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 22, 2003
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number: 33-63372
Nutritional Sourcing Corporation
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0415593
------------------------------------ -----------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
1300 N.W. 22nd Street
Pompano Beach, Florida 33069
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (954) 977-2500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES NO X
Indicate by check mark 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 ___ NO X_
Number of shares of the Registrant's Common Stock, $ .10 par value,
outstanding as of July 31, 2003 -- 200.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page(s)
-------
Consolidated Balance Sheets -
February 22, 2003 (Unaudited) and November 2, 2002. . . . . 3-4
Consolidated Statements of Operations (Unaudited) -
Sixteen weeks ended February 22, 2003
and February 23, 2002 . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows (Unaudited)-
Sixteen weeks ended February 22, 2003
and February 23, 2002 . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements (Unaudited). . . . . . . . . 7-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 15-21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 21
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . 24-26
CONSOLIDATED BALANCE SHEETS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
(Dollars in thousands)
(Unaudited)
February 22, November 2,
2003 2002
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,545 $ 17,992
Accounts receivable, net of allowance for
doubtful accounts of $337 at February 22,
2003 and $321 at November 2, 2002 2,685 3,226
Inventories 49,353 51,660
Prepaid expenses 8,221 11,018
Deferred income taxes 15,964 15,964
--------- ---------
TOTAL CURRENT ASSETS 88,768 99,860
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 6,307 6,307
Buildings and improvements 44,095 40,092
Furniture, fixtures and equipment 103,107 101,497
Leasehold improvements 44,528 44,511
Construction in progress 1,691 5,278
--------- ---------
199,728 197,685
Less accumulated depreciation
and amortization 110,798 106,558
--------- ---------
88,930 91,127
Property under capital leases, net 11,421 11,720
--------- ---------
TOTAL PROPERTY AND EQUIPMENT 100,351 102,847
GOODWILL 5,621 145,477
DEFERRED INCOME TAX 6,024 6,024
TRADE NAMES 26,574 26,574
DEFERRED CHARGES AND OTHER ASSETS 18,205 17,943
--------- ---------
TOTAL ASSETS $ 245,543 $ 398,725
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
(Dollars in thousands, except share data)
(Unaudited)
February 22, November 2,
2003 2002
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Accounts payable $ 43,233 $ 44,387
Accrued expenses 17,116 16,179
Salaries, wages and benefits payable 7,794 10,358
Current obligations under capital leases 671 704
Current deferred tax liability 950 950
Borrowings under revolving credit
facility 20,984 32,000
----------- -----------
TOTAL CURRENT LIABILITIES 90,748 104,578
CAPITAL LEASE OBLIGATIONS, net of
current portion 11,408 11,591
RESERVE FOR SELF-INSURANCE CLAIMS 5,174 5,240
DEFERRED INCOME TAXES 27,176 27,176
OTHER LIABILITIES AND DEFERRED CREDITS 29,716 29,226
----------- -----------
LIABILITIES NOT SUBJECT TO COMPROMISE 164,222 177,811
----------- -----------
LIABILITIES SUBJECT TO COMPROMISE 186,208 186,208
----------- -----------
TOTAL LIABILITIES 350,430 364,019
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 4, and 7)
STOCKHOLDER'S EQUITY
Common stock, $.10 par value; 200 shares
authorized and issued - -
Additional paid-in capital 91,500 91,500
Accumulated deficit (196,387) (56,794)
----------- -----------
TOTAL STOCKHOLDER'S EQUITY (104,887) 34,706
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 245,543 $ 398,725
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
(Dollars in thousands)
(Unaudited)
16 weeks ended
-------------------------------
February 22, February 23,
2003 2002
------------- -------------
Net sales $ 186,365 $ 187,281
Cost of goods sold 124,884 125,880
------------- -------------
GROSS PROFIT 61,481 61,401
OPERATING EXPENSES
Selling, general and administrative expenses 50,952 50,144
Depreciation and amortization 6,704 8,712
------------- -------------
OPERATING PROFIT 3,825 2,545
Interest expense on debt (does not include
contractual interest expense on pre-petition
debt totaling approximately $5,200 for the
16 weeks ended February 22, 2003) (1,531) (6,641)
Interest expense on capital lease obligations (539) (559)
Interest and investment income, net 155 65
Reorganization items (1,678) -
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 232 (4,590)
Income tax benefit 31 -
------------- -------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE 263 (4,590)
Cumulative effect of an accounting change (139,856) -
------------- -------------
NET LOSS $ (139,593) $ (4,590)
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
(Dollars in thousands)
(Unaudited)
16 weeks ended
-------------------------------
February 22, February 23,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(139,593) $ (4,590)
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 4,596 4,967
Amortization of intangible and other assets 2,108 3,745
Amortization of bond discount - 310
Benefit for deferred income tax benefit (31) -
Gain on disposal of property and equipment, net - (21)
Reorganization items 1,678 -
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 541 764
Inventories 661 (268)
Prepaid expenses 2,165 2,252
Other assets (724) 316
(Decrease) increase in:
Accounts payable, accrued expenses and accrued interest (1,232) (3,491)
Salaries, wages and benefits payable (2,564) 984
Other liabilities and deferred credits and
Reserve for self insurance claims 424 482
------------- -------------
Net cash provided by operating activities 7,885 5,450
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,100) (1,649)
Proceeds from disposal of property and equipment - 21
------------- -------------
Net cash used in investing activities (2,100) (1,628)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of revolving credit facility, net of borrowings (11,016) -
Principal payments on capital lease obligations (216) (185)
------------- -------------
Net cash used in financing activities (11,232) (185)
------------- -------------
Net (decrease) increase in cash and cash equivalents (5,447) 3,637
Cash and cash equivalents at beginning of period 17,992 2,169
------------- -------------
Cash and cash equivalents at end of period $ 12,545 $ 5,806
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $1,110 $9,607
Income taxes, net of refunds $500 $0
The accompanying notes are an integral part of these
consolidated financial statements
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 1 -- INTERIM FINANCIAL STATEMENTS
Organization
Effective July 22, 2002 the registrant changed its name from Pueblo
Xtra International, Inc. to Nutritional Sourcing Corporation ("NSC" or
"Entity in Reorganization Proceedings"). The consolidated financial
statements include the accounts of Nutritional Sourcing Corporation, and its
wholly-owned subsidiaries (the "Company").
Proceedings under Chapter 11 of the Bankruptcy Code and Basis of Presentation
On September 24, 2002, NSC voluntarily consented to the entry of
an order for relief under Chapter 11 of the Bankruptcy Code by filing a
Consent to Entry of Order For Relief Under Chapter 11 in the United States
Bankruptcy Court For The District of Delaware (the "Court"). The Court
ordered such relief on September 27, 2002 (case No: 02-12550 (PJW)). This
action by NSC was in response to an involuntary petition filed in the
Court by certain creditors of NSC under title 11, United States Code (the
"Chapter 11 Case").
The creditors' actions were taken as a result of NSC not paying the
August 1, 2002 interest payment on its $177,283 in notes outstanding which
were due in August of 2003. The interest was not paid as a result of NSC's
operating subsidiaries not paying interest they owed to NSC; this non-payment
was consented to by the operating subsidiaries' lender banks.
The relief under the Chapter 11 Case pertained to NSC only, not to its
operating subsidiaries. However, the bank debt of the operating subsidiaries,
which was guaranteed by NSC, was due on February 1, 2003.
On January 30, 2003, a new bank lender assumed the existing bank debt
and committed to lend the operating subsidiaries additional funds at the time
NSC emerged from bankruptcy. The new bank lender also obtained the guarantee
of NSC.
On June 5, 2003, NSC emerged from bankruptcy pursuant to an April 30,
2003 confirmation order from the Court.
The interim bank agreement, new bank financing and NSC's emergence from
bankruptcy, including the settlement of liabilities subject to compromise,
are discussed in detail in the footnotes to the consolidated financial
statements included in Item 15 of the Company's Form 10-K for the fiscal year
(52 weeks) ended November 2, 2002 which was filed on July 28, 2003.
The accompanying consolidated financial statements have been presented
in conformity with generally accepted accounting principles in the United
States of America, including the provisions of the American Institute of
Certified Public Accountants ("AICPA")'s Statement of Position 90-7,
"Financial Reporting By Entities in Reorganization Under the Bankruptcy
Code," ("SOP 90- 7"). The statement requires a segregation of liabilities
subject to compromise by the Bankruptcy Court as of the bankruptcy filing
date, and identification of all transactions and events that are directly
associated with the reorganization of the debtor.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTE 1 -- INTERIM FINANCIAL STATEMENTS (continued)
Reorganization items reflected in the Statement of Operations for the
fiscal quarter ended February 22, 2003 are composed primarily of professional
fees directly related to the bankruptcy case.
The accompanying consolidated financial statements have been prepared on
the going concern basis of accounting, which contemplates the continuity of
operations, the realization of assets and the satisfaction of liabilities in
the ordinary course of business with the exception of liabilities subject to
compromise and related interest expense. Intercompany accounts and
transactions are eliminated in consolidation.
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States ("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.
These 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 2, 2002. Certain amounts in the prior period have been reclassified
to conform to the current period's presentation. With respect to the
unaudited financial statements for the 16 weeks ended February 22, 2003 and
February 23, 2002, it is the opinion of the management of the Company that
such adjustments necessary to prepare 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.
Operating results for the 16 weeks ended February 22, 2003 and February
23, 2002 are not necessarily indicative of results that may be expected for
the full fiscal years. The Company's fiscal year ends on the Saturday
closest to October 31.
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 June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill and
Other Intangibles." This standard requires that an intangible asset that is
acquired shall be initially recognized and measured based on its fair value.
This statement also provides that goodwill and intangible assets deemed to
have indefinite lives should not be amortized, but shall be tested for
impairment annually or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. SFAS
No. 142 is effective for fiscal periods beginning after December 15, 2001.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTE 3 -- GOODWILL AND TRADE NAMES (continued)
The Company adopted SFAS No. 142 on November 3, 2002. Accordingly,
goodwill and trade names will no longer be amortized as a recurring charge to
earnings. They will hereafter be tested, at least annually, for impairment.
During the prior year (52 weeks ended November 2, 2002), goodwill and trade
names generally were amortized over 40 years. Goodwill and trade names
amortization expense totaled $1,458 and $267, respectively, for the 16 weeks
ended February 23, 2002. 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. The Company determined that it has two reporting units as defined in
SFAS No. 142, its retail food division and its video rental division. The
transitional impairment test was performed at the reporting unit level.
Generally, fair value represented a multiple of earnings before interest,
taxes, depreciation, and amortization ("EBITDA") or discounted projected
future cash flows. Impairment was indicated when the carrying value of a
division, including goodwill, exceeded its fair value. 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 video rental division.
Additionally, no impairment was indicated for trade names.
The fair value of the Company's retail food division was subsequently
measured, by the third party evaluator, against the fair value of its
underlying assets and liabilities, excluding goodwill, to estimate an implied
fair value of the division's goodwill. As a result of this analysis, the
evaluator determined that the retail food division goodwill was entirely
impaired. Impairment primarily resulted from its projected cash flows on a
discounted basis, rather than on an undiscounted basis, as was the standard
under SFAS No. 121, prior to adoption of SFAS No. 142. This loss was
recorded as a cumulative effect of an accounting change during the 16 weeks
ended February 22, 2003.
The following table summarizes changes in the Company's goodwill balance
during the first quarter of the current fiscal year (16 weeks ended February
22, 2003):
Retail Video
food rental Consol-
division division idated
---------- ---------- ----------
Balance at November 2, 2002 $ 139,856 $ 5,621 $ 145,477
Cumulative effect of an
accounting change (139,856) - (139,856)
---------- ---------- ----------
Balance at February 22, 2003 $ - $ 5,621 $ 5,621
========== ========== ==========
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTE 3 -- GOODWILL AND TRADE NAMES (continued)
The following table provides the comparable after-tax effect on net
income due to goodwill and trade names no longer being amortized pursuant to
SFAS No. 142:
16 weeks ended
-------------------------------
February 22, February 23,
2003 2002
------------- -------------
Reported net loss $ (139,593) $ (4,590)
Add:
Goodwill amortization - 1,458
Trade names amortization - 267
------------- --------------
Adjusted net loss $ (139,593) $ (2,865)
============= ==============
NOTE 4 -- LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise ("prepetition") refers to liabilities
incurred prior to the commencement of the Chapter 11 case. These liabilities
consist primarily of amounts outstanding under NSC's 9.5% senior notes (the
"Notes") and 9.5% series C senior notes (the "Series C Senior Notes"), both
due 2003 and also includes accrued interest.
No contractual interest expense has been accrued on prepetition debt
since September 4, 2002. The amount of contractual interest expense not
accrued during the 16 weeks ended February 22, 2003 was approximately $5,200.
For more detail regarding these liabilities subject to compromise and their
final resolution, see NOTES 1, 5, 8, 9 and 16 of the footnotes to the
consolidated financial statements included in Item 15 of the Company's Form
10-K for the fiscal year (52 weeks) ended November 2, 2002 which was filed on
July 28, 2003.
NOTE 5 -- DISCLOSURE ON OPERATING SEGMENTS
The Company has two primary operating segments: retail food sales and
video tape rentals and sales. The Company's retail food division consists of
48 supermarkets, 42 of which are in Puerto Rico and 6 of which are in the
U.S. Virgin Islands. The Company also operates 42 video tape rental stores,
40 of which are in Puerto Rico and 2 of which are in the U.S. Virgin Islands.
Most of the video tape rental stores are adjacent to or a separate section
within one of the Company's retail food supermarkets. Administrative
headquarters are in Florida. Although the Company maintains data by
geographic location, its segment decision making process is based on its two
product lines.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTE 5 -- DISCLOSURE ON OPERATING SEGMENTS (continued)
Reportable operating segment financial information is as follows (dollars in
thousands):
Retail Food Video Rental Total
For the 16 Weeks Ended and as of February 22, 2003:
Net sales $ 172,133 $ 14,232 $ 186,365
Depreciation and amortization (4,606) (2,098) (6,704)
Operating profit (a) 1,854 1,971 3,825
Total assets 225,815 19,728 245,543
Capital expenditures (2,077) (23) (2,100)
Video tape purchases N/A (1,956) (1,956)
For the 16 Weeks Ended February 23, 2002:
Net sales $ 173,551 $ 13,730 $ 187,281
Depreciation and amortization (6,583) (2,129) (8,712)
Operating profit (a) 614 1,931 2,545
Capital expenditures (1,646) (3) (1,649)
Video tape purchases N/A (1,519) (1,519)
As of November 2, 2002:
Total assets $ 378,529 $ 20,196 $ 398,725
Because the Retail Food and Video Rental 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.
NOTE 6 -- RECENT ACCOUNTING PRONOUNCEMENTS
The Company is not aware of any additional significant recent accounting
pronouncements since those included in NOTE 1 of the footnotes to the
consolidated financial statements included in Item 15 of the Company's Form
10-K for the fiscal year (52 weeks) ended November 2, 2002 which was filed on
July 28, 2003.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTE 7 -- PROFORMA IMPACT OF EMERGENCE FROM BANKRUPTCY
As required in Rule 11-01 of Regulation S-X (17 CFR Part 210), the
following table provides proforma information as to the impact of both the
reorganization and the new Loan and Security Agreement, and Amended and
Restated Guarantor General Security Agreement, which the Company's operating
subsidiaries entered into on May 23, 2003 (collectively the "May 2003 Bank
Agreement") on the Company's consolidated February 22, 2003 balance sheets.
Had the funding of the May 2003 Bank Agreement and the reorganization of
the Company taken place on February 22, 2003 the proforma impact on the
consolidated assets, liabilities and stockholder equity of the Company would
have been as indicated in the following table. For purposes of the proforma
presentation included in the following table the same Additional Cash
Consideration has been used as was actually paid out at the time of the
reorganization on June 5, 2003. For a more complete discussion of the new
bank financing and NSC's emergence from bankruptcy, including the settlement
of liabilities subject to compromise, see NOTES 1, 5, 8, 9 and 16 of the
footnotes to the consolidated financial statements included in Item 15 of the
Company's Form 10-K for the fiscal year (52 weeks) ended November 2, 2002
which was filed on July 28, 2003.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTE 7 -- PROFORMA IMPACT OF EMERGENCE FROM BANKRUPTCY (continued)
Unaudited Adjustments to record
the impact of... (a)
---------------------------------
(Unaudited)
Proforma
Consolidated Consolidated
Balance Sheets May Consummation Balance Sheets
as of February 2003 Bank of Plan of as of February
22, 2003 Agreement Reorganization 22, 2003
-------------- --------------- --------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,545 $ 36,345 (b) $(47,890) (c) $ 1,000
Inventories 49,353 49,353
Prepaid expenses 8,221 8,221
All other current assets 18,649 18,649
--------- ---------- ----------- ----------
TOTAL CURRENT ASSETS 88,768 36,345 (47,890) 77,223
PROPERTY & EQUIMPMENT INCLUDING
PROPERTY UNDER CAPITAL
LEASE, net 100,351 100,351
GOODWILL 5,621 5,621
DEFERRED INCOME TAXES 6,024 6,024
TRADE NAMES 26,574 26,574
DEFERRED CHARGES AND
OTHER ASSETS 18,205 811 (d) 19,016
--------- ---------- ----------- ----------
TOTAL ASSETS $245,543 37,156 (47,890) 234,809
========= ========== =========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Revolver borrowings $ 20,984 (7,755) (13,229) (e) -
Accounts Payable 43,233 43,233
Accrued interest 89 (89) -
Other current Liabilities 26,442 26,442
--------- ---------- ----------- ----------
TOTAL CURRENT LIABILITIES 90,748 (7,844) (13,229) 69,675
REVOLVER BORROWINGS 13,229 (e) 13,229
TERM LOANS 45,000 45,000
NEW 10.125% SENIOR SECURED NOTES 90,000 90,000
CAPITAL LEASE OBLIGATIONS - L/T 11,408 11,408
RESERVE FOR SELF-INSURANCE CLAIMS 5,174 5,174
DEFERRED INCOME TAXES 27,176 27,176
OTHER LIABILITIES AND DEFERRED
CREDITS 29,716 29,716
--------- ---------- ----------- ----------
TOTAL LIABILITIES NOT
SUBJECT TO COMPROMISE 164,222 37,156 90,000 291,378
--------- ---------- ----------- ----------
LIABILITIES SUBJECT TO
COMPROMISE 186,208 (186,208) -
--------- ---------- ----------- ----------
TOTAL LIABILITIES $350,430 37,156 (96,208) 291,378
--------- ---------- ----------- ----------
STOCKHOLDER'S EQUITY:
Additional paid-in capital 91,500 15,000 (c) 106,500
Accumulated deficit (196,387) 33,318 (f) (163,069)
--------- ---------- ----------- ----------
TOTAL STOCKHOLDER'S EQUITY (104,887) 48,318 (56,569)
---------- ---------- ----------- ----------
TOTAL LIABILITIES AND $245,543 $37,156 $(47,890) $234,809
STOCKHOLDER'S EQUITY ========== ========== =========== ==========
(a), (b), (c), (d), (e) and (f) are discussed on the following page.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTE 7 -- PROFORMA IMPACT OF EMERGENCE FROM BANKRUPTCY (continued)
Explanatory comments to the February 22, 2003 proforma consolidated
balance sheets in the preceding table:
(a) As required by SOP 90-7, the Company did not adopt fresh-start reporting
because the holder of the Existing Equity in the Entity In Reorganization
Proceedings retained 100% ownership of equity when the entity emerged
from bankruptcy.
(b) Net cash from term loans proceeds.
(c) Cash consideration paid to prepetition noteholders $59,464
Cash for the payment of professional fees associated with
the Plan 3,426
$62,890
Less cash received from Holder of Existing Equity (15,000)
$47,890
The $47,890 was provided to the entity in reorganization proceedings by
its operating subsidiaries which were not in reorganization.
(d) Costs associated with the May 2003 Bank Agreement that will be amortized
over the 5 year life of the agreement. Costs included the
commitment/closing fee, recording fees, title insurance and legal fees.
(e) To properly classify the revolver debt under the May 2003 Bank Agreement
as long-term.
(f) Liabilities subject to compromise $186,208
Less:
Total cash paid to prepetition noteholders (59,464)
New notes (90,000)
Gain on early extinguishment of debt 36,744
Less payment of professional fees (3,426 )
$ 33,318
The gain is not tax affected as, based on the provisions of the United
States Internal Revenue Code and the tax basis of the assets and
liabilities after reorganization, the gain is not taxable currently nor
will the tax basis of the assets be reduced by it.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
On September 24, 2002, NSC voluntarily consented to the entry of an
order for relief under Chapter 11 of the Bankruptcy Code by filing a Consent
to Entry of Order For Relief Under Chapter 11 in the United States Bankruptcy
Court For The District of Delaware (the "Court"). The Court ordered such
relief on September 27, 2002 (Case No: 02-12550 (PJW)). This action by NSC
was in response to an involuntary petition filed in the Court by certain
creditors of NSC under title 11, United States Code (the "Chapter 11 Case").
The creditors' actions were taken as a result of NSC not paying the
August 1, 2002 interest payment on its $177.3 million in notes outstanding
which were due in August of 2003. The interest was not paid as a result of
NSC's operating subsidiaries not paying interest they owed to NSC; this non-
payment was consented to by the operating subsidiaries' lender banks.
The relief under the Chapter 11 Case pertained to NSC only, not to its
operating subsidiaries. However, the bank debt of the operating
subsidiaries, which was guaranteed by NSC, was due on February 1, 2003.
On January 30, 2003, a new bank lender assumed the existing bank debt
and committed to lend the operating subsidiaries additional funds at the time
NSC emerged from bankruptcy. The new bank lender also obtained the guarantee
of NSC.
On June 5, 2003, NSC emerged from bankruptcy pursuant to an April 30,
2003 confirmation order from the Court.
The impact of the Chapter 11 Case on NSC's operations for the quarter
ended February 22, 2003 and its financial condition as of that date are
disclosed in the Company's consolidated financial statements and related
footnotes included in Item 1 of this Form 10-Q.
The impact, including new bank debt and issuance of new 10.125% Senior
Secured Notes, of the financial restructuring and emergence from proceedings
under Chapter 11 of the United States Bankruptcy Code, both of which occurred
subsequent to February 22, 2003, are discussed in more detail in NOTE 16 -
SUBSEQUENT EVENTS of the footnotes to the consolidated financial statements
included in Item 15 of the Company's Form 10-K for the fiscal year (52 weeks)
ended November 2, 2002 which was filed on July 28, 2003.
Overview and Basis of Presentation
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.
Selected Operating Results
(As a percentage of sales)
<CAPTION)
16 WEEKS ENDED
--------------------------------------
February 22, February 23,
2003 2002
-------------- --------------
Gross Profit 33.0 % 32.8%
Selling, General & Administrative Expenses 27.3 26.8
EBITDA, as defined (1) 5.7 6.0
Depreciation & Amortization 3.6 4.6
Operating Profit 2.1 1.4
Reorganization items 1.0 -
Income (Loss) before income taxes and cumulative
effect of an accounting change 0.1 (2.5)
Income (Loss) before cumulative effect of an
accounting change 0.1 (2.5)
Net loss (74.9) (2.5)
- ----------
(1) EBITDA, as defined, is earnings before interest expense-net, income
taxes, depreciation, and amortization, reorganization items, and the
cumulative effect of an accounting change. EBITDA, as defined and
disclosed herein, is neither a measurement pursuant to accounting
principles generally accepted in the United States of America nor a
measurement of operating results and is included for informative purposes
only. The reconciliation of EBITDA, as defined, to Operating Profit
may be found on Page 19.
Results of Operations
As of February 22, 2003, the Company operated a total of 48 supermarkets
and 42 video rental locations in Puerto Rico and the U. S. Virgin Islands.
On November 20, 2002, the Company opened one supermarket and one video rental
store in the Isla Verde section of Carolina, Puerto Rico. The history of
store openings and closings from February 23, 2002 through the end of the
first quarter of the current year on February 22, 2003, as well as the store
composition, is set forth in the following tables:
Stores in Operation:
At February 23, 2002 . . . . . . . . . . . 88
Stores opened:
Supermarkets . . . . . . . . . . . . . 1
Video tape rental stores . . . . . . . 1
Stores closed:
Supermarket . . . . . . . . . . . . . . -
Video tape rental stores . . . . . . . -
-------
At February 22, 2003 . . . . . . . . . . . 90
=======
Remodels . . . . . . . . . . . . . . . . . 1
=======
February 22, February 23,
2003 2002
------------ ------------
Store Composition at Quarter-End:
By division:
Supermarkets . . . . . . . . . . . . 48 47
Video tape rental stores . . . . . . 42 41
------- -------
Total 90 88
======= =======
By location:
Puerto Rico . . . . . . . . . . . . . 82 80
U.S. Virgin Islands . . . . . . . . . 8 8
------- -------
Total 90 88
======= =======
The following is the summary of total and comparable store sales:
Percentage (decrease) increase in sales
for the 16 weeks ended February 22, 2003, as
compared to the 16 weeks ended February 23, 2002
------------------------------------------------
Total Sales (0.5)%
=======
Comparable Stores:
Retail Food Division (3.3)%
=======
Video Tape Rental Division 2.3 %
=======
Total Comparable Store Sales (2.9)%
=======
Total sales for the first quarter (16 weeks) ended February 22, 2003 were
$186.4 million, versus $187.3 million for the 16 comparable weeks ended
February 23, 2002, a decrease of 0.5%; and same store sales decreased by
2.9%. For the 16 weeks ended February 22, 2003, same store sales were $180.5
million versus $185.8 million for the 16 comparable weeks ended February 23,
2002. "Same stores" are defined as those stores that were open as of the
beginning of both periods and remained open through the end of the periods.
Same store sales in the Retail Food Division decreased 3.3% from the 16
comparable weeks ended February 23, 2002. The principal factors contributing
to the decrease in same stores sales in the Retail Food Division are
continued growth in competition and a softening of the economy, in Puerto
Rico and the U. S. Virgin Islands. Video Rental Division same store sales
increased 2.3% for the 16 weeks as compared to the same periods in the prior
year due to an increase in the number of new releases and in customer
response to new releases for both rental and sell-through videos.
Gross profit increased for the quarter (16 weeks) ended February 22, 2003
by $0.1 million to $61.5 million from $61.4 million for the comparable period
of the prior year (16 weeks) ended February 23, 2002. The rate of gross
profit (as a percentage of sales), for the quarter (16 weeks) ended February
22, 2003 was 33.0% compared to 32.8% for the comparable period of the prior
year (16 weeks) ended February 23, 2002, an increase of 0.2%. The increase,
over the prior year, in video rental division sales, which have a higher rate
of gross margin than the retail food division sales, was the primary reason
for the improvement in the consolidated gross profit and the consolidated
rate of gross profit between the comparable periods.
Selling, general and administrative expenses were $51.0 million for the
quarter (16 weeks) ended February 22, 2003 compared to $50.1 million for the
comparable period of the prior year (16 weeks) ended February 23, 2002, an
increase of $0.9 million. This $0.9 million increase is primarily the result
of the new supermarket and new video rental store that opened during the
quarter and increased energy cost for all stores.
Depreciation and amortization was $6.7 million for the quarter (16 weeks)
ended February 22, 2003 compared to $8.7 million for the comparable period
of the prior year, a decrease of $2.0 million. This decrease was primarily a
result of discontinuing amortization of goodwill and trade names as
of November 3, 2002 (see NOTE 3 - GOODWILL AND TRADE NAMES included in the
notes to the Company's consolidated financial statements in Item 1 of this
Form 10-Q).
Interest expense, net of interest income, decreased by $5.2 million
between the 16 weeks ended February 22, 2003 and the comparable period of the
prior year primarily as a result of the Company discontinuing to record
interest expense on the Notes and Series C Senior Notes as of the date of the
voluntary petition for Chapter 11 (see NOTE 4 - LIABILITIES SUBJECT TO
COMPROMISE in the notes to the Company's consolidated financial statements in
Item 1 of this Form 10-Q).
Reorganization items during the quarter (16 weeks) ended February 22,
2003 consisted primarily of the costs of financial and legal professionals
providing financial and legal services to both the Company and the Company's
noteholders on matters pertaining to NSC's Chapter 11 proceedings.
The effective tax rate for the 16 weeks ended February 22, 2003 was 13.4%
compared to 0.0% for the comparable 16 weeks ended February 23, 2002.
Variances in the effective tax rates were primarily due to the relationship
of items of permanent difference between Income (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 Income
(Loss) Before Income Taxes and Cumulative Effect of an Accounting Change.
The Company recorded net income for the quarter (16 weeks) ended
February 22, 2003 of $0.2 million, before the cumulative effect of an
accounting change, a $4.8 million improvement from the net loss, before the
cumulative effect of an accounting change, of $4.6 million for the 16
comparable weeks ended February 23, 2002. The preceding paragraphs in this
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERTATIONS discuss the reasons for the variance.
EBITDA, as defined (Earnings Before Interest expense-net, income Taxes,
Depreciation and Amortization, reorganization items, and a cumulative effect
of an accounting change) was $10.5 million for the quarter (16 weeks) ended
February 22, 2003, versus $11.3 million for the comparable 16 weeks ended
February 23, 2002, a decrease of $0.8 million. The decrease is primarily due
to the increase in selling, general, and administrative expenses, as detailed
above. Included below is a reconciliation of Operating profit (loss) to
EBITDA (dollars in thousands):
For the 16 weeks ended
----------------------------
February 22, February 23,
2003 2002
------------- -------------
Operating profit (loss) $ 3,825 $ 2,545
Add:
Depreciation and amortization 6,704 8,712
------------- -------------
EBITDA (as defined) $10,529 $11,257
============= =============
Liquidity and Capital Resources
The Company's financial restructuring and proceedings under Chapter 11
of the United States Bankruptcy Code are discussed in NOTE 1 of the notes to
the Company's consolidated financial statements included in Item 1 of this
Form 10-Q.
Historically Company operations, along with its available credit
facility, have provided adequate liquidity for the Company's operational
needs.
As to cash provided or used during the quarter (16 weeks) ended February
22, 2003, the following pertains:
As of February 22, 2003, the Company had borrowings of $21.0 million
under the Extension and Modification Agreement with the 2003 Bank Lender (see
NOTE 16 - SUBSEQUENT EVENTS of the notes to the consolidated financial
statements included in Item 15 of the Company's Form 10-K for the fiscal year
ended November 2, 2002 which was filed on July 28, 2003). Per the terms of
the Extension and Modification Agreement the 2003 Bank Lender committed to
lend the operating subsidiaries up to $35.0 million. After giving effect to
outstanding standby letters of credit in the amount of $3.9 million, as of
February 22, 2003, the borrowing availability on a revolving basis under the
terms of the Extension and Modification Agreement was $10.1 million as of
February 22, 2003.
Net cash provided by operating activities for the 16 weeks ended February
22, 2003 was $7.9 million versus $5.5 million for the comparable period of
the prior year. The improvement is a result of a decrease in cash used for
components of working capital including the impact of making the $8.4 million
interest payment on the Notes and Series C Senior Notes on February 1, 2002
of the prior year.
Net cash used in investing activities for purchases of property and
equipment, net of proceeds on sales of property and equipment, was $2.1
million for the 16 weeks ended February 22, 2003 versus $1.6 million for the
comparable period of the prior year.
Net cash used in financing activities was $11.2 million for the 16 weeks
ended February 22, 2003 versus $0.2 million for the 16 weeks ended February
23, 2002. The increase was a result of the pay down of the revolving credit
facility under the terms of the Extension and Modification Agreement with the
2003 Bank Lender.
On May 23, 2003 the Company's operating subsidiaries entered into a new
Loan and Security Agreement, and the Company entered into an Amended and
Restated Guarantor General Security Agreement (collectively the "May 2003
Bank Agreement") with the lender thereunder (the "2003 Bank Lender"). The
initial term of the May 2003 Bank Agreement expires June 22, 2008 and will
continue on a year-to-year basis unless sooner terminated. The borrowers
granted the 2003 Bank Lender a security interest in all assets, tangible and
intangible, owned or hereafter acquired or existing as collateral. In
addition, the May 2003 Bank Agreement is collateralized by a pledge of the
capital stock of, and inter-company notes issued by the Company's operating
subsidiaries.
The Company is required, under the terms of the May 2003 Bank Agreement,
to meet certain financial covenants including minimum consolidated net worth
(as defined) levels, minimum working capital (as defined) levels, minimum
earnings before net interest, income taxes, depreciation and amortization
(EBITDA) as defined, minimum net revenues, a minimum fixed charge coverage
ratio (as defined) and maximum debt to EBITDA ratio (as defined). The May
2003 Credit Agreement also contains certain other restrictions, including
restrictions on additional indebtedness and the declaration and payment of
dividends.
The May 2003 Bank Agreement provides both a revolving loan (with amounts
available based on a borrowing base formula, not to exceed, except in the
lender's discretion, $35 million outstanding) and term loans facilities for
various specified purposes and in certain specified amounts, aggregating $45
million in outstandings.
Funding took place on June 5, 2003 at which time the existing bank debt
for borrowed money outstanding was repaid in full and the 2003 Bank Lender
lent the operating subsidiaries a total of approximately $57.4 million, $12.4
million of which was borrowed under the revolving credit facility. See
NOTE 16 - SUBSEQUENT EVENTS of the footnotes to the consolidated financial
statements included in Item 15 of the Company's Form 10-K for the fiscal
year ended November 2, 2002 which was filed on July 28, 2003. After giving
effect to the funding on June 5, 2003 and the issuance of standby letters of
credit in the amount of $3.9 million, availability under the revolving credit
facility under the May 2003 Bank Agreement was $8.4 million.
Working capital increased during the first quarter by $2.7 million to
$(2.0) million as of February 22, 2003 from $(4.7) million as of November 2,
2002 producing a current ratio of 0.98:1 as of February 22, 2003 versus
0.95:1 as of November 2, 2002. The increase in working capital is primarily
a result of a decrease in cash used for certain components of working
capital.
The Company's general liability and certain of its workers compensation
insurance programs are self-insured. The Company maintains insurance
coverage for claims in excess of $500,000 for eight of its locations and
$250,000 for all other locations. The current portion of the reserve,
representing amounts expected to be paid in the next fiscal year, is $4.3
million as of February 22, 2003 and is anticipated to be funded with cash
provided by operating activities.
Impact of Inflation and Currency Fluctuations
The inflation rate for food prices continues to be lower than the overall
increase in the U.S. Consumer Price Index. The Company's primary costs,
products and labor, usually increase with inflation. Increases in inventory
costs can typically be passed on to the customer. Other cost increases must
by recovered through operating efficiencies and improved gross margins.
Currency in Puerto Rico and the U.S. Virgin Islands is the U.S. Dollar. As
such, the Company has no exposure to foreign currency fluctuations.
Critical Accounting Policies
The Company's critical accounting policies, including the assumptions and
judgments underlying them, are disclosed in the Notes to the Consolidated
Financial Statements in the Company's Annual Report on Form 10-K for the 52
weeks ended November 2, 2002 filed on July 28, 2003.
The policies have been consistently applied in all material respects and
address such matters as: inventories, impairment of long-lived assets,
accrued self-insurance and realization of deferred tax assets.
While the estimates and judgments associated with the application of
these policies may be affected by different assumptions and conditions, the
Company believes the estimates and judgments associated with the reported
amounts are appropriate in the circumstances.
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
Within the 90-day period prior to the filing of this report, Company
management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as defined in
Exchange Act Rule 13a-14(c). Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of the date of that evaluation.
There have been no significant changes in internal controls, or in factors
that could significantly affect internal controls, subsequent to the date the
Chief Executive Officer and Chief Financial Officer completed their
evaluation.
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.
Risk Factors
Supermarket Industry
The retail grocery industry is extremely competitive and is
characterized by high inventory turnover and narrow profit margins. The
Company's results of operations are therefore, sensitive to, and may be
materially adversely impacted by, among other things, competitive pricing,
promotional pressures and additional store openings by competitors. The
Company competes with national, regional and local supermarkets, warehouse
club stores, drug stores, convenience stores, discount merchandisers and
other local retailers in the market areas it serves. Competition with these
outlets is based on price, store location, advertising and promotion, product
mix, quality and service. Some of these competitors may have greater
financial resources, lower merchandise acquisition costs and lower operating
expenses than the Company, and the Company may be unable to compete
successfully in the future.
Video Operations
The Company's video rental franchise faces significant competition and
risks associated with technological obsolescence, and the Company may be
unable to compete effectively. The home video and home video game industries
are highly competitive. The Company competes with local, regional and
national video retail stores, and with mass merchants, specialty retailers,
supermarkets, pharmacies, convenience stores, bookstores, mail order
operations, online stores and other retailers, as well as with noncommercial
sources, such as libraries. As a result of direct competition with others,
pricing strategies for videos and video games is a significant competitive
factor in the Company's video rental business. The Company's home video and
home video game businesses also compete with other forms of entertainment,
including cinema, television, sporting events and family entertainment
centers. If the Company does not compete effectively with competitors in the
home video industry or the home video game industry or with providers of
other forms of entertainment, its revenues and/or its profit margin could
decline and its business, financial condition, liquidity and results of
operations could be adversely affected.
Geographic Considerations; Regulation
The Company is concentrated in the densely populated greater San Juan
metropolitan area of Puerto Rico and in the U.S. Virgin Islands. As a result,
the Company is vulnerable to economic downturns in those regions, as well as
natural and other catastrophic events, such as hurricanes and earthquakes,
that may impact those regions. These events may adversely affect the
Company's sales which may lead to lower earnings, or even losses, and may
also adversely affect its future growth and expansion. Further, since the
Company is concentrated on three islands, opportunities for future store
expansion may be limited, which may adversely affect its business and results
of operations. Additionally, the Company is subject to governmental
regulations that impose obligations and restrictions and may increase its
costs.
Reemergence from Bankruptcy
As discussed in greater detail in Financial Restructuring and
Proceedings Under Chapter 11 of the United States Bankruptcy Code and in NOTE
16 - SUBSEQUENT EVENTS - in the notes to the consolidated financial
statements included in Item 15 of the Company's Form 10-K for the fiscal year
ended November 2, 2002 which was filed on July 28, 2003, the Company
recently emerged from bankruptcy and has a substantial amount of indebtedness
and debt service obligations, which could adversely affect its financial and
operational flexibility and increase its vulnerability to adverse conditions.
The Company could incur substantial additional indebtedness in the future,
including indebtedness that would be secured by its assets. If the Company
increases its indebtedness, the related risks that it now faces could
intensify. For example, it could:
- require the Company to dedicate an increased portion of its cash
flow to payments on its indebtedness;
- limit the Company's ability to borrow additional funds;
- increase the Company's vulnerability to general adverse economic
and industry conditions;
- limit the Company's ability to fund future working capital, capital
expenditures and other general corporate requirements;
- limit the Company's flexibility in planning for, or reacting to,
changes in its business and the industry in which it operates or
taking advantage of potential business opportunities;
- limit the Company's ability to execute its business strategy
successfully; and
- place the Company at a potential competitive disadvantage in its
industry.
Company is Highly Leveraged
The Company's ability to satisfy its indebtedness obligations will
depend on its financial and operating performance, which may fluctuate
significantly from quarter to quarter and is subject to economic, industry
and market conditions and to risks related to its business and other factors
beyond its control. The Company cannot provide assurance that its business
will generate sufficient cash flow from operations or that future borrowings
will be available to it in amounts sufficient to enable it to pay its
indebtedness or to fund its other liquidity needs. Further, as NSC is a
holding company, indebtedness at the NSC level is effectively subordinated to
indebtedness and other obligations at the operating subsidiary level. See
Item 7 MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS and NOTE 16 - SUBSEQUENT EVENTS - to the consolidated
financial statements included in Item 15 of the Company's Form 10-K filed on
July 28, 2003.
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.
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS ON SENIOR SECURITIES
For a more detailed discussion of the default on the Notes and Series C
Senior Notes and the eventual resolution and replacement thereof, see NOTES
1, 5, 8, 9, and 16 of the footnotes to the consolidated financial statements
included in Item 15 of the Company's Form 10-K for the fiscal year ended
November 2, 2002 which was filed on July 28, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits incorporated by reference:
2.1 TERMS OF PROPOSED RESTRUCTURING (INCORPORATED
BY REFERENCE TO EXHIBIT 99.1 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED JANUARY 22,
2003).
2.2 STATEMENT OF FINANCIAL AFFAIRS (INCORPORATED
BY REFERENCE TO EXHIBIT 99.2 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED JANUARY 22,
2003).
2.3 AMENDED SUMMARY OF SCHEDULES (INCORPORATED BY
REFERENCE TO EXHIBIT 99.3 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED JANUARY 22,
2003).
2.4 DISCLOSURE STATEMENT (INCORPORATED BY
REFERENCE TO EXHIBIT 99.1 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18,
2003).
2.5 APPENDIX A TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.2 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.6 APPENDIX B TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.3 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.7 APPENDIX C TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.4 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.8 APPENDIX F TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.7 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.9 APPENDIX G TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.8 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.10 APPENDIX H TO DISCLOSURE STATEMENT
(INCORPORATED BY REFERENCE TO EXHIBIT 99.9 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
2.11 ORDER BY THE COURT AUTHORIZING THE COMPANY TO
APPROVE THE EXTENSION AND MODIFICATION
AGREEMENT AND MODIFYING THE AUTOMATIC STAY
(INCORPORATED BY REFERENCE TO EXHIBIT 99.13 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
10.43 GUARANTEE AGREEMENT (INCORPORATED BY REFERENCE
TO EXHIBIT 99.11 TO THE COMPANY'S CURRENT
REPORT ON FORM 8-K DATED FEBRUARY 18, 2003).
10.44 EXTENSION AND MODIFICATION AND SECURITY
AGREEMENT WITH WESTERNBANK OF PURTO RICO
(INCORPORATED BY REFERENCE TO EXHIBIT 99.10 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED
FEBRUARY 18, 2003).
10.45 AMENDMENT NO. 1 TO LLC AGREEMENT (INCORPORATED
BY REFERENCE TO EXHIBIT 99.12 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18,
2003).
10.46 SUBORDINATION AGREEMENT (INCORPORATED BY
REFERENCE TO EXHIBIT 99.13 TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18,
2003).
Exhibits attached to this Form 10-Q:
99.1 CEO CERTIFICATION PURSUANT TO SECTION 906 OF
OF THE SARBANES-OXLEY ACT OF 2002
99.2 CFO CERTIFICATION PURSUANT TO SECTION 906 OF
OF THE SARBANES-OXLEY ACT OF 2002
(b) Reports on Form 8-K: The Company filed the following Current
Reports on Form 8-K with the SEC during the 16 weeks ended
February 22, 2003
1. December 26, 2002 - Initial Monthly Operating Report and
Monthly Operating Reports for the periods from September
4, 2002 to October 5, 2002 and October 6, 2002 to
November 2, 2002 (subsequently amended, to correct
a transmission error). The amended 8-K was filed on
January 7, 2003.
2. January 16, 2003 - Monthly Operating Report for the
periods from November 3, 2002 to November 30, 2002.
3. January 22, 2003 - to report that on January 17, 2003,
the Company filed a motion for an order extending its
exclusive periods to file a Plan of Reorganization and
solicit acceptances thereof and the Company filed an
emergency motion for an order authorizing the Court to
approve the Company's Extension and Modification and
Security Agreement with the 2003 Bank Lender.
Additionally, the Company announced that it had reached
an agreement with the Official Committee of Unsecured
Creditors and its equityholders on the principal terms
of a comprehensive financial restructuring as part of a
Plan of Reorganization. The Company also announced that
it would not timely file its Form 10-K for the fiscal
year ended November 2, 2002.
4. February 11, 2003 - Monthly Operating Report for the
periods from December 1, 2002 to December 28, 2002.
5. February 18, 2003 - to report than on January 31, 2003,
the Company filed a Disclosure Statement and a motion
for an order to approve such Disclosure Statement and
set a date for confirmation of a Plan of Reorganization.
Also, on January 30, 2003, the Company, as guarantor,
and its subsidiaries entered into an Extension and
Modification and Security Agreement with Westernbank of
Puerto Rico.
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: July 31, 2003 /s/ Daniel J. O'Leary
-----------------------------
Daniel J. O'Leary,
Executive Vice President
and Chief Financial Officer
NUTRITIONAL SOURCING CORPORATION
Certificates pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
I, William T. Keon III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nutritional
Sourcing Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: _July 31, 2003____
/s/ William T. Keon III_
William T, Keon III
Chief Executive Officer
I, Daniel J. O'Leary, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nutritional
Sourcing Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: __July 31, 2003___
/s/ Daniel J. O'Leary
Daniel J. O'Leary
Chief Financial Officer
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