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 QUARTER ENDED NOVEMBER 2, 1996
[ ] 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
PUEBLO XTRA INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0415593
- --------------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1300 N.W. 22ND STREET
POMPANO BEACH, FLORIDA 33069
- --------------------------------------- ----------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 977-2500
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK, $ .10 PAR VALUE,
OUTSTANDING AS OF DECEMBER 16, 1996 -- 200.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE(S)
Consolidated Balance Sheets (Unaudited) -
November 2, 1996 and January 27, 1996........................3-4
Consolidated Statements of Operations (Unaudited) -
Twelve and 40 weeks ended November 2, 1996
and November 4, 1995...........................................5
Consolidated Statements of Cash Flows (Unaudited) -
Forty weeks ended November 2, 1996
and November 4, 1995...........................................6
Notes to Consolidated Financial Statements (Unaudited) ....................7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................9-14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................15
CONSOLIDATED BALANCE SHEETS
PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOVEMBER 2, JANUARY 27,
1996 1996
----------- -----------
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 447 $ 6,998
Marketable securities (market value of $1,202
at November 2, 1996 and $888 at January 27, 1996) 1,202 888
Accounts receivable 5,911 10,071
Inventories 71,754 67,237
Assets held for sale 14,160 26,000
Prepaid expenses 12,767 10,670
Deferred income taxes 10,986 9,215
-------- ---------
TOTAL CURRENT ASSETS 117,227 131,079
-------- ---------
PROPERTY AND EQUIPMENT
Land and improvements 18,357 18,116
Buildings and improvements 63,350 60,766
Furniture, fixtures and equipment 96,228 95,591
Leasehold improvements 32,280 31,617
Construction in progress 7,091 4,139
-------- ---------
217,306 210,229
Less accumulated depreciation and amortization 73,740 55,505
-------- ---------
143,566 154,724
Property under capital leases, net 9,905 11,559
-------- ---------
TOTAL PROPERTY AND EQUIPMENT, NET 153,471 166,283
GOODWILL, net of accumulated amortization of $16,889 at
November 2, 1996 and $13,018 at January 27, 1996 184,829 188,700
DEFERRED INCOME TAXES 10,542 10,272
TRADENAMES 31,770 32,436
DEFERRED CHARGES AND OTHER ASSETS 41,084 44,613
-------- ---------
TOTAL ASSETS $538,923 $573,383
======== =========
The accompanying notes are an integral part of these financial statements.
-3-
CONSOLIDATED BALANCE SHEETS
PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOVEMBER 2, JANUARY 27,
1996 1996
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable $ 63,742 $ 65,112
Accrued expenses 38,304 52,610
Salaries, wages and benefits payable 13,196 14,315
Short-term borrowing 14,400 --
Current installments of long-term debt 10,063 29,214
Current obligations under capital leases 715 859
Income taxes payable -- 94
--------- ----------
TOTAL CURRENT LIABILITIES 140,420 162,204
NOTES PAYABLE TO A RELATED PARTY 10,000 --
LONG-TERM DEBT, net of current portion 81,414 89,477
NOTES PAYABLE 180,000 180,000
CAPITAL LEASE OBLIGATIONS, net of current portion 8,165 8,947
RESERVE FOR SELF-INSURANCE CLAIMS 10,605 12,862
DEFERRED INCOME TAXES 33,704 35,335
OTHER LIABILITIES AND DEFERRED CREDITS 33,472 39,659
--------- ----------
TOTAL LIABILITIES 497,780 528,484
--------- ----------
COMMITTMENTS AND CONTINGENCIES -- --
STOCKHOLDER'S EQUITY
Common stock, $.10 par value; 200 shares authorized
and issued -- --
Additional paid-in capital 91,500 86,500
Accumulated deficit (50,357) (41,601)
--------- ----------
TOTAL STOCKHOLDER'S EQUITY 41,143 44,899
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 538,923 $ 573,383
========= ==========
The accompanying notes are an integral part of these financial statements.
-4-
CONSOLIDATED STATEMENTS OF OPERATIONS
PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
(UNAUDITED)
12 WEEKS 12 WEEKS 40 WEEKS 40 WEEKS
ENDED ENDED ENDED ENDED
NOVEMBER 2, NOVEMBER 4, NOVEMBER 2, NOVEMBER 4,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net sales $ 228,632 $ 261,769 $ 765,008 $ 881,040
Cost of goods sold 171,625 195,936 567,631 652,171
---------- ---------- ---------- ----------
57,007 65,833 197,377 228,869
GROSS PROFIT ---------- ---------- ---------- ----------
OPERATING EXPENSES
Selling, general and administrative 47,984 55,428 155,613 182,283
expenses 9,105 9,853 30,153 33,034
Depreciation and amortization ---------- ---------- ---------- ----------
(82) 552 11,611 13,552
OPERATING PROFIT (LOSS)
(11) (15) (67) (35)
Sundry, net ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INTEREST (93) 537 11,544 13,517
AND INCOME TAXES
(6,814) (7,243) (22,830) (24,053)
Interest expense on debt
Interest expenses on capital lease (252) (520) (866) (1,790)
obligations 35 120 127 800
Interest and investment income, net ---------- ---------- ---------- ----------
(7,124) (7,106) (12,025) (11,526)
LOSS BEFORE INCOME TAXES
2,472 2,352 3,269 3,498
Income tax benefit ---------- ---------- ---------- ----------
$ (4,652) $ (4,754) $ (8,756) $ (8,028)
NET LOSS ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS
PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
(UNAUDITED)
40 WEEKS ENDED 40 WEEKS ENDED
NOVEMBER 2, NOVEMBER 4,
1996 1995
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,756) $ (8,028)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities, net of effects of disposal of
Florida retail operations:
Depreciation and amortization of property and equipment 19,377 22,646
Amortization of intangible and other assets 10,776 10,388
Deferred income taxes (3,672) (3,382)
Loss on disposal of property and equipment, net 377 374
Decrease in deferred charges, goodwill, and other assets 1,251 2,116
Decrease in reserve for self-insurance claims (237) (848)
Decrease in other liabilities and deferred credits (5,186) (1,603)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 3,011 (5,669)
Increase in inventories (9,326) (12,821)
Increase in prepaid expenses (2,171) (1,374)
Increase (decrease) in accounts payable and accrued expenses (4,444) 757
Increase in income taxes payable (20) (1,398)
--------- --------
980 1,158
Decrease attributable to disposal of Florida retail operations (14,210) --
--------- --------
Net cash provided by (used in) operating activities (13,230) 1,158
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,475) (16,823)
Proceeds from disposal of property and equipment 53 473
Proceeds from disposal of Florida retail operations 11,840 --
--------- --------
Net cash provided by (used in) investing activities 5,418 (16,350)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to a related party 10,000 --
Principal payments on long-term debt (27,214) (6,473)
Principal payments on capital lease obligations (925) (1,032)
Proceeds from short-term borrowing, net 14,400 7,600
Proceeds from capital contribution 5,000 --
--------- --------
Net cash provided by financing activities 1,261 95
--------- --------
Net decrease in cash and cash equivalents (6,551) (15,097)
Cash and cash equivalents at beginning of period 6,998 15,680
--------- --------
Cash and cash equivalents at end of period $ 447 $ 583
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 24,889 $ 26,094
Income taxes (net of refunds) 475 1,050
The accompanying notes are an integral part of these financial statements.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTE 1 -- INTERIM FINANCIAL STATEMENTS
With respect to the unaudited financial information for each of the 12
and 40 weeks ended November 2, 1996 and November 4, 1995, it is the opinion of
management of Pueblo Xtra International, Inc. and its wholly-owned subsidiaries
(collectively, the "Company") that the adjustments necessary to prepare a fair
statement of the results for such interim periods have been included. Such
adjustments were of a normal and recurring nature, or as a result of the
strategic measures implemented by the Company described in Note (2)--Unusual
Charges or the business combination described in Note (3)--Acquisitions of the
audited consolidated financial statements contained in the Company's Form 10-K
for the fiscal year ended January 27, 1996 filed with the Securities and
Exchange Commission (hereinafter referred to as the "Form 10-K"). The unaudited
financial information should be read in conjunction with the Company's Form
10-K. The consolidated balance sheet at January 27, 1996 included herein has
been derived from the audited consolidated financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
Operating results for the 12- and 40-week periods ended November 2,
1996 and November 4, 1995 are not necessarily indicative of results that may be
expected for the full fiscal years. The Company's fiscal year ends on the last
Saturday in January.
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 -- DEBT
During April 1996, the Company amended the credit facility consisting
of $115.0 million in term loans and a maximum of $60.0 million in revolving
loans (the "Credit Facility") with a syndicate of banks (the "Bank Syndicate")
led by The Chase Manhattan Bank and Scotiabank de Puerto Rico (hereinafter
referred to as the "Seventh Amendment"). In accordance with the terms of the
Seventh Amendment, the sole shareholder of the Company, PXC&M Holdings, Inc.
("Holdings"), contributed $5.0 million in additional capital to the Company on
April 18, 1996 which was immediately used to reduce the Company's term loans
under the Credit Facility. In addition, in connection with the Seventh
Amendment, Holdings provided $10.0 million in additional funds to the Company on
October 18, 1996 in return for an agreement by the Company to provide to
Holdings, or its designee, as soon as practicable, either an acceptable
financial instrument or form thereof in accordance with the terms set forth in
the Seventh Amendment. The Seventh Amendment also provided certain revised
financial covenant requirements, including those which the Company was unable to
comply with during the current quarter, and a modification in the Company's
scheduled principal payments under the Credit Facility during the next two
fiscal years.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTE 3 -- DEBT (CONTINUED)
As of November 2, 1996, the Company was not in compliance with certain
financial covenants contained in the credit agreement under which the Credit
Facility is available. However, the Company and representatives of the Bank
Syndicate have agreed to amend the credit agreement to cure the Company's
non-compliance with such covenants as of November 2, 1996 (see the Eighth
Amendment filed as Exhibit 10.4 hereto). However, as a condition to such
amendment, the Bank Syndicate has required that the maximum amount available
under the revolving loans of the Credit Facility be reduced from $60.0 million
to $39.3 million, the amount outstanding as of December 13, 1996, which is
comprised of $16.0 million in revolving loans and a maximum of $23.3 million
utilized in the form of standby letters of credit. In accordance with the Eighth
Amendment, the revolving features of the Credit Facility have been removed. The
Company continues to discuss with the Bank Syndicate the possibility of
obtaining incremental borrowings under the revolving loans of the Credit
Facility, but there can be no assurance that the Bank Syndicate will agree to
any such incremental borrowings. In addition, the Company has expressed to
representatives of the Bank Syndicate its expected need for additional
amendments to enable it to be in compliance with all of its covenants as of the
end of its current fiscal year and thereafter. Although reaching an agreement
with the Bank Syndicate for prospective covenant compliance during the next 12
months cannot be assured, the Company believes a resolution, whether with the
Bank Syndicate or through alternative sources of financing, will be available.
Since the Credit Facility is unlikely to be available for future
incremental borrowing in the near term, the Company's operations are the primary
remaining source for meeting its current liquidity and capital needs. It is the
Company's belief that, for the near term, its liquidity and capital needs can be
met through the cash flows generated by normal business operations. However, the
Company expects to continue to realize significant losses in the future, much of
which pertains to depreciation and amortization and interest expense related to
the July 1993 transaction described in Note (3)--Acquisitions to the Company's
Form 10-K for the year ended January 27, 1996; as a result, the Company
anticipates that its accumulated earnings deficit will continue to increase for
the foreseeable future. The Company's future results of operations also will be
affected by its ability to react to changes in the competitive environment.
The Company believes that its ability to meet its long-term liquidity
and capital requirements beyond the near term will be dependent upon the
successful outcome of the negotiations with the Bank Syndicate or upon the
Company's ability to secure alternative sources of financing. However, there can
be no assurance that such alternative sources of financing can be identified or
that such sources would be willing to provide funding to the Company under
acceptable terms.
The terms of the credit agreement under which the Credit Facility is
available include covenants restricting the Company's ability to engage in
certain activities, including the payment of dividends by the borrower
subsidiaries of Pueblo Xtra International, Inc. under the Credit Facility to
Pueblo Xtra International, Inc. These terms include an exception to the
restriction on the payment of dividends to the effect that so long as no default
or event of default exists, or would exist under the terms of the Credit
Facility as a result thereof, Pueblo International, Inc. ("Pueblo"), a
subsidiary of Pueblo Xtra International, Inc., and other borrower subsidiaries
are permitted to pay cash dividends to Pueblo Xtra International, Inc. in an
aggregate amount necessary to pay interest on Pueblo Xtra International, Inc.'s
9 1/2% Senior Notes due 2003 (the "Senior Notes") then due and payable in
accordance with the terms thereof. Accordingly, any future non-compliance by the
Company with the financial covenants contained in the credit agreement may
restrict the ability of Pueblo and other borrower subsidiaries to pay dividends
to Pueblo Xtra International, Inc. to pay interest on the Senior Notes. The
reduction in the amount available under the Credit Facility pursuant to the
Eighth Amendment, coupled with the potential unavailability of dividends from
Pueblo, may restrict the ability of Pueblo Xtra International, Inc. to pay
interest on the Senior Notes.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW AND BASIS OF PRESENTATION
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Form 10-Q.
12 WEEKS ENDED 40 WEEKS ENDED
----------------------------------- -------------------------------------
NOVEMBER 2, NOVEMBER 4, NOVEMBER 2, NOVEMBER 4,
1996 1995 1996 1995
------------- ----------- ----------- ------------------
SELECTED OPERATING RESULTS
(AS A PERCENTAGE OF SALES)
Gross profit 24.9% 25.1% 25.8% 26.0%
Selling, general and
administrative expenses 21.0 21.2 20.3 20.7
EBITDA (1) 3.9 4.0 5.5 5.3
Depreciation and amortization 4.0 3.8 3.9 3.7
Operating profit (loss) (0.0) 0.2 1.5 1.5
Loss before income taxes (3.1) (2.7) (1.6) (1.3)
Net loss (2.0) (1.8) (1.1) (0.9)
<FN>
- -----------
(1) Represents income before interest, income taxes and depreciation and
amortization. EBITDA, as disclosed herein, is neither a measurement
pursuant to generally accepted accounting principles (GAAP) nor a
measurement of operating results and is included for informative
purposes only.
</FN>
RESULTS OF OPERATIONS
As the market leader in Puerto Rico and the U.S. Virgin Islands, the
Company operated a total of 51 supermarkets and 24 BLOCKBUSTER video stores as
of November 2, 1996. The history of store openings, closings and conversions
through November 2, 1996, since the same period of the prior year, is set forth
below:
Stores in operation at November 4, 1995 80
Stores opened:
Supermarkets 2
BLOCKBUSTER video stores 2
Stores closed (9)
-----
Stores in operation at November 2, 1996 75
=====
-9-
NOVEMBER 2, NOVEMBER 4,
1996 1995
----------- -----------
Store composition at quarter-end:
XTRA stores 30 33
PUEBLO supermarkets 21 25
BLOCKBUSTER video stores 24 22
By location:
Puerto Rico 68 66
U.S. Virgin Islands 7 6
Florida - 8
The change in store composition, excluding conversions, since the same
period of last year consists of the closing of all eight XTRA stores in south
Florida as part of the Company's strategic restructuring measures, which
included closing the Florida operating division (the "Florida Closing"), the
closing of one XTRA store in Puerto Rico, and the opening of one new XTRA store
in Puerto Rico and one new PUEBLO store in the U.S. Virgin Islands. During the
most recent quarter, the Company converted one PUEBLO store in Puerto Rico to an
XTRA unit for a total of five PUEBLO-to-XTRA conversions on a year-to-date
basis. In addition, as a part of the Company's traffic-building strategic
measures, two in-supermarket video departments (or "Video Clubs") were converted
to BLOCKBUSTER video stores.
Sales for the 12 and 40 weeks ended November 2, 1996 were $33.1
million, or 12.7%, and $116.0 million, or 13.2%, respectively, below that of the
same period last year. A primary factor in the overall sales reductions relative
to the comparable periods of last year is the closing of the Florida retail
operations, which had sales of $36.6 million and $132.9 million for the 12 and
40 weeks ended November 4, 1995, respectively. The effective closing date of the
Florida Closing was December 30, 1995. On a comparable store basis, sales
declined by 1.5% and 2.6%, respectively, for the 12 and 40 weeks ended November
2, 1996, reflecting a slight improvement since the second quarter of this fiscal
year. Supermarket operations in Puerto Rico contributed to the overall same
store sales decline as competition and retail pricing adjustments continue to
affect the operating division's sales performance. Supermarket operations in the
U.S. Virgin Islands reflect comparable store sales increases of 7.1% and 8.3%
for the 12 and 40 weeks ended November 2, 1996, respectively, which is
consistent with management's previous predictions for continued improvement in
this operating division. Management believes that the U.S. Virgin Islands
supermarket operations will continue to reflect positive same store sales
results. Blockbuster video operations reflected strong same store sales
increases of 10.1% and 12.8% for the 12 and 40 weeks ended November 2, 1996,
respectively.
As competition continues to challenge the Company's sales performance
in Puerto Rico, certain strategic measures were implemented by the Company,
including the launching of a major advertising campaign during the first quarter
of fiscal 1997. The advertising campaign was further enhanced during the recent
quarter with certain sales promotions presenting both the PUEBLO and XTRA
formats in a single advertisement instead of two different promotions. This
marketing strategy stresses the two different store formats yet serves to reduce
the cost of this advertising campaign.
Other strategic measures being undertaken by the Company include (1)
continually evaluating PUEBLO store formats relative to the markets they serve
for potential future conversions to XTRA stores; (2) conversion of
in-supermarket Video Clubs to BLOCKBUSTER video stores; and (3) other interior
changes to increase the traffic in the supermarkets, such as in-store banking
and possible in-store fast food restaurants for select locations. Management
anticipates converting the remaining in-supermarket Video Clubs to BLOCKBUSTER
video stores. The Video Club conversions involve replacing the existing video
departments in the Company's supermarkets with BLOCKBUSTER units which typically
will be within the same building. A video customer would typically
-10-
enter the BLOCKBUSTER store through its entrance but would leave the video store
through an exit that leads into the supermarket. It is believed that these
strategic measures will be an effective means of increasing customer traffic in
the supermarkets.
On September 9, 1996, Puerto Rico was directly hit by Hurricane
Hortense, a category-1 hurricane. The Company's operations in Puerto Rico remain
structurally sound and were largely unaffected. Damage resulting from the storm
did not materially affect the financial condition of the Company and was
adequately covered by its existing insurance policies. Although utilities on the
island were inoperable for several days, the Company was able to reopen all
stores within 24 hours.
Gross profit margin, as a percentage of sales, for the 12 and 40 weeks
ended November 2, 1996 was below that of the comparable period of the prior year
by 0.2% for both periods. Common factors for both the 12- and 40-week periods
contributing to the decline in gross margin were an increase in retail shrink
and lower margins in the meat department. The decline in meat margins was
principally the result of a reduction in prices due, in part, to competition,
partially offset by improved shrink in the meat department. Additional factors
for the fluctuation for the current fiscal quarter were approximately $0.4
million in insurance deductibles primarily associated with Hurricane Hortense in
Puerto Rico and a reduction in vendor allowances. The prior year 40-week period
also included a one-time adjustment for a change in estimate for the reversal of
certain liabilities due to the passage of time resulting in a $1.0 million
increase to gross margin.
The 0.2% and 0.4% favorable decreases in selling, general and
administrative expenses, as a percentage of sales, for the 12 and 40 weeks ended
November 2, 1996, respectively, resulted primarily from an improvement in direct
store selling expenses, partially offset by an increase in general and
administrative expenses. In addition, selling expenses were positively impacted
by the closing of the Florida retail operations which, in the prior year
comparable periods, contributed unfavorably to consolidated expenses on a
rate-to-sales basis. For the 40 weeks ended November 2, 1996, advertising costs
increased in Puerto Rico, primarily due to the major advertising campaign
launched earlier in this fiscal year. The increase in general and administrative
costs stemmed primarily from the Florida Closing, despite a favorable decline in
administrative labor costs, and approximately $0.6 million for consulting fees
arising from an ongoing project to improve supermarket operations in Puerto
Rico.
The decrease in depreciation and amortization was principally due to
the Florida Closing which included the reclassification of the Florida division
depreciable assets to a non-depreciable category, assets held for sale.
Net interest expense decreased by $0.6 million and $1.5 million,
respectively, for the 12 and 40 weeks ended November 2, 1996 primarily due to a
reduction in interest on capital lease obligations resulting from the Florida
Closing combined with lower interest rates and principal amortization on the
term loans of the Credit Facility, partially offset by increased short-term
borrowing during the current fiscal year.
The income tax benefit increased marginally for the 12 weeks ended
November 2, 1996 by $0.1 million and decreased by $0.2 million for the 40-week
period ended November 2, 1996.
The net loss for the 12 weeks ended November 2, 1996 was comparable to
the same period last year with a $0.1 million improvement whereas, on a 40-week
basis, the net loss increased by $0.7 million in comparison to the same period
last year.
-11-
LIQUIDITY AND CAPITAL RESOURCES
Company operations have historically provided a sufficient cash flow
which, along with the available credit facility, provided adequate liquidity to
the Company's operational needs.
As of November 2, 1996, the Company was not in compliance with certain
financial covenants contained in the credit agreement under which the Credit
Facility is available. However, the Company and representatives of the Bank
Syndicate have agreed to amend the credit agreement to cure the Company's
non-compliance with such covenants as of November 2, 1996 (see the Eighth
Amendment filed as Exhibit 10.4 hereto). However, as a condition to such
amendment, the Bank Syndicate has required that the maximum amount available
under the revolving loans of the Credit Facility be reduced from $60.0 million
to $39.3 million, the amount outstanding as of December 13, 1996, which is
comprised of $16.0 million in revolving loans and a maximum of $23.3 million
utilized in the form of standby letters of credit. In accordance with the Eighth
Amendment, the revolving features of the Credit Facility have been removed. The
Company intends to discuss further with the Bank Syndicate the possibility of
obtaining incremental borrowings under the revolving loans of the Credit
Facility, but there can be no assurance that the Bank Syndicate will agree to
any such incremental borrowings. In addition, the Company has expressed to
representatives of the Bank Syndicate its expected need for additional
amendments to enable it to be in compliance with all of its covenants as of the
end of its current fiscal year and thereafter. Although reaching an agreement
with the Bank Syndicate for prospective covenant compliance during the next 12
months cannot be assured, the Company believes a resolution, whether with the
Bank Syndicate or through alternative sources of financing, will be available.
Since the Credit Facility is unlikely to be available for future
incremental borrowing in the near term, the Company's operations are the primary
remaining source for meeting its current liquidity and capital needs. It is the
Company's belief that, for the near term, its liquidity and capital needs can be
met through the cash flows generated by normal business operations. However, the
Company expects to continue to realize significant losses in the future, much of
which pertains to depreciation and amortization and interest expense related to
the July 1993 transaction described in Note (3)--Acquisitions to the Company's
Form 10-K for the year ended January 27, 1996; as a result, the Company
anticipates that its accumulated earnings deficit will continue to increase for
the foreseeable future. The Company's future results of operations also will be
affected by its ability to react to changes in the competitive environment.
The Company believes that its ability to meet its long-term liquidity
and capital requirements beyond the near term will be dependent upon the
successful outcome of the negotiations with the Bank Syndicate or upon the
Company's ability to secure alternative sources of financing. However, there can
be no assurance that such alternative sources of financing can be identified or
that such sources would be willing to provide funding to the Company under
acceptable terms.
Net cash used in operating activities increased by $14.4 million for
the comparable 40-week periods. Major factors contributing to this increased use
of cash from operations were net cash outlays totaling $14.2 million related to
the Florida Closing (excluding proceeds from the sale of certain of the Florida
retail operation's fixed assets) combined with changes in working capital as a
result of timing of receipts and disbursements.
The working capital deficit improved by $7.9 million for the 40-week
period ended November 2, 1996 primarily due to the payment of certain
obligations relating to the closing of retail operations in Florida financed, in
part, by the sale of certain assets in the Florida operating division as well as
the timing of certain receipts and disbursements, including receipt of insurance
proceeds related to Hurricane Marilyn, which hit the U.S. Virgin Islands during
the prior year.
-12-
Net cash provided by (used in) investing activities was $5.4 million
and $(16.4) million for the 40 week periods ended November 2, 1996 and November
4, 1995, respectively. This $21.8 million increase in cash from investing
activities pertains primarily to $11.8 million in proceeds received during the
first two quarters of this fiscal year for the sale of two XTRA stores and
certain store equipment in Florida as part of the Florida Closing coupled with a
$10.3 million reduction in expenditures for the capital program. Management is
monitoring its capital program for the current fiscal year to ensure maximum
realization on capital projects as part of its strategic measures to improve
operating results. Capital expenditures for the current period include five
PUEBLO-to-XTRA conversions and two Video Club conversions in Puerto Rico as well
as remodeling of certain existing locations. Capital expenditures for the
comparable period of the prior year included the opening of two XTRA stores in
Puerto Rico, a deposit for a pending acquisition of two stores in the U.S.
Virgin Islands, one major remodel in Puerto Rico and minor remodels.
Capital expenditures for fiscal 1997 are not expected to exceed
approximately $11.0 million. The capital program, which is subject to continuing
change and review, includes major remodels and the purchase of land for an XTRA
store, all in Puerto Rico, in addition to several Video Club conversions (two of
which have occurred to date), one new free-standing BLOCKBUSTER video store and
the remodeling of certain existing locations.
Net cash provided by financing activities increased by $1.2 million for
the 40 weeks ended November 2, 1996 as compared to the same period of the prior
year. During April 1996, the Company executed the Seventh Amendment which
included an additional capital contribution of $5.0 million by Holdings and
$10.0 million of funding by Holdings. The proceeds totalling $15.0 million
received from Holdings were used to immediately reduce the Company's term loans
under the Credit Facility. Principal payments on long-term debt for the 40-week
period also include the pay-off of the mortgages for certain properties in
Florida which matured during the second quarter of fiscal 1997 or were satisfied
pursuant to the sale of the underlying collateral. In addition, the Company had
net borrowings under the revolving facility of the Credit Facility of $14.4
million, principally resulting from timing of receipts and disbursements, in
part due to the closing of the Florida retail operations.
The Seventh Amendment also provided certain revised financial covenant
requirements and a modification in the Company's scheduled principal payments
under the Credit Facility during the next two fiscal years. The Seventh
Amendment was filed as an exhibit to the Form 10-K for the year ended January
27, 1996 as Exhibit 10.25 thereto.
In early November 1996, the Company reached a settlement (the
"Settlement") of the Premium Sales litigation described in Item 3, Legal
Proceedings, in the Company's Form 10-K for the year ended January 27, 1996. The
terms of the Settlement do not materially affect the Company's financial
position or results of operations.
IMPACT OF RECENT EVENTS ON ABILITY TO SERVICE SENIOR NOTES
The terms of the credit agreement under which the Credit Facility is
available include covenants restricting the Company's ability to engage in
certain activities, including the payment of dividends by the borrower
subsidiaries of Pueblo Xtra International, Inc. under the Credit Facility to
Pueblo Xtra International, Inc. These terms include an exception to the
restriction on the payment of dividends to the effect that so long as no default
or event of default exists, or would exist under the terms of the Credit
Facility as a result thereof, Pueblo International, Inc. ("Pueblo"), a
subsidiary of Pueblo Xtra International, Inc., and other borrower subsidiaries
are permitted to pay cash dividends to Pueblo Xtra International, Inc. in an
aggregate amount necessary to pay interest on Pueblo Xtra International, Inc.'s
9 1/2% Senior Notes due 2003 (the "Senior Notes") then due and payable in
accordance with the terms thereof. Accordingly, any future non-compliance by the
Company with the financial covenants contained in the credit agreement may
restrict the ability of
-13-
Pueblo and other borrower subsidiaries to pay dividends to Pueblo Xtra
International, Inc. to pay interest on the Senior Notes. The reduction in the
amount available under the Credit Facility pursuant to the Eighth Amendment,
coupled with the potential unavailability of dividends from Pueblo, may restrict
the ability of Pueblo Xtra International, Inc. to pay interest on the Senior
Notes.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The inflation rate for food prices continues to be lower than the
overall increase in the U.S. Consumer Price Index. The Company's primary costs,
products and labor, can be affected by inflation. Increases in inventory costs
can typically be passed on to the customer. Other cost increases must be
recovered through operating efficiencies and improved gross margins. Currency in
Puerto Rico and the U.S. Virgin Islands is the U.S. dollar. As such, the Company
has no exposure to foreign currency fluctuations.
FORWARD LOOKING STATEMENTS
The foregoing statements regarding the Company's anticipation of
continued improvements in sales performance in the U.S. Virgin Islands, the
impact of Hurricane Hortense on operations and recoverability from insurance,
the Company's expectations that certain contemplated interior changes, including
Video Clubs, in-store banking and possibly in-store fast-food restaurants, will
improve the supermarket operations and the Company's expectations with respect
to its ongoing liquidity and capital needs and resources and related issues are
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, which represent the Company's expectations and beliefs concerning
future events. The Company cautions that its discussion of these matters is
further qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including but not
limited to competitive conditions in the markets in which the Company operates,
buying patterns of consumers and the prospective outcome of litigation as
discussed in Item 3, Legal Proceedings, in the Company's Form 10-K.
-14-
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Receipt and Agreement by PXC&M Holdings, Inc. from Bothwell
Corporation dated October 18, 1996
10.2 - Receipt and Agreement by Pueblo Xtra International, Inc. from PXC&M
Holdings, Inc. dated October 18, 1996
10.3 - Consent executed by Scotiabank de Puerto Rico, as Administrative Agent,
dated October 18, 1996
10.4 - Eighth Amendment, dated as of November 1, 1996, to the Credit
Agreement among Pueblo Xtra International, Inc., Pueblo International,
Inc., Xtra Super Food Centers, Inc., various lending institutions, The
Chase Manhattan Bank, N.A. and Scotiabank de Puerto Rico, as
Co-Managing Agents and Scotiabank de Puerto Rico, as Administrative
Agent
(b) Reports on Form 8-K
None.
-15-
SIGNATURES
Pursuant to the requirements 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.
PUEBLO XTRA INTERNATIONAL, INC.
Dated: December 16, 1996 /S/ JEFFREY P. FREIMARK
-----------------------
Jeffrey P. Freimark
Executive Vice President
and Chief Financial Officer
-16-