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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 February 19, 2005
[ ] 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 April 5, 2005 -- 200.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page(s)
-------
Condensed Consolidated Balance Sheets (Unaudited) -
February 19, 2005 and October 30, 2004. . . . . . . . . . . 3-4
Condensed Consolidated Statements of Operations (Unaudited) -
Sixteen weeks ended February 19, 2005 and February 21, 2004. 5
Condensed Consolidated Statements of Cash Flows (Unaudited)-
Sixteen weeks ended February 19, 2005 and February 21, 2004. 6
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . 7-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . 12-21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 21
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CONDENSED CONSOLIDATED BALANCE SHEETS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited)
--------------------------------
February 19, October 30,
2005 2004
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 883 $ 1,917
Accounts receivable, net of allowance for
doubtful accounts of $166 at February 19,
2005 and $148 at October 30, 2004 2,800 2,671
Inventories 46,258 49,300
Prepaid expenses 10,390 9,973
Deferred income taxes 12,655 12,655
--------- ---------
TOTAL CURRENT ASSETS 72,986 76,516
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 6,426 6,426
Buildings and improvements 45,836 45,763
Furniture, fixtures and equipment 104,231 105,240
Leasehold improvements 43,313 43,742
Construction in progress 1,359 839
--------- ---------
201,165 202,010
Less accumulated depreciation
and amortization 132,721 130,574
--------- ---------
68,444 71,436
Property under capital leases, net 9,167 9,306
--------- ---------
TOTAL PROPERTY AND EQUIPMENT 77,611 80,742
GOODWILL 5,621 5,621
DEFERRED INCOME TAX 1,800 1,800
TRADE NAMES 26,574 26,574
DEFERRED CHARGES AND OTHER ASSETS 14,586 15,154
--------- ---------
TOTAL ASSETS $199,178 $ 206,407
========= =========
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)
--------------------------------
February 19, October 30,
2005 2004
------------- -------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Revolving credit facility $ 10,425 $ 14,051
Current portion term loans 4,200 4,200
Accounts payable 43,780 41,847
Accrued interest 636 2,546
Accrued expenses 20,598 19,964
Salaries, wages and benefits payable 8,767 11,033
Current obligations under capital leases 523 553
----------- -----------
TOTAL CURRENT LIABILITIES 88,929 94,194
CAPITAL LEASE OBLIGATIONS, net of
current portion 9,784 9,955
LONG-TERM DEBT - TERM LOANS, net of
current portion 33,800 35,200
NOTES PAYABLE 90,000 90,000
RESERVE FOR SELF-INSURANCE CLAIMS 4,400 4,530
DEFERRED INCOME TAXES 18,292 18,292
OTHER LIABILITIES AND DEFERRED CREDITS 28,400 28,323
----------- -----------
TOTAL LIABILITIES 273,605 280,494
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 (178,403) (178,063)
Accumulated other comprehensive loss (2,524) (2,524)
----------- -----------
TOTAL STOCKHOLDER'S DEFICIT (74,427) (74,087)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $199,178 $ 206,407
=========== ===========
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)
16 weeks ended
-------------------------------
February 19, February 21,
2005 2004
------------- -------------
Net sales $ 175,772 $ 175,209
Cost of goods sold 118,432 119,055
------------- -------------
GROSS PROFIT 57,340 56,154
OPERATING EXPENSES
Selling, general and administrative expenses 48,489 45,669
Gain on lease amendment (875) -
Depreciation and amortization 5,557 5,943
------------- -------------
OPERATING PROFIT 4,169 4,542
Interest expense on debt (4,081) (4,209)
Interest expense on capital lease obligations (443) (521)
Interest and investment income, net 15 8
------------- -------------
LOSS BEFORE INCOME TAXES (340) (180)
Income tax expense - 15
------------- -------------
NET LOSS $ (340) $ (195)
============= =============
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)
16 weeks ended
-------------------------------
February 19, February 21,
2005 2004
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (340) $ (195)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 3,996 4,293
Amortization of intangible and other assets 1,561 1,650
Gain on disposal of property and equipment, net (13) -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (129) (394)
Inventories 1,824 3,161
Prepaid expenses (417) 402
Other assets 225 (145)
Increase (decrease) in:
Accounts payable, accrued expenses and accrued interest 657 (6,492)
Salaries, wages and benefits payable (2,266) (308)
Other liabilities and deferred credits and
reserve for self-insurance claims (53) 77
------------- -------------
Net cash provided by operating activities 5,045 2,049
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (865) (776)
Proceeds from disposal of property and equipment 13 -
------------- -------------
Net cash used in investing activities (852) (776)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (201) (205)
Repayments under May 2003 Bank Credit Facility (3,626) (572)
Repayments on Term Loans (1,400) (1,050)
------------- -------------
Net cash used in financing activities (5,227) (1,827)
------------- -------------
Net decrease in cash and cash equivalents (1,034) (554)
Cash and cash equivalents at beginning of period 1,917 651
------------- -------------
Cash and cash equivalents at end of period $ 883 $ 97
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $6,220 $7,490
Income taxes, net of refunds $ - $ -
Reorganization items $ - $1,731
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 first quarters (16 weeks) ended February 19, 2005 and February 21, 2004 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 October 30, 2004. With respect to the unaudited condensed consolidated
financial statements for the first quarters (16 weeks) ended February 19, 2005
and February 21, 2004, 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 were of a normal and
recurring nature. Inter-company accounts and transactions are eliminated in
consolidation.
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.
NOTE 3 -- GOODWILL AND TRADE NAMES
In accordance with Statements of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets", goodwill and trade names are
not amortized as a recurring charge to earnings but are tested, annually,
for impairment. There has not been a change in the Company's goodwill and
tradenames balance during the periods covered by these unaudited condensed
consolidated financial statements, (see NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES in the Company's Form 10-K for the 52 weeks ended October 30, 2004,
which was filed with the Securities and Exchange Commission on December 23,
2004 for more details concerning the Company's goodwill and tradenames).
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 4 -- 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. The retail
food division is headquartered in Puerto Rico, and consists of 45 supermarkets,
40 of which are in Puerto Rico and 5 of which are in the U.S. Virgin Islands.
During the 16 weeks ended February 19, 2005, the Company closed a supermarket
in Puerto Rico as a result of an agreement between the Company and its landlord
in which the Company agreed to close the store and return the premises to the
landlord earlier than its original lease termination date and settle an ongoing
dispute with the landlord. The in-home movie and game entertainment division
consists of 41 in-home movie and game entertainment stores, 39 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 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 16 Weeks Ended and as of February 19, 2005:
Net sales $ 162,719 $ 13,053 $ 175,772
Depreciation and amortization 4,051 1,506 5,557
Operating profit (a) 2,274 1,895 4,169
Total assets 183,277 15,901 199,178
Capital expenditures 810 55 865
In-home movie and game entertainment
purchases N/A 1,638 1,638
For the 16 Weeks Ended February 21, 2004:
Net sales $ 161,283 $ 13,926 $ 175,209
Depreciation and amortization 4,268 1,675 5,943
Operating profit (a) 2,186 2,356 4,542
Capital expenditures 746 30 776
In-home movie and game entertainment
purchases N/A 1,419 1,419
As of October 30, 2004:
Total assets $ 190,200 $ 16,207 $ 206,407
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.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 5 -- RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
statement 153 "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No.
29". The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions, is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The
guidance in that Opinion, however, included certain exceptions to that
principle. This Statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a
result of the exchange. The statement is effective for fiscal periods
beginning after June 15, 2005 and the change should be reported as a
retroactive cumulative effect, with certain exceptions. The adoption of this
standard will not have an impact on the Company's consolidated financial
statements.
In December 2004, the FASB issued Staff Position No. FAS 109-2, "Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004" ("FSP 109-2"). The American Jobs
Creation Act allows a special one-time dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer (repatriation
provision), provided certain criteria are met. The Company may elect to
repatriate earnings in either fiscal 2005 or fiscal 2006. FSP 109-2 provides
accounting and disclosure guidance for the repatriation provision. Although FSP
109-2 is effective immediately, it allows companies additional time beyond the
enactment date to evaluate the effects of the provision on its plan for
investment or repatriation of unremitted foreign earnings. The Company is
currently evaluating the impact of the new Act but believes it will not benefit
from it.
NOTE 6 -- COMPREHENSIVE INCOME
The Company reports comprehensive income (loss) in accordance with
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). Comprehensive income (loss) refers to revenues,
expenses, gains and losses that are not included in net earnings but rather
are recorded directly in shareholders' equity. The Company's accumulated
other comprehensive loss is comprised of an additional minimum pension
liability related to the Company's defined benefit plan for the fiscal year
ending October 30, 2004. For a discussion of the Company's comprehensive
income (loss), see Note 7 -- "Retirement Benefits" section of the Company's
Form 10-K for the year ended October 30, 2004 which was filed with the
Securities and Exchange Commission on December 23, 2004.
NOTE 7 -- 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. The Company has made approximately $712 in
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 7 -- RETIREMENT BENEFITS (continued)
contributions to its defined benefit pension plan trust during the 16 weeks
ended February 19, 2005. During the remainder of its fiscal year ending October
29, 2005, the Company anticipates contributing approximately $3,000 to
the trust.
Net pension cost under the Retirement Plan includes the following
components:
For the 16 weeks ended
-------------------------
February 19, February 21,
2005 2004
------------ ------------
Service cost - benefits
earned during the period $ 479 $ 433
Interest cost on projected
benefit obligation 552 506
Expected return on plan
assets (378) (308)
Net amortization and
deferrals (3) (3)
Recognized net actuarial
loss 128 61
--------- ---------
NET PENSION COST $ 778 $ 689
========= =========
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. 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 $118 in payments
to its beneficiaries during the 16 weeks ended February 19, 2005. During the
remainder of its fiscal year ended October 29, 2005, the Company currently
anticipates paying approximately $287 to the beneficiaries of the plan.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
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 16 weeks ended
-------------------------
February 19, February 21,
2005 2004
------------ -----------
Service cost - benefits
earned during the period $ 98 $ 98
Interest cost on projected
benefit obligation 156 127
Net amortization and
deferrals 12 2
---------- ----------
NET PENSION COST $ 266 $ 227
========== ==========
NOTE 8 -- CONTINGENCIES
At February 19, 2005, 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 9 -- DEBT
On January 28, 2005 the Company's operating subsidiaries agreed to an
Amended and Restated Loan and Security Agreement with their lender bank (the
"Bank") and NSC agreed to an Amended and Restated Corporate Guarantee. The
purpose of this amendment and restatement was to allow for a Term Loan D
pursuant to which the Bank agreed to lend the Company up to $45.0 million
solely for the purchase of NSC's 10.125% Senior Secured Notes due 2009 (the
"Notes") from Noteholders. On January 28, 2005 there were $90.0 million of the
Notes outstanding. On the same date NSC launched a modified Dutch Auction (the
"Invitation") in which it offered to use $42.0 million to purchase Notes for
prices ranging from $715 to $745 per $1,000 of face value of the Notes. The
Invitation also provided for Noteholder consent to an amendment to the
Indenture under which the Notes were issued in the event that a majority of
the Notes outstanding were tendered for purchase by NSC. The purpose of the
amendment was to permit NSC to discontinue filing reports with the Securities
and Exchange Commission (the "SEC") and discontinue providing such reports to
Noteholders. The Invitation was originally scheduled to expire at 5 p.m. New
York City time on February 28, 2005 and was subsequently extended to 5 p.m. New
York City time on March 7, 2005 (the "Expiration Date").
At the Expiration Date approximately $14.3 million (at face value) of the
bonds had been tendered and NSC agreed to purchase them at a clearing price of
$745 per $1,000 of face value of the Notes, which resulted in an aggregate
purchase price for the Notes tendered of approximately $10.7 million. Expenses
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 9 -- DEBT (Continued)
of the transaction including bank commitment and success fees, legal and other
costs were approximately $0.9 million and unpaid interest on the tendered Notes
through the settlement date (March 10, 2005) was approximately $0.2 million.
Consequently, the net gain on the transaction was approximately $2.7 million
and borrowing pursuant to Term Loan D was approximately $11.7 million.
On March 9, 2005 NSC, its subsidiaries and the Bank agreed to a First
Amendment to Loan and Security Agreement. Among other matters, including
certain restrictions on borrowing under the revolving credit facility once Term
Loan D exceeds $30.0 million, one of the provisions of the First Amendment is
that the remainder of the $45.0 million available for Term Loan D may be
borrowed from time to time until March 6, 2006. The remainder of the funds
available for Term Loan D is approximately $33.3 million. The use of all
borrowings under Term Loan D continues to be restricted to the purchase of
NSC's Notes and related expenses (which are limited in the aggregate to $3.0
million).
A majority of the Notes outstanding were not tendered. Consequently, the
Company continues to be required to report to the SEC and to make such reports
available to Noteholders.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company operates supermarkets and in-home movie and game
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 (i.e.: the 1990 U.S. Census indicated there were
approximately 3.5 million people in Puerto Rico and the July 1, 2004 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 businesses is to concentrate on improving the value offering in
and convenience at its existing locations rather than engaging in an
aggressive expansion program. In both businesses this involves a greater
variety of goods and services than that offered by competitors. Consequently,
from January 2000 through February 19, 2005 the Company's supermarkets have
decreased from 50 to 45. This net decrease of 5 stores is the result of
closing 6 stores and opening 1 new store. The Company's in-home entertainment
stores have decreased from 43 in January of 2000 to 41 as of February 19, 2005.
This net decrease of 2 stores is the result of closing 4 stores and opening 2
new stores.
For more detail concerning stores for the period from February 21, 2004
through February 19, 2005 see page 17 of this Form 10-Q. For the detail of
activity for the fiscal year of 2001 through the end of fiscal year 2004 see
ITEM 2 - PROPERTIES in the Company's Form 10-K for the 52 weeks ended October
30, 2004, which was filed with the Securities and Exchange Commission on
December 23, 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 also 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 such 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.
The Company 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. In
April 2004, the Company relaunched the program under the name Da Gusto Rewards
with enhancements to the program to offer additional savings to participants.
The additional savings are based on the points earned by the participants
during the calendar year. Each year, each participant begins the year with no
points. A point is earned for every dollar spent at the Company's supermarkets
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. In September of 2004, the
Company further enhanced the program to include a second, higher point
threshold which allows the customer to choose a second, but different
department in which to receive a discount for the remainder of the calendar
year. All those customers that achieved the second, higher point threshold
during the prior calendar year are automatically qualified to receive a
discount in the department of their choice starting on January 1 of the new
calendar year. These discounts, when utilized by the consumer-participants, are
deducted from gross sales in the accompanying unaudited condensed consolidated
financial statements as required by GAAP in the United States. There were
approximately 1.3 million loyalty cards issued by the Company as of February
19, 2005.
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 include statements concerning the Company's
anticipated contributions and payments on its deferred compensation plans.
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, 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 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, 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. This industry is also challenged by
illegal and non-official competitors that copy and distribute illegal VHS tapes
and DVD's, also known as piracy activity. 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. The Company is also
dependent on its franchisor for technological advances and permission to
expand the items offered for sale.
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, expansion, and ability to acquire windstorm insurance
coverage. 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. Additionally, the Company's revolving and term
loan debt is subject to variable interest rates. If the Company increases its
indebtedness, or if there is a substantial increase in interest rates, the
related risks that it now faces could intensify. For example, the Company's
current level of indebtedness and/or an increase in indebtedness and interest
rates 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 MANAGEMENTS' 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 December 23, 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, or in the method of computation
of, the Company's critical accounting estimates since the year ended October
30, 2004. 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 October 30, 2004, which was filed with the Securities
and Exchange Commission on December 23, 2004.
Selected Operating Results
(As a percentage of net sales)
16 WEEKS ENDED
-------------------------
February 19, February 21,
2005 2004
---------- -----------
Net sales 100.0% 100.0%
Gross profit 32.6 32.0
Selling, general & administrative expenses 27.6 26.1
Gain on lease amendments 0.5 -
EBITDA, as defined (1) 5.5 6.0
Depreciation & amortization 3.2 3.4
Operating profit 2.4 2.6
Loss before income taxes 0.2 0.1
Net loss 0.2 0.1
(1) EBITDA (as defined) represents Earnings Before Interest, Taxes,
Depreciation and Amortization. EBITDA (as defined) is not intended to
replace 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 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.
Following is a reconciliation of Net Loss to EBITDA, as defined (dollars
in thousands):
For the 16 weeks ended
------------------------
February 19, February 21,
2005 2004
------------ ------------
Net Loss $ (340) $ (195)
Add/(Subtract):
Income tax expense (benefit) - 15
Interest and investment income, net (15) (8)
Interest expense on capital lease obligations 443 521
Interest expense on debt 4,081 4,209
Depreciation and amortization 5,557 5,943
------------ ------------
EBITDA (as defined) $ 9,726 $ 10,485
============ ============
Results of Operations
As of February 19, 2005, the Company operated a total of 45 supermarkets
and 41 in-home movie and game entertainment locations in Puerto Rico and the
U.S. Virgin Islands. During the 16 weeks ended February 19, 2005, the Company
closed a supermarket in Puerto Rico as a result of an agreement between the
Company and its landlord in which the Company agreed to close the store and
return the premises to the landlord earlier that its original lease termination
date and settle an ongoing dispute with the landlord. The history of store
openings and closings from February 21, 2004 through the end of the first
quarter of the current fiscal year on February 19, 2005, as well as the store
composition, is set forth in the following tables:
Stores in operation:
At February 21, 2004 . . . . . . . . . . . . . . . 88
Stores closed:
Puerto Rico - Supermarket 1
Puerto Rico - In-home movie and game entertainment. . 1
-------
At February 19, 2005 . . . . . . . . . . . 86
=======
February 19, February 21,
2005 2004
------------ ------------
Store Composition at Quarter-End:
Supermarkets by location:
Puerto Rico . . . . . . . . . . . . . . . 40 41
U.S. Virgin Islands . . . . . . . . . . . 5 5
------- -------
Subtotal Supermarkets 45 46
======= =======
In-home movie and game entertainment stores by location:
Puerto Rico . . . . . . . . . . . . . . . . 39 40
U.S. Virgin Islands . . . . . . . . . . . . 2 2
------- -------
Subtotal In-home movie and game
entertainment stores 41 42
------- -------
Grand Total 86 88
======= =======
The following is the summary of total and comparable store sales:
Percentage increase (decrease) in sales
for the 16 weeks ended February 19, 2005 as
compared to the 16 weeks ended February 21, 2004
-----------------------------------------------------
Total Sales 0.3 %
=========
Comparable Stores:
Retail Food Division 1.4 %
=========
In-Home Movie and Game Entertainment Division (5.6)%
=========
Total Comparable Store Sales 0.8 %
=========
Net sales for the 16 weeks ended February 19, 2005 were $175.8 million,
versus $175.2 million for the 16 comparable weeks ended February 21, 2004, an
increase of $0.6 million or 0.3%. Same store net sales increased by 0.8%. For
the 16 weeks ended February 19, 2005, same store net sales were $174.7 million,
versus $173.2 million, for the 16 comparable weeks ended February 21, 2004.
"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 increased 1.4% from the 16 comparable weeks
ended February 21, 2004. The principal factor contributing to the increase in
same stores net sales in the retail food division is the positive impact of the
Company's Da Gusto rewards program. The Company has also been able to either
maintain or improve its in-stock position while certain of its competitors have
struggled to do so in the face of transitions in their businesses. The positive
impact of these factors are offset somewhat by continued growth in competition.
In-home movie and game entertainment division same store net sales decreased
5.6%, from the 16 comparable weeks ended February 21, 2004, primarily due to a
decline in rental revenue. However, same store net sales for the most recent
eight weeks of the quarter (eight weeks ended February 19, 2005) have produced
positive results. Same store net sales for these eight weeks increased by 2.6%
over the comparable period of the prior year. 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 increased for the 16 weeks ended February 19, 2005 by $1.1
million to $57.3 million, from $56.2 million for the 16 weeks ended February
21, 2004. Approximately $0.2 million of the increase in gross profit was a
result of the increase in net sales. The remaining $0.9 million increase was a
result of the increase in the rate of gross profit. For the 16 weeks ended
February 19, 2005, the rate of gross profit increased by 0.6% to 32.6% from
32.0% for the comparable period of the prior year. The improvement in the rate
of gross profit is primarily a result of the change in the mix of sales in the
retail food division, compared to the 16 weeks ended February 21, 2004, to
items with a higher rate of gross margin. This was offset somewhat by a
reduction in the gross profit rate in the in-home movie and game entertainment
division for the 16 weeks ended February 19, 2005 versus the comparable period
of the prior year as a result of the decline in rental revenue, which has a
higher rate of gross profit than product revenue.
Selling, general and administrative expenses were $48.5 million for the
first quarter (16 weeks) ended February 19, 2005 versus $45.7 million for the
16 comparable weeks ended February 21, 2004, an increase of $2.8 million. One
of the primary reasons for this increase relates to increases in fuel prices
which have led to an increase in electric costs totaling approximately $0.7
million, despite the Company's positive efforts in reducing electricity
consumption. Additionally, the Company has experienced an increase in
administrative costs in order to improve the operations, merchandising and
product procurement functions of its Retail Food Division. Since the end of
the second quarter of the prior year, the Retail Food Division has filled
several key management positions in these departments. Additionally, the
Company has hired consultants in its Retail Food Division to help execute the
Company's strategy in reducing energy consumption and improving its
merchandising and procurement functions in order to achieve increased sales,
an improvement in its rate of gross profit, and an improvement in working
capital.
The 16 weeks ended February 19, 2005, include a gain of approximately
$0.9 million, net of related expenses, as a result of amending a certain
store's lease. The amendment to the Puerto Rico supermarket lease involved
an agreement to close the store earlier than the original lease termination
date and return the property back to the landlord, both of which occurred
prior to February 19, 2005. The Company had previously recorded a gain of
approximately $0.7 million, net of expenses, during the fourth quarter of the
fiscal year ended October 30, 2004. For more details, refer to the Company's
Form 10-K for the 52 weeks ended October 30, 2004, which was filed with the
Securities and Exchange Commission on December 23, 2004.
Depreciation and amortization was $5.6 million for the first quarter
(16 weeks) ended February 19, 2005 versus $5.9 million for the 16 comparable
weeks ended February 21, 2004, a decrease of $0.3 million.
Interest expense, net of interest income, decreased by $0.2 million
between the first quarter (16 weeks) ended February 19, 2005 and the 16
comparable weeks ended February 21, 2004. The primary reason for the decline
in interest expense is a reduction in the average principal borrowings on both
the Company's revolver and term loans. Revolver borrowings are made, as
needed, in order to fund the Company's operating and working capital needs,
while the principal on term loans is reduced each month as the Company makes
equal principal payments in accordance with the term loan agreement.
The effective tax rate for the first quarter (16 weeks) ended February
19, 2005 was 0.0% versus (8.3%) for the 16 comparable weeks ended February 21,
2004. Variances in the effective tax rates were primarily due to the
relationship of items of permanent difference between Income (Loss) Before
Income Taxes, pretax income for income tax return reporting purposes and
valuation allowances established against deferred tax assets for which it is
more likely than not that a tax benefit will not be realized.
The Company recorded net loss, before income taxes, of $0.3 million for
the first quarter (16 weeks) ended February 19, 2005, versus net loss, before
income taxes of $0.2 million for the 16 comparable weeks ended February 21,
2004, an increase of $0.1 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 asset is its equity
interest in Pueblo International, LLC ("Pueblo") and inter-company notes
issued to NSC by this subsidiary. 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 subsidiary on such inter-
company notes. The inter-company notes are subordinated to the obligations of
the subsidiary under the May 2003 Bank Agreement and to the trade creditors of
Pueblo International, LLC. 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 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 is permitted to pay its inter-company interest on its
inter-company notes payable to NSC in accordance with the terms thereof.
On January 28, 2005 the Company's operating subsidiaries agreed to an Amended
and Restated Loan and Security Agreement with their lender bank (the "Bank")
and NSC agreed to an Amended and Restated Corporate Guarantee. The purpose of
this amendment and restatement was to allow for a Term Loan D pursuant to which
the Bank agreed to lend the Company up to $45.0 million solely for the purchase
of NSC's 10.125% Senior Secured Notes due 2009 (the "Notes") from Noteholders.
On January 28, 2005 there were $90.0 million of the Notes outstanding. On the
same date NSC launched a modified Dutch Auction (the "Invitation") in which it
offered to use $42.0 million to purchase Notes for prices ranging from $715 to
$745 per $1,000 of face value of the Notes. The Invitation also provided for
Noteholder consent to an amendment to the Indenture under which the Notes were
issued in the event that a majority of the Notes outstanding were tendered for
purchase by NSC. The purpose of the amendment was to permit NSC to discontinue
filing reports with the Securities and Exchange Commission (the "SEC") and
discontinue providing such reports to Noteholders. The Invitation was
originally scheduled to expire at 5 p.m. New York City time on February 28,
2005 and was subsequently extended to 5 p.m. New York City time on March 7,
2005 (the "Expiration Date").
At the Expiration Date approximately $14.3 million (at face value) of the bonds
had been tendered and NSC agreed to purchase them at a clearing price of $745
per $1,000 of face value of the Notes, which resulted in an aggregate purchase
price for the Notes tendered of approximately $10.7 million. Expenses of the
transaction including bank commitment and success fees, legal and other costs
were approximately $0.9 million and unpaid interest on the tendered Notes
through the settlement date (March 10, 2005) was approximately $0.2 million.
Consequently, the net gain on the transaction was approximately $2.7 million
and borrowing pursuant to Term Loan D was approximately $11.7 million.
On March 9, 2005 NSC, its subsidiaries and the Bank agreed to a First
Amendment to Loan and Security Agreement. Among other matters, including
certain restrictions on borrowing under the revolving credit facility once Term
Loan D exceeds $30.0 million, one of the provisions of the First Amendment is
that the remainder of the $45.0 million available for Term Loan D may be
borrowed from time to time until March 6, 2006. The remainder of the funds
available for Term Loan D is approximately $33.3 million. The use of all
borrowings under Term Loan D continues to be restricted to the purchase of
NSC's Notes and related expenses (which are limited in the aggregate to $3.0
million).
A majority of the Notes outstanding were not tendered. Consequently, the
Company continues to be required to report to the SEC and to make such reports
available to Noteholders.
As to cash provided or used during the first quarter (16 weeks) ended
February 19, 2005, the following pertains:
Net cash provided by operating activities for the quarter (16 weeks)
ended February 19, 2005 was approximately $5.0 million versus approximately
$2.0 million for the comparable 16 weeks ended February 21, 2004. The primary
reasons for the $3.0 million increase in cash provided by operating activities
are a difference in amount of interest paid on the new 10.125% Senior Secured
Notes and the impact of the payment of restructuring costs. When the Company
emerged from bankruptcy, the first interest payment on the 10.125% Senior
Secured Notes was due in February of 2004. The accrued amount of $3.7 million
as of November 1, 2003 included interest from June 1, 2003 through November 1,
2003. All succeeding interest payments are due on August 1 and February 1 of
each year. Consequently, the amount accrued as of October 30, 2004 included
interest from August 2, 2004 through October 30, 2004, or $2.3 million.
Additionally, restructuring costs totaling approximately $1.7 million, which
had been accrued as of November 1, 2003, were paid during the 16 weeks ended
February 21, 2004. No such payments were made during the 16 weeks ended
February 19, 2005.
Net cash used in investing activities for purchases of property and
equipment, net of proceeds on sales of property and equipment, was $0.9
million for the first quarter (16 weeks) ended February 19, 2005 versus $0.8
million for the 16 comparable weeks ended February 21, 2004.
The cash used for financing activities increased from approximately
$1.8 million for the 16 weeks ended February 21, 2004 to $5.2 million for the
16 weeks ended February 19, 2005. The primary reason for this $3.4 million
increase is due to the Company paying down approximately $3.0 million more of
the borrowings under its revolver during the 16 weeks ended February 19, 2005
versus the comparable period of the prior year. The Company had been able to
accomplish this increase in revolver repayments through its management of
working capital. The remaining $0.4 million increase is due to the Company
making one more payment on its term loans during the 16 weeks ended February
19, 2005 versus the comparable period of the prior year due to the way the
fiscal periods fell. These payments are made in equal installments on the
first of each calendar month. As of February 19, 2005, after giving affect to
cash borrowings of approximately $10.4 million and outstanding letters of
credit of approximately $2.4 million the amount available to be borrowed under
the revolving credit facility was approximately $9.1 million.
Working capital deficit was $15.9 million as of February 19, 2005, an
improvement of $1.8 million from the $17.7 million working capital deficit as
of October 30, 2004, producing a current ratio of 0.82:1 as of February 19,
2005, versus 0.81:1 as of October 30, 2004. 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, such as the Company's February
1 interest payment on its 10.125% senior secured debt, payment of the
Company's annual property insurance premium, and the payment of certain
benefits pertaining to and accrued through the end of the prior fiscal year.
Additionally, the Company has made improvements in its management of other
components of working capital, such as inventory and accounts payable.
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 $18.0 million to a low of $0.7 million. The total balance
outstanding is not expected to be repaid in full in the current period.
Off-Balance Sheet Arrangements
At February 19, 2005, 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 October 30, 2004, which was filed
with the Securities and Exchange Commission on December 23, 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
(a) Exhibits
Exhibits incorporated by reference:
None.
Exhibits attached to this Form 10-Q:
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
99.1 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
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: April 5, 2005 /s/ Daniel J. O'Leary
-----------------------------
Daniel J. O'Leary,
Executive Vice President
and Chief Financial Officer
22
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