10-Q 1 a10qq3.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended August 9, 2003 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ________________ Commission file number: 33 -63372 Nutritional Sourcing Corporation ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 65 -0415593 ------------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 1300 N.W. 22nd Street Pompano Beach, Florida 33069 ------------------------------------ ----------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (954) 977-2500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ Indicate by check mark whether the registrant is an accelerated filer (as in Rule 12b-2 of the Exchange Act). YES NO X Indicate by check mark whether the registrant has filed all documents and Reports required to be filed by Section 12, 13, or 15(d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the Court. YES X NO ___ Number of shares of the Registrant's Common Stock, $ .10 par value, outstanding as of September 17, 2003 -- 200. INDEX PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS Page(s) ------- Condensed Consolidated Balance Sheets - ~~May~~August 179, 2003 (Unaudited) and November 2, 2002. . . . . . . . 3-4 Condensed Consolidated Statements of Operations (Unaudited) - Twelve and ~~twenty-eight~~forty weeks ended ~~May~~August 179, 2003 and ~~May~~August 1810, 2002 . . . . . . . . . . . . . . . . . . . . . . 5 Condensed Consolidated Statements of Cash Flows (Unaudited)- ~~Twenty-eight~~Forty weeks ended ~~May~~August 179, 2003 and ~~May~~August 1810, 2002 . . . . . . . . . . . . . . . . . . . . ~~. .~~ 6 Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . 7-1413 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . 1513-2120 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 2220 ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . 2221 PART II. OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . 2524 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 2524

CONDENSED CONSOLIDATED BALANCE SHEETS NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (Dollars in thousands)

(Unaudited) ~~May~~August 179, November 2, 2003 2002 ------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ ~~12,881~~586 $ 17,992 Accounts receivable, net of allowance for doubtful accounts of $~~350~~367 at ~~May~~August 179, 2003 and $321 at November 2, 2002 32,~~064~~835 3,226 Inventories 4948,~~808~~276 51,660 Prepaid expenses 1211,~~137~~266 11,018 Deferred income taxes 15,964 15,964 --------- --------- TOTAL CURRENT ASSETS 9378,~~854~~927 99,860 --------- --------- PROPERTY AND EQUIPMENT Land and improvements 6,307 6,307 Buildings and improvements 44,~~879~~875 40,092 Furniture, fixtures and equipment 101,~~780~~500 101,497 Leasehold improvements 43,~~821~~676 44,511 Construction in progress 1,~~066~~196 5,278 --------- --------- 197,~~853~~554 197,685 Less accumulated depreciation and amortization ~~111~~114,~~523~~098 106,558 --------- --------- 8683,~~330~~456 91,127 Property under capital leases, net 1110,~~174~~969 11,720 --------- --------- TOTAL PROPERTY AND EQUIPMENT 9794,~~504~~425 102,847 GOODWILL 5,621 145,477 DEFERRED INCOME TAX 64,~~024~~445 6,024 TRADE NAMES 26,574 26,574 DEFERRED CHARGES AND OTHER ASSETS 17,~~510~~932 17,943 --------- --------- TOTAL ASSETS $ ~~247~~227,~~087~~924 $ 398,725 ========= =========

The accompanying notes are an integral part of these condensed consolidated financial statements. CONDENSED CONSOLIDATED BALANCE SHEETS NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (Dollars in thousands)

(Unaudited) ~~May~~August 179, November 2, 2003 2002 ------------- ------------- LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES NOT SUBJECT TO COMPROMISE CURRENT LIABILITIES Revolving credit facility $ 2213,~~540~~349 $ 32,000 Current portion term loans 4,200 - Accounts payable 4538,~~869~~640 44,387 Accrued interest 1,733 73 Accrued expenses 1720,~~194~~717 16,~~179~~106 Salaries, wages and benefits payable 7,~~901~~719 10,358 Current obligations under capital leases ~~646~~621 704 Current deferred tax liability ~~950~~- 950 ----------- ----------- TOTAL CURRENT LIABILITIES 9586,~~100~~979 104,578 CAPITAL LEASE OBLIGATIONS, net of current portion 11,~~273~~133 11,591 LONG-TERM DEBT, TERM LOANS, net of current portion 40,100 - NOTES PAYABLE 90,000 - RESERVE FOR SELF-INSURANCE CLAIMS 5,~~154~~183 5,240 DEFERRED INCOME TAXES 27,176 27,176 OTHER LIABILITIES AND DEFERRED CREDITS 29,~~580~~535 29,226 ----------- ----------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ~~168~~290,~~283~~106 177,811 ----------- ----------- LIABILITIES SUBJECT TO COMPROMISE ~~186,208~~- 186,208 ----------- ----------- TOTAL LIABILITIES ~~354~~290,~~491~~106 364,019 COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 4, and 7) STOCKHOLDER'S EQUITY Common stock, $.10 par value; 200 shares authorized and issued - - Additional paid-in capital 91106,500 91,500 Accumulated deficit (~~198~~168,~~904~~682) (56,794) ----------- ----------- TOTAL STOCKHOLDER'S EQUITY (~~107~~62,~~404~~182) 34,706 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ ~~247~~227,~~087~~924 $ 398,725 =========== ===========

The accompanying notes are an integral part of these condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (Dollars in thousands)

(Unaudited) (Unaudited) 12 weeks ended 2840 weeks ended ------------------------ ----------------------- ~~May~~August 179, ~~May~~August 1810, ~~May~~August 179, ~~May~~August 1810, 2003 2002 2003 2002 ----------- ---------- ----------- ---------- Net sales $~~133~~127,~~992~~679 $~~136~~135,~~189~~770 $~~320~~448,~~357~~036 $~~323~~459,~~470~~240 Cost of goods sold 9286,~~298~~238 9091,~~957~~203 ~~217~~303,~~182~~420 ~~216~~308,~~837~~039 ----------- ----------- ----------- --------- GROSS PROFIT 41,~~694~~441 4544,~~232~~567 ~~103~~144,~~175~~616 ~~106~~151,~~633~~201 OPERATING EXPENSES Selling, general and administrative expenses 3634,~~499~~998 3534,~~783~~477 87122,~~451~~449 85120,~~927~~402 ~~Store~~Gain ~~closings:~~on ~~Exit~~insurance ~~cost~~settlement ~~382~~ - ~~382~~(14,693) - ~~Write~~(14,693) ~~down~~Store ofexit ~~impaired~~cost ~~assets~~230 ~~166~~ - ~~166~~612 - Depreciation and amortization 45,~~807~~108 6,~~227~~296 1116,~~511~~785 1421,~~939~~235 ----------- ----------- ----------- --------- OPERATING ~~(LOSS)~~ PROFIT ~~(160)~~1,105 318,~~222~~487 34,~~665~~770 524,~~767~~257 Interest expense on debt (does not include contractual interest expense on pre-petition debt totaling approximately $3,900 and $910,~~100~~000 for the 12 and 2840 weeks ended ~~May~~August 179, 2003, respectively) (~~725~~2,705) (5,~~079~~092) (24,~~256~~961) (1116,~~720~~812) Interest expense on capital lease obligations (404) (~~421~~422) (~~943~~1,347) (~~980~~1,402) Interest and investment income (expense), net 61(48) 3775 ~~216~~168 ~~102~~177 Reorganization items (~~992~~2,984) - (25,~~670~~654) - Gain on early extinguishment of debt 36,508 - 36,508 - ----------- ----------- ----------- --------- ~~LOSS~~INCOME BEFORE INCOME TAXES & CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE (231,~~220)~~427 (213,~~241)~~048 (129,~~988)~~484 (6,~~831)~~220 Income tax expense (~~297~~1,250) -(4,874) (~~266~~1,516) -(4,874) ----------- ----------- ----------- --------- ~~LOSS~~INCOME BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE (230,~~517)~~222 (28,~~241)~~174 (227,~~254)~~968 (61,~~831)~~346 Cumulative effect of an accounting change - - (139,856) - ----------- ----------- ----------- --------- NET INCOME (LOSS) $(2 30,~~517)~~222 $(2 8,~~241)~~174 $(~~142~~111,~~110~~888) $(6 1,~~831)~~346 =========== ============ =========== =========

The accompanying notes are an integral part of these condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (Dollars in thousands)

(Unaudited) 2840 weeks ended --------------------------------- ~~May~~August 179, ~~May~~August 1810, 2003 2002 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(~~142~~111,~~110~~888) $(6 1,~~831)~~346 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Cumulative effect of an accounting change 139,856 - Gain on early extinguishment of debt (36,508) - Depreciation and amortization of property and equipment 711,~~979~~732 812,~~531~~241 Amortization of intangibles, other assets and inventories 35,~~532~~053 68,~~408~~994 ~~Write down of impaired assets on store closings 166 -~~ Accrual for exit costs on store closing ~~382~~612 - Amortization of bond discount - ~~553~~802 Reorganization items 25,~~670~~654 - ~~Benefit~~(Provision) benefit for deferred income taxes ~~266~~629 -807 Gain on disposal of property and equipment, net ~~(2)~~- (3739) Changes in operating assets and liabilities: Decrease (increase) in: Accounts receivable ~~162~~328 ~~913~~946 Inventories (~~872~~345) (~~584~~421) Prepaid expenses (21,~~228~~286) (53,~~012~~125) Other assets (~~375~~1,486) ~~778~~(719) (Decrease) increase in: Accounts payable, accrued expenses and accrued interest ~~288~~ (~~149~~4,704) 671 Salaries, wages and benefits payable (2,~~457~~639) ~~347~~1,080 Income taxes currently payable - 1,753 Current deferred tax liability - 2,314 Other liabilities and deferred credits and reserve for self-insurance claims ~~268~~252 ~~664~~(783) --------------- -------------- Net cash provided by operating activities 75,~~525~~260 525,~~581~~867 --------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (23,~~801~~313) (34,~~068~~830) Proceeds from disposal of property and equipment 13 3739 --------------- -------------- Net cash used in investing activities (23,~~800~~310) (34,~~031~~791) --------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of revolving credit facility, net of borrowings (932,~~460~~000) 2,000 Borrowings (repayments) under May 2003 Bank Agreement: Borrowing under revolving credit facility 103,457 - Repayments of revolving credit facility (90,108) - Principal borrowings on term loans 45,000 - Principal payments on term loans (700) - Principal payment on Notes and Series C Senior Notes (59,464) - Proceeds from capital contribution 15,000 - Principal payments on capital lease obligations (~~376~~541) (~~334~~480) --------------- -------------- Net cash (used in) provided by financing activities (919,~~836~~356) ~~(334)~~1,520 --------------- -------------- Net (decrease) increase in cash and cash equivalents (517,~~111~~406) 222,~~216~~596 Cash and cash equivalents at beginning of period 17,992 2,169 --------------- -------------- Cash and cash equivalents at end of period $~~12,881~~ 586 $424,~~385~~765 =============== ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 13,~~977~~254 $1011,~~503~~456 Income taxes paid (refunded), net $ ~~535~~608 $ (597)

The accompanying notes are an integral part of these condensed consolidated financial statements NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands) NOTE 1 -- INTERIM FINANCIAL STATEMENTS Organization Effective July 22, 2002 the registrant changed its name from Pueblo Xtra International, Inc. to Nutritional Sourcing Corporation ("NSC"). The condensed consolidated financial statements include the accounts of Nutritional Sourcing Corporation, and its wholly-owned subsidiaries (the "Company"). Proceedings under Chapter 11 of the Bankruptcy Code and Basis of Presentation On September 24, 2002, NSC voluntarily consented to the entry of an order for relief under Chapter 11 of the Bankruptcy Code by filing a Consent to Entry of Order For Relief Under Chapter 11 in the United States Bankruptcy Court For The District of Delaware (the "Court"). The Court ordered such relief on September 27, 2002 (case No: 02-12550 (PJW)). This action by NSC was in response to an involuntary petition filed in the Court by certain creditors of NSC under title 11, United States Code (the "Chapter 11 Case"). The creditors' actions were taken as a result of NSC not paying the August 1, 2002 interest payment on its $177,283 in notes outstanding which were due in August of 2003. The interest was not paid as a result of NSC's operating subsidiaries not paying interest they owed to NSC; this non-payment was consented to by the operating subsidiaries' lender banks. The relief under the Chapter 11 Case pertained to NSC only, not to its operating subsidiaries. However, the bank debt of the operating subsidiaries, which was guaranteed by NSC, was due on February 1, 2003. On January 30, 2003, a new bank lender assumed the existing bank debt and committed to lend the operating subsidiaries additional funds at the time NSC emerged from bankruptcy. The new bank lender also obtained the guarantee of NSC. On June 5, 2003, NSC emerged from bankruptcy pursuant to an April 30, 2003 confirmation order from the Court. The interim bank agreement, new bank financing and NSC's emergence from bankruptcy, including the settlement of liabilities subject to compromise, are discussed in detail in the footnotes to the consolidated financial statements included in Item 15 of the Company's Form 10-K for the fiscal year (52 weeks) ended November 2, 2002 which was filed on July 28, 2003. The accompanying condensed consolidated financial statements have been presented in conformity with generally accepted accounting principles in the United States of America, including the provisions of the American Institute of Certified Public Accountants ("AICPA")'s Statement of Position 90-7, "Financial Reporting By Entities in Reorganization Under the Bankruptcy Code," ("SOP 90- 7"). The statement requires a segregation of liabilities subject to compromise by the Bankruptcy Court as of the bankruptcy filing date, and identification of all transactions and events that are directly associated with the reorganization of the debtor. In accordance with SOP 90-7, the Company did not adopt fresh-start accounting upon emergence from bankruptcy. NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES NOTE 1 -- INTERIM FINANCIAL STATEMENTS (continued) Reorganization items reflected in the Statement of Operations for 12 and 40 weeks ended August 9, 2003 are composed primarily of professional fees directly related to the bankruptcy case. Costs associated with the reorganization have been accrued as of August 9, 2003. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and in accordance with the requirements of Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and changes in cash flows required by GAAP. These condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended November 2, 2002. Certain amounts in the prior period have been reclassified to conform to the current period's presentation. With respect to the unaudited financial statements for the 12 and 40 weeks ended August 9, 2003 and August 10, 2002, it is the opinion of the management of the Company that such adjustments necessary to prepare a fair statement of the results for such interim periods have been included. Such adjustments, other than those related to the cumulative effect of an accounting change as detailed herein, were of a normal and recurring nature. Intercompany accounts and transactions are eliminated in consolidation. Operating results for the 12 and 40 weeks ended August 9, 2003 and August 10, 2002 are not necessarily indicative of results that may be expected for the full fiscal years. The Company's fiscal year ends on the Saturday closest to October 31. NOTE 2 -- INVENTORY The results of the Company's operations reflect the application of the last-in, first-out ("LIFO") method of valuing certain inventories of grocery, non-food and dairy products. Since an actual valuation of inventories under the LIFO method is only made at the end of a fiscal year based on inventory levels and costs at that time, interim LIFO calculations are based on management's estimates of expected year-end inventory levels and costs and are subject to year-end adjustments. NOTE 3 -- GOODWILL AND TRADE NAMES In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill and Other Intangibles." This standard requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. This statement also provides that goodwill and intangible assets deemed to have indefinite lives should not be amortized, but shall be tested for impairment annually or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES NOTE 3 -- GOODWILL AND TRADE NAMES (continued) The Company adopted SFAS No. 142 on November 3, 2002. Accordingly, goodwill and trade names will no longer be amortized as a recurring charge to earnings. They will hereafter be tested, at least annually, for impairment. During the prior year (52 weeks ended November 2, 2002), goodwill and trade names generally were amortized over 40 years. Goodwill amortization expense totaled $1,094 and $3,646 for the 12 and 40 weeks ended August 10, 2002, respectively. Trade names amortization expense totaled $200 and $667 for the 12 and 40 weeks ended August 10, 2002, respectively. As a result of its adoption, the Company had an independent, qualified third party evaluator perform a transitional impairment test on its existing goodwill and intangible assets on November 3, 2002. The Company determined that it has two reporting units as defined in SFAS No. 142, its retail food division and its video rental division. The transitional impairment test was performed at the reporting unit level. Generally, fair value represented a multiple of earnings before interest, taxes, depreciation, and amortization ("EBITDA") or discounted projected future cash flows. Impairment was indicated when the carrying value of a division, including goodwill, exceeded its fair value. The Company determined that the carrying value of its retail food division, which included $139,856 of goodwill, exceeded its fair value. Impairment was not indicated for the goodwill associated with its video rental division. Additionally, no impairment was indicated for trade names. The fair value of the Company's retail food division was subsequently measured, by the third party evaluator, against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the division's goodwill. As a result of this analysis, the evaluator determined that the retail food division goodwill was entirely impaired. Impairment primarily resulted from its projected cash flows on a discounted basis, rather than on an undiscounted basis, as was the standard under SFAS No. 121, prior to adoption of SFAS No. 142. This loss was recorded as a cumulative effect of an accounting change during the 16 weeks ended February 22, 2003. The following table summarizes changes in the Company's goodwill balance during the 40 weeks ended August 9, 2003): Retail Video food rental Consol- division division idated ---------- ---------- ---------- Balance at November 2, 2002 $ 139,856 $ 5,621 $ 145,477 Cumulative effect of an accounting change (139,856) - (139,856) ---------- ---------- ---------- Balance at August 9, 2003 $ - $ 5,621 $ 5,621 ========== ========== ========== NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES NOTE 3 -- GOODWILL AND TRADE NAMES (continued) The following table provides the comparable after-tax effect on net income due to goodwill and trade names no longer being amortized pursuant to SFAS No. 142:

12 weeks ended 2840 weeks ended ----------------------- ----------------------- ~~May~~August 179, ~~May~~August 1810, ~~May~~August 179, ~~May~~August 1810, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Reported net income (loss) $ (230,~~517)~~222 $ (28,~~241)~~174 $(~~142~~111,~~110~~888) $ (61,~~831)~~346 Add: Goodwill amortization - 1,094 - 23,~~552~~646 Trade names amortization - 200 - ~~467~~667 ---------- ---------- ---------- ---------- Adjusted net income (loss) $ (230,~~517)~~222 $ ~~(947)~~9,468 $(~~142~~111,~~110~~888) $ (35,~~812)~~659 ========== ========== ========== ==========

NOTE 4 -- LIABILITIES SUBJECT TO COMPROMISE Liabilities subject to compromise ("prepetition") refers to liabilities incurred prior to the commencement of the Chapter 11 case. These liabilities consisted primarily of amounts outstanding under NSC's 9.5% senior notes (the "Notes") and 9.5% series C senior notes (the "Series C Senior Notes"), both due 2003 and includes accrued interest. No contractual interest expense was accrued on prepetition debt from September 4, 2002 through June 5, 2003. The amount of contractual interest expense not accrued during the 12 and 40 weeks ended August 9, 2003 was approximately $900 and 10,000, respectively. For more detail regarding these liabilities subject to compromise and their final resolution, see NOTES 1, 5, 8, 9 and 16 of the footnotes to the consolidated financial statements included in Item 15 of the Company's Form 10-K for the fiscal year (52 weeks) ended November 2, 2002 which was filed on July 28, 2003. NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES NOTE 5 -- CLASSIFICATION OF BORROWINGS PURSUANT TO REVOLVING CREDIT FACILITY Borrowings under the revolving credit facility at November 2, 2002 were classified as current liabilities as that facility expired on February 1, 2003. In the accompanying August 9, 2003 condensed consolidated balance sheet, the classification as current of the borrowings under the new revolving credit facility, which is part of the May 2003 Bank Agreement, is different from the classification as long-term of such borrowings anticipated in the proforma balance sheets in previous filings that gave effect to the Company?s reorganization. The May 2003 Bank Agreement was funded on June 5, 2003 at the time NSC consummated its Plan Of Reorganization and emerged from bankruptcy. The facility is a five year facility which expires on June 22, 2008 and borrowing availability under it is based on the inventory levels and values as more fully discussed in Note 16 ? SUBSEQUENT EVENTS - to the consolidated financial statements included in Item 15 of the Company?s Form 10-K for the year ended on November 2, 2002 which was filed on July 28, 2003. Generally accepted accounting principles (GAAP) in the United States of America require that borrowings under the revolving credit facility in the May 2003 Bank Agreement be classified as current. GAAP requires such classification despite the five year life of the agreement as the lender, per the terms of the agreement, has the discretion to issue a five day notice to change the level of availability should it believe, in good faith and based on specific circumstances, that a change is appropriate. Per the terms of the agreement the lender may either decrease or increase availability. At this filing the lender has not issued such notice or indicated it intends to do so. Management believes that no adjustment will be made to availability in the foreseeable future. NOTE 6 -- DISCLOSURE OF OPERATING SEGMENTS The Company has two primary operating segments: retail food sales and video tape rentals and sales. The Company's retail food division, with headquarters in Puerto Rico, consists of 48 supermarkets, 42 of which are in Puerto Rico and 6 of which are in the U.S. Virgin Islands. The Company also operates 42 video tape rental stores, 40 of which are in Puerto Rico and 2 of which are in the U.S. Virgin Islands. Most of the video tape rental stores are adjacent to or a separate section within one of the Company's retail food supermarkets. Administrative headquarters are in Florida. Although the Company maintains data by geographic location, its segment decision making process is based on its two product lines. NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES NOTE 6 -- DISCLOSURE OF OPERATING SEGMENTS (continued) Reportable operating segment financial information is as follows (dollars in thousands):

Retail Food Video Rental Total For the 2840 Weeks Ended and as of ~~May~~August 179, 2003: Net sales $ ~~297~~416,~~265~~055 $ 2331,~~093~~981 $ ~~320~~448,~~357~~036 Depreciation and amortization (811,~~008~~954) (34,~~503~~831) (1116,~~511~~785) ~~Loss~~Store onexit ~~store~~costs ~~closing~~ (b) ~~548~~612 - ~~548~~612 Operating profit (a) ~~608~~(b) 3132 4,~~057~~638 34,~~665~~770 Total assets ~~226~~210,~~350~~120 2017,~~737~~804 ~~247~~227,~~087~~924 Capital expenditures (23,~~731~~206) (70107) (23,~~801~~313) ~~Video~~Rental video tape purchases N/A (23,~~884~~889) (23,~~884~~889) For the 2840 Weeks Ended ~~May~~August 1810, 2002: Net sales $ ~~301~~427,~~153~~593 $ 2231,~~317~~647 $ ~~323~~459,~~470~~240 Depreciation and amortization (1116,~~368~~282) (34,~~571~~953) (1421,~~939~~235) ~~Operating~~Gain on settlement of insurance claim (~~loss~~c) 13,421 1,272 14,693 Operating profit (a) 2(c) 18,~~518~~097 36,~~249~~160 524,~~767~~257 Capital expenditures (34,~~052~~780) (1650) (34,~~068~~830) ~~Video~~Rental video tape purchases N/A (24,~~976~~340) (24,~~976~~340) As of November 2, 2002: Total assets $ 378,529 $ 20,196 $ 398,725

Because the Retail Food and Video Rental Divisions are not segregated by corporate entity structure, the operating segment amounts shown above do not represent totals for any subsidiary of the Company. All overhead expenses including depreciation on assets of administrative departments are allocated to operations. Amounts shown in the total column above correspond to amounts in the consolidated financial statements. (a) See Management's Discussion and Analysis for discussions of gross profit and selling, general and administrative expenses. (b) The 40 weeks ended August 9, 2003 include a $0.6 million loss (before income taxes) for the estimated exit costs of two supermarkets that are being closed. One of the stores is in Puerto Rico, and one is on the island of St. Thomas in the U.S. Virgin Islands. Both are being closed based on management's view of their profit potential. The exit costs accrued primarily include contractual occupancy costs, property taxes, and other occupancy costs beyond the closing date, employee severance and related benefit costs. (c) The 40 weeks ended August 10, 2002 include a $14.7 million gain (before income taxes) realized upon the settlement of the business interruption portion of the Company's Hurricane Georges insurance claim. NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES NOTE 7 -- RECENT ACCOUNTING PRONOUNCEMENTS The Company is not aware of any additional significant recent accounting pronouncements since those included in NOTE 1 of the footnotes to the consolidated financial statements included in Item 15 of the Company's Form 10-K for the fiscal year (52 weeks) ended November 2, 2002 which was filed on July 28, 2003. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General On September 24, 2002, NSC voluntarily consented to the entry of an order for relief under Chapter 11 of the Bankruptcy Code by filing a Consent to Entry of Order For Relief Under Chapter 11 in the United States Bankruptcy Court For The District of Delaware (the "Court"). The Court ordered such relief on September 27, 2002 (Case No: 02-12550 (PJW)). This action by NSC was in response to an involuntary petition filed in the Court by certain creditors of NSC under title 11, United States Code (the "Chapter 11 Case"). The creditors' actions were taken as a result of NSC not paying the August 1, 2002 interest payment on its $177.3 million in notes outstanding which were due in August of 2003. The interest was not paid as a result of NSC's operating subsidiaries not paying interest they owed to NSC; this non- payment was consented to by the operating subsidiaries' lender banks. The relief under the Chapter 11 Case pertained to NSC only, not to its operating subsidiaries. However, the bank debt of the operating subsidiaries, which was guaranteed by NSC, was due on February 1, 2003. On January 30, 2003, a new bank lender assumed the existing bank debt and committed to lend the operating subsidiaries additional funds at the time NSC emerged from bankruptcy. The new bank lender also obtained the guarantee of NSC. On June 5, 2003, NSC emerged from bankruptcy pursuant to an April 30, 2003 confirmation order from the Court. Overview and Basis of Presentation The following discussion of the Company's financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. Selected Operating Results (As a percentage of sales) Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 32.5 32.8 32.3 32.9 Selling, general & administrative expenses 27.4 25.4 27.3 26.2 Gain on insurance settlement (1) - (10.8) - (3.2) Store exit costs (2) 0.2 - 0.1 - EBITDA, as defined (3) 4.9 18.3 4.8 9.9 Depreciation & amortization 4.0 4.6 3.7 4.6 Operating profit 0.9 13.6 1.1 5.3 Reorganization items (2.3) - (1.3) - Gain on early extinguishment of debt 28.6 - 8.1 - Income before income taxes and cumul- ative effect of an accounting change 24.6 9.6 6.6 1.4 Income before cumulative effect of an accounting change 23.7 6.0 6.2 0.3 Net income (loss) 23.7 6.0 (25.0) 0.3

(1) The 12 and 40 weeks ended August 10, 2002 include a $14.7 million gain (before income taxes) realized upon the settlement of the business interruption portion of the Company's Hurricane Georges insurance claim. (2) The 12 and 40 weeks ended August 9, 2003 include a $0.2 million and $0.6 million loss (before income taxes), respectively, for the estimated exit costs of two stores that are being closed. (3) EBITDA, as defined, is earnings before interest expense-net, income taxes, depreciation, and amortization, reorganization items, the gain on early extinguishment of debt, and the cumulative effect of an accounting change. EBITDA, as defined and disclosed herein, is neither a measurement pursuant to accounting principles generally accepted in the United States of America nor a measurement of operating results and is included for informative purposes only. The reconciliation of EBITDA, as defined, to Operating profit may be found on Page 17. Results of Operations As of August 9, 2003, the Company operated a total of 48 supermarkets and 42 video rental locations in Puerto Rico and the U.S. Virgin Islands. On November 20, 2002, the Company opened one supermarket and one video rental store in the Isla Verde section of Carolina, Puerto Rico. The history of store openings and closings from August 10, 2002 through the end of the third quarter of the current fiscal year on August 9, 2003, as well as the store composition, is set forth in the following tables:

~~Unaudited~~Stores ~~Adjustments~~in toOperation: ~~record~~At ~~the~~August ~~impact~~10, of2002. . . ~~(a)~~. ~~---------------------------------~~. ~~(Unaudited)~~. ~~Proforma~~. ~~Consolidated~~. ~~Consolidated~~. ~~Balance~~. ~~Sheets~~. ~~May~~. ~~Consummation~~. ~~Balance~~88 ~~Sheets~~Stores asopened: ofSupermarkets ~~May~~. 17. ~~2003~~. ~~Bank~~. of. ~~Plan~~. of. as. of. ~~May~~. 17. ~~2003~~. ~~Agreement~~. ~~Reorganization~~1 ~~2003~~Video ~~--------------~~tape ~~---------------~~rental ~~---------------~~stores ~~-------------~~. ~~ASSETS~~. ~~CURRENT~~. ~~ASSETS~~. ~~Cash~~. ~~and~~. ~~cash~~. ~~equivalents~~1 $Stores ~~12,881~~closed: $Supermarket ~~35,478~~. ~~(b)~~. ~~$(47,359)~~. ~~(c)~~. $. ~~1,000~~. ~~Inventories~~. ~~49,808~~. ~~49,808~~. ~~Prepaid~~. ~~expenses~~. ~~12,137~~. ~~12,137~~. ~~All~~. ~~other~~- ~~current~~Video ~~assets~~tape ~~19,028~~rental ~~19,028~~stores ~~---------~~. ~~----------~~. . . . . . -~~----------~~ -------~~---~~ ~~TOTAL~~At ~~CURRENT~~August ~~ASSETS 93~~9,~~854~~ ~~35,478~~2003. ~~(47,359)~~. ~~81,973~~. ~~PROPERTY~~. &. ~~EQUIMPMENT~~. ~~INCLUDING~~. ~~PROPERTY~~. ~~UNDER~~. ~~CAPITAL~~. ~~LEASE,~~. ~~net~~. ~~97,504~~. ~~97,504~~90 ~~GOODWILL~~* ~~5,621~~======= ~~5,621~~Remodels ~~DEFERRED~~. ~~INCOME~~. ~~TAXES~~. ~~6,024~~. ~~6,024~~. ~~TRADE~~. ~~NAMES~~. ~~26,574~~. ~~26,574~~. ~~DEFERRED~~. ~~CHARGES~~. ~~AND~~. ~~OTHER~~. ~~ASSETS~~. ~~17,510~~. ~~811~~. ~~(d)~~. ~~18,321~~ -~~--------~~ ~~---------- ----------- ---------- TOTAL ASSETS $247,087 36,289 (47,359) 236,017~~ ========= ~~==========~~August ~~=========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Revolver borrowings $ 22~~9,~~540~~ ~~(8,639)~~August ~~(13~~10,~~901)~~ ~~(e)~~2003 -2002 ~~Accounts Payable 45,869 45,869 Accrued interest 72 (72)~~ - ~~Other current Liabilities 26,619 26,619~~ --------- --~~--------~~ ----------- -~~---------~~ ~~TOTAL~~Store ~~CURRENT~~Composition ~~LIABILITIES~~at ~~95,100~~Quarter-End: ~~(8,711)~~By ~~(13,901)~~division: ~~72,488~~Supermarkets ~~REVOLVER~~. ~~BORROWINGS~~. ~~13,901~~. ~~(e)~~. ~~13,901~~. ~~TERM~~. ~~LOANS~~. ~~45,000~~. ~~45,000~~. ~~NEW~~. 10.~~125%~~ ~~SENIOR~~. ~~SECURED~~48 ~~NOTES~~47 ~~90,000~~Video ~~90,000~~tape ~~CAPITAL~~rental ~~LEASE~~stores ~~OBLIGATIONS~~. -. ~~L/T~~. ~~11,273~~. ~~11,273~~. ~~RESERVE~~. ~~FOR~~42 ~~SELF-INSURANCE~~41 ~~CLAIMS 5,154 5,154 DEFERRED INCOME TAXES 27,176 27,176 OTHER LIABILITIES AND DEFERRED CREDITS 29,580 29,580~~ --------- -------~~---~~ ~~-----------~~Total ~~----------~~90 ~~TOTAL~~88 ~~LIABILITIES~~======= ~~NOT~~======= ~~SUBJECT~~By TOlocation: ~~COMPROMISE~~Puerto ~~168,283~~Rico ~~36,289~~. ~~90,000~~. ~~294,572~~. ~~---------~~. ~~----------~~. ~~-----------~~. ~~----------~~. ~~LIABILITIES~~. ~~SUBJECT~~. TO. ~~COMPROMISE~~. ~~186,208~~. ~~(186,208)~~. -82 ~~---------~~80 ~~----------~~U.S. ~~-----------~~Virgin ~~----------~~Islands ~~TOTAL~~. ~~LIABILITIES~~. ~~$354,491~~. ~~36,289~~. ~~(96,208)~~. ~~294,572~~. ~~---------~~. ~~----------~~. . 8 8 -------~~----~~ -------~~---~~ ~~STOCKHOLDER'S~~Total ~~EQUITY:~~90 ~~Additional~~* ~~paid-in~~88 ~~capital~~======= ~~91,500~~======= ~~15,000~~* ~~(c)~~The ~~106,500~~stores ~~Accumulated~~in ~~deficit~~operation ~~(198,904)~~as ~~33,849~~of ~~(f)~~August ~~(165~~9,~~055)~~ ~~---------~~2003 ~~----------~~include ~~-----------~~two ~~----------~~supermarkets ~~TOTAL~~that ~~STOCKHOLDER'S~~will ~~EQUITY~~be closed (~~107,404)~~see ~~48,849~~NOTE ~~(58,555)~~5 ~~----------~~? ~~----------~~DISCLOSURE ~~-----------~~OF ~~----------~~OPERATING ~~TOTAL~~SEGMENTS ~~LIABILITIES~~included ~~AND~~in ~~$247,087~~the ~~$36,289~~notes ~~$(47,359)~~to ~~$236,017~~the ~~STOCKHOLDER~~Company'Ss ~~EQUITY~~consolidated ~~==========~~financial ~~==========~~statements ~~===========~~included ~~==========~~in ~~(a),~~Item ~~(b),~~1 ~~(c),~~of ~~(d),~~this ~~(e)~~Form ~~and (f~~10-Q) ~~are discussed on the following page~~.

The following is the summary of total and comparable store sales:

~~Stores~~Percentage inincrease ~~Operation:~~(decrease) Atin ~~May~~sales ~~18,~~for ~~2002.~~the .12 .and ..40 .ended .August .9, .2003, .as .compared .to .the .12 .and 8840 ~~Stores~~weeks ~~opened:~~ended ~~Supermarkets~~August .10, .2002 ~~. . . . . . . . . . . 1 Video tape rental stores . . . . . . . 1 Stores closed: Supermarket . . . . . . . . . . . . . .~~ - ~~Video tape rental stores . . . . . . .~~ - ------- ~~At May 17, 2003. . . . . . . . . . . . . . 90 ======= Remodels . . . . . . . . . . . . . . . . .~~ - ~~======= May 17, May 18, 2003 2002~~ ------------ ------------ ~~Store Composition at Quarter~~-~~End:~~------------------ By12 ~~division:~~Weeks ~~Supermarkets~~Ended .40 .Weeks .Ended ~~. . . . . . . . . 48 47 Video tape rental stores . . . . . . 42 41~~ ------------------ ------------------- Total 90Sales 88(6.0)% (2.4)% ========= ========= ByComparable ~~location~~Stores: ~~Puerto~~Retail ~~Rico~~Food .Division (9.8)% (5.9)% .========= .========= .Video .Rental .Division (6.4)% (0.5)% .========= .========= .Total 82Comparable 80Store ~~U.S.~~Sales ~~Virgin Islands~~ (9.6)% (5.5)% ~~. . . . . . . 8 8 ------- ------- Total 90 88~~ ========= =========

Total sales for the 12 and 40 weeks ended August 9, 2003 were $127.7 million and $448.0 million, respectively, versus $135.8 million and $459.2 million for the 12 and 40 weeks ended August 10, 2002, decreases of 6.0% and 2.4%, respectively. Same store sales decreased by 9.6% and 5.5%, respectively. For the 12 and 40 weeks ended August 9, 2003, same store sales were $122.8 million and $432.5 million, respectively, versus $135.8 million and $457.8 million, respectively, for the 12 and 40 comparable weeks ended August 10, 2002. "Same stores" are defined as those stores that were open as of the beginning of both periods and remained open through the end of the periods. Same store sales in the Retail Food Division decreased 9.8% and 5.9%, respectively, from the 12 and 40 comparable weeks ended August 10, 2002. The factors contributing to the decline in same stores sales in the Retail Food Division is continued growth in competition and a softening of the economy in both Puerto Rico and the U.S. Virgin Islands. The above factors have created severe pressure on the Company's retail food division as well as its competitors to reduce retail prices in the Company's markets. Video Rental Division same store sales decreased 6.4% and 0.5%, respectively, from the 12 and 40 comparable weeks ended August 10, 2002. The decrease in Video Rental Division sales for the quarter was due primarily to a decrease in the number of new releases and in customer response to new releases for both rental and sell-through videos. Gross profit decreased for the 12 and 40 weeks ended August 9, 2003 by $3.2 million and $6.6 million, respectively, to $41.4 million and $144.6 million, respectively, from $44.6 million and $151.2 million for the 12 and 40 weeks ended August 10, 2002. The rate of gross profit (as a percentage of sales), for the 12 and 40 weeks ended August 9, 2003 was 32.5% and 32.3%, respectively, compared to 32.8% and 32.9%, respectively for the 12 and 40 weeks ended August 10, 2002, decreases of 0.3% and 0.6%, respectively. The primary reason for the decline in the consolidated gross profit is the reduction in retail prices in the retail food division as a result of the pricing pressures mentioned above. Selling, general and administrative expenses were $35.0 million and $122.4 million, respectively, for the 12 and 40 weeks ended August 9, 2003 compared to $34.5 million and $120.4 million, respectively, for the 12 and 40 weeks ended August 10, 2002, increases of $0.5 million and $2.0 million, respectively. These increases are primarily the result of the new supermarket and new video rental store that opened during the quarter ended February 22, 2003 and increased energy cost for all stores. Included in the 12 and 40 weeks ended August 9, 2003 are severance costs totaling $0.5 million as part of the Company's plan to reduce operating and administrative costs. The Company has taken several other initiatives, as part of its challenge plan to reduce costs, including steps to reduce warehouse and distribution costs, supply costs, bank processing fees, communication, and advertising. Additionally, the Company is taking steps to reduce its labor costs in its supermarkets, through more efficient management of labor scheduling and systems enhancements that will reduce processing and transaction times. Results for the 12 and 40 weeks ended August 10, 2002 include a $14.7 million gain (before income taxes) realized upon the settlement of the business interruption portion of the Company's Hurricane Georges insurance claim. Depreciation and amortization was $5.1 million and $16.8 million, respectively, for the 12 and 40 weeks ended August 9, 2003 compared to $6.3 million and $21.2 million for the 12 and 40 weeks ended August 10, 2002, decreases of $1.2 million and $4.4 million, respectively. These decreases are primarily a result of the discontinuation of amortization of goodwill and trade names as of November 3, 2002 (see NOTE 3 ? GOODWILL AND TRADE NAMES included in the notes to the Company's consolidated financial statements included in Item 1 of this Form 10-Q). Interest expense, net of interest income, decreased by $2.3 million and $11.9 million between the 12 and 40 weeks ended August 9, 2003 and the comparable periods of the prior year primarily as a result of a reduction in interest expense on debt. As shown in the table below, the primary factor affecting the change in interest expense on debt, between the 12 and 40 weeks ended August 9, 2003 and the comparable periods of the prior year, was the reorganization, which concluded on June 5, 2003 (See NOTE 16 ? SUBSEQUENT EVENTS of the footnotes to the consolidated financial statements included in Item 15 of the Company's Form 10-K for the fiscal year ended November 2, 2002 which was filed on July 28, 2003). Included below is a more detailed summary of interest expense on debt for the 12 and 40 weeks ended August 9, 2003 and August 10, 2002 (dollars in thousands).

~~Percentage~~INTEREST ~~increase~~EXPENSE ~~(decrease)~~ON inDEBT ~~sales~~----------------------------------------------- ~~for~~For the ~~period~~12 weeks ended ~~May~~For ~~17, 2003, as compared to~~ the 1240 ~~and 28~~ weeks ended ~~May 18, 2002~~ ---------------------- ----------------------~~------~~ 12August ~~Weeks~~9, ~~Ended~~August 2810, ~~Weeks~~August ~~Ended~~9, August 10, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- ~~Total~~Interest ~~Sales~~expense ~~(1.6)%~~on debt: Liabilities subject to compromise (~~1.0)%~~the ~~=========~~amount ~~=========~~of ~~Comparable~~contractual ~~Stores:~~interest ~~Retail~~expense ~~Food~~on ~~Division~~pre-petition ~~(5.6~~debt not accrued was $900 and $10,000 for the 12 and 40 weeks ended August 9, 2003, respectively)% ($ - $ 4,150 $ - $ 13,754 New 10.~~3)%~~125 ~~=========~~Senior ~~=========~~Secured ~~Video~~Notes, ~~tape~~issued ~~rental~~6/5/03 ~~division~~1,636 - 1~~.6%~~,636 - Revolver borrowings 318 501 1,351 1,649 Term loans 574 - 574 - Amortization of debt issuance costs 177 441 1,400 1,409 ---------- ---------- ---------- ---------- Total $ 2~~.0%~~,705 $ 5,092 $ 4,961 $ 16,812 ========== ========== ~~Total Comparable Store Sales (5.1)% (3.8)%~~ ========== ==========

Reorganization items during the 12 and 40 weeks ended August 9, 2003 consisted primarily of the costs of financial and legal professionals providing financial and legal services to both the Company and the Company's noteholders on matters pertaining to NSC's Chapter 11 proceedings. All of the costs associated with the reorganization have been accrued as of August 9, 2003. The 12 and 40 weeks ended August 9, 2003 include a $36.5 million gain resulting from consummation of the Plan of Reorganization in which NSC provided consideration to the prepetition noteholders equal to $59.5 million in cash and $90.0 million in New 10.125 Senior Secured Notes. The effective tax rate for the 12 and 40 weeks ended August 9, 2003 was 4.0% and 5.1%, respectively, compared to 37.4% and 78.4% for the comparable 12 and 40 weeks ended August 10, 2002, respectively. Variances in the effective tax rates were primarily due to the relationship of items of permanent difference between Income Before Income Taxes and Cumulative Effect of an Accounting Change for financial reporting purposes, and pretax income for income tax return reporting purposes to Income Before Income Taxes and Cumulative Effect of an Accounting Change. The Company recorded net income, before the cumulative effect of an accounting change, of $30.2 million and $28.0 million for the 12 and 40 weeks ended August 9, 2003, respectively, versus net income, before the cumulative effect of an accounting change, of $8.2 million and $1.3 million for the comparable 12 and 40 weeks ended August 10, 2002, an improvement of $22.0 million and $26.7 million. The preceding paragraphs in this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS discuss the reasons for the variances. EBITDA, as defined (Earnings Before Interest expense-net, income Taxes, Depreciation and Amortization, reorganization items, gain from early extinguishment of debt, and cumulative effect of an accounting change), was $6.2 million and $21.6 million for the 12 and 40 weeks ended August 9, 2003, versus $24.8 million and $45.5 million, respectively, for the comparable 12 and 40 weeks ended August 10, 2002, decreases of $18.6 million and $23.9 million, respectively. EBITDA for the 12 and 40 weeks ended August 10, 2002 includes a pre-tax gain of $14.7 million from the settlement of the Company's business interruption insurance claim. Other reasons for the decline in EBITDA include the previously discussed decline in gross profit and the increase in selling, general and administrative expenses. Additionally, the 12 and 40 weeks ended August 9, 2003 include charges to EBITDA of $0.2 and $0.6 million, respectively, for the estimated carrying costs of two stores that are being closed. Included below is a reconciliation of Operating profit (loss) to EBITDA (dollars in thousands):

For the 12 weeks ended For the 2840 weeks ended ---------------------- ---------------------- ~~May~~August 179, ~~May~~August 1810, ~~May~~August 179, ~~May~~August 1810, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Operating (loss) profit $ ~~(160)~~1,105 $ 318,~~222~~487 $ 34,~~665~~770 $ 524,~~767~~257 Add: Depreciation and amortization 45,~~807~~108 6,~~227~~296 1116,~~511~~785 1421,~~939~~235 ~~Write down of impaired assets 166~~ - ~~166~~ - ---------- ---------- ---------- ---------- EBITDA (as defined) $ 46,~~813~~213 $ 924,~~449~~783 $1521,~~342~~555 $2045,~~706~~492 ========== ========== ========== ==========

Liquidity and Capital Resources The Company's financial restructuring and proceedings under Chapter 11 of the United States Bankruptcy Code are discussed in NOTE 1 of the notes to the Company's consolidated financial statements included in Item 1 of this Form 10-Q. Historically Company operations, along with its available credit facility, have provided adequate liquidity for the Company's operational needs. On May 23, 2003 the Company's operating subsidiaries entered into a new Loan and Security Agreement, and the Company entered into an Amended and Restated Guarantor General Security Agreement (collectively the "May 2003 Bank Agreement") with the lender thereunder (the "2003 Bank Lender"). The initial term of the May 2003 Bank Agreement expires June 22, 2008 and will continue on a year-to-year basis unless sooner terminated. The borrowers granted the 2003 Bank Lender a security interest in all assets, tangible and intangible, owned or hereafter acquired or existing as collateral. In addition, the May 2003 Bank Agreement is collateralized by a pledge of the capital stock of, and inter-company notes issued by the Company's operating subsidiaries. The Company is required, under the terms of the May 2003 Bank Agreement, to meet certain financial covenants including minimum consolidated net worth (as defined) levels, minimum working capital (as defined) levels, minimum earnings before net interest, income taxes, depreciation and amortization (EBITDA) as defined, minimum net revenues, a minimum fixed charge coverage ratio (as defined) and maximum debt to EBITDA ratio (as defined). The May 2003 Credit Agreement also contains certain other restrictions, including restrictions on additional indebtedness and the declaration and payment of dividends. The May 2003 Bank Agreement provides both a revolving loan (with amounts available based on a borrowing base formula, not to exceed, except in the lender's discretion, $35.0 million outstanding) and term loans facilities for various specified purposes and in certain specified amounts, aggregating $45.0 million. Funding took place on June 5, 2003 at which time the existing bank debt for borrowed money outstanding was repaid in full and the 2003 Bank Lender lent the operating subsidiaries a total of approximately $57.4 million, $12.4 million of which was borrowed under the revolving credit facility. See NOTE 16 -- SUBSEQUENT EVENTS of the footnotes to the consolidated financial statements included in Item 15 of the Company's Form 10-K for the fiscal year ended November 2, 2002 which was filed on July 28, 2003. Debt issuance costs associated with the May 2003 Bank Agreement totaled $3.3 million. As to cash provided or used during the 40 weeks ended August 9, 2003, the following pertains: As of August 9, 2003, the Company had revolver borrowings of approximately $13.3 million and principal amount of term loans of $44.3 million under the May 2003 Bank Agreement with the 2003 Bank Lender (see NOTE 16 -- SUBSEQUENT EVENTS of the notes to the consolidated financial statements included in Item 15 of the Company's Form 10-K for the fiscal year ended November 2, 2002 which was filed on July 28, 2003). Per the terms of the May 2003 Bank Agreement the 2003 Bank Lender committed to lend the operating subsidiaries up to $35.0 million under the revolving credit facility. On August 9, 2003, after giving effect to outstanding standby letters of credit in the amount of $3.3 million, borrowing availability on a revolving basis under the terms of the May 2003 Bank Agreement was $7.2 million. Net cash provided by operating activities for the 40 weeks ended August 9, 2003 was $5.3 million versus $25.9 million for the comparable 40 weeks ended August 10, 2002. The decline is primarily a result of the Company recording a $14.7 million gain, during the 40 weeks ended August 10, 2002, upon settlement of the business interruption portion of its Hurricane Georges insurance claim. The remaining decrease resulted from an increase in cash used for components of working capital. Net cash used in investing activities for purchases of property and equipment, net of proceeds on sales of property and equipment, was $3.3 million for the 40 weeks ended August 9, 2003 versus $4.8 million for the comparable 40 weeks ended August 10, 2002. Net cash used for financing activities was $19.4 million for the 40 weeks ended August 9, 2003 versus net cash provided from financing activities of $1.5 million for the comparable 40 weeks ended August 10, 2002. Upon consummation of the Plan of Reorganization, the Company paid consideration to the holders of its Notes and Series C Senior Notes totaling $59.9 million in cash and $90.0 million in New 10.125 Senior Secured Notes. Also as part of its Plan of Reorganization, the Company received a capital contribution from its equity holders totaling $15.0 million and additional financing related to its May 2003 Bank Agreement, including $45.0 million principal amount of term loans. The Company also repaid its existing revolving credit facility, which totaled $32.0 million on November 2, 2002, and borrowed funds under its May 2003 Bank Agreement. Revolver borrowings under its May 2003 Bank Agreement totaled approximately $13.3 million on August 9, 2003. Working capital was $(8.1) million as of August 9, 2003, a decrease of $3.4 million from the $(4.7) million as of November 2, 2002, producing a current ratio of 0.91:1 as of August 9, 2003 versus 0.95:1 as of November 2, 2002. Upon consummation of its Plan of Reorganization, the Company replaced its existing revolving credit facility with the new revolving credit facility under the terms of its May 2003 Bank Agreement. During the 40 weeks ended August 9, 2003, the Company decreased its net borrowings under its revolving credit facility. However, the professional fees associated with the Chapter 11 Case and refinancing are the primary reason for the $3.4 million decrease in working capital during the 40 weeks ended August 9, 2003. The Company's general liability and certain of its workers compensation insurance programs are self-insured. The Company maintains insurance coverage for claims in excess of $500,000 for eight of its locations and $250,000 for all other locations. The current portion of the reserve, representing amounts expected to be paid in the next fiscal year, is $4.3 million as of August 9, 2003 and is anticipated to be funded with cash provided by operating activities. Impact of Inflation and Currency Fluctuations The inflation rate for food prices continues to be lower than the overall increase in the U.S. Consumer Price Index. The Company's primary costs, products and labor, usually increase with inflation. Increases in product costs can typically be passed on to the customer. Other cost increases must by recovered through operating efficiencies. Currency in Puerto Rico and the U.S. Virgin Islands is the U.S. Dollar. As such, the Company has no exposure to foreign currency fluctuations. Critical Accounting Policies The Company's critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the Notes to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the 52 weeks ended November 2, 2002 filed on July 28, 2003. With the exception of amortization of goodwill and trade names, as previously discussed, the policies have been consistently applied in all material respects and address such matters as: inventories, impairment of long-lived assets, accrued self-insurance and realization of deferred tax assets. While the estimates and judgments associated with the application of these policies may be affected by different assumptions and conditions, the Company believes the estimates and judgments associated with the reported amounts are appropriate in the circumstances. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company does not trade or speculate in derivative financial instruments. The Company's primary market risk exposure relates to interest rate risk. The Company manages its interest rate risk in order to balance its exposure between fixed and variable rates while attempting to minimize its interest costs. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, Company management carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed in the Company's periodic reports filed with the Securities and Exchange Commission. In addition, Company management carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the Company's internal control over financial reporting and there have been no changes that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting. Forward Looking Statements Statements, other than statements of historical information, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q may constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on Company management's expectations and are subject to various risks and uncertainties. Actual results could differ materially from those anticipated due to a number of factors, including but not limited to the Company's substantial indebtedness and high degree of leverage, which continue as a result of the financial restructuring (including limitations on the Company's ability to obtain additional financing and trade credit, to apply operating cash flow for purposes in addition to debt service, to respond to price competition in economic downturns and to dispose of assets pledged to secure such indebtedness or to freely use proceeds of any such dispositions), the Company's limited geographic markets and competitive conditions in the markets in which the Company operates and buying patterns of consumers. Risk Factors Supermarket Industry The retail grocery industry is extremely competitive and is characterized by high inventory turnover and narrow profit margins. The Company's results of operations are therefore, sensitive to, and may be materially adversely impacted by, among other things, competitive pricing, promotional pressures and additional store openings by competitors. The Company competes with national, regional and local supermarkets, warehouse club stores, drug stores, convenience stores, discount merchandisers and other local retailers in the market areas it serves. Competition with these outlets is based on price, store location, advertising and promotion, product mix, quality and service. Some of these competitors may have greater financial resources, lower merchandise acquisition costs and lower operating expenses than the Company, and the Company may be unable to compete successfully in the future. Video Operations The Company's video rental franchise faces significant competition and risks associated with technological obsolescence, and the Company may be unable to compete effectively. The home video and home video game industries are highly competitive. The Company competes with local, regional and national video retail stores, and with mass merchants, specialty retailers, supermarkets, pharmacies, convenience stores, bookstores, mail order operations, online stores and other retailers, as well as with noncommercial sources, such as libraries. As a result of direct competition with others, pricing strategies for videos and video games is a significant competitive factor in the Company's video rental business. The Company's home video and home video game businesses also compete with other forms of entertainment, including cinema, television, sporting events and family entertainment centers. If the Company does not compete effectively with competitors in the home video industry or the home video game industry or with providers of other forms of entertainment, its revenues and/or its profit margin could decline and its business, financial condition, liquidity and results of operations could be adversely affected. Geographic Considerations; Regulation The Company is concentrated in Puerto Rico and in the U.S. Virgin Islands. As a result, the Company is vulnerable to economic downturns in those regions, as well as natural and other catastrophic events, such as hurricanes and earthquakes, that may impact those regions. These events may adversely affect the Company's sales which may lead to lower earnings, or even losses, and may also adversely affect its future growth and expansion. Further, since the Company is concentrated on three islands, opportunities for future store expansion may be limited, which may adversely affect its business and results of operations. Additionally, the Company is subject to governmental regulations that impose obligations and restrictions and may increase its costs. Reemergence from Bankruptcy As discussed in greater detail in Financial Restructuring and Proceedings Under Chapter 11 of the United States Bankruptcy Code and in NOTE 16 -- SUBSEQUENT EVENTS -- in the notes to the consolidated financial statements included in Item 15 of the Company's Form 10-K for the fiscal year ended November 2, 2002 which was filed on July 28, 2003, the Company recently emerged from bankruptcy and has a substantial amount of indebtedness and debt service obligations, which could adversely affect its financial and operational flexibility and increase its vulnerability to adverse conditions. The Company could incur substantial additional indebtedness in the future, including indebtedness that would be secured by its assets. If the Company increases its indebtedness, the related risks that it now faces could intensify. For example, it could: - require the Company to dedicate an increased portion of its cash flow to payments on its indebtedness; - limit the Company's ability to borrow additional funds; - increase the Company's vulnerability to general adverse economic and industry conditions; - limit the Company's ability to fund future working capital, capital expenditures and other general corporate requirements; - limit the Company's flexibility in planning for, or reacting to, changes in its business and the industry in which it operates or taking advantage of potential business opportunities; - limit the Company's ability to execute its business strategy successfully; and - place the Company at a potential competitive disadvantage in its industry. Company is Highly Leveraged The Company's ability to satisfy its indebtedness obligations will depend on its financial and operating performance, which may fluctuate significantly from quarter to quarter and is subject to economic, industry and market conditions and to risks related to its business and other factors beyond its control. Management believes that its business will generate cash flows from operations in amounts sufficient to fund its liquidity needs for the foreseeable future. See Item 7 MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and NOTE 16 -- SUBSEQUENT EVENTS to the consolidated financial statements included in Item 15 of the Company's Form 10-K filed on July 28, 2003. Market Risk In addition to the foregoing, the market price of the Company's debt securities may be significantly affected by change in market rates of interest, yields obtainable from investments in comparable securities, credit ratings assigned to the Company's debt securities by third parties and perceptions regarding its ability to pay its obligations on its debt securities. PART II. OTHER INFORMATION ITEM 3. DEFAULTS ON SENIOR SECURITIES For a more detailed discussion of the default on the Notes and Series C Senior Notes and the eventual resolution and replacement thereof, see NOTES 1, 5, 8, 9, and 16 of the footnotes to the consolidated financial statements included in Item 15 of the Company's Form 10-K for the fiscal year ended November 2, 2002 which was filed on July 28, 2003. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibits incorporated by reference: None. Exhibits attached to this Form 10-Q: 31.1 CEO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 31.2 CFO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 32.1 CEO CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 32.2 CFO CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (b) Reports on Form 8-K None. SIGNATURE Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NUTRITIONAL SOURCING CORPORATION Dated: September 17, 2003 /s/ Daniel J. O'Leary ----------------------------- Daniel J. O'Leary, Executive Vice President and Chief Financial Officer 23 - 23 -

Filing Compare · NUTRITIONAL SOURCING CORP