UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended May 14, 2005
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to ________________
Commission file number: 33-63372
Nutritional Sourcing Corporation
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(Exact name of registrant as specified in its charter)
Delaware 65-0415593
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
1300 N.W. 22nd Street
Pompano Beach, Florida 33069
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (954) 977-2500
Registrant's worldwide web address: www.pueblo.net
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO ___
Indicate by check mark whether the registrant is an accelerated filer (as
in Rule 12b-2 of the Exchange Act). YES NO X
Indicate by check mark whether the registrant has filed all documents and
Reports required to be filed by Section 12, 13, or 15(d) of the Securities
and Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by the Court. YES X NO ___
Number of shares of the Registrant's Common Stock, $ .10 par value,
outstanding as of June 13, 2005 -- 200.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page(s)
-------
Condensed Consolidated Balance Sheets (Unaudited) -
May 14, 2005 and October 30, 2004 . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of Operations (Unaudited) -
Twelve and twenty-eight weeks ended May 14, 2005
and May 15, 2004 . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows (Unaudited)-
Twenty-eight weeks ended May 14, 2005 and May 15, 2004 . . . 6
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . 7-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . 13-23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 23
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . 23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . 24
CONDENSED CONSOLIDATED BALANCE SHEETS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited)
--------------------------------
May 14, October 30,
2005 2004
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,836 $ 1,917
Accounts receivable, net of allowance for
doubtful accounts of $137 at May 14,
2005 and $148 at October 30, 2004 2,906 2,671
Inventories 44,826 49,300
Prepaid expenses 12,906 9,973
Deferred income taxes 12,655 12,655
--------- ---------
TOTAL CURRENT ASSETS 75,129 76,516
--------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 6,428 6,426
Buildings and improvements 45,836 45,763
Furniture, fixtures and equipment 104,449 105,240
Leasehold improvements 43,389 43,742
Construction in progress 1,815 839
--------- ---------
201,917 202,010
Less accumulated depreciation
and amortization 135,532 130,574
--------- ---------
66,385 71,436
Property under capital leases, net 8,997 9,306
--------- ---------
TOTAL PROPERTY AND EQUIPMENT 75,382 80,742
GOODWILL 5,621 5,621
DEFERRED INCOME TAX 1,800 1,800
TRADE NAMES 26,574 26,574
DEFERRED CHARGES AND OTHER ASSETS 14,134 15,154
--------- ---------
TOTAL ASSETS $ 198,640 $ 206,407
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands, except share data)
(Unaudited)
--------------------------------
May 14, October 30,
2005 2004
------------- -------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Revolving credit facility $ 13,409 $ 14,051
Current portion term loans 4,982 4,200
Accounts payable 41,694 41,847
Accrued interest 2,377 2,546
Accrued expenses 20,681 19,964
Salaries, wages and benefits payable 9,336 11,033
Current obligations under capital leases 537 553
----------- -----------
TOTAL CURRENT LIABILITIES 93,016 94,194
CAPITAL LEASE OBLIGATIONS, net of
current portion 9,650 9,955
LONG-TERM DEBT - TERM LOANS, net of
current portion 43,573 35,200
NOTES PAYABLE 75,699 90,000
RESERVE FOR SELF-INSURANCE CLAIMS 4,377 4,530
DEFERRED INCOME TAXES 18,292 18,292
OTHER LIABILITIES AND DEFERRED CREDITS 28,082 28,323
----------- -----------
TOTAL LIABILITIES 272,689 280,494
COMMITMENTS AND CONTINGENCIES (Notes 1 and 8)
STOCKHOLDER'S DEFICIT
Common stock, $.10 par value; 200 shares
authorized and issued - -
Additional paid-in capital 106,500 106,500
Accumulated deficit (178,025) (178,063)
Accumulated other comprehensive loss (2,524) (2,524)
----------- -----------
TOTAL STOCKHOLDER'S DEFICIT (74,049) (74,087)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 198,640 $ 206,407
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited)
12 weeks ended 28 weeks ended
------------------------ -----------------------
May 14, May 15, May 14, May 15,
2005 2004 2005 2004
----------- ---------- ----------- ----------
Net sales $120,673 $123,625 $296,445 $298,834
Cost of goods sold 81,019 82,302 199,451 201,357
----------- ----------- ----------- ---------
GROSS PROFIT 39,654 41,323 96,994 97,477
OPERATING EXPENSES
Selling, general and administrative expenses 34,155 35,101 82,644 80,770
Gain on lease amendments - (400) (875) (400)
Depreciation and amortization 4,334 4,492 9,891 10,435
----------- ----------- ----------- ---------
OPERATING PROFIT 1,165 2,130 5,334 6,672
Interest expense on debt (3,168) (3,234) (7,249) (7,443)
Interest expense on capital lease obligations (350) (375) (793) (896)
Interest and investment income, net 13 8 28 16
Gain on early extinguishment of debt 2,718 - 2,718 -
----------- ----------- ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 378 (1,471) 38 (1,651)
Income tax expense - 81 - 96
----------- ----------- ----------- ---------
NET INCOME (LOSS) 378 $ (1,552) $ 38 $ (1,747)
=========== ============ =========== =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
(Unaudited)
28 weeks ended
-------------------------------
May 14, May 15,
2005 2004
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 38 $ (1,747)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on early extinguishment of debt (2,718) -
Depreciation and amortization of property and equipment 7,030 7,439
Amortization of intangible and other assets 2,861 2,996
Provision for deferred income taxes - 472
Gain on disposal of property and equipment, net (18) (3)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (235) 15
Inventories 2,213 2,797
Prepaid expenses (2,933) (5,327)
Other assets 420 36
Increase (decrease) in:
Accounts payable, accrued expenses and accrued interest 395 (5,010)
Salaries, wages and benefits payable (1,697) 277
Other liabilities and deferred credits and
reserve for self-insurance claims (394) (696)
------------- -------------
Net cash provided by operating activities 4,962 1,249
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,670) (1,515)
Proceeds from disposal of property and equipment 18 3
------------- -------------
Net cash used in investing activities (1,652) (1,512)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (321) (341)
Purchase of 10.125% Senior Secured Notes due 2009 (11,583) -
(Repayments) borrowings under May 2003 Bank Credit Facility (642) 5,867
New term loan borrowings 11,736 -
Repayments on term loans (2,581) (2,100)
------------- -------------
Net cash (used in) provided by financing activities (3,391) 3,426
------------- -------------
Net (decrease) increase in cash and cash equivalents (81) 3,163
Cash and cash equivalents at beginning of period 1,917 651
------------- -------------
Cash and cash equivalents at end of period $ 1,836 $ 3,814
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $7,814 $8,864
Income taxes $ (349) $ (474)
Reorganization items $ - $1,731
The accompanying notes are an integral part of these
condensed consolidated financial statements
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 1 -- INTERIM FINANCIAL STATEMENTS
Basis of Presentation
The unaudited condensed consolidated financial statements include the
accounts of Nutritional Sourcing Corporation ("NSC"), and its wholly owned
subsidiaries (the "Company"). The accompanying unaudited condensed
consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
of America ("GAAP") for interim financial information and in accordance with
the requirements of Form 10-Q and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and changes in cash flows required by GAAP. The Company's fiscal
year ends on the Saturday closest to October 31. Interim operating results for
the 12 and 28 weeks ended May 14, 2005 and May 15, 2004 are not necessarily
indicative of results that may be expected for the full fiscal years. The
condensed consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and related
notes included in the Company's Annual Report on Form 10-K for the year ended
October 30, 2004. With respect to the unaudited condensed consolidated
financial statements for the 12 and 28 weeks ended May 14, 2005 and May 15,
2004, it is the opinion of the management of the Company that all adjustments
necessary to present a fair statement of the results for such interim periods
have been included. Such adjustments were of a normal and recurring nature.
Inter-company accounts and transactions are eliminated in consolidation.
NOTE 2 -- INVENTORY
The results of the Company's operations reflect the application of the
last-in, first-out ("LIFO") method of valuing certain inventories of grocery,
non-food and dairy products. Since an actual valuation of inventories under
the LIFO method is only made at the end of a fiscal year based on inventory
levels and costs at that time, interim LIFO calculations are based on
management's estimates of expected year-end inventory levels and costs and
are subject to year-end adjustments.
NOTE 3 -- GOODWILL AND TRADE NAMES
In accordance with Statements of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets", goodwill and trade names are
not amortized as a recurring charge to earnings but are tested, annually,
for impairment. There has not been a change in the Company's goodwill and
trade names balances during the periods covered by these unaudited condensed
consolidated financial statements, (see NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES in the Company's Form 10-K for the 52 weeks ended October 30, 2004,
which was filed with the Securities and Exchange Commission on December 23,
2004 for more details concerning the Company's goodwill and trade names).
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 4 -- DISCLOSURE OF OPERATING SEGMENTS
The Company has two primary operating and reporting segments: the retail
food division and the in-home movie and game entertainment division. The retail
food division is headquartered in Puerto Rico, and consists of 45 supermarkets,
40 of which are in Puerto Rico and 5 of which are in the U.S. Virgin Islands.
During the 28 weeks ended May 14, 2005, the Company closed a supermarket in
Puerto Rico as a result of an agreement between the Company and its landlord
in which the Company agreed to close the store and return the premises to the
landlord earlier than its original lease termination date and settle an ongoing
dispute with the landlord. The in-home movie and game entertainment division
consists of 41 in-home movie and game entertainment stores, 39 of which are in
Puerto Rico and 2 of which are in the U.S. Virgin Islands. Most of the in-home
movie and game entertainment stores are adjacent to or a separate section
within one of the Company's retail food supermarkets. Certain administrative
support functions are located in Florida. Although the Company maintains data
by geographic location, its segment decision-making process is based on its two
product lines.
Reportable operating segment financial information is as follows:
In-home Movie
and Game
Retail Food Entertainment Total
----------- ------------- ----------
For the 28 Weeks Ended and as of May 14, 2005:
Net sales $ 276,103 $ 20,342 $ 296,445
Depreciation and amortization 7,127 2,764 9,891
Operating profit (a) 2,928 2,406 5,334
Total assets 182,991 15,649 198,640
Capital expenditures 1,535 135 1,670
In-home movie and game entertainment
purchases N/A 2,443 2,443
For the 28 Weeks Ended May 15, 2004:
Net sales $ 276,601 $ 22,233 $ 298,834
Depreciation and amortization 7,404 3,031 10,435
Operating profit (a) 3,393 3,279 6,672
Capital expenditures 1,455 60 1,515
In-home movie and game entertainment
purchases N/A 2,634 2,634
As of October 30, 2004:
Total assets $ 190,200 $ 16,207 $ 206,407
Because the Retail Food and In-Home Movie and Game Entertainment
Divisions are not segregated by corporate entity, the operating segment amounts
shown above do not represent totals for any subsidiary of the Company. All
overhead expenses including depreciation on assets of administrative
departments are allocated to operations. Amounts shown in the total column
above correspond to amounts in the consolidated financial statements.
(a) See Management's Discussion and Analysis for discussions of gross profit
and selling, general and administrative expenses.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 5 -- RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board (FASB), issued
Statement of Financial Accounting Standards 154 "Accounting Changes and Error
Corrections"("SFAS 154"). This Statement replaces APB Opinion No. 20,
"Accounting Changes", and FASB Statement No. 3, "Reporting Accounting Changes
in Interim Financial Statements", and changes the requirements for the
accounting for and reporting of a change in accounting principle. The
accompanying unaudited condensed consolidated financial statements do not
have any accounting changes or error corrections.
On March 30, 2005, the Financial Accounting Standards Board (FASB), issued
FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations ("FIN 47"). FIN 47 is effective no later than the end of fiscal
years ending after December 15, 2005 (December 31, 2005, for calendar-year
enterprises). The Company is currently evaluating the impact of the new
interpretation, but does not believe it will have a material impact on its
condensed consolidated financial statements.
In December 2004, the FASB issued Staff Position No. FAS 109-2, "Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004" ("FSP 109-2"). The American Jobs
Creation Act (the "Act")allows a special one-time dividends received deduction
on the repatriation of certain foreign earnings to a U.S. taxpayer
(repatriation provision), provided certain criteria are met. FSP 109-2
provides accounting and disclosure guidance for the repatriation provision.
Although FSP 109-2 is effective immediately, it allows companies additional
time beyond the enactment date to evaluate the effects of the provision on its
plan for investment or repatriation of unremitted foreign earnings. The Company
has evaluated the new Act and believes it will not benefit from it.
NOTE 6 -- COMPREHENSIVE INCOME
The Company reports comprehensive income (loss) in accordance with
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). Comprehensive income (loss) refers to revenues,
expenses, gains and losses that are not included in net earnings but rather
are recorded directly in shareholders' equity. The Company's accumulated
other comprehensive loss is comprised of an additional minimum pension
liability related to the Company's defined benefit plan for the fiscal year
ending October 30, 2004. For a discussion of the Company's comprehensive
income (loss), see Note 7 -- "Retirement Benefits" section of the Company's
Form 10-K for the year ended October 30, 2004 which was filed with the
Securities and Exchange Commission on December 23, 2004. The accumulated other
comprehensive loss has not changed during the 28 weeks ended May 14, 2005.
NOTE 7 -- RETIREMENT BENEFITS
The Company has a noncontributory defined benefit plan (the "Retirement
Plan") covering substantially all full-time and certain part-time associates.
Retirement Plan benefits are based on years of service and a base level of
compensation. The Company funds retirement plan costs in accordance with the
requirements of the Employee Retirement Income Security Act of 1974.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
Retirement Plan assets consist primarily of stocks, bonds and U.S. Government
securities. Full vesting for the Retirement Plan occurs upon the completion
of five years of service. The Company has made approximately $1,659 in
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 7 -- RETIREMENT BENEFITS (continued)
contributions to its defined benefit pension plan trust during the 28 weeks
ended May 14, 2005. During the remainder of its fiscal year ending October
29, 2005, the Company anticipates contributing approximately $2,053 to
the trust.
Net pension cost under the Retirement Plan includes the following
components:
For the 12 weeks ended For the 28 weeks ended
---------------------- ----------------------
May 14, May 15, May 14, May 15,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Service cost - benefits
earned during the period $ 358 $ 325 $ 837 $ 758
Interest cost on projected
benefit obligation 413 378 965 884
Expected return on plan
assets (282) (229) (660) (537)
Net amortization and
deferrals (1) - (4) (3)
Recognized net actuarial
loss 95 46 223 107
--------- --------- --------- ----------
NET PENSION COST $ 583 $ 520 $ 1,361 $ 1,209
========= ========= ========= ==========
The Company maintains a Supplemental Executive Retirement Plan (the
"SERP"), which is an un-funded plan, for its officers under which the Company
will pay, from general corporate funds, a supplemental pension equal to the
difference between the annual amount of pension calculated under the SERP and
the amount the participant will receive under the Retirement Plan. The pension
benefit calculation under the SERP is limited to a total of 20 years employment
and is based on a specified percentage of the average annual compensation
received for the five highest consecutive years during a participant's last 10
years of service, reduced by the participant's annual Retirement Plan and
social security benefits. Full vesting for the SERP occurs upon the completion
of five years of service. The Company has made approximately $197 in payments
to its beneficiaries during the 28 weeks ended May 14, 2005. During the
remainder of its fiscal year ended October 29, 2005, the Company currently
anticipates paying approximately $208 to the beneficiaries of the plan.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 7 -- RETIREMENT BENEFITS (continued)
Net pension cost under the SERP includes the following components:
For the 12 weeks ended For the 28 weeks ended
---------------------- ----------------------
May 14, May 15, May 14, May 15,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Service cost - benefits
earned during the period $ 73 $ 73 $ 171 $ 171
Interest cost on projected
benefit obligation 116 95 272 222
Net amortization and
deferrals 9 1 21 3
---------- ---------- ---------- ----------
NET PENSION COST $ 198 $ 169 $ 464 $ 396
========== ========== ========== ==========
NOTE 8 -- CONTINGENCIES
At May 14, 2005, the Company was party to a number of legal proceedings
involving claims for money damages arising in the ordinary course of
conducting its business, which are either covered by insurance or are within
the Company's self-insurance program, and in a number of other proceedings
which are not deemed material. It is not possible to determine the ultimate
outcome of these matters however, management is of the opinion that the final
resolution of any threatened or pending litigation at such date is not likely
to have a material adverse effect on the financial position or results of
operations of the Company.
NOTE 9 -- DEBT
On January 28, 2005 the Company's operating subsidiaries agreed to an
Amended and Restated Loan and Security Agreement with their lender bank (the
"Bank") and NSC agreed to an Amended and Restated Corporate Guarantee. The
purpose of this amendment and restatement was to allow for a Term Loan D
pursuant to which the Bank agreed to lend the Company up to $45.0 million
solely for the purchase of NSC's 10.125% Senior Secured Notes due 2009 (the
"Notes") from Noteholders. On January 28, 2005 there were $90.0 million of the
Notes outstanding. On the same date NSC launched a tender offer (the
"Invitation") in which it offered to use $42.0 million to purchase Notes for
prices ranging from $715 to $745 per $1,000 of face value of the Notes. The
Invitation also provided for Noteholder consent to an amendment to the
Indenture under which the Notes were issued in the event that a majority of
the Notes outstanding were tendered for purchase by NSC. The purpose of the
amendment was to permit NSC to discontinue filing reports with the Securities
and Exchange Commission (the "SEC") and discontinue providing such reports to
Noteholders. The Invitation was originally scheduled to expire at 5 p.m. New
York City time on February 28, 2005 and was subsequently extended to 5 p.m. New
York City time on March 7, 2005 (the "Expiration Date").
At the Expiration Date approximately $14.3 million (at face value) of the
bonds had been tendered and NSC agreed to purchase them at a clearing price of
$745 per $1,000 of face value of the Notes, which resulted in an aggregate
purchase price for the Notes tendered of approximately $10.7 million. Expenses
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 9 -- DEBT (continued)
of the transaction including bank commitment and success fees, legal and other
costs were approximately $0.9 million and unpaid interest on the tendered Notes
through the settlement date (March 10, 2005) was approximately $0.2 million.
Consequently, the net gain on the transaction was approximately $2.7 million
and borrowing pursuant to Term Loan D was approximately $11.7 million.
On March 9, 2005, NSC, its subsidiaries and the Bank agreed to a First
Amendment to Loan and Security Agreement among other matters, including certain
restrictions on borrowing under the revolving credit facility once Term Loan D
exceeds $30.0 million, one of the provisions of the First Amendment is that the
remainder of the $45.0 million available for Term Loan D may be borrowed from
time to time until March 6, 2006. The use of all borrowings under
Term Loan D continues to be restricted to the purchase of NSC's Notes and
related expenses (which are limited in the aggregate to $3.0 million).
A majority of the Notes outstanding were not tendered. Consequently, the
Company continues to be required to report to the SEC and to make such reports
available to Noteholders.
On May 17, 2005, NSC, announced the commencement of a new tender offer
(the "Invitation") for its outstanding 10.125% Senior Secured Notes due 2009
(the "Notes"). The maximum amount available to the Company to fund the purchase
of the notes is $31,540,000; as a consequence, the Company will accept for
purchase less than all of the outstanding Notes. The Invitation will expire at
5:00 p.m., New York City time, on June 15, 2005, unless extended.
The Company is offering to purchase the Notes for cash, at the purchase
price indicated in the schedule of prices (the "Pricing Schedule") included in
the Invitation, upon terms and conditions specified in the Invitation. The
Invitation is attached to the Company's Form 8-K, filed with the SEC on May 17,
2005.
To the extent acceptance of all offers at the price would cause the
aggregate purchase price (excluding accrued interest) to exceed $31,540,000,
the Company will allocate its acceptance of offers at the Price among all such
offers on a pro rata basis with holders of notes being tendered in
denominations under $1,000 being given priority.
The offer stipulates that each Noteholder tendering Notes will be deemed
to have consented to an amendment to the indenture under which the Notes were
issued. The amendment will permit the Company to discontinue its reporting to
the Securities and Exchange Commission. However, the proposed amendment does
require that the Company provide Noteholders with financial statements and a
management discussion and analysis of operations on a quarterly and annual
basis. The amendment will not become effective unless a majority of the Notes
are purchased under the invitation, but if effective will bind all Noteholders.
A majority in principal amount of the notes outstanding and not owned by an
affiliate is $37,595,555.51. No separate fee will be paid for the consent.
Funding for the tender offer is being provided under the Company's
amended and restated Senior Credit Facility with Westernbank of Puerto Rico.
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
NOTE 10 -- INCOME TAXES
In NOTE 7 - INCOME TAXES - to the Company's consolidated financial
statements included in its annual report to the SEC on Form 10-K for the 52
weeks ended October 30, 2004 the Company disclosed that the Treasury Department
of the Government of Puerto Rico is auditing the Company's operating
subsidiaries' tax years that ended January 1999 and 2000 for compliance with
the various income tax and excise tax laws of the Commonwealth of Puerto Rico.
At that time the Treasury Department had asserted, preliminarily, the
disallowance of certain deductions and the assessment of certain excise taxes
that would, if sustained, result in charging the subsidiaries a total of $6.6
million in a combination of additional taxes and related interest. Since that
time the Treasury Department of Puerto Rico has updated its preliminary
findings to disallow the deferral of certain income associated with the
insurance proceeds the subsidiaries received as a result of a hurricane that
damaged many of the operating subsidiaries' locations. Consequently, the
Treasury Department of Puerto Rico is currently asserting disallowances and
additional assessments that would, if sustained, result in charging the
subsidiaries additional taxes and interest totaling approximately $12.8
million.
The Company believes it has complied with the various tax laws and
regulations involved and the likelihood of paying these additional taxes and
related interest is remote. However, the ultimate outcome and any related
amount due are not determinable at this time. Consequently, no provision for
this preliminary assertion has been made in the accompanying unaudited
condensed consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company operates supermarkets and in-home movie and game
entertainment stores in the Caribbean; specifically on the islands of Puerto
Rico, St. Thomas and St. Croix, the latter two being part of the group of
islands known as the U.S. Virgin Islands. The population in these markets has
grown very slowly (i.e.: the 1990 U.S. Census indicated there were
approximately 3.5 million people in Puerto Rico and the July 1, 2004 U.S.
Census indicated there were approximately 3.9 million people in Puerto Rico).
The Company's strategy for both the supermarkets and the in-home
entertainment businesses is to concentrate on improving the value offering in
and convenience at its existing locations rather than engaging in an
aggressive expansion program. In both businesses this involves a greater
variety of goods and services than that offered by competitors. Consequently,
from January 2000 through May 14, 2005 the Company's supermarkets have
decreased from 50 to 45. This net decrease of 5 stores is the result of
closing 6 stores and opening 1 new store. The Company's in-home entertainment
stores have decreased from 43 in January of 2000 to 41 as of May 14, 2005.
This net decrease of 2 stores is the result of closing 4 stores and opening 2
new stores.
For more detail concerning stores for the period from May 15, 2004
through May 14, 2005 see page 18 of this Form 10-Q. For the detail of
activity for the fiscal year of 2001 through the end of fiscal year 2004 see
ITEM 2 - PROPERTIES in the Company's Form 10-K for the 52 weeks ended October
30, 2004, which was filed with the Securities and Exchange Commission on
December 23, 2004.
The Company's supermarket markets have been affected by an increasing
level of competition from local supermarket chains, independent supermarkets,
warehouse club stores, mass merchandisers, department stores, discount drug
stores and convenience stores. Warehouse club stores and mass merchandisers,
which began entering the Puerto Rico and U.S. Virgin Islands markets in 1990
offering various grocery and general merchandise items, have also increased
pricing pressures on supermarket retailers including the Company. In addition,
low inflation in food prices in recent years has made it difficult for the
Company and other supermarket operators to increase prices and has intensified
the competitive environment by causing such retailers to emphasize promotional
activities and discount pricing to maintain or gain market share, in addition
to improving cost and expense efficiencies at all levels.
The Company is the only supermarket operator in its markets that has a
customer loyalty program that provides special economic benefits to consumers
that have chosen to participate in the program. Since its inception in March
2001, these benefits have included special discounts on selected items. In
April 2004, the Company relaunched the program under the name Da Gusto Rewards
with enhancements to the program to offer additional savings to participants.
The additional savings are based on the points earned by the participants
during the calendar year. Each year, each participant begins the year with no
points. A point is earned for every dollar spent at the Company's supermarkets
during the calendar year. Once 600 points have been earned the customer
receives a discount on all purchases for the remainder of the calendar year in
the department chosen by the participant. The discount is 12% for all
departments other than grocery and 6% for grocery. In September of 2004, the
Company further enhanced the program to include a second, higher point
threshold which allows the customer to choose a second, but different
department in which to receive a discount for the remainder of the calendar
year. All those customers that achieved the second, higher point threshold
during the prior calendar year are automatically qualified to receive a
discount in the department of their choice starting on January 1 of the new
calendar year. These discounts, when utilized by the consumer-participants, are
deducted from gross sales in the accompanying unaudited condensed consolidated
financial statements as required by GAAP in the United States. There were
approximately 1.1 million loyalty cards issued by the Company as of May 14,
2005.
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Form 10-Q:
Risk Factors
Forward Looking Statements
Statements, other than statements of historical information, under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Form 10-Q may constitute forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements include statements concerning the Company's
anticipated contributions and payments on its deferred compensation plans.
These statements are based on Company management's expectations and are
subject to various risks and uncertainties. Actual results could differ
materially from those anticipated due to a number of factors, including but
not limited to the Company's substantial indebtedness and high degree of
leverage, which continue as a result of the financial restructuring (including
limitations on the Company's ability to obtain additional financing and trade
credit, to apply operating cash flow for purposes in addition to debt service,
to respond to price competition in economic downturns and to dispose of assets
pledged to secure such indebtedness or to freely use proceeds of any such
dispositions), the Company's limited geographic markets and competitive
conditions in the markets in which the Company operates and buying patterns of
consumers.
Supermarket Industry
The retail grocery industry is extremely competitive and is characterized
by high inventory turnover and narrow profit margins. The Company's results of
operations are therefore sensitive to, and may be materially adversely impacted
by, among other things, competitive pricing, promotional pressures and
additional store openings by competitors. The Company competes with national,
regional and local supermarkets, warehouse club stores, supercenters, drug
stores, convenience stores, discount merchandisers and other local retailers in
the market areas it serves. Competition with these outlets is based on price,
store location, advertising and promotion, product mix, quality and service.
Some of these competitors may have greater financial resources, lower
merchandise acquisition costs and lower operating expenses than the Company,
and the Company may be unable to compete successfully in the future.
In-home Movie and Game Entertainment Operations
The Company's in-home movie and game entertainment franchise faces
significant competition and risks associated with technological obsolescence,
and the Company may be unable to compete effectively. The in-home movie and
game entertainment industry is highly competitive. The Company competes with
local, regional and national video retail stores, and with mass merchants,
specialty retailers, supermarkets, pharmacies, convenience stores, bookstores,
mail order operations, online stores and other retailers, as well as with
noncommercial sources, such as libraries. This industry is also challenged by
illegal and non-official competitors that copy and distribute illegal VHS tapes
and DVD's, also known as piracy activity. As a result of direct competition
with others, pricing strategies for in-home movies and games is a significant
competitive factor in the Company's in-home movie and game entertainment
business. The Company's in-home movie and game entertainment business also
competes with other forms of entertainment, including cinema, television,
sporting events and family entertainment centers. If the Company does not
compete effectively with competitors in the in-home movie and game
entertainment industry or with providers of other forms of entertainment, its
revenues and/or its profit margin could decline and its business, financial
condition, liquidity and results of operations could be adversely affected.
Further, the division's operations are dependent on the studios that
develop and distribute the product. Changes in video formats or distribution
practices (for example from VHS tapes to DVD's) are disruptive to the
division's operations as these changes may cause significant changes in its
product acquisition costs, quantities it is required to purchase, the timing
of the period a title may be rented before it is brought to market for sale
(which impacts the length of time of high rental volume for a title - better
known in the industry as the "rental window") and its per rental revenue
depending on the distribution and pricing practices of the studios.
The division is also dependent on the movie and game production industry
for the development of new product and re-launches of older titles as it has
no production or duplication facilities of its own. The Company is also
dependent on its franchisor for technological advances and permission to
expand the items offered for sale.
Geographic Considerations; Regulation
The Company is concentrated in the densely populated greater San Juan
metropolitan area of Puerto Rico and in the U.S. Virgin Islands. As a result,
the Company is vulnerable to economic downturns in those regions, as well as
natural and other catastrophic events, such as hurricanes and earthquakes that
may impact those regions. These events may adversely affect the Company's sales
which may lead to lower earnings, or even losses, and may also adversely affect
its future growth, expansion, and ability to acquire windstorm insurance
coverage. Further, since the Company is concentrated on three islands,
opportunities for future store expansion may be limited, which may adversely
affect its business and results of operations. Additionally, the Company is
subject to governmental regulations (such as import taxes) that impose
obligations and restrictions and may increase its costs.
Company is Highly Leveraged
The Company has a substantial amount of indebtedness and debt service
obligations, which could adversely affect its financial and operational
flexibility and increase its vulnerability to adverse conditions. The Company
could incur additional indebtedness in the future, including indebtedness that
would be secured by its assets. Additionally, the Company's revolving and term
loan debt is subject to variable interest rates. If the Company increases its
indebtedness, or if there is a substantial increase in interest rates, the
related risks that it now faces could intensify. For example, the Company's
current level of indebtedness and/or an increase in indebtedness and interest
rates could:
- require the Company to dedicate an increased portion of its cash
flow to payments on its indebtedness;
- limit the Company's ability to borrow additional funds;
- increase the Company's vulnerability to general adverse economic
and industry conditions;
- limit the Company's ability to fund future working capital, capital
expenditures and other general corporate requirements;
- limit the Company's flexibility in planning for, or reacting to,
changes in its business and the industry in which it operates or
taking advantage of potential business opportunities;
- limit the Company's ability to execute its business strategy
successfully; and
- place the Company at a potential competitive disadvantage in its
industry.
The Company's ability to satisfy its indebtedness will depend on its
financial and operating performance, which may fluctuate significantly from
quarter to quarter and is subject to economic, industry and market conditions
and to risks related to its business and other factors beyond its control.
The Company cannot provide assurance that its business will generate
sufficient cash flow from operations or that future borrowings will be
available to it in amounts sufficient to enable it to pay its indebtedness or
to fund its other liquidity needs.
Further, as NSC is a holding company, indebtedness at the NSC level is
effectively subordinated to indebtedness and other obligations at the
operating subsidiary level. See Item 2 MANAGEMENTS' DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS included in this Form 10-Q
and NOTE 5 - DEBT to the consolidated financial statements included in item
15 of the Company's Form 10-K filed with the Securities and Exchange Commission
on December 23, 2004.
Market Risk
In addition to the foregoing, the market price of the Company's debt
securities may be significantly affected by changes in market rates of
interest, yields obtainable from investments in comparable securities, credit
ratings assigned to the Company's debt securities by third parties and
perceptions regarding its ability to pay its obligations on its debt
securities.
Critical Accounting Estimates
There have been no material changes in, or in the method of computation
of, the Company's critical accounting estimates since the year ended October
30, 2004. For a discussion of the Company's critical accounting estimates see
the "Critical Accounting Estimates" section of ITEM 7 of the Company's Form
10-K for the year ended October 30, 2004, which was filed with the Securities
and Exchange Commission on December 23, 2004.
Selected Operating Results
(As a percentage of sales)
<CAPTION)
12 WEEKS ENDED 28 WEEKS ENDED
------------------------- -------------------------
May 14, May 15, May 14, May 15,
2005 2004 2005 2004
------------ ----------- ------------- ----------
Gross profit 32.9% 33.4% 32.7% 32.6%
Selling, general & administrative expenses 28.3 28.4 27.9 27.0
Gain on lease settlements 0.0 0.3 0.3 0.1
EBITDA, as defined (1) 4.6 5.4 5.1 5.7
Depreciation & amortization 3.6 3.6 3.3 3.5
Operating profit 1.0 1.7 1.8 2.2
Income (loss) before income taxes 0.3 (1.2) 0.0 (0.6)
Net income (loss) 0.3 (1.3) 0.0 (0.6)
(1) EBITDA (as defined) represents Earnings Before Interest, Taxes,
Depreciation, Amortization and the gain from early extinguishment of
debt. EBITDA (as defined) is not intended to replace cash flow from
operations as defined by accounting principles generally accepted in the
United States of America and should not be considered as an alternative
to net income (loss) as an indication of the Company's operating
performance or to cash flows as a measure of liquidity. EBITDA (as
defined) is included as it is the basis upon which the Company assesses
its financial performance. EBITDA (as defined) margin represents EBITDA
(as defined) divided by net sales. The bank credit facility and the
indenture underlying NSC's publicly issued debt contain various
financial covenants. Some of these covenants are based on EBITDA.
Consequently, EBITDA is disclosed and discussed as management believes
it is an important means by which to measure the Company's liquidity and
compliance with its debt covenants, and it is a measure by which
management monitors operating results. Furthermore, EBITDA is used, in
part, to determine incentive compensation for management.
Following is a reconciliation of Net Income (loss) to EBITDA, as defined
(dollars in thousands):
For the 12 weeks ended For the 28 weeks ended
---------------------- ----------------------
May 14, May 15, May 14, May 15,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income (loss) $ 378 $(1,552) $ 38 $ (1,747)
Add/(Subtract):
Income tax expense - 81 - 96
Interest and investment income, net (13) (8) (28) (16)
Interest expense on capital lease obligations 350 375 793 896
Interest expense on debt 3,168 3,234 7,249 7,443
Depreciation and amortization 4,334 4,492 9,891 10,435
Gain on early extinguishment of debt (2,718) - (2,718) -
---------- ---------- ---------- ----------
EBITDA (as defined) $ 5,499 $ 6,622 $15,225 $ 17,107
========== ========== ========== ==========
Results of Operations
As of May 14, 2005, the Company operated a total of 45 supermarkets
and 41 in-home movie and game entertainment locations in Puerto Rico and the
U.S. Virgin Islands. During the 28 weeks ended May 14, 2005, the Company
closed a supermarket in Puerto Rico as a result of an agreement between the
Company and its landlord in which the Company agreed to close the store and
return the premises to the landlord earlier that its original lease termination
date and settle an ongoing dispute with the landlord. The history of store
openings and closings from May 15, 2004 through the end of the second quarter
of the current fiscal year on May 14, 2005, as well as the store composition,
is set forth in the following tables:
Stores in operation:
At May 15, 2004 . . . . . . . . . . . . . . . . . 88
Stores closed:
Puerto Rico - Supermarket 1
Puerto Rico - In-home movie and game entertainment. . 1
-------
At May 14, 2005 . . . . . . . . . . . . . 86
=======
May 14, May 15,
2005 2004
------------ ------------
Store Composition at Quarter-End:
Supermarkets by location:
Puerto Rico . . . . . . . . . . . . . . . 40 41
U.S. Virgin Islands . . . . . . . . . . . 5 5
------- -------
Subtotal Supermarkets 45 46
======= =======
In-home movie and game entertainment stores by location:
Puerto Rico . . . . . . . . . . . . . . . . 39 40
U.S. Virgin Islands . . . . . . . . . . . . 2 2
------- -------
Subtotal In-home movie and game
entertainment stores 41 42
------- -------
Grand Total 86 88
======= =======
The following is the summary of total and comparable store sales:
Percentage increase (decrease) in sales
for the 12 and 28 weeks ended May 14, 2005, as
compared to the 12 and 28 weeks ended May 15, 2004
--------------------------------------------------
12 Weeks Ended 28 Weeks Ended
------------------ -------------------
Total Sales (2.4) % (0.8) %
========= =========
Comparable Stores:
Retail Food Division (0.5) % 0.6 %
========= =========
In-home Movie and Game
Entertainment Division (11.6) % (8.1) %
========= =========
Total Comparable Store Sales (1.3) % 0.0 %
========= =========
Net sales for the 12 and 28 weeks ended May 14, 2005 were $120.7 million
and $296.4 million, respectively, versus $123.6 million and $298.8 million for
the 12 and 28 weeks ended May 15, 2004, decreases of $2.9 million and $2.4
million or 2.4% and 0.8%, respectively. For the 12 and 28 weeks ended May
14, 2005, same store net sales were $120.7 million and $295.4 million,
respectively, versus $122.2 million and $295.5 million, respectively for the
12 and 28 comparable weeks ended May 15, 2004. Same store net sales in the
retail food division increased 0.6% from the 28 comparable weeks ended May 15,
2004. The principal factor contributing to the increase in same stores net
sales in the retail food division for the 28 weeks ended May 14, 2005, is the
positive impact of the Company's Da Gusto rewards program. The Company has also
been able to either maintain or improve its in-stock position while certain of
its competitors have struggled to do so in the face of transitions in their
businesses. The positive impact of these factors are offset somewhat by
continued growth in competition. Competition during the 12 weeks ended May 14,
2005 continued to intensify as many retailers lowered prices in order to
improve market share. This increase in the intensity of competition is
the primary reason for the 0.5% decrease in same store net sales in the retail
food division from the 12 comparable weeks ended May 15, 2004. In-home movie
and game entertainment division same store net sales decreased by $1.0 million
and $1.7 million, respectively, from the 12 and 28 comparable weeks ended May
15, 2004, decreases of 11.6% and 8.1%, respectively. Same store rental revenue
accounted for approximately $0.8 million and $1.6 million, respectively, of the
decreases in same store net sales for the 12 and 28 comparable weeks. As the
popularity of DVD's has increased over the past several years, so has
competition in this industry. This is because DVD titles are primarily released
for rental and sale at the same time, whereas VHS tapes had generally been
released for rental prior to being released for sale allowing the Company to
benefit from a "rental window". Currently, substantially all DVD's and tapes
are simultaneously released for rental and sale resulting in lower sell-through
prices and a negative impact on rental from selling the DVDs or tapes. These
sell-through offerings and pricing practices accelerate consumer interest in the
DVD format, but also increase competition from mass merchant retailers.
Gross profit decreased for the 12 and 28 weeks ended May 14, 2005 by $1.6
million and $0.5 million, respectively, to $39.7 million and $97.0 million,
respectively, from $41.3 million and $97.5 million for the 12 and 28 weeks
ended May 15, 2004. The rate of gross profit (as a percentage of sales), for
the 12 and 28 weeks ended May 14, 2005 was 32.9% and 32.7%, respectively,
compared to 33.4% and 32.6%, respectively, for the 12 and 28 weeks ended May
15, 2004, a decrease of 0.5% for the 12 comparable weeks and an increase of
0.1%, for the 28 comparable weeks. The decrease in the rate of gross profit for
the 12 weeks ended May 14, 2005 is a result of the increased pricing pressures
in the retail food division mentioned in the previous paragraph and the
decline in rental revenue, which has a higher rate of gross profit than product
revenue, in the Company's in-home movie and game entertainment division. The
improvement in the rate of gross profit for the 28 weeks ended May 14, 2005 is
primarily a result of the change in the mix of sales in the retail food
division, compared to the 28 weeks ended May 15, 2004, to items with a higher
rate of gross profit. This was offset somewhat by the reductions in the gross
profit rate for the most recent 12 weeks mentioned above.
Selling, general and administrative expenses were $34.2 million and $82.6
million, respectively, for the 12 and 28 weeks ended May 14, 2005 compared to
$35.1 million and $80.8 million, respectively, for the 12 and 28 weeks ended
May 15, 2004, a decrease of $0.9 million for the 12 comparable weeks and an
increase of 1.8 million for the 28 comparable weeks. One of the primary
reasons for the increase for the 28 comparable weeks relates to increases in
fuel prices which have led to an increase in electric costs totaling
approximately $1.3 million, despite the Company's successful efforts in
reducing electricity consumption. Additionally, the Company has experienced an
increase in administrative costs in order to improve the operations,
merchandising and product procurement functions of its Retail Food Division.
Since the end of the second quarter of the prior year, the Retail Food Division
has filled several key management positions in these departments. Additionally,
the Company has hired consultants in its Retail Food Division to help execute
the Company's strategy in reducing energy consumption and improving its
merchandising and procurement functions in order to achieve increased sales, an
improvement in its rate of gross profit, and an improvement in working capital.
The above increases also impacted the 12 comparable weeks, although to a lesser
degree, and were offset by a large reduction in advertising expense during the
comparable 12 weeks, resulting in the $0.9 million reduction in selling,
general and administrative expenses for the 12 weeks ended May 14, 2005 versus
the 12 comparable weeks.
The 28 weeks ended May 14, 2005, include a gain of approximately $0.9
million, net of related expenses, as a result of amending a certain store's
lease. The amendment to the Puerto Rico supermarket lease involved an
agreement to close the store earlier than the original lease termination
date and return the property back to the landlord, both of which occurred
prior to February 19, 2005. The Company had previously recorded a gain of
approximately $0.7 million, net of expenses, during the fourth quarter of the
fiscal year ended October 30, 2004. The 12 and 28 weeks ended May 15, 2004
included a gain $0.4 million related to an amendment to a supermarket lease
that involved returning to the landlord land the Company was leasing under the
lease but not using and allowing the landlord to develop a different parcel of
land at the shopping center that heretofore had been undeveloped. Under the
amendment, the landlord paid the Company $0.4 million for the right to develop
the undeveloped land. For more details, refer to the Company's Form 10-K for
the 52 weeks ended October 30, 2004, which was filed with the Securities and
Exchange Commission on December 23, 2004.
Depreciation and amortization was $4.3 million and $9.9 million, respectively,
for the 12 and 28 weeks ended May 14, 2005 compared to $4.5 million and $10.4
million for the 12 and 28 weeks ended May 15, 2004, decreases of $0.2 million
and $0.5 million, respectively.
Interest expense, net of interest income, decreased by $0.1 million and $0.3
million between the 12 and 28 weeks ended May 14, 2005 and the comparable
period of the prior year, primarily as a result of a reduction in the average
principal borrowings on both the Company's revolver and term loans. Revolver
borrowings are made, as needed, in order to fund the Company's operating and
working capital needs, while the principal on term loans is reduced each month
as the Company makes equal principal payments in accordance with the term loan
agreement.
During the 12 and 28 weeks ended May 14, 2005, the Company recorded a $2.7
million gain from the early extinguishment of debt. This resulted from the
purchase of approximately $14.3 million (at face value) of the Company's Senior
Secured Notes due 2009 at a clearing price of $745 per $1,000 of face value.
The aggregate purchase price was approximately $10.7 million and expenses of
the transaction including bank commitment and success fees, legal and other
costs were approximately $0.9 million.
The effective tax rate for both the 12 and 28 weeks ended May 14, 2005
was 0.0%, compared to (5.5)% and (5.8)%, respectively for the comparable 12 and
28 weeks ended May 15, 2004. Variances in the effective tax rates were
primarily due to the relationship of items of permanent difference between
Income (Loss) Before Income Taxes, pretax income for income tax return
reporting purposes and valuation allowances established against deferred tax
assets for which it is more likely than not that a tax benefit will not be
realized.
The Company recorded net income, for the 12 and 28 weeks ended May 14,
2005 of $0.4 million and $0.0 million, respectively, versus a net loss of $1.6
million and $1.7 million for the comparable 12 and 28 weeks of the prior year,
respectively, improvements of $2.0 million and $1.7 million, respectively. The
preceding paragraphs in this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS discuss the reasons for the variances.
Liquidity and Capital Resources
NSC has no operations of its own, and its only asset is its equity
interest in Pueblo International, LLC ("Pueblo") and inter-company notes
issued to NSC by this subsidiary. NSC has no source of cash to meet its
obligations, including its obligations under the New 10.125% Senior Secured
Notes ("New Notes"), other than payments by its subsidiary on such inter-
company notes. The inter-company notes are subordinated to the obligations of
the subsidiary under the May 2003 Bank Agreement and to the trade creditors of
Pueblo International, LLC. Certain restrictive covenants in the May 2003 Bank
Agreement impose limitations on the declaration or payment of dividends by NSC.
Additionally, dividend payments by Pueblo to NSC are restricted under the terms
of the May 2003 Bank Agreement. The May 2003 Bank Agreement, however, provides
that so long as no default or event of default (as defined in the May 2003 Bank
Agreement) exists, or would exist as a result, and certain other conditions
are satisfied, Pueblo is permitted to pay its inter-company interest on its
inter-company notes payable to NSC in accordance with the terms thereof.
On January 28, 2005 the Company's operating subsidiaries agreed to an Amended
and Restated Loan and Security Agreement with their lender bank (the "Bank")
and NSC agreed to an Amended and Restated Corporate Guarantee. The purpose of
this amendment and restatement was to allow for a Term Loan D pursuant to which
the Bank agreed to lend the Company up to $45.0 million solely for the purchase
of NSC's 10.125% Senior Secured Notes due 2009 (the "Notes") from Noteholders.
On January 28, 2005 there were $90.0 million of the Notes outstanding. On the
same date NSC launched a tender offer (the "Invitation") in which it offered to
use $42.0 million to purchase Notes for prices ranging from $715 to $745 per
$1,000 of face value of the Notes. The Invitation also provided for Noteholder
consent to an amendment to the Indenture under which the Notes were issued in
the event that a majority of the Notes outstanding were tendered for purchase
by NSC. The purpose of the amendment was to permit NSC to discontinue filing
reports with the Securities and Exchange Commission (the "SEC") and discontinue
providing such reports to Noteholders. The Invitation was originally scheduled
to expire at 5 p.m. New York City time on February 28, 2005 and was
subsequently extended to 5 p.m. New York City time on March 7, 2005 (the
"Expiration Date").
At the Expiration Date approximately $14.3 million (at face value) of the bonds
had been tendered and NSC agreed to purchase them at a clearing price of $745
per $1,000 of face value of the Notes, which resulted in an aggregate purchase
price for the Notes tendered of approximately $10.7 million. Expenses of the
transaction including bank commitment and success fees, legal and other costs
were approximately $0.9 million and unpaid interest on the tendered Notes
through the settlement date (March 10, 2005) was approximately $0.2 million.
Consequently, the net gain on the transaction was approximately $2.7 million
and borrowing pursuant to Term Loan D was approximately $11.7 million.
On March 9, 2005 NSC, its subsidiaries and the Bank agreed to a First
Amendment to Loan and Security Agreement Among other matters, including certain
restrictions on borrowing under the revolving credit facility once Term Loan D
exceeds $30.0 million, one of the provisions of the First Amendment is that the
remainder of the $45.0 million available for Term Loan D may be borrowed from
time to time until March 6, 2006. The use of all borrowings under Term Loan D
continues to be restricted to the purchase of NSC's Notes and related expenses
(which are limited in the aggregate to $3.0 million).
A majority of the Notes outstanding were not tendered. Consequently, the
Company continues to be required to report to the SEC and to make such reports
available to Noteholders.
On May 17, 2005, NSC, announced the commencement of a new tender offer
(the "Invitation") for its outstanding 10.125% Senior Secured Notes due 2009
(the "Notes"). The maximum amount available to the Company to fund the purchase
of the notes is $31,540,000; as a consequence, the Company will accept for
purchase less than all of the outstanding Notes.
The Company is offering to purchase the Notes for cash, at the purchase
price indicated in the schedule of prices (the "Pricing Schedule") included in
the Invitation, upon terms and conditions specified in the Invitation.
To the extent acceptance of all offers at the price would cause the
aggregate purchase price (excluding accrued interest) to exceed $31,540,000,
the Company will allocate its acceptance of offers at the Price among all such
offers on a pro rata basis with holders of notes being tendered in
denominations under $1,000 being given priority.
The offer stipulates that each Noteholder tendering Notes will be deemed
to have consented to an amendment to the indenture under which the Notes were
issued. The amendment will permit the Company to discontinue its reporting to
the Securities and Exchange Commission. However, the proposed amendment does
require that the Company provide Noteholders with financial statements and a
management discussion and analysis of operations on a quarterly and annual
basis. The amendment will not become effective unless a majority of the Notes
are purchased under the invitation, but if effective will bind all Noteholders.
A majority in principal amount of the notes outstanding and not owned by an
affiliate is $37,595,555.51. No separate fee will be paid for the consent.
Funding for the tender offer is being provided under the Company's
amended and restated Senior Credit Facility with Westernbank of Puerto Rico.
As to cash provided or used during the 28 weeks ended May 14, 2005, the
following pertains:
Net cash provided by operating activities for the 28 weeks ended May 14,
2005 was approximately $5.0 million versus approximately $1.2 million for the
comparable 28 weeks ended May 15, 2004. The primary reasons for the $3.8
million increase in cash provided by operating activities are a difference in
amount of interest paid on the new 10.125% Senior Secured Notes and the impact
of the payment of restructuring costs. When the Company emerged from
bankruptcy, the first interest payment on the 10.125% Senior Secured Notes was
due in February of 2004. The accrued amount of $3.7 million as of November 1,
2003 included interest from June 1, 2003 through November 1, 2003. All
succeeding interest payments are due on August 1 and February 1 of each year.
Consequently, the amount accrued as of October 30, 2004 included interest from
August 2, 2004 through October 30, 2004, or $2.3 million. Additionally,
restructuring costs totaling approximately $1.7 million, which had been
accrued as of November 1, 2003, were paid during the 28 weeks ended May 15,
2004. No such payments were made during the 28 weeks ended May 14, 2005. The
remaining increase can be attributed to an improvement in the management 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 $1.7
million for the 28 weeks ended May 14, 2005 versus $1.5 million for the 28
comparable weeks ended May 15, 2004.
The cash used in financing activities was approximately $3.4 million for
the 28 weeks ended May 15, 2004 compared to cash provided by financing
activities of $3.4 million for the 28 weeks ended May 14, 2005, an increase in
cash used for financing activities of $6.8 million. The primary reason for this
$6.8 million increase is due to the Company paying down approximately $6.5
million more of the borrowings under its revolver during the 28 weeks ended May
14, 2005 versus the comparable period of the prior year. The Company has had
to borrow less under its revolver this year due to a decrease in cash needed
for operating activities, as previously mentioned. The remaining $0.3 million
increase is primarily due to the Company making one more payment on its term
loans during the 28 weeks ended May 14, 2005 versus the comparable period of
the prior year due to the way the fiscal periods fell. These payments are made
in equal installments on the first of each calendar month. As of May 14, 2005,
after giving effect to cash borrowings of approximately $13.4 million and
outstanding letters of credit of approximately $2.4 million the amount
available to be borrowed under the revolving credit facility was approximately
$5.9 million.
Working capital deficit was $17.9 million as of May 14, 2005, an
increase of $0.2 million from the $17.7 million working capital deficit as
of October 30, 2004, producing a current ratio of 0.81:1 as of both May 14,
2005 and October 30, 2004. The increase in the working capital deficit is a
result of the additional term loan borrowed in connection with the Company's
tender offer, see Note - 9 DEBT of this Form 10-Q for further details. Current
liabilities include the liability for cash borrowed under the revolving credit
facility, as the terms of the facility effectively require the balance
fluctuate daily and availability is based on inventory levels. Since the
facility was funded on June 5, 2003, cash borrowings have fluctuated from a
high of $18.0 million to a low of $0.7 million. The total balance outstanding
is not expected to be repaid in full in the current period. Additionally, the
Company believes it has made improvements in its management of other
components of working capital, such as inventory and accounts payable.
Off-Balance Sheet Arrangements
At May 14, 2005, the Company did not have any unconsolidated entities or
financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which might have been established for the
purpose of facilitating off-balance sheet arrangements.
Contractual Obligations
In accordance with the Securities and Exchange Commission's regulation
17 CFR 228, 229 and 249, release 33-8182, the Company has not had any material
changes in contractual obligations from those presented in ITEM 7 of the
Company's Form 10-K for the year ended on October 30, 2004, which was filed
with the Securities and Exchange Commission on December 23, 2004.
Impact of Inflation and Currency Fluctuations
The Company's primary costs, products and labor, usually increase with
inflation. Increases in product costs can typically be passed on to the
customer. Other cost increases must by recovered through operating
efficiencies. Currency in Puerto Rico and the U.S. Virgin Islands is the U.S.
Dollar. As such, the Company has no exposure to foreign currency
fluctuations.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks from transactions that
are entered into during the normal course of business. The Company does not
trade or speculate in derivative financial instruments. The Company's
primary market risk exposure relates to interest rate risk. The Company
manages its interest rate risk in order to balance its exposure between fixed
and variable rates while attempting to minimize its interest costs.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, Company management
carried out an evaluation, under the supervision and with the participation
of the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information required to be disclosed in the Company's periodic reports filed
with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits
Exhibits incorporated by reference:
None.
Exhibits attached to this Form 10-Q:
31.1 CEO CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
31.2 CFO CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
32.1 CEO CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
32.2 CFO CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NUTRITIONAL SOURCING CORPORATION
Dated: June 13, 2005 /s/ Daniel J. O'Leary
-----------------------------
Daniel J. O'Leary,
Executive Vice President
and Chief Financial Officer
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