ITEM 1. BUSINESS
GENERAL
Pueblo Xtra International, Inc. (the "Company") is a Delaware holding company that owns all of the common stock of Pueblo International, Inc., a Delaware company (together with its subsidiaries, "Pueblo"). Pueblo, which was founded in 1955 with the opening of the first mainland-style supermarkets in Puerto Rico, is the leading supermarket chain in the Commonwealth of Puerto Rico and the Territory of the U.S. Virgin Islands. In addition, Pueblo is the leading operator of video rental outlets in Puerto Rico and St. Thomas, U.S. Virgin Islands through its exclusive franchise rights with Blockbuster Entertainment Corporation ("BEC") and its in-supermarket video operations. The Company believes it has developed significant name recognition, strong customer loyalty and leading market shares due to the superior quality and large size of its stores, the breadth and price competitiveness of its product offerings and its extensive market coverage in prime locations. The Company currently operates 44 supermarkets in Puerto Rico and six supermarkets in the U.S. Virgin Islands. The Company also currently operates 27 Blockbuster locations in Puerto Rico and two Blockbuster locations in the U.S. Virgin Islands as the exclusive Blockbuster franchisee for Puerto Rico and the U.S. Virgin Islands.
On July 28, 1993, the Company acquired all of the outstanding shares of common stock of Pueblo for an aggregate purchase price of $283.6 million plus transaction costs (hereinafter referred to as the "Acquisition"). Pursuant to the Acquisition, Pueblo became a wholly-owned subsidiary of the Company. The shares were acquired from an investor group including affiliates of Metropolitan Life Insurance Company, The First Boston Corporation and certain current and former members of Pueblo management and its Board of Directors.
The Acquisition has been accounted for under the purchase method effective July 31, 1993. Reference is made to Note (3)--Acquisitions of the notes to the Company's consolidated financial statements referenced in Part II, Item 8 of this Form 10-K for further details of the Acquisition.
BUSINESS OF THE COMPANY
Supermarket Industry Overview
The top three chains in the retail grocery industry in Puerto Rico account for approximately one-half of total industry sales, with the remainder divided among smaller chains and numerous independent operations. Total supermarket chain sales in calendar year 1996 were approximately $3.1 billion, a significant portion of which was attributable to the more densely populated greater San Juan metropolitan area, where the larger chains are concentrated. The grocery industry in less populated parts of the island is characterized by smaller family-run operations with limited selection and less competitive prices. No major U.S. supermarket chains have established operations in the Puerto Rico grocery market, although a number of national general merchandise chains have significant Puerto Rican operations. National warehouse clubs and mass merchandisers, which have entered the Puerto Rico and U.S. Virgin Islands markets since 1990 offering various bulk grocery and general merchandise items, have increased pricing pressures on grocery retailers including the Company.
Puerto Rico
The Company operates two complementary supermarket formats: conventional Pueblo supermarkets which emphasize service, variety and high quality products at competitive prices, and Xtra supermarkets which are typically larger stores emphasizing everyday low prices. In Puerto Rico, the Company currently operates 14 Pueblo stores and 30 Xtra stores and has a grocery retailing market share of approximately 29%. In addition, the Company estimates that is has a 34% market share in the greater San Juan metropolitan area, the most densely populated region of Puerto Rico, with more than one-third of the island's 3.7 million residents. In fiscal 1997 in Puerto Rico, Pueblo stores averaged approximately 28,286 gross sq. ft. and generated an average of approximately $942 of sales per selling sq. ft., while Xtra stores averaged approximately 45,900 gross sq. ft. and generated an average of approximately $673 of sales per selling sq. ft. Since the Acquisition, the Company has constructed five new Xtra stores, remodeled ten existing supermarkets and converted five Pueblo stores into Xtra stores in Puerto Rico.
U.S. Virgin Islands
In fiscal 1997, the six Pueblo stores in the U.S. Virgin Islands averaged 32,500 gross sq. ft. and generated an average of approximately $752 sales per selling sq. ft. The Company has an estimated U.S. Virgin Islands grocery retailing market share of approximately 50%. Since the Acquisition, the Company has added one new supermarket and remodeled five existing supermarkets in the U.S. Virgin Islands.
Video Operations
The Company has been the exclusive franchisee of Blockbuster locations in Puerto Rico since 1989 and in the U.S. Virgin Islands since 1993 and currently operates 29 Blockbuster locations in Puerto Rico and the U.S. Virgin Islands. In Puerto Rico, the Company operates five in-store Blockbuster outlets and 22 free-standing Blockbuster stores, the majority of which are adjacent to its supermarkets. In the U.S. Virgin Islands, the Company operates one in-store Blockbuster outlet and one free-standing Blockbuster store. The Company's free-standing Blockbuster stores average approximately 6,000 gross sq. ft., while the Company's in-store Blockbuster outlets average approximately 4,200 gross sq. ft. In addition, the Company currently operates 14 video outlets in its supermarkets under the name Pueblo Video Clubs, all of which it intends to convert into in-store Blockbuster outlets. In order to increase customer traffic in its supermarkets, the Company's typical in-store Blockbuster outlet has a separate entrance but its principal exit leads into the supermarket. In addition, the Company is able to take advantage of cross-marketing opportunities with its supermarket operations, including promotional video rental and merchandising offers.
The Company's Blockbuster operations are currently the only major video chain operating in Puerto Rico and the U.S. Virgin Islands. Each location carries an average of approximately 10,000 tapes dedicated to video rental. Each location also offers for sale a selection of recorded and blank video tapes, accessories and snack food products. Since each Blockbuster location is typically larger than its competitors, it provides greater depth and breadth in selections. For promotions of its Blockbuster operations, the Company primarily utilizes print, radio, billboards and in-store signage, and also benefits from Blockbuster's television advertising. BEC also provides extensive product and support services to the Company. These include, among other things, site selection review, packaging of the initial rental inventory and providing computer hardware and software.
The Company's successful development of the Blockbuster franchise has been the result of its ability to leverage its knowledge of Puerto Rico and existing market and retailing expertise. The Company's knowledge of real estate and its existing portfolio of desirable supermarket locations has enabled its Blockbuster division to obtain attractive, high traffic locations. The Company will continue to evaluate expansion opportunities in its markets.
The Company's Development Agreements with Blockbuster Entertainment Corporation, now known as Blockbuster Entertainment, Inc. ("BEC") provide for the Company's exclusive right to open Blockbuster locations in Puerto Rico and the U.S. Virgin Islands during the term of such agreements. The Development Agreements require the Company to open a certain number of Blockbuster locations in Puerto Rico by December 1999 and in the U.S. Virgin Islands by April 1997. In 1996, the Company amended its Development Agreements to allow the necessary flexibility to develop smaller store formats. Each Blockbuster location is subject to a Franchise Agreement with BEC that provides the right for such location to conduct Blockbuster operations for a 20-year period so long as the terms of such Franchise Agreement are complied with. The Company has fulfilled its development quota in the U.S. Virgin Islands and plans to fulfill its December 1999 development quota in Puerto Rico by the end of the first quarter of fiscal 1998 and otherwise believes it is in full compliance with its obligations under the Development Agreements. The Company is currently in discussions with BEC to establish new development quotas.
Disposal of Florida Retail Operations
On January 16, 1996, the Company announced its decision to discontinue its retail operations in Florida (the "Florida Disposal"). The announcement was made as part of the Company's restructuring plans whereby the Company will exit the underperforming Florida retail market and place more emphasis on the strength of its operations in Puerto Rico and the U.S. Virgin Islands. The Florida Disposal includes the disposal of all eight Xtra stores and one warehouse and distribution center, whether by sale or abandonment, which was completed in the first quarter of fiscal year 1997. As of the date of this filing, one owned location and the lease rights to a second location have been sold.
The Florida Disposal has been accounted for as a disposal of part of a line of business effective December 30, 1995. See Note (2)--Unusual Charges of the notes to the Company's consolidated financial statements referenced in Part II, Item 8 of this Form 10-K for further details of the Florida Disposal.
Store Composition
The Company currently has store locations in 23 of the 39 markets in Puerto Rico with populations of over 30,000 people. The Company believes there are selected new store expansion opportunities in Puerto Rico, particularly in markets outside greater San Juan.
Since the Acquisition, the Company has made capital expenditures of approximately $56.2 million in its supermarket operations in Puerto Rico and the U.S. Virgin Islands, including the opening of five new Xtra stores, the addition of one new Pueblo store, the remodeling of 15 existing stores and the conversion of five Pueblo stores into Xtra stores. In the same period, the Company has made capital expenditures totalling approximately $5.2 million in its Blockbuster operations. The history of store openings, closings and remodelings, beginning with fiscal 1993, is set forth in the table below:
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(1) Subsequent to fiscal 1997, the Company opened two additional locations and currently operates a total of 29 Blockbuster locations.
Supermarket Purchasing and Distribution
The Company's buying staff actively purchase products from distributors, as well as directly from the producer or manufacturer. The Company generally controls shipping from the point of purchase in an effort to reduce costs and control delivery times. During fiscal 1997, the Company bought approximately 45% of its total dollar volume of product purchases directly from manufacturers and is seeking to increase this percentage to reduce costs and to obtain superior payment terms. Moreover, the Company is renegotiating existing direct buying arrangements with certain manufacturers for the same purpose and will also seek to increase utilization of its excess warehouse capacity to take advantage of bulk purchase discounts.
The Company owns a 300,000 square foot full-line warehouse and distribution center in greater San Juan. The only facility of its type on the island with both refrigerated and freezer capacity, the San Juan warehouse has capacity to store approximately 1.5 million cases of assorted products, and acts as the Company's central distribution center for the island. The warehouse is equipped with a computerized tracking system which is fully integrated with the Company's purchasing, inventory management and shipping systems. This system enables the Company to make rapid procurement decisions, optimize inventory levels and increase labor productivity. In fiscal 1997, this facility provided approximately 59% of the goods (measured by purchase cost) supplied to the Company's stores in Puerto Rico.
Supermarket Merchandising
General
The Company's merchandising strategies, which are differentiated by division and store type, integrate one-stop shopping convenience, premium quality products, attractive pricing and effective advertising and promotions. At Pueblo supermarkets in Puerto Rico and the U.S. Virgin Islands, the Company's
merchandising strategy focuses on offering premium quality products with attractive pricing, excellent selection, superior customer service and special buying opportunities. The Company's Xtra superstores combine the merchandising features of Pueblo supermarkets with everyday low prices. The Company reinforces its merchandising strategies with friendly and efficient service, effective promotional programs, in-store activities, and both brand name and high quality private label product offerings.
Product Offerings
With approximately 23,000 stock keeping units ("SKU"), management believes the Company's Pueblo and Xtra stores offer the greatest product variety within their market areas, as its competitors generally lack the sales volume, store size and procurement efficiencies to stock and merchandise the wide variety of products and services offered by the Company. The Company believes that the convenience and quality of its specialty department products contribute to customer satisfaction.
The following table sets forth the mix of products sold in the Company's supermarkets for the fiscal years indicated:
Pricing
As the largest grocery operator in its markets, the Company is able to take advantage of volume purchase discounts and shipping efficiencies in order to offer competitive pricing at its Pueblo supermarkets, as well as everyday low pricing at its Xtra superstores. Pueblo and Xtra supermarkets utilize weekly circulars to emphasize special offers. The Company's "Family Pack" program offers bulk sizes of high volume products typically priced equal to or lower than prices offered by warehouse club stores.
Private Label
An important element of Pueblo's reputation for high quality and excellent value, and Xtra's reputation for everyday low prices, is the utilization of Food Club private label products through the Company's membership with Topco Associates, Inc. ("Topco"). Topco's private label program offers its members over 4,000 food and non-food items. Topco products are sold under the Food Club, World Classic, Top Frost, Top Crest, Top Care, Top Fresh and Mega labels in the grocery, frozen food, dairy, fresh meat, poultry and health and beauty care departments. The high quality and attractive pricing of the Food Club program have made it widely accepted by the Company's customers as an alternative to national brands. Approximately 17% of the Company's fiscal 1997 grocery item sales were of Topco products. Topco's private label program allows the Company to pass on substantial savings to customers, while maintaining a reputation for superior quality. The low cost of Topco products enables the Company to earn above average margins compared to national brands despite the lower prices offered to customers. The Company intends to continue to expand its sales of profitable Food Club private label products to price-conscious consumers through its arrangement with Topco. The Company also intends to develop its own private label products aimed at price points below the Topco products.
Category Management
The Company is currently in the process of implementing a category management system designed to combine traditional buying, reordering and pricing functions under the leadership of corporate level category merchandisers. The system will also allow the Company to assign direct profit management to the individuals responsible for a product category. The Company believes that such a system will improve sales, optimize inventory levels, reduce purchase costs and thereby enhance gross profit and operating profit margins. The Company anticipates completion of the program's implementation in fiscal 1998.
Advertising and Promotion
The Company primarily utilizes newspaper, radio, television and in-store advertising in both Puerto Rico and the U.S. Virgin Islands. The Company's grocery operations run multi-page newspaper inserts and page full-color shoppers. The Company advertises on television primarily through trailers on vendor-sponsored advertisements. In fiscal 1997, the Company launched a major advertising campaign. This campaign presents both the Pueblo and Xtra format in a single advertisement promoting special offers at both store formats. This market strategy stresses the different store formats yet serves to reduce advertising costs.
All advertising is created and designed through the Company's wholly-owned advertising agency, CaribAd (Adteam). Adteam, based in Puerto Rico, develops promotional programs for all of the Company's markets, thereby providing it with cost advantages over its competitors. In addition, Adteam has other clients in Puerto Rico, generating incremental income for the Company.
Competition
The grocery retailing business is highly competitive. Competition is based primarily on price, quality of goods and service, convenience and product mix. The number and type of competitors and the degree of competition experienced by individual stores, vary by location.
The Company competes with local food chains such as Supermercados Amigo, Grande Supermarkets, and Plaza Extra, as well as numerous independent operations throughout Puerto Rico and the U.S. Virgin Islands. In addition, several warehouse clubs and mass merchants, such as Sam's Warehouse clubs, Wal-Mart, Kmart and Walgreens, have opened locations in Puerto Rico and the U.S. Virgin Islands. Despite these competitive challenges, the Company continues to maintain its position as market share leader in each of its respective markets.
Although the Company's Blockbuster operations constitute the only major video chain in Puerto Rico and the U.S. Virgin Islands, they compete with numerous local, independent video retailers. In addition, the Company's Blockbuster video stores compete against television, cable, satellite broadcasting, movie theaters and other forms of entertainment.
Management Information Systems
The Company believes that high levels of automation and technology are essential to its operations and has invested considerable resources in computer hardware, systems applications and networking capabilities. These systems integrate all major aspects of the Company's business, including the monitoring of store sales, inventory control, merchandise planning, labor utilization, distribution and financial reporting.
All of the Company's stores are equipped with state-of-the-art point of sale terminals with full price look-up capabilities that capture sales at the time of transaction down to the SKU level through the use of bar-code scanners. These scanners facilitate customer check-out and provide valuable stock- replenishment
information for buyers and real-time financial information used by management to provide greater control on a line-item basis in determining true store-by-store costs. To provide the best service possible, the Company has installed a labor scheduling system that schedules the optimal staffing based on sales, customer traffic and defined service objectives. The Company's management information systems at its Blockbuster operations are state-of-the-art systems which are licensed to the Company by BEC. The conversion of the Company's financial systems to handle the year 2000 is expected to be completed by May 1997. Other system conversions are expected to be completed by the end of calendar 1998 for year 2000 compatibility.
Employees
As of January 25, 1997, the Company had approximately 8,000 employees (full- and part-time) of whom approximately 6,700 were employed at the supermarket level, 600 at the corporate offices and distribution center and 700 by the Blockbuster division. Approximately 65% of the Company's supermarket employees are employed on a part-time basis. Approximately 5,600 store employees are represented by a non-affiliated collective bargaining organization under a contract expiring in 1999. The Company considers its relations with its employees to be good.
As part of the Company's effort to reduce labor costs, the Company has changed labor scheduling practices, reduced the handling of products and improved stock room operations. This enabled the Company to eliminate 440 store employees in its Puerto Rico supermarkets in January 1997, reducing annual labor costs by approximately $9.0 million.
Trademarks, Tradenames and Service Marks
The Company owns certain trademarks, tradenames and service marks used in its business. The Company believes that its trademarks, tradenames, and service marks, including Pueblo and Xtra, are valuable assets due to the fact that brand name recognition and logos are important considerations in the Company's consumers' markets. As a franchisee, the Company has exclusive rights to use the Blockbuster trademark in its specified franchise territories.
Regulation
Compliance by the Company with federal, state and local environmental protection laws has not had, and is not expected to have, a material effect on capital expenditures, earnings or the competitive position of the Company.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth information as of January 25, 1997 with respect to the owned and leased stores and support facilities used by Pueblo in its business:
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(1) Four of the owned stores include land leases: three Xtra stores in Puerto Rico, and one Pueblo store in the U.S. Virgin Islands.
The Company also owns the shopping centers at three of its store locations in Puerto Rico.
The majority of the Company's supermarket operations are conducted on leased premises which have initial terms generally ranging from 20 to 25 years. The lease terms typically contain renewal options allowing the Company to extend the lease term in five to ten year increments. The leases provide for fixed monthly rental payments subject to various periodic adjustments. The leases often require the Company to pay certain expenses related to the premises such as insurance, taxes and maintenance. See Note (6)--Leases and Leasehold Interests of the notes to the Company's consolidated financial statements referenced in Part II, Item 8 of this Form 10-K. The Company does not anticipate any difficulties in renewing its leases as they expire.
The construction of owned facilities is financed principally with internally generated funds. All owned properties of Pueblo are pledged as collateral (by a pledge of the assets of the Company's subsidiaries) under the Company's existing bank credit agreement, dated as of July 21, 1993 (the "Existing Bank Credit Agreement") with a syndicate of banks entered into in connection with the Acquisition. See Note (5)--Debt of the notes to the Company's consolidated financial statements referenced in Part II, Item 8 of this Form 10-K. Pueblo contemplates entering into an amended bank credit agreement (the "New Bank Credit Agreement") in connection with its proposed refinancing plan. See Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.
The Company has discontinued its operations in Florida, as described more fully in Note (2)--Unusual Charges of the notes to the Company's consolidated financial statements referenced in Part II, Item 8 of this Form 10-K, and has closed all eight of its Xtra stores located in Florida during fiscal 1997. The Company has sold one owned Xtra location and the lease rights to a second location. The Company is seeking to dispose of its remaining Florida retailing assets.
The Company owns its corporate offices located in San Juan, Puerto Rico, and leases its administrative offices located in Pompano Beach, Florida.
The Company believes that its properties are adequately maintained and sufficient for its business needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a number of legal proceedings involving claims for money damages arising in the ordinary course of conducting its business which are either covered by insurance or are within the Company's self-insurance program, and in a number of other proceedings which, except as set forth below, are not deemed material. The Company's management does not believe that the ultimate resolution of any of these matters could have a material adverse effect on the Company's consolidated results of operations or financial condition.
Pueblo has been party to various lawsuits alleging a fraud engaged in by Premium Sales Corp., Plaza Trading Corporation and Windsor Wholesale Company and numerous of their related subsidiaries ("Premium") in which damages totalling approximately $300 million (plus treble damages, punitive damages and/or attorneys' fees) were claimed against each defendant. Premium was ostensibly engaged in the business of "brokering" or "diverting" groceries throughout the United States and various foreign countries from 1988 until its official bankruptcy in 1993. Following the Premium bankruptcy, the Receiver and Bankruptcy Trustee sued numerous grocers, including Pueblo, claiming that the grocers were liable for Premium's losses, and a class action was filed against Pueblo and other defendants on behalf of the investors in the funding entities which lost monies in the Premium fraud. All litigation against Pueblo has been settled for an amount which, taking into account all litigation costs and settlement costs, is within the $5.3 million of reserves established from fiscal years 1994 through 1997 for such purpose. The settlement received preliminary court approval on February 11, 1997. The Company's legal counsel has advised that it expects the settlement to receive final approval at a final fairness hearing scheduled for May 7, 1997.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter ended January 25, 1997.
PART II.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
There is no established public trading market for the Company's common equity.
Holders
The Company is a wholly-owned subsidiary of PXC&M Holdings, Inc., a Delaware holding company ("Holdings") which in turn is beneficially owned by a trust for the benefit of the family of Gustavo Cisneros, and a trust for the benefit of the family of Ricardo Cisneros (the "Principal Shareholders"), with each trust having an approximate 50% indirect beneficial interest in Holdings. Messrs. Gustavo and Ricardo Cisneros disclaim beneficial ownership of such shares.
Dividends
No cash dividends have been declared on the common stock since the Company's inception. Certain restrictive covenants in the Existing Bank Credit Agreement impose limitations on the declaration or payment of dividends by the Company. Additionally, dividend payments by Pueblo to the Company are restricted under the terms of the Existing Bank Credit Agreement. The Existing Bank Credit Agreement, however, provides that so long as no default or event of default (as defined in the Credit Facility) exists, or would exist as a result, Pueblo is permitted to pay cash dividends to the Company in an aggregate amount necessary to pay interest on the 10-year, 9 1/2% senior notes (issued in connection with the Acquisition) then due and payable in accordance with the terms thereof. Similar restrictions on dividends will be included in the New Bank Credit Agreement.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per selling square foot amounts)
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(1) Operating activity for the 26 weeks ended January 29, 1994 and for the fiscal years 1995, 1996 and 1997 are representative of the Company subsequent to the Acquisition. All other operating activity pertains to Pueblo prior to the Acquisition. (2) Fiscal 1993 was a 53-week year.
(3) Represents the combined results of operations for the 26-week period ended July 31, 1993 of the Company's predecessor prior to the Acquisition and the 26-week period ended January 29, 1994 of the Company. The results for each 26-week period are as follows:
(4) Selling, general and administrative expenses for fiscal years 1996 and 1997 include certain expenses and charges related to the implementation of the Company's strategic initiatives and other matters. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -General". (5) The Company recorded unusual charges of approximately $30 million in fiscal 1996 and $4.2 million in fiscal 1997 as a result of the Company's exit from the Florida market and an unusual charge of $2.2 million in fiscal 1996 as a result of the Company's restructuring of its Puerto Rico operations. (6) Highly liquid investments purchased with a maturity of three months or less are considered cash equivalents. (7) EBITDA represents income (loss) before interest, income taxes, sundry, depreciation and amortization, transaction costs, and unusual charges. In fiscal 1997, income taxes included $1.5 million representing the tax effect of the cumulative effect of a change in accounting principle relating to the adoption of SFAS No. 121 during such fiscal year. See Note (1)--Significant Accountiing Policies of the notes to the Company's consolidated financial statements included in Part II, Item 8 of this Form 10-K. EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as an alternative to net income (loss) as an indication of the Company's operating performance or to cash flows as a measure of liquidity. EBITDA is included as it is the basis upon which the Company assesses its financial performance. EBITDA margin represents EBITDA divided by net sales. (8) Beginning in 1996, average sales are weighted for the period of time stores are open during the year. (9) All Xtra stores in Florida were closed in the first quarter of fiscal 1997.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized in 1993 to acquire Pueblo in the Acquisition. In connection with the Acquisition, the Company incurred significant indebtedness and recorded significant goodwill. Following the Acquisition, the Company continued an existing operating strategy designed to significantly expand its supermarket penetration through new supermarket openings in Puerto Rico and Florida and new Blockbuster locations in Puerto Rico. The number of the Company's supermarkets in Puerto Rico and the U.S. Virgin Islands grew from 46 to 50 and the number of the Company's Blockbuster locations (including conversions) grew from 20 to 27, in each case measured from the Acquisition through the end of fiscal 1997. In addition, the Company added one new supermarket in Florida after the Acquisition which was subsequently closed in fiscal 1997, as described below. From the Acquisition through fiscal 1997, the Company made capital expenditures totalling $67.1 million, of which $61.3 million related to Puerto Rico and the U.S. Virgin Islands. The Company's focus on new supermarket development rather than supermarket operations, as well as the effects of increased competition, resulted in a decline in total sales, same store sales, and consolidated operating results.
Throughout this time period, the Company's markets have been affected by an increasing level of competition from local supermarket chains, independent supermarkets, warehouse club stores, discount drug stores and convenience stores. Warehouse club stores and mass merchandisers, which have entered the Puerto Rico and U.S. Virgin Islands markets since 1990 offering various bulk grocery and general merchandise items, have increased pricing pressures on grocery retailers including the Company. In addition, low inflation in food prices in recent years has made it difficult for the Company and other grocery store operators to increase prices and has intensified the competitive environment by causing such retailers to emphasize promotional activities and discount pricing to maintain or gain market share. The South Florida market, in particular, has been characterized by intense competition that negatively affected the performance of the Company's stores in that market through fiscal 1996.
In October 1995, William T. Keon, III was named President and Chief Executive Officer of the Company. Following his arrival at the Company, Mr. Keon conducted a thorough review of the Company's operating business practices and its financial performance. As a result of such review, the Company determined in January 1996 to discontinue its retail operations in the competitive Florida market in order to focus on its core markets where it has a stronger competitive position and greater profit opportunities. In the spring of 1996, management also began to take several other actions designed to improve the financial performance of the Company, including the conversion of five Pueblo stores to the Xtra format, the closing of two underperforming Xtra stores in Puerto Rico, an increase in the Company's advertising expenditures in Puerto Rico, and the conversion of six Pueblo Video Clubs into in-store Blockbuster outlets.
In the summer of 1996, in conjunction with implementation of a revised business strategy, the Company retained a retail industry consulting firm to assist management in analyzing the Company's operating practices. One result of such analysis was the reorganization of labor scheduling practices, which enabled the Company to eliminate 440 store employees in January 1997 and reduce annual labor costs by approximately $9.0 million. It is management's belief that the decision to exit the Florida market, together with the actions which the Company began to take in the spring of 1996 and the implementation of its revised business strategy, has begun to contribute, and should continue to contribute, toward improved operating results.
Other strategic measures being undertaken by the Company include: (i) continual evaluation of Pueblo store formats relative to the markets they serve for potential future conversions to Xtra stores; (ii) continued conversion of its remaining Pueblo Video Clubs to Blockbuster outlets and the opening of additional free-standing Blockbuster stores; (iii) other interior store changes to increase customer traffic, such as in-store banking and in-store fast food restaurants for select locations; (iv) selective development of new supermarkets in attractive markets, particularly in the interior of Puerto Rico; (v) continued implementation of new store operating procedures and practices to enhance productivity and reduce labor costs; (vi) improving procurement and distribution practices in order to improve gross margins; (vii) implementation of a category management system and expansion of its sales of private label products; (viii) continuing a more effective advertising program emphasizing the Company's price competitiveness and (ix) maintenance of an ongoing program to recruit managers trained in United States mainland supermarket retailing practices and establishment of performance-based compensation programs. The Company believes that these strategic measures will be an effective means of improving sales by increasing customer traffic in its supermarkets.
In connection with the strategic initiatives begun in January 1996, the Company has incurred a number of unusual charges and other items that have adversely affected the Company's operating profit, including the following items which aggregated $36.1 million in fiscal 1996 and $12.3 million in fiscal 1997. The Company recorded unusual charges of approximately $30.0 million in fiscal 1996 and $4.2 million in fiscal 1997 as a result of the Company's exit from the Florida market, and an unusual charge of $2.2 million in fiscal 1996 as a result of the Company's restructuring of its Puerto Rico operations. See Note (2)--Unusual Charges of the notes to the Company's consolidated financial statements included in Part II, Item 8
ITEM 8. FINANCIAL STATEMENTS
Information called for by this item is set forth in the Company's consolidated financial statements and supplementary data contained in this report. Specific consolidated financial statements can be found at the pages listed in the following index:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with the Company's accountants on accounting and financial disclosure during the applicable periods.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a list (as of April 1, 1997) of the names of the directors and executive officers of the Company, their respective ages and their respective positions with the Company. The terms of the directors and executive officers of the Company expire annually upon the holding of the annual meeting of stockholders.
Directors - ---------
Gustavo A. Cisneros has been the Chairman of the Board of the Company since its inception (July 28, 1993). He was appointed to the Executive Committee in October 1995. Since prior to 1992, he has been a direct or indirect beneficial owner of interests in and a director of certain companies that own or are engaged in a number of diverse commercial enterprises in Venezuela, the United States, Brazil, Chile and Mexico (the "Cisneros Group"), including the Company. He is a member of the board of directors of Univision Communications, Inc., Evenflo & Spalding Holdings Corporations and RSL Communications, Inc.
William T. Keon, III has been a Director of the Company since October 1995. He assumed the position of President and Chief Executive Officer and was appointed Chairman of the Executive Committee and Audit and Risk Committee also in October 1993. He is also a member of the Compensation and Benefits Committee. Since January 1983, Mr. Keon has served in senior managerial roles in the Cisneros Group.
David L. Aston joined the Company in March 1997 as a Director, Executive Vice President and President of the Puerto Rico Food Retail Division. From June 1993 until the time he joined the Company, Mr. Aston served as president of Waldbaums and Superfresh Foods, units of the A&P Company, a supermarket chain in the New York area. Prior to June 1993, he served as Vice President of Merchandising and Operations for the Kroger Company.
Steven I. Bandel has been a Director of the Company since the Acquisition. He was appointed to the Executive Committee during October 1995. Since prior to 1992, he has been actively involved in the operations and management of certain companies in the Cisneros Group, other than a period from February 1990 to May 1992 during which he acted as a partner in a Venezuelan investment banking firm.
Alejandro Rivera has been a Director of the Company since April 1, 1997. He was previously a Director of the Company since the Acquisition until June 30, 1995. Since 1976, he has been actively involved in the operations and management of certain companies in the Cisneros Group. Mr. Rivera is also an Alternate Director of Univision Communications, Inc. Mr. Rivera is a member of the Audit and Risk Committee and of the Compensation and Benefits Committee.
Cristina Pieretti was appointed a Director in March 1997. During most of the last seven years, she has been actively involved in operations of companies in the Cisneros Group in areas related to consumer goods, retailing and telecommunications, other than a period from March 1995 to February 1996 during which she acted as a partner in a consulting firm.
Lawrence Elias has served as Senior Vice President of Management Information Systems of the Company since September 1993. He joined the Company in March 1988 as Vice President of Management Information Systems and was promoted to Senior Vice President in September 1993.
Filiberto Berrios has held a variety of positions with the Company since 1965, most recently as Vice President and General Manager of the Blockbuster Division. In March 1997, he was promoted to Senior Vice President and President of the Blockbuster Division.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid or distributed by the Company through January 25, 1997 to, or accrued through such date for the account of the current Chief Executive Officer as well as each of the three executive officers of the Company serving at January 25, 1997 and the executive officer terminating during fiscal 1997 (who would have been reportable except for his termination from the Company) for their services in all capacities to the Company.
SUMMARY COMPENSATION TABLE
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(1) Includes costs related to the reimbursement of executive medical expenses of $19,990 and an automobile allowance in the amount of $10,168.
(2) Includes costs related to the reimbursement of executive medical expenses of $9,369 and an automobile allowance in the amount of $7,200.
(3) Includes costs related to the reimbursement of executive medical expenses of $7,870 and $8,223 in fiscal 1996 and fiscal 1995, respectively. Also includes automobile allowances in the amounts of $4,758 and $4,092 in fiscal 1996 and fiscal 1995, respectively.
(4) Amount represents the employer contributions from the Pueblo International, Inc. Salaried Employees' Discretionary Contribution Plan which covers eligible salaried associates in Puerto Rico and the U.S. Virgin Islands divisions.
(5) Amount represents the Company matching contribution to an elective non-qualified deferred compensation plan maintained by the Company.
PENSION PLAN TABLES
The Company sponsors two defined benefit plans. The Pueblo International, Inc. Employees' Retirement Plan (the "Retirement Plan") is tax-qualified under the Internal Revenue Code and covers all full-time and certain part-time employees of the Company over age 21 with one year of service. It provides an annual benefit equal to 1% of the average annual compensation over a five-year period per year of service. The Supplemental Executive Retirement Plan (the "SERP") is non-qualified and covers all officers of the Company and its subsidiaries. It provides an annual benefit equal to 3% of the average compensation over a five-year period per year of service (up to 20 years). Full vesting for the Retirement Plan and the SERP occurs upon completion of five years of service. The following tables give the estimated annual benefit payable upon retirement for participants in the Retirement Plan and the SERP. The SERP benefits are offset by the Retirement Plan benefits and by 100% of social security benefits. These offsets are reflected in the benefits shown in the SERP table. The Company does not sponsor any other defined benefit or actuarial plans.
TABLE 1. RETIREMENT PLAN
TABLE 2. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Compensation covered by the qualified Retirement Plan is equal to the total compensation (excluding compensation attributable to the redemption of stock options resulting from the Transaction) paid to an employee during a plan year prior to any reduction under a salary reduction agreement entered into by the employee pursuant to a plan maintained by the employer which qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"), or pursuant to a plan maintained by the employer which qualifies under Section 125 of the Code. Compensation in excess of $160,000 shall be disregarded, provided, however, that such $160,000 limitation shall be adjusted at the same time and in such manner as the maximum compensation limit is adjusted under Section 401(a)(17) of the Code.
Compensation covered by the non-qualified Supplemental Executive Retirement Plan is the same as the qualified Retirement Plan, except that the $160,000 limit is not applicable.
The estimated years of credited service and age, respectively, for purposes of calculating benefits through January 25, 1997 for Mr. Keon is three and 50, respectively, for Mr. Freimark is 10 and 42, respectively, for Mr. Perez is one and 43, respectively, for Mr. Applebaum is three and 41, respectively, and for Mr. Elias is nine and 54 respectively. The benefits provided by both the Retirement Plan and the SERP are on a straight-life annuity basis, as are the examples in the Retirement Plan table.
DIRECTOR COMPENSATION
Directors who are not employees of the Company or associated with companies in the Cisneros Group are paid a fee of $18,000 per year for serving on the Board of Directors, $1,250 for each board meeting attended and $1,250 for each committee meeting attended with a limit of one committee meeting paid per day. All directors are also reimbursed for their usual and customary expenses incurred in attending all board and committee meetings. During fiscal year 1997, the Company had no outside directors.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
On March 1, 1997, Edwin Perez resigned as President of the Puerto Rico division and resigned as an officer and board member of any related corporations. In accordance with his employment agreement dated February 28, 1996, Mr. Perez will be paid $275,000 in separation pay.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Keon, Freimark, Bandel, Rivera and Paul L. Whiting served as members of the Compensation and Benefits Committee of the Board of Directors of the Company during all or a portion of the fiscal year ended January 25, 1997. Messrs. Keon and Freimark also served as officers of the Company during the fiscal year ended January 25, 1997.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
a) Security Ownership of Certain Beneficial Owners
As discussed in Part II, Item 5 - Market for the Registrant's Common Equity and Related Shareholder Matters, the Company is a wholly-owned subsidiary of Holdings.
The following table sets forth certain information regarding the beneficial ownership of more than 5% of the common stock of Holdings as of April 1, 1997. By virtue of its ownership of the Holdings common stock, the following entity may be deemed to own a corresponding percentage of the Company's common stock.
The shares of Holdings described above are beneficially owned by the Principal Shareholders by virtue of their indirect ownership of the entity listed above. The principal business address of the Principal Shareholders is Paseo Enrique Eraso, Centro Commercial Paseo Las Mercedes, Caracas, Venezuela.
(b) Security Ownership of Management
As of April 1, 1997, the executive officers and the management of the Company have no beneficial ownership of Holdings. The following table sets forth certain information regarding beneficial ownership of Holdings by the principal shareholders as described above. By virtue of their ownership of the common stock of Holdings, the following may be deemed to own a corresponding percentage of the equity of the Company.
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(1) Includes common and preferred stock beneficially owned by the Principal Shareholders.
(c) Changes in Control
The borrowings outstanding under the Existing Bank Credit Agreement are collateralized by a pledge of the assets of the Company's subsidiaries, by the capital stock of, and intercompany notes issued by, the Company's subsidiaries and by the capital stock of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 18, 1996, Holdings contributed additional capital of $5.0 million which, under the terms of the Existing Bank Credit Agreement, as amended in April 1996, was used to reduce the Company's term loans under the Existing Bank Credit Agreement. In addition, Holdings provided $10.0 million in additional funds to the Company on October 18, 1996 in return for a non-interest-bearing redeemable note payable to a related party (the "Holdings Note"). The Holdings Note matures after the expiration of the Existing Bank Credit Agreement and can be redeemed earlier subject to the Company meeting various performance and financial criteria. Proceeds from the Holdings Note were used to reduce the Company's term loans under the Existing Bank Credit Agreement in accordance with terms set forth in the Existing Bank Credit Agreement, as amended. In connection with the consummation of the Refinancing Plan, the Company intends to satisfy this indebtedness by transferring its interest in two real estate properties from its closed Florida operations to Holdings. The Company believes such properties have a fair market value of no more than $10.0 million.
During April 1994, the Company received additional capital of $15.0 million from Holdings. Concurrent with the capital contribution, the Company loaned $10.0 million to Spalding & Evenflo. This loan, which had an interest rate of 4.4%, was repaid by Spalding & Evenflo in two equal installments during July and September 1994. Under the terms of the Existing Bank Credit Agreement, as amended, the Company used $15.0 million to reduce amounts outstanding under its term loan credit facilities and revolving credit facility, including a $5.0 million prepayment on the fiscal 1996 amortization of the term loans.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Documents filed as part of this report:
(1) Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (Located in Item 8 hereto)
Independent Auditors' Report
Consolidated Balance Sheets as of January 25, 1997 and January 27, 1996
Fiscal years ended January 25, 1997, January 27, 1996, and January 28, 1995
Consolidated Statements of Operations Consolidated Statements of Cash Flows Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
Location in (2) Consolidated Financial Statement Schedules: this report -----------
Independent Auditors' Report........................................S-1
Schedule II - Valuation and Qualifying Accounts...........................................S-2
(3) Exhibits
INDEX TO EXHIBITS
* Previously filed and incorporated by reference to corresponding exhibits in the Company's Form 10-K for fiscal year ended January 29, 1994.
** Previously filed and incorporated by reference to corresponding exhibits in the Company's Form 10-K for fiscal year ended January 28, 1995.
*** Previously filed and incorporated by reference to corresponding exhibits in the Company's Form 10-K for fiscal year ended January 27, 1996.
(B) Reports on Form 8-K
None
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report to security holders covering the Registrant's last fiscal year and no proxy statement, form of proxy or other proxy soliciting material with respect to any annual or other meeting of security holders has, as of the date hereof, been sent to security holders by the Registrant. If such report or proxy material is to be furnished to security holders subsequent to the filing of the annual report of this Form 10-K, the Registrant will furnish copies of such material to the Commission when it is sent to the security holders.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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. (Registrant)
By: /s/ Daniel Cammarata ---------------------------------------- Daniel Cammarata Controller and Chief Accounting Officer
Dated April 23, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of Pueblo Xtra International, Inc. San Juan, Puerto Rico Pompano Beach, Florida
We have audited the accompanying consolidated balance sheets of Pueblo Xtra International, Inc. and Subsidiaries as of January 25, 1997 and January 27, 1996, and the related consolidated statements of operations, cash flows and stockholder's equity for each of the three years in the period ended January 25, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pueblo Xtra International, Inc. and Subsidiaries as of January 25, 1997 and January 27, 1996 and the results of their operations and their cash flows for each of the three years in the period ended January 25, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective January 28, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
DELOITTE & TOUCHE LLP Certified Public Accountants
Miami, Florida April 3, 1997
CONSOLIDATED BALANCE SHEETS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED BALANCE SHEETS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Pueblo Xtra International, Inc. and its wholly-owned subsidiaries (the "Company"). The Company operated retail supermarkets and video rental locations in Puerto Rico and the U.S. Virgin Islands during fiscal 1997. Intercompany accounts and transactions are eliminated in consolidation.
The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the last Saturday in January. Accordingly, fiscal year 1997 ended on January 25, 1997, fiscal 1996 ended on January 27, 1996, and fiscal 1995 ended on January 28, 1995. All fiscal years comprised 52 weeks.
Cash and Cash Equivalents
Highly liquid investments purchased with a maturity of three months or less are considered cash equivalents.
Marketable Securities
Marketable securities consist of U.S. Government or agency issues with the majority of the maturities occurring within the next 12 months. These investments in debt securities are classified as held-to-maturity and measured at amortized cost as it is both the Company's positive intent and ability to hold the investments to maturity.
Inventories
Inventories held for sale are stated at the lower of cost or market. The cost of inventories held for sale is determined, depending on the nature of the product, either by the last-in, first-out (LIFO) method or by the first-in, first-out (FIFO) method. Videocassette rental inventories are recorded at cost, net of accumulated amortization. Videocassettes held for rental are amortized over 12 months on a straight-line basis.
Property and Equipment
Property and equipment, including expenditures for remodeling and improvements, are carried at cost. Routine maintenance, repairs and minor betterments are charged to operations as incurred. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets or, in relation to leasehold improvements and property under capital leases, over the lesser of the asset's useful life or the lease term, not to exceed 20 years. Estimated useful lives are 20 years for buildings and improvements, 5 to 12 years for furniture, fixtures and equipment, 4 years for automotive equipment and 3 years for computer hardware and software.
Upon the sale, retirement or other disposition of assets, the related cost and accumulated depreciation or amortization are eliminated from the accounts. Any resulting gains or losses from disposals are included in the consolidated statements of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill and Other Intangibles
Goodwill represents the excess of cost over the estimated fair value of the net tangible and other intangible assets acquired in connection with the transaction described in Note (3)--Acquisitions. Goodwill and other intangibles are being amortized using the straight-line method over periods not exceeding 40 years. The Company periodically evaluates the carrying amount of goodwill and other intangibles to recognize and measure the possible impairment of these assets. Based on the recoverability from cash flows method (which includes evaluating the probability that estimated undiscounted cash flows from related operations will be less than the carrying amount of goodwill and other long-lived assets), the Company believes there is no impairment to goodwill and other intangibles.
Self-Insurance
The Company's general liability and certain of its workers compensation insurance programs are self-insured. The reserve for self-insurance claims is based upon an annual review by the Company and its independent actuary of claims filed and claims incurred but not yet reported. Due to inherent uncertainties in the estimation process, it is at least reasonably possible that the Company's estimate of the reserve for self-insurance claims could change in the near term. The liability for self-insurance is not discounted. Individual self-insured losses are limited to $250,000 per occurrence for general liability and certain workers compensation. The Company maintains insurance coverage for claims in excess of $250,000. The current portion of the reserve, representing the amounts expected to be paid in the next fiscal year, were $6.7 million and $7.7 million at January 25, 1997 and January 27, 1996, respectively, and are included in the consolidated balance sheets as accrued expenses.
Pre-Opening Expenses
Store pre-opening expenses are charged to operations in the month the stores are opened.
Advertising Expenses
Advertising expenses are charged to operations as they are incurred. During fiscal 1997, fiscal 1996, and fiscal 1995, advertising expenses were $11.0 million, $11.4 million, and $10.8 million, respectively.
Interest Rate Instruments
The Company is a party to an interest rate swap agreement and interest rate cap agreements to limit its exposure to increases in market interest rates.
The interest rate swap agreement (the "Swap") involves the exchange of fixed and floating rate interest payment obligations over the life of the agreement without exchange of the underlying notional principal amount. The differential to be paid or received is recognized as an adjustment to the reserve established in purchase accounting as a result of the transaction described in Note (3)--Acquisitions. Prior to the acquisition, the differential was charged to interest expense.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The interest rate cap agreements are three-year contracts entered into with two banks in the credit facility syndicate discussed more fully in Note (5)--Debt. Under the terms of the agreements, interest costs on the underlying notional principal amount will not exceed a specified amount on a cumulative basis over a three-year period. The premium paid for the agreements is included in the consolidated balance sheets as deferred charges and other assets and is being amortized over the life of the agreements.
Postemployment Benefits
The Company has a policy which provides severance benefits to its salaried employees. However, the Company cannot reasonably estimate postemployment benefits, including severance benefits, on an ongoing basis, these costs are charged to expense only when the probability of payment and the amount of such payment can be reasonably determined.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires deferred tax assets and liabilities to be determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates currently in effect.
Earnings Per Common Share
The Company is a wholly-owned subsidiary of PXC&M Holdings, Inc. ("Holdings") with a total of 200 shares of common stock issued and outstanding. Earnings per share is not meaningful to the presentation of the consolidated financial statements and is therefore excluded.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Change
In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for the long-lived assets and certain identifiable intangibles to be disposed of. Long-lived assets and certain identifiable intangibles to be held and used by an entity are required to be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the assets. Long-lived assets and certain identifiable intangibles to be disposed of are required to be reported generally at the lower of the carrying amount or fair value less cost to sell. Pursuant to the requirements of SFAS No. 121, in the year the Company adopts SFAS No. 121, assets to be disposed of are to be recorded at the lower of carrying amount or fair value less cost to sell. Upon adoption of SFAS No. 121 at the beginning of fiscal 1997 (the "Adoption Date"), the Company recorded a cumulative effect of a change in accounting principle of $2.7 million, net of deferred income taxes of $1.5 million, to record assets held for disposal at fair value as of the Adoption Date. Such adjustment represents the phase-out of operations of the closed Florida stores in fiscal 1997 that were included in unusual charges in fiscal 1996 (see Note 2).
Reclassifications
Certain amounts in the prior year's consolidated financial statements and related notes have been reclassified to conform to the current year's presentation.
NOTE 2 -- UNUSUAL CHARGES
During January 1996, management implemented several strategic measures. These measures included the disposal of the Company's Florida retail operations (the "Florida Disposal") and a restructuring of certain operating functions. As a result of these measures, the Company recorded approximately $32.2 million in unusual charges. Of this amount, approximately $30.0 million was recorded in accordance with APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB No. 30"), related to the decision to exit the Florida retail market (the "Loss from Florida Disposal"). In addition, the Company recorded costs for postemployment benefits, including severance pay, under existing benefit arrangements.
The Florida Disposal included the closing of all eight Xtra units (three of which are owned) and a warehouse and distribution center in Florida, whether by sale or abandonment, which was completed in the first quarter of fiscal 1997. In fiscal 1997, the Company sold one location and the lease rights to another location. The Company is currently negotiating the sale of certain other locations. In addition, the Company has sold the equipment within all its stores.
During fiscal 1997, the Company recorded an additional $4.2 million in unusual charges to write down assets from the Florida operations. This adjustment was made to reflect a revision in the estimated fair value of the remaining properties held for sale. After this adjustment and the sale of certain properties, $10.0 million, relating to the Florida Disposal, is included in assets held for sale at January 25, 1997 pursuant to their anticipated sale in the near term.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 2 -- UNUSUAL CHARGES (CONTINUED)
Included in the $30.0 million loss from the Florida Disposal recorded in fiscal 1996 were estimated operating losses during the phase-out period, a reduction of related assets to their estimated realizable value, the recognition of net future lease obligations, employee termination benefits for Florida operations and other closing costs. With the adoption of SFAS No. 121, the Company recorded an additional operating loss in fiscal 1997 of $4.1 million for the phase-out of operations subsequent to January 27, 1996. Such amount, net of taxes, was offset by the cumulative effect of a change in accounting principle recorded in fiscal 1997 (see Note 1).
The Florida operating division reported sales of $6.7 million, $159.7 million, and $187.8 million for fiscal 1997, fiscal 1996, and fiscal 1995, respectively. The total assets and liabilities of the Florida operating division as of January 25, 1997 were $51.5 million and $55.0 million, respectively, and $77.6 million and $83.0 million, respectively, as of January 27, 1996.
Unusual charges include management's best estimates of the amounts expected to be realized in the near term. However, the amounts the Company will ultimately realize could differ from those estimates.
NOTE 3 -- ACQUISITIONS
On July 28, 1993, the Company acquired all of the outstanding shares of the common stock of Pueblo International, Inc. and subsidiaries for an aggregate purchase price of $283.6 million plus transaction costs (hereinafter referred to as the "Transaction"). The shares were acquired from an investor group including affiliates of Metropolitan Life Insurance Company, The First Boston Corporation and certain current and former members of the Company's management and its Board of Directors.
The Transaction was financed with $71.5 million of equity, the issuance of $180.0 million in 10-year, 9 1/2% senior notes and $130.0 million borrowed by subsidiaries of the Company under a new credit facility. See Note (5)--Debt for further details of the senior notes and the new credit facility. Concurrent with the Transaction, previously existing bank debt of $19.3 million and senior subordinated notes of $48.6 million were satisfied.
The Transaction has been accounted for as a purchase effective July 31, 1993. Accordingly, the costs of the Transaction were allocated to the assets acquired and liabilities assumed. The excess of the aggregate purchase price over the fair market value of net assets acquired of approximately $210.2 million was recognized as goodwill and is being amortized over 40 years.
NOTE 4 -- INVENTORIES
The cost of approximately 76% and 78% of total inventories at January 25, 1997 and January 27, 1996, respectively, is determined by the LIFO method. The excess of current cost over inventories valued by the LIFO method was $1,980,000 and $1,570,000 as of January 25, 1997 and January 27, 1996, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 5 -- DEBT
Total debt consists of the following (in thousands):
The Transaction described in Note (3)--Acquisitions was financed by the issuance of $180.0 million in senior notes (the "Senior Notes") and a credit facility consisting of $115.0 million in term loans and a maximum of $60.0 million in revolving loans (the "Credit Facility") entered into by subsidiaries of the Company and a syndicate of banks led by The Chase Manhattan Bank (National Association) and Scotiabank de Puerto Rico ("Bank Syndicate"). The Credit Facility matures on July 31, 2000.
The term loans of the Credit Facility are reduced over the term of the facility on a graduated basis in accordance with the credit agreement. Principal payments aggregating $10.8 million are due under the term loans of the Credit Facility in the succeeding 12-month period. Of the $60.0 million revolving facility, $16.0 million remains outstanding at January 25, 1997 and $23.3 million is utilized in the form of standby letters of credit. The Company pays a fee of .50% per annum on unused commitments under the $60.0 million revolving facility. The Company has classified as non-current $9.0 million under the revolving Credit Facility as a result of its intent to maintain this obligation on a long-term basis. Interest on the Credit Facility fluctuates based on the availability of Section 936 funds in Puerto Rico, Euroloan rates and the prime rate. The weighted average interest rate on the Credit Facility, which approximates that of short-term borrowings under the revolving facility, was 8.57% and 8.82% during fiscal 1997 and fiscal 1996, respectively.
During fiscal 1997 and subsequent thereafter, the Credit Facility has been amended with the last amendment effective as of January 25, 1997. In accordance with the amendments, the sole shareholder of the Company, Holdings, contributed $5.0 million in additional capital to the Company on April 18, 1996. In addition, Holdings provided $10.0 million in additional funds to the Company on October 18, 1996 in return for a non-interest-bearing redeemable note payable to a related party (the "Holdings Note"). The Holdings Note matures after the expiration of the Credit Facility and can be redeemed earlier subject to the Company meeting various performance and financial criteria. The proceeds of these two transactions were used to immediately reduce the Company's term loans under the Credit Facility. The terms of these amendments also required that the maximum amount available under the revolving loans of the Credit Facility be reduced from $60.0 million to $49.3 million, which is comprised of $26.0 million in revolving loans and a maximum of $23.3 million utilized in the form of standby letters of credit. The amendments also provide for certain revised financial covenant requirements. In addition, the amendments require the Company to pay additional fees on the last business day of each calendar month from April 1997 through December 1997 equal to 1/9 of 1 1/2% of the revolving commitment and term loans outstanding as of each respective date for certain Bank Syndicate members.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 5 -- DEBT (CONTINUED)
The Credit Facility is collateralized by a pledge of the assets of the Company, by the capital stock of, and intercompany notes issued by, the Company's subsidiaries and by the capital stock of the Company. The Company is required, under the terms of the Credit Facility, to meet certain financial covenants which include minimum consolidated net worth levels, interest and fixed charges coverage ratios and minimum EBITDA (as defined in the credit agreement). The agreement also contains certain restrictions on additional indebtedness, capital expenditures and the declaration and payment of dividends.
Subsequent to January 25, 1997, the Company began negotiations with the Bank Syndicate to restructure the Credit Facility and has begun to explore alternative sources of finances.
The Senior Notes, which mature on August 1, 2003, are general unsecured obligations of the Company subordinate in right of payment to all existing and future liabilities (including, without limitation, obligations under the Credit Facility) of its subsidiaries. The Senior Notes may be called by the holders of the notes at 101% in the event of a change in control of the Company (as defined in the indenture). The Senior Notes are senior to all future subordinated indebtedness which the Company may from time to time incur. The Senior Notes bear interest at 9.50% per annum which is payable semi-annually on February 1st and August 1st. Terms of the Senior Notes include covenants which restrict the Company and its subsidiaries from engaging in certain activities and transactions.
Outstanding borrowings with a governmental agency of the Commonwealth of Puerto Rico are $17.5 million from the issuance of industrial revenue bonds. The bonds, which bear interest at variable rates based on an index of tax-exempt borrowing, have a weighted average interest rate of 4.08% and 4.00% at January 25, 1997 and January 27, 1996, respectively. Principal payments are due in fiscal 1998 ($7.5 million) and fiscal 2001 ($10.0 million), which correspond to the maturity dates of the bonds. Payment of the bonds is guaranteed by standby letters of credit totaling $17.9 million, issued under the $60.0 million revolving credit facility discussed above.
The Company is a party to a collateralized Swap to reduce its exposure to increases in interest rates on the loans payable to the Puerto Rico governmental agency. Under the terms of the Swap, the Company pays a fixed rate of 5.29% on the $17,500,000 notional principal amount and receives a variable rate of interest based on an index of tax-exempt borrowing. Net interest payments under the Swap were $325,000, $249,000, and $420,000, for fiscal 1997, fiscal 1996, and fiscal 1995, respectively. The Swap expires in fiscal 1998 and is collateralized bythe Company's pledge of marketable securities in an amount
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 5 -- DEBT (CONTINUED)
(reset quarterly) sufficient to offset the market risk, not to exceed $4,130,000. The required collateral balance of $27,000 as of January 25, 1997 is included with deferred charges and other assets in the accompanying consolidated balance sheet. During fiscal 1995, the Company entered into a three-year interest rate cap transaction with two banks in its Credit Facility syndicate as a means of managing the cost of the floating rate debt under the Credit Facility. Under the terms of the interest rate cap agreements, interest costs on a notional principal amount of $35.0 million will not exceed approximately $7.4 million during the succeeding three-year period. Total cash requirements under the agreements included the payment of a premium totalling $455,000 which is being amortized over the term of the agreements and is included in the consolidated statements of operations. The interest rate cap agreements expire in fiscal 1998. Counterparties to the interest rate swap and cap agreements are major financial institutions. Credit loss from counterparty nonperformance is not anticipated.
Annual maturities of the Company's debt are as follows (in thousands):
Total interest paid on debt, net of interest capitalized, was $34.5 million, $28.7 million, and $26.9 million for fiscal 1997, fiscal 1996, and fiscal 1995, respectively. Interest payable as of January 25, 1997 and January 27, 1996 was $695,000 and $9.9 million, respectively.
NOTE 6 -- LEASES AND LEASEHOLD INTERESTS
The Company conducts the major part of its operations on leased premises which have initial terms generally ranging from 20 to 25 years. Substantially, all leases contain renewal options which extend the lease terms in increments of 5 to 10 years. The Company also has certain equipment leases which have terms of up to five years. Realty and equipment leases generally require the Company to pay operating expenses such as insurance, taxes and maintenance. Certain store leases provide for percentage rentals based upon sales above specified levels.
The Company leases retail space to tenants in certain of its owned and leased properties. The lease terms generally range from two to five years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 6 -- LEASES AND LEASEHOLD INTERESTS (CONTINUED)
The major classes of property recorded under capital leases are as follows (in thousands):
Amortization of assets recorded under capital leases is included with depreciation and amortization expense in the consolidated statement of operations.
As a result of the Florida Disposal discussed further in Note (2)--Unusual Charges, the Company eliminated the net property recorded under capital leases of $7.2 million and the related capital lease obligations of $10.3 million for the Florida retail operations as of December 30, 1995.
Minimum rentals under non-cancelable leases at January 25, 1997 are as follows (in thousands):
Additionally, the Company is committed to future minimum payments under leases which it has entered into for stores not opened as of January 25, 1997 totaling $54.5 million over a 20- to 25-year period. Payment on these leases will commence with occupancy.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 6 -- LEASES AND LEASEHOLD INTERESTS (CONTINUED)
Rent expense and the related contingent rentals under operating leases were $11,899,000 and $567,000 for fiscal 1997, respectively, $12,636,000 and $645,000 for fiscal 1996, respectively, and $12,008,000 and $658,000 for fiscal 1995, respectively.
Contingent rentals under capital leases, which are directly related to sales, were $289,000 for fiscal 1997, $331,000 for fiscal 1996, and $387,000 for fiscal 1995. Interest paid on capital lease obligations was $1,152,000 for fiscal 1997, $2,286,000 for fiscal 1996, and $2,455,000 for fiscal 1995.
Sublease rental income for operating and capital leases was $1,881,000 for fiscal 1997, $1,854,000 for fiscal 1996, and $1,747,000 for fiscal 1995.
NOTE 7 -- STOCKHOLDER'S EQUITY
Authorized common stock of the Company consists of 200 shares of $.10 par value, all of which are issued and outstanding and held by Holdings as of January 25, 1997 and January 27, 1996.
During April 1994, the Company received additional capital of $15.0 million from its parent company, Holdings. Under the terms of the Credit Facility, as amended, the Company used $15.0 million to reduce the amounts outstanding under its term loan credit facilities and revolving credit facility, including a $5.0 million prepayment on the fiscal 1996 principal amortization of the term loans.
During April 1996, the Company received additional capital of $5.0 million from its parent company, Holdings, which it used to reduce the amounts outstanding under its term Credit Facility.
NOTE 8 -- INCOME TAXES
As described in Note (1)--Significant Accounting Policies, the Company's method of accounting for income taxes is the liability method as required by SFAS No. 109.
The components of income tax expense (benefit) are as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 8 -- INCOME TAXES (CONTINUED)
The significant components of the net deferred tax liabilities are as follows (in thousands):
SFAS No. 109 requires a valuation allowance against deferred tax assets if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets may not be realized.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 8 -- INCOME TAXES (CONTINUED)
A reconciliation of the difference between actual income tax benefit and income taxes computed at U.S. Federal statutory tax rates is as follows (in thousands):
As of January 25, 1997, the Company has unused net operating loss carryforwards of $18,000,000 and $8,000,000 available to offset future taxable income in Puerto Rico and the United States through fiscal years 2004 and 2011, respectively.
The Company also has unused investment tax credits of approximately $811,000 available to offset future U.S. income tax liabilities. Such investment tax credits expire as follows: 1999 - $97,000; 2000 - $20,000; 2001 - $674,000; and 2002 - $20,000. Utilization of the investment tax credit carryforward may be limited each year.
Total income taxes paid were $496,600 for fiscal 1997, $1,286,000 for fiscal 1996, and $1,886,000 for fiscal 1995.
NOTE 9 -- RETIREMENT BENEFITS
The Company has a non-contributory defined benefit plan (the "Retirement Plan") covering substantially all full-time and certain part-time associates. Retirement Plan benefits are based on years of service and a base level of compensation. The Company funds Retirement Plan costs in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Retirement Plan assets consist primarily of stocks, bonds and U.S. Government securities. Full vesting for the Retirement Plan occurs upon the completion of five years of service.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 9 -- RETIREMENT BENEFITS (CONTINUED)
Net pension cost under the Retirement Plan includes the following components (in thousands):
The average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the net periodic pension cost for the Retirement Plan are 7.5% and 5.0%, respectively, for fiscal years 1997, 1996 and 1995. The average expected long-term rate of return on plan assets is 9.0% for the three-year period.
The funded status and amounts recognized in the Company's consolidated balance sheets for the Retirement Plan are as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 9 -- RETIREMENT BENEFITS (CONTINUED)
The Company maintains a Supplemental Executive Retirement Plan (the "Supplemental Plan") for its officers under which the Company will pay, from general corporate funds, a supplemental pension equal to the difference between the annual amount of pension calculated under the Supplemental Plan and the amount the participant will receive under the Retirement Plan. Effective January 1, 1992, the Board of Directors amended the Supplemental Plan in order to conform various provisions and definitions with those of the Retirement Plan. The pension benefit calculation under the Supplemental Plan is limited to a total of 20 years employment and is based on a specified percentage of the average annual compensation received for the five highest consecutive years during a participant's last 10 years of service, reduced by the participant's annual Retirement Plan and social security benefits. Full vesting for the Supplemental Plan occurs upon the completion of five years of service.
Net pension cost under the Supplemental Plan includes the following components (in thousands):
The average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the net periodic pension cost for the Supplemental Plan are 7.5% and 5.0%, respectively, for fiscal years 1997, 1996 and 1995.
The funded status and amounts recognized in the Company's consolidated balance sheets for the Supplemental Plan are as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 9 -- RETIREMENT BENEFITS (CONTINUED)
The Company has a non-contributory defined contribution plan covering its eligible associates in Puerto Rico and the U.S. Virgin Islands. Contributions to this plan are at the discretion of the Board of Directors. The Company also has a contributory thrift savings plan in which it matches eligible contributions made by participating eligible associates in the United States. Expenses related to these plans, which are recognized in the year the cost is incurred, were $728,000 for fiscal 1997, $862,000 for fiscal 1996 and $774,000 for fiscal 1995.
NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments.
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of these instruments.
Marketable Securities
Due to the nature and maturities of the underlying securities in the portfolio, the carrying amount of marketable securities approximates fair value. The carrying and fair value amounts include securities which the Company classifies as marketable securities in the accompanying consolidated balance sheets, as well as securities held as collateral for the Swap which are included in the consolidated balance sheets as deferred charges and other assets.
Debt
The fair value of the Company's indebtedness, excluding the Senior Notes, is estimated based on quoted market prices for similar instruments. The fair value of the Senior Notes is determined based on market quotes.
Interest Rate Instruments
The fair value of the Swap and interest rate cap agreements used for hedging purposes is the amount the Company would pay to terminate these agreements as of the balance sheet dates, taking into account current interest rates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of the Company's financial instruments are as follows (in thousands):
NOTE 11 -- CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and the interest rate instruments (described in Note (5)--Debt). The Company places its temporary cash investments with highly-rated financial institutions in investment grade short-term debt instruments. Marketable securities consist exclusively of obligations issued or guaranteed by the United States of America or its agencies and mutual funds in which the underlying securities are obligations of the United States of America.
NOTE 12 -- CONTINGENCIES
At January 25, 1997, the Company is party to various lawsuits arising in the ordinary course of business. Additionally, the Company is also a defendant, together with other companies, including those in the grocery industry, in two legal actions pending in the United States District Court. These lawsuits allege that diverting companies, collectively known as Premium Sales, which are presently in bankruptcy, were engaged in fraudulent activities and that Pueblo and other grocers are liable for their investors' losses. The losses claimed against each of the defendants in these lawsuits, including Pueblo, are alleged to be approximately $300 million (plus treble damages, punitive damages and/or attorney fees). Pueblo's alleged liability is solely based on the claim that one of its former employees confirmed the validity of certain allegedly false grocery diverting transactions. The Company contested vigorously such claims. On October 25, 1996, a settlement was reached between the Company and the Plaintiffs. The settlement was preliminarily approved on February 11, 1997. A final fairness hearing has been scheduled for May 7, 1997. The amount of the settlement is fully reserved by the Company as of January 25, 1997.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of Pueblo Xtra International, Inc. San Juan, Puerto Rico Pompano Beach, Florida
We have audited the consolidated financial statements of Pueblo Xtra International, Inc. and Subsidiaries as of January 25, 1997 and January 27, 1996 and for each of the three years in the period ended January 25, 1997; such report is included elsewhere in this Form 10-K. Our audit also included the consolidated financial statement schedule of Pueblo Xtra International, Inc. and Subsidiaries as of January 25, 1997 and January 27, 1996, and for each of the three years in the period ended January 25, 1997, listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP - ---------------------------- Deloitte & Touche LLP
Miami, Florida April 3, 1997
S-1 SCHEDULE II
PUEBLO XTRA INTERNATIONAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED JANUARY 25, 1997, JANUARY 27, 1996, AND JANUARY 28, 1995 (DOLLARS IN THOUSANDS)
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(1) Amounts consist primarily of payments on claims.
(2) Amounts represent both the current and long-term portions.
S-2