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 1, 2003___
[ ] 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
Registrant's worldwide web address: www.pueblo.net
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 X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [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 _X NO _
Number of shares of the Registrant's Common Stock, $ .10 par value
outstanding as of January 28, 2004 -- 200.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
ITEM 1. BUSINESS
Name of the Registrant
Nutritional Sourcing Corporation was founded in 1993 under the name
Pueblo Xtra International, Inc. and was known as Pueblo Xtra International,
Inc. until July 22, 2002. Effective that date its name was changed to
Nutritional Sourcing Corporation ("NSC").
General
NSC 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
in-home movie and game entertainment 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 in-home movie and game entertainment 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 in-home movie and game
entertainment outlets in Puerto Rico and the U.S. Virgin Islands through its
franchise rights with Blockbuster Inc. ("BI"). As of November 1, 2003, the
Company operated 41 supermarkets in Puerto Rico and 5 supermarkets in the
U.S. Virgin Islands. As of November 1, 2003, the Company also operated 40
in-home movie and game entertainment stores in Puerto Rico and 2 in-home
movie and game entertainment stores in the U.S. Virgin Islands.
On November 2, 2001 NSC and its subsidiaries changed their fiscal year
end from the Saturday closest to January 31 to the Saturday closest to
October 31. Consequently, one of the previous comparable periods
being reported in this Annual Report on Form 10-K is the forty weeks
ended November 3, 2001.
On July 28, 1993, NSC 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 NSC. The
Acquisition has been accounted for under the purchase method effective
July 31, 1993 as discussed in the Goodwill and Trade Names section of NOTE 1
to the notes to the Company's consolidated financial statements included in
Item 15 of this Form 10-K.
In August 2002, NSC defaulted in the payment of interest on its
outstanding notes, and consented to the entry of an order for relief under
Chapter 11 of the Bankruptcy code the next month. NSC consummated a plan of
reorganization and emerged from bankruptcy in June 2003.
Business of the Company
Puerto Rico and U.S. Virgin Islands Supermarket Industry Overview
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 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 2002 were approximately $2.4
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.
In Puerto Rico the Company operates its supermarkets under the name
Pueblo with emphasis on service, variety and high quality products at
competitive prices. In Puerto Rico, the Company estimates that it has a
grocery retailing market share of approximately 20%. During the 52 weeks
ended November 1, 2003, the Company's stores in Puerto Rico averaged
approximately 40,926 gross square feet and generated an average of
approximately $407 of sales per selling square foot.
During the 52 weeks ended November 1, 2003, the five supermarkets in the
U.S. Virgin Islands averaged 35,470 gross square feet and generated an
average of approximately $366 of sales per selling square foot. The Company
estimates a U.S. Virgin Islands grocery retailing market share of
approximately 33%.
Supermarket Purchasing and Distribution
The Company's buying staff actively purchases products from distributors,
as well as directly from producers or manufacturers. 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 56% 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 refrigerated, freezer and dry grocery 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 1, 2003, this facility
provided approximately 54% 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 including in-store promotional 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 and analyzed the preferences of its customers. The Company has
expanded its supermarket stock keeping units ("SKUs") from approximately
23,000 to approximately 58,000 as of November 1, 2003. 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 Year
--------------------------- 40 Weeks
Ended Ended Ended
November 1, November 2, November 3,
Product Category 2003 2002 2001
----------- ----------- -----------
Grocery . . . . . . . . . . . . 43.9% 43.3% 43.8%
Health/Beauty Care/General Merchandise 8.1 8.1 8.2
Dairy . . . . . . . . . . . . . . 18.6 18.6 18.6
Meat/Seafood . . . . . . . . . . . 15.1 16.0 15.7
Produce . . . . . . . . . . . . . . 9.2 9.2 9.1
Deli/Bakery . . . . . . . . . . . . 5.1 4.8 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
every other week in some periods to weekly 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 1,
2003, the Company continued to have approximately 233 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 is being expanded. 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 fourth quarter of the fiscal
year ended November 1, 2003, private label sales were approximately 12.1% of
total supermarket sales.
Supermarket Category Management
The Company's category management system is 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.
Supermarket Advertising and Promotion
The Company primarily utilizes newspaper 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. At
various times during the year this is supplemented by radio and television
spots.
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.
In-home Movie and Game Entertainment Operations
The Company has operated franchised in-home movie and game entertainment
locations in Puerto Rico since 1989 and in the U.S. Virgin Islands since 1993
and operated 42 in-home movie and game entertainment locations in Puerto Rico
and the U.S. Virgin Islands as of November 1, 2003. In Puerto Rico, the
Company operates 17 in-home movie and game entertainment outlets that are in
the same buildings as its supermarkets and 23 free-standing in-home movie and
game entertainment stores, most of which are adjacent to its supermarkets. In
the U.S. Virgin Islands, the Company operates two free-standing in-home movie
and game entertainment stores. The Company's free-standing in-home movie and
game entertainment stores average approximately 5,231 gross square feet,
while the Company's in-home movie and game entertainment outlets that are in
the same building as its supermarkets average approximately 3,867 gross
square feet. In order to increase customer traffic in its supermarkets, the
Company's typical in-home movie and game entertainment 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 in-home movie and game entertainment and merchandising
offers.
The Company's In-home Movie and Game Entertainment Operations are
currently the largest (in terms of number of stores and total revenue) major
in-home movie and game entertainment chain operating in Puerto Rico and the
U.S. Virgin Islands. The Company believes its locations and name recognition
give it an advantage over its competitors. In the last several years Video
Avenue has opened 17 stores in Puerto Rico in competition with the Company.
Each of the Company's free-standing in-home movie and game entertainment
locations carries an average of approximately 10,000 tapes/discs dedicated to
video rental whereas its in-home movie and game entertainment locations that
are in the same building as its supermarkets average approximately 8,600
tapes/discs. Each location also offers for sale a selection of recorded and
blank video tapes and discs, music compact discs, video game cartridges,
prepaid phone cards, accessories, and snack food products. For promotions of
its In-home Movie and Game Entertainment Division operations, the Company
primarily utilizes print, television, radio, billboards and in-store signage.
The Company's franchiser also provides supplies, some licensed product and
support services to the Company. These include, among other things, marketing
programs and computer software.
The Company's successful development of its in-home movie and game
entertainment 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 In-home Movie and Game Entertainment Operations. The
Company continues to evaluate expansion opportunities in Puerto Rico.
Each in-home movie and game entertainment location is subject to a
Franchise Agreement with the Company's franchiser that provides the right for
such location to conduct in-home movie and game entertainment operations for
a 20-year period from the initial date of operation of the location. The
Franchise Agreement provides, in addition to other things, that the
franchiser has the right to approve each location, approve the promotional
activities of the division, approve products sold in each location as well as
the cash register check-out hardware and software to be used at each
location, and the communications systems to be used at each location. The
Agreement also specifies the franchise fees, as a percentage of sales, to be
paid to the franchiser and provides for direction from the franchiser as to
the monies spent on advertising, also as a percentage of sales.
Although the Company's In-home Movie and Game Entertainment Operations
constitute the largest in-home movie and game entertainment chain in Puerto
Rico and the U.S. Virgin Islands, the Company competes with 17 Video Avenue
stores, 20 Cinema Video stores, numerous local independent video retailers,
and mass merchandisers in the category of retail sales of movies and game
videos. In addition, the Company's in-home movie and game entertainment
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 (POS) 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 checkout and provide, by store,
valuable information to assist our buyers in the reordering process and
provide other valuable 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 front-end staffing
based on sales, customer traffic and defined service objectives. 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. In addition the Company's
supermarket POS system is integrated with the PuebloCard to electronically
reward loyal PuebloCard customers.
The Company's management information systems at its In-home Movie and
Game Entertainment Operations are state-of-the art systems that are licensed
to the Company by its franchiser.
Employees
As of November 1, 2003, the Company had approximately 4,275 employees
(full- and part-time), of whom approximately 3,404 were employed at the
supermarket level, 415 at the administrative and financial services offices
and distribution center and 456 by the In-home Movie and Game Entertainment
Division. Approximately 68% of the Company's hourly supermarket employees
were employed on a part-time basis and approximately 2,948 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 franchiser's trademark in its specified franchise territories.
Environmental 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
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 expectation of adequate liquidity and 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 (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.
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, supercenters, 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
have greater financial resources, and may have lower merchandise acquisition
costs and lower operating expenses than the Company, and the Company may be
unable to compete successfully in the future.
In-home Movie and Game Entertainment Operations
The Company's in-home movie and game entertainment franchise faces
significant competition and risks associated with technological obsolescence,
and the Company may be unable to compete effectively. The in-home movie and
game entertainment industry is 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 in-home movies and games is a
significant competitive factor in the Company's in-home movie and game
entertainment business. The Company's in-home movie and game entertainment
business also competes 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 in-home movie and game
entertainment 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.
Further, the division's operations are dependent on the studios that
develop and distribute the product. Changes in video formats or distribution
practices (for example from VHS tapes to DVD's)are disruptive to the
division's operations as these changes may cause significant changes in its
product acquisition costs, quantities it is required to purchase, the timing
of the period a title may be rented before it is brought to market for sale
(which impacts the length of time of high rental volume for a title - better
known in the industry as the "rental window") and its per rental revenue
depending on the distribution and pricing practices of the studios.
The division is also dependent on the movie and game production industry
for the development of new product and re-launches of older titles as it has
no production or duplication facilities of its own.
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 (such as import taxes) that impose obligations and restrictions
and may increase its costs.
Company is Highly Leveraged
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, the Company's current
level of indebtedness and/or an increase in indebtedness 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.
The Company's ability to satisfy its indebtedness 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 Item 7 MANAGEMENTS'DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and NOTE 5 - DEBT 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 1, 2003 with
respect to the owned and leased stores and support facilities used by the
Company in its business:
Estimated square footage
---------------------------------------------------------
Owned (1) Leased Total
----------------- ----------------- ----------------
No. Gross Sq. Ft. No. Gross Sq. Ft. No. Gross Sq. Ft
--- ------------- --- ------------- --- ------------
Supermarkets . . . . . . . 7 314,000 39 1,542,000 46 1,856,000
In-home movie and game
entertainment stores . . . 4 20,000 38 180,000 42 200,000
Distribution center & offices 1 300,000 1 13,000 2 313,000
(1) For five of the owned stores the Company owns the building and leases
the land. Four 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 annual percentage
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 operating subsidiaries) under the Company's
May 2003 Bank Agreement with the 2003 Bank Lender (see NOTE 5 - DEBT in the
notes to the Company's consolidated financial statements included in Item 15
of this Form 10-K).
The Company owns its general offices, which includes the supermarket and
In-home Movie and Game Entertainment 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.
Since the Acquisition through November 1, 2003, the Company made capital
expenditures of approximately $128.7 million in its supermarket operations in
Puerto Rico and the U.S. Virgin Islands, including the opening of seven 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 $11.1 million in its In-home Movie and
Game Entertainment Division operations. The history of store openings,
closings and remodels, beginning with fiscal 2000, is set forth in the
following table:
40 Weeks
Fiscal Year Ended Fiscal Year
------------- November 3, ------------
2003 2002 2001 2001 2000
---- ---- ---- ---- ----
Stores in Operation:
At beginning of year . . . . . . . 88 89 91 93 94
Stores opened:
Puerto Rico - Supermarkets. . . 1 - - - -
Puerto Rico In-home movie and
game entertainment stores . . 1 - - 1 -
Stores closed:
Puerto Rico - Supermarkets . . . 1 1 - 2 -
Virgin Islands - Supermarkets. . 1 - - - -
Puerto Rico - in-home movie and
game entertainment stores . . . - - 2 1 1
---- ---- ---- ---- ----
At end of year . . . . . . . . . 88 88 89 91 93
==== ==== ==== ==== ====
Remodels . . . . . . . . . . . . . 0 2 2 8 9
==== ==== ==== ==== ====
Supermarkets by location:
Puerto Rico . . . . . . . . 41 41 42 42 44
U.S. Virgin Islands . . . . 5 6 6 6 6
---- ---- ---- ---- ----
Subtotal Supermarkets 46 47 48 48 50
In-home movie and game
entertainment stores by
location:
Puerto Rico . . . . . . . . 40 39 39 41 41
Virgin Islands. . . . . . . 2 2 2 2 2
---- ---- ---- ---- -----
Subtotal In-home Movie
and game entertainment
stores 42 41 41 43 43
---- ---- ----- ---- ------
Grand Total 88 88 89 91 93
==== ==== ==== ==== ====
ITEM 3. LEGAL PROCEEDINGS
At November 1, 2003, 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. 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 1, 2003.
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 NSC's common equity.
Holders
NSC 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 May 2003 Bank Agreement
impose limitations on the declaration or payment of dividends by NSC.
Additionally, dividend payments by Pueblo and Pueblo Entertainment to NSC are
restricted under the terms of the May 2003 Bank Agreement. The May 2003 Bank
Agreement, however, provides that so long as no default or event of default
(as defined in the May 2003 Bank Agreement) exists, or would exist as a
result, and certain other conditions are satisfied, Pueblo and Pueblo
Entertainment are permitted to pay their inter-company interest on their
inter-company notes payable to NSC in accordance with the terms thereof. See
NOTES 1 and 5 to the Company's consolidated financial statements included in
Item 15 of this Form 10-K for a discussion of the issuance of New 10.125%
Senior Secured Notes to the Holders and the May 2003 Bank Agreement.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except average sales per selling square
foot amounts)
Fiscal Year Ended 40 Weeks Fiscal Year Ended
------------------------ Ended ------------------------
November 1, November 2, November 3, January 27, January 29,
2003 2002 2001 2001 2000
----------- ----------- ----------- ----------- -----------
Operating Statement Data
Net sales $571,336 $588,179 $433,342 $622,050 $674,145
Cost of goods sold 387,797 396,239 290,997 423,755 456,143
--------- --------- --------- --------- ---------
Gross profit (A) 183,539 191,940 142,345 198,295 218,002
Selling, general and admin-
istrative expenses (B) 156,428 154,371 116,541 165,667 163,785
Gain on insurance settlement(1)(C) - (14,693) - (2,464) (15,066)
Store Closings- exit costs (D) 546 246 - 685 -
--------- --------- --------- --------- ---------
EBITDA ='s A minus the sum
of B+C+D (10) 26,565 52,016 25,804 34,407 69,283
Depreciation and amortization(2) 23,505 28,260 22,671 37,676 31,632
--------- --------- --------- --------- ---------
Operating profit (loss) 3,060 23,756 3,133 (3,269) 37,651
Interest expense-debt and
capital lease
obligations (3) (9,909) (20,946) (18,376) (28,830) (30,371)
Interest and investment
income, net 178 291 415 2,500 2,750
Loss on sale of real
property (4) - - - - (1,291)
Reorganization items (5) (5,654) (995) - - -
Gain on early extinguishment
of debt (6) 36,508 - - 33,867 -
-------- ---------- -------- ---------- ---------
Income (Loss) before income
tax and cumulative effect of
an accounting change 24,183 2,106 (14,828) 4,268 8,739
Income tax (expense) benefit (52) (2,785) 6,612 (1,573) (4,015)
--------- --------- --------- --------- ---------
Net income (loss) before
cumulative effect of an
accounting change 24,131 (679) (8,216) 2,695 4,724
Cumulative effect of an
accounting change (7) (139,856) - - - -
---------- --------- --------- ---------- ---------
Net (loss) income $(115,725) $ (679) $ (8,216) $ 2,695 $ 4,724
========== ========= ========= ========== =========
See notes to Selected Financial Data at the end of this Item 6.
As of
-------------------------------------------------------------------
November 1, November 2, November 3, January 27, January 29,
2003 2002 2001 2001 2000
----------- ----------- ----------- ----------- -----------
Balance Sheet Data
Cash and cash equivalents (8) $651 $17,992 $2,169 $34,833 $95,711
Working capital (deficit) (16,844) (4,718) 252 (6,899) 22,214
Property and equipment, net 91,252 102,847 111,227 118,598 122,263
Total assets 214,434 391,751 394,159 434,790 521,564
Total debt and capital
lease obligations (9) 156,197 220,526 218,277 218,047 283,705
Stockholder's equity (deficit) (66,019) 34,706 35,385 43,601 40,906
See notes to Selected Financial Data at the end of this Item 6.
Fiscal Year Ended 40 Weeks Fiscal Year Ended
------------------------- Ended ------------------------
November 1, November 2, November 3, January 27, January 29,
2003 2002 2001 2001 2000
----------- ----------- ----------- ----------- -----------
Certain Financial Ratios
and Other Data
EBITDA (as defined) (10) * $26,565 $52,016 $25,804 $34,407 $69,283
Cash flow (used in) provided
by investing activities (4) (4,019) (7,352) (5,240) (17,249) 1,077
Cash flow (used in) provided
by financing activities (22,562) 1,376 (503) (31,685) (576)
Cash flow provided by (used
in) operating activities 9,240 21,779 (26,921) (11,944) 39,710
Capital expenditures 4,027 7,391 5,271 17,452 21,650 **
EBITDA (as defined) margin (10) 4.6% 8.8% 6.0% 5.5% 10.3%
Debt to EBITDA (as defined) 5.88:1 4.24:1 6.65:1*** 6.34:1 4.09:1
* 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.
** 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.
See notes to Selected Financial Data at the end of this Item 6.
40 Weeks
Fiscal Year Ended Fiscal Year
------------------------ November 3, ------------------
2003 2002 2001 2001 2000
----------- ----------- -------- -------- --------
RETAIL FOOD DIVISION DATA
Puerto Rico
Number of stores (at fiscal year-end) 41 41 42 42 44
Average sales per store (11) $ 11,619 $ 12,125 $ 8,698 $ 11,943 $ 12,901
Average selling square footage 29,344 29,393 28,895 28,149 28,243
Average sales per selling square foot (11)$ 407 $ 442 $ 319 $ 452 $ 491
Total sales $485,307 $500,624 $365,311 $522,059 $567,658
Same store sales % change (6.5)% 4.1% (7.6)% (7.6)% (13.1)%
U.S. Virgin Islands
Number of stores (at fiscal year-end) 5 6 6 6 6
Average sales per store (11) $ 7,610 $ 7,729 $ 5,916 $ 8,085 $ 8,364
Average selling square footage 21,043 19,421 19,421 19,421 19,421
Average sales per selling square foot (11)$ 366 $ 400 $ 305 $ 414 $ 427
Total sales $ 44,929 $ 46,376 $ 35,497 $ 48,509 $ 50,185
Same store sales % change (1.6)% (1.0)% (4.5)% (3.3)% (26.2)%
IN-HOME MOVIE AND GAME ENTERTAINMENT DIVISION DATA
In-home Movie and Game Entertainment Stores
Number of stores (at fiscal year-end) 42 41 41 43 43
Average sales per store (11) $ 951 $ 973 $ 702 $ 1,000 $ 1,146
Average weekly sales $ 768 $ 781 $ 740 $ 837 $ 962
Total sales $ 39,903 $ 39,893 $ 29,421 $ 42,954 $ 49,920
Same store sales % change (1.5)% (0.5)% (7.8)% (13.5)% (18.6)%
See notes to Selected Financial Data at the end of this Item 6.
NOTES TO SELECTED FINANCIAL DATA
(1) Includes a gain from the Hurricane Georges insurance claim of $14.7
million, $2.5 million, and $15.1 million for the fiscal years ended
November 2, 2002, January 27, 2001, and January 29, 2000, respectively.
(2) Includes charges of $0.4 million and $3.5 million for the write down of
stores that were closed for the fiscal years ended November 1, 2003 and
January 27, 2001, respectively. Additionally, the Company recorded a
charge of $1.2 million during the fiscal year ended November 1, 2003, for
the write down of impaired assets related to two under performing stores
in accordance with SFAS No. 144.
(3) The fiscal years ended November 1, 2003 and November 2, 2002 amounts do
not include contractual interest expense on pre-petition debt totaling
approximately $10.0 million and $2.7 million, respectively.
(4) During the fiscal year ended January 29, 2000, the Company received $35.5
million in cash and incurred a loss in a sale/leaseback of real estate.
(5) Reorganization items 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.
(6) The 52 weeks ended November 1, 2003 included a gain from the consummation
of the Plan of Reorganization in which NSC provided consideration to the
prepetition noteholders equal to $59.5 million in cash and $90 million
in New 10.125% Senior Secured Notes. The 52 weeks ended January 27, 2001
included a gain resulting from the Company's purchase of $87.7 million
principal amount of its Notes and Series C Senior Notes.
(7) The Company recorded a write down of goodwill during the fiscal year
ended November 1, 2003 as a result of its adoption of SFAS No. 142.
(8) Highly liquid investments purchased with a maturity of three months or
less are considered cash equivalents.
(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.
(10) EBITDA (as defined) represents earnings before interest, taxes,
depreciation, amortization, the loss on sale/leaseback transaction,
sundry, the gain from early extinguishment of debt, reorganization items,
and the cumulative effect of an accounting change. 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.
The bank credit facility and the indenture underlying NSC's publicly
issued debt contain various financial covenants. Some of these covenants
are based on EBITDA. Consequently, EBITDA is disclosed and discussed as
management believes it is an important means by which to measure the
Company's liquidity and compliance with our debt covenants, and it is a
measure by which management monitors operating results. Furthermore,
EBITDA is used, in part, to determine incentive compensation for
management.
On January 22, 2003, the SEC issued release No. 33-8176 that set forth
new requirements relating to the disclosure of non-Generally Accepted
Accounting Principles (GAAP) financial measures, as defined in the
release.
Management will continue to present EBITDA as management continues to
believe it is an important means by which to measure the Company's
liquidity. However, in compliance with release No. 33-8176 we have
provided, in the first table in this ITEM 6, a reconciliation of EBITDA
to the GAAP measure of net (loss) income.
(11) For all periods presented, average sales are weighted for the period of
time each store is open during the period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
In recent years, the Company's retail grocery markets, and the Company,
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 number
of Company stores has decreased in recent years.
Critical Accounting Estimates
NSC's management has chosen accounting policies that management believes
are appropriate to report accurately and fairly NSC's consolidated operating
results and financial position, and those accounting policies are applied in
a consistent manner unless otherwise indicated. The significant accounting
policies are summarized in Note 1 to the Consolidated Financial Statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues, and expenses, and related disclosures of contingent assets and
liabilities. Management bases these estimates on historical experience and
other factors believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
Actual results could differ from those estimates.
Management believes that the following accounting policies are the most
critical in the preparation of NSC's consolidated financial statements
because they involve the most difficult, subjective or complex judgments
about the effect of matters that are inherently uncertain.
Self-Insurance Costs
NSC's and its operating subsidiaries are, primarily, self-insured for
costs related to workers' compensation, general liability claims and
certain health insurance programs. Liabilities for general liability and
workers' compensation claims are actuarially determined, by an outside
actuary, and are recognized based on claims filed and an estimate of
claims incurred but not yet reported. We have purchased stop-loss
coverage to limit our exposure to any significant exposure on a per
claim basis. We are insured for covered costs in excess of these per
claim limits. These costs are included in "Selling, General and
Administrative Costs" in the Consolidated Statements of Operations
included in ITEM 15 of this Form 10-K.
The assumptions underlying the ultimate costs of existing claim losses
are subject to a high degree of unpredictability, which can affect the
liability recorded for such claims. For example, variability in
inflation rates of health care costs inherent in these claims can affect
the amounts realized. Similarly, changes in legal trends and
interpretations, as well as a change in the nature and method of how
claims are settled can impact ultimate costs. Although our estimates of
liabilities incurred do not anticipate significant changes in historical
trends for these variables, any changes could have a considerable effect
upon future claim costs and currently recorded liabilities.
Impairments of Long-Lived Assets
We monitor the carrying value of long-lived assets for potential
impairment based on whether trigger events have occurred. These events
include current period losses, by location, combined with a history of
losses, a projection of continuing losses or a significant decrease in
the market value of an asset. When a trigger event occurs, an impairment
calculation is performed, comparing projected undiscounted cash flows,
utilizing current cash flow information and management's estimates of
expected cash flows related to specific stores, to the carrying value
for those stores. If impairment is identified for long-lived assets to
be held and used, the value of the assets is written down to its
estimated fair value. With respect to owned property and equipment held
for disposal, the value of the property and equipment is adjusted to
reflect recoverable values based on our previous efforts to dispose of
similar assets and current economic conditions. Impairment is recognized
for the excess of the carrying value over the estimated fair market
value, reduced by estimated direct costs of disposal. The estimates
included in this process involve subjective and complex judgments by
management. Any reductions in the carrying value of assets resulting
from the application of this policy are included in "Depreciation and
Amortization" in the Consolidated Statements of Operations included in
ITEM 15 of this Form 10-K.
Store Closing Costs
We provide for closed store liabilities relating to the undiscounted
value of the estimated remaining non-cancelable lease payments after the
anticipated closing date, net of estimated subtenant income. The closed
store lease liabilities usually are paid over the lease terms associated
with the closed stores. Should the store being closed be an owned store
that management intends to sell, the store would be actively marketed to
potential buyers. Owned stores held for disposal would be reduced to
their estimated net realizable value. The value of any equipment and
leasehold improvements related to a closed store is reduced to reflect
estimated recoverable values. We estimate subtenant income, future cash
flows and asset recovery values based on our experience and knowledge of
the market in which the closed store is located, our previous efforts to
dispose of similar assets and current economic conditions. However, the
ultimate cost of the disposition of these leases and related assets is
affected by current real estate markets, inflation rates, and general
economic conditions.
Store closings generally are completed within one year after the
decision to close.
Adjustments to closed store liabilities primarily relate to changes in
subtenant and actual exit costs differing from original estimates.
Adjustments are made for changes in estimates in the period in which the
change becomes known. Any excess store closing liability remaining upon
settlement of the obligation is reversed to income in the period that
the settlement is determined. Costs related to individual operational
store closings, other than the costs to reduced the carrying value of
property and equipment, are reflected in the Consolidated Statements of
Operations as "Store closings-exit costs". Reductions in the carrying
value of property and equipment related to closed stores are included in
"depreciation and amortization" in the Consolidated Statements of
Operations. Inventory write-downs, if any, in connection with store
closings, are classified in "Cost of Goods Sold." Costs to transfer
inventory and equipment from closed stores are expensed as incurred.
Store closing liabilities are reviewed quarterly to ensure that any
accrued amount that is not a sufficient estimate of future costs, or
that no longer is needed for its originally intended purpose, is
adjusted to income in the proper period.
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.
Essentially, the difference between the accounting practices that the
Company had been following before this pronouncement and what the
pronouncement calls for is the time at which store-closing costs are
recorded pursuant to SFAS No. 146. The Company had been recording
estimated store closing costs (costs to be incurred subsequent to the
actual store closing) at the time the decision was made to close a
store. SFAS No. 146 stipulates that these costs may not be recorded
until the store is actually closed.
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 was effective prospectively for exit
or disposal activities initiated after December 31, 2002, with earlier
adoption encouraged. Based on the level of store closing activity for
the periods presented herein the provisions of SFAS No. 146 did not have
a material impact on the consolidated financial statements.
Benefit Plans
The determination of our obligation and expense for pension and other
post-retirement benefits is dependent upon our selection of assumptions
used by actuaries in calculating those amounts. Those assumptions are
described in NOTE 8 - RETIREMENT BENEFITS in the notes to the
Consolidated Financial Statements included in ITEM 15 of this Form 10-K
and include, among others, the discount rate, the expected long-term
rate of return on plan assets and the rates of increase in compensation.
In accordance with generally accepted accounting principles, actual
results that differ from our assumptions are accumulated and amortized
over future periods and, therefore, generally affect our recognized
expense and recorded obligation in future periods. While we believe that
our assumptions are appropriate, significant differences in our actual
experience or significant changes in our assumptions may materially
affect our pension obligations and our future expense. The cost of these
plans are included in "Selling, General and Administrative Costs" in the
Consolidated Statements of Operations included in ITEM 15 of this Form
10-K.
Revenue Recognition
Revenues from the sale of products are recognized at the point of sale
of our products or, in the case of video rentals, at the time of rental.
Discounts provided to customers at the point of sale are recognized as a
reduction in sales as the products are sold/rented.
Income from items such as vending machines, money transfer activities,
subtenant rentals, etc. are not included in revenue in the Consolidated
Statements of Operations. They are included,(netted against) the
"Selling, General and Administrative Expenses" line item in the
Consolidated Statements of Operations.
Cost of Goods Sold, including Vendor Allowances, Warehousing and
Transportation
Management believes the classification of costs included in merchandise
costs could vary widely throughout our industry. Our approach is to
include the direct, net costs of acquiring products and making them
available to customers in our stores in the "Cost Of Goods Sold" line
item in the Consolidated Statements of Operations. We believe this
approach most accurately presents the actual costs of products sold, and
is consistent with recently issued accounting standards on the topic.
In addition to the cost of merchandise, net of discounts and allowances;
inbound freight charges; warehousing costs, including receiving and
inspection costs; and transportation costs are included in the "Cost of
Goods Sold", line item of the Consolidated Statements of Operations.
Allowances (including rebates) relating to the Company's buying and
merchandising activity (including promotional activity) are recorded as
a reduction in "Cost of Goods Sold" as earned according to subjective
estimates by management relating to the underlying agreement, inventory
movement and time.
Purchasing management salaries and administration costs are not included
in "Cost of Goods Sold". Rather, they are included in the "Selling,
general, and administrative expenses" line item in the Consolidated
Statements of Operations along with all other managerial and
administrative costs and store operating costs (including store
occupancy costs).
Income Tax Expense
NSC and its subsidiaries are subject to taxation in the United States of
America (U.S.), and are included in the consolidated tax return of NSC'S
parent (PXC&M Holdings, Inc) in that jurisdiction. Certain of the
operating subsidiaries are also subject to tax in the Commonwealth of
Puerto Rico and certain operating subsidiaries are subject to tax in the
Territory of the U.S. Virgin Islands. The consolidated tax provision is
computed based on the tax laws of these jurisdictions, including the
availability of foreign tax credits in the U. S.
As discussed in NOTE 7 - INCOME TAXES to the consolidated financial
statements included in ITEM 15 to this Form 10-K, the Company has
approximately $21.1 million in tax benefits from net operating losses
and tax credit carry-forwards. These carry-forwards are in the Puerto
Rico and U.S. Virgin Islands tax jurisdictions. Management has
established a valuation reserve of approximately $16.0 million against
these future tax benefits as their realization in these jurisdictions
is doubtful during the carry-forward periods.
Results of Operations
52 Weeks Ended November 1, 2003 vs. 52 Weeks Ended November 2, 2002
As of November 1, 2003, the Company operated a total of 46 supermarkets
and 42 in-home movie and game entertainment locations in Puerto Rico and the
U. S. Virgin Islands. During the fiscal year ended November 1, 2003, the
Company opened one new supermarket and one new in-home movie and game
entertainment store in Puerto Rico. Additionally, the Company closed two of
its under-performing supermarkets, one in Puerto Rico and one in the U.S.
Virgin Islands; both supermarkets had expiring leases.
Total sales for the 52 weeks ended November 1, 2003 were $571.3 million
versus $588.2 million in the comparable period of the prior year, a
decrease of 2.9%. For the comparable 52 week periods, same store sales were
$542.5 million for the year ended November 1, 2003 versus $576.0 million for
the comparable period of the prior year, a decrease of 5.8%. "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 decreased 6.1% for the 52 weeks ended November 1,
2003 as compared to the same period of the prior year. The factors
contributing to the decrease in same store sales in the Retail Food Division
are continued growth in competition and a softening of the economy in both
Puerto Rico and the U.S. Virgin Islands. The above factors have created
severe pressure on the Company's Retail Food Division as well as its
competitors to reduce retail prices in the Company's markets. In-home Movie
and Game Entertainment Division same store sales (rental revenue and sales)
decreased 1.5% for the 52 weeks as compared to the same period in the prior
year primarily due to a decline in rental revenue. As the popularity of
DVD's has increased over the past several years, so has competition in this
industry. This is because DVD titles are primarily released for rental and
sale at the same time whereas, VHS tapes are generally released for rental
prior to being released for sale allowing the Company to benefit from a
"rental window". Currently, substantially all DVD's are simultaneously
released for rental and sale resulting in lower sell-through prices, which
means prices that are low enough to allow an affordable sales price by the
retailer to the consumer. This sell-through price has accelerated consumer
interest in the format but has also served to increase competition from mass
merchant retailers.
Gross profit for the 52 weeks ended November 1, 2003 was $183.5 million
versus $191.9 million for the comparable period of the prior year, a
decrease of $8.4 million. Gross profit for the Retail Food Division was
$152.2 million for the 52 weeks ended November 1, 2003 compared to $160.2
million for the comparable period of the prior year, a decrease of $8.0
million. The $8.0 million decrease in gross profit for the Retail Food
Division was primarily a result of the decrease in sales. The rate of gross
profit (as a percentage of sales) for the Retail Food Division was 28.6% for
the 52 weeks ended November 1, 2003 compared to 29.2% for the 52 weeks ended
November 2, 2002, a decrease of 0.6%. The primary reason for the decline in
the rate of gross profit in the Retail Food Division is the reduction of
retail prices as a result of the pricing pressures mentioned above. The
gross profit for the In-home Movie and Game Entertainment Division for the 52
weeks ended November 1, 2003 was $31.3 million versus $31.7 million for the
comparable period of the prior year, a decrease of $0.4 million. The gross
profit rate for the In-home Movie and Game Entertainment Division decreased
by 1.1%, to 78.5% in the 52 weeks ended November 1, 2003. The decrease in
the gross profit rate was a result of a decrease in video rentals, which have
a higher gross margin rate than product sales, as a percentage of total In
-home Movie and Game Entertainment Division sales.
Selling, general and administrative expenses were $156.4 million for the
52 weeks ended November 1, 2003 compared to $154.4 million for the comparable
period of the prior year. Considering the decline in same store sales and the
stores closed during both periods selling general and administrative expenses
would be expected to decline approximately $5.5 million dollars. However,
included in the total for the 52 weeks ended November 1, 2003 are
approximately $4.5 million in selling, general and administrative costs of
the new supermarket and the new In-home Movie and Game Entertainment store,
both opened in late November of 2002, and severance costs of approximately
$0.5 million associated with staff reductions in the administrative areas
of the Company in the Spring of 2003. In addition energy costs increased
approximately $1.8 million primarily as a result of rate increases. All
other selling general and administrative costs increased approximately $0.7
million net of the impact of cost containment programs initiated in the
Spring of 2003 in the areas of administrative support costs, insurance,
supply costs, repairs and maintenance, communications, advertising and store
labor. The full annual impact of these initiatives will be realized in
the 52 weeks ending October 30, 2004. Further, the Company is undertaking a
number of new initiatives focusing on reducing costs in the areas of energy,
communications and information technology.
Results for the 52 weeks ended November 2, 2002 include a $14.7 million
gain (before income taxes) realized upon the settlement of the business
interruption portion of the Company's Hurricane Georges insurance claim.
Results for the 52 weeks ended November 1, 2003 include a $0.5 million
loss (before income taxes) for the estimated exit costs of two supermarkets
that were closed. One of the stores is in Puerto Rico, and one is on the
island of St. Thomas in the U.S. Virgin Islands. Both were closed based on
management's view of their profit potential. The exit costs accrued
primarily include contractual occupancy costs, property taxes, and other
occupancy costs beyond the closing date, employee severance and related
benefit costs.
Depreciation and Amortization was $23.5 million for the 52 weeks ended
November 1, 2003 compared to $28.3 million for the comparable period of the
prior year, a decrease of $4.8 million. This decrease was primarily a result
of the discontinuation of amortization of goodwill and trade names as a
result of the Company's adoption of SFAS No. 142, effective November 3, 2002.
Goodwill and trade name amortization were $4.7 million and $0.9 million,
respectively, during the 52 weeks ended November 2, 2002. Additionally, the
Company recorded an adjustment of $1.0 million during the 52 weeks ended
November 1, 2003 as a result of changing the estimated useful lives of its
rental video and game inventory from one year to six months (see NOTE 2 -
INVENTORIES to the notes to the consolidated financial statements included in
Item 15 of this Form 10-K). The Company also recorded a write down of
impaired assets in accordance with SFAS No. 144 of $1.2 million (see Long-
Lived Assets in NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES in the notes to the
consolidated financial statements included in Item 15 of this Form 10-K).
Interest expense, net of interest income, decreased by $11.0 million
between the 52 weeks ended November 1, 2003 and the comparable period of the
prior year primarily as a result of a reduction in interest expense on debt
as shown in the table below (dollars in thousands).
INTEREST EXPENSE ON DEBT
---------------------------
For the 52 weeks ended
---------------------------
November 1, November 2,
2003 2002
------------ ------------
Interest expense on debt:
Liabilities subject to compromise (the amount of contractual
interest expense on pre-petition debt not accrued was
approximately $10,000 and $2,700 for the 52 weeks
ended November 1, 2003 and November 2, 2002, respectively) $ - $ 14,923
New 10.125% Senior Secured Notes, issued 6/5/03 3,718 -
Revolver borrowings 1,426 1,840
Term loans 1,291 -
Amortization of debt issuance costs 1,726 2,363
------------ ------------
Total $ 8,161 $ 19,126
============ ============
Reorganization items during the fiscal years ended November 1, 2003 and
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. All of the costs associated with the reorganization were
accrued as of the end of the third quarter of Fiscal 2003.
The 52 weeks ended November 1, 2003 include a $36.5 million gain
resulting from extinguishment of debt on consummation of the Plan of
Reorganization in which NSC provided consideration to the prepetition
noteholders equal to $59.5 million in cash and $90.0 million in New 10.125%
Senior Secured Notes.
Income tax expense for the 52 weeks ended November 1, 2003 was $0.1
million compared to $2.8 million in the comparable period of the prior year,
a decrease of $2.7 million. The effective rates for the 52 weeks ended
November 1, 2003 and the comparable period of the prior year were 0.2% and
132.2%, respectively. Variances in the effective tax rates were primarily due
to the relationship of items of permanent difference between Income Before
Income Taxes and Cumulative Effect of an Accounting Change for financial
reporting purposes, and pretax income for income tax return reporting
purposes to Income Before Income Taxes and Cumulative Effect of an Accounting
Change.
The Company recorded net income, before the cumulative effect of an
accounting change, of $24.1 million for the 52 weeks ended November 1, 2003,
an improvement of $24.8 million from the net loss, before the cumulative
effect of an accounting change, of $0.7 million in the comparable period of
the prior year. The preceding paragraphs in this MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS discuss the reasons
for the variances.
During the fiscal year ended November 1, 2003, the Company recorded a
$139.9 million charge as the cumulative effect of an accounting change as a
result of its adoption of SFAS No. 142 (see NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES to the notes to the consolidated financial statements included in
Item 15 of this Form 10-K). This charge represented the write-off of goodwill
from the original Acquisition of Pueblo, which was determined to be impaired.
52 Weeks ended November 2, 2002 vs. 52 Weeks ended November 3, 2001
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.
However, the discussion in this section is based, for the sake of
comparability, on a 52-week period obtained by including the last quarter of
the preceding fiscal year
As of November 2, 2002, the Company operated a total of 47 supermarkets
and 41 in-home movie and game entertainment 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 were the Company's
PuebloCard and the Company's repositioning efforts, both beginning in March
of 2001. In-home Movie and Game Entertainment 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 In-home Movie and
Game Entertainment 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 In-home Movie and
Game Entertainment 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 In-home Movie and Game Entertainment Division
sales.
Results for the 52 weeks ended November 2, 2002 include a $14.7 million
gain (before income taxes) realized upon the settlement of the business
interruption portion of the Company's Hurricane Georges insurance claim.
Hurricane Georges struck all of the Company's operating facilities on
September 20 and 21, 1998. During fiscal year 2000, the Company settled the
property portion of its hurricane insurance claims for approximately $42.0
million. The Company's insurance also includes business interruption
coverage which provided for reimbursement for lost profits as a result of
the storm. The business interruption portion of the Hurricane Georges
insurance 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 the recognition of the $14.7 million gain, net of
claim and appraisal expenses of $3.5 million.
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.
Reorganization 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 NSC's
noteholders on matters pertaining to NSC'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 Before Cumulative Effect of an Accounting
Change for financial reporting purposes and pretax income for income tax
return reporting purposes to (Loss) Income Before Income Taxes Before
Cumulative Effect of an Accounting Change.
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. The preceding paragraphs in this MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS discuss the reasons
for the variances.
Liquidity and Capital Resources
NSC has no operations of its own, and its only assets are its equity
interests in Pueblo and Pueblo Entertainment and inter-company notes issued
to NSC by its subsidiaries that replaced inter-company notes issued at the
time of the Acquisition. NSC has no source of cash to meet its obligations,
including its obligations under the New 10.125% Senior Secured Notes ("New
Notes"), other than payments by its subsidiaries on such inter-company notes,
which are restricted and subordinated to Pueblo's and Pueblo Entertainment's
obligations under the May 2003 Bank Agreement and to the trade creditors of
Pueblo and Pueblo Entertainment. Certain restrictive covenants in the May
2003 Bank Agreement impose limitations on the declaration or payment of
dividends by NSC. Additionally, dividend payments by Pueblo and Pueblo
Entertainment to NSC are restricted under the terms of the May 2003 Bank
Agreement. The May 2003 Bank Agreement, however, provides that so long as no
default or event of default (as defined in the May 2003 Bank Agreement)
exists, or would exist as a result, and certain other conditions are
satisfied, Pueblo and Pueblo Entertainment are permitted to pay their
inter-company interest on their inter-company notes payable to NSC in
accordance with the terms thereof.
The Company's financial restructuring and proceedings under Chapter 11
of the United States Bankruptcy Code are discussed in NOTES 1 and 5 to
the consolidated financial statements included in Item 15 of this Form 10-K.
Off-balance sheet arrangements
At November 1, 2003 the Company did not have any unconsolidated entities
or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which might have been established for
the purpose of facilitating off-balance sheet arrangements.
Contractual Obligations
The following table reflects a summary of obligations and commitments
outstanding as of November 1, 2003 (dollars in thousands).
Payment due by period
---------------------------------------------------------------
Less than More than
Contractual obligation Total 1 year 1-3 years 3-5 years 5 years
- ------------------------- ----------- ----------- ----------- ----------- -----------
Long-term debt $ 144,605 $ 4,200 $ 8,400 $ 42,005 $ 90,000
Capital lease obligations
(including interest) 27,404 2,259 4,302 3,697 17,146
Operating lease obligations 143,863 13,471 25,707 21,229 83,456
Purchase obligations 45,266 13,846 24,822 6,598 0
Other long-term liabilities
(included on the Company's
balance sheet):
Deferred income taxes 17,176 620 2,284 956 13,316
Reserve for self insurance 4,729 0 946 946 2,837
Other long-term liabilities
and deferred credits 28,180 (208) 2,923 1,856 23,609
----------- ----------- ----------- ----------- -----------
Total $ 411,223 $ 34,188 $ 69,384 $ 77,287 $ 230,364
=========== =========== =========== =========== ===========
Long-term debt - for a discussion, refer to NOTE 5 -- DEBT to the notes
of the Company's consolidated financial statements included in Item 15
of this Form 10-K.
Capital lease obligations - for a discussion, refer to NOTE 6 - LEASES
to the notes of the Company's consolidated financial statements
included in Item 15 of this Form 10-K.
Operating lease obligations - includes operating leases, which
generally provide for payment of direct operating costs in addition to
rent. The amounts included in the table are future minimum lease
payments and exclude such direct operating costs. For a discussion,
refer to NOTE 6 -- LEASES to the notes of the Company's consolidated
financial statements included in Item 15 of this Form 10-K.
Purchase obligations - the Company's purchase obligations include two
contracts. Of the total $45,266 obligation, $37,804 relates to a
contract to purchase merchandise to be sold in the Company's
supermarkets in Puerto Rico. This contract has a term of five years
with an expiration date of June 30, 2007. The contract stipulates a
minimum purchase requirement over the 5 year term of the agreement, in
cases (as defined by the agreement), and can be automatically extended
by either the Company or the supplier for an additional term until such
time as the minimum purchase requirement is met by the Company.
Management anticipates the purchase requirement will be met during the
5 year term of the agreement. The remaining $7,462 relates to a
contract to purchase supplies. This contract has a three year term
with an expiration of December 31, 2005. The contract stipulates a
minimum purchase requirement of $9.0 million over its term. This
contract also stipulates that if, upon expiration or termination of the
contract for any reason, the Company has not purchased $9.0 million in
products, the Company shall pay to the supplier an amount equal to 1%
of the minimum purchase requirement not achieved. The above purchase
obligations have been apportioned by year in the table above based on
estimates of current purchasing and price levels.
Deferred income taxes - for a discussion, refer to NOTE 7 - INCOME
TAXES to the notes of the Company's consolidated financial statements
included in Item 15 of this Form 10-K.
Other long-term liabilities and deferred credits - for a discussion,
refer to NOTE 4 -- OTHER LIABILITIES AND DEFERRED CREDITS to the notes
of the Company's consolidated financial statements included in Item 15
of this Form 10-K.
Company operations, along with its available credit facility, are
expected to provide adequate liquidity for the Company's operational needs.
On May 23, 2003 the Company's operating subsidiaries entered into a new
Loan and Security Agreement, and NSC entered into an Amended and Restated
Guarantor General Security Agreement. The initial term of the May 2003 Bank
Agreement expires June 22, 2008 and will continue thereafter 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.
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, $35.0 million outstanding including the total of
borrowed money and letters of credit) and term loans facilities for various
specified purposes and in certain specified amounts, aggregating $45.0
million. The borrowing base formula is discussed in NOTE 5 -- DEBT to the
notes of the Company's consolidated financial statements included in Item 15
of this Form 10-K.
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 5 -- DEBT to these consolidated financial statements included in Item 15
of this Form 10-K. Debt issuance costs associated with the May 2003 Bank
Agreement totaled $3.3 million.
As of November 1, 2003, the Company had borrowings of $11.4 million
under its May 2003 revolving credit facility. During Fiscal 2003, the
Company had borrowings under both the April 1997 and May 2003 revolving
credit facilities (See NOTE 5 - DEBT to the consolidated financial statements
included in Item 15 of this Form 10-k). The weighted average per annum
interest rate on these borrowings for the 52 weeks ended November 1, 2003 and
November 2, 2002 was 5.851% and 5.927%, respectively. After giving effect to
outstanding standby letters of credit in the amount of $3.3 million, as of
November 1, 2003, the borrowing availability on a revolving basis under the
terms of the May 2003 Bank Agreement was $9.2 million.
As to cash provided or used during Fiscal 2003 the following pertains:
Cash provided by operating activities was $9.2 million during the 52
weeks ended November 1, 2003 compared to $21.8 million in the comparable
period of the prior year. The decline is primarily a result of the Company
recording a $14.7 million gain, during the 52 weeks ended November 2, 2002,
upon settlement of the business interruption portion of its Hurricane Georges
insurance claim. This decrease was partially offset by a decrease in cash
used for components of working capital.
Net cash used in investing activities was $4.0 million and $7.4 million
during the 52 weeks ended November 1, 2003 and the comparable period of the
prior year, respectively. The decrease is a result of a decrease in
purchases of property and equipment, net of proceeds from sales of property
and equipment, during the 52 weeks ended November 1, 2003 as compared to the
comparable period of the prior year. The primary reason for the decrease is
the construction of the new supermarket and new in-home movie and game
entertainment store, for which the majority of the capital expenditures
occurred during the fiscal year ended November 2, 2002.
Net cash used in financing activities was $22.6 million for the 52 weeks
ended November 1, 2003 while net cash provided by financing activities was
$1.4 million in the prior year. Upon consummation of the Plan of
Reorganization, the Company paid consideration to the holders of its Notes
and Series C Senior Notes totaling $59.5 million in cash and $90.0 million in
New 10.125% Senior Secured Notes. Also as part of its Plan of
Reorganization, the Company received a capital contribution from its equity
holders totaling $15.0 million and additional financing related to its May
2003 Bank Agreement, $45.0 million, principal amount, of term loans. The
Company also repaid its existing revolving credit facility, which totaled
$32.0 million on November 2, 2002, and borrowed funds under its May 2003 Bank
Agreement.
Working capital as of November 1, 2003 was a deficit of $16.8 million,
a decrease of $12.1 million from the deficit of $4.7 million as of November
2, 2002, producing a current ratio of 0.81:1 and 0.95:1, respectively. Upon
consummation of its Plan of Reorganization, the Company replaced its existing
revolving credit facility with the new revolving credit facility under the
terms of its May 2003 Bank Agreement. During the 52 weeks ended November 1,
2003, the Company decreased its net borrowings under its revolving credit
facility.
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 7 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 1, 2003 and is anticipated to be funded with cash provided by
operating activities.
Capital expenditures for Fiscal 2004 are expected to be approximately
$5.3 million. This capital program (which is subject to continuing change
and review) includes 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.
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. A
hypothetical change of 10% in the Company's effective interest rate for its
revolving credit borrowings from Fiscal 2003 levels, would increase/decrease
interest expense by approximately $0.1 million.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-31 appearing at the end of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, Company management
carried out an evaluation, under the supervision and with the participation
of the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information required to be disclosed in the Company's periodic reports filed
with the Securities and Exchange Commission.
In addition, Company management carried out an evaluation, under the
supervision and with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, of the Company's internal control over
financial reporting and there have been no changes during the Company's
fourth fiscal quarter that have materially affected, or are reasonably likely
to materially affect the Company's internal control over financial reporting.
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 . . . . . 57 Director and Chairman of the Board of
Directors; President and Chief Executive
Officer; Chairman of the Executive
Committee
Steven I. Bandel . . . . . . . 50 Director; Member of the Executive
Committee and Chairman of the Audit and
Risk Committee; Chairman of the
Compensation and Benefits Committee
Cristina Pieretti . . . . . . 51 Director; Member of the Audit and Risk
Committee
Executive Officers
- ------------------
William T. Keon, III . . . . . 57 President and Chief Executive Officer
Daniel J. O'Leary . . . . . . 57 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. In addition, the Board of Directors
has determined that Steven I. Bandel qualifies as an "audit committee
financial expert" as defined in Item 401(h) of Regulation S-K, but is not
"independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under
the Securities Exchange Act of 1934.
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.
Code of Ethics
The Company has adopted a Code of Ethics that applies to all of its
employees, including its Chief Executive Officer, Chief Financial Officer,
Chief Accounting Officer, Controller and any person performing similar
functions (the "Senior Financial Officers"). The Company has filed a copy of
this Code of Ethics as Exhibit 14.1 to this Form 10-K. The Company intends to
satisfy its disclosure requirement regarding any amendment to, or waiver of,
a provision of the Code of Ethics for any Senior Financial Officer by posting
such information on its website or as otherwise provided by the Securities
Exchange Act of 1934 and the rules there under.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid or
distributed by the Company through November 1, 2003 to, or accrued through
such date for the account of the Chief Executive Officer as well as each of
the most highly compensated executive officers of the Company serving
at November 1, 2003 (the "named executive officers") for services rendered
to the Company during each of the last three fiscal years, if applicable.
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, (6) 2003 545,962 701,100 23,000(2) 37,412(1)
President and Chief 2002 518,846 945,547 22,614(2) 44,235(1)
Executive Officer 2001(5) 384,616 240,000 15,021(2) 11,538(1)
Daniel J. O'Leary (6) 2003 297,327 235,550 25,735(3) -
Executive Vice President; 2002 281,846 219,162 18,904(3) -
Chief Financial Officer 2001(5) 203,846 - 10,413(3) -
Fernando Bonilla (6) 2003 147,981 47,410 11,690(4) -
Vice President; General 2002 140,723 40,230 11,998(4) -
Counsel; Secretary 2001(5) 103,846 15,000 9,355(4) -
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 $10,650, $10,264, and $5,521 and an automobile allowance in the
amount of $12,350, $12,350, and $9,500 for Fiscal 2003, Fiscal 2002, and
the 40 weeks ended November 3, 2001, respectively.
(3) Includes costs related to the reimbursement of executive medical expense
of $15,335, $8,504, and $2,413 and an automobile allowance in the amount
of $10,400, $10,400, and $8,000 for Fiscal 2003, Fiscal 2002, and the 40
weeks ended November 3, 2001, respectively.
(4) Includes costs related to the reimbursement of executive medical expense
of $2,590, $2,898, and $2,355, and an automobile allowance in the amount
of $9,100, $9,100, and $7,000 for Fiscal 2003, Fiscal 2002, and the 40
weeks ended November 3, 2001, respectively.
(5) Represents the 40 weeks ended November 3, 2001.
(6) Effective March 15, 2003, the employment arrangements for Messrs. Keon,
O'Leary and Bonilla were formalized in retention agreements.
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 . . . . . . . - 7,446 22,446 37,446 29,946 22,446 15,086
200,000 . . . . . . . - 17,446 37,446 57,446 47,446 37,446 27,586
250,000 . . . . . . . 4,946 32,446 59,946 87,446 77,446 67,446 57,586
300,000 . . . . . . . 12,446 47,446 82,446 117,446 107,446 97,446 87,586
350,000 . . . . . . . 19,946 62,446 104,946 147,446 137,446 127,446 117,586
400,000 . . . . . . . 27,446 77,446 127,446 177,446 167,446 157,446 147,586
450,000 . . . . . . . 34,946 92,446 149,946 207,446 197,446 187,446 177,586
500,000 . . . . . . . 42,446 107,446 172,446 237,446 227,446 217,446 207,586
550,000 . . . . . . . 49,946 122,446 194,946 267,446 257,446 247,446 237,586
600,000 . . . . . . . 57,446 137,446 217,446 297,446 287,446 277,446 267,586
650,000 . . . . . . . 64,946 152,446 239,946 327,446 317,446 307,446 297,586
700,000 . . . . . . . 72,446 167,446 262,446 357,446 347,446 337,446 327,586
750,000 . . . . . . . 79,946 182,446 284,946 387,446 377,446 367,446 357,586
800,000 . . . . . . . 87,446 197,446 307,446 417,446 407,446 397,446 387,586
850,000 . . . . . . . 94,946 212,446 329,946 447,446 437,446 427,446 417,586
900,000 . . . . . . . 102,446 227,446 352,446 477,446 467,446 457,446 447,586
950,000 . . . . . . . 109,946 242,446 374,946 507,446 497,446 487,446 477,586
1,000,000 . . . . . . 117,446 257,446 397,446 537,446 527,446 517,446 507,586
1,050,000 . . . . . . 124,946 272,446 419,946 567,446 557,446 547,446 537,586
1,100,000 . . . . . . 132,446 287,446 442,446 597,446 587,446 577,446 567,586
1,150,000 . . . . . . 139,946 302,446 464,946 627,446 617,446 607,446 597,586
1,200,000 . . . . . . 147,446 317,446 487,446 657,446 647,446 637,446 627,586
1,250,000 . . . . . . 154,946 332,446 509,946 687,446 677,446 667,446 657,586
1,300,000 . . . . . . 162,446 347,446 532,446 717,446 707,446 697,446 687,586
1,350,000 . . . . . . 169,946 362,446 554,946 747,446 737,446 727,446 717,586
1,400,000 . . . . . . 177,446 377,446 577,446 777,446 767,446 757,446 747,586
1,450,000 . . . . . . 184,946 392,446 599,946 807,446 797,446 787,446 777,586
1,500,000 . . . . . . 192,446 407,446 622,446 837,446 827,446 817,446 807,586
Compensation covered by the qualified Retirement Plan is equal to the
total compensation 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 1, 2003 for Mr. Keon is
ten and 57, respectively, and for Mr. O'Leary is six and 56, 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
Mr. Bandel served as a member of the Compensation and Benefits
Committee of the Board of Directors of the Company during all of the fiscal
years ended November 1, 2003 and November 2, 2002. Mr. Keon served as a
member of the Compensation and Benefits Committee through July 2002, at which
time he resigned from the Committee. Mr. Keon also served as an officer of
the Company during the fiscal years ended November 1, 2003 and November 2,
2002.
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, NSC 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 NSC'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 May 2003 Bank Agreement are
collateralized by a pledge of the assets of the Company's operating
subsidiaries and by the capital stock of, and inter-company notes issued by,
the Company's operating subsidiaries.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Paid to the Independent Auditor
The following table presents fees for professional audit services
rendered by Deloitte & Touche LLP, the Company's independent public
accountant, for the audit of the Company's annual financial statements ended
November 1, 2003 and November 2, 2002, and fees for other services rendered
by Deloitte & Touche LLP during those periods (dollars in thousands).
52 weeks ended
-------------------------
November 1, November 2,
2003 2002
----------- -----------
Audit fees $ 293 $ 275
Audit-related fees 69 44
Tax fees 42 287
All other fees - 307
----------- -----------
Total $ 404 $ 913
=========== ===========
For purposes of the preceding table, the professional fees are
classified as follows:
* Audit Fees are fees for professional services performed for the
audit of the Company, a review of financial statements included in the
Company's 10-Q filings, services provided in connection with the audit of
certain of NSC's operating subsidiaries' annual financial statements for
statutory and regulatory filings or engagements, and services that
generally only the Company's independent public accountant reasonably
can provide, such as rent certification letters.
* Audit-Related Fees are fees for assurance and related services that
traditionally are performed by the Company's independent public
accountant. More specifically, these include: employee benefit plan audits
and consultation concerning financial accounting and reporting standards.
* Tax Fees are fees for all professional services performed by
professional staff in the Company's independent public accountant's tax
division except those services related to the audit of our financial
statements. These include fees for tax compliance, tax planning and tax
advice. The fees billed during the fiscal year ended November 2, 2002
include services related to NSC's fiscal year end change, which occurred
on November 2, 2001.
* All Other Fees are fees for other permissible work performed that
does not meet the above category descriptions, primarily assistance
with the preparation and appraisal of the Company's Hurricane Georges
business interruption insurance claim.
Audit and Risk Committee Pre-Approval Policies
The Audit and Risk Committee currently does not have any pre-approval
policies or procedures concerning services performed by Deloitte & Touche
LLP. All the services performed by Deloitte & Touche LLP that are described
above were pre-approved by the Audit and Risk Committee. Less than 50% of the
hours expended on Deloitte & Touche LLP's engagement to audit the Company's
financial statements for the fiscal years ended November 1, 2003 and November
2, 2002 were attributed to work performed by persons other than Deloitte &
Touche LLP's full-time, permanent employees.
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 - 31
(2) Financial Statement Schedules:
Schedule I - Financial Information of the Registrant S - 1 through S - 3
Schedule II - Valuation and Qualifying Accounts S - 4
(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 APPENDIX 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 APPENDIX 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 APPENDIX 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 APPENDIX 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 APPENDIX 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 APPENDIX 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 *******
4.7 SECURITY PLEDGE AND INTERCREDITOR AGREEMENT,
DATED JUNE 5, 2003, BETWEEN THE COMPANY AND
WILMINGTON TRUST COMPANY, AS TRUSTEE *******
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**
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------------- ------------------------------------------- ----------------
10.25 EXECUTED SEVENTH AMENDMENT, DATED AS OF
JANUARY 26, 1996, TO THE OLD BANK CREDIT
AGREEMENTS**
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)
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------------- ------------------------------------------- ----------------
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)
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
*******
10.48 RETENTION AGREEMENT, DATED MARCH 15, 2003,
BETWEEN PUEBLO INTERNATIONAL, LLC AND PUEBLO
ENTERTAINMENT, INC. AND DANIEL O'LEARY
*******
10.49 RETENTION AGREEMENT, DATED MARCH 15, 2003,
BETWEEN PUEBLO INTERNATIONAL, LLC AND PUEBLO
ENTERTAINMENT, INC. AND FERNANDO J. BONILLA
*******
10.50 AMENDED AND RESTATED GUARANTOR AND GENERAL
SECURITY AGREEMENT, DATED MAY 23, 2003, BY
NSC IN FAVOR OF WESTERNBANK OF PUERTO RICO
*******
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------------- ------------------------------------------- ----------------
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. *******
14.1 CODE OF ETHICS FOR NUTRITIONAL SOURCING
CORPORATION, PUEBLO INTERNATIONAL, LLC,
PUEBLO ENTERTAINMNET, INC. FLBN CORPORATION,
AND CARIBAD, INC (FILED HEREWITH)
31.1 CEO CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002 (FILED HEREWITH)
31.2 CFO CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002 (FILED HEREWITH)
32.1 CEO CERTIFICATION PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (FILED HEREWITH)
32.2 CFO CERTIFICATION PURSUANT TO SECTION 906 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.
******* Previously filed and incorporated by reference to corresponding
exhibits in the Company's Form 10-K for fiscal year ended November 2,
2002.
(B) Reports on Form 8-K:
None.
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: January 28, 2004 /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
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Nutritional Sourcing Corporation:
We have audited the accompanying consolidated balance sheets of Nutritional
Sourcing Corporation and subsidiaries (the "Company") as of November 1, 2003
and November 2, 2002, and the related consolidated statements of operations,
cash flows, and stockholder's equity, for the fifty two weeks ended November
1, 2003 and November 2, 2002, and the forty weeks ended November 3, 2001.
Our audits also included the financial statement schedules listed in the
Index at Item 15. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules 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 1,
2003 and November 2, 2002, and the results of its operations and its cash
flows for the fifty two weeks ended November 1, 2003 and November 2, 2002,
and the forty weeks ended November 3, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective
November 3, 2002, the Company changed its method of accounting for goodwill
and other intangibles to conform to Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
Deloitte & Touche LLP
Miami, Florida
December 18, 2003
F-1
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
November 1, November 2,
2003 2002
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 651 $ 17,992
Accounts receivable, net of allowance for doubtful
accounts of $410 at November 1, 2003 and $321 at
November 2, 2002 2,735 3,226
Inventories 51,718 51,660
Prepaid expenses 8,156 11,018
Deferred income taxes 10,218 15,014
--------- ---------
TOTAL CURRENT ASSETS 73,478 98,910
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 6,404 6,307
Buildings and improvements 43,089 40,092
Furniture, fixtures and equipment 99,651 101,497
Leasehold improvements 43,307 44,511
Construction in progress 1,009 5,278
--------- ---------
193,460 197,685
Less accumulated depreciation and amortization 112,953 106,558
--------- ---------
80,507 91,127
Property under capital leases, net 10,745 11,720
--------- ---------
TOTAL PROPERTY AND EQUIPMENT 91,252 102,847
GOODWILL 5,621 145,477
DEFERRED INCOME TAXES 682 0
TRADE NAMES 26,574 26,574
DEFERRED CHARGES AND OTHER ASSETS 16,827 17,943
--------- ---------
TOTAL ASSETS $ 214,434 $ 391,751
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
November 1, November 2,
2003 2002
----------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Revolving credit facility $ 11,355 $ 32,000
Current portion term loans 4,200 -
Accounts payable 43,018 44,387
Accrued interest 3,724 73
Accrued expenses 18,768 16,106
Salaries, wages and benefits payable 8,661 10,358
Current obligations under capital leases 596 704
--------- ---------
TOTAL CURRENT LIABILITIES 90,322 103,628
CAPITAL LEASE OBLIGATIONS, net of current portion 10,996 11,591
LONG-TERM DEBT - TERM LOANS, net of current portion 39,050 -
NOTES PAYABLE 90,000 -
RESERVE FOR SELF-INSURANCE CLAIMS 4,729 5,240
DEFERRED INCOME TAXES 17,176 21,152
OTHER LIABILITIES AND DEFERRED CREDITS 28,180 29,226
--------- ---------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 280,453 170,837
--------- ---------
LIABILITIES SUBJECT TO COMPROMISE - 186,208
--------- ---------
TOTAL LIABILITIES $ 280,453 $ 357,045
--------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 6)
STOCKHOLDER'S EQUITY
Common stock, $.10 par value; 200 shares
authorized and issued - -
Additional paid-in capital 106,500 91,500
Accumulated deficit (172,519) (56,794)
--------- ---------
TOTAL STOCKHOLDER'S EQUITY (66,019) 34,706
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 214,434 $ 391,751
========= ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
52 weeks ended
------------------------------------ 40 weeks
(unaudited) ended
November 1, November 2, November 3, November 3,
2003 2002 2001 2001
---------- ---------- ---------- -----------
Net sales $ 571,336 $ 588,179 $ 576,593 $ 433,342
Cost of goods sold 387,797 396,239 388,686 290,997
---------- ---------- ---------- ----------
GROSS PROFIT 183,539 191,940 187,907 142,345
OPERATING EXPENSES
Selling, general and
administrative expenses 156,428 154,371 155,107 116,541
Gain on insurance settlement - (14,693) - -
Store Closings- exit costs 546 246 - -
Depreciation and amortization 23,505 28,260 30,824 22,671
---------- ---------- ---------- ----------
OPERATING PROFIT 3,060 23,756 1,976 3,133
Interest expense on debt
(does not include
contractual interest
expense on pre-petition
debt totaling approximately
$10,000 and 2,700 for the 52 weeks
ending November 1, 2003, and
November 2, 2002, respectively) (8,161) (19,126) (22,148) (16,967)
Interest expense on capital
lease obligations (1,748) (1,820) (1,786) (1,409)
Interest and investment
income, net 178 291 659 415
Reorganization items (5,654) (995) - -
Gain on early extinguishment of debt 36,508 - - -
---------- --------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
& CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE 24,183 2,106 (21,299) (14,828)
Income tax (expense) benefit (52) (2,785) 9,806 6,612
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF AN ACCOUNTING CHANGE 24,131 (679) (11,493) (8,216)
Cumulative effect of an
accounting change (139,856) - - -
---------- ---------- ---------- ----------
NET LOSS $(115,725) $ (679) $ (11,493) $ (8,216)
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fiscal Year Ended
----------------------------------- 40 Weeks
(unaudited) Ended
November 1, November 2, November 3, November 3,
2003 2002 2001 2001
---------- ---------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(115,725) $ (679) $ (11 493) $ (8,216)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Cumulative effect of an accounting change 139,856 - - -
Gain on early extinguishment of debt (36,508) - - -
Depreciation and amortization of property 15,622 15,771 17,717 12,635
Amortization of intangibles, other assets
and inventories 7,883 12,489 13,108 10,036
Amortization of bond discount - 873 938 733
(Benefit) provision for deferred income taxes 137 1,266 (18,159) (6,203)
Gain on disposal of property and equipment, net (8) (39) (48) (31)
Adjustments to goodwill - - 6,943 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 428 224 108 (1,327)
Inventories (5,683) (2,814) (3,759) (5,843)
Prepaid expenses and other current assets 2,862 (2,021) 1,203 (1,622)
Other assets (1,315) 1,373 1,270 919
(Decrease) increase in:
Accounts payable, accrued expenses and
accrued interest 4,945 (4,097) (4,932) (29,016)
Salaries, wages and benefits payable (1,697) 2,496 - -
Other liabilities and deferred credits
and reserve for self-insurance claims (1,557) (3,043) (98) 1,014
--------- --------- --------- ----------
Net cash provided by (used in) operating activities 9,240 21,799 2,798 (26,921)
--------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,027) (7,391) (6,569) (5,271)
Proceeds from disposal of property and equipment 8 39 50 31
--------- --------- --------- ----------
Net cash used in investing activities (4,019) (7,352) (6,519) (5,240)
--------- --------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (703) (624) (634) (503)
Purchase of Senior Notes due 2003 (59,464) - (139) -
(Repayments) borrowings of Revolver (32,000) 2,000 - -
Borrowings under May 2003 Bank Credit
Facility, net of repayments 11,355 - - -
Principal borrowings on term loans, net of repayments 43,250 - - -
Proceeds from capital contribution 15,000 - - -
--------- --------- --------- ----------
Net cash (used in) provided by financing activities (22,562) 1,376 (773) (503)
--------- --------- --------- ----------
Net (decrease) increase in cash and cash equivalents (17,341) 15,823 ( 4,494) (32,664)
Cash and cash equivalents at beginning of period 17,992 2,169 6,663 34,833
--------- --------- --------- ----------
Cash and cash equivalents at end of period $ 651 $ 17,992 $ 2,169 $ 2,169
========= ========= ========== ==========
Cash paid for reorganization items: $2,885 $ 2,033 $ - $ -
========= ========= ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
F-5
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Fiscal years ended November 1, 2003 and November 2, 2002,
and 40 weeks ended November 3, 2001,
(Dollars in thousands)
Additional Total
Common Paid-in Accumulated Stockholder's
Stock Capital Deficit Equity
--------- ------------ ------------- -------------
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
Capital contribution - 15,000 15,000
Net loss for the year - - (115,725) (115,725)
--------- ----------- ------------- -------------
Balance at November 1, 2003 - $ 106,500 $ (172,519) $ (66,019)
========= =========== ============= =============
The accompanying notes are an integral part of these
consolidated financial statements
F-6
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Organization
The consolidated financial statements include the accounts of
Nutritional Sourcing Corporation ("NSC"), 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 in-home movie and game
entertainment 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 third
comparable fiscal period being presented is the 40 weeks ended November 3,
2001. The fiscal years ended November 1, 2003 and November 2, 2002 ("Fiscal
2003" and "Fiscal 2002" 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 at the time.
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 May 23, 2003 the Company's operating subsidiaries entered into a new
Loan and Security Agreement, and NSC entered into an Amended and
Restated Guarantor General Security Agreement (collectively the "May 2003
Bank Agreement") with the lender there under (the "2003 Bank Lender").
Funding took place on June 5, 2003 (For a complete discussion, see NOTE 5 -
DEBT to these consolidated financial statements).
Also on June 5, 2003, NSC consummated its emergence from bankruptcy
pursuant to an April 30, 2003 confirmation order from the Court.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
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. In accordance with SOP
90-7, the Company did not adopt fresh-start accounting upon emergence from
bankruptcy.
Reorganization items reflected in the Statement of Operations for the
fiscal years ended November 1, 2003 and November 2, 2002 are composed
primarily of professional fees directly related to the bankruptcy case.
Inter-company 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. In-home movie and game rental inventories are
recorded at cost, net of accumulated amortization. In-home movies and games
held for rental were previously amortized over 52 weeks on a straight-line
basis. During the 52 weeks ended November 1, 2003, the Company re-evaluated
and changed the estimated useful life of these movies and games from one year
to six months. This change resulted in a charge of $932 to depreciation and
Amortization during the year and is a result of the average rental life of
tapes and games decreasing.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
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 previously represented 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 "Acquisition"). Trade names
acquired at the time of the Acquisition were recorded based on valuations by
independent appraisers. Goodwill and tradenames were being amortized using
the straight-line method over periods of 40 years.
During the first quarter of Fiscal 2003, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". Accordingly, beginning November 3, 2002, goodwill and
trade names are no longer amortized as a recurring charge to earnings and
will thereafter be tested, at least annually, for impairment. As a result of
its adoption, the Company had an independent, qualified third party evaluator
perform a transitional impairment test on its existing goodwill and
intangible assets on November 3, 2002. This impairment test was calculated
at the reporting unit level, which are the retail food division and the
in-home movie and game entertainment division for the Company. The goodwill
impairment test has two steps: the first, identifies potential impairments
by comparing the fair value of a reporting unit to its book value including
goodwill. Generally, fair value represented a multiple of earnings before
interest, taxes, depreciation, and amortization ("EBITDA") or discounted
projected future cash flows. The Company determined that the carrying value
of its retail food division, which included $139,856 of goodwill, exceeded
its fair value. Impairment was not indicated for the goodwill associated
with its in-home movie and game entertainment division. Additionally, no
impairment was indicated for trade names.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
The second step of the impairment test calculates the possible
impairment loss by comparing the implied fair value of goodwill with the
carrying amount. If the implied goodwill is less than the carrying amount,
a write down is recorded. The third party evaluator performed step two of
the impairment test, and as a result of this analysis, the evaluator
determined that the retail food division goodwill was entirely impaired.
This loss was recorded as a cumulative effect of an accounting change during
the 16 weeks ended February 22, 2003.
The following table summarizes changes in the Company's goodwill balance
during the 52 weeks ended November 1, 2003):
In-home
Movie and
Retail Game Enter-
food tainment Consol-
division division idated
---------- ---------- ----------
Balance at November 2, 2002 $ 139,856 $ 5,621 $ 145,477
Cumulative effect of an accounting change
accounting change (139,856) - (139,856)
---------- ---------- ----------
Balance at November 1, 2003 $ - $ 5,621 $ 5,621
========== ========== ==========
The following table provides the comparable after-tax effect on net
loss due to goodwill and trade names no longer being amortized pursuant to
SFAS No. 142:
52 weeks ended 40 weeks ended
---------------------------------------- --------------
November 1, November 2, November 3, November 3,
2003 2002 2001 2001
(unaudited)
----------- ----------- ----------- --------------
Reported net loss $ (115,725) $ (679) $ (11,493) $ (8,216)
Add:
Goodwill amortization - 4,740 4,805 3,643
Trade names amortization - 866 866 666
Cumulative effect of an
accounting change 139,856 - - -
----------- ----------- ----------- --------------
Adjusted net income (loss) $ 24,131 $ 4,927 $ (5,822) $ (3,907)
=========== =========== =========== ==============
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 seven 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 1, 2003 and November 2, 2002, and is included in the
consolidated balance sheets as accrued expense. The reserve for health
insurance programs was approximately $1,000 at both November 1, 2003 and
November 2, 2002. It is included in the consolidated balance sheets caption
entitled Salaries, wages, and benefits payable.
Revenue Recognition
The Company has two primary operating segments: retail food sales and
in-home movie and game 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.
In-home movie and game rentals and sales - Revenues from in-home movie
and game rentals and sales are recognized at the point of rental/sale. Late
fees for in-home movie and game 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, inventory movement and time.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which was issued in July of 2001. If an impairment is
identified, the assets carrying amount is adjusted to fair value. During the
52 weeks ended November 1, 2003, the Company recorded a charge of
approximately $1,200 as a result of a review of its long-lived assets as
required by SFAS No. 144. The long-lived assets that were written down
included the assets of two under-performing stores in the Company's Retail
Food Division. The write down of these impaired assets is included as
Depreciation and amortization in the Company's consolidated financial
statements.
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 the fiscal years ending November 1, 2003 and November 2, 2002, and the
40 weeks ended November 3, 2001, advertising expenses were approximately
$7,919, $9,400, and $6,600, 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 reporting the future tax consequences of deferred tax
assets and liabilities. These deferrals are caused by temporary differences.
Temporary differences occur when the tax law requirements for the timing of
recognition and measurements differs from the timing of recognition and
measurements required in the financial statements.
Earnings Per Common Share
NSC 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.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements
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. The
provisions of SFAS No. 146 did not have a material impact on the consolidated
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 82% and 76% of total inventories at
November 1, 2003 and November 2, 2002, respectively, is determined by the
LIFO method. The excess of current cost over inventories valued by the LIFO
method was approximately $2,800 and $2,500 as of November 1, 2003 and
November 2, 2002, respectively.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 3 -- DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consists of the following:
November 1, November 2,
2003 2002
------------ -------------
Favorable leases and leasehold interest $ 9,531 $ 11,355
Franchise fees and rights 2,952 3,395
Debt issue costs, including bank fees 2,664 1,224
Other 1,680 1,969
------------ -------------
Deferred charges and other assets $ 16,827 $ 17,943
============ =============
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 acquisition of the leases (mostly as part of the
Acquisition). 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 franchiser when each in-home movie and game
entertainment store was opened and the unamortized portion of the step up in
basis set up at the time of the 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, including bank fees consist of the following:
The $2,664 as of November 1, 2003 is the un-amortized portion of
bank fees paid in connection with establishing the Company's May 2003
Bank Agreement (see Note 5 -- DEBT). They are being amortized through
June 22, 2008, when the initial term expires.
The $1,244 as of November 2, 2002 includes 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, and the un-amortized portion
of the bank fees paid in connection with the April 1997 Bank Credit
Agreement. The bank fees were amortized through January 30, 2003, when
the agreement expired. The bond issue costs were amortized through June
5, 2003 when the refinancing transaction took place.
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)
(Dollars in thousands)
NOTE 4 -- OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits consists of the following:
November 1, November 2,
2003 2002
------------ -------------
Retirement benefits and compensation:
Deferred pension plan contribution $ 7,414 $ 8,440
Supplemental Employee Retirement Plan (SERP) 6,329 5,696
Deferred supplemental pension 534 646
Deferred compensation 635 671
Real Estate Related:
Deferred gain on sale/leaseback 6,148 6,324
Deferred escalation in leases 4,515 3,850
Other 2,605 3,599
------------ -------------
Other liabilities and deferred credits $ 28,180 $ 29,226
============ =============
Deferred pension plan contribution and Supplemental Employee Retirement
Plan ("SERP") 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 8 - 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)
(Dollars in thousands)
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.
Other includes deferred allowances, which represents the unamortized
long-term portion of vendor allowance contracts and deposits due tenants,
which represent the amounts received from tenants/subtenants at the Company's
retail locations for security deposits, last months rent, and property
insurance reserves.
NOTE 5 -- DEBT
Total debt consists of the following:
November 1, November 2,
2003 2002
----------- -----------
10.125% Senior Secured Notes due 2009 $ 90,000 $ -
Term Loans 43,250 -
Revolving Credit Facility 11,355 -
Notes and Series C Senior Notes due 2003,
net of unamortized discount of $1,052
at November 2, 2002 - 176,231
Revolving Credit Facility due 2003 - 32,000
------------ -----------
144,605 208,231
Less:
Current portion, not subject to compromise (15,555) (32,000)
Liabilities subject to compromise - (176,231)
------------ -----------
Long-term debt, net $129,050 $ -
============ ===========
The accompanying balance sheet as of November 2, 2002 includes the
$176,231 above and $9,977 of interest payable on the Notes and Series C
Senior Notes in Liabilities Subject to Compromise.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 5 - DEBT (Continued)
Revolving Credit Facility and Term Loans
On May 23, 2003 the Company's operating subsidiaries entered into
a new Loan and Security Agreement, and NSC entered into an Amended and
Restated Guarantor General Security Agreement (collectively the "May 2003
Bank Agreement") with the 2003 Bank Lender. The May 2003 Bank Agreement
provides both a revolving loan and term loans facilities. 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.
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 Bank Agreement also contains certain other restrictions, including
restrictions on additional indebtedness and the declaration and payment of
dividends.
The May 2003 Bank Agreement also stipulates the following prepayment
penalties:
From the date of the Agreement to
and including August 31, 2003 $4,000
From September 1, 2003 to and $1,050 plus 3% of the then outstanding
including June 22, 2005 balance of the Term Loans.
From June 23, 2005 to and $700 plus 2% of the then outstanding
including June 22, 2006 balance of the Term Loans.
From June 23, 2006 to and $350 plus 1% of the then outstanding
including June 21, 2008 balance of the Term Loan.
Funding took place on June 5, 2003 at which time the bank debt for
borrowed money outstanding under the Extension and Modification Agreement,
and other related agreements, was repaid in full and the 2003 Bank Lender
lent the operating subsidiaries a total of $57,427. In addition, there were
$3,900 of standby letters of credit outstanding.
Capitalized terms used below shall have the meaning set forth in the May
2003 Bank Agreement. The revolving loan facility provides that from time to
time the operating subsidiaries may borrow no greater than an amount equal to
(collectively the "borrowing base"):
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 5 - DEBT (Continued)
- 90 % of the Net Amount of Eligible Accounts plus.
- Up to the lesser of (A) 65% of the Value of Eligible Inventory or
(B) 80% of the "Net Recovery Percentage" for Eligible Inventory, plus.
- Up to 100% of Pledged Cash, less.
- Any Availability Reserves.
- Provided that, except in the Lender's discretion, the aggregate amount
of Revolving Loans at any time outstanding shall not exceed $35,000.
For all practical purposes the operating subsidiaries do not have any
Eligible Accounts and no cash is pledged. Consequently, the borrowing base
consists of Eligible Inventory less Availability Reserves.
The revolving loan facility provides accommodations for letters of
credit up to a maximum of $10,000. Fees for outstanding letters of credit
are to be paid monthly, in arrears, at the rate of 2.5%, per annum, on the
daily outstanding balance. Any issued and outstanding letters of credit
reduce the amount available for borrowed money under the revolving loan
facility.
In addition, the facility provides for the Lender to charge,
monthly, an Unused Line Fee of 0.5%, per annum, based on the difference
between $30,000 and the sum of the average daily principal balance of the
loans and letters of credit outstanding under the facility.
Interest is payable monthly in arrears and, at the borrower's option
with certain limitations, the interest rate on money borrowed under the
revolving loan facility may be based on a spread over the Prime Rate or
Eurodollar Rate. The spread over the Prime Rate is 1.5%, per annum, and the
spread over Eurodollar Rate is 3.5% per annum. However, in no event shall
the interest rate be less than 6% per annum. As of the date of the closing
the interest rate was the 6% minimum.
Availability under the revolver was as follows as of November 1, 2003:
Total availability $25,655
Less:
Required excess availability reserve (1,800)
Availability net of excess availability reserve 23,855
Less:
Letters of credit outstanding as of November 1, 2003 (3,316)
Borrowed money as of November 1, 2003 (11,355)
Availability at November 1, 2003 $ 9,184
=========
The term loan facility in the May 2003 Bank Agreement provides
for 3 term loans totaling $45,000 as follows:
Term loan A $ 4,000
Term loan B 36,000
Term loan C 5,000
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 5 - DEBT (Continued)
Term loan A was for the purpose of remodeling, relocating or opening new
retail stores and purchasing new equipment for same in the original principal
amount of up to the lesser of $4,000 or 70% of Eligible Construction Costs
plus 70% of the equipment cost. The loan was drawn based on the costs of the
Company's new supermarket and in-home movie and game entertainment outlet
both of which opened on November 20, 2002. The loan is repayable in 60 equal
monthly payments of principal with final payment due on June 1, 2008.
Term loan B was for the purpose of partially refinancing existing
indebtedness of the operating subsidiaries to the Company and for working
capital in the lesser amount of $36,000 or 75% of the Net Fair Market
Value of Eligible Real Property owned by the operating subsidiaries. Equal
monthly repayments of principal are calculated on the basis of 180 months
with the final payment being due on June 1, 2008.
Term loan C was for working capital of the operating subsidiaries and in
the lesser amount of $5,000 or 50% of the Net Value of Eligible Leaseholds.
The loan is repayable in 60 equal monthly payments of principal with final
payment due on June 1, 2008.
As to all term loans, interest is payable monthly in arrears and, at the
borrower's option with certain limitations, the interest rate may be based on
a spread over the Prime Rate or Eurodollar Rate. The spread over the Prime
Rate is 2.0%, per annum, and the spread over Eurodollar Rate is 4.0% per
annum. However, in no event shall the interest rate be less than 7% per
annum. As of the date of the closing the interest rate was the 7% minimum.
Annual maturities of the Company's debt are as follows (in thousands):
Fiscal Year Ending Amount
------------------ ----------
October 30, 2004 $ 4,200
October 29, 2005 4,200
October 28, 2006 4,200
November 3, 2007 4,200
November 1, 2008 37,805
October 31, 2009 90,000
----------
Total $144,605
==========
Total interest paid on debt was approximately $4,700, $12,400, and
$19,200 for the Fiscal 2003, Fiscal 2002, and the 40 weeks ended November 3,
2001, respectively. Interest payable was $3,724 and $10,050 as of November
1, 2003 and November 2, 2002, respectively. Of the $10,050 of interest
payable as of November 2, 2002, $9,977 was classified as liabilities subject
to compromise.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 5 - DEBT (Continued)
Emergence From Bankruptcy and New 10.125% Senior Secured Notes:
On June 5, 2003, NSC emerged from Chapter 11 bankruptcy proceedings by
consummating its Plan of Reorganization (the "Plan") which had been confirmed
by the Court on April 30, 2003. The Plan was consummated by providing the
following consideration to the prepetition noteholders:
Principal amount of New 10.125% Senior Secured Notes $ 90,000
Cash Consideration 59,464
--------
$149,464
========
As a result of the consummation of the Plan, the Company recorded a gain
of approximately $36,508, as follows:
Liabilities subject to compromise $ 186,208
Consideration provided (see above) (149,464)
Unamortized debt issuance costs and other assets (236)
----------
Gain from extinguishment of debt $ 36,508
==========
The New 10.125% Senior Secured Notes are due August 1, 2009 with
interest payable February 1 and August 1 of each year commencing February 1,
2004. Interest is payable to holders of record on the July 15th and January
15th prior to each interest payment date. The New 10.125% Senior Secured
Notes are secured, subordinate to the 2003 Bank Lender, by the equity of all
First-tier subsidiaries of NSC and the inter-company notes between
the Company and its operating subsidiaries. In addition, certain real
property of the operating subsidiaries is collateral for one of the inter
-company notes. The inter-company notes are subordinate to both the 2003
Bank Lender and the trade creditors of the operating subsidiaries.
The New 10.125% Senior Secured Notes may be called by the holders of the
Notes at 101% in the event of a change in control of NSC (as defined
in the indenture). The New 10.125% Senior Secured Notes are senior to all
future subordinated indebtedness which the Company may from time to time
incur. Terms of the New 10.125% Senior Secured Notes restrict the Company
and its subsidiaries from engaging in certain activities and transactions.
The proceeds of the pre-petition notes which were issued in 1993 and
1997 were advanced to the operating subsidiaries. At the time NSC emerged
from bankruptcy on June 5, 2003 these advances were canceled and new inter-
company notes were issued which are equal in amount, in total, to the New
10.125% Senior Secured Notes. The new inter-company notes consist of a
$70,000 restated subordinated inter-company real estate note due to NSC from
Pueblo International, LLC and a $20,000 subordinated inter-company note due
to NSC from Pueblo Entertainment, Inc.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 5 - DEBT (Continued)
The source of the $59,464 of Cash Consideration consisted of $15,000
from the holders of Existing Equity and $44,464 from the Company. Existing
Equity refers to the pre-petition owners of NSC's equity interests. These
owners retained ownership of 100% of equity when NSC emerged from bankruptcy.
The source of the Company cash was Company funds and proceeds from the May
2003 Bank Agreement.
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 1, November 2,
2003 2002
--------------- --------------
Real estate $ 18,367 $ 19,192
Less accumulated depreciation 7,622 7,472
--------------- --------------
Property under capital leases, net $ 10,745 $ 11,720
=============== ==============
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 1, 2003 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:
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 6 -- LEASES (Continued)
Capital Operating Operating
Lease Lease Lease
Payments Payments Receipts
Fiscal Years Ending (As Lessee) (As Lessee) (As Lessor)
- -------------------------------- ------------ ------------ ------------
October 30, 2004 $ 2,259 $ 13,471 $ 137
October 29, 2005 2,176 13,261 108
October 28, 2006 2,126 12,446 84
November 3, 2007 1,944 11,122 68
November 1, 2008 1,753 10,107 56
October 31, 2009 and thereafter 17,146 83,456 395
------------ ------------ ------------
27,404 $143,863 $ 848
============ ============
Less executory costs -
-----------
Net minimum lease payments 27,404
Less amount representing interest 15,812
-----------
Present value of net minimum lease
payments under capital lease
obligations 11,592
Less: current portion 596
----------
Capital lease obligations,
net of current portion $ 10,996
==========
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 $ 837 $ 8,351
=========== ============
Rent expense and the related contingent rentals under operating leases
were approximately $17,200 and $200 for Fiscal 2003, respectively,
$16,200 and $200 for Fiscal 2002, respectively, and $11,800 and $200 for the
40 weeks ended November 3, 2001, respectively.
Contingent rentals under capital leases, which are directly related to
sales, were approximately $80 for Fiscal 2003, $60 for Fiscal 2002, and
$30 for the 40 weeks ended November 3, 2001, respectively. Interest paid on
capital lease obligations was approximately $1,748 for Fiscal 2003, $1,820
for Fiscal 2002, and $1,409 for the 40 weeks ended November 3, 2001.
Sublease rental income for operating and capital leases was
approximately $4,300 for both Fiscal 2003 and Fiscal 2002, and $3,700 for the
40 weeks ended November 3, 2001.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
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 52 weeks 40 weeks
ended ended ended
November 1, November 2, November 3,
2003 2002 2001
----------- ----------- ------------
Current
Federal $ (254) $ 1,012 $ (429)
State (1) 7 (3)
U.S. Possessions 170 500 23
----------- ----------- ------------
(85) 1,519 (409)
----------- ----------- ------------
Deferred
Federal 492 (85) (1,785)
State 4 (1) (12)
U.S. Possessions (359) 1,352 (4,406)
----------- ----------- ------------
137 1,266 (6,203)
----------- ----------- ------------
Total income tax
expense (benefit) $ 52 $ 2,785 $ (6,612)
=========== =========== ============
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 7 -- INCOME TAXES (Continued)
The significant components of the deferred tax assets and liabilities
are as follows:
November 1, November 2,
2003 2002
--------------- --------------
Deferred tax assets:
Reserve for self-insurance claims $ 6,632 $ 7,012
Employee benefit plans 9,303 10,040
Property and equipment 7,398 6,852
Accrued expenses and other liabilities
and deferred credits 9,831 11,863
Other operating loss and tax credit
carry forwards 21,120 12,325
All other 6,536 2,654
Valuation Allowance (15,980) (4,686)
--------------- --------------
Total deferred tax assets 44,840 46,060
--------------- --------------
Deferred tax liabilities:
Property and equipment (12,903) (13,803)
Tradenames (19,697) (19,693)
Operating leases (7,069) (7,905)
Inventories (7,064) (7,267)
Other assets (2,177) (2,501)
Accrued expenses and other liabilities
and deferred credits (2,206) (1,029)
--------------- --------------
Total deferred tax liabilities (51,116) (52,198)
--------------- --------------
Net deferred tax liabilities $ (6,276) $ (6,138)
=============== ==============
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 $15,980 as of November 1, 2003 and $4,686 as of
November 2, 2002.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
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 52 weeks 40 weeks
ended ended ended
November 1, November 2, November 3,
2003 2002 2001
----------- ----------- -----------
U.S. Federal Statutory rate of 35%
applied to pretax income (loss) $ 8,465 $ 738 $ (5,190)
Foreign Income taxes (benefit)
expense (7,726) (957) (6,324)
Non Taxable Gain-Debt Restructure (12,785) - -
Provision for Valuation of Deferred
Tax Asset 11,294 898 788
Non deductible items 541 3,109 2,456
Foreign Tax Credits 0 (530) (34)
Branch taxes (possession - PR
US/VI) 121 (195) 549
All others, net 142 (278) 1,143
----------- ----------- -----------
Income tax expense (benefit) $ 52 $ 2,785 $ (6,612)
=========== =========== ===========
The Company's operations are located in U.S. possessions where they
are subject to U.S. and local taxation.
As of November 1, 2003, the Company has unused net operating loss
carryforwards of approximately $13,800 and $40,700 and $219 available to
offset future taxable income in the U.S. Virgin Islands, Puerto Rico, and
United States, respectively, through fiscal years 2023, 2010, and 2023,
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 and $400 to offset future income tax
liabilities in Puerto Rico and United States, respectively. This credit is
carried forward indefinitely.
Total income taxes paid were approximately $608 for Fiscal 2003,
$1,200 for Fiscal 2002 and $45 for the forty weeks ended November 3,
2001.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 8 -- RETIREMENT BENEFITS
The Company has a noncontributory defined benefit plan (the "Retirement
Plan") covering substantially all full-time and certain part-time associates.
Retirement Plan benefits are based on years of service and a base level of
compensation. The Company funds retirement plan costs in accordance with the
requirements of the Employee Retirement Income Security Act of 1974.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
Retirement Plan assets consist primarily of stocks, bonds and U.S.
Government securities. Full vesting for the Retirement Plan occurs upon the
completion of five years of service.
Net pension cost under the Retirement Plan includes the following
components:
Fiscal Year Fiscal Year 40 Weeks
ended ended ended
November 1, November 2, November 3,
2003 2002 2001
----------- ----------- -----------
Service cost - benefits
earned during the period $ 1,214 $ 1,658 $ 1,119
Interest cost on projected
benefit obligation 1,664 1,717 1,293
Expected return on plan
assets (831) (1,048) (1,166)
Net amortization and
deferrals (6) (6) (135)
Recognized net actuarial
(gain)/loss 136 0 0
----------- ----------- -----------
NET PENSION COST $ 2,177 $ 2,321 $ 1,111
=========== =========== ===========
The discount rates used in determining the actuarial present value of the
net periodic pension cost for the Retirement Plan are 6.5%, 7.0%, and 7.25%
for the fiscal years ended November 1, 2003, November 2, 2002 and November 3,
2001 (40 weeks), respectively. The average expected long-term rate of return
on plan assets and rate of increase in future compensation levels used in
determining the actuarial present value of the net periodic pension cost for
the Retirement Plan are 9.0% and 5.0%, respectively, for all fiscal periods
presented above.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 8 -- RETIREMENT BENEFITS (Continued)
The funded status and amounts recognized in the Company's consolidated
balance sheets for the Retirement Plan are as follows:
November 1, November 2,
2003 2002
--------------- -------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $19,660 at November 1,
2003 and $16,463 at November 2, 2002 $20,776 $ 17,619
=============== ==============
Plan assets at fair value - beginning of
the year/period $10,427 $ 12,040
Actual return on plan assets 305 (2,333)
Employer contributions 3,645 2,719
Benefits paid (2,101) (1,999)
--------------- --------------
Plan assets at fair value - end of the
year/period 12,276 10,427
--------------- --------------
Projected benefit obligation for service
rendered to date - beginning of the
year/period (27,639) (24,773)
Service cost (1,214) (1,658)
Interest cost (1,664) (1,717)
Actuarial gain/(loss) 1,948 (1,490)
Benefits paid 2,101 1,999
--------------- --------------
Projected benefit obligation for service
rendered to date - end of the year/period (26,468) (27,639)
--------------- --------------
FUNDED STATUS (14,192) (17,212)
Unrecognized net gain 5,516 7,074
Unrecognized prior service cost (38) (44)
--------------- -------------
NET PENSION LIABILITY $ (8,714) $ (10,182)
=============== =============
The Company maintains a Supplemental Executive Retirement Plan (the
"SERP") for its officers under which the Company will pay, from general
corporate funds, a supplemental pension equal to the difference between the
annual amount of pension calculated under the SERP and the amount the
participant will receive under the Retirement Plan. Effective January 1,
1992, the Board of Directors amended the SERP in order to conform various
provisions and definitions with those of the Retirement Plan. The pension
benefit calculation under the SERP is limited to a total of 20 years
employment and is based on a specified percentage of the average annual
compensation received for the five highest consecutive years during a
participant's last 10 years of service, reduced by the participant's annual
Retirement Plan and social security benefits. Full vesting for the SERP
occurs upon the completion of five years of service.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 8 -- RETIREMENT BENEFITS (Continued)
Net pension cost under the SERP includes the following components:
Fiscal Year Fiscal Year 40 weeks
ended ended ended
November 1, November 2, November 3,
2003 2002 2001
----------- ----------- ------------
Service cost - benefits earned
during the year/period $ 363 $ 323 $ 274
Interest cost on projected
benefit obligation 413 376 255
Net amortization and deferrals 7 7 (41)
----------- ----------- ------------
NET PENSION COST $ 783 $ 706 $ 488
=========== =========== ============
The discount rate used in determining the actuarial present value of the
net periodic pension cost for the SERP are 6.5%, 7.0%, and 7.25% for the
fiscal years ended November 1, 2003, November 2, 2002, and November 3, 2001
(40 weeks), respectively. The rate of increase in future compensation levels
used in determining the actuarial present value of the net periodic pension
cost for the SERP is 5.0% for all fiscal years presented above.
The funded status and amounts recognized in the Company's consolidated
balance sheets for the SERP are as follows:
November 1, November 2,
2003 2002
--------------- --------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $4,841 at November 1,
2003 and $5,184 at November 2, 2002 $ 4,969 $ 5,308
=============== ==============
Projected benefit obligation for service
rendered to date $ (6,483) $ (6,062)
--------------- --------------
FUNDED STATUS (6,483) (6,062)
Unrecognized net gain (227) (227)
Unrecognized prior service cost 5 12
--------------- --------------
NET PENSION LIABILITY $ (6,705) $ (6,277)
=============== ==============
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 8 -- RETIREMENT BENEFITS (Continued)
Change in benefit obligations was as follows:
November 1, November 2,
2003 2002
--------------- --------------
Benefit obligation as of beginning of the
year/period $ 6,062 $ 5,359
Service costs 363 323
Interest costs 413 376
Actuarial loss 0 313
Benefits paid (355) (309)
--------------- --------------
Benefit obligation as of end of the
year/period $ 6,483 $ 6,062
=============== ==============
Change in plan assets were as follows:
November 1, November 2,
2003 2002
--------------- --------------
Fair value of assets as of beginning of the
year/period $ - $ -
Employer contribution 355 309
Benefits paid (355) (309)
--------------- --------------
Fair value of assets as of end of the
year/period $ - $ -
=============== ==============
The Company has a noncontributory defined contribution plan covering its
eligible associates in Puerto Rico. Contributions to this plan are at the
discretion of the Board of Managers of Pueblo. The Company also has a
contributory thrift savings plan in which it matches eligible contributions
made by participating eligible associates in the United States and the U. S.
Virgin Islands. The cost of these plans are recognized in the year the cost
is incurred. The Company recognized an expense of $541 and $767 for these
plans during Fiscal 2003 and Fiscal 2002, respectively, and a net credit of
$12 during the 40 weeks ended November 3, 2001.
NOTE 9 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash equivalents,
accounts receivable, accounts payable, accrued expenses, a revolving credit
facility and the 10.125% New Senior Secured Notes due in 2009.
Cash equivalents, accounts receivable, accounts payable, accrued
expenses - These accounts are carried at amounts that approximate their fair
value due to their short-term nature.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 9 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Revolving credit facility - Due to the variable interest rates, the fair
value of the revolving credit facility approximates its carrying value.
10.125% New Senior Secured Notes due in 2009 - The Company believes that
the value of the 10.125% New Senior Secured Notes due in 2009 is highly
speculative. At November 1, 2003, the Company estimates the fair value of
these instruments was approximately $59,400 based on market quotes.
NOTE 10 -- CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company places its temporary cash investments with highly-rated
financial institutions in investment grade short-term debt instruments.
NOTE 11 -- CONTINGENCIES
At November 1, 2003, 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. 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.
NOTE 12 -- GAIN ON INSURANCE SETTLEMENT
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 $42,000.
As a result the Company recorded gains associated with the property
settlement during Fiscal 2000 and 2001 of $15,066 and $2,464, respectively
($9,200 and $1,500, 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 an
approximately $69,400 proof of loss for business interruption losses to its
grocery stores and in-home movie and game entertainment 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
approximately $18,200 after a prolonged appraisal process (similar to an
arbitration process). The settlement resulted in recording a gain, during
Fiscal 2002, of $14,693, net of claim and appraisal expenses of approximately
$3,500.
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
NOTE 13 -- DISCLOSURE ON OPERATING SEGMENTS
The Company has two primary operating segments: retail food sales and
in-home movie and game rentals and sales. The Company's retail food division
consists of 46 supermarkets, 41 of which are in Puerto Rico and 5 of which
are in the U.S. Virgin Islands. The Company also has the exclusive franchise
rights to Blockbuster in-home movie and game entertainment stores for Puerto
Rico and the U.S. Virgin Islands operated through 42 in-home movie and game
entertainment stores, 40 of which are in Puerto Rico and 2 of which are in
the U. S. Virgin Islands. Most of the in-home movie and game entertainment
stores are adjacent to, or a separate section within, a retail food
supermarket. Administrative support functions are located in Florida.
Although the Company maintains data by geographic location, its segment
decision making process is based on its two product lines.
Reportable operating segment financial information is as follows:
In-home Movie
and Game
Retail Food Entertainment Total
------------ -------------- ------------
Fiscal Year Ended 2003
Net sales $ 531,433 $ 39,903 $ 571,336
Depreciation and amortization ** 16,475 7,030 23,505
Operating profit 305 2,755 3,060
Total assets 196,395 18,039 214,434
Capital expenditures 3,890 137 4,027
Video tape purchases N/A 4,823 4,823
Fiscal Year Ended 2002
Net sales $ 548,285 $ 39,894 $ 588,179
Depreciation and amortization 21,039 7,221 28,260
Operating profit 17,485 * 6,271 * 23,756 *
Total assets 371,555 20,196 391,751
Capital expenditures 7,320 71 7,391
Video tape purchases N/A 5,611 5,611
40 weeks ended November 3, 2001
Net sales $ 403,921 $ 29,421 $ 433,342
Depreciation and amortization 16,508 6,163 22,671
Operating profit 1,158 1,975 3,133
Capital expenditures 5,237 34 5,271
Video tape purchases N/A 4,831 4,831
* Includes a gain of $14,693 on the settlement of the business interruption portion of
the Hurricane Georges insurance claim of which $13,421 was in the Retail Food segment and
$1,272 was in the In-home Movie and Game Entertainment segment.
** Included in the Retail Food Division is a charge of approximately $400 for the write down
of stores that were closed and a charge of approximately $1,200 for the write down of impaired
assets of two under performing stores in accordance with SFAS no. 144.
Because the Retail Food and In-Home Movie and Game Entertainment
Divisions are not segregated by corporate entity structure, the operating
segment amounts shown above do not represent totals for any subsidiary of the
Company. All overhead expenses, including depreciation on assets of
administrative departments, are allocated to operations. Amounts shown in
the total column above correspond to amounts in the consolidated financial
statements.
F-31
Schedule I
NUTRITIONAL SOURCING CORPORATION
BALANCE SHEETS-PARENT COMPANY ONLY
(Dollars in thousands)
November 1, November 2,
2003 2002
------------- -------------
ASSETS
CURRENT ASSETS
Investment in and note receivable from subsidiaries 31,835 230,064
Other current assets 11 1,443
------------ ------------
TOTAL CURRENT ASSETS 31,846 231,507
DEFERRED INCOME TAXES - 1,579
OTHER ASSETS - 353
------------ ------------
TOTAL ASSETS $ 31,846 $ 233,439
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
10.125% SENIOR SECURED NOTES 90,000 -
Inter-company accounts payable, net 2,819 11,575
Accrued expenses including interest 5,046 -
Current deferred tax liability - 950
------------- -----------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 97,865 12,525
LIABILITIES SUBJECT TO COMPROMISE - 186,208
------------- -----------
TOTAL LIABILITIES 97,865 198,733
------------- -----------
COMMITMENTS AND CONTINGENCIES - -
------------- -----------
STOCKHOLDER'S EQUITY (66,019) 34,706
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 31,846 $ 233,439
============= ===========
(Continued)
S-1
NUTRITIONAL SOURCING CORPORATION
STATEMENTS OF OPERATIONS-PARENT COMPANY ONLY
(Dollars in thousands)
Fiscal Year Ended 40 weeks
---------------------- ended
November 1, November 2, November 3,
2003 2002 2001
--------- ---------- -----------
Selling, general and administrative expenses - 3 -
--------- ---------- -----------
OPERATING PROFIT (LOSS) - (3) -
Interest expense on debt
(does not include contractual interest
expense on pre-petition debt totaling
approximately $10,000 and 2,700 for the 52 weeks
ending November 1, 2003, and
November 2, 2002, respectively (3,998) (15,397) (14,049)
Interest and investment income, net 13,000 17,084 13,074
Equity in loss of unconsolidated subsidiaries (154,952) (757) (8,433)
Reorganization items (5,654) (995) -
Gain on early extinguishment of debt 36,508 - -
---------- ---------- -----------
LOSS BEFORE INCOME TAXES (115,096) (68) (9,408)
Income tax benefit (expense) (629) (611) 1,192
---------- ---------- -----------
NET LOSS $ (115,725) $ (679) $ (8,216)
========== ========== ===========
S-2
NUTRITIONAL SOURCING CORPORATION
STATEMENTS OF CASH FLOWS-PARENT COMPANY ONLY
(Dollars in thousands)
Fiscal Year Ended 40 weeks
---------------------- ended
November 1, November 2, November 3,
2003 2002 2001
---------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES: (73,967) (1,633) (17,600)
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES: 118,442 755 8,433
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES: (44,464) 873 733
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents 11 (5) (8,434)
Cash and cash equivalents at beginning of period - 5 8,439
--------- --------- ----------
Cash and cash equivalents at end of period $ 11 $ - $ 5
========= ========= ==========
S-3
Schedule II
NUTRITIONAL SOURCING CORPORATION
Valuation and Qualifying Accounts
For the Fiscal Years Ended November 1, 2003 and November 2, 2002
and the 40 weeks ended November 3, 2001
(Dollars in thousands)
Balance at Additions Balance
Beginning Charged to at End
of Year/ Costs and of Year/
Description Period Expenses Deductions (1) Period (2)
- ----------------------------- ----------- ----------- --------------- -----------
Fiscal 2003
Reserves not deducted
from assets:
Reserve for self-
insurance claims.... $ 9,559 $ 2,203 $ 2,745 $ 9,017
Fiscal 2002
Reserves not deducted
from assets:
Reserve for self-
insurance claims.... $ 10,327 $ 2,819 $ 3,587 $ 9,559
40 Weeks Ended November 3, 2001
Reserves not deducted
from assets:
Reserve for self-
insurance claims.... $ 10,980 $ 2,896 $ 3,549 $ 10,327
(1) Amounts consist primarily of payments on claims and related expenses.
(2) Amounts represent both the current and long-term portions.
S-4
8
1