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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 March 25, 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 _______ No X .
------
The registrant had 29,286,764 shares of common stock outstanding as of May 2,
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 9
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 14
Part II
Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
1
SMART & FINAL INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 25, December 31,
ASSETS 2001 2000
------ ----------- ----------
Current assets: (Unaudited)
Cash & cash equivalents $ 26,924 $ 23,328
Trade notes and accounts receivable, less
allowance for doubtful accounts of
$3,315 in 2001 and $3,182 in 2000 71,455 68,776
Inventories 169,212 170,276
Prepaid expenses 7,327 6,426
Deferred tax asset 11,410 10,890
--------- ---------
Total current assets 286,328 279,696
Property, plant and equipment:
Land 37,078 36,338
Buildings and improvements 29,559 29,559
Leasehold improvements 105,254 104,646
Fixtures and equipment 187,414 182,678
--------- ---------
359,305 353,221
Less - Accumulated depreciation and amortization 151,525 146,904
--------- ---------
Net property, plant and equipment 207,780 206,317
Assets under capital leases, net of accumulated
amortization of $8,435 in 2001 and $8,098 in 2000 6,540 6,877
Goodwill, net of accumulated amortization
of $5,563 in 2001 and $5,203 in 2000 53,164 53,524
Deferred tax asset 6,051 6,051
Other assets 28,727 29,876
--------- ---------
Total assets $ 588,590 $ 582,341
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 108,687 $ 91,209
Accounts payable 98,670 102,858
Accrued salaries and wages 10,623 15,538
Other accrued liabilities 36,148 39,688
--------- ---------
Total current liabilities 254,128 249,293
Long-term liabilities:
Notes payable, net of current maturities 10,095 10,117
Notes payable to Parent 15,965 15,965
Obligations under capital leases 9,049 9,390
Other long-term liabilities 13,630 12,632
Workers' compensation reserve, postretirement
and postemployment benefits 20,537 20,079
--------- ---------
Total long-term liabilities 69,276 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; 29,284,964 shares issued
and outstanding in 2001 and 29,203,114 in 2000) 293 292
Additional paid-in capital 205,366 204,898
Notes receivable for stock (100) (100)
Accumulated other comprehensive loss (1,933) (915)
Retained earnings 61,560 60,690
--------- ---------
Total stockholders' equity 265,186 264,865
--------- ---------
Total liabilities and stockholders' equity $ 588,590 $ 582,341
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
Twelve Weeks Ended
-----------------------------
March 25, March 26,
2001 2000
------------- ------------
(Unaudited)
Sales $ 424,168 $ 399,361
Cost of sales, buying and occupancy 366,115 345,138
----------- -----------
Gross margin 58,053 54,223
Operating and administrative expenses 53,811 50,013
----------- -----------
Income from operations 4,242 4,210
Interest expense, net 3,067 3,245
----------- -----------
Income before provision for income taxes 1,175 965
Provision for income taxes 425 373
----------- -----------
Income from consolidated subsidiaries 750 592
Equity earnings in unconsolidated subsidiary 120 44
----------- -----------
Net income $ 870 $ 636
=========== ===========
Earnings per common share $ 0.03 $ 0.02
=========== ===========
Weighted average common shares 29,216,756 29,163,185
=========== ===========
Earnings per common share, assuming dilution $ 0.03 $ 0.02
=========== ===========
Weighted average common shares
and common share equivalents 29,492,458 29,176,666
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Twelve Weeks Ended
---------------------------------
March 25, March 26,
2001 2000
--------------- ----------------
Cash Flows From Operating Activities: (Unaudited)
Net income $ 870 $ 636
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on disposal of fixed assets (7) (39)
Depreciation and amortization 7,794 7,701
Deferred tax benefit (520) --
Amortization of deferred financing costs 390 444
Equity earnings in unconsolidated subsidiary (120) (44)
Decrease (increase) in:
Trade notes and accounts receivable (2,679) 1,431
Inventories 1,064 3,364
Prepaid expenses and other (901) 90
Increase (decrease) in:
Accounts payable 1,343 (3,255)
Accrued liabilities (4,915) 1,217
Other liabilities (2,084) (600)
-------- --------
Net cash provided by operating activities 235 10,945
-------- --------
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment (13,223) (5,467)
Proceeds from disposal of property, plant and equipment 26 52
Other (557) (338)
-------- --------
Net cash used in investing activities (13,754) (5,753)
-------- --------
Cash Flows From Financing Activities:
Payments on bank line of credit -- (17,500)
Borrowings on bank line of credit 17,500 --
Payments on notes payable (385) (395)
-------- --------
Net cash provided by (used in) financing activities 17,115 (17,895)
-------- --------
Increase (decrease) in cash and cash equivalents 3,596 (12,703)
Cash and cash equivalents at beginning of period 23,328 42,936
-------- --------
Cash and cash equivalents at end of period $ 26,924 $ 30,233
======== ========
The accompanying notes are an integral part of these 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 57.0
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 60.0 percent of
the Company's common stock.
The consolidated balance sheet as of March 25, 2001 and the consolidated
statements of income and cash flows for the twelve weeks ended March 25, 2001
and March 26, 2000 are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of these financial statements in conformity
with accounting principals 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")
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 133 on January 1, 2001 resulted in a cumulative
pretax reduction of $480,000 recorded in OCI as of January 1, 2001, representing
cumulative losses on the fair values of these derivative instruments since
inception.
4. Derivatives
As of March 25, 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 first quarter of 2001, a pretax reduction of $930,000 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 quarter is
attributable to the declining market interest rates. As of March 25, 2001, the
Company did not have other derivative financial instruments.
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.
6. Comprehensive Income (Loss)
Comprehensive income (loss) was computed as follows, amounts in thousands:
Twelve Weeks Ended
---------------------
March 25, March 26,
2001 2000
------- -----
Net income $ 870 636
Other comprehensive income (loss):
Cumulative effect of accounting change, net of tax (305) -
Net gain (loss) on derivative instruments, net of tax (585) -
Foreign currency translation adjustments (128) 73
------- -----
Total other comprehensive income (loss) (1,018) 73
------- -----
Total comprehensive income (loss) $ (148) $ 709
======= =====
6
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $2.8
million and $3.5 million in interest in the twelve-week periods ended March 25,
2001 and March 26, 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
$745,000 and $133,000 to the Parent in the twelve weeks ended March 25, 2001 and
March 26, 2000, respectively. The Company paid $5,000 state income taxes for
states other than California in the twelve-week period ended March 25, 2001 and
did not pay state income taxes for states other than California in the twelve
weeks ended March 26, 2000. The Company paid $1,150,000 and $550,000 of federal
income taxes in the twelve-week periods ended March 25, 2001 and March 26, 2000,
respectively.
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 distribution 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.
7
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 revenues, profit or loss and other information of each segment are as
follows, amounts in thousands:
For the twelve weeks ended March 25, 2001:
Corporate
Stores Foodservice Expense Total
-------- ------------ ---------- --------
Revenues from external
customers $324,573 $99,595 $ - $424,168
Intercompany real estate
charge (income) 3,211 - (3,211) -
Interest income - - 125 125
Interest expense - - 3,192 3,192
Pre-tax income (loss) 6,938 (2,330) (3,433) 1,175
The basis for allocating distribution expense to stores was changed in 2001,
reducing Foodservice pre-tax income and increasing Stores pre-tax income by
$300,000.
For the twelve weeks ended March 26, 2000:
Corporate
Stores Foodservice Expense Total
-------- ----------- ---------- --------
Revenues from external
customers $303,470 $95,891 $ - $399,361
Intercompany real estate
charge (income) 3,167 - (3,167) -
Interest income - - 393 393
Interest expense - - 3,638 3,638
Pre-tax income (loss) 5,808 208 (5,051) 965
11. Legal Actions
The Company has been named as a defendant in various legal actions arising
in the normal conduct of its business. In the opinion of management, after
consultation with counsel, none of these actions are expected to result in
significant liability to the Company.
8
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 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 $0.9 million, or
$0.03 per diluted share, for the twelve weeks ended March 25, 2001, compared to
net income of $0.6 million, or $0.02 per diluted share, for the twelve weeks
ended March 26, 2000.
Operating earnings were $4.2 million in both the current year quarter and
the first quarter of the prior year. For first quarter 2001, when compared to
the first quarter of 2000, store operating results increased $1.1 million
despite a $2.2 million year to year increase in marketing expense and
foodservice operating results declined $2.5 million due to restructuring costs
in the northern California unit.
Interest expense, net decreased $0.2 million in the first quarter of 2001
compared to first quarter 2000 as a result of lower average outstanding debt and
rate reductions caused by the Company's improved financial ratios and declining
market rates.
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.
Twelve Weeks Ended
----------------------
March 25, March 26,
2001 2000
---- ----
Sales:
Stores 76.5% 76.0%
Foodservice 23.5 24.0
----- -----
Sales, consolidated total 100.0 100.0
Cost of sales, buying and occupancy 86.3 86.4
----- -----
Gross margin 13.7 13.6
Operating and administrative expenses 12.7 12.5
----- -----
Income from operations 1.0 1.1
Interest expense, net 0.7 0.8
----- -----
Income before provision for income taxes 0.3 0.2
Provision for income taxes 0.1 0.1
----- -----
Income from consolidated subsidiaries 0.2 0.1
Equity earnings in unconsolidated subsidiaries - -
----- -----
Net income 0.2% 0.2%
===== =====
9
The following table sets forth pre-tax profit or loss, in millions, for
each of the Company's various reportable segments:
Twelve Weeks Ended
----------------------
March 25, March 26,
2001 2000
---- ----
Stores $ 6.9 $ 5.8
Foodservice (2.3) 0.2
----- -----
Segment totals 4.6 6.0
Interest and other corporate expenses (3.4) (5.0)
----- -----
Consolidated pre-tax income $ 1.2 $ 1.0
===== =====
Stores segment improved as a result of strong sales and margin rates.
Foodservice segment reported a loss due to costs related to restructuring
northern California distribution operations. The basis for allocating
distribution expense to stores was changed in 2001, reducing Foodservice pre-tax
income and increasing Stores pre-tax income by $0.3 million.
Background
During the quarter, the Company opened four new stores and relocated one
store. New store growth is planned to continue in the remainder of fiscal 2001.
Quarter Ended Year Ended
----------------------- -------------
March 25, March 26, December 31,
2001 2000 2000
---- ---- ----
USA:
Beginning store count 214 212 212
Stores opened:
New stores 4 - 2
Relocations 1 1 1
Stores relocated or closed (1) (1) (1)
---- ---- ----
Ending store count 218 212 214
---- ---- ----
MEXICO:
Beginning store count 7 6 6
New stores opened - - 1
---- ---- ----
Ending store count 7 6 7
---- ---- ----
Grand Total 225 218 221
==== ==== ====
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
profit 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.
10
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.
Comparison of Twelve Weeks Ended March 25, 2001 with Twelve Weeks Ended March
26, 2000.
Sales. First quarter 2001 sales were $424.2 million, up 6.2% from $399.4
million in the first quarter of 2000.
Store sales increased 7.0%, from $303.5 million in first quarter 2000 to
$324.6 million in first quarter 2001. Comparable store sales for the first
quarter of 2001 increased 6.4% over the prior year's same quarter. Average
comparable transaction size also increased, by 3.1%, to $37.98 in the first
quarter of 2001.
Foodservice distribution sales increased 3.9%, from $95.9 million in the
first quarter of 2000 to $99.6 million in the current year's first quarter.
Florida foodservice sales increased 15.4% while northern California foodservice
sales declined 9.9% in part as a result of the restructuring program now in
progress.
Gross Margin. Gross margin improved 7.1%, from $54.2 million in the first
quarter of 2000 to $58.1 million in the current year quarter. As a percentage of
sales, gross margin improved from 13.6% in the prior year's first quarter to
13.7% in first quarter 2001. The primary factors of the increase in gross margin
rates were lower purchase costs due to the continuing effort in 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 cost reductions at Florida foodservice. These
improvements were largely offset by costs incurred at northern California
foodservice related to re-racking the facility and restructuring the operation.
Operating and Administrative Expenses. Operating and administrative
expenses for the first quarter of 2001 were $53.8 million, up $3.8 million, or
7.6%, over the first quarter of 2000. These expenses, as a percentage of sales,
increased from 12.5% in the first quarter of 2000 to 12.7% in the first quarter
of 2001. Expenses increased mainly due to a $2.2 million increase in marketing
expense, $0.7 million increase in California utility expenses and to a lesser
extent, the costs associated with restructuring the northern California
foodservice operation. These increases were largely offset by $1.9 million of
consulting fees incurred during the prior year's first quarter. There were no
consulting fees in the first quarter of 2001.
Interest expense, net. Interest expense, net decreased from $3.2 million
recorded in first quarter 2000 to $3.1 million in the first quarter of 2001 due
to the lower average outstanding debt
11
and rate reductions as a result of the Company's improved financial ratios and
declining market rates.
Financial Condition
Cash and cash equivalents were $23.3 million at December 31, 2000, and
$26.9 million at March 25, 2001. Operating activities provided cash of $0.2
million for the twelve weeks ended March 25, 2001. For the quarter, net
borrowings on bank and other debt were $17.1 million and investments in fixed
asset and other additions were $13.8 million.
During the twelve weeks ended March 25, 2001, inventories decreased by $1.1
million while the related accounts payable increased $1.3 million. Trade notes
and accounts receivable increased $2.7 million. Other changes in operating
assets and liabilities generally reflect the timing of receipts and
disbursements.
Stockholders' equity increased by $0.3 million to $265.2 million at March
25, 2001 as a result of the $0.9 million net income for the first quarter of
2001 plus $0.4 million due to the issuance of restricted stock and other stock
agreements and $1.0 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, $0.6 million, net of tax
reduction in fair values of interest rate collar agreements and $0.1 million
translation adjustment.
Liquidity and Capital Resources
Historically, the Company's primary source of liquidity has been cash flows
from operations. In addition, the Company has availability under bank
facilities. Net cash provided by operating activities was $0.2 million in the
first quarter of 2001. At March 25, 2001, the Company had cash of $26.9 million,
compared to $23.3 million at December 31, 2000. The Company had $133.2 million
of debt, excluding capital leases, at March 25, 2001, compared to $115.7 million
at December 31, 2000, and stockholders' equity of $265.2 million at March 25,
2001.
The Company had $219.0 million committed under its Senior Secured Credit
Facilities ("Credit Facilities") at March 25, 2001 and December 31, 2000. At
March 25, 2001, the Company's borrowings under these facilities totaled $189.1
million compared with $171.6 million at December 31, 2000. At March 25, 2001,
the Company had available $29.9 million of unused credit under these facilities.
As of the end of first quarter 2001, the Company was in substantial
compliance with all financial covenants contained in its loan agreements, as
amended.
The Credit Facilities expire in November of 2001. The Company is currently
restructuring and extending these facilities. Given the Company's significantly
improved financial position and excellent relationship with its lending group,
the Company expects a successful restructuring process.
12
The Company expects to be able to fund future acquisitions and other cash
requirements by a combination of available cash, cash 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.
13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks relating to fluctuations in interest
rates and the exchange rate between the U.S. Dollar and Mexican Peso. 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 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 accounts receivable. The Company
provides credit primarily to foodservice distribution customers in the ordinary
course of business and performs ongoing credit evaluations. Concentrations of
credit risk with respect to trade receivables 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
From time to time Smart & Final may publish forward-looking statements
about anticipated results. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that such forward-looking
statements are based upon internal estimates which are subject to change because
they reflect preliminary information and management assumptions, and that a
variety of factors could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements. The factors which could cause
actual results or outcomes to differ from such expectation include the extent of
the company's success in (i) changing market
14
conditions (ii) unforeseen costs and expenses (iii) ability to attract new
customers and retain existing customers (iv) gain or losses from sales along
with the uncertainties (v) increases in interest rates of the Company's cost of
borrowing and other factors, including unusually adverse weather conditions,
described from time to time in the company's SEC filing and reports. This report
includes "forward-looking statements" including, without limitation, statements
as to the Company's liquidity and availability of capital resources.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
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:
Exhibit Number Description of Exhibit
-------------- ----------------------
Not applicable
_________
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated February 26,
2001, with the Securities and Exchange Commission reporting on the
Company's program to exchange certain outstanding stock options
for restricted shares of the Company's common stock.
16
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: May 4, 2001 /s/ MARTIN A. LYNCH
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Martin A. Lynch
Executive Vice President,
Chief Financial Officer, and
Principal Accounting Officer of the Company
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