worth
(as defined) levels, minimum working capital (as defined) levels, minimum
earnings before net interest, income taxes, depreciation and amortization
(EBITDA) as defined, minimum net revenues, a minimum fixed charge coverage
ratio (as defined) and maximum debt to EBITDA ratio (as defined). The May
2003 Credit Agreement also contains certain other restrictions, including
restrictions on additional indebtedness and the declaration and payment of
dividends.
The May 2003 Bank Agreement provides both a revolving loan (with amounts
available based on a borrowing base formula, not to exceed, except in the
lender's discretion, $35 million outstanding) and term loans facilities for
various specified purposes and in certain specified amounts, aggregating $45
million in outstandings
Funding took place on June 5, 2003 at which time the existing bank debt
for borrowed money outstanding was repaid in full and the 2003 Bank Lender
lent the operating subsidiaries a total of approximately $57.4 million, $12.4
million of which was borrowed under the revolving credit facility. See
NOTE 16 - SUBSEQUENT EVENTS - of the footnotes to the Company's consolidated
financial statements included in Item 15 of this Form 10-K. After giving
effect to the funding on June 5, 2003 and the issuance of standby letters of
credit in the amount of $3.9 million, availability under the revolving
credit facility under the May 2003 Bank Agreement was $8.4 million.
Working capital as of November 2, 2002 was a deficit of $4.7 million,
a decrease of $5.0 million from the $0.3 million working capital as of
November 3, 2001, producing a current ratio of 0.95:1 and 1.00:1,
respectively. The primary reason for this decrease is the
reclassification of the Company's borrowing under its revolving credit
facility to a current liability.
The Company's general liability and certain of its workers compensation
insurance programs are self-insured. The Company maintains insurance
coverage for claims in excess of $500,000 for 8 of its locations and $250,000
for all other locations. The current portion of the reserve, representing
amounts expected to be paid in the next fiscal year, is $4.3 million as of
November 2, 2002 and is anticipated to be funded with cash provided by
operating activities.
Capital expenditures for fiscal 2003 are expected to be approximately
$6.2 million. This capital program (which is subject to continuing change
and review) includes completion of the new stores, the remodeling of certain
existing locations, and updating of equipment and software.
Impact of Inflation, Currency Fluctuations, and Market Risk
The inflation rate for food prices continues to be lower than the
overall increase in the U.S. Consumer Price Index. The Company's primary
costs, products and labor, usually increase with inflation. Increases in
inventory costs can typically be passed on to the customer. Other cost
increases must by recovered through operating efficiencies and improved gross
margins. Currency in Puerto Rico and the U.S. Virgin Islands is the U.S.
dollar. As such, the Company has no exposure to foreign currency
fluctuations.
Significant Accounting Policies
For a discussion of the Company's significant accounting policies refer
to NOTE 1 of the notes to the consolidated financial statements included in
Item 15 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks from transactions that
are entered into during the normal course of business. The Company does not
trade or speculate in derivative financial instruments. The Company's
primary market risk exposure relates to interest rate risk. The Company
manages its interest rate risk in order to balance its exposure between fixed
and variable rates while attempting to minimize its interest costs.
****
Forward Looking Statements
Statements, other than statements of historical information, under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Form 10-K may constitute
forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements include, among others,
statements concerning anticipated capital expenditures. These statements are
based on Company management's expectations and are subject to various risks
and uncertainties. Actual results could differ materially from those
anticipated due to a number of factors, including but not limited to the
Company's substantial indebtedness and high degree of leverage, which
continue as a result of the financial restructuring (including limitations on
the Company's ability to obtain additional financing and trade credit, to
apply operating cash flow for purposes in addition to debt service, to
respond to price competition in economic downturns and to dispose of assets
pledged to secure such indebtedness or to freely use proceeds of any such
dispositions), the Company's limited geographic markets and competitive
conditions in the markets in which the Company operates and buying patterns
of consumers.
****
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-42 appearing at the end of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's accountants on
accounting and financial disclosure during the applicable periods.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a list, as of the date of this filing, of the names of
the directors and executive officers of the Company, their respective ages
and their respective positions with the Company. The terms of the directors
and executive officers of the Company expire annually upon the holding of the
annual meeting of stockholders.
Directors
- ---------
Name Age Position
- ---- ---- --------
William T. Keon, III . . . . . 56 Director and Chairman of the Board of
Directors; President and Chief Executive
Officer; Chairman of the Executive
Committee
Steven I. Bandel . . . . . . . 49 Director; Member of the Executive Committee
and Chairman of the Audit and Risk
Committee; Chairman of the Compensation
and Benefits Committee
Cristina Pieretti . . . . . . 50 Director; Member of the Audit and Risk
Committee
Executive Officers
- ------------------
William T. Keon, III . . . . . 56 President and Chief Executive Officer
Daniel J. O'Leary . . . . . . 56 Executive Vice President and Chief
Financial Officer, Chief Accounting
Officer and Assistant Secretary
Fernando J. Bonilla . . . . . 43 Vice President, General Counsel and
Secretary
William T. Keon, III has been a Director of the Company since October
1995, at which time he assumed the position of President and Chief Executive
Officer and was appointed Chairman of the Executive Committee. In July 2002,
Mr. Keon was appointed Chairman of the Board of Directors in addition to his
other duties. Since January 1983, Mr. Keon has served in senior managerial
roles in the Cisneros Group.
Steven I. Bandel has been a Director of the Company since the
Acquisition. He was appointed to the Executive Committee in October 1995 and
Chairman of the Audit and Risk Committee in July 2002. Since 1995, Mr. Bandel
has held several senior management positions at companies within the Cisneros
Group, with responsibilities in the areas of finance and business
development. Mr. Bandel has the title of President and Chief Operating
Officer of the Cisneros Group. He is also a member of the board of directors
of America Online Latin America, Inc.
Cristina Pieretti was appointed a Director in March 1997. Since
February 1996, Ms. Pieretti has held a number of senior management positions
within the Cisneros Group in the consumer goods, retail and
telecommunications industries. From March 1995 to February 1996, Ms.
Pieretti was a partner at Booz-Allen & Hamilton, a consulting firm. Ms.
Pieretti has recently been appointed Executive Vice-President Venezuela for
the Cisneros Group. She is also a member of the board of directors of
America Online Latin America, Inc.
Daniel J. O'Leary joined the Company in June 1997 as Executive Vice
President and Chief Financial Officer. From December 1992 until the time he
joined the Company, Mr. O'Leary served as Senior Vice President of Finance
and Chief Financial Officer of Phar-Mor, Inc., a deep discount drugstore
chain. Prior to that time, he served as a Director and, at various times,
President and Chief Operating Officer, Executive Vice President, Vice
President of Finance and Chief Financial Officer at Fay's, Inc., a
multi-concept retailer with drugstores and auto parts stores. From 1969 to
1987, Mr. O'Leary was a member of the accounting firm of Touche, Ross & Co.
(now known as Deloitte & Touche LLP).
Fernando J. Bonilla joined the Company in September 1997 as Vice
President, General Counsel and Secretary. Before joining the Company, Mr.
Bonilla served as General Counsel and Secretary to the Board of Directors of
the Puerto Rico Maritime Shipping Authority and a junior partner of Fiddler
Gonzalez and Rodriguez, a law firm in Puerto Rico. Since February 2003, Mr.
Bonilla is a member of the Board of Directors of the Authority of the Port of
the Americas, a government corporation of the Commonwealth of Puerto Rico
that is developing a transshipment port in southern Puerto Rico.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid or distributed
by the Company through November 2, 2002 to, or accrued through such date for
the account of the Chief Executive Officer as well as each of the four most
highly compensated executive officers of the Company serving at November 2,
2002 (the "named executive officers") for services rendered to the Company
during each of the last three fiscal years, if applicable. Pursuant to SEC
rules, the table also sets forth information concerning the compensation of
former executive officers of the Company who are also deemed by SEC rules to
be named executive officers for fiscal 2002. All compensation was paid by
Pueblo.
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------------------------------------------
(a) (b) (c) (d) (e) (f)
Other
Name Annual All Other
and Compen- Compen-
Principal Fiscal Salary Bonus sation sation
Position Year ($) ($) ($) ($)
- -------------------------- -------- -------- --------- ----------- -----------
William T. Keon, III, (11) 2002 518,846 945,547 22,614(2) 44,235(1)
President and Chief 2001(8) 384,616 240,000 15,021(2) 11,538(1)
Executive Officer 2001 480,000 220,000 21,853(2) 24,592(1)
Daniel J. O'Leary (11) 2002 281,846 219,162 18,904(3) -
Executive Vice President; 2001(8) 203,846 - 10,413(3) -
Chief Financial Officer 2001 259,000 60,000 17,332(3) -
Fernando Bonilla (11) 2002 140,723 40,230 11,998(4)
Vice President; General 2001(8) 103,846 15,000 9,355(4)
Counsel; Secretary 2001 130,558 15,000 12,237(4)
Charles R. Newsom 2002(9) 222,202 55,300 9,141(5) 41,980(1)
Senior Vice President; 2001(8) 192,308 - 11,621(5) -
President, Retail Food 2001 206,465 40,300 22,714(5) -
Division
Alicia Echevarria 2002(10) 116,245 20,300 8,711(6) -
Vice President of 2001(8) 118,362 - 9,108(6) -
Human Resources 2001 151,368 20,300 13,730(6) -
Melissa Lammers (Started 1/8/01) 2002(10) 180,392 35,300 7,205(7) -
Senior Vice President 2001(8) 184,616 8,322 7,723(7) -
and Chief Marketing Officer 2001 13,846 - - -
NOTES TO SUMMARY COMPENSATION TABLE
(1) Amount represents the Company's matching contribution to an elective
non-qualified deferred compensation plan maintained by the Company.
(2) Includes costs related to the reimbursement of executive medical expense
of $10,264, $5,521, and $9,503 and an automobile allowance in the amount of
$12,350, $9,500, and $12,350 for fiscal 2002, the 40 weeks ended November 3,
2001 and fiscal 2001, respectively.
(3) Includes costs related to the reimbursement of executive medical expense
of $8,504, $2,413, and $6,932 and an automobile allowance in the amount of
$10,400, $8,000 and $10,400 for fiscal 2002, the 40 weeks ended November 3,
2001, and fiscal 2001, respectively.
(4) Includes costs related to the reimbursement of executive medical expense
of $2,898, $2,355, and $3,137, and an automobile allowance in the amount of
$9,100, $7,000, and $9,100 for fiscal 2002, the 40 weeks ended November 3,
2001, and fiscal 2001, respectively.
(5) Includes costs related to the reimbursement of executive medical expense
of $1,703, $3,121, and $12,834 and an automobile allowance in the amount of
$7,438, $8,500, and $9,880, for fiscal 2002, the 40 weeks ended November 3,
2001, and fiscal 2001, respectively.
(6) Includes costs related to the reimbursement of executive medical expense
of $2,236, $2,108, and $4,630 and an automobile allowance in the amount of
$6,475, $7,000, and $9,100 for fiscal 2002, the 40 weeks ended Nov. 3, 2001,
and fiscal 2001, respectively.
(7) Includes costs related to the reimbursement of executive medical expense
of $267, and $223 and an automobile allowance in the amount of $6,938, and
$7,500 for fiscal 2002 and the 40 weeks ended November 3, 2001
(8) Represents the 40 weeks ended November 3, 2001.
(9) Pursuant to his resignation effective July 11, 2002, Mr. Newsom left the
employ of the Company and its operating subsidiaries.
(10) Represents compensation for the period from November 4, 2001 to July 23,
2002. These individuals were officers of the Company and certain of its
operating subsidiaries during this time period. Effective July 23, 2002 they
resigned as officers of the Company. They continued as officers of the
operating subsidiaries.
(11) Effective March 15, 2003, the employment arrangements for Messrs. Keon,
O'Leary and Bonilla were formalized in retention.
PENSION PLAN TABLES
-------------------
The Company sponsors two defined benefit plans. The Pueblo
International, LLC Employees' Retirement Plan (the "Retirement Plan") is
tax-qualified under the Internal Revenue Code and covers all full-time and
certain part-time employees of the Company over age 21 with one year of
service. It provides an annual benefit equal to 1% of the average annual
compensation over a five-year period per year of service. The Supplemental
Executive Retirement Plan (the "SERP") is non-qualified and covers all
officers of the Company and its subsidiaries. It provides an annual benefit
equal to 3% of the average compensation over a five-year period per year of
service (up to 20 years). Full vesting for the Retirement Plan and the SERP
occurs upon completion of five years of service. The following tables give
the estimated annual benefit payable upon retirement for participants in the
Retirement Plan and the SERP. The SERP benefits are offset by the Retirement
Plan benefits and by 100% of social security benefits. These offsets are
reflected in the benefits shown in the SERP table. The Company does not
sponsor any other defined benefit or actuarial plans.
Table 1. Retirement Plan
Years of Service
---------------------------------------------------------------------------
Remuneration 5 10 15 20 25 30 35
---------------------------------------------------------------------------
125,000 . . . . . . 6,250 12,500 18,750 25,000 31,250 37,500 43,750
150,000 . . . . . . 7,500 15,000 22,500 30,000 37,500 45,000 52,500
175,000 . . . . . . 8,750 17,500 26,250 35,000 43,750 52,500 61,250
200,000 . . . . . . 10,000 20,000 30,000 40,000 50,000 60,000 70,000
Table 2. Supplemental Executive Retirement Plan
Years of Service
---------------------------------------------------------------------------
Remuneration 5 10 15 20 25 30 35
---------------------------------------------------------------------------
150,000 . . . . . . . - 8,556 23,556 38,556 31,056 23,556 16,512
200,000 . . . . . . . - 18,556 38,556 58,556 48,556 38,556 29,012
250,000 . . . . . . . 6,056 33,556 61,056 88,556 78,556 68,556 59,012
300,000 . . . . . . . 13,556 48,556 83,556 118,556 108,556 98,556 89,012
350,000 . . . . . . . 21,056 63,556 106,056 148,556 138,556 128,556 119,012
400,000 . . . . . . . 28,556 78,556 128,556 178,556 168,556 158,556 149,012
450,000 . . . . . . . 36,056 93,556 151,056 208,556 198,556 188,556 179,012
500,000 . . . . . . . 43,556 108,556 173,556 238,556 228,556 218,556 209,012
550,000 . . . . . . . 51,056 123,556 196,056 268,556 258,556 248,556 239,012
600,000 . . . . . . . 58,556 138,556 218,556 298,556 288,556 278,556 269,012
650,000 . . . . . . . 66,056 153,556 241,056 328,556 318,556 308,556 299,012
700,000 . . . . . . . 73,556 168,556 263,556 358,556 348,556 338,556 329,012
750,000 . . . . . . . 81,056 183,556 286,056 388,556 378,556 368,556 359,012
800,000 . . . . . . . 88,556 198,556 308,556 418,556 408,556 398,556 389,012
850,000 . . . . . . . 96,056 213,556 331,056 448,556 438,556 428,556 419,012
900,000 . . . . . . . 103,556 228,556 353,556 478,556 468,556 458,556 449,012
950,000 . . . . . . . 111,056 243,556 376,056 508,556 498,556 488,556 479,012
1,000,000 . . . . . . 118,556 258,556 398,556 538,556 528,556 518,556 509,012
1,050,000 . . . . . . 126,056 273,556 421,056 568,556 558,556 548,556 539,012
1,100,000 . . . . . . 133,556 288,556 443,556 598,556 588,556 578,556 569,012
1,150,000 . . . . . . 141,056 303,556 466,056 628,556 618,556 608,556 599,012
1,200,000 . . . . . . 148,556 318,556 488,556 658,556 648,556 638,556 629,012
1,250,000 . . . . . . 156,056 333,556 511,056 688,556 678,556 668,556 659,012
1,300,000 . . . . . . 163,556 348,556 533,556 718,556 708,556 698,556 689,012
1,350,000 . . . . . . 171,056 363,556 556,056 748,556 738,556 728,556 719,012
1,400,000 . . . . . . 178,556 378,556 578,556 778,556 768,556 758,556 749,012
1,450,000 . . . . . . 186,056 393,556 601,056 808,556 798,556 788,556 779,012
1,500,000 . . . . . . 193,556 408,556 623,556 838,556 828,556 818,556 809,012
Compensation covered by the qualified Retirement Plan is equal to the
total compensation (excluding compensation attributable to the redemption of
certain stock options) paid to an employee during a plan year prior to any
reduction under a salary reduction agreement entered into by the employee
pursuant to a plan maintained by the employer which qualifies under Section
401(k) of the Internal Revenue Code of 1986, as amended (the "Code"), or
pursuant to a plan maintained by the employer which qualifies under Section
125 of the Code. Compensation in excess of $200,000 shall be disregarded,
provided, however, that such $200,000 limitation shall be adjusted at the
same time and in such manner as the maximum compensation limit is adjusted
under Section 401(a)(17) of the Code.
Compensation covered by the non-qualified Supplemental Executive
Retirement Plan is the same as the qualified Retirement Plan, except that the
$200,000 limit is not applicable.
The estimated years of credited service and age, respectively, for
purposes of calculating benefits through November 2, 2002 for Mr. Keon is
nine and 56, respectively, and for Mr. O'Leary is five and 55, respectively.
The benefits provided by both the Retirement Plan and the SERP are on a
straight-life annuity basis, as are the examples in the Retirement Plan
table. Mr. Keon's retention agreement calls for some pension benefit
adjustments for employment under the common controlled ownership group.
Compensation Committee Interlocks and Insider Participation
Messrs. Keon and Bandel served as members of the Compensation and
Benefits Committee of the Board of Directors of the Company during all or a
portion of the year ended November 2, 2002 and the 40 weeks ended
November 3, 2001. Mr. Keon also served as an officer of the Company during
those periods. By July 2002, Mr. Keon resigned from the
Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
a) Security Ownership of Certain Beneficial Owners
As discussed in Part II, Item 5 - Market for the Registrant's Common
Equity and Related Shareholder Matters, the Company is a wholly-owned
subsidiary of Holdings.
The following table sets forth certain information regarding the
beneficial ownership of more than 5% of the common stock of Holdings as of
the date of this filing. By virtue of its ownership of the Holdings common
stock, the following entity may be deemed to own a corresponding percentage
of the Company's common stock.
Shares
Beneficially Owned
---------------------------------------------
Name and Address Number Percent
- ------------------------------- --------------------- -------------------
Parkside Investments LLC
Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801 1,000 100.0%
The shares of Holdings described above are beneficially owned by the
Principal Shareholders by virtue of their indirect ownership of the entity
listed above. The principal business address of the Principal Shareholders
is New Court, St. Swithin's Lane, London EC 4P 4DU, United Kingdom.
(b) Security Ownership of Management
As of the date of this filing, the directors and executive officers of
the Company have no beneficial ownership of Holdings.
(c) Changes in Control
The borrowings outstanding under the April 1997 Bank Credit Agreement
are collateralized by a pledge of the assets of the Company's subsidiaries,
by the capital stock of, and intercompany notes issued by, the Company's
subsidiaries and by the capital stock of the Company. The May 2003 Bank
Agreement is also collateralized. See NOTE 16 - SUBSEQUENT EVENTS - of the
footnotes to the Company's consolidated financial statements included in Item
15 of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, Company
management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as defined in
Exchange Act Rule 13a-14(c). Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of the date of that evaluation.
There have been no significant changes in internal controls, or in factors
that could significantly affect internal controls, subsequent to the date the
Chief Executive Officer and Chief Financial Officer completed their
Evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Documents filed as part of this report:
Page
(1) Consolidated Financial Statements:
Independent Auditors' Report F - 1
Consolidated Balance Sheets F - 2 through F - 3
Consolidated Statements of Operations F - 4
Consolidated Statements of Cash Flows F - 5
Consolidated Statements of Stockholder's Equity F - 6
Notes to Consolidated Financial Statements F - 7 through F -42
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts S - 1
(3) Exhibits:
The following documents are included as exhibits to this Form 10-K.
Those exhibits below incorporated by reference herein are indicated
as such by the information supplied in the indicated footnote or in
the parenthetical thereafter. If no footnote is indicated or
parenthetical appears after an exhibit, such exhibit is filed
herewith.
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------------- ------------------------------------------- ----------------
2.1 TERMS OF PROPOSED RESTRUCTURING (INCORPORATED
BY REFERENCE TO EXHIBIT 99.1 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED JANUARY 22,
2003).
2.2 STATEMENT OF FINANCIAL AFFAIRS (INCORPORATED
BY REFERENCE TO EXHIBIT 99.2 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED JANUARY 22,
2003).
2.3 AMENDED SUMMARY OF SCHEDULES (INCORPORATED BY
REFERENCE TO EXHIBIT 99.3 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED JANUARY 22,
2003).
2.4 DISCLOSURE STATEMENT (INCORPORATED BY
REFERENCE TO EXHIBIT 99.1 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18,
2003).
2.5 APENDIX A TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.2 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.6 APENDIX B TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.3 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.7 APENDIX C TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.4 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.8 APENDIX F TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.7 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.9 APENDIX G TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.8 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.10 APENDIX H TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.9 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.11 ORDER BY THE COURT AUTHORIZING THE COMPANY TO
APPROVE THE EXTENSION AND MODIFICATION
AGREEMENT AND MODIFYING THE AUTOMATIC STAY
(INCORPORATED BY REFERENCE TO EXHIBIT 99.13 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.12 AMENDED SCHEDULE G, FILED WITH THE U.S.
BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE
ON APRIL 1, 2003, TO THE AMENDED SUMMARY OF
SCHEDULES, FILED WITH THE U.S. BANKRUPTCY
COURT FOR THE DISTRICT OF DELAWARE ON JANUARY
17, 2003 (INCORPORATED BY REFERENCE TO EXHIBIT
99.1 TO THE COMPANY'S CURRENT REPORT ON FORM
8-K DATED APRIL 9,2003).
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------------- ------------------------------------------- ----------------
3.1 RESTATED CERTIFICATE OF INCORPORATION OF
THE COMPANY (INCORPORATED BY REFERENCE TO
EXHIBIT 3.1 TO THE COMPANY'S REGISTRATION
STATEMENT NO. 33-63372 ON FORM S-1)
3.2 AMENDED AND RESTATED BY-LAWS OF THE
COMPANY (INCORPORATED BY REFERENCE TO
EXHIBIT 3.2 TO THE COMPANY'S REGISTRATION
STATEMENT NO. 33-63372 ON FORM S-1)
4.1 SPECIMEN NOTE FOR COMPANY'S 9 1/2% SENIOR
NOTES DUE 2003 (INCLUDED IN EXHIBIT 4.2)*
4.2 INDENTURE DATED AS OF JULY 28, 1993
BETWEEN THE COMPANY AND UNITED STATES
TRUST COMPANY OF NEW YORK, AS TRUSTEE*
4.3 SPECIMEN NOTE FOR THE COMPANY'S 9 1/2%
SERIES C SENIOR NOTES DUE 2003 (INCLUDED
IN EXHIBIT 4.4)
4.4 INDENTURE, DATED AS OF APRIL 24, 1997,
BETWEEN THE COMPANY AND UNITED STATES
TRUST COMPANY OF NEW YORK, AS TRUSTEE
(INCORPORATED BY REFERENCE TO EXHIBIT 4.2
TO THE COMPANY'S REGISTRATION STATEMENT
NO. 333-27523 ON FORM S-3)
4.5 REGISTRATION RIGHTS AGREEMENT, DATED AS
OF APRIL 29, 1997, BETWEEN THE COMPANY
AND NATIONSBANC CAPITAL MARKETS, INC. AND
SCOTIA CAPITAL MARKETS (USA) INC.
(INCORPORATED BY REFERENCE TO EXHIBIT 4.3
TO THE COMPANY'S REGISTRATION STATEMENT
NO. 333-27523 ON FORM S-3)
4.6 INDENTURE, DATED AS OF JUNE 5, 2003 BETWEEN
THE COMPANY AND WILMINGTON TRUST COMPANY,
AS TRUSTEE (FILED HEREWITH)
4.7 SECURITY PLEDGE AND INTERCREDITOR AGREEMENT,
DATED JUNE 5, 2003, BETWEEN THE COMPANY AND
WILMINGTON TRUST COMPANY, AS TRUSTEE (FILED
HEREWITH)
10.1 CREDIT AGREEMENT AMONG THE COMPANY,
PUEBLO MERGER CORPORATION, PUEBLO
INTERNATIONAL, INC., XTRA SUPER FOOD
CENTERS, INC., VARIOUS LENDING
INSTITUTIONS, THE CHASE MANHATTAN BANK,
N.A. AND SCOTIABANK DE PUERTO RICO, AS
CO-MANAGING AGENTS AND SCOTIABANK DE
PUERTO RICO, AS ADMINISTRATIVE AGENT (THE
"OLD BANK CREDIT AGREEMENT")*
10.2 FIRST AMENDMENT, DATED AS OF AUGUST 2,
1993, OF THE OLD BANK CREDIT AGREEMENT*
10.3 SECOND AMENDMENT, DATED AS OF DECEMBER
15, 1993, TO THE OLD BANK CREDIT
AGREEMENT (INCORPORATED BY REFERENCE TO
EXHIBIT 10.1 TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED
NOVEMBER 6, 1993)
10.4 THIRD AMENDMENT, DATED AS OF JANUARY 31,
1994 (EFFECTIVE AS OF NOVEMBER 5, 1993),
TO THE OLD BANK CREDIT AGREEMENT*
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------------- ------------------------------------------- ----------------
10.11 MEMBERSHIP CORRESPONDENCE CONCERNING
TOPCO ASSOCIATES, INC. (INCORPORATED BY
REFERENCE TO EXHIBIT 10.3 TO COMPANY'S
REGISTRATION STATEMENT NO. 33-63372 ON
FORM S-1)
10.12 MORTGAGE NOTES DATED JUNE 6, AND 10, 1986
DUE FISCAL 1997 (INCORPORATED BY
REFERENCE TO EXHIBIT 10.4 TO THE
COMPANY'S REGISTRATION STATEMENT NO.
33-63372 ON FORM S-1)
10.13 AGREEMENT BETWEEN THE CHASE MANHATTAN
BANK (NATIONAL ASSOCIATION) (THE "BANK"),
PUERTO RICO INDUSTRIAL, MEDICAL AND
ENVIRONMENTAL POLLUTION CONTROL
FACILITIES FINANCING AUTHORITY (THE
"AUTHORITY") AND THE COMPANY; TRUST
AGREEMENT BETWEEN THE AUTHORITY AND BANCO
POPULAR DE PUERTO RICO, AS TRUSTEE;
GUARANTEE AND CONTINGENT PURCHASE
AGREEMENT BETWEEN THE REGISTRANT AND THE
BANK; LOAN AGREEMENT BETWEEN THE
AUTHORITY AND THE REGISTRANT; TENDER
AGENT AGREEMENT AMONG THE AUTHORITY;
BANCO POPULAR DE PUERTO RICO AS TRUSTEE;
RE-MARKETING AGREEMENT BETWEEN CHASE
MANHATTAN CAPITAL MARKETS CORPORATION AND
THE REGISTRANT; EACH DATED OCTOBER 1,
1985, RELATING TO A $5,000,000 FINANCING
IN OCTOBER 1985 (SUBSTANTIALLY IDENTICAL
DOCUMENTS WERE EXECUTED FOR AN ADDITIONAL
$5,000,000 FINANCING IN NOVEMBER 1985 AND
$7,500,000 IN DECEMBER 1985)
(INCORPORATED BY REFERENCE HEREIN AS
FILED WITH PUEBLO'S REGISTRATION
STATEMENT NO. 1-6376 ON FORM S-2 DATED
JANUARY 23, 1986)
10.20 EXECUTED FOURTH AMENDMENT, DATED AS OF
APRIL 8, 1994, TO THE OLD BANK CREDIT
AGREEMENT (INCORPORATED BY REFERENCE TO
EXHIBIT 10.1 TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MAY 21, 1994)
10.21 EXECUTED FIFTH AMENDMENT, DATED AS OF
AUGUST 11, 1995, TO THE OLD BANK CREDIT
AGREEMENT (INCORPORATED BY REFERENCE TO
EXHIBIT 10.1 TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED
NOVEMBER 4, 1995)
10.22 EXECUTED SIXTH AMENDMENT, DATED AS OF
NOVEMBER 3, 1995, TO THE OLD BANK CREDIT
AGREEMENT (INCORPORATED BY REFERENCE TO
EXHIBIT 10.2 TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED
NOVEMBER 4, 1995)
10.23 EMPLOYMENT AGREEMENT, DATED FEBRUARY 28,
1996, BETWEEN PUEBLO INTERNATIONAL, INC.
AND EDWIN PEREZ**
10.24 AGREEMENT, DATED MARCH 1, 1996, BETWEEN
PUEBLO INTERNATIONAL, INC. AND HECTOR G.
QUINONES**
10.25 EXECUTED SEVENTH AMENDMENT, DATED AS OF
JANUARY 26, 1996, TO THE OLD BANK CREDIT
AGREEMENTS**
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------------- ------------------------------------------- ----------------
10.29 RECEIPT AND AGREEMENT BY PXC&M HOLDINGS,
INC. FROM BOTHWELL CORPORATION DATED
OCTOBER 18, 1996 (INCORPORATED BY
REFERENCE TO EXHIBIT 10.1 TO THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 2, 1996)
10.30 RECEIPT AND AGREEMENT BY PUEBLO XTRA
INTERNATIONAL, INC. FROM PXC&M HOLDINGS,
INC. DATED OCTOBER 18, 1996 (INCORPORATED
BY REFERENCE TO EXHIBIT 10.2 TO THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 2, 1996)
10.31 CONSENT EXECUTED BY SCOTIABANK DE PUERTO
RICO, AS ADMINISTRATIVE AGENT, DATED
OCTOBER 18, 1996 (INCORPORATED BY
REFERENCE TO EXHIBIT 10.3 TO THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 2, 1996)
10.32 EIGHTH AMENDMENT, DATED AS OF NOVEMBER 1,
1996, TO THE OLD CREDIT AGREEMENT AMONG
PUEBLO XTRA INTERNATIONAL, INC., PUEBLO
INTERNATIONAL, INC., XTRA SUPER FOOD
CENTERS, INC., VARIOUS LENDING
INSTITUTIONS, THE CHASE MANHATTAN BANK,
N.A. AND SCOTIABANK DE PUERTO RICO, AS
ADMINISTRATIVE AGENT (INCORPORATED BY
REFERENCE TO EXHIBIT 10.4 TO THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 2, 1996)
10.33 NINTH AMENDMENT, DATED AS OF JANUARY 25,
1997, TO THE OLD CREDIT AGREEMENT AMONG
PUEBLO XTRA INTERNATIONAL, INC., PUEBLO
INTERNATIONAL, INC., XTRA SUPER FOOD
CENTERS, INC., VARIOUS LENDING
INSTITUTIONS, THE CHASE MANHATTAN BANK,
N.A. AND SCOTIABANK DE PUERTO RICO, AS
ADMINISTRATIVE AGENTS***
10.34 EMPLOYMENT AGREEMENT, DATED MARCH 20, 1997,
BETWEEN PUEBLO INTERNATIONAL, INC. AND
DAVID L. ASTON****
10.35 AMENDED AND RESTATED CREDIT AGREEMENT,
DATED AS OF APRIL 29, 1997, OF THE OLD
BANK CREDIT AGREEMENT (THE "NEW BANK
CREDIT AGREEMENT")****
10.36 FIRST AMENDMENT, DATED AS OF APRIL 15, 1999,
TO THE NEW BANK CREDIT AGREEMENT*****
10.37 SECOND AMENDMENT, DATED AS OF AUGUST 11,
2000, TO NEW BANK CREDIT AGREEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 10.1
TO THE COMPANY'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED AUGUST 12, 2000)
10.38 THIRD AMENDMENT , DATED AS OF JANUARY 26,
2001, TO THE NEW BANK CREDIT AGREEMENT *****
10.39 FOURTH AMENDMENT, DATED AS OF AUGUST 11,
2001, TO THE NEW BANK CREDIT AGREEMENT
(INCORPORATED BY REFERNECE TO EXHIBIT 10.1
TO THE COMPANY'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED AUGUST 11, 2001)******
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------------- ------------------------------------------- ----------------
10.40 FIFTH AMENDMENT, DATED AS OF NOVEMBER 2,
2001, TO THE NEW BANK CREDIT AGREEMENT******
10.41 SIXTH AMENDMENT, DATED AS OF JANUARY 31,
2002, TO THE NEW BANK CREDIT AGREEMENT******
10.42 CONSENT AGREEMENT DATED AS OF AUGUST 1, 2002
("CONSENT AGREEMENT") MADE BY AND AMONG PXI,
THE BORROWER, XTRA, THE AGENTS AND THE BANKS.
(INCOPORATED BY REFERENCE TO EXHIBIT 10.1
TO THE COMPANY'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED AUGUST 10, 2002)
10.43 GUARANTEE AGREEMENT (INCORPORATED BY REFERENCE
TO EXHIBIT 99.11 TO THE COMPANY'S CURRENT
REPORT ON FORM 8-K DATED FEBRUARY 18, 2003).
10.44 EXTENSION AND MODIFICATION AND SECURITY
AGREEMENT WITH WESTERNBANK OF PUERTO RICO
(INCORPORATED BY REFERENCE TO EXHIBIT 99.10 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
10.45 AMENDMENT NO. 1 TO LLC AGREEMENT (INCORPORATED
BY REFERENCE TO EXHIBIT 99.12 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18,
2003).
10.46 SUBORDINATION AGREEMENT (INCORPORATED BY
REFERENCE TO EXHIBIT 99.13 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18,
2003).
10.47 RETENTION AGREEMENT, DATED MARCH 15, 2003,
BETWEEN PUEBLO INTERNATIONAL, LLC AND PUEBLO
ENTERTAINMENT, INC. AND WILLIAM T KEON III
(FILED HEREWITH)
10.48 RETENTION AGREEMENT, DATED MARCH 15, 2003,
BETWEEN PUEBLO INTERNATIONAL, LLC AND PUEBLO
ENTERTAINMENT, INC. AND DANIEL O'LEARY
(FILED HEREWITH)
10.49 RETENTION AGREEMENT, DATED MARCH 15, 2003,
BETWEEN PUEBLO INTERNATIONAL, LLC AND PUEBLO
ENTERTAINMENT, INC. AND FERNANDO J. BONILLA
(FILED HEREWITH)
10.50 AMENDED AND RESTATED GUARANTOR AND GENERAL
SECURITY AGREEMENT, DATED MAY 23, 2003, BY
NSC IN FAVOR OF WESTERNBANK OF PUERTO RICO
(FILED HEREWITH)
10.51 LOAN AND SECURITY AGREEMENT, DATED AS OF MAY
23, 2003 ("MAY 2003 BANK AGREEMENT") ENTERED
INTO BY AND BETWEEN WESTERNBANK OF PUERTO RICO,
PUEBLO INTERNATIONAL, LLC, FLBN CORPORATION
(F/K/A. XTRA SUPER FOOD CENTERS, INC., PUEBLO
ENTERTAINMENT, INC., XTRA MERFER CORPORATION,
CARIBAD, INC. AND ALL TRUCK, INC. (FILED HEREWITH)
99.1 CEO CERTIFICATION PURSUANT TO SECTION 906 OF
OF THE SARBANES-OXLEY ACT OF 2002 (FILED
HEREWITH)
99.2 CFO CERTIFICATION PURSUANT TO SECTION 906 OF
OF THE SARBANES-OXLEY ACT OF 2002 (FILED
HEREWITH)
* Previously filed and incorporated by reference to corresponding
exhibits in the Company's Form 10-K for fiscal year ended January 29,
1994.
** Previously filed and incorporated by reference to corresponding
exhibits in the Company's Form 10-K for fiscal year ended January 27,
1996.
*** Previously filed and incorporated by reference to corresponding
exhibits in the Company's Form 10-K for fiscal year ended January 25,
1997.
**** Previously filed and incorporated by reference to corresponding
exhibits in the Company's Form 10-K for fiscal year ended January 31,
1998.
***** Previously filed and incorporated by reference to corresponding
exhibits in the Company's Form 10-K for fiscal year ended January 27,
2001
****** Previously filed and incorporated by reference to corresponding
exhibits in the Company's Form 10-K for fiscal year ended November 3,
2001
(B) Reports on Form 8-K: The Company filed the following Current
Reports on Form 8-K with the SEC since August 10, 2002
1. September 9, 2002 - to report that certain creditors of the
Company filed an involuntary petition under title 11,
United States Code in the United States Bankruptcy Court
for the District of Delaware requesting an order for relief
under Chapter 11 of the Bankruptcy Code (Title 11 of the
United States Code).
2. October 9, 2002 - to report that on September 24, 2002, the
Company voluntarily consented to an order for relief under
Chapter 11 of the Bankruptcy Code by filing a Consent to
Entry of Order For Relief Under Chapter 11 in the United
States Bankruptcy Court for the District of Delaware. The
Court issued such a relief on September 27, 2002.
3. October 18, 2002 - to advise investors that it was
substantially revising the information, including five year
projections, that it had provided to an ad-hoc committee of
the Company's noteholders at an August 22, 2002 meeting.
4. December 26, 2002 - Initial Monthly Operating Report and
Monthly Operating Reports for the periods from September
4, 2002 to October 5, 2002 and October 6, 2002 to November
2, 2002 (subsequently amended, to correct a transmission
error). The amended 8-K was filed on January 7, 2003.
5. January 16, 2003 - Monthly Operating Report for the periods
from November 3, 2002 to November 30, 2002.
6. January 22, 2003 - to report that on January 17, 2003,
the Company filed a motion for an order extending its
exclusive periods to file a Plan of Reporganization and
solicit acceptances thereof and the Company filed an
emergency motion for an order authorizing the Court to
approve the Company's Extension and Modification and
Security Agreement with the 2003 Bank Lender.
Additionally, the Company announced that it had reached an
agreement with the Official Committee of Unsecured
Creditors and its equityholders on the principal terms of a
comprehensive financial restructuring as part of a Plan of
Reorganization. The Company also announced that it would
not timely file its Form 10-K for the fiscal year ended
November 2, 2002.
7. February 11, 2003 - Monthly Operating Report for the
periods from December 1, 2002 to December 28, 2002.
8. February 18, 2003 - to report than on January 31, 2003, the
Company filed a Disclosure Statement and a motion for an
order to approve such Disclosure Statement and set a date
for confirmation of a Plan of Reorganization. Also, on
January 30, 2003, the Company, as guarantor, and its
subsidiaries entered into an Extension and Modification and
Security Agreement with Westernbank of Puerto Rico.
9. March 5, 2003 - Monthly Operating Report for the
period from December 29, 2002 to January 25, 2003.
10. April 9, 2003 - Monthly Operating Report for the period
from January 26, 2003 to February 22, 2003. The Company
also reported that, on April 1, 2003, it filed an amended
Schedule G with the Court, to the Amended Summary Of
Schedules, filed with the Court on January 17, 2003. The
Company also announced that it would not timely file its
Form 10-Q for the quarterly period ended February 22, 2003.
11. May 22, 2003 - Monthly Operating Report for the period
from February 23, 2003 to March 22, 2003. The Company also
reported that, at a hearing on April 30, 2003, the Court
confirmed NSC's Plan of Reorganization, dated as of
February 28, 2003, as modified.
12. June 6, 2003 - Monthly Operating Report for the
period from March 23, 2003 to April 19, 2003.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
No annual report to security holders covering the Company's last
fiscal year and no proxy statement, form of proxy or other proxy soliciting
material with respect to any annual or other meeting of security holders has,
as of the date hereof, been sent to security holders by the Company. If such
report or proxy material is to be furnished to security holders subsequent to
the filing of the annual report of this Form 10-K, the Company will furnish
copies of such material to the Commission when it is sent to the security
holders.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NUTRITIONAL SOURCING CORPORATION
Dated: July 25, 2003 /s/ Daniel J. O'Leary
Daniel J. O'Leary,
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- ---------------- ------------------------------ ------------
/s/ William T. Keon, III Chairman; President; and Chief
William T. Keon, III Executive Officer
/s/ Daniel J. O'Leary Executive Vice President, Chief
Daniel J. O'Leary Financial Officer and Chief
Accounting Officer
/s/ Evis H. Lois Controller
Evis H. Lois
/s/ Steven I. Bandel Director
Steven I. Bandel
/s/ Cristina Pieretti Director
Cristina Pieretti
NUTIRITIONAL SOURCING CORPORATION
Certificates pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
I, William T. Keon III, certify that:
1. I have reviewed this annual report on Form 10-K of Nutritional Sourcing
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: _July 25, 2003____
/s/ William T. Keon III_
William T, Keon III
Chief Executive Officer
I, Daniel J. O'Leary, certify that:
1. I have reviewed this annual report on Form 10-K of Nutritional Sourcing
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: _July 25, 2003____
/s/ Daniel J. O'Leary_
Daniel J. O'Leary
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Nutritional Sourcing Corporation (formerly Pueblo Xtra International,
Inc.):
We have audited the accompanying consolidated balance sheets of Nutritional
Sourcing Corporation (Debtor-in-Possession and formerly Pueblo Xtra
International, Inc.) and its subsidiaries (the "Company") as of November 2,
2002 and November 3, 2001, and the related consolidated statements of
operations, cash flows, and stockholder's equity, for the fifty two weeks
ended November 2, 2002, the forty weeks ended November 3, 2001, and the fifty
two weeks ended January 27, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 15. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of November 2,
2002 and November 3, 2001, and the results of its operations and its cash
flows for the fifty two weeks ended November 2, 2002, the forty weeks ended
November 3, 2001, and the fifty two weeks ended January 27, 2001, in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 1 to the consolidated financial statements, Nutritional
Sourcing Corporation ("NSC") filed for reorganization under Chapter 11 of the
Federal Bankruptcy Code and began operating its business as a debtor-in-
possession on September 27, 2002. On June 5, 2003, NSC consummated its plan
of reorganization and emerged from bankruptcy pursuant to an April 30, 2003
order entered by the Bankruptcy Court as further described in Note 16.
Deloitte & Touche LLP
Miami, Florida
November 22, 2002
(June 5, 2003 as to the new bank financing and the emergence from bankruptcy
described in Notes 1 and 16).
F-1
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(formerly Pueblo Xtra International, Inc.)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
November 2, November 3,
2002 2001
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,992 $ 2,169
Accounts receivable, net of allowance for doubtful
accounts of $321 at November 2, 2002 and $520 at
November 3, 2001 3,226 3,450
Inventories 51,660 54,228
Prepaid expenses and other current assets 11,018 8,997
Deferred income taxes 15,964 14,534
--------- ---------
TOTAL CURRENT ASSETS 99,860 83,378
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 6,307 6,299
Buildings and improvements 40,092 40,051
Furniture, fixtures and equipment 101,497 99,758
Leasehold improvements 44,511 43,736
Construction in progress 5,278 2,803
--------- ---------
197,685 192,647
Less accumulated depreciation and amortization 106,558 94,110
--------- ---------
91,127 98,537
Property under capital leases, net 11,720 12,690
--------- ---------
TOTAL PROPERTY AND EQUIPMENT 102,847 111,227
GOODWILL, net of accumulated amortization of $46,561 at
November 2, 2002 and $41,821 at November 3, 2001 145,477 150,217
DEFERRED INCOME TAXES 6,024 1,080
TRADE NAMES, net of accumulated amortization of $11,926
at November 2, 2002 and $11,059 at November 3, 2001 26,574 27,441
DEFERRED CHARGES AND OTHER ASSETS 17,943 20,816
--------- ---------
TOTAL ASSETS $ 398,725 $ 394,159
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(formerly Pueblo Xtra International, Inc.)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
November 2, November 3,
2002 2001
----------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Revolving credit facility $ 32,000 $ -
Accounts payable 44,387 53,539
Accrued expenses 16,106 16,669
Accrued interest 73 4,432
Salaries, wages and benefits payable 10,358 7,862
Current obligations under capital leases 704 623
Current deferred tax liability 950 -
--------- ---------
TOTAL CURRENT LIABILITIES 104,578 83,125
LONG-TERM DEBT - revolving credit facility - 30,000
NOTES PAYABLE - 175,358
CAPITAL LEASE OBLIGATIONS, net of current portion 11,591 12,296
RESERVE FOR SELF-INSURANCE CLAIMS 5,240 6,008
DEFERRED INCOME TAXES 27,176 20,486
OTHER LIABILITIES AND DEFERRED CREDITS 29,226 31,501
--------- ---------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 177,811 358,774
--------- ---------
LIABILITIES SUBJECT TO COMPROMISE 186,208 -
--------- ---------
TOTAL LIABILITIES $ 364,019 $ 358,774
--------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 6, 8, 9, and 16)
STOCKHOLDER'S EQUITY
Common stock, $.10 par value; 200 shares
authorized and issued - -
Additional paid-in capital 91,500 91,500
Accumulated deficit (56,794) (56,115)
--------- ---------
TOTAL STOCKHOLDER'S EQUITY 34,706 35,385
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 398,725 $ 394,159
========= ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(formerly Pueblo Xtra International, Inc.)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
52 weeks ended 40 weeks ended
------------------------ ----------------------- 52 weeks
(unaudited) (unaudited) ended
November 2, November 3, November 3, November 4, January 27,
2002 2001 2001 2000 2001
---------- ---------- ---------- ---------- -----------
Net sales $ 588,179 $ 576,593 $ 433,342 $ 478,799 $ 622,050
Cost of goods sold 396,239 388,686 290,997 326,066 423,755
---------- ---------- ---------- ---------- ----------
GROSS PROFIT 191,940 187,907 142,345 152,733 198,295
OPERATING EXPENSES
Selling, general and
administrative expenses 154,371 155,107 116,541 127,101 165,667
Gain on insurance
Settlement (14,693) - - (2,464) (2,464)
Store Closings:
Exit costs 246 - - 685 685
Write down of impaired
assets - (44) - 3,578 3,534
Depreciation and
amortization 28,260 30,868 22,671 25,945 34,142
---------- ---------- ---------- ---------- ----------
OPERATING PROFIT (LOSS) 23,756 1,976 3,133 (2,112) (3,269)
Interest expense on debt
(does not include
contractual interest
expense on pre-petition
debt toaling approximately
$2,700 for the period from
September 4, 2002 to
November 2, 2002 (19,126) (22,148) (16,967) (21,779) (26,960)
Interest expense on capital
lease obligations (1,820) (1,786) (1,409) (1,493) (1,870)
Interest and investment
income, net 291 659 415 2,256 2,500
Reorganization items (995) - - - -
Gain on early extinguishment
of debt - - - 33,867 33,867
---------- ---------- --------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES 2,106 (21,299) (14,828) 10,739 4,268
Income tax (expense)
benefit (2,785) 9,806 6,612 (4,767) (1,573)
---------- ---------- ---------- ---------- ----------
NET (LOSS) INCOME $ (679) $ (11,493) $ (8,216) $ 5,972 $ 2,695
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(formerly Pueblo Xtra International, Inc.)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
52 weeks ended 40 weeks ended
---------------------- ---------------------- 52 weeks
(unaudited) (unaudited) ended
November 2, November 3, November 3, November 4, January 27,
2002 2001 2001 2000 2001
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (679) $(11,493) $ (8,216) $ 5,972 $ 2,695
Adjustments to reconcile net (loss) income
to net cash provided by (used in) operating
activities:
Gain on early extinguishment
of debt - - - (33,867) (33,867)
Depreciation and amortization of property
and equipment 15,771 17,760 12,635 15,041 20,166
Amortization of intangibles, other assets
and inventories 12,489 13,108 10,036 10,904 13,976
Amortization of bond discount 873 938 733 933 1,138
Gain on disposal of property and
equipment, net (39) (48) (31) (102) (119)
Adjustments to goodwill - 6,943 - - 6,943
Gain on insurance settlement - - - (2,464) (2,464)
Accrual for exit costs on store closings - - - 685 685
Write down of impaired assets on store closings - (43) - 3,577 3,534
(Benefit) provision for deferred income taxes 1,266 (18,159) (6,203) 13,706 1,750
Provision for deferred charges and other assets - 351 - (17) 334
Reorganization items 995 - - - -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 224 108 (1,327) 454 1,889
Inventories (2,814) (3,759) (5,843) (3,954) (1,870)
Prepaid expenses and other current assets (3,016) 1,203 (1,622) (2,385) 440
Other assets 1,373 919 919 - -
(Decrease) increase in:
Accounts payable, accrued expenses and
accrued interest (4,097) (4,932) (29,016) (49,216) (25,132)
Salaries, wages and benefits payable 2,496 - - - -
Other liabilities and deferred credits
and reserve for self-insurance claims (3,043) (98) 1,014 (930) (2,042)
Net cash provided by (used in) operating --------- --------- --------- --------- ---------
activities 21,799 2,798 (26,921) (41,663) (11,944)
-------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,391) (6,569) (5,271) (16,154) (17,452)
Proceeds from disposal of property and equipment 39 50 31 184 203
--------- --------- --------- --------- ---------
Net cash used in investing activities (7,352) (6,519) (5,240) (15,970) (17,249)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (624) (634) (503) (507) (638)
Purchase of Senior Notes due 2003 - (139) - (50,908) (51,047)
Repayment of Industrial Revenue Bonds - - - (10,000) (10,000)
Borrowings under Revolving Credit Facility 4,000 25,000 - 30,000 30,000
Repayments of Revolving Credit Facility (2,000) (25,000) - - -
Net cash provided by (used in) --------- --------- --------- --------- ---------
financing activities 1,376 (773) (503) (31,415) (31,685)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 15,823 (4,494) (32,664) (89,048) (60,878)
Cash and cash equivalents at beginning of period 2,169 6,663 34,833 95,711 95,711
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 17,992 $ 2,169 $ 2,169 $ 6,663 $ 34,833
========= ========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements
F-5
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(formerly Pueblo Xtra International, Inc.)
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Fiscal year ended November 2, 2002, 40 weeks ended November 3, 2001,
fiscal year ended January 27, 2001 and fiscal year ended January 29, 2000
(Dollars in thousands)
Additional Total
Common Paid-in Accumulated Stockholder's
Stock Capital Deficit Equity
--------- ------------ ------------- -------------
Balance at January 29, 2000 - $ 91,500 $ (50,594) $ 40,906
Net income for the year - - 2,695 2,695
--------- ----------- ------------- -------------
Balance at January 27, 2001 - 91,500 (47,899) 43,601
Net loss for the 40 weeks
ended November 3, 2001 (8,216) (8,216)
--------- ----------- ------------- -------------
Balance at November 3, 2001 - 91,500 (56,115) 35,385
Net loss for the year - - (679) (679)
--------- ----------- ------------- -------------
Balance at November 2, 2002 - $ 91,500 $ (56,794) $ 34,706
========= =========== ============= =============
The accompanying notes are an integral part of these
consolidated financial statements
F-6
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(formerly Pueblo Xtra International, Inc.)
(DEBTOR-IN-POSSESION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Organization
Effective July 22, 2002 the registrant changed its name from Pueblo
Xtra International, Inc. to Nutritional Sourcing Corporation ("NSC" or
"Entity in Reorganization Proceedings"). The consolidated financial
statements include the accounts of Nutritional Sourcing Corporation, and its
wholly -owned subsidiaries (the "Company"). NSC is a wholly-owned
subsidiary of PXC&M Holdings, Inc. Through its subsidiaries, Pueblo
International, LLC and Pueblo Entertainment, Inc., NSC operates retail
supermarkets and video rental locations in Puerto Rico and the U.S. Virgin
Islands.
Effective November 2, 2001, the Company changed its fiscal year end to
the Saturday closest to October 31. Previously, the Company's fiscal year
ended on the Saturday closest to January 31. Consequently, the previous
fiscal period was the 40 weeks ended November 3, 2001. The fiscal years ended
November 2, 2002 and January 27, 2001 ("Fiscal 2002" and "Fiscal 2001"
respectively) were both 52-week years.
Proceedings under Chapter 11 of the Bankruptcy Code and Basis of Presentation
On September 24, 2002, NSC voluntarily consented to the entry of an
order for relief under Chapter 11 of the Bankruptcy Code by filing a Consent
to Entry of Order For Relief Under Chapter 11 in the United States Bankruptcy
Court For The District of Delaware (the "Court"). The Court ordered such
relief on September 27, 2002 (Case No: 02-12550 (PJW)). This action by NSC
was in response to an involuntary petition filed in the Court by certain
creditors of NSC under title 11, United States Code (the "Chapter 11 Case").
The creditors' actions were taken as a result of NSC not paying the
August 1, 2002 interest payment on its $177,283 in notes outstanding which
were due in August of 2003. The interest was not paid as a result of NSC's
operating subsidiaries not paying interest they owed to NSC; this non-payment
was consented to by the operating subsidiaries' lender banks.
The relief under the Chapter 11 Case pertained to NSC only, not
to its operating subsidiaries. However, the bank debt of the operating
subsidiaries, which was guaranteed by NSC, was due on February 1, 2003.
On January 30, 2003 a new bank lender assumed the existing bank debt and
committed to lend the operating subsidiaries additional funds at the time NSC
emerged from bankruptcy. The new bank lender also obtained the guarantee of
NSC.
On June 5, 2003, NSC consummated its emergence from bankruptcy pursuant
to an April 30, 2003 confirmation order from the Court.
The interim bank agreement, new bank financing and NSC's emergence from
bankruptcy, including the settlement of liabilities subject to compromise,
are discussed in detail in NOTE 16 - SUBSEQUENT EVENTS - to these
consolidated financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
The accompanying consolidated financial statements have been presented
in conformity with generally accepted accounting principles in the United
States of America, including the provisions of the American Institute of
Certified Public Accountants ("AICPA")'s Statement of Position 90-7,
"Financial Reporting By Entities in Reorganization Under the Bankruptcy
Code," ("SOP 90-7"). The statement requires a segregation of liabilities
subject to compromise by the Bankruptcy Court as of the bankruptcy filing
date, and identification of all transactions and events that are directly
associated with the reorganization of the debtor.
Reorganization items reflected in the Statement of Operations for the
fiscal year ended November 2, 2002 are composed primarily of professional
fees directly related to the bankruptcy case.
The accompanying consolidated financial statements have been prepared on
the going concern basis of accounting, which contemplates the continuity of
operations, the realization of assets and the satisfaction of liabilities in
the ordinary course of business with the exception of liabilities subject to
compromise and related interest expense. Intercompany accounts and
transactions are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Highly liquid investments with a maturity of three months or less are
considered cash equivalents.
Inventories
Inventories held for sale are stated at the lower of cost or market. The
cost of inventories held for sale is determined, depending on the nature of
the product, either by the last-in, first-out (LIFO) method or by the first-
in, first-out (FIFO) method. Videocassette rental inventories are recorded
at cost, net of accumulated amortization. Videocassettes held for rental are
amortized over 52 weeks on a straight-line basis.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment, including expenditures for remodeling and
improvements, are carried at cost. Routine maintenance, repairs and minor
betterments are charged to operations as incurred. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives of the assets or, in relation to leasehold improvements and property
under capital leases, over the lesser of the asset's useful life or the lease
term, not to exceed 20 years. Estimated useful lives are 20 years for
buildings and improvements, 5 to 12 years for furniture, fixtures and
equipment, 4 years for automotive equipment and 3 years for computer hardware
and software.
Upon the sale, retirement or other disposition of assets, the related
cost and accumulated depreciation or amortization are eliminated from the
accounts. Any resulting gains or losses from disposals are included in the
consolidated statements of operations.
Goodwill and Trade names
Goodwill represents the excess of cost over the then estimated fair
value of the net tangible and other intangible assets acquired in connection
with the 1993 purchase of all the outstanding series of the common stock of
Pueblo International, Inc. (the "Transaction"). Since the acquisition,
approximately $18,100 of goodwill has been written off, including
approximately $6,900 in the fiscal year ended January 27, 2001, resulting
from adjustments to the acquired deferred tax liability. Trade names
acquired at the time of the Transaction were recorded based on valuations by
independent appraisers. Goodwill and trademarks are being amortized using the
straight-line method over periods not exceeding 40 years. The carrying values
of goodwill and trade names are being evaluated in connection with the
adoption of SFAS No. 142 on November 3, 2002 which is discussed on Page F-11.
Self-Insurance
The Company's general liability, certain of its workers compensation,
and certain of its health insurance programs are self-insured. The general
liability and workers compensation reserves for self-insurance claims are
based upon an annual review, by the Company and its independent actuary, of
claims filed and claims incurred but not yet reported. Due to inherent
uncertainties in the estimation process, it is at least reasonably possible
that the Company's estimate of the reserve for self-insurance claims could
change in the near term. The liability for self-insurance is not discounted.
Individual self-insured losses are limited to $500 per occurrence for
general liability claims for eight of the Company's retail locations and to
$250 per occurrence for general liability at all other locations and for
certain workers compensation claims. The Company maintains insurance
coverage for claims in excess of the self-insurance amounts. The current
portion of the reserve for general liability and workers compensation,
representing the amount expected to be paid in the next fiscal year, was
approximately $4,300 at both November 2, 2002 and November 3, 2001, and is
included in the consolidated balance sheets as accrued expense. The reserve
for health insurance programs was approximately $1,000 at November 2, 2002
and approximately $1,100 at November 3, 2001. It is included in the
consolidated balance sheets caption entitled Salaries, wages, and benefits
payable.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The Company has two primary operating segments: retail food sales and
video tape rentals and sales.
Retail food sales - Revenues from the sale of products are recognized at
the point of sale to the Company's customers. The discount earned by
customers by using their preferred loyalty card is recorded as a reduction to
the sales price to the customer. Rental income from in-store rental
arrangements is recorded as a reduction of selling, general, and
administrative expenses.
Video tape rentals and sales - Revenues from video tape rentals and
sales are recognized at the point of rental/sale. Late fees for video
rentals are written off if not collected after sixty days.
Vendor Allowances
Vendor allowances consist primarily of promotional, advertising,
exclusivity and slotting allowances. The Company uses vendor allowances to
fund pricing promotions, advertising expenses and slotting expenses. Vendor
allowances and credits relating to the Company's buying and merchandising
activity are recorded in cost of sales and are recognized as earned according
to the underlying agreement. The most significant agreements are based on
volume and time.
Long-Lived Assets
Long-lived assets are reviewed on an ongoing basis for impairment based
on comparison of carrying value against undiscounted future cash flows. If
an impairment is identified, the assets carrying amount is adjusted to fair
value. No such adjustments were recorded during the periods presented.
Pre-Opening Expenses
Store pre-opening expenses are charged to operations as they are
incurred.
Advertising Expenses
Advertising expenses are charged to operations as they are incurred.
During fiscal year 2002, the 40 weeks ended November 3, 2001, and fiscal
year 2001, advertising expenses were approximately $9,400, $6,600, and
$9,400, respectively.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 requires deferred tax assets and liabilities to be determined based
on the difference between the financial statement carrying value and the tax
bases of assets and liabilities using enacted tax rates currently in effect.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share
The Company is a wholly-owned subsidiary of PXC&M Holdings, Inc.
("Holdings") with a total of 200 shares of common stock issued and
outstanding. Earnings per share is not meaningful to the presentation of the
consolidated financial statements and is therefore excluded.
New Accounting Pronouncements
In July 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS 138, "Accounting for Derivative Instruments and Hedging Activities (an
amendment for FASB Statement No. 133)" which amends SFAS No. 133, to provide
additional guidance and to exclude certain provisions. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value, and is effective for the Company's fiscal period ended November 3,
2001. The adoption of SFAS No. 133, as amended, did not have a material
impact on the financial statements. In April 2003, the FASB issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The Company is
currently analyzing the provisions of SFAS No. 149 to determine if there will
be any impact of adoption, but does not believe that there will be any
material impact on its consolidated financial statements.
In July 2001, the FASB issued SFAS No.141 "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that all business combinations be accounted for under the purchase method.
The statement further requires separate recognition of intangible assets.
The statement applies to all business combinations initiated after June 30,
2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The statement also
provides that goodwill and intangible assets deemed to have indefinite lives
should not be amortized, but shall be tested for impairment annually or more
frequently if circumstances indicate potential impairment, through a
comparison of fair value to its carrying amount. SFAS No. 142 is effective
for fiscal periods beginning after December 15, 2001. The Company adopted
SFAS No. 142 on November 3, 2002 and discontinued the amortization of
goodwill and tradenames. The Company performed an impairment test on the
existing goodwill and tradenames determining that goodwill was impaired by
approximately $140,000, at November 3, 2002. No impairment was indicated for
tradenames. The goodwill impairment charge will be recorded in the first
quarter of fiscal year 2003 as a cumulative effect of a change in accounting
principle. Goodwill amortization expense was approximately $4,700 for the 52
weeks ended November 2, 2002, approximately $3,600 for the 40 weeks ended
November 3, 2001 and approximately $5,000 for the 52 weeks ended January 27,
2001.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
In July 2001, the FASB issued SFAS No. 144,"Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets. This statement supercedes SFAS No. 121 on the same topic and
the accounting and certain reporting provisions of Accounting Principles
Board ("APB") Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal
of a segment of a business (as defined in that Opinion). This Statement also
amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. SFAS No. 144 is effective for
fiscal periods beginning after December 15, 2001. The adoption of SFAS No.
144 did not have a material impact on the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of the FASB
Statements No. 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. " SFAS No. 145 eliminates the requirement to classify gains and
losses from the extinguishment of indebtedness as extraordinary, requires
certain lease modifications to be treated the same as a sale-leaseback
transaction, and makes other non-substantive technical corrections to
existing pronouncements. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002, with earlier adoption encouraged. The adoption of SFAS
145 did not have a material effect on the Company's consolidated
financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities. " SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Under SFAS No. 146, a liability for a cost associated with an exit or
disposal activity is incurred when the definition of a liability is met.
According to FASB Concepts Statement No. 6, Elements of Financial Statements,
a liability is defined as a probable future sacrifice of economic benefit
arising from present obligations of a particular entity to transfer assets or
provide services to other entities in the future as a result of past
transactions or events. An obligation becomes a present obligation when a
transaction or event occurs that leaves an entity little or no discretion to
avoid the future transfer or use of assets to settle a liability. Examples
of costs covered by SFAS No. 146 include lease termination costs and certain
employee severance costs that are associated with a restructuring,
discontinued operations, plant closing, or other exit or disposal activities.
SFAS No. 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. As the
provisions of SFAS No. 146 are required to be applied prospectively after the
adoption date, the Company cannot determine the potential effects that
adoption of SFAS No. 146 will have on its consolidated financial statements.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements Nos. 5, 57, 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirement of SFAS No. 5, relating to the guarantor's
accounting for, and disclosure of, the issuance of certain types of
guarantees. This Interpretation clarifies that a guarantor is required to
recognize, at the inception of certain types of guarantees, a liability for
the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements in this Interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company's adoption of FIN 45 did not have a material impact to the Company's
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of APB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
is effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company has
determined that it is not reasonably possible that it will be required to
consolidate information about a variable interest entity upon the effective
date of FIN 46.
Reclassifications
Certain amounts in the prior year's consolidated financial statements
and related notes have been reclassified to conform to the current year's
presentation.
NOTE 2 -- INVENTORIES
The cost of approximately 76% and 78% of total inventories at November
2, 2002 and November 3, 2001, respectively, is determined by the LIFO
method. The excess of current cost over inventories valued by the LIFO
method was approximately $2,500 and $2,200 as of November 2, 2002 and
November 3, 2001, respectively. For the 40 weeks ended November 3, 2001 and
for the prior fiscal year ended January 27, 2001, inventory quantities were
reduced resulting in a liquidation of certain inventory base layers carried
at costs that were lower than the cost of current purchases, the effect of
which reduced the net loss for the 40 weeks ended November 3, 2001 by $120
and increased net income by $20 in the fiscal year ended January 27, 2001.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consists of the following:
November 2, November 3,
2002 2001
------------ -------------
Favorable leases and leasehold interest $ 11,355 $ 12,421
Franchise fees and rights 3,395 3,834
Debt issue costs 1,224 2,554
Other 1,969 2,007
------------ -------------
Deferred charges and other assets $ 17,943 $ 20,816
============ =============
Favorable leases and leasehold interest represent the difference between
the rent required per the leases and the higher value of rents in the market
at the time of the Transaction of the leases (mostly as part of the 1993
Transaction). This asset is being amortized on a straight-line basis over
the life of the particular lease.
Franchise fees and rights include the unamortized portion of the
franchise fees paid to the franchisor when each video rental store was opened
and the unamortized portion of the step up in basis set up at the time of the
1993 acquisition. The franchise rights were valued at approximately $7,500
at the time of the acquisition and are being amortized over 17 years.
Debt issue costs include:
The un-amortized portion of bond issue costs (fees, attorney costs,
etc.) incurred in connection with Senior Notes issued at the time
the Company was acquired in 1993 and Series C Senior Notes issued
in 1997. They are being amortized through August of 2003, when the
Notes expire.
The un-amortized portion of bank fees paid in connection with
establishing the Company's April 1997 Bank Credit Facility (see
Note 5 -- DEBT). They are being amortized through January 25,
2003, when the facility expires.
Other includes, primarily, utility and other deposits required by the
Puerto Rico and U.S. Virgin Islands power utilities and a trust to provide
funding for a former employee's severance benefits.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits consists of the following:
November 2, November 3,
2002 2001
------------ -------------
Retirement benefits and compensation:
Deferred pension plan contribution $ 8,440 $ 9,051
Supplemental Employee Retirement Plan (SERP) 5,696 5,328
Deferred supplemental pension 646 727
Deferred compensation 671 704
Real Estate Related:
Deferred gain on sale/leaseback 6,324 6,503
Deferred escalation in leases 3,850 3,187
Deferred gain on business interruption portion
of the hurricane insurance claim - 4,279
Other 3,599 1,722
------------ -------------
Other liabilities and deferred credits $ 29,226 $ 31,501
============ =============
Deferred pension plan contribution and Supplemental Employee Retirement
Plan represents the long-term reserves for benefits payable under the
Company's Retirement Plan and SERP. For a complete discussion of the
Company's liabilities pursuant to these plans, see NOTE 10 - RETIREMENT
BENEFITS.
Deferred supplemental pension represents agreements with certain former
executives, who were not participants in the SERP. The plans are essentially
defined benefit plans with the beneficiary receiving benefits until death.
After their death, surviving spouses receive 50% of the beneficiary's defined
benefit amount.
Deferred compensation represents the present value of an actuarially
determined liability to a former officer for severance pursuant to the terms
of his employment contract. Under the terms of the agreement the former
officer receives a monthly benefit for life equal to one half of his base
salary at the time of retirement and is reduced by the monthly benefits paid
to him from the Company's Retirement Plan and SERP. The payments are funded
from the earnings of a trust (see NOTE 3 - DEFERRED CHARGES AND OTHER ASSETS).
Deferred Gain on Sale/Leaseback represents the portion of the gain
realized at the time the Company sold and leased back the related properties
in June of 1999 that must be deferred and amortized over the initial 20 year
term of the related leases pursuant to generally accepted accounting
principles.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- OTHER LIABILITIES AND DEFERRED CREDITS (continued)
Deferred escalation in leases represents the liability the Company is
required to recognize as a result of certain of its operating leases having
required rent increases during their fixed term. In such cases generally
accepted accounting principles require that the Company recognize a rent
expense in each period that is the proportionate share, for the period, of
the total rent to be paid over the fixed term. Consequently, the rent
recognized is a level (straight - line) amount regardless of the cash being
paid. This liability is the difference between the cash paid and the level
amount of rent expense recorded on the books.
Deferred gain on business interruption portion of the hurricane
insurance claim represents the difference between any advances the Company
had received and any unreimbursed claim preparation expenses related to the
Company's Hurricane Georges insurance claim (see NOTE 14 - HURRICANE
GEORGES). This claim was settled during the 52 weeks ended November 2, 2002.
NOTE 5 -- DEBT
Total debt consists of the following:
November 2, November 3,
2002 2001
----------- -----------
Notes and Series C Senior Notes due 2003,
net of unamortized discount of $1,052
and $1,925 at November 2, 2002 and
November 3, 2001, respectively $ 176,231 $ 175,358
Liabilities not subject to compromise:
Revolving Credit Facility due 2003 32,000 30,000
------------ -----------
$ 208,231 $ 205,358
Less:
Current portion, not subject to compromise (32,000) -
Liabilities subject to compromise (176,231) -
------------ -----------
Long-term debt, net - $ 205,358
============ ===========
The discussion in this footnote relates to the debt that existed as of
November 2, 2002. For the ultimate disposition of this debt as a result of
events subsequent to November 2, 2002 see NOTE 16 - SUBSEQUENT EVENTS - to
these consolidated financial statements.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - DEBT (continued)
In 1993, NSC issued $180,000 in 10-year, 9.5% senior notes (the
"Notes"). On April 29, 1997, the Company entered into a refinancing plan
(the "April 1997 Refinancing Plan"), which included the issuance and sale of
$85,000 principal amount of 9.5% Series C Senior Notes Due 2003 (the
"Series C Senior Notes"), the terms of which are substantially identical to
those of the Notes. The net proceeds from the sale of the Series C Senior
Notes of approximately $73,900 after deducting expenses, together with
available cash of the Company, were used to repay the senior secured
indebtedness outstanding under a bank credit agreement dated July 31, 1993
(the "July 1993 Bank Credit Agreement"). During fiscal 2001, the Company
purchased, at a gain, approximately $87,700 aggregate principal amount of its
Notes and Series C Senior Notes. Additionally, the Company repaid $10,000 in
industrial revenue bonds.
The Notes and Series C Senior Notes, with a maturity date of August 1,
2003, are general unsecured obligations of the Company and are subordinate in
right of payment to all existing and future liabilities (including, without
limitation, obligations under the April 1997 Credit Facility) of its
subsidiaries. The Notes and Series C Senior Notes may be called by the
holders of the notes at 101% in the event of a change in control of the
Company (as defined in the indenture). The Notes and Series C Senior Notes
are senior to all future subordinated indebtedness which the Company may from
time to time incur. The Notes and Series C Senior Notes bear interest at the
rate of 9.50% per annum which is payable semiannually on February 1 and
August 1. Terms of the Notes and Series C Senior Notes include covenants
which restrict the Company and its subsidiaries from engaging in certain
activities and transactions.
NSC did not make the semi-annual interest payment on the Notes and the
Series C Senior Notes which was due on August 1, 2002. See NOTES 1, 8, 9,
and 16.
In connection with the April 1997 Refinancing Plan, a subsidiary entered
into an amended bank credit agreement (the "April 1997 Bank Credit
Agreement"), which provides for a $65,000 revolving credit facility (the
"April 1997 Credit Facility") with less restrictive covenants compared to the
July 1993 Bank Credit Agreement. On August 1, 2002, the lender banks and the
Company agreed to permanently reduce the total availability under the
revolving credit facility to $38,000 through the termination date of the
facility, which is February 1, 2003. Total availability had previously been
reduced to $40,000. Additionally, the lender banks and the Company agreed to
reduce the total principal amount the Company can borrow under the agreement
to $36,000 through the termination date of the facility. As of November 2,
2002, the Company had standby letters of credit in the amount of
approximately $3,900 and borrowings of $32,000 under the revolver. The
Company pays a fee of .50% per annum on unused commitments under the $65,000
revolving credit facility. Interest on the April 1997 Credit Facility
fluctuates based on the availability of Section 936 funds in Puerto Rico,
Euroloan rates and the prime rate.
Also in connection with the April 1997 Refinancing Plan, on April 29,
1997, the Company satisfied $10,000 of indebtedness payable to a
related party by transferring its interest in two real estate properties from
its closed Florida operations to such related party.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- DEBT (Continued)
The April 1997 Credit Facility is collateralized by a pledge of the
assets of the Company, by the capital stock of, and intercompany notes issued
by, the Company's subsidiaries and by the capital stock of the Company. The
Company is required, under the terms of the April 1997 Credit Facility, to
meet certain financial covenants which include minimum consolidated net worth
levels, interest and fixed charges coverage ratios and minimum EBITDA
(earnings before interest, taxes, depreciation, and amortization) as defined
in the April 1997 Credit Facility. The April 1997 Credit Facility also
contains certain restrictions on additional indebtedness, capital
expenditures and the declaration and payment of dividends. Because the
Company's operating subsidiaries are not part of the Chapter 11 bankruptcy
filing, interest payments on the April 1997 Credit Facility were made as
specified in the agreement.
Total interest paid on debt was approximately $10,300 for fiscal 2002,
$19,200 for the 40 weeks ended November 3, 2001, and $28,300 for fiscal year
2001. Interest payable was approximately $10,100 and $4,400 as of November
2, 2002 and November 3, 2001, respectively.
NSC ceased accruing interest on the Notes and Series C Senior Notes on
September 4, 2002, in accordance with SOP 90-7. The Notes and Series C
Senior Notes are included as liabilities subject to compromise in the
accompanying 2002 consolidated financial statements. See NOTES 1, 8, 9, and
16.
NOTE 6 -- LEASES
The Company conducts the major part of its operations on leased premises
which have initial terms generally ranging from 20 to 25 years.
Substantially all leases contain renewal options which extend the lease
terms in increments of 5 to 10 years and include escalation clauses. The
Company also has certain equipment leases which have terms of up to five
years. Realty and equipment leases generally require the Company to pay
operating expenses such as insurance, taxes and maintenance. Certain store
leases provide for percentage rentals based upon sales above specified
levels.
The Company leases retail space to tenants in certain of its owned and
leased properties. The lease terms generally range from two to five years.
Property recorded as assets under capital leases consists of real estate
as follows:
November 2, November 3,
2002 2001
--------------- --------------
Real estate $ 19,192 $ 19,192
Less accumulated depreciation 7,472 6,502
--------------- --------------
Property under capital leases, net $ 11,720 $ 12,690
=============== ==============
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- LEASES (continued)
Depreciation of assets recorded under capital leases is included with
depreciation and amortization expense in the consolidated statements of
operations. Minimum rentals payments to be made under noncancelable leases
at November 2, 2002 as well as rent to be received as lessor of owned
property and as lessor in sublease rentals of portions of leased property are
as follows:
Capital Operating Operating
Lease Lease Lease
Payments Payments Receipts
Fiscal Years Ending (As Lessee) (As Lessee) (As Lessor)
- -------------------------------- ------------ ------------ ------------
November 1, 2003 $ 2,439 $ 12,546 $ 136
October 30, 2004 2,259 11,922 109
October 29, 2005 2,176 11,627 109
October 28, 2006 2,126 10,946 85
November 3, 2007 1,944 9,947 68
November 1, 2008 and thereafter 18,899 78,843 452
------------ ------------ ------------
29,843 $135,831 $ 959
============ ============
Less executory costs -
-----------
Net minimum lease payments 29,843
Less amount representing interest 17,548
-----------
Present value of net minimum lease
payments under capital lease
obligations 12,295
Less: current portion 704
----------
Capital lease obligations,
net of current portion $ 11,591
==========
Sublease rental receipts to be received from capital and operating leases:
Capital Operating
Leases Leases
----------- ------------
Total minimum sublease rentals
to be received in the future $ 980 $ 9,142
=========== ============
Rent expense and the related contingent rentals under operating leases
were approximately $16,200 and $200 for fiscal 2002, respectively, $11,800
and $200 for the 40 weeks ended November 3, 2001, respectively, and $16,100
and $200 for fiscal 2001, respectively.
Contingent rentals under capital leases, which are directly related to
sales, were approximately $60 for fiscal 2002, $30 for the 40 weeks ended
November 3, 2001, and $100 for fiscal 2001. Interest paid on capital lease
obligations was approximately $1,800 for fiscal 2002, $1,400 for the 40 weeks
ended November 3, 2001, and $1,900 for fiscal 2001.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- LEASES (continued)
Sublease rental income for operating and capital leases was
approximately $4,300 for fiscal 2002, $3,700 for the 40 weeks ended November
3, 2001, and $4,100 for fiscal 2001.
NOTE 7 -- INCOME TAXES
As described in NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES, the
Company's method of accounting for income taxes is the liability method as
required by SFAS No. 109.
The components of income tax expense (benefit) are as follows:
52 weeks 40 weeks 52 weeks
ended ended ended
November 2, November 3, January 27,
2002 2001 2001
----------- ----------- ------------
Current
Federal $ 1,012 $ (429) $ 3,752
State 7 (3) -
U.S. Possessions 493 23 (177)
----------- ----------- ------------
1,512 (409) 3,575
----------- ----------- ------------
Deferred
Federal (85) (1,785) 6,753
State (1) (12) 388
U.S. Possessions 1,359 (4,406) (9,143)
----------- ----------- ------------
1,273 (6,203) (2,002)
----------- ----------- ------------
Total income tax
expense (benefit) $ 2,785 $ (6,612) $ 1,573
=========== =========== ============
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (Continued)
The significant components of the deferred tax assets and liabilities
are as follows:
November 2, November 3,
2002 2001
--------------- --------------
Deferred tax assets:
Reserve for self-insurance claims $ 7,012 $ 7,153
Employee benefit plans 10,040 10,287
Property and equipment 6,852 7,167
Accrued expenses and other liabilities
and deferred credits 11,863 11,555
Other operating loss and tax credit
carry forwards 12,325 11,402
All other 2,654 5,316
Valuation Allowance (4,686) (3,788)
--------------- --------------
Total deferred tax assets 46,060 49,092
--------------- --------------
Deferred tax liabilities:
Property and equipment (13,803) (14,314)
Tradenames (19,693) (20,674)
Operating leases (7,905) (7,173)
Inventories (7,267) (7,255)
Other assets (2,501) (3,820)
Accrued expenses and other liabilities
and deferred credits (1,029) (721)
--------------- --------------
Total deferred tax liabilities (52,198) (53,957)
--------------- --------------
Net deferred tax liabilities $ (6,138) $ (4,865)
=============== ==============
SFAS 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets may not be realized. Management
believes that some portion of the deferred tax assets will not be realized
based on this criterion. Consequently, the Company has recorded a valuation
allowance of approximately $4,700 in Fiscal 2002 and $3,800 in the 40 weeks
ended November 3, 2001.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (Continued)
A reconciliation of the difference between actual income tax expense,
and income taxes computed at U. S. Federal statutory tax rates is as follows
:
52 weeks 40 weeks 52 weeks
ended ended ended
November 2, November 3, January 27,
2002 2001 2001
----------- ----------- -----------
U.S. Federal Statutory rate of 35%
applied to pretax income (loss) $ 738 $(5,190) $ 1,494
Foreign Income taxes paid at
Rates different from US
Federal statutory rate 58 (338) (1,354)
Amortization of goodwill 3,109 2,356 3,233
State and local taxes 11 (17) 1,303
Branch taxes (possession -
US/VI) (1,938) (4,993) (2,777)
All others, net 807 1,570 (326)
----------- ----------- -----------
Income tax expense (benefit) $2,785 $ (6,612) $ 1,573
=========== =========== ===========
The Company's operations are located in U. S. possessions where they are
subject to U. S. and local taxation.
As of November 2, 2002, the Company has unused net operating loss
carryforwards of approximately $10,200 and $27,000 available to offset future
taxable income in the U.S. Virgin Islands and Puerto Rico, respectively,
through fiscal years 2022 and 2009, respectively. Utilization of the tax
net operating loss carryforward may be limited each year.
The Company also has unused alternative minimum tax credits in the
amount of approximately $200 to offset future income tax liabilities in
Puerto Rico. This credit is carried forward indefinitely.
Total income taxes paid were approximately $1,200 for the fiscal year
ended November 2, 2002, $45 during the 40 weeks ended November 3, 2001
and $3,800 for the fiscal year ended January 27, 2001.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise ("prepetition") refers to liabilities
incurred prior to the commencement of the Chapter 11 case. These liabilities
consist primarily of amounts outstanding under NSC's Notes and Series C
Senior Notes and also includes accrued interest. These amounts represent
NSC's estimate of known or potential claims to be resolved in connection with
the Chapter 11 case.
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below:
Notes and Series C Senior Notes due 2003,
net of unamortized discount of $1,052
at November 2, 2002 $ 176,231
Accrued interest payable 9,977
-----------
Total liabilities subject to compromise $ 186,208
===========
Contractual interest expense not accrued on prepetition debt totaled
approximately $2,700 for the period from September 4, 2002 through November
2, 2002. See NOTE 16 - SUBSEQUENT EVENTS - to these consolidated financial
statements for the resolution of these liabilities.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- CONDENSED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY
The following condensed combined financial statements are presented in
accordance with SOP 90-7: