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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended May 15, 2004
[ ] 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
------------------------------------ -----------------------------
(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
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 whether the registrant is an accelerated filer (as
in Rule 12b-2 of the Exchange Act). YES NO X
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 June 25, 2004 -- 200.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page(s)
-------
Condensed Consolidated Balance Sheets (Unaudited) -
May 15, 2004 and November 1, 2003 . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of Operations (Unaudited) -
Twelve and twenty-eight weeks ended May 15, 2004
and May 17, 2003 . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows (Unaudited)-
Twenty-eight weeks ended May 15, 2004 and May 17, 2003 . . . 6
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . 7-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . 12-23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 23
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . 23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 24
CONDENSED CONSOLIDATED BALANCE SHEETS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited)
--------------------------------
May 15, November 1,
2004 2003
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,814 $ 651
Accounts receivable, net of allowance for
doubtful accounts of $250 at May 15,
2004 and $410 at November 1, 2003 2,720 2,735
Inventories 46,548 51,718
Prepaid expenses 13,483 8,156
Deferred income taxes 10,218 10,218
--------- ---------
TOTAL CURRENT ASSETS 76,783 73,478
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 6,407 6,404
Buildings and improvements 45,671 45,633
Furniture, fixtures and equipment 102,780 102,496
Leasehold improvements 43,678 43,670
Construction in progress 1,765 1,009
--------- ---------
200,301 199,212
Less accumulated depreciation
and amortization 125,216 118,705
--------- ---------
75,085 80,507
Property under capital leases, net 9,756 10,745
--------- ---------
TOTAL PROPERTY AND EQUIPMENT 84,841 91,252
GOODWILL 5,621 5,621
DEFERRED INCOME TAX 682 682
TRADE NAMES 26,574 26,574
DEFERRED CHARGES AND OTHER ASSETS 16,168 16,827
--------- ---------
TOTAL ASSETS $ 210,669 $ 214,434
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands, except share data)
(Unaudited)
--------------------------------
May 15, November 1,
2004 2003
------------- -------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Revolving credit facility $ 17,222 $ 11,355
Current portion term loans 4,200 4,200
Accounts payable 40,059 43,018
Accrued interest 2,793 3,724
Accrued expenses 17,648 18,768
Salaries, wages and benefits payable 8,938 8,661
Current obligations under capital leases 538 596
----------- -----------
TOTAL CURRENT LIABILITIES 91,398 90,322
CAPITAL LEASE OBLIGATIONS, net of
current portion 10,226 10,996
LONG-TERM DEBT - TERM LOANS, net of
current portion 36,950 39,050
NOTES PAYABLE 90,000 90,000
RESERVE FOR SELF-INSURANCE CLAIMS 4,599 4,729
DEFERRED INCOME TAXES 17,648 17,176
OTHER LIABILITIES AND DEFERRED CREDITS 27,614 28,180
----------- -----------
TOTAL LIABILITIES 278,435 280,453
COMMITMENTS AND CONTINGENCIES (Notes 1 and 8)
STOCKHOLDER'S DEFICIT
Common stock, $.10 par value; 200 shares
authorized and issued - -
Additional paid-in capital 106,500 106,500
Accumulated deficit (174,266) (172,519)
----------- -----------
TOTAL STOCKHOLDER'S DEFICIT (67,766) (66,019)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 210,669 $ 214,434
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited) (Unaudited)
12 weeks ended 28 weeks ended
------------------------ -----------------------
May 15, May 17, May 15, May 17,
2004 2003 2004 2003
----------- ---------- ----------- ----------
Net sales $123,625 $133,992 $298,834 $320,357
Cost of goods sold 82,302 92,298 201,357 217,182
----------- ----------- ----------- ---------
GROSS PROFIT 41,323 41,694 97,477 103,175
OPERATING EXPENSES
Selling, general and administrative expenses 34,701 36,499 80,370 87,451
Store closings - exit cost - 382 - 382
Depreciation and amortization 4,492 4,973 10,435 11,677
----------- ----------- ----------- ---------
OPERATING PROFIT (LOSS) 2,130 (160) 6,672 3,665
Interest expense on debt (does not include
contractual interest expense on pre-petition
debt totaling approximately $3,900 and
$9,100 for the 12 and 28 weeks ended
May 17, 2003, respectively) (3,234) (725) (7,443) (2,256)
Interest expense on capital lease obligations (375) (404) (896) (943)
Interest and investment income, net 8 61 16 216
Reorganization items - (992) - (2,670)
---------- ----------- ----------- ---------
LOSS BEFORE INCOME TAXES & CUMULATIVE
EFFECT OF AN ACCOUNTING CHANGE (1,471) (2,220) (1,651) (1,988)
Income tax expense (81) (297) (96) (266)
----------- ----------- ----------- ---------
LOSS BEFORE CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE (1,552) (2,517) (1,747) (2,254)
Cumulative effect of an accounting change - - - (139,856)
----------- ----------- ----------- ---------
NET LOSS $(1,552) $(2,517) $ (1,747) $(142,110)
=========== ============ =========== =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited)
28 weeks ended
-------------------------------
May 15, May 17,
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,747) $ (142,110)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of an accounting change - 139,856
Depreciation and amortization of property and equipment 7,439 8,145
Amortization of intangible and other assets 2,996 3,532
Provision for deferred income taxes 472 -
Gain on disposal of property and equipment, net (3) (2)
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 15 162
Inventories 2,797 (872)
Prepaid expenses (5,327) (2,228)
Other assets 36 (375)
(Decrease) increase in:
Accounts payable, accrued expenses and accrued interest (5,010) 3,606
Salaries, wages and benefits payable 277 (2,457)
Other liabilities and deferred credits and
reserve for self-insurance claims (696) 268
------------- -------------
Net cash provided by operating activities 1,249 7,525
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,515) (2,801)
Proceeds from disposal of property and equipment 3 1
------------- -------------
Net cash used in investing activities (1,512) (2,800)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (341) (376)
Repayments on April 1997 Bank Credit Facility - (9,460)
Borrowings under May 2003 Bank Credit Facility 5,867 -
Repayments on Term Loans (2,100) -
------------- -------------
Net cash provided by (used in) financing activities 3,426 (9,836)
------------- -------------
Net increase (decrease) in cash and cash equivalents 3,163 (5,111)
Cash and cash equivalents at beginning of period 651 17,992
------------- -------------
Cash and cash equivalents at end of period $ 3,814 $ 12,881
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $8,864 $1,977
Net Income taxes (refunded) paid, $ (474) $ 535
Reorganization items $1,731 $ 753
The accompanying notes are an integral part of these
condensed consolidated financial statements
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 1 -- INTERIM FINANCIAL STATEMENTS
Basis of Presentation
The unaudited condensed consolidated financial statements include the
accounts of Nutritional Sourcing Corporation ("NSC"), and its wholly owned
subsidiaries (the "Company"). The accompanying unaudited condensed
consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
of America ("GAAP") for interim financial information and in accordance with
the requirements of Form 10-Q and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and changes in cash flows required by GAAP. The Company's fiscal
year ends on the Saturday closest to October 31. Interim operating results for
the 12 and 28 weeks ended May 15, 2004 and May 17, 2003 are not necessarily
indicative of results that may be expected for the full fiscal years. The
condensed consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and related
notes included in the Company's Annual Report on Form 10-K for the year ended
November 1, 2003. The Property and Equipment components of the balance sheet as
of November 1, 2003, have been reclassified to record the gross cost and
accumulated depreciation applicable to assets still used in the business, which
were previously recorded at a net cost of zero. With respect to the unaudited
financial statements for the 12 and 28 weeks ended May 15, 2004 and May 17,
2003, it is the opinion of the management of the Company that all adjustments
necessary to present a fair statement of the results for such interim periods
have been included. Such adjustments, other than those related to the
cumulative effect of an accounting change as detailed herein, were of a normal
and recurring nature. Inter-company accounts and transactions are eliminated in
consolidation.
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. Consequently, the
condensed consolidated statement of operations included herein for the 12 and
28 weeks ended May 17, 2003 include the accounting treatment for the
contractual interest expense for pre-petition debt and for reorganization items
prescribed by 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 relief under Chapter 11 pertained to NSC only, not to its operating
subsidiaries.
NOTE 2 -- INVENTORY
The results of the Company's operations reflect the application of the
last-in, first-out ("LIFO") method of valuing certain inventories of grocery,
non-food and dairy products. Since an actual valuation of inventories under
the LIFO method is only made at the end of a fiscal year based on inventory
levels and costs at that time, interim LIFO calculations are based on
management's estimates of expected year-end inventory levels and costs and
are subject to year-end adjustments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 3 - 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 trade names were being amortized using
the straight-line method over periods of 40 years.
During the 28 weeks ended May 17, 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
represents 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. 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 first quarter (16 weeks) ended February 22, 2003.
There wasn't any change in the Company's goodwill and trade names balance
during the 28 weeks ended May 15, 2004.
NOTE 4 - CAPITAL LEASE OBLIGATIONS
On April 15, 2004, the Company signed a lease amendment for one of its
properties in Puerto Rico. As a result of the amendment, the Company returned
approximately 50,000 sq. ft. of vacant land to the landlord, and both long
term capital lease obligations and property under capital leases were reduced
by approximately $487.
NOTE 5 -- DISCLOSURE OF OPERATING SEGMENTS
The Company has two primary operating and reporting segments: the retail
food division and the in-home movie and game entertainment division both of
which are headquartered in Puerto Rico. The retail food division consisted of
46 supermarkets as of May 15, 2004, 41 of which are in Puerto Rico and 5 of
which are in the U.S. Virgin Islands. The in-home movie and game
entertainment division consisted of 42 in-home movie and game entertainment
stores as of May 15, 2004, 40 of which are in Puerto Rico and 2 of which are
in the U.S. Virgin Islands. On May 21, 2004 the Company closed one of its in-
home movie and game entertainment stores in Puerto Rico. Any exit costs
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 5 -- DISCLOSURE OF OPERATING SEGMENTS (continued)
associated with the closing of this store were immaterial and are included in
selling, general and administrative expenses in the condensed consolidated
statement of operations in this form 10-Q. Most of the in-home movie and game
entertainment stores are adjacent to or a separate section within one of the
Company's retail food supermarkets. Certain 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
----------- ------------- ----------
For the 28 Weeks Ended and as of May 15, 2004:
Net sales $ 276,601 $ 22,233 $ 298,834
Depreciation and amortization 7,404 3,031 10,435
Operating profit (a) 3,393 3,279 6,672
Total assets 194,338 16,331 210,669
Capital expenditures 1,455 60 1,515
In-home movie and game entertainment
purchases N/A 2,634 2,634
For the 28 Weeks Ended May 17, 2003:
Net sales $ 297,264 $ 23,093 $ 320,357
Depreciation and amortization 8,174 3,503 11,677
Store closing - exit costs 382(b) - 382
Operating profit (a) 608 3,057 3,665
Capital expenditures 2,731 70 2,801
In-home movie and game entertainment
purchases N/A 2,884 2,884
As of November 1, 2003:
Total assets $ 196,891 $ 17,543 $ 214,434
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.
(a) See Management's Discussion and Analysis for discussions of gross profit
and selling, general and administrative expenses.
(b) The 12 and 28 weeks ended May 17, 2003 included a $382 loss (before income
taxes) for the estimated closure costs of a store for which the Company
had already given notice to the landlord of its intent not to renew the lease
and was subsequently closed on September 27, 2003. The exit costs accrued
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 5 -- DISCLOSURE OF OPERATING SEGMENTS (continued)
primarily included contractual occupancy costs, property taxes, and other
occupancy costs beyond the closing date, employee severance and related
benefit costs.
NOTE 6 -- RECENT ACCOUNTING PRONOUNCEMENTS
The following recent accounting pronouncements are not expected to have
a material impact on the Company's condensed consolidated financial
statements:
In March 2004, the Financial Accounting Standards Board ("FASB"),
Emerging Issues Task Force ("EITF"), confirmed as a consensus EITF Issue 03-
16, which requires investments in limited liability corporation's that have
separate ownership accounts for each investor to be accounted for similar to a
limited partnership investment under the AICPA's Statement of Position No. 78-
9 ("SOP 78-9"), Accounting for Investments in Real Estate Ventures. Investors
would be required to apply the equity method of accounting to their
investments at a much lower ownership threshold (typically any ownership
interest greater than 3%-5%) than the 20% threshold applied under Accounting
Principles Board ("APB") Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock. The consensus is effective for the first period
beginning after June 15, 2004 and the change should be reported as a
retroactive cumulative effect, with certain exceptions.
On April 9, 2004, FASB issued FASB Staff Position ("FSP") SFAS 129-1,
Disclosure Requirements under FASB Statement No. 129, Disclosure of Information
about Capital Structure, Relating to Contingently Convertible Securities to
provide disclosure guidance for contingently convertible securities, including
those instruments with contingent conversion requirements that have not been
met and otherwise are not required to be included in the computation of diluted
earnings per share. The FSP addresses concerns that disclosures relating to
contingently convertible securities are inconsistent between companies or may
be inadequate. FSP FAS 129-1 notes that to comply with the requirements of SFAS
129, the significant terms of the conversion features of the contingently
convertible security should be disclosed to enable users of financial
statements to understand the circumstances of the contingency and the potential
impact of conversion.
NOTE 7 -- RETIREMENT BENEFITS
In December 2003, the FASB revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post Retirement Benefits." This revision
("No. 132R") requires additional disclosures to those in the original SFAS No.
132 about assets, obligations, cash flows and the periodic benefit cost of
defined benefit pension plans and other defined benefit post-retirement plans.
The required information should be provided separately for pension plans and
for other post-retirement benefit plans. This statement revision is effective
for the fiscal years ended after December 14, 2003 and interim periods
beginning after December 15, 2003.
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 7 -- RETIREMENT BENEFITS (continued)
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. The Company has made approximately $1,560 in
contributions to its defined benefit pension plan trust during the 28 weeks
ended May 15, 2004. During the remainder of its fiscal year ending October 30,
2004, the Company anticipates contributing approximately $2,826 to the trust.
Net pension cost under the Retirement Plan includes the following
components:
For the 12 weeks ended For the 28 weeks ended
---------------------- ----------------------
May 15, May 17, May 15, May 17,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Service cost - benefits
earned during the period $ 325 $ 280 $ 758 $ 654
Interest cost on projected
benefit obligation 378 384 884 895
Expected return on plan
assets (230) (192) (537) (447)
Net amortization and
deferrals (1) (1) (3) (3)
Recognized net actuarial
loss 46 31 107 73
--------- --------- --------- ----------
NET PENSION COST $ 518 $ 502 $ 1,209 $ 1,172
========= ========= ========= ==========
The Company maintains a Supplemental Executive Retirement Plan (the
"SERP"), which is an un-funded plan, 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. The Company has made
approximately $189 in payments to its beneficiaries during the
28 weeks ended May 15, 2004. During the remainder of its fiscal year ended
October 30, 2004, the Company currently anticipates paying approximately $189
to the beneficiaries of the plan.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 7 -- RETIREMENT BENEFITS (continued)
Net pension cost under the SERP includes the following components:
For the 12 weeks ended For the 28 weeks ended
---------------------- ----------------------
May 15, May 17, May 15, May 17,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Service cost - benefits
earned during the period $ 73 $ 84 $ 171 $ 195
Interest cost on projected
benefit obligation 95 95 220 223
Net amortization and
deferrals 1 2 3 4
---------- ---------- ---------- ----------
NET PENSION COST $ 169 $ 181 $ 394 $ 422
========== ========== ========== ==========
NOTE 8 -- CONTINGENCIES
At May 15, 2004, 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company operates retail supermarkets and in-home movie and game
entertainment stores ("in-home entertainment stores") in the Caribbean;
specifically on the islands of Puerto Rico, St. Thomas and St. Croix, the
latter two being part of the group of islands known as the U.S. Virgin
Islands. The population in these markets has grown very slowly (the 1990 U.S.
Census indicated there were approximately 3.5 million people in Puerto Rico
and the 2002 U.S. Census indicated there were approximately 3.9 million people
in Puerto Rico).
The Company's strategy for both the supermarkets and the in-home
entertainment business is to concentrate on improving the value offering in,
and convenience at, its existing locations rather than engaging in an
expansion program. In both businesses this involves a greater
variety of goods and services than that offered by competitors. Consequently,
from January 2000 through May 15, 2004 the Company's supermarkets have
decreased from 50 to 46. This net decrease of four stores is the result of
closing five stores and opening one new store. The Company's in-home
entertainment stores have decreased from 43 in January of 2000 to 42 as of
May 15, 2004. This net decrease of one store is the result of closing three
stores and opening two new stores. Additionally, on May 21, 2004, the Company
closed one of its in-home entertainment stores in Puerto Rico. The Company is
evaluating replacement sites for this store.
For more detail concerning stores for the period from May 17, 2003
through May 15, 2004 see page 18 of this Form 10-Q. For the detail of
activity for the fiscal year of 2000 through the end of fiscal year ended
November 1, 2003 see ITEM 2 - PROPERTIES in the Company's Form 10-K for the 52
weeks ended November 1, 2003, which was filed with the Securities and Exchange
Commission on January 28, 2004.
The Company's supermarket markets have been affected by an increasing
level of competition from local supermarket chains, independent supermarkets,
warehouse club stores, mass merchandisers, department stores, discount drug
stores and convenience stores. Warehouse club stores and mass merchandisers,
which began entering the Puerto Rico and U.S. Virgin Islands markets in 1990
offering various grocery and general merchandise items, have increased
pricing pressures on supermarket retailers including the Company. In
addition, low inflation in food prices in recent years has made it difficult
for the Company and other supermarket operators to increase prices and has
intensified the competitive environment by causing retailers to emphasize
promotional activities and discount pricing to maintain or gain market share,
in addition to improving cost and expense efficiencies at all levels.
Pueblo is the only supermarket operator in its markets that has a customer
loyalty program that provides special economic benefits to consumers that have
chosen to participate in the program. Since its inception in March 2001, these
benefits have included special discounts on selected items. There are
approximately 600,000 loyalty cards issued by Pueblo. In April 2004, the
Company enhanced the program to offer additional savings to participants. The
additional savings are based on the points earned by the participants. A point
is earned for every dollar spent at Pueblo during the calendar year. Once 600
points have been earned the customer receives a discount on all purchases for
the remainder of the calendar year in the department chosen by the participant.
The discount is 12% for all departments other than grocery and 6% for grocery.
These discounts, when utilized by the consumer-participants, are deducted from
gross sales in the accompanying condensed consolidated financial statements as
required by GAAP in the United States.
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Form 10-Q:
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-Q 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. These statements are based on Company management's expectations and
are subject to various risks and uncertainties. Actual results could differ
materially from those anticipated due to a number of factors, including but
not limited to the Company's substantial indebtedness and high degree of
leverage, which continue as a result of the financial restructuring (including
limitations on the Company's ability to obtain additional financing and trade
credit, to apply operating cash flow for purposes in addition to debt service,
to respond to price competition in economic downturns and to dispose of assets
pledged to secure such indebtedness or to freely use proceeds of any such
dispositions), the Company's limited geographic markets and competitive
conditions in the markets in which the Company operates and buying patterns of
consumers.
Supermarket Industry
The retail grocery industry is extremely competitive and is
characterized by high inventory turnover and narrow profit margins. The
Company's results of operations are therefore, sensitive to, and may be
materially adversely impacted by, among other things, competitive pricing,
promotional pressures and additional store openings by competitors. The
Company competes with national, regional and local supermarkets, warehouse
club stores, drug stores, convenience stores, discount merchandisers and
other local retailers in the market areas it serves. Competition with these
outlets is based on price, store location, advertising and promotion, product
mix, quality and service. Some of these competitors may have greater
financial resources, lower merchandise acquisition costs and lower operating
expenses than the Company, and the Company may be unable to compete
successfully in the future.
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 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 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 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 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 2; MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS included in this Form 10-Q
and NOTE 5 - DEBT to the consolidated financial statements included in item
15 of the Company's Form 10-K filed with the Securities and Exchange Commission
on January 28, 2004.
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.
Critical Accounting Estimates
There have been no material changes in the basis for, or method of
computation of, the Company's critical accounting estimates since the year
ended November 1, 2003. For a discussion of the Company's critical accounting
estimates see the "Critical Accounting Estimates" section of ITEM 7 of the
Company's Form 10-K for the year ended November 1, 2003, which was filed with
the Securities and Exchange Commission on January 28, 2004.
Selected Operating Results
(As a percentage of sales)
12 WEEKS ENDED 28 WEEKS ENDED
------------------------- -------------------------
May 15, May 17, May 15, May 17,
2004 2003 2004 2003
------------ ----------- ------------- ----------
Gross profit 33.4% 31.1% 32.6% 32.2%
Selling, general &
administrative expenses 28.1 27.2 26.9 27.3
Store closing - exit costs (2) - 0.3 - 0.1
EBITDA, as defined (1) 5.4 3.6 5.7 4.8
Depreciation & amortization 3.6 3.7 3.5 3.6
Operating profit (loss) 1.7 (0.1) 2.2 1.1
Reorganization items - (0.7) - (0.8)
Loss before income taxes and cumulative
effect of an accounting change (1.2) (1.7) (0.6) (0.6)
Loss before cumulative effect of an
accounting change (1.3) (1.9) (0.6) (0.7)
Net loss (1.3) (1.9) (0.6) (44.4)
(1) EBITDA (as defined) represents earnings before interest, taxes,
depreciation, amortization, 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 a 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 its 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.
(2) The 12 and 28 weeks ended May 17, 2003 include a $0.4 million loss
(before income taxes) for the estimated exit costs of a store that
was closed.
Following is a reconciliation of Net Loss to EBITDA, as defined (dollars
in thousands):
For the 12 weeks ended For the 28 weeks ended
---------------------- ----------------------
May 15, May 17, May 15, May 17,
2004 2003 2004 2003
---------- ---------- ---------- -----------
Net Loss $(1,552) $(2,517) $ (1,747) $(142,110)
Add/(Subtract):
Cumulative effect of an accounting change - - - 139,856
Income tax expense 81 297 96 266
Reorganization items - 992 - 2,670
Interest and investment income, net (8) (61) (16) (216)
Interest expense on capital lease obligations 375 404 896 943
Interest expense on debt 3,234 725 7,443 2,256
Depreciation and amortization 4,492 4,973 10,435 11,677
---------- ---------- ---------- -----------
EBITDA (as defined) $ 6,622 $ 4,813 $ 17,107 $ 15,342
========== ========== ========== ===========
Please see pages 19 - 21 of this MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS for a discussion of the changes
in the components of EBITDA.
Results of Operations
As of May 15, 2004, 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. The history of store openings and closings from
May 17, 2003 through the end of the second quarter of the current fiscal
year on May 15, 2004, as well as the store composition, is set forth in
the following tables:
Stores in Operation:
At May 17, 2003 . . . . . . . . . . . . . . . 90
Stores closed:
Puerto Rico - Supermarket . . . . . . . . . . 1
U.S. Virgin Islands - Supermarket . . . . . . 1
-------
At May 15, 2004 . . . . . . . . . . . 88
=======
May 15, May 17,
2004 2003
------------ ------------
Store Composition at Quarter-End:
Supermarkets by location:
Puerto Rico . . . . . . . . . . . . . . . 41 42
U.S. Virgin Islands . . . . . . . . . . . 5 6
------- -------
Subtotal Supermarkets 46 48
======= =======
In-home movie and game entertainment
stores by location:
Puerto Rico . . . . . . . . . . . . . . . . 40 40
U.S. Virgin Islands . . . . . . . . . . . . 2 2
------- -------
Subtotal In-home Movie and game
entertainment stores 42 42
------- -------
Grand Total 88 90
======= =======
The Company also closed an in-home movie and game entertainment store
subsequent to the quarter ended May 15, 2004, as discussed in the second
paragraph of this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following is the summary of total and comparable store sales:
Percentage decrease in sales
for the 12 and 28 ended May 15, 2004, as
compared to the 12 and 28 weeks ended May 17, 2003
--------------------------------------------------
12 Weeks Ended 28 Weeks Ended
------------------ -------------------
Total Sales (7.7) % (6.7) %
========= =========
Comparable Stores:
Retail Food Division (6.0) % (5.8) %
========= =========
In-home movie and game
entertainment division (6.2) % (4.1) %
========= =========
Total Comparable Store Sales (6.0) % (5.7) %
========= =========
Net sales for the 12 and 28 weeks ended May 15, 2004 were $123.6 million
and $298.8 million, respectively, versus $134.0 million and $320.4 million for
the 12 and 28 weeks ended May 17, 2003, decreases of $10.4 million and $21.5
million or 7.7% and 6.7%, respectively. A portion of the decline in net sales
is a result of closing two supermarkets during the third quarter of the year
(52 weeks) ended November 1, 2003. Of the $10.4 million and $21.5 million
decline, net sales declined approximately $2.4 million and $5.7 million for the
12 and 28 weeks ended May 15, 2004, respectively, compared to the 12 and 28
weeks ended May 17, 2003, respectively, as a result of closing these two
stores. The stores were closed as a result of unsatisfactory operating results
and management's belief that satisfactory results were not attainable in the
future. Same store net sales decreased by 6.0% and 5.7%, respectively. For
the 12 and 28 weeks ended May 15, 2004, same store net sales were $123.6
million and $286.7 million, respectively, versus $131.6 million and $304.0
million, respectively for the 12 and 28 comparable weeks ended May 17, 2003.
"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 net
sales in the retail food division decreased 6.0% and 5.8%, respectively, from
the 12 and 28 comparable weeks ended May 17, 2003. The principal factors
contributing to the decline in same stores net sales in the retail food
division is continued growth in competition and a softening of the economy in
Puerto Rico. Subsequent to introducing the additional benefits to participants
in Pueblo's customer loyalty program (discussed on page 13 of this Form 10-Q)
the decline in same store net sales in the retail food division abated
somewhat. For the 4 weeks ended May 15, 2004, same stores net sales in the
retail food division decreased 4.2%. The factors discussed above concerning the
decline in same store net sales 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 net
sales decreased 6.2% and 4.1%, respectively, from the 12 and 28 comparable
weeks ended May 17, 2003 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 had generally been
released for rental prior to being released for sale allowing the Company to
benefit from a "rental window". Currently, substantially all DVD's and tapes
are simultaneously released for rental and sale resulting in lower sell-through
prices and a negative impact on rental from selling the DVDs or tapes. These
sell-through offering and pricing practices accelerate consumer interest in
the DVD format, but also increase competition from mass merchant retailers.
Gross profit decreased for the 12 and 28 weeks ended May 15, 2004 by $0.4
million and $5.7 million, respectively, to $41.3 million and $97.5 million,
respectively, from $41.7 million and $103.2 million for the 12 and 28 weeks
ended May 17, 2003. The rate of gross profit (as a percentage of sales), for
the 12 and 28 weeks ended May 15, 2004 was 33.4% and 32.6%, respectively,
compared to 31.1% and 32.2%, respectively for the 12 and 28 weeks ended May 17,
2003, increases of 2.3% and 0.4%, respectively. Of the 2.3% and 0.4% increases
in the 12 and 28 weeks ended May 15, 2004, 2.1% and 0.2% is attributable to the
company's retail food division. The improvement in the division's gross margin
for both the 12 and 28 weeks versus the comparable period of the previous year
is a result of utilizing management information systems to better manage the
division's promotions and their impact on the mix of sales and gross margin.
The remainder of the improvement in the gross profit rate for the 12 and 28
weeks ended May 15, 2004 versus the comparable period of the prior year is
attributable, primarily to the sales and gross margin of the in-home movie and
game entertainment division being a larger portion of consolidated sales and
gross margin.
Selling, general and administrative expenses were $34.7 million and $80.4
million, respectively, for the 12 and 28 weeks ended May 15, 2004 compared to
$36.5 million and $87.5 million, respectively, for the 12 and 28 weeks ended
May 17, 2003, decreases of $1.8 million and $7.1 million, respectively. These
decreases are a result of cost reductions achieved through the third stage of
the Company's "Challenge Program" which is part of the Company's cost
containment effort to combat the highly competitive nature of its markets.
Depreciation and amortization was $4.5 million and $10.4 million, respectively,
for the 12 and 28 weeks ended May 15, 2004 compared to $5.0 million and $11.7
million for the 12 and 28 weeks ended May 17, 2003, decreases of $0.5 million
and $1.3 million, respectively. The reason for these decreases are the closure
of two of the Company's supermarkets and the write down of impaired assets the
Company recorded during the fourth quarter of the fiscal year (52 weeks) that
ended November 1, 2003.
Interest expense, net of interest income, increased by $2.5 million and $5.3
million between the 12 and 28 weeks ended May 15, 2004 and the comparable
period of the prior year, primarily as a result of an increase in interest
expense on debt. As shown in the table below, the primary factor affecting the
change in interest expense on debt, between the 12 and 28 weeks ended May 15,
2004 and the 12 and 28 comparable weeks ended May 17, 2003, was the
reorganization, which concluded on June 5, 2003. Included below [next page] is
a more detailed summary of interest expense on debt for the 12 and 28 weeks
ended May 15, 2004 and May 17, 2003 (dollars in thousands).
INTEREST EXPENSE ON DEBT
------------------------------------------------------
12 WEEKS ENDED 28 WEEKS ENDED
------------------------- -----------------------
May 15, May 17, May 15, May 17,
2004 2003 2004 2003
------------ --------- ----------- ----------
Interest expense on debt:
Old 9.5% Notes and Series C Senior Notes, due August 1,
2003 (the amount of contractual interest expense on
pre-petition debt not accrued was $3,900 and 9,100,
for the 12 and 28 weeks ended May 17, 2003,
respectively)) $ - $ - $ - $ -
New 10.125% Senior Secured Notes, issued 6/5/03 2,103 - 4,884 -
Revolver borrowings 286 448 573 1,032
Term loans 681 - 1,612 -
Amortization of debt issuance costs 164 277 374 1,224
----------- ----------- ----------- ---------
Total $ 3,234 $ 725 $ 7,443 $ 2,256
=========== =========== =========== ==========
Reorganization items during the 12 and 28 weeks ended May 17, 2003 consisted
primarily of the costs of financial and legal professionals providing financial
and legal services to both the Company and the Company's note-holders on
matters pertaining to NSC's Chapter 11 proceedings.
The effective tax rate for both the 12 and 28 weeks ended May 15, 2004
was (5.5)% and (5.8)%, respectively, compared to (13.4)% for both the
comparable 12 and 28 weeks ended May 17, 2003. Variances in the effective tax
rates were primarily due to the relationship of items of permanent difference
between Loss Before Income Taxes and Cumulative Effect of an Accounting Change
for financial reporting purposes and pretax income for income tax return
reporting purposes to Loss Before Income Taxes and Cumulative Effect of an
Accounting Change.
The Company recorded net losses, before the cumulative effect of an
accounting change, for the 12 and 28 weeks ended May 15, 2004 of $1.6 million
and $1.7 million, respectively, versus net losses, before the cumulative effect
of an accounting change, of $2.5 million and $2.2 million for the comparable 12
and 28 weeks of the prior year, respectively, improvements of $0.9 million and
$0.5 million, respectively. The preceding paragraphs in this MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERTATIONS
discuss the reasons for the variances.
During the 28 weeks ended May 17, 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 3 - Goodwill and Trade Names to the notes to
the consolidated financial statements included in this Form 10-Q).
Liquidity and Capital Resources
As discussed in ITEM 1, Note 1 - INTERIM FINANCIAL STATEMENTS, 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. The relief under Chapter 11 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
under an Extension & Modification Agreement 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.
The New 10.125% Senior Secured Notes issued by NSC at the time it
emerged from Chapter 11 and the May 2003 Bank Agreement are discussed in NOTE
5 - DEBT in the notes to the consolidated financial statements for NSC
included in ITEM 15 of NSC's Form 10-K for the 52 weeks ended November 1,
2003. Certain financial requirements (covenants), of the Company, in the May
2003 Bank Agreement were amended effective May 14, 2004. The amendment is
attached as Exhibit 10.1 to this Form 10-Q.
NSC has no operations of its own, and its only assets are its equity
interests in Pueblo International, LLC and Pueblo Entertainment, Inc. and
inter-company notes issued to NSC by these subsidiaries. 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. The inter-company notes are subordinated to the
obligations of the subsidiaries under the May 2003 Bank Agreement and to the
trade creditors of Pueblo International, LLC, and Pueblo Entertainment, Inc.
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 International, LLC and Pueblo Entertainment, Inc.
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 International,
LLC and Pueblo Entertainment, Inc. are permitted to pay their inter-company
interest on their inter-company notes payable to NSC in accordance with the
terms thereof.
As to cash provided or used during the 28 weeks ended May 15, 2004, the
following pertains:
Net cash provided by operating activities for the 28 weeks ended May 15,
2004 was approximately $1.2 million versus approximately $7.5 million for the
comparable 28 weeks ended May 17, 2003. The primary reasons for the $6.3
million decrease in cash provided by operating activities are the February 1,
2004 interest payment on the new 10.125% Senior Secured Notes, the impact of
the payment of restructuring costs and the variance in timing of volume of
business tax payments.
Net cash used in investing activities for purchases of property and
equipment, net of proceeds on sales of property and equipment, was $1.5
million for the 28 weeks ended May 15, 2004 versus $2.8 million for the 28
comparable weeks ended May 17, 2003. The primary reason for the difference is
the expenditures made during the 28 weeks ended May 17, 2003 for completion of
a new store that opened during that period. No similar expenditure was made
during the 28 weeks ended May 15, 2004. The expenditures made during the 28
weeks ended May 15, 2004 were primarily for normal recurring capital
expenditures for replacement of equipment at the Company's stores and
distribution center. Additionally, the Company made capital expenditures to
enhance its distribution and ordering systems during the 12 and 28 weeks ended
May 15, 2004.
The cash provided by financing activities was approximately $3.4 million
for the 28 weeks ended May 15, 2004, compared to cash used for financing
activities of approximately $9.8 million for the 28 weeks ended May 17, 2003,
an increase of approximately $13.2 million. The cash used for financing
activities during the 28 weeks ended May 17, 2003 was, primarily, repayments
of monies borrowed under the April 1997 revolving credit agreement. The
lender that assumed and extended this agreement on January 30, 2003 required
repayments pursuant to a borrowing formula based on inventory levels whereas
the previous lender had not. The May 2003 Bank Agreement also requires the use
of this formula for revolver borrowings. During the 28 weeks ended May 15,
2004, borrowings under this agreement were approximately $5.9 million. This
cash provided by financing activities was offset by approximately $2.1 million
of cash used to repay term loans during the 28 weeks ended May 15, 2004. There
were no such repayments during the 28 weeks ended May 17, 2003 as the related
loans were originated in June of 2003. As of May 15, 2004, after giving affect
to cash borrowings of approximately $17.2 million and outstanding letters of
credit of approximately $3.4 million the amount available to be borrowed under
the revolving credit facility was approximately $2.2 million. On May 28, 2004,
outstanding letters of credit were reduced by $1.0 million which increased
availability by an equal amount.
Working capital deficit was $14.6 million as of May 15, 2004, an improvement
of $2.2 million from the $16.8 million working capital deficit as of November
1, 2003, producing a current ratio of 0.84:1 as of May 15, 2004, versus 0.81:1
as of November 1, 2003. The improvement in the working capital deficit is a
result of normal fluctuations in the components of working capital during this
period of the year. Current liabilities include the liability for cash borrowed
under the revolving credit facility as the terms of the facility effectively
require the balance fluctuate daily and availability is based on inventory
levels. Since the facility was funded on June 5, 2003, cash borrowings have
fluctuated from a high of $17.2 million to a low of $1.6 million.
Off-Balance Sheet Arrangements
At May 15, 2004, 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
In accordance with the Securities and Exchange Commission's regulation
17 CFR 228, 229 and 249, release 33-8182, the Company has not had any material
changes in contractual obligations from those presented in ITEM 7 of the
Company's Form 10-K for the year ended on November 1, 2003, which was filed
with the Securities and Exchange Commission on January 28, 2004.
Impact of Inflation and Currency Fluctuations
The Company's primary costs, products and labor, usually increase with
inflation. Increases in product costs can typically be passed on to the
customer. Other cost increases must by recovered through operating
efficiencies. 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 3 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.
ITEM 4. 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibits incorporated by reference:
None.
Exhibits attached to this Form 10-Q:
10.1 AMENDMENT NO. 1, DATED May 14, 2004, TO THE May 23,
2003 LOAN AND SECURITY AGREEMENT
31.1 CEO CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
31.2 CFO CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
32.1 CEO CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
32.2 CFO CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
(b) Reports on Form 8-K: None
SIGNATURE
Pursuant to the requirement 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: June 25, 2004 /s/ Daniel J. O'Leary
-----------------------------
Daniel J. O'Leary,
Executive Vice President
and Chief Financial Officer
19
- - 19 -