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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_______________________
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 7, 2001
OR
____ 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 001-10811
SMART & FINAL INC.
(Exact name of registrant as specified in its charter)
Delaware No. 95-4079584
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
600 Citadel Drive
City of Commerce, California 90040
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (323) 869-7500
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 ____.
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The registrant had 29,388,449 shares of common stock outstanding as of November
15, 2001.
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SMART & FINAL INC.
Index
Part I
Financial Information
Page
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets 2
Unaudited Consolidated Statements of Income 3
Unaudited Consolidated Statements of Cash Flows 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk 17
Part II
Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
1
SMART & FINAL INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
October 7, December 31,
ASSETS 2001 2000
------ ------------ ------------
Current assets: (Unaudited)
Cash and cash equivalents $ 22,060 $ 23,328
Trade notes and accounts receivable, less allowance for
doubtful accounts of $3,764 in 2001 and $3,182 in 2000 74,269 68,776
Inventories 175,340 170,276
Prepaid expenses 6,664 6,426
Deferred tax asset 12,457 10,890
------------ ------------
Total current assets 290,790 279,696
Property, plant and equipment:
Land 36,669 36,338
Buildings and improvements 31,029 29,559
Leasehold improvements 110,775 104,646
Fixtures and equipment 197,148 182,678
------------ ------------
375,621 353,221
Less - Accumulated depreciation and amortization 164,572 146,904
------------ ------------
Net property, plant and equipment 211,049 206,317
Assets under capital leases, net of accumulated
amortization of $8,857 in 2001 and $8,098 in 2000 6,042 6,877
Goodwill, net of accumulated amortization
of $6,344 in 2001 and $5,203 in 2000 52,383 53,524
Deferred tax asset 6,051 6,051
Other assets 31,966 29,876
------------ ------------
Total assets $ 598,281 $ 582,341
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 111,255 $ 91,209
Accounts payable 92,835 102,858
Accrued salaries and wages 13,254 15,538
Other accrued liabilities 39,221 39,688
------------ ------------
Total current liabilities 256,565 249,293
Long-term liabilities:
Notes payable, net of current maturities 5,010 10,117
Notes payable to Parent 15,965 15,965
Obligations under capital leases 8,249 9,390
Other long-term liabilities 15,394 12,632
Workers' compensation reserve, postretirement
and postemployment benefits 22,428 20,079
------------ ------------
Total long-term liabilities 67,046 68,183
Stockholders' equity:
Preferred stock, $1 par value (authorized-
10,000,000 shares; no shares issued) - -
Common stock, $0.01 par value (authorized-
100,000,000 shares; 29,388,329 shares issued
and outstanding in 2001 and 29,203,114 in 2000) 294 292
Additional paid-in capital 206,635 204,898
Notes receivable for common stock (100) (100)
Accumulated other comprehensive loss (3,434) (915)
Retained earnings 71,275 60,690
------------ ------------
Total stockholders' equity 274,670 264,865
------------ ------------
Total liabilities and stockholders' equity $ 598,281 $ 582,341
============ ============
The accompanying notes are an integral part of these unaudited consolidated
financial statements
2
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
Sixteen Weeks Ended Forty Weeks Ended
------------------------------------ ---------------------------------------
October 7, October 8, October 7, October 8,
2001 2000 2001 2000
------------ ----------------- ----------------- ----------------
(Unaudited) (Unaudited)
Sales $ 609,329 $ 587,313 $ 1,497,091 $ 1,429,672
Cost of sales, buying and occupancy 519,083 504,767 1,282,527 1,232,747
------------ ----------------- ----------------- ----------------
Gross margin 90,246 82,546 214,564 196,925
Operating and administrative expenses 78,562 71,958 188,912 174,176
------------ ----------------- ----------------- ----------------
Income from operations 11,684 10,588 25,652 22,749
Interest expense, net 3,633 4,170 9,545 10,652
------------ ----------------- ----------------- ----------------
Income before provision for income taxes 8,051 6,418 16,107 12,097
Provision for income taxes 3,071 2,452 6,192 4,441
------------ ----------------- ----------------- ----------------
Income from consolidated
subsidiaries 4,980 3,966 9,915 7,656
Equity earnings in unconsolidated
subsidiary 274 129 670 267
------------ ----------------- ----------------- ----------------
Net income $ 5,254 $ 4,095 $ 10,585 $ 7,923
============ ================= ================= ================
Earnings per common share $ 0.18 $ 0.14 $ 0.36 $ 0.27
============ ================= ================= ================
Weighted average common shares 29,387,111 29,203,114 29,314,891 29,187,912
============ ================= ================= ================
Earnings per common share,
assuming dilution $ 0.18 $ 0.14 $ 0.36 $ 0.27
============ ================= ================= ================
Weighted average common shares
and common share equivalents 29,783,608 29,268,181 29,659,309 29,239,544
============ ================= ================= ================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
3
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Forty Weeks Ended
------------------------------
October 7, October 8,
2001 2000
---------- ----------
Cash Flows From Operating Activities: (Unaudited)
Net income $ 10,585 $ 7,923
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on disposal of fixed assets (462) (129)
Depreciation and amortization 26,196 25,628
Deferred tax provision (benefit) (1,567) -
Amortization of deferred financing costs 1,302 1,393
Equity earnings in unconsolidated subsidiary (670) (267)
Decrease (increase) in:
Trade notes and accounts receivable (5,493) (1,902)
Inventories (5,064) (7,095)
Prepaid expenses and other (1,309) (1,449)
Increase (decrease) in:
Accounts payable (3,981) (2,013)
Accrued liabilities (2,284) 4,555
Other liabilities 2,548 7,482
-------- --------
Net cash provided by operating activities 19,801 34,126
-------- --------
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment (32,474) (15,602)
Proceeds from disposal of property, plant and equipment 986 149
Other (4,049) (1,317)
-------- --------
Net cash used in investing activities (35,537) (16,770)
-------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 976 -
Payments on bank line of credit (10,000) (25,500)
Borrowings on bank line of credit 27,500 -
Payments on notes payable (4,008) (3,838)
-------- --------
Net cash provided by (used in) financing activities 14,468 (29,338)
-------- --------
Decrease in cash and cash equivalents (1,268) (11,982)
Cash and cash equivalents at beginning of period 23,328 42,936
-------- --------
Cash and cash equivalents at end of period $ 22,060 $ 30,954
======== ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Smart & Final Inc. (the "Company") is a Delaware corporation and is a 56.8
percent owned subsidiary of Casino USA, Inc. (the "Parent"). Casino
Guichard-Perrachon, S.A. ("Casino France"), a publicly traded French joint stock
limited liability company, is the principal shareholder of the Parent.
Collectively, Casino France and its subsidiaries currently own approximately
59.8 percent of the Company's common stock.
The consolidated balance sheet as of October 7, 2001 and the consolidated
statements of income and cash flows for the sixteen and forty weeks ended
October 7, 2001 and October 8, 2000 are unaudited. In the opinion of management,
all adjustments necessary for a fair presentation of these financial statements
in conformity with accounting principles generally accepted in the United States
have been included. Such adjustments consisted of normal recurring items as well
as the accounting change to adopt Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". Interim results are not necessarily
indicative of results for a full year.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2000.
2. Fiscal Years
The Company's fiscal year ends on the Sunday closest to December 31. Each
fiscal year consists of twelve-week periods in the first, second and fourth
quarters and a sixteen-week period in the third quarter.
3. Accounting Change
Effective January 1, 2001, the Company adopted SFAS No. 133, as amended by
SFAS No. 138, which established accounting and reporting standards for
derivative instruments and hedging activities. All derivative instruments are
required to be measured at fair values and recognized on the balance sheet.
Changes in fair values of derivative instruments designated as fair value hedges
are recognized in current earnings. The effective portions of changes in fair
values of derivative instruments designated as cash flow hedges are recorded as
other comprehensive income ("OCI") and are reported on the statement of income
when the hedged forecasted transaction affects earnings or the hedged item
becomes ineffective. The ineffective portions of cash flow hedges are recognized
in current earnings.
5
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company uses interest rate collar agreements to minimize the negative
impact of interest rate fluctuations on the Company's cash flows. These
agreements are designated as cash flow hedges and are considered fully
effective. The adoption of SFAS No. 133 on January 1, 2001 resulted in a
cumulative pre-tax reduction of $480,000 recorded to OCI, representing
cumulative losses since inception on the fair values of these derivative
instruments as of January 1, 2001.
4. Derivatives
As of October 7, 2001, the Company had interest rate collar agreements with
various banks to limit the impact of interest rate fluctuations on revolving
debt. These agreements hedge principal amounts of up to an aggregate of $100
million. The agreements limit LIBOR fluctuations to interest rate ranges from
4.70% to 8.00% and expire during various periods from October 2002 to September
2004. For the forty weeks ended October 7, 2001, a pretax reduction of
$3,645,000 was recorded to OCI as a result of changes in the fair values of
these agreements. The decrease in fair values of these cash flow hedges during
the current reporting period is attributable to the declining market interest
rates. For the sixteen weeks and forty weeks ended October 7, 2001, net
derivative losses reclassified into earnings were $327,000 and $374,000,
respectively. The Company estimates that $1.9 million of net derivative losses
included in OCI will be reclassified into earnings within the next twelve
months.
5. Stockholders' Equity
In the fourth quarter of 2000, the Company's board of directors approved a
program for the voluntary exchange (the "Exchange Program") of certain
outstanding options having an exercise price of $14.00 or higher per share for
shares of common stock issued as "Restricted Stock" under the terms of the
Company's Long-Term Equity Compensation Plan. All options surrendered as a
result of an election under the Exchange Program were canceled and returned to
the respective plan under which the canceled options were first granted. The
Exchange Program expired on March 9, 2001. A total of 178,510 shares of
Restricted Stock were issued. The related compensation expense to be recognized
over the vesting periods of one year or three years is $1.6 million. Through the
period ended October 7, 2001, the related compensation expense recognized was
$0.4 million.
6
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Comprehensive Income (Loss)
Comprehensive income (loss) was computed as follows, amounts in thousands:
Sixteen Weeks Ended Forty Weeks Ended
----------------------------- ----------------------------
October 7, October 8, October 7, October 8,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net income $ 5,254 $ 4,095 $ 10,585 $ 7,923
Other comprehensive income (loss):
Cumulative effect of accounting change,
net of tax - - (305) -
Net gain (loss) on derivative instruments,
net of tax (1,465) - (2,253) -
Foreign currency translation adjustments 136 (164) 39 55
------------- ------------- ------------- -------------
Total other comprehensive income (loss) (1,329) (164) (2,519) 55
------------- ------------- ------------- -------------
Total comprehensive income $ 3,925 $ 3,931 $ 8,066 $ 7,978
============= ============= ============= =============
See Note 3 regarding cumulative effect of accounting change resulting from
adoption of SFAS 133 and Note 4 for change in OCI during the reporting period
due to changes in fair values of derivative instruments designated as cash flow
hedges.
In accordance with generally accepted accounting principles, the functional
currency for the Company's Mexico operations has been the Mexican Peso. As such,
foreign currency translation gains and losses are included in OCI.
7. Interest Expense
Interest expense was incurred primarily on borrowings under the Company's
revolving credit facilities and a loan from its Parent. The Company paid $9.9
million and $11.6 million in interest in the forty weeks ended October 7, 2001
and October 8, 2000, respectively.
8. Income Taxes
The Company and the Parent are parties to a tax sharing arrangement
covering income tax obligations in the state of California. Under this
arrangement, based upon pre-tax income, the Company made tax sharing payments of
$1,586,000 and $534,000 to the Parent in the forty weeks ended October 7, 2001
and October 8, 2000, respectively. The Company paid $46,000 and $60,000 of state
income taxes for states other than California in the forty weeks ended October
7, 2001 and October 8, 2000, respectively. The Company paid $5,550,000 and
$3,685,000 of federal income taxes in the forty weeks ended October 7, 2001 and
October 8, 2000, respectively.
7
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. Earnings per Common Share
Earnings per common share is based on the weighted average number of common
shares outstanding. Earnings per common share, assuming dilution includes the
weighted average number of common stock equivalents outstanding related to
employee stock options and other stock agreements.
10. Segment Reporting
The Company has two reportable segments: Stores and Foodservice. The Stores
segment provides food and related items in bulk sizes and quantities through
non-membership grocery warehouse stores. The Foodservice segment provides
delivery of food, restaurant equipment and supplies to mainly restaurant
customers and Smart & Final stores. Corporate Expense is comprised primarily of
the Company's corporate expenses incidental to the activities of the reportable
segments and rental income from Smart & Final stores. The Company's reportable
segments are strategic business units that offer different products and
services. They are managed separately because each segment requires different
technology and marketing strategies.
The Company does not allocate interest, income taxes or nonrecurring gains
and losses to the reportable segments. These costs are included in Corporate
Expense below. The Company evaluates performance based on profit or loss from
operations before income taxes not including nonrecurring gains and losses.
The sales, pre-tax income or loss and other information of each segment are
as follows, amounts in thousands:
For the sixteen weeks ended October 7, 2001:
Corporate
Stores Foodservice Expense Total
---------------- ------------------ ----------------- ----------------
Sales to external
customers $ 492,043 $ 117,286 $ - $ 609,329
Intercompany real estate
charge (income) 4,997 182 (5,179) -
Interest income - - 155 155
Interest expense - - 3,788 3,788
Pre-tax income (loss) 13,088 (2,433) (2,604) 8,051
8
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the sixteen weeks ended October 8, 2000:
Corporate
Stores Foodservice Expense Total
--------------- ------------------ ----------------- ----------------
Sales to external
customers $ 468,859 $ 118,454 $ - $ 587,313
Intercompany real estate
charge (income) 4,260 - (4,260) -
Interest income - - 485 485
Interest expense - - 4,655 4,655
Pre-tax income (loss) 13,055 (1,983) (4,654) 6,418
For the forty weeks ended October 7, 2001:
Corporate
Stores Foodservice Expense Total
---------------- ------------------ ----------------- ----------------
Sales to external
customers $ 1,182,507 $ 314,584 $ - $ 1,497,091
Intercompany real estate
charge (income) 11,852 301 (12,153) -
Interest income - - 422 422
Interest expense - - 9,967 9,967
Pre-tax income (loss) 30,351 (5,360) (8,884) 16,107
For the forty weeks ended October 8, 2000:
Corporate
Stores Foodservice Expense Total
---------------- ------------------ ----------------- ----------------
Sales to external
customers $ 1,120,398 $ 309,274 $ - $ 1,429,672
Intercompany real estate
charge (income) 10,607 - (10,607) -
Interest income - - 1,179 1,179
Interest expense - - 11,831 11,831
Pre-tax income (loss) 27,073 (2,682) (12,294) 12,097
The basis for allocating distribution expense to Stores was changed in
2001, reducing Foodservice pre-tax income and increasing Stores pre-tax income
by $1,200,000 and $1,800,000 for the sixteen weeks and forty weeks ended October
7, 2001, respectively.
9
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. Legal Actions
The Company has been named as a defendant in various legal actions arising
in the normal conduct of its business. The Company has also been named as
defendant in a suit filed on September 13, 2001 in the Superior Court for the
State of California for the County of Los Angeles. This suit, Sergio Camacho vs.
Smart & Final Inc., was filed by the plaintiff, on his behalf and on behalf of
all other Company store managers and assistant managers in California, alleging
that the Company misclassified the status of store managers and assistant
managers in California as exempt employees for employment purposes. The action
seeks to be classified as a "class action" and seeks unspecified damages. The
Company is actively investigating the merits of this action but, after
consultation with counsel, does not currently believe that merits of this action
warrant class action status or will result in significant liability to the
Company. In the opinion of management, after consultation with counsel, none of
the other legal actions involving the Company are expected to result in
significant liability to the Company.
12. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that all business combinations be
accounted for under the purchase method. The statement further requires separate
recognition of intangible assets that meet one of two criteria. The statement
applies to all business combinations initiated after June 30, 2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The statement also
provides that goodwill 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. Existing
goodwill will continue to be amortized through the remainder of fiscal 2001 at
which time amortization will cease and the Company will perform a transitional
goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning
after December 15, 2001. The Company is currently evaluating the impact of the
new accounting standards on existing goodwill and other intangible assets. While
the ultimate impact of the new accounting standards has yet to be determined,
goodwill amortization expense for the forty weeks ended October 7, 2001 was $1.1
million.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires the
recognition and measurement of the impairment of long-lived assets to be held
and used and the measurement of long-lived assets to be disposed by sale. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001. The
Company is currently assessing the impact, if any, of the adoption of SFAS No.
144.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
accompanying unaudited consolidated financial statements and notes thereto and
the Company's Form 10-K for the year ended December 31, 2000.
Summary
Smart & Final Inc. (the "Company") reported net income of $5.3 million, or
$0.18 per diluted share, for the sixteen weeks ended October 7, 2001, compared
to net income of $4.1 million, or $0.14 per diluted share, for the sixteen weeks
ended October 8, 2000. For the forty weeks ended October 7, 2001, the Company
reported net income of $10.6 million, or $0.36 per diluted share, compared to
net income of $7.9 million, or $0.27 per diluted share, in the forty weeks ended
October 8, 2000.
Operating income increased 10.4%, or $1.1 million, from last year's same
quarter to $11.7 million in the sixteen weeks ended October 7, 2001. Corporate
Expense reported decreased expenses, partially offset by an increase in
operating loss reported by Foodservice, for the quarter as compared to last
year's same quarter. Stores reported operating income at about prior year's
level for the quarter. Operating income increased 12.8%, or $2.9 million, to
$25.7 million in the forty weeks ended October 7, 2001. When compared to the
same period of last year, Corporate Expense reported decreased expenses and
Stores reported increased operating income, despite a $2.7 million year-to-year
increase in marketing expense. These improvements were partially offset by
increased operating losses in Foodservice, primarily due to restructuring costs
in the northern California unit and changes in the basis of allocating
distribution expense to Stores.
Interest expense, net decreased $1.1 million in the forty weeks ended
October 7, 2001, compared to the same period of 2000 as a result of lower
average outstanding debt and rate reductions, attributable to the Company's
improved financial ratios and declining market rates.
The events of September 11, 2001 initially reduced sales in all segments of
the Company's business. Sales in the Stores segment have recovered and our
recent trends indicate sales patterns similar to pre-September 11th levels.
Foodservice segment sales were more sharply reduced and are continuing to be
negatively impacted, as this segment is more dependent upon the tourism and
travel industries. We cannot be certain of the future impact that the events of
September 11th and their aftermath will have on the Company's business.
11
Results of Operations
The following table shows, for the periods indicated, certain condensed
consolidated income statement data, expressed as a percentage of sales. Totals
may not aggregate due to rounding.
Sixteen Weeks Ended Forty Weeks Ended
----------------------------- ----------------------------
October 7, October 8, October 7, October 8,
2001 2000 2001 2000
------------- ------------- ------------- ------------
Sales:
Stores 80.8% 79.8% 79.0% 78.4%
Foodservice 19.2 20.2 21.0 21.6
------------- ------------- ------------- ------------
Sales, consolidated total 100.0 100.0 100.0 100.0
Cost of sales, buying and occupancy 85.2 85.9 85.7 86.2
------------- ------------- ------------- ------------
Gross margin 14.8 14.1 14.3 13.8
Operating and administrative expenses 12.9 12.3 12.6 12.2
------------- ------------- ------------- ------------
Income from operations 1.9 1.8 1.7 1.6
Interest expense, net 0.6 0.7 0.6 0.7
------------- ------------- ------------- ------------
Income before provision for income taxes 1.3 1.1 1.1 0.8
Provision for income taxes 0.5 0.4 0.4 0.3
------------- ------------- ------------- ------------
Income from consolidated subsidiaries 0.8 0.7 0.7 0.5
Equity earnings in unconsolidated
subsidiary - - - -
------------- ------------- ------------- ------------
Net income 0.9% 0.7% 0.7% 0.6%
============= ============= ============= ============
The following table sets forth pre-tax income or loss, in millions, for
each of the Company's various reportable segments:
Sixteen Weeks Ended Forty Weeks Ended
----------------------------- ----------------------------
October 7, October 8, October 7, October 8,
2001 2000 2001 2000
------------- ------------- ------------- ------------
Stores $ 13.1 $ 13.1 $ 30.4 $ 27.1
Foodservice (2.5) (2.0) (5.4) (2.7)
----------- ----------- ------------ ------------
Segment totals 10.6 11.1 25.0 24.4
Interest and other corporate expenses 2.6 4.7 8.9 12.3
----------- ----------- ------------ ------------
Consolidated pre-tax income $ 8.0 $ 6.4 $ 16.1 $ 12.1
=========== =========== ============ ============
The basis for allocating distribution expense to Stores was changed in
2001, reducing Foodservice pre-tax income and increasing Stores pre-tax income
by $1.2 million and $1.8 million for the sixteen weeks and forty weeks ended
October 7, 2001, respectively.
Strong sales and margin rates improvement at Stores segment offset its
increased operating expenses. Foodservice segment reported a loss primarily due
to costs related to restructuring northern California distribution operations
during the first half of 2001 and changes in the basis of allocating
distribution expenses to Stores, partially offset by continued effort in cost
control.
12
During the forty weeks ended October 7, 2001, the Company opened eight
new stores and relocated one store. Additional new store growth is planned for
the remainder of fiscal 2001.
Forty
Sixteen Weeks Ended Weeks Ended Year Ended
---------------------- --------------------------- -----------------
October 7, October 8, October 7, October 8, December 31,
2001 2000 2001 2000 2000
----------- ----------- ------------ ----------- -----------------
USA:
Beginning store count 219 213 214 212 212
Stores opened:
New stores 3 - 8 1 2
Relocations - - 1 1 1
Stores relocated or closed (1) - (2) (1) (1)
----------- ----------- ------------- ----------- -----------------
Ending store count 221 213 221 213 214
----------- ----------- ------------ ----------- -----------------
MEXICO:
Beginning store count 7 6 7 6 6
New stores opened - 1 - 1 1
----------- ----------- ------------ ----------- -----------------
Ending store count 7 7 7 7 7
----------- ----------- ------------ ----------- -----------------
Total Ending Store Count 228 220 228 220 221
=========== =========== ============ =========== =================
Mexico operations are not consolidated and are reported on the equity basis
of accounting.
Management continually assesses each store's profitability on a pre-tax
income basis after allocation of all corporate expenses. Stores not meeting
strategic management objectives for profitability, market penetration, and/or
other measures are evaluated for closure or relocation. Generally, stores opened
in mature markets are expected to achieve profitability within 18 months of
operations. However, there can be no assurance that the Company will be able to
open new stores in a timely manner; hire, train and integrate employees;
continue locating and obtaining favorable store sites; or adapt distribution,
management information and other operating systems sufficiently to grow in a
successful and profitable manner.
Each of the Company's fiscal years consists of twelve-week periods in the
first, second and fourth quarters of the fiscal year and a sixteen-week period
in the third quarter.
13
Comparison of Sixteen Weeks Ended October 7, 2001 with Sixteen Weeks Ended
October 8, 2000.
Sales. Third quarter 2001 sales were $609.3 million, up 3.7% from $587.3
million in the third quarter of 2000.
Store sales increased 4.9%, from $468.9 million in third quarter 2000 to
$492.0 million in third quarter 2001. Comparable store sales for the third
quarter of 2001 increased 3.2% over the prior year's same quarter. Average
comparable transaction size decreased, by 0.3%, to $38.86 in the third quarter
of 2001.
Foodservice sales decreased 1.0%, from $118.5 million in the third quarter
of 2000 to $117.3 million in the current year's third quarter. Florida
foodservice sales increased 7.8% while northern California foodservice sales
declined 9.1%. The rate of sales increases at Florida foodservice declined from
the first two quarters of the current year, primarily due to the traditionally
slower summer season, followed by the effects of the September 11th events. In
the northern California foodservice unit, the effects of the September 11th
events on sales were partially offset by the initiation of business in September
with a large institutional customer.
Gross Margin. Gross margin improved 9.3%, from $82.5 million in the third
quarter of 2000 to $90.2 million in the current year quarter. As a percentage of
sales, gross margin improved from 14.1% in the prior year's third quarter to
14.8% in third quarter 2001. The primary factors of the increase in gross margin
rates were lower purchase costs due to the continuing effort in marketing,
national procurement and corporate brand expansion programs, better store
assortment mix and reduced distribution costs resulting from improved efficiency
at the Commerce distribution center and improved distribution efficiency in the
foodservice operations. These improvements were partially offset by a change in
sales mix at both foodservice units that generated lower margins.
Operating and Administrative Expenses. Operating and administrative
expenses for the third quarter of 2001 were $78.6 million, up $6.6 million, or
9.2%, over the third quarter of 2000. These expenses, as a percentage of sales,
increased from 12.3% in the third quarter of 2000 to 12.9% in the third quarter
of 2001. Expenses increased due to costs related to increased service and sales
support at the store level, selling expenses incurred in northern California
foodservice operations, and increased utility costs and marketing expenses.
Interest Expense, Net. Interest expense, net decreased from $4.2 million
recorded in third quarter 2000 to $3.6 million in the third quarter of 2001 due
to rate reductions as a result of the Company's improved financial ratios, lower
market interest rates and lower average debt outstanding.
Comparison of Forty Weeks Ended October 7, 2001 with Forty Weeks Ended October
8, 2000.
Sales. Sales in the forty weeks ended October 7, 2001 were $1,497.1
million, up 4.7% from the comparable 2000 period.
14
Store sales increased 5.5%, from $1,120.4 million to $1,182.5 million in
the forty weeks ended October 7, 2001. Comparable store sales increased 4.3% in
the first three quarters of 2001 over the prior year period. Average comparable
transaction size also increased, by 1.1% to $38.55 in the first three quarters
of 2001.
Foodservice sales increased 1.7%, from $309.3 million to $314.6 million in
the forty weeks ended October 7, 2001. Florida foodservice sales increased 12.7%
but northern California foodservice sales declined 9.7% in part as a result of
the restructuring program during the first half of the current year. Sales have
decreased in both foodservice units in the last part of the third quarter,
following the September 11th events.
Gross Margin. Gross margin improved 9.0% from $196.9 million in the forty
weeks ended October 8, 2000 to $214.6 million in forty weeks ended October 7,
2001. As a percentage of sales, gross margin increased from 13.8% of sales for
the first three quarters of 2000 to 14.3% in the comparable 2001 period. The
primary factors in the improvement of gross margin rates were lower purchase
costs due to the new national procurement program and corporate brand expansion
programs, better store assortment mix and reduced distribution costs due to the
improved efficiency at the Commerce distribution center and improved
distribution efficiency at Florida foodservice. These improvements were
partially offset by costs incurred at northern California foodservice related to
the restructuring and changes in sales mix as new sales from Foodservice
typically generate lower margins, but also cost less to serve.
Operating and Administrative Expenses. Operating and administrative
expenses for the forty weeks ended October 7, 2001 were $188.9 million, or 12.6%
of sales, compared with $174.2 million, or 12.2% of sales, in the comparable
2000 period. The expense increase was primarily driven by increased store
marketing expense, costs related to increased service and sales support at the
store level, increased utility costs and northern California foodservice
operation restructuring costs. The increase was partially offset by the $2.4
million consulting fees incurred related to improving procurement programs and
$1.0 million of retroactive medical insurance and other benefit charges recorded
in the comparable period of 2000. No similar consulting fees or retroactive
medical insurance and other benefit charges were recorded in the same period of
2001.
Interest Expense, Net. Interest expense, net decreased from $10.7 million,
or 0.7% of sales, in the first three quarters of 2000 to $9.5 million, or 0.6%
of sales, in the comparable 2001 period. This decrease was primarily a result of
rate reductions as a result of the Company's improved financial ratios,
decreased market interest rates and lower average debt outstanding.
Financial Condition
Cash and cash equivalents were $22.1 million at October 7, 2001, compared
to $23.3 million at December 31, 2000. Operating activities provided cash of
$19.8 million for the forty weeks ended October 7, 2001. For the forty weeks
ended October 7, 2001, net proceeds from financing activities were $14.5 million
and net cash used in investing activities was $35.5 million.
15
During the forty weeks ended October 7, 2001, inventories increased by $5.1
million and the related accounts payable decreased by $4.0 million. Trade notes
and accounts receivable increased $5.5 million primarily due to the increased
sales at foodservice operations and slowdown of the economy. Other changes in
operating assets and liabilities generally reflect the timing of receipts and
disbursements.
Stockholders' equity increased by $9.8 million to $274.7 million at October
7, 2001 as a result of the $10.6 million net income for the forty weeks ended
October 7, 2001 plus $1.7 million of stock options exercised, issuance of
restricted stock and other stock agreements and $2.5 million decrease in
accumulated OCI. The decrease in accumulated OCI includes $0.3 million, net of
tax, cumulative effect of accounting change as a result of adoption of SFAS 133
and $2.2 million, net of tax, reduction in fair values of interest rate collar
agreements for the first three quarters of 2001.
Liquidity and Capital Resources
Historically, the Company's primary source of liquidity has been cash flows
from operations. Net cash provided by operating activities was $19.8 million in
the first three quarters of 2001. At October 7, 2001, the Company had cash of
$22.1 million, compared to $23.3 million at December 31, 2000. The Company had
$130.5 million of debt, excluding capital leases, at October 7, 2001, compared
to $115.7 million at December 31, 2000, and stockholders' equity of $274.7
million at October 7, 2001.
Additionally, the Company has availability under bank facilities. The
Company had $219.0 million committed under its Senior Secured Credit Facilities
("Credit Facilities") at October 7, 2001 and December 31, 2000. At October 7,
2001, the Company's borrowings under these facilities totaled $189.1 million,
compared with $171.6 million at December 31, 2000. At October 7, 2001, the
Company had available $29.9 million of unused credit under these facilities.
As of the end of third quarter 2001, the Company was in compliance with all
financial covenants contained in its loan agreements, as amended.
The Credit Facilities expired in mid-November of 2001 and an extension has
been granted by the existing lenders, through November 30, 2001 for the purpose
of completing the documentation of the replacement credit facilities. The
Company currently believes that the documentation of the replacement credit
facilities will be completed prior to November 30, 2001.
The Company expects to be able to fund future acquisitions and other cash
requirements by a combination of available cash, cash flows from operations,
lease financing and other borrowings and proceeds from the issuance of equity
securities. The Company believes that its sources of funds are adequate to
provide for working capital, other capital expenditures, and debt service
requirements for the foreseeable future.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risks relating to fluctuations in interest
rates, the exchange rate between the U.S. Dollar and Mexican Peso and credit
risk. The Company's objective of financial risk management is to minimize the
negative impact of interest rate fluctuations on the Company's earnings and cash
flows. The Company's exposure to foreign currency risk is limited. The Company
does not hold or issue financial instruments for trading purposes, nor engage in
other speculative or leveraged transactions. See Note 3 and Note 4 to the
unaudited consolidated financial statements regarding the adoption of SFAS 133,
as amended.
Interest Rate Risk
Interest rate risk is managed through the use of four interest rate collar
agreements to hedge principal amounts of up to an aggregate of $100 million.
These agreements limit LIBOR fluctuations to interest rate ranges from 4.7% to
8.0% and expire during various periods from October 2002 to September 2004.
These agreements are entered into with major financial institutions thereby
minimizing risk of credit loss.
Foreign Currency Risk
The Company's exposure to foreign currency risk is limited to the Company's
operations under Smart & Final Mexico and the equity earnings in its Mexico
joint venture. The Company's other transactions are conducted in U.S. dollars
and are not exposed to fluctuations in foreign currency. The Company does not
hedge foreign currency and therefore is not exposed to such hedging risk.
Credit Risk
The Company is exposed to credit risk on trade accounts receivable. The
Company provides credit primarily to foodservice customers in the ordinary
course of business and performs ongoing credit evaluations. Concentrations of
credit risk with respect to trade accounts receivable are limited due to the
number of customers comprising the Company's customer base. The Company
currently believes its allowance for doubtful accounts is sufficient to cover
customer credit risks.
Forward-Looking Statements
When used in this report, the words "believe," "expect," "anticipate" and
similar expressions, together with other discussion of future trends or results,
are intended to identify forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Such statements are subject to certain risks and uncertainties, including
those discussed below that could cause actual results to differ materially from
those projected. These forward-looking statements speak only as of the date
hereof. All of these forward-looking statements are based on estimates and
assumptions made by management of the Company which, although believed to be
reasonable, are inherently uncertain and difficult to
17
predict; therefore, undue reliance should not be placed upon such statements.
The following important factors, among others, could cause the Company's results
of operations to be adversely affected in future periods: (i) increased
competitive pressures from existing competitors and new entrants, including
price-cutting strategies, store openings and remodels; (ii) increases in
interest rates or the Company's cost of borrowing or a default under any
material debt agreements; (iii) deterioration in general or regional economic
conditions; (iv) adverse state or federal legislation or regulation that
increases the costs of compliance, or adverse findings by a regulator with
respect to existing operations; (v) loss of customers or sales weakness; (vi)
inability to achieve future sales levels or other operating results; (vii) the
unavailability of funds for capital expenditures; and (viii) operational
inefficiencies in distribution or other Company systems. Many of such factors
are beyond the control of the Company. There can be no assurance that the
Company will not incur new or additional unforeseen costs in connection with the
ongoing conduct of its business. Accordingly, any forward-looking statements
included herein do not purport to be predictions of future events or
circumstances and may not be realized. In addition, assumptions relating to
budgeting, marketing, advertising, litigation and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause the Company to alter its marketing, capital expenditure or other
budgets, which may in turn affect the Company's financial position and results
of operations.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named as defendant in a suit filed on
September 13, 2001 in the Superior Court for the State of California
for the County of Los Angeles. This suit, Sergio Camacho vs. Smart &
Final Inc., was filed by the plaintiff, on his behalf and on behalf of
all other Company store managers and assistant managers in California,
alleging that the Company misclassified the status of store managers
and assistant managers in California as exempt employees for
employment purposes. The action seeks to be classified as a "class
action" and seeks unspecified damages. The Company is actively
investigating the merits of this action but, after consultation with
counsel, does not currently believe that merits of this action warrant
class action status or will result in significant liability to the
Company.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Not applicable.
_________
(b) Reports on Form 8-K
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMART & FINAL INC.
By:
Date: November 15, 2001 /s/ RICHARD N. PHEGLEY
-------------------------------------------
Richard N. Phegley
Senior Vice President,
Chief Financial Officer, and
Principal Accounting Officer of the Company
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