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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 June 17, 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
----- -----.
The registrant had 29,386,585 shares of common stock outstanding as of July 25,
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 11
and Results of Operations
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 20
Item 6. Exhibits and Reports on Form 8-K 20
1
SMART & FINAL INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 17, December 31,
ASSETS 2001 2000
------ ------- ------------
(Unaudited)
Current assets:
Cash & cash equivalents $ 24,991 $ 23,328
Trade notes and accounts receivable, less
allowance for doubtful accounts of $3,478 in
2001 and $3,182 in 2000 72,840 68,776
Inventories 168,976 170,276
Prepaid expenses 6,793 6,426
Deferred tax asset 11,540 10,890
-------- -------
Total current assets 285,140 279,696
Property, plant and equipment:
Land 36,669 36,338
Buildings and improvements 31,029 29,559
Leasehold improvements 108,206 104,646
Fixtures and equipment 191,531 182,678
-------- -------
367,435 353,221
Less - Accumulated depreciation and amortization 157,913 146,904
-------- -------
Net property, plant and equipment 209,522 206,317
Assets under capital leases, net of accumulated
amortization of $8,799 in 2001 and $8,098 in 2000 6,484 6,877
Goodwill, net of accumulated amortization of $5,857
in 2001 and $5,203 in 2000 52,870 53,524
Deferred tax asset 6,051 6,051
Other assets 27,239 29,876
-------- --------
Total assets $587,306 $582,341
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $111,345 $ 91,209
Accounts payable 90,060 102,858
Accrued salaries and wages 11,892 15,538
Other accrued liabilities 38,201 39,688
-------- --------
Total current liabilities 251,498 249,293
Long-term liabilities:
Notes payable, net of current maturities 5,069 10,117
Notes payable to Parent 15,965 15,965
Obligations under capital leases 8,763 9,390
Other long-term liabilities 14,557 12,632
Workers' compensation reserve, postretirement
and postemployment benefits 20,966 20,079
-------- --------
Total long-term liabilities 65,320 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; 29,385,085
shares issued and outstanding in 2001 and
29,203,114 in 2000) 294 292
Additional paid-in capital 206,378 204,898
Notes receivable for stock (100) (100)
Accumulated other comprehensive loss (2,105) (915)
Retained earnings 66,021 60,690
-------- --------
Total stockholders' equity 270,488 264,865
-------- --------
Total liabilities and stockholders' equity $587,306 $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 Twenty-four Weeks Ended
--------------------------- ---------------------------
June 17, June 18, June 17, June 18,
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Sales $ 463,594 $ 442,998 $ 887,762 $ 842,359
Cost of sales, buying and occupancy 397,329 382,842 763,444 727,980
----------- ----------- ----------- -----------
Gross margin 66,265 60,156 124,318 114,379
Operating and administrative expenses 56,539 52,205 110,350 102,218
----------- ----------- ----------- -----------
Income from operations 9,726 7,951 13,968 12,161
Interest expense, net 2,845 3,237 5,912 6,482
----------- ----------- ----------- -----------
Income before provision for income taxes 6,881 4,714 8,056 5,679
Provision for income taxes 2,696 1,616 3,121 1,989
----------- ----------- ----------- -----------
Income from consolidated subsidiaries 4,185 3,098 4,935 3,690
Equity earnings in unconsolidated subsidiary 276 94 396 138
----------- ----------- ----------- -----------
Net income $ 4,461 $ 3,192 $ 5,331 $ 3,828
========== ========== ========== ==========
Earnings per common share $ 0.15 $ 0.11 $ 0.18 $ 0.13
========== ========== ========== ==========
Weighted average common shares 29,316,731 29,192,368 29,266,744 29,177,777
========== ========== ========== ==========
Earnings per common share, assuming dilution $ 0.15 $ 0.11 $ 0.18 $ 0.13
========== ========== ========== ==========
Weighted average common shares
and common share equivalents 29,660,429 29,264,238 29,576,444 29,220,452
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Twenty-four Weeks
Ended
------------------------
June 17, June 18,
2001 2000
------------------------
(Unaudited)
Cash Flows From Operating Activities:
Net income $ 5,331 $ 3,828
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on disposal of fixed assets (426) (61)
Depreciation and amortization 15,663 15,474
Deferred tax provision (benefit) (650) -
Amortization of deferred financing costs 781 873
Equity earnings in unconsolidated subsidiary (396) (138)
Decrease (increase) in:
Trade notes and accounts receivable (3,942) 1,008
Inventories 1,300 3,621
Prepaid expenses and other 173 411
Increase (decrease) in:
Accounts payable (6,831) (6,115)
Accrued liabilities (3,646) 3,159
Other liabilities 597 5,907
-------- --------
Net cash provided by operating activities 7,954 27,967
-------- --------
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment (21,996) (9,479)
Proceeds from disposal of property, plant and equipment 944 77
Other (217) (1,286)
-------- --------
Net cash used in investing activities (21,269) (10,688)
-------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 821 -
Payments on bank line of credit (5,000) (17,500)
Borrowings on bank line of credit 22,500 -
Payments on notes payable (3,343) (3,146)
-------- --------
Net cash provided by (used in) financing activities 14,978 (20,646)
-------- --------
Increase (decrease) in cash and cash equivalents 1,663 (3,367)
Cash and cash equivalents at beginning of period 23,328 42,936
-------- --------
Cash and cash equivalents at end of period $ 24,991 $ 39,569
======== ========
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 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 June 17, 2001 and the consolidated
statements of income and cash flows for the twelve and twenty-four weeks ended
June 17, 2001 and June 18, 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 pretax 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 June 17, 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 two quarters of 2001, a pretax reduction of $1,263,000 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
twelve-week and twenty-four-week periods ended June 17, 2001, net derivative
losses reclassified into earnings were $47,000. The Company estimates that $1.1
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.
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:
Twenty-four
Twelve Weeks Ended Weeks Ended
------------------- -------------------
June 17, June 18, June 17, June 18,
2001 2000 2001 2000
------ ------ ------- ------
Net income $4,461 3,192 5,331 3,828
Other comprehensive income (loss):
Cumulative effect of accounting change, net of tax - - (305) -
Net gain (loss) on derivative instruments, net of tax (203) - (788) -
Foreign currency translation adjustments 31 146 (97) 219
------ ------ ------- ------
Total other comprehensive income (loss) (172) 146 (1,190) 219
------ ------ ------- ------
Total comprehensive income $4,289 $3,338 $ 4,141 $4,047
====== ====== ======= ======
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 $5.2
million and $4.7 million in interest in the twenty-four weeks ended June 17,
2001 and June 18, 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
$1,246,000 and $235,000 to the Parent in the twenty-four weeks ended June 17,
2001 and June 18, 2000, respectively. The Company paid $10,000 and $40,000 of
state income taxes for states other than California in the twenty-four weeks
ended June 17, 2001 and June 18, 2000, respectively. The Company paid
$2,150,000 and $1,185,000 of federal income taxes in the twenty-four weeks ended
June 17, 2001 and June 18, 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 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.
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 June 17, 2001:
Corporate
Stores Foodservice Expense Total
-------- ------------ ---------- --------
Revenues from external
customers $365,891 $97,703 $ - $463,594
Intercompany real estate
charge (income) 3,644 119 (3,763) -
Interest income - - 142 142
Interest expense - - 2,987 2,987
Pre-tax income (loss) 10,325 (597) (2,847) 6,881
8
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the twelve weeks ended June 18, 2000:
Corporate
Stores Foodservice Expense Total
-------- ------------ ---------- --------
Revenues from external
customers $348,069 $ 94,929 $ - $442,998
Intercompany real estate
charge (income) 3,180 - (3,180) -
Interest income - - 301 301
Interest expense - - 3,538 3,538
Pre-tax income (loss) 8,210 (907) (2,589) 4,714
For the twenty-four weeks ended June 17, 2001:
Corporate
Stores Foodservice Expense Total
-------- ----------- --------- --------
Revenues from external
customers $690,464 $197,298 $ - $887,762
Intercompany real estate
charge (income) 6,855 119 (6,974) -
Interest income - - 267 267
Interest expense - - 6,179 6,179
Pre-tax income (loss) 17,263 (2,927) (6,280) 8,056
For the twenty-four weeks ended June 18, 2000:
Corporate
Stores Foodservice Expense Total
-------- ----------- --------- --------
Revenues from external
customers $651,539 $190,820 $ - $842,359
Intercompany real estate
charge (income) 6,347 - (6,347) -
Interest income - - 694 694
Interest expense - - 7,176 7,176
Pre-tax income (loss) 14,018 (699) (7,640) 5,679
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 and $600,000 for the twelve weeks and twenty-four weeks ended June
17, 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. In the opinion of management, after
consultation with counsel, none of these actions are expected to result in
significant liability to the Company.
12. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board 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 twenty-four weeks ended June
17, 2001 was $0.7 million.
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 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 $4.5 million, or
$0.15 per diluted share, for the twelve weeks ended June 17, 2001, compared to
net income of $3.2 million, or $0.11 per diluted share, for the twelve weeks
ended June 18, 2000. For the twenty-four weeks ended June 17, 2001, the Company
reported net income of $5.3 million, or $0.18 per diluted share, compared to net
income of $3.8 million, or $0.13 per diluted share, in the twenty-four weeks
ended June 18, 2000.
Operating earnings increased 22.3%, or $1.8 million, from last year's same
quarter to $9.7 million in the twelve weeks ended June 17, 2001. Stores
reported an increase in its operating earnings and Foodservice reported a
decrease in its operating loss for the quarter as compared to last year's same
quarter. Operating earnings increased 14.9%, or $1.8 million, to $14.0 million
in the twenty-four weeks ended June 17, 2001. When compared to the same period
of last year, for the first half of 2001, store operating results increased $3.3
million despite a $2.6 million year-to-year increase in marketing expense and
foodservice operating results declined $2.2 million primarily due to
restructuring costs in the northern California unit.
Interest expense, net decreased $0.6 million in the first half of 2001
compared to the first half of 2000 as a result of lower average outstanding debt
and rate reductions caused by the Company's improved financial ratios and
declining market rates.
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.
Twelve Weeks Ended Twenty-four Weeks Ended
-------------------- -------------------------
June 17, June 18, June 17, June 18,
2001 2000 2001 2000
----- ----- ----- -----
Sales:
Store 78.9% 78.6% 77.8% 77.3%
Foodservice distribution sales 21.1 21.4 22.2 22.7
----- ----- ----- -----
Sales, consolidated total 100.0 100.0 100.0 100.0
Cost of sales, buying and occupancy 85.7 86.4 86.0 86.4
----- ----- ----- -----
Gross margin 14.3 13.6 14.0 13.6
Operating and administrative expenses 12.2 11.8 12.4 12.1
----- ----- ----- -----
Income from operations 2.1 1.8 1.6 1.4
Interest expense, net 0.6 0.7 0.7 0.8
----- ----- ----- -----
Income before provision for income taxes 1.5 1.1 0.9 0.7
Provision for income taxes 0.6 0.4 0.4 0.2
----- ----- ----- -----
Income from consolidated subsidiaries 0.9 0.7 0.6 0.4
Equity earnings in unconsolidated
subsidiary 0.1 - - -
----- ----- ----- -----
Net income 1.0% 0.7% 0.6% 0.5%
===== ===== ===== =====
The following table sets forth pre-tax profit or loss, in millions, for
each of the Company's various reportable segments:
Twelve Weeks Ended Twenty-four Weeks Ended
-------------------- -------------------------
June 17, June 18, June 17, June 18,
2001 2000 2001 2000
----- ----- ----- -----
Stores $10.4 $ 8.2 $17.3 $14.0
Foodservice (0.6) (0.9) (2.9) (0.7)
----- ----- ----- -----
Segment totals 9.8 7.3 14.4 13.3
Interest and other corporate expenses 2.9 2.6 6.3 7.6
----- ----- ----- -----
Consolidated pre-tax income $ 6.9 $ 4.7 $ 8.1 $ 5.7
===== ===== ===== =====
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 and $0.6 million for the twelve-week and twenty-four-week
periods ended June 17, 2001, respectively.
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; however, despite the restructuring
costs, the loss decreased by $0.3 million in the second quarter from prior
year's same quarter. The year-to-year improvement in the second quarter at the
Foodservice segment is the result of sales increases and continued effort in
cost reductions.
12
Background
During the first half of 2001, the Company opened five new stores and
relocated one store. Additional new store growth is planned for the remainder
of fiscal 2001.
Twenty-four
Twelve Weeks Ended Weeks Ended Year Ended
------------------ ------------------ -------------
June 17, June 18, June 17, June 18, December 31,
2001 2000 2001 2000 2000
-------- -------- -------- ------- ------------
USA:
Beginning store count 218 212 214 212 212
Stores opened:
New stores 1 1 5 1 2
Relocations - - 1 1 1
Stores relocated or closed - - (1) (1) (1)
---- ---- ---- ---- ---
Ending store count 219 213 219 213 214
---- ---- ---- ---- ---
MEXICO:
Beginning store count 7 6 7 6 6
New stores opened - - - - 1
---- ---- ---- ---- ---
Ending store count 7 6 7 6 7
---- ---- ---- ---- ---
Grand Total 226 219 226 219 221
==== ==== ==== ==== ===
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. 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 Twelve Weeks Ended June 17, 2001 with Twelve Weeks Ended June 18,
2000.
Sales. Second quarter 2001 sales were $463.6 million, up 4.6% from $443.0
million in the second quarter of 2000.
Store sales increased 5.1%, from $348.1 million in second quarter 2000 to
$365.9 million in second quarter 2001. Comparable store sales for the second
quarter of 2001 increased 4.0% over the prior year's same quarter. Average
comparable transaction size also increased, by 1.1%, to $38.64 in the second
quarter of 2001.
Foodservice distribution sales increased 2.9%, from $94.9 million in the
second quarter of 2000 to $97.7 million in the current year's second quarter.
Florida foodservice sales increased 15.7% while northern California foodservice
sales declined 10.3% in part as a result of the restructuring program now in
progress.
Gross Margin. Gross margin improved 10.2%, from $60.2 million in the
second quarter of 2000 to $66.3 million in the current year quarter. As a
percentage of sales, gross margin improved from 13.6% in the prior year's second
quarter to 14.3% in second 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 partially offset by a change in sales mix at Florida
foodservice that generated lower margins and 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 second quarter of 2001 were $56.5 million, up $4.3 million, or
8.3%, over the second quarter of 2000. These expenses, as a percentage of
sales, increased from 11.8% in the second quarter of 2000 to 12.2% in the second
quarter of 2001. Expenses increased due to restructuring costs incurred in
northern California foodservice operations, increased utility costs and
marketing expense increases. These increases were partially offset by a $1.0
million retroactive medical insurance and other benefit charge recorded in the
prior year's second quarter.
Interest expense, net. Interest expense, net decreased from $3.2 million
recorded in second quarter 2000 to $2.8 million in the second quarter of 2001
due to rate reductions as a result of the Company's improved financial ratios
and declining market rates.
Comparison of Twenty-Four Weeks Ended June 17, 2001 with Twenty-Four Weeks Ended
June 18, 2000.
Sales. Sales in the first half of 2001 were $887.8 million, up 5.4% from
the comparable 2000 period.
14
Store sales increased 6.0%, from $651.5 million to $690.5 million in the
first half of 2001. Comparable store sales increased 5.1% in the first half of
2001 over the prior year period. Average comparable transaction size also
increased 2.1% to $38.33 in the first half of 2001.
Foodservice distribution sales increased 3.4%, from $190.8 in the first
half of 2000 to $197.3 million in the first half of 2001. Florida foodservice
sales increased 15.6% but northern California foodservice sales declined 10.1%
in part as a result of the restructuring program now in progress.
Gross Margin. Gross margin improved 8.7% from $114.4 million in the first
half of 2000 to $124.3 million in the 2001 twenty-four-week period. As a
percentage of sales, gross margin increased from 13.6% of sales for the first
half of 2000 to 14.0% 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 expanded corporate brands, better store
assortment mix and reduced distribution costs due to the improved efficiency at
the new Commerce distribution center and cost reductions at Florida foodservice.
These improvements were partially offset by costs incurred at northern
California foodservice related to the restructuring.
Operating and Administrative Expenses. Operating and administrative
expenses for the first half of 2001 were $110.4 million, or 12.4% of sales,
compared with $102.2 million, or 12.1% of sales, in the first half of 2000. The
expense increase was primarily driven by increased store marketing expense,
increased utility costs and northern California foodservice operation
restructuring costs. The increase was partially offset by the $2.2 million
consulting fees incurred related to improving procurement programs and $1.0
million of retroactive medical insurance and other benefit charges recorded in
the first half of 2000. No similar consulting fees or retroactive medical
insurance and other benefit charges were recorded in the first half of 2001.
Interest Expense, net. Interest expense, net decreased from $6.5 million,
or 0.8% of sales, in the first half of 2000 to $5.9 million, or 0.7% of sales,
in the comparable 2001 period. This decrease was primarily a result of lower
interest rates and lower average debt outstanding.
Financial Condition
Cash and cash equivalents were $25.0 million at June 17, 2001, compared to
$23.3 million at December 31, 2000. Operating activities provided cash of $8.0
million for the twenty-four weeks ended June 17, 2001. For the first half of
2001, net proceeds from financing activities were $15.0 million and investments
in fixed asset and other additions were $21.3 million.
During the twenty-four weeks ended June 17, 2001, inventories decreased by
$1.3 million and the related accounts payable decreased by $6.8 million. Trade
notes and accounts receivable increased $3.9 million primarily due to the
increased sales at Florida foodservice operation. Other changes in operating
assets and liabilities generally reflect the timing of receipts and
disbursements.
Stockholders' equity increased by $5.6 million to $270.5 million at June
17, 2001 as a result of the $5.3 million net income for the first half of 2001
plus $1.5 million of stock options
15
exercised, issuance of restricted stock and other stock agreements and $1.2
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, $0.8 million, net of tax reduction in fair values of
interest rate collar agreements for the first half of 2001 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 $8.0 million in the
first half of 2001. At June 17, 2001, the Company had cash of $25.0 million,
compared to $23.3 million at December 31, 2000. The Company had $130.6 million
of debt, excluding capital leases, at June 17, 2001, compared to $115.7 million
at December 31, 2000, and stockholders' equity of $270.5 million at June 17,
2001.
The Company had $219.0 million committed under its Senior Secured Credit
Facilities ("Credit Facilities") at June 17, 2001 and December 31, 2000. At
June 17, 2001, the Company's borrowings under these facilities totaled $189.1
million, compared with $171.6 million at December 31, 2000. At June 17, 2001,
the Company had available $29.9 million of unused credit under these facilities.
As of the end of second quarter 2001, the Company was in 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.
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.
16
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
17
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 of achieving planned sales (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.
18
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
The annual Meeting of Stockholders of the Company was held on May
23, 2001. At the meeting, stockholders (1) elected four directors of
the Company; (2) approved an amendment to the Long-Term Equity
Compensation Plan increasing by 1,130,000 the number of shares
authorized for grant thereunder and extending the expiration date of
that plan until December 31, 2010; and (3) ratified the selection of
Arthur Andersen LLP, independent public accountants, as auditors for
the Company for the year ending December 30, 2001.
The four directors elected at the meeting were Pierre B. Bouchut,
David J. McLaughlin, Thomas G. Plaskett, and Etienne Snollaerts. The
directors whose term of office as a director continued after the
meeting are Christian P. Couvreux, Timm F. Crull, James S. Gold,
Antoine Guichard, Joel-Andre Ornstein and Ross E. Roeder.
The votes cast for, against, or withheld, as well as the number of
abstention and broker non-votes for each nominee for office as a
director were as follows:
VOTES
----------------------------- Broker
For Against Withheld Abstentions Non-Votes
---------- ------- -------- ----------- ---------
Pierre B. Bouchut 27,009,921 - 994,730 - -
David J. McLaughlin 27,009,932 - 994,719 - -
Thomas G. Plaskett 27,009,572 - 995,079 - -
Etienne Snollaerts 27,009,621 - 995,030 - -
The votes cast for, against, or withheld, as well as the number of
abstentions and broker non-votes for approving the amendment to the
Long-Term Equity Compensation Plan were as follows:
VOTES
----------------------------- Broker
For Against Withheld Abstentions Non-Votes
---------- ------- -------- ----------- ---------
Amendment to the 24,433,012 1,226,688 - 15,476 2,329,475
Long-Term Equity
Compensation Plan
19
The votes cast for, against, or withheld, as well as the number of
abstentions and broker non-votes for ratification of Arthur Andersen
LLP, as auditors for the Company for the year ending December 30, 2001
were as follows:
VOTES
------------------------------- Broker
For Against Withheld Abstentions Non-Votes
---------- ------- -------- ----------- ---------
Ratification of 27,993,301 7,337 - 4,013 -
Arthur Andersen LLP
as auditors for the
Company for the year
ending December 30, 2001
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description of Exhibit
-------------- ----------------------
10.53 Amendment dated May 11, 2001 to Employment Agreement
between the Company and Ross E. Roeder dated May 11, 1999*
10.54 Amendment dated May 31, 2001 to Employment Agreement and
Consulting Agreement between the Company and Martin A.
Lynch dated April 1, 1997*
*Management contracts and compensatory plans, contracts and
arrangements of the Company.
_________
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated April 5,
2001, announcing the retirement of Martin A. Lynch, the Executive
Vice President and Chief Financial Officer of the Company,
effective at the end of May 2001 and the appointment of Richard
N. Phegley as the new Chief Financial Officer.
20
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: July 26, 2001 /s/ RICHARD N. PHEGLEY
----------------------
Richard N. Phegley
Senior Vice President,
Chief Financial Officer, and
Principal Accounting Officer of the Company
21