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 August 9, 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
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(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
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 September 17, 2003 -- 200.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page(s)
-------
Condensed Consolidated Balance Sheets -
August 9, 2003 (Unaudited) and November 2, 2002. . . . . . . 3-4
Condensed Consolidated Statements of Operations (Unaudited) -
Twelve and forty weeks ended August 9, 2003
and August 10, 2002 .. . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows (Unaudited)-
Forty weeks ended August 9, 2003
and August 10, 2002 . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . 7-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . 13-20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 20
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
CONDENSED CONSOLIDATED BALANCE SHEETS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited)
August 9, November 2,
2003 2002
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 586 $ 17,992
Accounts receivable, net of allowance for
doubtful accounts of $367 at August 9,
2003 and $321 at November 2, 2002 2,835 3,226
Inventories 48,276 51,660
Prepaid expenses 11,266 11,018
Deferred income taxes 15,964 15,964
--------- ---------
TOTAL CURRENT ASSETS 78,927 99,860
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 6,307 6,307
Buildings and improvements 44,875 40,092
Furniture, fixtures and equipment 101,500 101,497
Leasehold improvements 43,676 44,511
Construction in progress 1,196 5,278
--------- ---------
197,554 197,685
Less accumulated depreciation
and amortization 114,098 106,558
--------- ---------
83,456 91,127
Property under capital leases, net 10,969 11,720
--------- ---------
TOTAL PROPERTY AND EQUIPMENT 94,425 102,847
GOODWILL 5,621 145,477
DEFERRED INCOME TAX 4,445 6,024
TRADE NAMES 26,574 26,574
DEFERRED CHARGES AND OTHER ASSETS 17,932 17,943
--------- ---------
TOTAL ASSETS $ 227,924 $ 398,725
========= =========
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)
(Unaudited)
August 9, November 2,
2003 2002
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Revolving credit facility $ 13,349 $ 32,000
Current portion term loans 4,200 -
Accounts payable 38,640 44,387
Accrued interest 1,733 73
Accrued expenses 20,717 16,106
Salaries, wages and benefits payable 7,719 10,358
Current obligations under capital leases 621 704
Current deferred tax liability - 950
----------- -----------
TOTAL CURRENT LIABILITIES 86,979 104,578
CAPITAL LEASE OBLIGATIONS, net of
current portion 11,133 11,591
LONG-TERM DEBT, TERM LOANS, net of
current portion 40,100 -
NOTES PAYABLE 90,000 -
RESERVE FOR SELF-INSURANCE CLAIMS 5,183 5,240
DEFERRED INCOME TAXES 27,176 27,176
OTHER LIABILITIES AND DEFERRED CREDITS 29,535 29,226
----------- -----------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 290,106 177,811
----------- -----------
LIABILITIES SUBJECT TO COMPROMISE - 186,208
----------- -----------
TOTAL LIABILITIES 290,106 364,019
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 106,500 91,500
Accumulated deficit (168,682) (56,794)
----------- -----------
TOTAL STOCKHOLDER'S EQUITY (62,182) 34,706
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 227,924 $ 398,725
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited) (Unaudited)
12 weeks ended 40 weeks ended
------------------------ -----------------------
August 9, August 10, August 9, August 10,
2003 2002 2003 2002
----------- ---------- ----------- ----------
Net sales $127,679 $135,770 $448,036 $459,240
Cost of goods sold 86,238 91,203 303,420 308,039
----------- ----------- ----------- ---------
GROSS PROFIT 41,441 44,567 144,616 151,201
OPERATING EXPENSES
Selling, general and administrative expenses 34,998 34,477 122,449 120,402
Gain on insurance settlement - (14,693) - (14,693)
Store exit cost 230 - 612 -
Depreciation and amortization 5,108 6,296 16,785 21,235
----------- ----------- ----------- ---------
OPERATING PROFIT 1,105 18,487 4,770 24,257
Interest expense on debt (does not include
contractual interest expense on pre-petition
debt totaling approximately $900 and
$10,000 for the 12 and 40 weeks ended
August 9, 2003, respectively) (2,705) (5,092) (4,961) (16,812)
Interest expense on capital lease obligations (404) (422) (1,347) (1,402)
Interest and investment income (expense), net (48) 75 168 177
Reorganization items (2,984) - (5,654) -
Gain on early extinguishment of debt 36,508 - 36,508 -
----------- ----------- ----------- ---------
INCOME BEFORE INCOME TAXES & CUMULATIVE
EFFECT OF AN ACCOUNTING CHANGE 31,427 13,048 29,484 6,220
Income tax expense (1,250) (4,874) (1,516) (4,874)
----------- ----------- ----------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE 30,222 8,174 27,968 1,346
Cumulative effect of an accounting change - - (139,856) -
----------- ----------- ----------- ---------
NET INCOME (LOSS) $ 30,222 $ 8,174 $(111,888) $ 1,346
=========== ============ =========== =========
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)
40 weeks ended
---------------------------------
August 9, August 10,
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(111,888) $ 1,346
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Cumulative effect of an accounting change 139,856 -
Gain on early extinguishment of debt (36,508) -
Depreciation and amortization of property and equipment 11,732 12,241
Amortization of intangibles, other assets and inventories 5,053 8,994
Accrual for exit costs on store closing 612 -
Amortization of bond discount - 802
Reorganization items 5,654 -
(Provision) benefit for deferred income taxes 629 807
Gain on disposal of property and equipment, net - (39)
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 328 946
Inventories (345) (421)
Prepaid expenses (1,286) (3,125)
Other assets (1,486) (719)
(Decrease) increase in:
Accounts payable, accrued expenses and accrued interest (4,704) 671
Salaries, wages and benefits payable (2,639) 1,080
Income taxes currently payable - 1,753
Current deferred tax liability - 2,314
Other liabilities and deferred credits and reserve for
self-insurance claims 252 (783)
--------------- --------------
Net cash provided by operating activities 5,260 25,867
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,313) (4,830)
Proceeds from disposal of property and equipment 3 39
--------------- --------------
Net cash used in investing activities (3,310) (4,791)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of revolving credit facility, net of borrowings (32,000) 2,000
Borrowings (repayments) under May 2003 Bank Agreement:
Borrowing under revolving credit facility 103,457 -
Repayments of revolving credit facility (90,108) -
Principal borrowings on term loans 45,000 -
Principal payments on term loans (700) -
Principal payment on Notes and Series C Senior Notes (59,464) -
Proceeds from capital contribution 15,000 -
Principal payments on capital lease obligations (541) (480)
--------------- --------------
Net cash (used in) provided by financing activities (19,356) 1,520
--------------- --------------
Net (decrease) increase in cash and cash equivalents (17,406) 22,596
Cash and cash equivalents at beginning of period 17,992 2,169
--------------- --------------
Cash and cash equivalents at end of period $ 586 $24,765
=============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,254 $11,456
Income taxes paid (refunded), net $ 608 $ (597)
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
Organization
Effective July 22, 2002 the registrant changed its name from Pueblo
Xtra International, Inc. to Nutritional Sourcing Corporation ("NSC"). The
condensed 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 condensed consolidated financial statements have been
presented in conformity with generally accepted accounting principles in the
United States of America, including the provisions of the American Institute
of Certified Public Accountants ("AICPA")'s Statement of Position 90-7,
"Financial Reporting By Entities in Reorganization Under the Bankruptcy
Code," ("SOP 90- 7"). The statement requires a segregation of liabilities
subject to compromise by the Bankruptcy Court as of the bankruptcy filing
date, and identification of all transactions and events that are directly
associated with the reorganization of the debtor. In accordance with SOP
90-7, the Company did not adopt fresh-start accounting upon emergence from
bankruptcy.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTE 1 -- INTERIM FINANCIAL STATEMENTS (continued)
Reorganization items reflected in the Statement of Operations for 12 and
40 weeks ended August 9, 2003 are composed primarily of professional fees
directly related to the bankruptcy case. Costs associated with the
reorganization have been accrued as of August 9, 2003.
The accompanying unaudited condensed 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 condensed consolidated financial statements
included herein should be read in conjunction with the audited consolidated
financial statements and related notes included in the Company's Annual
Report on Form 10-K for the year ended November 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 12
and 40 weeks ended August 9, 2003 and August 10, 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.
Intercompany accounts and transactions are eliminated in consolidation.
Operating results for the 12 and 40 weeks ended August 9, 2003 and
August 10, 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 amortization expense
totaled $1,094 and $3,646 for the 12 and 40 weeks ended August 10, 2002,
respectively. Trade names amortization expense totaled $200 and $667 for the
12 and 40 weeks ended August 10, 2002, respectively. 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 40 weeks ended August 9, 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 August 9, 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:
12 weeks ended 40 weeks ended
----------------------- -----------------------
August 9, August 10, August 9, August 10,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Reported net income (loss) $ 30,222 $ 8,174 $(111,888) $ 1,346
Add:
Goodwill amortization - 1,094 - 3,646
Trade names amortization - 200 - 667
---------- ---------- ---------- ----------
Adjusted net income (loss) $ 30,222 $ 9,468 $(111,888) $ 5,659
========== ========== ========== ==========
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
consisted 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 includes accrued interest.
No contractual interest expense was accrued on prepetition debt from
September 4, 2002 through June 5, 2003. The amount of contractual interest
expense not accrued during the 12 and 40 weeks ended August 9, 2003 was
approximately $900 and 10,000, respectively. 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.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTE 5 -- CLASSIFICATION OF BORROWINGS PURSUANT TO REVOLVING CREDIT FACILITY
Borrowings under the revolving credit facility at November 2, 2002 were
classified as current liabilities as that facility expired on February 1,
2003.
In the accompanying August 9, 2003 condensed consolidated balance sheet,
the classification as current of the borrowings under the new revolving
credit facility, which is part of the May 2003 Bank Agreement, is different
from the classification as long-term of such borrowings anticipated in the
proforma balance sheets in previous filings that gave effect to the Company?s
reorganization.
The May 2003 Bank Agreement was funded on June 5, 2003 at the time NSC
consummated its Plan Of Reorganization and emerged from bankruptcy. The
facility is a five year facility which expires on June 22, 2008 and borrowing
availability under it is based on the inventory levels and values as more
fully discussed in Note 16 ? SUBSEQUENT EVENTS - to the consolidated
financial statements included in Item 15 of the Company?s Form 10-K for the
year ended on November 2, 2002 which was filed on July 28, 2003.
Generally accepted accounting principles (GAAP) in the United States of
America require that borrowings under the revolving credit facility in the
May 2003 Bank Agreement be classified as current. GAAP requires such
classification despite the five year life of the agreement as the lender, per
the terms of the agreement, has the discretion to issue a five day notice to
change the level of availability should it believe, in good faith and based
on specific circumstances, that a change is appropriate.
Per the terms of the agreement the lender may either decrease or increase
availability. At this filing the lender has not issued such notice or
indicated it intends to do so. Management believes that no adjustment will
be made to availability in the foreseeable future.
NOTE 6 -- DISCLOSURE OF OPERATING SEGMENTS
The Company has two primary operating segments: retail food sales and
video tape rentals and sales. The Company's retail food division, with
headquarters in Puerto Rico, 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 6 -- DISCLOSURE OF OPERATING SEGMENTS (continued)
Reportable operating segment financial information is as follows
(dollars in thousands):
Retail Food Video Rental Total
For the 40 Weeks Ended and as of August 9, 2003:
Net sales $ 416,055 $ 31,981 $ 448,036
Depreciation and amortization (11,954) (4,831) (16,785)
Store exit costs (b) 612 - 612
Operating profit (a) (b) 132 4,638 4,770
Total assets 210,120 17,804 227,924
Capital expenditures (3,206) (107) (3,313)
Rental video tape purchases N/A (3,889) (3,889)
For the 40 Weeks Ended August 10, 2002:
Net sales $ 427,593 $ 31,647 $ 459,240
Depreciation and amortization (16,282) (4,953) (21,235)
Gain on settlement of insurance claim (c) 13,421 1,272 14,693
Operating profit (a) (c) 18,097 6,160 24,257
Capital expenditures (4,780) (50) (4,830)
Rental video tape purchases N/A (4,340) (4,340)
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.
(b) The 40 weeks ended August 9, 2003 include a $0.6 million loss
(before income taxes) for the estimated exit costs of two supermarkets
that are being closed. One of the stores is in Puerto Rico, and one is
on the island of St. Thomas in the U.S. Virgin Islands. Both are being
closed based on management's view of their profit potential. The exit
costs accrued primarily include contractual occupancy costs, property
taxes, and other occupancy costs beyond the closing date, employee
severance and related benefit costs.
(c) The 40 weeks ended August 10, 2002 include a $14.7 million gain (before
income taxes) realized upon the settlement of the business interruption
portion of the Company's Hurricane Georges insurance claim.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTE 7 -- 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.
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.
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)
12 WEEKS ENDED 40 WEEKS ENDED
------------------------- -------------------------
August 9, August 10, August 9, August 10,
2003 2002 2003 2002
------------ ----------- ------------- ----------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 32.5 32.8 32.3 32.9
Selling, general &
administrative expenses 27.4 25.4 27.3 26.2
Gain on insurance settlement (1) - (10.8) - (3.2)
Store exit costs (2) 0.2 - 0.1 -
EBITDA, as defined (3) 4.9 18.3 4.8 9.9
Depreciation & amortization 4.0 4.6 3.7 4.6
Operating profit 0.9 13.6 1.1 5.3
Reorganization items (2.3) - (1.3) -
Gain on early extinguishment of debt 28.6 - 8.1 -
Income before income taxes and cumul-
ative effect of an accounting change 24.6 9.6 6.6 1.4
Income before cumulative effect of an
accounting change 23.7 6.0 6.2 0.3
Net income (loss) 23.7 6.0 (25.0) 0.3
(1) The 12 and 40 weeks ended August 10, 2002 include a $14.7 million gain
(before income taxes) realized upon the settlement of the business
interruption portion of the Company's Hurricane Georges insurance
claim.
(2) The 12 and 40 weeks ended August 9, 2003 include a $0.2 million and $0.6
million loss (before income taxes), respectively, for the estimated exit
costs of two stores that are being closed.
(3) EBITDA, as defined, is earnings before interest expense-net, income
taxes, depreciation, and amortization, reorganization items, the gain on
early extinguishment of debt, 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 17.
Results of Operations
As of August 9, 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 August 10, 2002 through the end of the
third quarter of the current fiscal year on August 9, 2003, as well as the
store composition, is set forth in the following tables:
Stores in Operation:
At August 10, 2002. . . . . . . . . . . . . 88
Stores opened:
Supermarkets . . . . . . . . . . . . . 1
Video tape rental stores . . . . . . . 1
Stores closed:
Supermarket . . . . . . . . . . . . . . -
Video tape rental stores . . . . . . . -
-------
At August 9, 2003. . . . . . . . . . . . . 90 *
=======
Remodels . . . . . . . . . . . . . . . . . -
=======
August 9, August 10,
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 stores in operation as of August 9, 2003 include two supermarkets that will be closed (see
NOTE 5 ? DISCLOSURE OF OPERATING SEGMENTS included in the notes to the Company's consolidated
financial statements included in Item 1 of this Form 10-Q).
The following is the summary of total and comparable store sales:
Percentage increase (decrease) in sales
for the 12 and 40 ended August 9, 2003, as
compared to the 12 and 40 weeks ended August 10, 2002
-----------------------------------------------------
12 Weeks Ended 40 Weeks Ended
------------------ -------------------
Total Sales (6.0)% (2.4)%
========= =========
Comparable Stores:
Retail Food Division (9.8)% (5.9)%
========= =========
Video Rental Division (6.4)% (0.5)%
========= =========
Total Comparable Store Sales (9.6)% (5.5)%
========= =========
Total sales for the 12 and 40 weeks ended August 9, 2003 were $127.7
million and $448.0 million, respectively, versus $135.8 million and $459.2
million for the 12 and 40 weeks ended August 10, 2002, decreases of 6.0% and
2.4%, respectively. Same store sales decreased by 9.6% and 5.5%,
respectively. For the 12 and 40 weeks ended August 9, 2003, same store sales
were $122.8 million and $432.5 million, respectively, versus $135.8 million
and $457.8 million, respectively, for the 12 and 40 comparable weeks ended
August 10, 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 9.8% and
5.9%, respectively, from the 12 and 40 comparable weeks ended August 10,
2002. The factors contributing to the decline in same stores sales in the
Retail Food Division is continued growth in competition and a softening of
the economy in both Puerto Rico and the U.S. Virgin Islands. The above
factors have created severe pressure on the Company's retail food division
as well as its competitors to reduce retail prices in the Company's markets.
Video Rental Division same store sales decreased 6.4% and 0.5%, respectively,
from the 12 and 40 comparable weeks ended August 10, 2002. The decrease in
Video Rental Division sales for the quarter was due primarily to a decrease
in the number of new releases and in customer response to new releases for
both rental and sell-through videos.
Gross profit decreased for the 12 and 40 weeks ended August 9, 2003
by $3.2 million and $6.6 million, respectively, to $41.4 million and $144.6
million, respectively, from $44.6 million and $151.2 million for the
12 and 40 weeks ended August 10, 2002. The rate of gross profit (as a
percentage of sales), for the 12 and 40 weeks ended August 9, 2003 was 32.5%
and 32.3%, respectively, compared to 32.8% and 32.9%, respectively for the 12
and 40 weeks ended August 10, 2002, decreases of 0.3% and 0.6%, respectively.
The primary reason for the decline in the consolidated gross profit is the
reduction in retail prices in the retail food division as a result of the
pricing pressures mentioned above.
Selling, general and administrative expenses were $35.0 million and
$122.4 million, respectively, for the 12 and 40 weeks ended August 9, 2003
compared to $34.5 million and $120.4 million, respectively, for the 12 and 40
weeks ended August 10, 2002, increases of $0.5 million and $2.0 million,
respectively. These increases are primarily the result of the new supermarket
and new video rental store that opened during the quarter ended February 22,
2003 and increased energy cost for all stores. Included in the 12 and 40
weeks ended August 9, 2003 are severance costs totaling $0.5 million as part
of the Company's plan to reduce operating and administrative costs. The
Company has taken several other initiatives, as part of its challenge plan to
reduce costs, including steps to reduce warehouse and distribution costs,
supply costs, bank processing fees, communication, and advertising.
Additionally, the Company is taking steps to reduce its labor costs in its
supermarkets, through more efficient management of labor scheduling and
systems enhancements that will reduce processing and transaction times.
Results for the 12 and 40 weeks ended August 10, 2002 include a $14.7
million gain (before income taxes) realized upon the settlement of the
business interruption portion of the Company's Hurricane Georges insurance
claim.
Depreciation and amortization was $5.1 million and $16.8 million,
respectively, for the 12 and 40 weeks ended August 9, 2003 compared to $6.3
million and $21.2 million for the 12 and 40 weeks ended August 10, 2002,
decreases of $1.2 million and $4.4 million, respectively. These decreases
are primarily a result of the discontinuation of 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
included in Item 1 of this Form 10-Q).
Interest expense, net of interest income, decreased by $2.3 million
and $11.9 million between the 12 and 40 weeks ended August 9, 2003 and the
comparable periods of the prior year primarily as a result of a reduction in
interest expense on debt. As shown in the table below, the primary factor
affecting the change in interest expense on debt, between the 12 and 40 weeks
ended August 9, 2003 and the comparable periods of the prior year, was the
reorganization, which concluded on June 5, 2003 (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). Included below is a more detailed summary
of interest expense on debt for the 12 and 40 weeks ended August 9, 2003 and
August 10, 2002 (dollars in thousands).
INTEREST EXPENSE ON DEBT
-----------------------------------------------
For the 12 weeks ended For the 40 weeks ended
---------------------- ----------------------
August 9, August 10, August 9, August 10,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Interest expense on debt:
Liabilities subject to compromise (the
amount of contractual interest expense on
pre-petition debt not accrued was $900
and $10,000 for the 12 and 40 weeks ended
August 9, 2003, respectively) $ - $ 4,150 $ - $ 13,754
New 10.125 Senior Secured Notes, issued 6/5/03 1,636 - 1,636 -
Revolver borrowings 318 501 1,351 1,649
Term loans 574 - 574 -
Amortization of debt issuance costs 177 441 1,400 1,409
---------- ---------- ---------- ----------
Total $ 2,705 $ 5,092 $ 4,961 $ 16,812
========== ========== ========== ==========
Reorganization items during the 12 and 40 weeks ended August 9, 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. All of the
costs associated with the reorganization have been accrued as of August 9,
2003.
The 12 and 40 weeks ended August 9, 2003 include a $36.5 million gain
resulting from consummation of the Plan of Reorganization in which NSC
provided consideration to the prepetition noteholders equal to $59.5 million
in cash and $90.0 million in New 10.125 Senior Secured Notes.
The effective tax rate for the 12 and 40 weeks ended August 9, 2003
was 4.0% and 5.1%, respectively, compared to 37.4% and 78.4% for the
comparable 12 and 40 weeks ended August 10, 2002, respectively. Variances in
the effective tax rates were primarily due to the relationship of items of
permanent difference between Income Before Income Taxes and Cumulative Effect
of an Accounting Change for financial reporting purposes, and pretax income
for income tax return reporting purposes to Income Before Income Taxes and
Cumulative Effect of an Accounting Change.
The Company recorded net income, before the cumulative effect of an
accounting change, of $30.2 million and $28.0 million for the 12 and 40 weeks
ended August 9, 2003, respectively, versus net income, before the
cumulative effect of an accounting change, of $8.2 million and $1.3 million
for the comparable 12 and 40 weeks ended August 10, 2002, an improvement of
$22.0 million and $26.7 million. The preceding paragraphs in this
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS discuss the reasons for the variances.
EBITDA, as defined (Earnings Before Interest expense-net, income Taxes,
Depreciation and Amortization, reorganization items, gain from early
extinguishment of debt, and cumulative effect of an accounting change), was
$6.2 million and $21.6 million for the 12 and 40 weeks ended August 9, 2003,
versus $24.8 million and $45.5 million, respectively, for the comparable 12
and 40 weeks ended August 10, 2002, decreases of $18.6 million and $23.9
million, respectively. EBITDA for the 12 and 40 weeks ended August 10, 2002
includes a pre-tax gain of $14.7 million from the settlement of the Company's
business interruption insurance claim. Other reasons for the decline in
EBITDA include the previously discussed decline in gross profit and the
increase in selling, general and administrative expenses. Additionally, the
12 and 40 weeks ended August 9, 2003 include charges to EBITDA of $0.2 and
$0.6 million, respectively, for the estimated carrying costs of two stores
that are being closed. Included below is a reconciliation of Operating profit
(loss) to EBITDA (dollars in thousands):
For the 12 weeks ended For the 40 weeks ended
---------------------- ----------------------
August 9, August 10, August 9, August 10,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating (loss) profit $ 1,105 $18,487 $ 4,770 $24,257
Add:
Depreciation and amortization 5,108 6,296 16,785 21,235
---------- ---------- ---------- ----------
EBITDA (as defined) $ 6,213 $24,783 $21,555 $45,492
========== ========== ========== ==========
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.
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, $35.0 million outstanding) and term loans facilities for
various specified purposes and in certain specified amounts, aggregating
$45.0 million.
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. Debt issuance costs
associated with the May 2003 Bank Agreement totaled $3.3 million.
As to cash provided or used during the 40 weeks ended August 9, 2003,
the following pertains:
As of August 9, 2003, the Company had revolver borrowings of
approximately $13.3 million and principal amount of term loans of $44.3
million under the May 2003 Bank 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 May
2003 Bank Agreement the 2003 Bank Lender committed to lend the operating
subsidiaries up to $35.0 million under the revolving credit facility. On
August 9, 2003, after giving effect to outstanding standby letters of credit
in the amount of $3.3 million, borrowing availability on a revolving basis
under the terms of the May 2003 Bank Agreement was $7.2 million.
Net cash provided by operating activities for the 40 weeks ended August
9, 2003 was $5.3 million versus $25.9 million for the comparable 40 weeks
ended August 10, 2002. The decline is primarily a result of the Company
recording a $14.7 million gain, during the 40 weeks ended August 10, 2002,
upon settlement of the business interruption portion of its Hurricane Georges
insurance claim. The remaining decrease resulted from an increase in cash
used for components of working capital.
Net cash used in investing activities for purchases of property and
equipment, net of proceeds on sales of property and equipment, was $3.3
million for the 40 weeks ended August 9, 2003 versus $4.8 million for the
comparable 40 weeks ended August 10, 2002.
Net cash used for financing activities was $19.4 million for the 40
weeks ended August 9, 2003 versus net cash provided from financing activities
of $1.5 million for the comparable 40 weeks ended August 10, 2002. Upon
consummation of the Plan of Reorganization, the Company paid consideration to
the holders of its Notes and Series C Senior Notes totaling $59.9 million in
cash and $90.0 million in New 10.125 Senior Secured Notes. Also as part of
its Plan of Reorganization, the Company received a capital contribution from
its equity holders totaling $15.0 million and additional financing related to
its May 2003 Bank Agreement, including $45.0 million principal amount of term
loans. The Company also repaid its existing revolving credit facility, which
totaled $32.0 million on November 2, 2002, and borrowed funds under its May
2003 Bank Agreement. Revolver borrowings under its May 2003 Bank Agreement
totaled approximately $13.3 million on August 9, 2003.
Working capital was $(8.1) million as of August 9, 2003, a decrease of
$3.4 million from the $(4.7) million as of November 2, 2002, producing a
current ratio of 0.91:1 as of August 9, 2003 versus 0.95:1 as of November 2,
2002. Upon consummation of its Plan of Reorganization, the Company replaced
its existing revolving credit facility with the new revolving credit facility
under the terms of its May 2003 Bank Agreement. During the 40 weeks ended
August 9, 2003, the Company decreased its net borrowings under its revolving
credit facility. However, the professional fees associated with the Chapter
11 Case and refinancing are the primary reason for the $3.4 million decrease
in working capital during the 40 weeks ended August 9, 2003.
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 August 9, 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 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.
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.
With the exception of amortization of goodwill and trade names, as
previously discussed, 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
As of the end of the period covered by this report, Company management
carried out an evaluation, under the supervision and with the participation
of the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information required to be disclosed in the Company's periodic reports filed
with the Securities and Exchange Commission.
In addition, Company management carried out an evaluation, under the
supervision and with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, of the Company's internal control over
financial reporting and there have been no changes that have materially
affected, or are reasonably likely to materially affect the Company's
internal control over financial reporting.
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 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. Management believes that its business will generate cash
flows from operations in amounts sufficient to fund its liquidity needs for
the foreseeable future. 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:
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
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NUTRITIONAL SOURCING CORPORATION
Dated: September 17, 2003 /s/ Daniel J. O'Leary
-----------------------------
Daniel J. O'Leary,
Executive Vice President
and Chief Financial Officer
23
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