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 21, 2004
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to ________________
Commission file number: 33 -63372
Nutritional Sourcing Corporation
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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
Registrant's worldwide web address: www.pueblo.net
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO ___
Indicate by check mark whether the registrant is an accelerated filer (as
in Rule 12b-2 of the Exchange Act). YES NO X
Indicate by check mark whether the registrant has filed all documents and
Reports required to be filed by Section 12, 13, or 15(d) of the Securities
and Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by the Court. YES X NO ___
Number of shares of the Registrant's Common Stock, $ .10 par value,
outstanding as of March 26, 2004 -- 200.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page(s)
-------
Condensed Consolidated Balance Sheets (Unaudited) -
February 21, 2004 and November 1, 2003 . . . . . 3-4
Condensed Consolidated Statements of Operations (Unaudited) -
Sixteen weeks ended February 21, 2004 and February 22, 2003. 5
Condensed Consolidated Statements of Cash Flows (Unaudited)-
Sixteen weeks ended February 21, 2004 and February 22, 2003. 6
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . 7-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . 11-17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 17
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . 17-20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 20
CONDENSED CONSOLIDATED BALANCE SHEETS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited)
--------------------------------
February 21, November 1,
2004 2003
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 97 $ 651
Accounts receivable, net of allowance for
doubtful accounts of $377 at February 21,
2004 and $410 at November 1, 2003 3,129 2,735
Inventories 47,263 51,718
Prepaid expenses 7,754 8,156
Deferred income taxes 10,218 10,218
--------- ---------
TOTAL CURRENT ASSETS 68,461 73,478
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 6,404 6,404
Buildings and improvements 45,657 45,633
Furniture, fixtures and equipment 102,520 102,496
Leasehold improvements 43,797 43,670
Construction in progress 1,457 1,009
--------- ---------
199,835 199,212
Less accumulated depreciation
and amortization 122,547 118,705
--------- ---------
77,288 80,507
Property under capital leases, net 10,447 10,745
--------- ---------
TOTAL PROPERTY AND EQUIPMENT 87,735 91,252
GOODWILL 5,621 5,621
DEFERRED INCOME TAX 682 682
TRADE NAMES 26,574 26,574
DEFERRED CHARGES AND OTHER ASSETS 16,616 16,827
--------- ---------
TOTAL ASSETS $ 205,689 $ 214,434
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands, except share data)
(Unaudited)
--------------------------------
February 21, November 1,
2004 2003
------------- -------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Revolving credit facility $ 10,783 $ 11,355
Current portion term loans 4,200 4,200
Accounts payable 41,195 43,018
Accrued interest 745 3,724
Accrued expenses 17,078 18,768
Salaries, wages and benefits payable 8,353 8,661
Current obligations under capital leases 563 596
----------- -----------
TOTAL CURRENT LIABILITIES 82,917 90,322
CAPITAL LEASE OBLIGATIONS, net of
current portion 10,824 10,996
LONG-TERM DEBT - TERM LOANS, net of
current portion 38,000 39,050
NOTES PAYABLE 90,000 90,000
RESERVE FOR SELF-INSURANCE CLAIMS 4,797 4,729
DEFERRED INCOME TAXES 17,176 17,176
OTHER LIABILITIES AND DEFERRED CREDITS 28,189 28,180
----------- -----------
TOTAL LIABILITIES 271,903 280,453
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, and 5)
STOCKHOLDER'S DEFICIT
Common stock, $.10 par value; 200 shares
authorized and issued - -
Additional paid-in capital 106,500 106,500
Accumulated deficit (172,714) (172,519)
----------- -----------
TOTAL STOCKHOLDER'S DEFICIT (66,214) (66,019)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 205,689 $ 214,434
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited)
16 weeks ended
-------------------------------
February 21, February 22,
2004 2003
------------- -------------
Net sales $ 175,209 $ 186,365
Cost of goods sold 119,055 124,884
------------- -------------
GROSS PROFIT 56,154 61,481
OPERATING EXPENSES
Selling, general and administrative expenses 45,669 50,952
Depreciation and amortization 5,943 6,704
------------- -------------
OPERATING PROFIT 4,542 3,825
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) (4,209) (1,531)
Interest expense on capital lease obligations (521) (539)
Interest and investment income, net 8 155
Reorganization items - (1,678)
------------- -------------
(LOSS) INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE (180) 232
Income tax expense (benefit) 15 (31)
------------- -------------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE (195) 263
Cumulative effect of an accounting change - (139,856)
------------- -------------
NET LOSS $ (195) $ (139,593)
============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited)
16 weeks ended
-------------------------------
February 21, February 22,
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(195) $(139,593)
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 4,293 4,596
Amortization of intangible and other assets 1,650 2,108
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable (394) 541
Inventories 3,161 661
Prepaid expenses 402 2,135
Other assets (145) (724)
(Decrease) increase in:
Accounts payable, accrued expenses and accrued interest (6,492) 445
Salaries, wages and benefits payable (308) (2,564)
Other liabilities and deferred credits and
reserve for self-insurance claims 77 424
------------- -------------
Net cash provided by operating activities 2,049 7,885
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (776) (2,100)
------------- -------------
Net cash used in investing activities (776) (2,100)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (205) (216)
Repayments on April 1997 Bank Credit Facility - (11,016)
Repayments under May 2003 Bank Credit Facility (572) -
Repayments on Term Loans (1,050) -
------------- -------------
Net cash used in financing activities (1,827) (11,232)
------------- -------------
Net decrease in cash and cash equivalents (554) (5,447)
Cash and cash equivalents at beginning of period 651 17,992
------------- -------------
Cash and cash equivalents at end of period $ 97 $ 12,545
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $7,490 $1,110
Income taxes, net of refunds $0 $500
Reorganization items $1,731 $222
The accompanying notes are an integral part of these
condensed consolidated financial statements
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 1 -- INTERIM FINANCIAL STATEMENTS
Basis of Presentation
The unaudited condensed consolidated financial statements include the
accounts of Nutritional Sourcing Corporation ("NSC"), and its wholly owned
subsidiaries (the "Company"). The accompanying unaudited condensed
consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
of America ("GAAP") for interim financial information and in accordance with
the requirements of Form 10-Q and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and changes in cash flows required by GAAP. The Company's fiscal
year ends on the Saturday closest to October 31. Interim operating results for
the first quarters (16 weeks) ended February 21, 2004 and February 22, 2003 are
not necessarily indicative of results that may be expected for the full fiscal
years. The condensed consolidated financial statements included herein should
be read in conjunction with the audited consolidated financial statements and
related notes included in the Company's Annual Report on Form 10-K for the year
ended November 1, 2003. The Property and Equipment components of the balance
sheet as of November 1, 2003, have been reclassified to record the gross cost
and accumulated depreciation applicable to assets still used in the business,
which were previously recorded at a net cost of zero. With respect to the
unaudited financial statements for the first quarters (16 weeks) ended February
21, 2004 and February 22, 2003, it is the opinion of the management of the
Company that all adjustments necessary to present a fair statement of the
results for such interim periods have been included. Such adjustments, other
than those related to the cumulative effect of an accounting change as detailed
herein, were of a normal and recurring nature. Inter-company accounts and
transactions are eliminated in consolidation.
In August 2002, NSC defaulted in the payment of interest on its
outstanding notes, and consented to the entry of an order for relief under
Chapter 11 of the Bankruptcy code the next month. NSC consummated a plan of
reorganization and emerged from bankruptcy in June 2003. Consequently, the
condensed consolidated statement of operations included herein for the 16 weeks
ended February 22, 2003 includes the accounting treatment for the contractual
interest expense for pre-petition debt and for reorganization items prescribed
by the American Institute of Certified Public Accountants ("AICPA")'s Statement
of Position 90-7, "Financial Reporting By Entities in Reorganization Under the
Bankruptcy Code," ("SOP 90-7").
The relief under Chapter 11 pertained to NSC only, not to it's operating
subsidiaries.
NOTE 2 -- INVENTORY
The results of the Company's operations reflect the application of the
last-in, first-out ("LIFO") method of valuing certain inventories of grocery,
non-food and dairy products. Since an actual valuation of inventories under
the LIFO method is only made at the end of a fiscal year based on inventory
levels and costs at that time, interim LIFO calculations are based on
management's estimates of expected year-end inventory levels and costs and
are subject to year-end adjustments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 3 - GOODWILL AND TRADE NAMES
Goodwill previously represented the excess of cost over the then
estimated fair value of the net tangible and other intangible assets acquired
in connection with the 1993 purchase of all the outstanding series of the
common stock of Pueblo International, Inc. (the "Acquisition"). Trade names
acquired at the time of the Acquisition were recorded based on valuations by
independent appraisers. Goodwill and trade names were being amortized using
the straight-line method over periods of 40 years.
During the first quarter (16 weeks) ended February 22, 2003, the Company
adopted SFAS No. 142, "Goodwill and Other Intangible Assets". Accordingly,
beginning November 3, 2002, goodwill and trade names are no longer amortized
as a recurring charge to earnings and will thereafter be tested, at least
annually, for impairment. As a result of its adoption, the Company had an
independent, qualified third party evaluator perform a transitional impairment
test on its existing goodwill and intangible assets on November 3, 2002. This
impairment test was calculated at the reporting unit level, which are the
retail food division and the in-home movie and game entertainment division for
the Company. The goodwill impairment test has two steps: the first,
identifies potential impairments by comparing the fair value of a reporting
unit to its book value including goodwill. Generally, fair value represents a
multiple of earnings before interest, taxes, depreciation, and amortization
("EBITDA") or discounted projected future cash flows. The Company determined
that the carrying value of its retail food division, which included $139,856
of goodwill, exceeded its fair value. Impairment was not indicated for the
goodwill associated with its in-home movie and game entertainment division.
Additionally, no impairment was indicated for trade names. The second step of
the impairment test calculates the possible impairment loss by comparing the
implied fair value of goodwill with the carrying amount. If the implied
goodwill is less than the carrying amount, a write down is recorded. The
third party evaluator performed step two of the impairment test, and as a
result of this analysis, the evaluator determined that the retail food
division goodwill was entirely impaired. This loss was recorded as a
cumulative effect of an accounting change during the first quarter (16 weeks)
ended February 22, 2003. There wasn't any change in the Company's goodwill and
trade names balance during the first quarter (16 weeks) ended February 21,
2004.
NOTE 4 -- DISCLOSURE OF OPERATING SEGMENTS
The Company has two primary operating and reporting segments: the retail
food division and the in-home movie and game entertainment division. The
retail food division is headquartered in Puerto Rico, and consists of 46
supermarkets, 41 of which are in Puerto Rico and 5 of which are in the U.S.
Virgin Islands. The in-home movie and game entertainment division consists of
42 in-home movie and game entertainment stores, 40 of which are in Puerto Rico
and 2 of which are in the U.S. Virgin Islands. Most of the in-home movie and
game entertainment stores are adjacent to or a separate section within one of
the Company's retail food supermarkets. Certain administrative support
functions are located in Florida. Although the Company maintains data by
geographic location, its segment decision-making process is based on its two
product lines.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 4 -- DISCLOSURE OF OPERATING SEGMENTS (continued)
Reportable operating segment financial information is as follows:
In-home Movie
and Game
Retail Food Entertainment Total
----------- ------------- ----------
For the 16 Weeks Ended and as of February 21, 2004:
Net sales $ 161,283 $ 13,926 $ 175,209
Depreciation and amortization 4,268 1,675 5,943
Operating profit (a) 2,186 2,356 4,542
Total assets 189,438 16,251 205,689
Capital expenditures 746 30 776
In-home movie and game entertainment
purchases N/A 1,419 1,419
For the 16 Weeks Ended 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
Capital expenditures 2,077 23 2,100
In-home movie and game entertainment
purchases N/A 1,956 1,956
As of November 1, 2003:
Total assets $ 196,891 $ 17,543 $ 214,434
Because the Retail Food and In-Home Movie and Game Entertainment
Divisions are not segregated by corporate entity structure, the operating
segment amounts shown above do not represent totals for any subsidiary of the
Company. All overhead expenses including depreciation on assets of
administrative departments are allocated to operations. Amounts shown in the
total column above correspond to amounts in the consolidated financial
statements.
(a) See Management's Discussion and Analysis for discussions of gross profit
and selling, general and administrative expenses.
NOTE 5 -- RECENT ACCOUNTING PRONOUNCEMENTS
In November 2003 the Financial Accounting Standards Board's ("FASB"),
Emerging Issues Task Force ("EITF"), confirmed as a consensus EITF Issue No.
03-10, "Application of EITF Issue No. 02-16, 'Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor,' by
Resellers to Sales Incentives Offered to Consumers by Manufacturers"("EITF 03-
10"). EITF 03-10 did not impact the Company's existing accounting and
reporting policies.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 5 -- RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of APB No. 51.
In December 2003, the FASB revised FIN 46 and extended the deadline for the
adoption of the revised FIN 46 ("FIN 46R"). FIN 46R addresses consolidation by
business enterprises of variable interest entities, which have certain
characteristics. Generally, application of FIN 46R is required in financial
statements of public entities that have interests in variable interest
entities commonly referred to as special-purpose entities for periods ending
after December 15, 2003. Application by public entities (other than small
business issuers) for all other types of entities is required in financial
statements for periods ending after March 15, 2004. The Company does not have
an interest in any variable interest entities.
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post Retirement Benefits." This revision ("No. 132R")
requires additional disclosures to those in the original SFAS No. 132 about
assets, obligations, cash flows and the periodic benefit cost of defined
benefit pension plans and other defined benefit post-retirement plans. The
required information should be provided separately for pension plans and for
other post-retirement benefit plans. This statement revision is effective for
the fiscal years ended after December 14, 2003 and interim periods beginning
after December 15, 2003. The adoption of this revision is not expected to have
a material impact on our results of operations or financial position. However
starting with the Company's next fiscal quarter end, SFAS No. 132R will
require the Company to disclose on a quarterly basis its individual elements
of net periodic benefit costs, such as service cost, interest cost, expected
return on assets, amortization of prior service costs, etc. In addition, the
disclosure for the employer's contribution paid, or expected to be paid during
the current fiscal year, if significantly different from amounts previously
disclosed.
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" which
supercedes SAB 101, "Revenue Recognition in Financial Statements." This SAB
revises or rescinds portions of the interpretive guidance included in Topic 13
of the codification of Staff Accounting Bulletins in order to make this
interpretive guidance consistent with current authoritative accounting
guidance and SEC rules and regulations. The principal revisions relate to the
rescission of interpretive material no longer necessary because of
developments outside of the SEC within accounting principles generally
accepted in the United States of America, and the incorporation of certain
sections of the SEC's document entitled "Revenue Recognition in Financial
Statements-Frequently Asked Questions and Answers" into Topic 13. The adoption
of SAB No. 104-did not have a material effect on the Company's consolidated
financial statements or its existing revenue recognition policies.
NOTE 6 -- CONTINGENCIES
At February 21, 2004, the Company was party to a number of legal
proceedings involving claims for money damages arising in the ordinary course
of conducting its business, which are either covered by insurance or are
within the Company's self-insurance program, and in a number of other
proceedings which are not deemed material. It is not possible to determine the
ultimate outcome of these matters; however, management is of the opinion that
the final resolution of any threatened or pending litigation at such date is
not likely to have a material adverse effect on the financial position or
results of operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company operates retail supermarkets and in-home movie and game
entertainment stores ("In-home entertainment stores") in the Caribbean;
specifically on the islands of Puerto Rico, St. Thomas and St. Croix, the
latter two being part of the group of islands known as the U.S. Virgin
Islands. The population in these markets has grown very slowly(i.e.: the 1990
U.S. Census indicated there were approximately 3.5 million people in Puerto
Rico and the 2000 U.S. Census indicated there were approximately 3.8 million
people in Puerto Rico).
The Company's strategy for both the supermarkets and the in-home
entertainment businesses is to concentrate on improving the value offering in,
and convenience at, it's existing locations rather than engaging in an
aggressive expansion program. In both businesses this involves a greater
variety of goods and services than that offered by competitors. Consequently,
from January 2000 through February 21, 2004 the Company's supermarkets have
decreased from 50 to 46. This net decrease of 4 stores is the result of
closing 5 stores and opening one new store. The Company's in-home
entertainment stores have decreased from 43 in January of 2000 to 42 as of
February 21, 2004. This net decrease of 1 store is the result of closing 3
stores and opening 2 new stores.
For more detail concerning stores for the period from February 22, 2003
through February 21, 2004 see page 13 of this Form 10-Q. For the detail of
activity for the fiscal year of 2000 through the end of fiscal year 2003 see
ITEM 2 - PROPERTIES in the Company's Form 10-K for the 52 weeks ended November
1, 2003, which was filed with the Securities and Exchange Commission on
January 28, 2004.
The Company's supermarket markets have been affected by an increasing
level of competition from local supermarket chains, independent supermarkets,
warehouse club stores, mass merchandisers, department stores, discount drug
stores and convenience stores. Warehouse club stores and mass merchandisers,
which began entering the Puerto Rico and U.S. Virgin Islands markets in 1990
offering various grocery and general merchandise items, have also increased
pricing pressures on supermarket retailers including the Company. In
addition, low inflation in food prices in recent years has made it difficult
for the Company and other supermarket operators to increase prices and has
intensified the competitive environment by causing such retailers to emphasize
promotional activities and discount pricing to maintain or gain market share,
in addition to improving cost and expense efficiencies at all levels.
The 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:
Critical Accounting Estimates
There have been no material changes in the basis for, or method of
computation of, the Company's critical accounting estimates since the year
ended November 1, 2003. For a discussion of the Company's critical accounting
estimates see the "Critical Accounting Estimates" section of ITEM 7 of the
Company's Form 10-K for the year ended November 1, 2003 which was filed with
the Securities and Exchange Commission on January 28, 2004.
Selected Operating Results
(As a percentage of net sales)
<CAPTION)
16 WEEKS ENDED
-------------------------
February 21, February 22,
2004 2003
---------- -----------
Net sales 100.0% 100.0%
Gross profit 32.0 33.0
Selling, general & administrative expenses 26.1 27.3
EBITDA, as defined (1) 6.0 5.6
Depreciation & amortization 3.4 3.6
Operating profit 2.6 2.1
Reorganization items 0.0 1.0
(Loss)/Income before income taxes and
cumulative effect of an accounting change (0.1) 0.1
(Loss)/Income before cumulative effect of an
accounting change (0.1) 0.1
Net loss (0.1) (74.9)
(1) EBITDA (as defined) represents earnings before interest, taxes,
depreciation, amortization, reorganization items, and the cumulative
effect of an accounting change. EBITDA (as defined) is not intended to
represent cash flow from operations as defined by accounting principles
generally accepted in the United States of America and should not be
considered as an alternative to net income (loss) as an indication of
the Company's operating performance or to cash flows as a measure of
liquidity. EBITDA (as defined) is included as it is the basis upon
which the Company assesses its financial performance. EBITDA (as
defined) margin represents EBITDA (as defined) divided by net sales.
The bank credit facility and the indenture underlying NSC's publicly
issued debt contain various financial covenants. Some of these covenants
are based on EBITDA. Consequently, EBITDA is disclosed and discussed as
management believes it is an important means by which to measure the
Company's liquidity and compliance with it's debt covenants, and it is a
measure by which management monitors operating results. Furthermore,
EBITDA is used, in part, to determine incentive compensation for
management.
Following is a reconciliation of Net Loss to EBITDA, as defined (dollars
in thousands):
For the 16 weeks ended
------------------------
February 22, February 21,
2004 2003
------------ ------------
Net Loss $ (195) $ (139,593)
Add/(Subtract):
Cumulative effect of an accounting change - 139,856
Income tax expense (benefit) 15 (31)
Reorganization items - 1,678
Interest and investment income, net (8) (155)
Interest expense on capital lease obligations 521 539
Interest expense on debt 4,209 1,531
Depreciation and amortization 5,943 6,704
------------ ------------
EBITDA (as defined) $ 10,485 $ 10,529
============ ============
Results of Operations
As of February 21, 2004, the Company operated a total of 46 supermarkets
and 42 in-home movie and game entertainment locations in Puerto Rico and the
U.S. Virgin Islands. The history of store openings and closings from
February 22, 2003 through the end of the first quarter of the current fiscal
year on February 21, 2004, as well as the store composition, is set forth in
the following tables:
Stores in Operation:
At February 22, 2003 . . . . . . . . . . . . . . . 90
Stores closed:
Puerto Rico - Supermarket . . . . . . . . . . 1
U.S. Virgin Islands - Supermarket . . . . . . 1
-------
At February 21, 2004 . . . . . . . . . . . 88
=======
February 21, February 22,
2004 2003
------------ ------------
Store Composition at Quarter-End:
Supermarkets by location:
Puerto Rico . . . . . . . . . . . . . . . 41 42
U.S. Virgin Islands . . . . . . . . . . . 5 6
------- -------
Subtotal Supermarkets 46 48
======= =======
In-home movie and game entertainment
stores by location:
Puerto Rico . . . . . . . . . . . . . . . . 40 40
U.S. Virgin Islands . . . . . . . . . . . . 2 2
------- -------
Subtotal In-home Movie and game
entertainment stores 42 42
------- -------
Grand Total 88 90
======= =======
The following is the summary of total and comparable store sales:
Percentage increase (decrease) in sales
for the 16 weeks ended February 21, 2004 as
compared to the 16 weeks ended February 22, 2003
-----------------------------------------------------
Total Sales (6.0)%
=========
Comparable Stores:
Retail Food Division (5.4)%
=========
In-Home Movie and Game Entertainment Division (2.6)%
=========
Total Comparable Store Sales (5.1)%
=========
Total sales for the first quarter (16 weeks) ended February 21, 2004 were
$175.2 million versus $186.4 million for the 16 comparable weeks ended
February 22, 2003, a decrease of 6.0%, and same store sales decreased by
5.1%. For the first quarter (16 weeks) ended February 21, 2004, same store
sales were $168.1 million versus $177.2 million for the 16 comparable weeks
ended February 22, 2003. "Same stores" are defined as those stores that were
open as of the beginning of both periods and remained open through the end of
the periods. Same store sales in the Retail Food Division decreased 5.4% from
the 16 comparable weeks ended February 22, 2003. The principal 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. In-home Movie
and Game Entertainment Division same store sales decreased 2.6% for the first
quarter (16 weeks) as compared to the same periods in the prior year
primarily due to a decline in rental revenue. As the popularity of DVD's has
increased over the past several years, so has competition in this industry.
This is because DVD titles are primarily released for rental and sale at the
same time whereas VHS tapes had generally been released for rental prior to
being released for sale allowing the Company to benefit from a "rental window".
Currently, substantially all DVD's are simultaneously released for rental and
sale resulting in lower sell-through prices, which means prices that are low
enough to allow an affordable sales price by the retailer to the consumer.
This sell-through price has accelerated consumer interest in the format but
has also served to increase competition from mass merchant retailers.
Gross profit decreased for the first quarter (16 weeks) ended February
21, 2004 by $5.3 million, to $56.2 million from $61.5 million for the 16
comparable weeks ended February 22, 2003, as a result of both a decline in
sales and a decline in the rate of gross profit (as a percentage of sales).
The rate of gross profit for the 16 weeks ended February 21, 2004 was 32.0%
versus 33.0% for the 16 comparable weeks ended February 22, 2003, a decrease
of 1.0%. The primary reason for the decline in the rate of 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 $45.7 million for the
first quarter (16 weeks) ended February 21, 2004 versus $51.0 million for the
16 comparable weeks ended February 22, 2003, a decrease of $5.3 million. This
decrease was primarily the result of initiatives the Company took as part of
its cost containment program to reduce costs, including steps to reduce
administrative support costs, insurance, supply costs, repairs and
maintenance, communications, advertising and store labor. For the first
quarter (16 weeks) ended February 21, 2004, Selling, general and
administrative expenses, as a percentage of net sales, decreased 1.3% as
compared to the first quarter (16 weeks) ended February 22, 2003.
Depreciation and amortization was $5.9 million for the first quarter (16
weeks) ended February 21, 2004 versus $6.7 million for the 16 comparable weeks
ended February 22, 2003, a decrease of $0.8 million. The reason for this
decrease is that during the fourth quarter of the fiscal year (52 weeks) that
ended November 1, 2003, the Company closed two of its supermarkets and
recorded a write down of impaired assets for two of its other supermarkets.
Interest expense, net of interest income, increased by $2.8 million
between the first quarter (16 weeks) ended February 21, 2004 and the 16
comparable weeks ended February 22, 2003, primarily as a result of an increase
in interest expense on debt. As shown in the table below, the primary factor
affecting the change in interest expense on debt, between the first quarter
(16 weeks) ended February 21, 2004 and the 16 comparable weeks ended February
22, 2003, was the reorganization, which concluded on June 5, 2003. Included
below is a more detailed summary of interest expense on debt for the 16 weeks
ended February 21, 2004 and February 22, 2003 (dollars in thousands).
INTEREST EXPENSE ON DEBT
-----------------------------
For the 16 weeks ended
-----------------------------
February 21, February 22
2004 2003
-------------- -------------
Interest expense on debt:
Old 9.5% Notes and Series C Senior Notes, due August 1,
2003 (the amount of contractual interest expense on
pre-petition debt not accrued was $5,200 for the 16
weeks ended February 22, 2003) $ - $ -
New 10.125% Senior Secured Notes, issued 6/5/03 2,782 -
Revolver borrowings 227 584
Term loans 931 -
Amortization of debt issuance costs 269 947
------------- -------------
Total $ 4,209 $ 1,531
============= =============
Reorganization items during the first 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
note-holders on matters pertaining to NSC's Chapter 11 proceedings.
The effective tax rate for the first quarter (16 weeks) ended February
21, 2004 was (8.3%) versus (13.4%) for the 16 comparable weeks ended
February 22, 2003. 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 loss, before the cumulative effect of an
accounting change, of ($0.2) million for the first quarter (16 weeks) ended
February 21, 2004, versus net income, before the cumulative effect of an
accounting change, of $0.3 million for the 16 comparable weeks ended February
22, 2003, a decrease of $0.5 million. The preceding paragraphs in this
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS discuss the reasons for the variances.
During the first quarter ended February 22, 2003, the Company recorded a
$139.9 million charge as the cumulative effect of an accounting change as a
result of its adoption of SFAS No. 142 (see NOTE 3 - Goodwill and Trade
Names to the notes to the consolidated financial statements included in
this Form 10Q).
EBITDA, as defined (Earnings Before Interest expense-net, income Taxes,
Depreciation and Amortization, reorganization items and cumulative effect of
an accounting change), was $10.5 million for both of the first quarters (16
weeks) ended February 21, 2004 and February 22, 2003.
Liquidity and Capital Resources
As discussed in ITEM 1, Note 1 - INTERIM FINANCIAL STATEMENTS, in August
2002, NSC defaulted in the payment of interest on its outstanding notes, and
consented to the entry of an order for relief under Chapter 11 of the
Bankruptcy code the next month. NSC consummated a plan of reorganization and
emerged from bankruptcy in June 2003. The relief under Chapter 11 pertained to
NSC only, not to its operating subsidiaries.
However, the bank debt of the operating subsidiaries, which was
guaranteed by NSC, was due on February 1, 2003.
On January 30, 2003 a new bank lender assumed the existing bank debt
under an Extension & Modification Agreement and committed to lend the
operating subsidiaries additional funds at the time NSC emerged from
bankruptcy. The new bank lender also obtained the guarantee of NSC.
On May 23, 2003 the Company's operating subsidiaries entered into a new
Loan and Security Agreement, and NSC entered into an Amended and Restated
Guarantor General Security Agreement (collectively the "May 2003 Bank
Agreement") with the lender there under (the "2003 Bank Lender"). Funding took
place on June 5, 2003.
The New 10.125% Senior Secured Notes issued by NSC at the time it
emerged from Chapter 11 and the May 2003 Bank Agreement are discussed in NOTE
5 - DEBT in the notes to the consolidated financial statements for NSC
included in ITEM 15 of NSC's Form 10-K for the 52 weeks ended November 1,
2003.
NSC has no operations of its own, and its only assets are its equity
interests in Pueblo International, LLC and Pueblo Entertainment, Inc. and
inter-company notes issued to NSC by these subsidiaries. NSC has no source of
cash to meet its obligations, including its obligations under the New 10.125%
Senior Secured Notes ("New Notes"), other than payments by its subsidiaries on
such inter-company notes. The inter-company notes are subordinated to the
obligations of the subsidiaries under the May 2003 Bank Agreement and to the
trade creditors of Pueblo International, LLC, and Pueblo Entertainment, Inc..
Certain restrictive covenants in the May 2003 Bank Agreement impose
limitations on the declaration or payment of dividends by NSC. Additionally,
dividend payments by Pueblo and Pueblo Entertainment to NSC are restricted
under the terms of the May 2003 Bank Agreement. The May 2003 Bank Agreement,
however, provides that so long as no default or event of default (as defined
in the May 2003 Bank Agreement) exists, or would exist as a result, and
certain other conditions are satisfied, Pueblo and Pueblo Entertainment are
permitted to pay their inter-company interest on their inter-company notes
payable to NSC in accordance with the terms thereof.
As to cash provided or used during the first quarter (16 weeks) ended
February 21, 2004, the following pertains:
Net cash provided by operating activities for the quarter (16 weeks)
ended February 21, 2004 was approximately $2.0 million versus approximately
$7.9 million for the comparable 16 weeks ended February 22, 2003. The primary
reasons for the $5.9 million decrease in cash provided by operating activities
are the February 1, 2004 interest payment on the new 10.125% Senior Secured
Notes, the impact of the payment of restructuring costs and the variance in
timing of prepaid sales tax payments.
Net cash used in investing activities for purchases of property and
equipment, net of proceeds on sales of property and equipment, was $0.8
million for the first quarter (16 weeks) ended February 21, 2004 versus $2.1
million for the 16 comparable weeks ended February 22, 2003. The primary reason
for the difference is the expenditures made during the 16 weeks ended February
22, 2003 for completion of a new store that opened during that period. No
similar expenditure was made during the 16 weeks ended February 21, 2004. The
expenditures made during the 16 weeks ended February 21, 2004 were for normal
recurring capital expenditures for replacement of equipment at the Company's
stores and distribution center.
The cash used for financing activities decreased from approximately
$11.2 million for the 16 weeks ended February 22, 2003 to $1.8 million for the
16 weeks ended February 21, 2004. Approximately $11.0 million of the cash
used for financing activities during the 16 weeks ended February 22, 2003 was,
primarily, repayments of monies borrowed under the April 1997 revolving credit
agreement. The lender that assumed and extended this agreement on January 30,
2003 required repayments pursuant to a borrowing formula based on inventory
levels where as the previous lender had not. The May 2003 Bank Agreement also
requires the use of this formula for revolver borrowings and consequently, the
repayments for the 16 weeks ended February 21, 2004 were approximately $0.6
million. Further, approximately $1.1 million of cash used for financing
activities during the 16 weeks ended February 21, 2004 was for repayments on
term loans. There were no such repayments during the 16 weeks ended February
22, 2003 as the related loans were originated in June of 2003. As of February
22, 2004, after giving affect to cash borrowings of approximately $10.8
million and outstanding letters of credit of approximately $3.3 million the
amount available to be borrowed under the revolving credit facility was
approximately $9.1 million.
Working capital deficit was 14.5 million as of February 21, 2004, a
decrease of $2.3 million from the $16.8 million working capital deficit as of
November 1, 2003, producing a current ratio of 0.83:1 as of February 21, 2004,
versus 0.81:1 as of November 1, 2003. The decrease in the working capital
deficit is a result of normal fluctuations in the components of working
capital during this period of the year. Current liabilities include the
liability for cash borrowed under the revolving credit facility as the terms
of the facility effectively require the balance fluctuate daily and
availability is based on inventory levels. Since the facility was funded on
June 5, 2003, cash borrowings have fluctuated from a high of $16.3 million to
a low of $1.6 million.
Off-Balance Sheet Arrangements
At February 21, 2004, the Company did not have any unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which might have been
established for the purpose of facilitating off-balance sheet arrangements.
Contractual Obligations
In accordance with the Securities and Exchange Commission's regulation
17 CFR 228, 229 and 249, release 33-8182, the Company has not had any material
changes in contractual obligations from those presented in ITEM 7 of the
Company's Form 10-K for the year ended on November 1, 2003, which was filed
with the Securities and Exchange Commission on January 28, 2004.
Impact of Inflation and Currency Fluctuations
The Company's primary costs, products and labor, usually increase with
inflation. Increases in product costs can typically be passed on to the
customer. Other cost increases must by recovered through operating
efficiencies. Currency in Puerto Rico and the U.S. Virgin Islands is the U.S.
Dollar. As such, the Company has no exposure to foreign currency
fluctuations.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks from transactions that
are entered into during the normal course of business. The Company does not
trade or speculate in derivative financial instruments. The Company's
primary market risk exposure relates to interest rate risk. The Company
manages its interest rate risk in order to balance its exposure between fixed
and variable rates while attempting to minimize its interest costs.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, Company management
carried out an evaluation, under the supervision and with the participation
of the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information required to be disclosed in the Company's periodic reports filed
with the Securities and Exchange Commission.
Risk Factors
Forward Looking Statements
Statements, other than statements of historical information, under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Form 10-Q may constitute forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements are based on Company management's expectations and
are subject to various risks and uncertainties. Actual results could differ
materially from those anticipated due to a number of factors, including but
not limited to the Company's substantial indebtedness and high degree of
leverage, which continue as a result of the financial restructuring (including
limitations on the Company's ability to obtain additional financing and trade
credit, to apply operating cash flow for purposes in addition to debt service,
to respond to price competition in economic downturns and to dispose of assets
pledged to secure such indebtedness or to freely use proceeds of any such
dispositions), the Company's limited geographic markets and competitive
conditions in the markets in which the Company operates and buying patterns of
consumers.
Supermarket Industry
The retail grocery industry is extremely competitive and is
characterized by high inventory turnover and narrow profit margins. The
Company's results of operations are therefore, sensitive to, and may be
materially adversely impacted by, among other things, competitive pricing,
promotional pressures and additional store openings by competitors. The
Company competes with national, regional and local supermarkets, warehouse
club stores, drug stores, convenience stores, discount merchandisers and
other local retailers in the market areas it serves. Competition with these
outlets is based on price, store location, advertising and promotion, product
mix, quality and service. Some of these competitors may have greater
financial resources, lower merchandise acquisition costs and lower operating
expenses than the Company, and the Company may be unable to compete
successfully in the future.
In-home Movie and Game Entertainment Operations
The Company's in-home movie and game entertainment franchise faces
significant competition and risks associated with technological obsolescence,
and the Company may be unable to compete effectively. The in-home movie and
game entertainment industry is highly competitive. The Company competes with
local video retail stores, and with mass merchants, specialty retailers,
supermarkets, pharmacies, convenience stores, bookstores, mail order operations,
online stores and other retailers, as well as with noncommercial sources, such
as libraries. As a result of direct competition with others, pricing
strategies for in-home movies and games is a significant competitive factor in
the Company's in-home movie and game entertainment business. The Company's in-
home movie and game entertainment business also competes with other forms of
entertainment, including cinema, television, sporting events and family
entertainment centers. If the Company does not compete effectively with
competitors in the in-home movie and game entertainment industry or with
providers of other forms of entertainment, its revenues and/or its profit
margin could decline and its business, financial condition, liquidity and
results of operations could be adversely affected.
Further, the division's operations are dependent on the studios that
develop and distribute the product. Changes in video formats or distribution
practices (for example from VHS tapes to DVD's) are disruptive to the
division's operations as these changes may cause significant changes in its
product acquisition costs, quantities it is required to purchase, the timing
of the period a title may be rented before it is brought to market for sale
(which impacts the length of time of high rental volume for a title - better
known in the industry as the "rental window") and its per rental revenue
depending on the distribution and pricing practices of the studios.
The division is also dependent on the movie and game production industry
for the development of new product and re-launches of older titles as it has
no production or duplication facilities of its own.
Geographic Considerations; Regulation
The Company is concentrated in Puerto Rico and in the U.S. Virgin
Islands. As a result, the Company is vulnerable to economic downturns in
those regions, as well as natural and other catastrophic events, such as
hurricanes and earthquakes that may impact those regions. These events may
adversely affect the Company's sales which may lead to lower earnings, or
even losses, and may also adversely affect its future growth and expansion.
Further, since the Company is concentrated on three islands, opportunities
for future store expansion may be limited, which may adversely affect its
business and results of operations. Additionally, the Company is subject to
governmental regulations (such as import taxes) that impose obligations and
restrictions and may increase its costs.
Company is Highly Leveraged
The Company has a substantial amount of indebtedness and debt service
obligations, which could adversely affect its financial and operational
flexibility and increase its vulnerability to adverse conditions. The Company
could incur additional indebtedness in the future, including indebtedness that
would be secured by its assets. If the Company increases its indebtedness, the
related risks that it now faces could intensify. For example, the Company's
current level of indebtedness and/or an increase in indebtedness could:
- require the Company to dedicate an increased portion of its cash
flow to payments on its indebtedness;
- limit the Company's ability to borrow additional funds;
- increase the Company's vulnerability to general adverse economic
and industry conditions;
- limit the Company's ability to fund future working capital, capital
expenditures and other general corporate requirements;
- limit the Company's flexibility in planning for, or reacting to,
changes in its business and the industry in which it operates or
taking advantage of potential business opportunities;
- limit the Company's ability to execute its business strategy
successfully; and
- place the Company at a potential competitive disadvantage in its
industry.
The Company's ability to satisfy its indebtedness will depend on its
financial and operating performance, which may fluctuate significantly from
quarter to quarter and is subject to economic, industry and market conditions
and to risks related to its business and other factors beyond its control.
The Company cannot provide assurance that its business will generate
sufficient cash flow from operations or that future borrowings will be
available to it in amounts sufficient to enable it to pay its indebtedness or
to fund its other liquidity needs.
Further, as NSC is a holding company, indebtedness at the NSC level is
effectively subordinated to indebtedness and other obligations at the
operating subsidiary level. See Item 2 MANAGEMENTS' DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS included in this Form 10-Q
and NOTE 5 - DEBT to the consolidated financial statements included in item
15 of the Company's Form 10-K filed with the Securities and Exchange Commission
on January 28, 2004.
Market Risk
In addition to the foregoing, the market price of the Company's debt
securities may be significantly affected by change in market rates of
interest, yields obtainable from investments in comparable securities, credit
ratings assigned to the Company's debt securities by third parties and
perceptions regarding its ability to pay its obligations on its debt
securities.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits incorporated by reference:
None.
Exhibits attached to this Form 10-Q:
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: The Company filed the following current
report on Form 8-K with the SEC during the first quarter (16
weeks) ended February 21, 2004:
January 2, 2004 - Monthly operating report for the
periods from April 20, 2003 through November 29, 2003.
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: March 26, 2004 /s/ Daniel J. O'Leary
-----------------------------
Daniel J. O'Leary,
Executive Vice President
and Chief Financial Officer
6
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