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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 24, 2002
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 29,394,841 shares of common stock outstanding as of June 3,
2002.
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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 10
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
Part II
Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SMART & FINAL INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
March 24, December 30,
2002 2001
(restated)
----------- -----------
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 27,642 $ 23,016
Trade notes and accounts receivable, less allowance for
doubtful accounts of $3,922 in 2002 and $3,817 in 2001 71,550 78,744
Inventories 165,631 175,302
Prepaid expenses and other current assets 9,381 7,303
Deferred tax asset 15,814 16,145
--------- ---------
Total current assets 290,018 300,510
Property, plant and equipment:
Land 35,510 36,329
Buildings and improvements 30,209 30,209
Leasehold improvements 121,345 123,742
Fixtures and equipment 206,028 196,461
--------- ---------
393,092 386,741
Less - Accumulated depreciation and amortization 174,611 168,514
--------- ---------
Net property, plant and equipment 218,481 218,227
Assets under capital leases, net of accumulated
amortization of $9,833 in 2002 and $9,196 in 2001 11,401 12,038
Goodwill, net of accumulated amortization of $6,767 in 2002 and 2001 52,432 52,432
Deferred tax asset 7,110 7,110
Other assets 38,915 40,807
--------- ---------
Total assets $ 618,357 $ 631,124
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt and capital leases $ 8,121 $ 8,096
Accounts payable 99,071 104,615
Accrued salaries and wages 10,282 14,383
Other accrued liabilities 46,624 51,282
--------- ---------
Total current liabilities 164,098 178,376
Long-term liabilities:
Notes payable, net of current maturities 5,001 5,004
Bank debt 126,500 127,000
Obligations under capital leases 12,127 12,871
Other long-term liabilities 16,140 15,349
Workers' compensation reserve, postretirement and postemployment benefits 21,451 20,943
--------- ---------
Total long-term liabilities 181,219 181,167
Commitments and contingencies - -
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; 29,394,841
shares issued and outstanding in 2002 and 29,393,449 in 2001) 294 294
Additional paid-in capital 207,047 206,874
Notes receivable for common stock (100) (100)
Accumulated other comprehensive loss (4,141) (4,840)
Retained earnings 69,940 69,353
--------- ---------
Total stockholders' equity 273,040 271,581
--------- ---------
Total liabilities and stockholders' equity $ 618,357 $ 631,124
========= =========
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 24, March 25,
2002 2001
(restated)
------------- --------------
(Unaudited)
Sales $ 444,824 $ 424,168
Cost of sales, buying and occupancy 385,260 366,380
------------ -------------
Gross margin 59,564 57,788
Operating and administrative expenses 55,426 54,082
------------ ------------
Income from operations 4,138 3,706
Interest expense, net 2,943 3,067
------------ ------------
Income before provision for income taxes 1,195 639
Provision for income taxes 528 205
------------ ------------
Income from consolidated subsidiaries 667 434
Equity earnings in unconsolidated subsidiary (80) 120
------------ ------------
Net income $ 587 $ 554
============ ============
Earnings per common share $ 0.02 $ 0.02
============ ============
Weighted average common shares 29,394,470 29,216,756
============ ============
Earnings per common share, assuming dilution $ 0.02 $ 0.02
============ ============
Weighted average common shares and common share equivalents 29,680,682 29,492,458
============ ============
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 24, March 25,
2002 2001
(restated)
-------- ---------
(Unaudited)
Cash Flows from Operating Activities:
Net income $ 587 $ 554
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss (gain) on disposal of property, plant and equipment 78 (7)
Depreciation and amortization 8,140 7,796
Deferred tax provision (benefit) 331 (690)
Amortization of deferred financing costs 366 390
Equity earnings in unconsolidated subsidiary 80 (120)
Decrease (increase) in:
Trade notes and accounts receivable 7,194 (2,662)
Inventories 9,671 1,282
Prepaid expenses and other current assets (3,466) (721)
Increase (decrease) in:
Accounts payable (4,775) 1,346
Accrued salaries and wages (4,101) (4,915)
Other accrued liabilities (1,874) (2,018)
-------- ---------
Net cash provided by operating activities 12,231 235
-------- ---------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (10,979) (13,223)
Proceeds from disposal of property, plant and equipment 2,479 26
Other 2,106 (557)
-------- ---------
Net cash used in investing activities (6,394) (13,754)
-------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock, net of costs 11 -
Payments on bank line of credit (8,000) -
Borrowings on bank line of credit 7,500 17,500
Payments on notes payable (722) (385)
-------- ---------
Net cash provided by (used in) financing activities (1,211) 17,115
-------- ---------
Increase in cash and cash equivalents 4,626 3,596
Cash and cash equivalents at beginning of the period 23,016 22,028
-------- ---------
Cash and cash equivalents at end of the period $ 27,642 $ 25,624
======== =========
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 own approximately 59.8 percent
of the Company's common stock as of March 24, 2002.
The consolidated balance sheet as of March 24, 2002 and the consolidated
statements of income and cash flows for the twelve weeks ended March 24, 2002
and March 25, 2001 are unaudited. In the opinion of management, all adjustments
which consisted of normal recurring items necessary for a fair presentation of
these financial statements in conformity with accounting principles generally
accepted in the United States have been included.
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 30, 2001, as amended.
2. Restatement of Financial Statements
On April 22, 2002 the Company announced it had identified certain
accounting issues at its Stockton, California broadline foodservice subsidiary
impacting prior years previously reported operating results that would cause it
to restate its financial statements. The Company's investigation of these
matters has resulted in the Company restating its audited financial statements
for fiscal years 2001, 2000 and 1999 including the cumulative effect of
prior-years restated results in the Company's filing on Form 10-K/A Amendment
No. 2. The dollar amounts for the 2001 periods presented in this Form 10-Q
reflect the aforementioned restatement adjustments, as applicable.
3. 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.
4. Goodwill
Effective December 31, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
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.
Accordingly, the Company will be
5
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
performing a transitional impairment test on its existing goodwill and other
intangible assets and expects to complete the aforementioned test by the second
quarter of 2002.
The following pro forma information presents the impact on net income and
earnings per share had SFAS No. 142 been effective for the quarter ended March
25, 2001, dollars in thousands except per share amounts:
Twelve Weeks Ended
------------------------------
March 24, March 25,
2002 2001
(restated)
------------- -------------
Net income, as reported $ 587 $ 554
Amortization of goodwill, net of tax - 232
------------- -------------
Net income, adjusted $ 587 $ 786
============= =============
Earnings per common share, as reported $ 0.02 $ 0.02
Amortization of goodwill, net of tax - 0.01
------------- -------------
Earnings per common share, adjusted $ 0.02 $ 0.03
============= =============
Earnings per common share, assuming
dilution, as reported $ 0.02 $ 0.02
Amortization of goodwill, net of tax - 0.01
------------- -------------
Earnings per common share, assuming
dilution, adjusted $ 0.02 $ 0.03
============= =============
5. Derivatives
As of March 24, 2002, the Company had interest rate collar agreements with
various banks to limit the impact of interest rate fluctuations on floating rate
debt. These agreements, expiring during various periods from October 2002 to
November 2004, hedge principal amounts of an aggregate of $100 million and limit
the effect of LIBOR fluctuations to interest rate ranges from 4.74% to 8.00%.
These agreements are designated as cash flow hedges and are considered fully
effective. Accordingly, the effective portions of changes in fair values of
these agreements 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.
As of March 24, 2002, these agreements had a cumulative loss of $3,242,000
recorded to OCI as a result of net changes in their fair market values. For the
quarter ended March 24, 2002, the reduction in the cumulative loss that was
recorded to OCI was $831,000. Net derivative loss reclassified from OCI and
recognized in results of operations was $769,000 in the twelve weeks ended March
24, 2002. There was no such reclassification during the twelve weeks ended
6
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 25, 2001. The Company estimates that $1,600,000 of net derivative loss
included in OCI will be recognized in results of operations within the next
twelve months.
6. Comprehensive Income (Loss)
Comprehensive income (loss) was computed as follows, amounts in thousands:
Twelve Weeks Ended
----------------------
March 24, March 25,
2002 2001
(restated)
---------- ----------
Net income $ 587 554
Other comprehensive income (loss):
Cumulative effect of accounting change, net of tax - (305)
Net gain (loss) on derivative instruments, net of tax 499 (585)
Foreign currency translation adjustments 200 (128)
---------- ----------
Total other comprehensive income (loss) 699 (1,018)
---------- ----------
Total comprehensive income (loss) $ 1,286 $ (464)
========== ==========
See Note 5 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 which was paid off in the
fourth quarter of 2001. The Company paid $3.6 million and $2.8 million in
interest in the twelve-week periods ended March 24, 2002 and March 25, 2001,
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, the Company has made tax sharing payments to, or received benefits
from, the Parent based upon pre-tax income for financial reporting purposes
adjusted for certain agreed upon items. Tax sharing payments made by the Company
to the Parent were $304,000 and $576,000 in the twelve weeks ended March 24,
2002 and March 25, 2001, respectively. The Company paid $18,000 and $5,000 state
income taxes for states other than California in the twelve weeks ended March
24, 2002 and March 25, 2001, respectively. The Company paid $1,000,000 and
$1,150,000 of federal income taxes in the twelve-week periods ended March 24,
2002 and March 25, 2001, 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 broadline Foodservice.
The Stores segment provides food and related items in bulk sizes and quantities
through non-membership grocery warehouse stores. The broadline 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 and Smart & Final de Mexico S.A. de C.V. (the Company's 100%-owned
subsidiary that holds 50% of a joint venture operating in Mexico). 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 March 24, 2002:
Corporate
Stores Foodservice Expense Total
---------- ----------- --------- ---------
Revenues from external
customers $ 349,960 $ 94,864 $ - $ 444,824
Intercompany real estate
charge (income) 3,056 (23) (3,033) -
Interest income - - 125 125
Interest expense - - 3,068 3,068
Pre-tax income (loss) 5,895 (1,668) (3,032) 1,195
8
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
For the twelve weeks ended March 25, 2001, as restated:
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 (2,866) (3,433) 639
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 of 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 monetary
damages. The Company is actively investigating the merits of this action and
believes that (a) the merits of this action do not warrant class action status;
(b) the Company has certain defenses to the claim; and (c) the ultimate
determination of this action will not have a material adverse effect on the
Company's results of operations or financial position.
The Company is a defendant in a number of other lawsuits or is otherwise a
party to certain litigation arising in the ordinary course from its operations.
The Company does not believe that the ultimate determination of these cases will
either individually or in the aggregate have a material adverse effect on the
Company's results of operations or financial position.
9
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 30, 2001, as amended.
Summary
Smart & Final Inc. (the "Company") reported net income of $0.6 million, or
$0.02 per diluted share, for the twelve weeks ended March 24, 2002, compared to
net income of $0.6 million, or $0.02 per diluted share, for the twelve weeks
ended March 25, 2001.
Operating income increased 11.7%, or $0.4 million, from $3.7 million in
last year's same quarter to $4.1 million in the twelve weeks ended March 24,
2002. For first quarter 2002, when compared to the first quarter of 2001, Stores
operating results decreased $1.0 million due to decreased gross margins and
increased store occupancy costs. Foodservice operating results improved $1.2
million due to improvement in Florida Foodservice.
Interest expense, net decreased $0.1 million in the first quarter of 2002
compared to first quarter 2001 as a result of rate reductions caused by the
Company's improved financial ratios and declining market rates partially offset
by higher average debt level outstanding for the period.
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 24, March 25,
2002 2001
(restated)
--------- ---------
Sales:
Stores 78.7% 76.5%
Foodservice 21.3 23.5
--------- ---------
Sales, consolidated total 100.0 100.0
Cost of sales, buying and occupancy 86.6 86.4
--------- ---------
Gross margin 13.4 13.6
Operating and administrative expenses 12.5 12.8
--------- ---------
Income from operations 0.9 0.9
Interest expense, net 0.7 0.7
--------- ---------
Income before provision for income taxes 0.3 0.2
Provision for income taxes 0.1 -
--------- ---------
Income from consolidated subsidiaries 0.1 0.1
Equity earnings in unconsolidated subsidiaries - -
--------- ---------
Net income 0.1% 0.1%
========= =========
10
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 24, March 25,
2002 2001
(restated)
------------- ----------
Stores $ 5.9 $ 6.9
Foodservice (1.7) (2.9)
------------- ----------
Segment totals 4.2 4.0
Interest and other corporate expenses (3.0) (3.4)
------------- ----------
Consolidated pre-tax income $ 1.2 $ 0.6
============= ==========
Stores segment declined as a result of lower margin rates and increased
store occupancy costs. Foodservice segment results improved as a result of
improvement in Florida Foodservice operations.
Background
During the quarter, the Company opened three new stores and relocated one
store. New store growth is planned to continue in the remainder of fiscal 2002.
Quarter Ended Year Ended
----------------------------- --------------
March 24, March 25, December 30,
2002 2001 2001
----------- ----------- --------------
USA:
Beginning store count 224 214 214
Stores opened:
New stores 3 4 11
Relocations 1 1 2
Stores relocated or closed (1) (1) (3)
----------- ----------- --------------
Ending store count 227 218 224
----------- ----------- --------------
MEXICO:
Beginning store count 8 7 7
New stores opened - - 1
----------- ----------- --------------
Ending store count 8 7 8
----------- ----------- -------------
Total Ending Store Count 235 225 232
=========== =========== ==============
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 corporate expenses. Stores not meeting
strategic management objectives for profitability, market penetration, and/or
other measures are evaluated for closure or relocation.
11
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; to hire, train and
integrate employees; to continue locating and obtaining favorable store sites;
or to adapt distribution, management information and other operating systems
sufficiently to support store growth 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 24, 2002 with Twelve Weeks Ended March
25, 2001.
Sales. First quarter 2002 sales were $444.8 million, up 4.9% from $424.2
million in the first quarter of 2001.
Store sales increased 7.8%, from $324.6 million in first quarter 2001 to
$350.0 million in first quarter 2002. Comparable store sales for the first
quarter of 2002 increased 4.7% over the prior year's same quarter. Average
comparable transaction size decreased by 1.4% to $37.47 in the first quarter of
2002.
Foodservice sales decreased 4.8%, from $99.6 million in the first quarter
of 2001 to $94.9 million in the current year's first quarter. Sales growth in
the first quarter of 2002 was adversely affected by the continuation of
decreased travel and tourism following the events of September 11, 2001 as well
as the general economic downturn.
Gross Margin. Gross margin improved 3.1%, from $57.8 million in the first
quarter of 2001 to $59.6 million in the current year quarter. As a percentage of
sales, gross margin decreased from 13.6% in the prior year's first quarter to
13.4% in first quarter 2002.
Gross margins in the Stores segment increased $0.9 million to $51.2
million, but as a percentage of sales, decreased compared to the prior year's
same quarter. The decrease in gross margins as a percentage of sales primarily
reflects the lower merchandise margins and higher occupancy costs associated
with new and relocated stores opened during 2001 and in the first quarter of
2002.
Gross margins in the Foodservice segment increased $0.9 million to $8.4
million. Gross margins as a percentage of sales improved at both the Florida and
northern California units. The Florida improvement was due to a favorable sales
mix. The improvement in the northern California unit was due to improvements in
warehouse and transportation partially offset by lower merchandise margins.
Operating and Administrative Expenses. Operating and administrative
expenses for the first quarter of 2002 were $55.4 million, up $1.3 million, or
2.5%, over the first quarter of 2001. These expenses, as a percentage of sales,
decreased from 12.8% in the first quarter of 2001 to 12.5% in the first quarter
of 2002. Operating and administrative expenses increased in the Stores segment
due to increased store labor in support of the program to improve service and
support sales as well as increased utility costs. Operating and administrative
expenses decreased in the Foodservice segment due to a reduction in payroll and
benefit costs in the Florida unit partially offset by
12
increases in the northern California unit due to increased sales force expenses.
Corporate expenses decreased due to the absence of other benefit charges that
were recorded in the first quarter of 2001.
Interest expense, net. Interest expense, net decreased from $3.1 million
recorded in first quarter 2001 to $2.9 million in the first quarter of 2002 due
to rate reductions as a result of the Company's improved financial ratios and
declining market rates.
Financial Condition
Cash and cash equivalents were $23.0 million at December 30, 2001, and
$27.6 million at March 24, 2002. Operating activities provided cash of $12.2
million for the twelve weeks ended March 24, 2002. For the quarter, net cash
used in investing activities was $6.4 million, comprised of $11.0 million in
capital expenditures in support of Stores and Foodservice segments, partially
offset by $2.5 million proceeds from sales of a store property and $2.1 million
proceeds from other investing activities. For the quarter, net cash used in
financing activities was $1.2 million.
During the twelve weeks ended March 24, 2002, inventories decreased by $9.7
million and the related accounts payable decreased $4.8 million. Trade notes and
accounts receivable decreased $7.2 million. Decreases in inventories and trade
notes and accounts receivable were partially offset by increased prepaid
expenses and other current assets and decreases in accounts payable, accrued
salaries and wages and other accrued liabilities. Changes in operating assets
and liabilities generally reflect the timing of receipts and disbursements.
Stockholders' equity increased by $1.4 million to $273.0 million at March
24, 2002 as a result of the $0.6 million net income for the first quarter of
2002 plus $0.1 million of restricted stock agreements and $0.7 million decrease
in accumulated OCI. The decrease in accumulated OCI includes $0.5 million, net
of tax reduction in fair values of interest rate collar agreements and $0.2
million translation adjustment.
Liquidity and Capital Resources
Historically, the Company's primary source of liquidity has been cash flows
from operations. Additionally, the Company has availability under bank credit
facilities. Net cash provided by operating activities was $12.2 million in the
first quarter of 2002 as compared to $0.2 million in the first quarter of 2001.
The $12.2 million cash provided by operations was due primarily to $6.5 million
decreased accounts receivable, primarily in the Foodservice segment, and $9.7
million decreased inventory. Inventory decreased $7.7 million in the stores
segment and $2.0 million in the Foodservice segment. At March 24, 2002, the
Company had cash of $27.6 million, compared to $23.0 million at December 30,
2001. The Company had $136.5 million of debt, excluding capital leases, at March
24, 2002, compared to $137.0 million at December 30, 2001, and stockholders'
equity of $273.0 million at March 24, 2002.
The Company has in place a $175.0 million three-year senior secured
revolving credit facility ("Credit Agreement") with a syndicate of banks that
expires on November 30, 2004. As of March 24, 2002, $126.5 million of revolving
debt and $3.0 million of letters of credit were outstanding. At March 24, 2002,
the remaining availability under the Credit Agreement was $23.8 million
according to a formula based on the value of eligible accounts receivable and
inventory. As of
13
March 24, 2002, the Company also has in place a five-year operating lease
agreement ("Lease Agreement") that provides for financing of three distribution
facilities and 15 store locations.
As a result of the restatement of the Company's financial statements and
the related impact on the Company's compliance with the financial and
non-financial covenants contained in the two agreements, the Company believed
it was appropriate to obtain waivers of certain possible breaches or failures to
comply with the covenants included in the Credit Agreement and Lease Agreement.
The Company obtained such waivers.
The Company expects to be able to fund future acquisitions and other cash
requirements by a combination of available cash, cash from operations 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,
capital expenditures, and debt service requirements for the foreseeable future.
New Accounting Pronouncements
See Note 4 Goodwill for discussion of the Company's adoption of SFAS No.
142.
14
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 financial risk management objective is to minimize the negative impact
of interest rate fluctuations on the Company's earnings and cash flows. As of
March 24, 2002, the Company's exposure to foreign currency risk was limited.
Additionally, the Company is exposed to the market fluctuations associated with
stock the Company received as a result of the demutualization transactions of a
mutual insurance company in December 2001. As of March 24, 2002, the fair market
value of the stock was $1.2 million.
Interest Rate Risk
Interest rate risk is managed through the use of interest rate collar
agreements to limit the impact of interest rate fluctuations on floating rate
debt. These agreements, expiring during various periods from October 2002 to
November 2004, hedge principal amounts of an aggregate of $100 million and limit
the effect of LIBOR fluctuations to interest rate ranges from 4.74% to 8.00%.
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 de Mexico S.A.de C.V. ("Smart & Final Mexico")
and the equity earnings in its Mexico joint venture. As of March 24, 2002, such
exposure was the $4.1 million net investment in Smart & Final Mexico, comprised
primarily of 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 its foreign currency and therefore is not
exposed to such hedging risk.
Credit Risk
The Company is exposed to credit risk on trade notes and 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 notes and
accounts 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 and Cautionary 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
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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 predict; therefore, undue reliance should
not be placed upon such statements. Actual results may differ materially and
adversely from such statements due to known and unknown factors. The following
important factors, among others, could cause the Company's results of operations
to be materially and adversely affected in future periods: (i) increased
competitive pressures from existing competitors and new entrants, including
price-cutting strategies, store openings and remodels; (ii) loss of customers or
sales weakness; (iii) inability to achieve projected future sales levels or
other operating results; (iv) interruption and/or inability to obtain adequate
supplies of foodservice and other products; (v) operational inefficiencies in
distribution or other Company systems; (vi) unexpected increases in fuel or
other transportation-related costs; (vii) adverse state or federal legislation
or regulation that increases the costs of compliance, or adverse findings by a
regulator with respect to existing operations; (viii) the unavailability of
funds for capital expenditures; (ix) increases in interest rates or the
Company's cost of borrowing or a default under any material debt agreement; (x)
continued downturn in tourism and travel industries; (xi) deterioration in
national or regional economic conditions; and (xii) costs and uncertainties
associated with known or potential legal actions. 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 materially affect the Company's financial position and results of
operations. On April 22, 2002 the Company announced it had identified certain
accounting issues that would cause it to restate its financial statements. The
Company restated its audited financial statements for fiscal years 2001, 2002
and 1999 including the cumulative effect of prior-years restated results. While
no claims have been made to date, it is possible that claims may be brought by
shareholders against the Company in connection with the accounting adjustments;
costs related to the claims, including defense costs, could have an adverse
effect on 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 of 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 monetary
damages. The Company is actively investigating the merits of this
action and believes that (a) the merits of this action do not
warrant class action status; (b) the Company has certain defenses
to the claim; and (c) the ultimate determination of this action
will not have a material adverse effect on the Company's results of
operations or financial position.
The Company is a defendant in a number of other lawsuits or is
otherwise a party to certain litigation arising in the ordinary
course from its operations. The Company does not believe that the
ultimate determination of these cases will either individually or
in the aggregate have a material adverse effect on the Company's
results of operations or financial position.
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
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The Company filed a Current Report on Form 8-K, dated April 22, 2002
announcing the identification of accounting issues in prior years'
reported operating results and the expected restatement of prior
years' reported results.
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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: June 4, 2002 /s/ RICHARD N. PHEGLEY
------------------------------------------
Richard N. Phegley
Senior Vice President and
Chief Financial Officer
Principal Financial Officer of the Company
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