<PAGE>
================================================================================
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 28, 1999
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 22,627,179 shares of common stock outstanding as of April 30,
1999.
===============================================================================
<PAGE>
SMART & FINAL INC.
Index
Part I
Financial Information
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets 2
Unaudited Consolidated Statements of Operations 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 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
Part II
Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
1
<PAGE>
SMART & FINAL INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
March 28, January 3,
ASSETS 1999 1999
- ------ ----------- ----------
(unaudited)
<S> <C> <C>
Current assets:
Cash & cash equivalents $ 33,954 $ 20,887
Trade notes and accounts receivable, less
allowance for doubtful accounts of
$2,686 in 1999 and $3,660 in 1998 62,941 70,155
Inventories 151,546 157,678
Prepaid expenses 15,944 22,341
Deferred tax asset 11,511 11,511
----------- ----------
Total current assets 275,896 282,572
Property, plant and equipment:
Land 36,387 36,387
Buildings and improvements 29,613 29,625
Leasehold improvements 82,023 85,501
Fixtures and equipment 165,555 162,148
----------- ----------
313,578 313,661
Less - Accumulated depreciation and amortization 106,494 108,588
----------- ----------
Net property, plant and equipment 207,084 205,073
Assets under capital leases, net of accumulated
amortization of $6,790 in 1999 and $6,669 in 1998 3,895 4,016
Goodwill, net of accumulated amortization
of $2,425 in 1999 and $2,060 in 1998 56,302 56,667
Deferred tax asset 3,730 3,730
Other assets 29,718 30,206
----------- ----------
Total assets $ 576,625 $ 582,264
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt $ 149,126 $ 139,680
Accounts payable 92,692 97,568
Payable to Parent and affiliates - 1,681
Accrued salaries and wages 14,455 13,951
Other accrued liabilities 32,678 40,789
----------- ----------
Total current liabilities 288,951 293,669
Long-term liabilities:
Notes payable, net of current maturities 15,212 15,839
Notes payable to affiliates 55,388 55,388
Obligations under capital leases 7,301 7,485
Other long-term liabilities 3,046 3,033
Workers' compensation reserve, postretirement
and postemployment benefits 17,859 17,564
----------- ----------
Total long-term liabilities 98,806 99,309
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; 22,527,179 shares issued
and outstanding in 1999 and 22,527,179 in 1998) 225 225
Additional paid-in capital 145,043 144,987
Cumulative translation loss (835) (835)
Retained earnings 44,435 44,909
----------- ----------
Total stockholders' equity 188,868 189,286
----------- ----------
Total liabilities and stockholders' equity $ 576,625 $ 582,264
=========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
<PAGE>
SMART & FINAL INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Twelve Weeks Ended
-----------------------------------
March 28, March 29,
1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
Sales................................................................ $ 398,337 $ 334,278
Cost of sales, buying and occupancy.................................. 348,259 294,538
--------------- --------------
Gross margin......................................................... 50,078 39,740
Operating and administrative expenses................................ 46,102 39,418
--------------- --------------
Income from operations........................................ 3,976 322
Interest expense, net................................................ 5,081 2,128
--------------- --------------
Income (loss) before income taxes and
cumulative effect of accounting change.......................... (1,105) (1,806)
Income taxes......................................................... (419) (780)
--------------- --------------
Income (loss) from consolidated subsidiaries................... (686) (1,026)
Equity earnings in unconsolidated subsidiary......................... 212 130
--------------- --------------
Income (loss) before cumulative effect of accounting change.... (474) (896)
Cumulative effect of accounting change (startup costs, net of
tax effect of $758)............................................. - 1,090
--------------- --------------
Net income (loss).............................................. $ (474) $ (1,986)
=============== ==============
Earnings (loss) per common share:
Earnings (loss) per common share before cumulative effect of
accounting change............................................... $ (0.02) $ (0.04)
Cumulative effect of accounting change per common share........... - (0.05)
--------------- --------------
Earnings (loss) per common share.................................. $ (0.02) $ (0.09)
=============== ==============
Weighted average common shares....................................... 22,527,179 22,395,653
=============== ==============
Earnings (loss) per common share, assuming dilution:
Earnings (loss) per common share, assuming dilution, before
cumulative effect of accounting change.......................... $ (0.02) $ (0.04)
Cumulative effect of accounting change per common share........... - (0.05)
--------------- --------------
Earnings (loss) per common share, assuming dilution............... $ (0.02) $ (0.09)
=============== ==============
Weighted average common shares
and common share equivalents..................................... 22,527,179 22,395,653
=============== ==============
Dividend per common share............................................ $ - $ 0.05
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Twelve Weeks Ended
----------------------------
March 28, March 29,
1999 1998
---------- -----------
(unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ....................................................... $ (474) $ (1,986)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Gain on disposal of fixed assets............................. (407) (587)
Depreciation and amortization................................ 6,898 6,434
Amortization of deferred financing costs..................... 515 -
Cumulative effect of accounting change, net of taxes......... - 1,090
Equity earnings in unconsolidated subsidiary................. (212) (130)
Decrease (increase), net of business acquisition, in:
Trade notes and accounts receivable........................ 7,214 2,458
Inventories................................................ 6,132 4,116
Prepaid expenses and other................................. 4,994 2,746
Increase (decrease), net of business acquisition, in:
Accounts payable........................................... (4,173) 3,089
Accrued liabilities........................................ 504 462
Other liabilities.......................................... (4,520) (5,013)
---------- ----------
Net cash provided by operating activities.................... 16,471 12,679
---------- ----------
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment ................... (9,417) (7,025)
Proceeds from disposal of property, plant and equipment......... 458 295
Acquisition of business......................................... - (1,924)
Other........................................................... (272) 952
---------- ----------
Net cash used in investing activities......................... (9,231) (7,702)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock.......................... - 373
Payments on bank line of credit................................. - (2,000)
Payments on notes payable....................................... (1,365) (1,040)
Change in payable to Parent and affiliates...................... (1,681) 2,386
Quarterly dividend paid......................................... (1,127) (1,119)
Borrowings of short-term debt................................... 10,000 -
---------- ----------
Net cash provided by (used in) financing activities........... 5,827 (1,400)
---------- ----------
Increase in cash and cash equivalents.............................. 13,067 3,577
Cash and cash equivalents at beginning of year..................... 20,887 22,891
---------- ----------
Cash and cash equivalents at end of period......................... $ 33,954 $ 26,468
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
Smart & Final Inc. (the "Company") is a Delaware corporation and is a 55.1
percent owned subsidiary of Casino USA, Inc. (the "Parent").
The consolidated balance sheet as of March 28, 1999, the consolidated
statements of operations and cash flows for the twelve weeks ended March 28,
1999 and March 29, 1998 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of these financial statements have
been included. Such adjustments consisted only of normal recurring items.
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 January 3, 1999.
(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) Income taxes
The Company and Casino USA are parties to a tax sharing arrangement
covering income tax obligations in the state of California. Under this
arrangement, the Company received tax sharing benefits of $1,361,000 and
$1,771,000 in the twelve-week periods ended March 28, 1999 and March 29, 1998,
respectively, from the Parent for state income taxes overpaid, due to losses in
1999 and 1998. The Company did not pay any federal income taxes in the twelve-
week periods ended March 28, 1999 and March 29, 1998, due to losses in the first
quarter of each year.
(4) 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 a stock purchase agreement.
(5) Dividend
The declaration and payment of dividends is subject to the discretion of
the Company's Board of Directors, and there can be no assurance whether or when
dividends will be paid in the future. The Company's debt facilities also contain
restrictions on the amount of cash dividends
5
<PAGE>
SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
declared or paid. The Company announced in a press release dated February 17,
1999, that, as part of a program to reduce debt levels and interest expense,
dividends on its common stock have been suspended indefinitely. The suspension
of dividends was effective following the payment of the fourth quarter 1998
dividend paid on January 29, 1999.
(6) 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 March 28, 1999:
<TABLE>
<CAPTION>
Corporate
Stores Foodservice Expense Total
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues from external
customers $294,466 $103,871 $ - $398,337
Intercompany real estate
charge (income) 3,194 - (3,194) -
Interest income - - 199 199
Interest expense - - 5,280 5,280
Pre-tax income (loss) 3,473 470 (5,048) (1,105)
</TABLE>
6
<PAGE>
SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the twelve weeks ended March 29, 1998:
<TABLE>
<CAPTION>
Corporate
Stores Foodservice Expense Total
-------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Revenues from external
customers $223,442 $110,836 $ - $334,278
Intercompany real estate
charge (income) 3,225 - (3,225) -
Interest income - - 95 95
Interest expense - - 2,223 2,223
Pre-tax income (loss) 974 (1,427) (1,353) (1,806)
</TABLE>
(7) Legal Actions
The Company has been named as 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) Subsequent Event
Pursuant to an agreement dated March 7, 1989, the Company's former Chairman
was obligated to purchase 100,000 common shares. The agreement, as amended at
December 29, 1996, included a fixed purchase price of $8.90 per share. On April
22, 1999, the Company's former Chairman fulfilled his obligation by purchasing
the 100,000 common shares.
7
<PAGE>
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 January 3, 1999.
Summary
Smart & Final Inc. (the "Company") reported a net loss of $0.5 million, or
$0.02 per diluted share, for the twelve weeks ended March 28, 1999, compared to
a net loss of $2.0 million, or $0.09 per diluted share, in the twelve weeks
ended March 29, 1998. The 1998 quarter included a cumulative effect of
accounting change, net of tax, charge of $1.1 million, or $0.05 per diluted
share, related to adoption of the American Institute of Certified Public
Accountants ("AICPA") Statement of Position 98-5 which required write-off of
start-up costs.
Operating earnings increased sharply from the prior year first quarter of
$0.3 million to $4.0 million in the current year quarter. This improvement was
attributed to increased sales, improved gross margin rates as well as reduced
operating and administrative expenses as a result of aggressive cost reduction
programs.
Although operating results improved, the Company reported a loss for the
first quarter of 1999 as a result of increased interest costs. Interest
expense, net increased due to higher debt levels and rate increases. A
previously announced fixed price rights offering to the Company's stockholders
is expected to significantly reduce interest expense and improve the Company's
financial position.
Results of Operations
The following table shows, for the periods indicated, certain condensed
consolidated income statement data, expressed as a percentage of sales.
<TABLE>
<CAPTION>
Twelve Weeks Ended
-----------------------
March 28, March 29,
1999 1998
---------- ----------
<S> <C> <C>
Sales:
Stores 73.9% 66.8%
Foodservice 26.1 33.2
----- -----
Sales, consolidated total 100.0 100.0
Cost of sales, buying and occupancy 87.4 88.1
----- -----
Gross margin 12.6 11.9
Operating and administrative expenses 11.6 11.8
----- -----
Income from operations 1.0 0.1
Interest expense, net 1.3 0.6
----- -----
Income (loss) before income taxes and
cumulative effect of accounting change (0.3) (0.5)
Income taxes (0.1) (0.2)
----- -----
Income (loss) before cumulative effect of
accounting change (0.1) (0.3)
Cumulative effect of accounting
change (start-up costs) -- 0.3
----- -----
Net income (loss) (0.1)% (0.6)%
===== =====
*Totals do not aggregate due to rounding.
</TABLE>
8
<PAGE>
The following table sets forth pre-tax profit or loss, in millions, for
each of the Company's various reportable segments:
<TABLE>
<CAPTION>
Twelve Weeks Ended
----------------------
March 28, March 29,
1999 1998
--------- ---------
<S> <C> <C>
Stores $ 3.5 $ 1.0
Foodservice 0.5 (1.4)
----- -----
Segment totals 4.0 (0.4)
Interest and other corporate expenses (5.1) (1.4)
----- -----
Consolidated pre-tax loss $(1.1) $(1.8)
===== =====
</TABLE>
Background
The Company continued its expansion program in 1999 and 1998 as shown in
the following table:
<TABLE>
Quarter Ended Year Ended
------------- ----------
March 28, March 29, January 3,
1999 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
USA:
Beginning store count 209 167 167
Stores opened:
New stores 1 2 5
Relocations -- 2 3
Acquired -- -- 39
Stores relocated or closed -- (2) (5)
----- ----- ----
Ending store count 210 169 209
----- ----- ----
MEXICO:
Beginning store count 6 5 5
New stores opened -- 1 1
----- ----- ----
Ending store count 6 6 6
----- ----- ----
Grand Total 216 175 215
===== ===== ====
</TABLE>
Mexico operations are not consolidated and are reported on the equity
basis.
Although new stores are important to the Company's continued growth and
profitability, each new store opening initially penalizes earnings because
stores are not immediately profitable. To date new stores opened in existing
market areas generally have achieved break even on a pre-tax basis after
allocation of all corporate expenses within the first six to eighteen months.
Stores opened in new market areas, which mature more slowly, generally have
achieved break even in approximately three years. Because of the complex
customer mix, break-even of the Florida stores is expected to take an even
longer period.
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.
9
<PAGE>
Comparison of Twelve Weeks Ended March 28, 1999 with Twelve Weeks Ended March
29, 1998.
Sales. First quarter 1999 sales were $398.3 million, up 19.2% over the
comparable 1998 period. Sales reflect the May, 1998 acquisition of the United
Grocers Cash & Carry ("Cash & Carry") store operations.
Store sales, including Cash & Carry, increased 31.8%, from $223.4 million
in first quarter 1998 to $294.5 million in first quarter 1999. Excluding Cash &
Carry, store sales increased 8.1% in the first quarter of 1999 versus the first
quarter of 1998. Comparable store sales for the first quarter of 1999 increased
4.6% over the prior year period. Average comparable transaction size also
increased, by 4.1%, to $31.98 in the first quarter of 1999. These increases are
partially due to better weather conditions in 1999 than the record rainfall
experienced in the Company's major markets in the first part of 1998. Store
sales reflect the eight new stores, including relocations, opened in 1998 and
the one new store opened in the first quarter of 1999. Additionally, 39 stores
were acquired from United Grocers in 1998.
Foodservice distribution sales decreased 6.3% from $110.8 million in the
first quarter of 1998 to $103.9 million in the current year first quarter. This
decrease reflects the decision made in the later part of 1998 to focus
foodservice growth on improved credit quality and profitability of foodservice
distribution business versus aggressive sales growth.
Gross Margin. Gross margin improved 26.0% from $39.7 million in the first
quarter of 1998 to $50.1 million in the current year quarter. As a percentage
of sales, gross margin improved from 11.9% in the prior year quarter to 12.6% in
first quarter 1999. The increase in gross margin percentage was due to a number
of factors: higher foodservice margins were achieved by expense reductions and a
focus on improved credit quality and margins, store margins increased due to
purchasing economies and store assortment mix, and a higher proportion of store
sales as a percentage of overall sales. Store sales generate higher gross
margins and higher expenses than foodservice distribution sales. The increases
in gross margin were offset by the inclusion of Cash & Carry, acquired in May
1998, which operates at lower gross margin and expense levels than Smart & Final
stores.
Operating and Administrative Expenses. Operating and administrative
expenses for the first quarter of 1999 were $46.1 million, up $6.7 million, or
17.0%, over the first quarter of 1998. These expenses, as a percentage of
sales, decreased from 11.8% in the first quarter of 1998 to 11.6% in the first
quarter of 1999. Expenses, as a percentage of sales, declined due to lower
store expense levels resulting from the inclusion of Cash & Carry, acquired in
May 1998, which operates at lower gross margin and expense levels than Smart &
Final stores and an intensive corporate-wide expense reduction program, offset
by higher foodservice distribution sales commission expenses related to higher
foodservice distribution gross margins.
Interest expense, net. Interest expense, net increased from $2.1 million
in the first quarter of 1998 to $5.1 million in the first quarter of 1999.
Interest expense, net increased due to higher weighted average borrowings as
well as higher weighted average interest rates as a result of the Company's debt
restructuring in late 1998. Weighted average borrowings for the first quarter
of
10
<PAGE>
1999 increased over the comparable 1998 quarter as a result of spending required
for working capital and the Company's expansion program which includes the Cash
& Carry acquisition.
Financial Condition
Cash and cash equivalents were $20.9 million on January 3, 1999, and $34.0
million at March 28, 1999. Cash provided by operating activities for the twelve
weeks ended March 28, 1999 was $16.5 million and an increase in revolving debt
borrowings provided $10.0 million. Payments on debt were $1.4 million and other
financing activities used $1.7 million for the quarter. Investments in fixed
asset and other additions were $9.2 million and $1.1 million of dividends were
paid.
During the twelve weeks ended March 28, 1999, trade notes and accounts
receivable decreased $7.2 million and inventories declined by $6.1 million as a
result of a program to reduce cash investments in working capital. Other
changes in operating assets and liabilities generally reflect the timing of
receipts and disbursements. Prepaid expenses decreased $5.0 million, accounts
payable decreased $4.2 million, and other liabilities decreased $4.0 million in
the quarter.
Stockholders' equity decreased by $0.4 million to $188.9 million at March
28, 1999 as a result of the $0.5 million loss for the first quarter of 1999 less
$0.1 million increase due to the issuance of stock.
Liquidity and Capital Resources
Historically, the Company's primary source of liquidity has been cash flow
from operations. Cash provided by operating activities was $16.5 million in the
first quarter of 1999, up from $12.7 million in the comparable 1998 period. At
March 28, 1999, the Company had cash of $34.0 million, compared to $20.9 million
at January 3, 1999. The Company had $219.0 million of debt, excluding capital
leases, and stockholders' equity of $188.9 million at March 28, 1999.
On April 2, 1999, the Company filed a registration statement for a fixed
price rights offering to its stockholders. The Company intends to distribute to
its stockholders subscription rights to purchase additional shares of common
stock at a discount to the market price of the stock. The total amount of the
offering is expected to be $60 million. The Company expects to complete this
offering during the second quarter of 1999. The principal purpose of the
proposed rights offering is to increase equity capital and reduce debt of the
Company. The Company's majority stockholder, Casino USA, has indicated that it
will exercise all of its subscription rights and will purchase any shares in the
rights offering not subscribed for by other stockholders. Casino USA is
expected to pay for shares it subscribes for by exchanging up to all of the
$55.4 million principal of Casino USA's loan to the Company for new shares based
on the subscription price set in the offering.
The Company was not in compliance with financial covenants contained in its
loan agreements at the end of fiscal 1998. Accordingly, the Company's debt has
been classified as currently payable in the Company's consolidated balance
sheet. As of March 12, 1999, the
11
<PAGE>
Company has received a waiver of default of certain financial covenants under
the Company's bank credit facilities, for a period extending until June 30,
1999. Continuation of the waiver until such date requires the performance by the
Company of certain operating earnings and financial reporting requirements. The
waiver also requires that the Company file its registration statement for the
rights offering by April 6, 1999 and consummate the offering prior to June 30,
1999. If the Company is not successful in complying with existing financial
covenants, it may be required to renegotiate the terms of its loan documents or
seek another waiver of certain financial requirements.
The Company expects to be able to fund future acquisitions and other cash
requirements by a combination of available cash, cash from operations, lease
financings and other borrowings and proceeds from the issuance of equity
securities. Assuming compliance with financial covenants, it believes that its
sources of funds are adequate to provide for working capital, other capital
expenditures, and debt service requirements for the foreseeable future.
Year 2000
The Company relies on a diverse assortment of computer hardware and
software, the integrated operation of which is essential to the successful
implementation of the Company's operations. In 1996, the Company began a
comprehensive review of its information technology systems and other systems and
equipment and has developed a Year 2000 implementation program. The
implementation program has been reviewed by the Company's Board of Directors.
Full compliance and testing is scheduled to be completed by the end of third
quarter 1999.
The entire implementation program is divided into three broad systems, the
corporate systems, the store systems and the foodservice systems and the program
has two phases, the impact analysis phase and the modification or replacement
phase.
The impact analysis phase for the corporate systems, includes the
identification of date sensitive computer codes within the systems, has been
completed. The modification or replacement phase for the corporate systems is
substantially complete with one remaining subsystem to be completed by the end
of third quarter 1999.
The impact analysis phase for the store systems has been completed and the
modification or replacement phase is expected to be completed by mid-1999. The
impact analysis phase for the foodservice systems also has been completed, and
the modification or replacement phase is on schedule to be completed by the end
of the second quarter of 1999.
Except for the cost of replacement systems, the Company will expense, as
incurred, the cost of the Year 2000 program. The Company is funding the costs
associated with the Year 2000 program through operating cash flows. The Company
estimates the total incremental cost of the Year 2000 program will not exceed
$2.3 million. As of March 28, 1999, the Company had incurred approximately $1.5
million in costs with respect to the Year 2000 program.
As part of the Year 2000 project, the Company has identified relationships
with third parties, including vendors, suppliers, and service providers, which
the Company believes are
12
<PAGE>
critical to its business operations. The Company is in the process of
communicating with these third parties through questionnaires, letters and
interviews in an effort to determine the extent to which they are addressing
their Year 2000 issues. The Company will continue to communicate with, assess
and monitor the progress of these third parties in resolving Year 2000 issues.
The Company anticipates minimal disruptions in its operations as a result
of system failures related to Year 2000 issues. If the Company or a key third
party experiences a systems failure due to the century change, the Company
believes the most significant adverse impact would be its inability to
communicate with suppliers concerning timely delivery of inventory. Other
possible consequences include, but are not limited to, loss of communications
with stores, loss of electric power, and an inability to process customer
transactions or otherwise engage in similar normal business activities. The
Company cannot assure that there will not be an adverse impact on the Company if
third parties do not appropriately address their Year 2000 issues in a timely
manner.
Although the Company does not believe the actual impact of these failures
will be material, the Company is currently developing a contingency plan for
possible Year 2000 issues including the delivery of inventory and processing of
customer transactions. The Company will continue to develop these plans based
on its internal testing results, tests with third parties and its assessment of
other outside risks. The Company will continually refine its contingency plan
throughout 1999, as additional information becomes available.
13
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
Interest Rate Risk
The Company is exposed to market risks relating to fluctuations in interest
rates. 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. Interest rate risk is managed through the use of interest rate collar
contracts. These contracts are entered into with major financial institutions
thereby minimizing risk of credit loss.
Credit Risk
The Company is exposed to credit risk on accounts receivable. The Company
provides credit to 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 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 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.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal proceedings
Not applicable.
Item 2. Changes in Securities
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
-------------- ----------------------
10.56 Fifth Amendment to Smart & Final Inc.
Supplemental Deferred Compensation Plan*
10.57 Third Amendment to Smart & Final Inc.
Directors Deferred Compensation Plan*
10.86 First Amendment to Supplemental Executive
Retirement Plan Master Plan Document*
27 Financial Data Schedule
_________
* Management contracts and compensatory plans, contracts and
arrangements of the Company.
(b) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K on February 17,
1999 reporting its fourth quarter 1998 and year-end operating
results.
2. The Company filed a Current Report on Form 8-K on March 4,
1999 announcing that the Company had eliminated certain
executive level positions within its principal operating
subsidiary, Smart & Final Stores Corporation.
15
<PAGE>
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 3, 1999 /s/ MARTIN A. LYNCH
____________________________________
Martin A. Lynch
Executive Vice President,
Chief Financial Officer, and
Principal Accounting Officer of the Company
16
<PAGE>
SMART & FINAL INC.
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
10.56 Fifth Amendment to Smart & Final Inc. Supplemental
Deferred Compensation Plan
10.57 Third Amendment to Smart & Final Inc. Directors Deferred
Compensation Plan
10.86 First Amendment to Supplemental Executive Retirement Plan
Master Plan Document
27 Financial Data Schedule
17
<PAGE>
EXHIBIT 10.56
FIFTH AMENDMENT
TO THE
SMART & FINAL
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
The Smart & Final Supplemental Deferred Compensation Plan (the "Plan") is
hereby amended, effective as of March 31, 1999, as follows:
1. Section 2.9 of the Plan is amended to read as follows:
"2.9 "Covered Compensation" means annual base salary and bonus, net
of deferrals to any plan other than this Plan, and any other compensation
designated by the Committee. For the Plan Year effective January 1, 1999
the Committee authorizes the Deferral at the Participant's election of (i)
grants of common stock of the Company made after January 1, 1999; (ii)
common stock of the Company received in partial or full payment for
services rendered to the Company; (iii) Restricted (common) Stock of the
company which becomes irrevocably vested in the Participant after January
1, 1999; and (iv) shares of common stock of the Company which become
irrevocably vested in the Participant after January 1, 1999 through the
proper exercise of options on such stock granted by the Company. These
deferral options related to the Company's common stock shall remain
effective for succeeding Plan Years, unless further modified by the
Committee. The Committee, in its sole and absolute discretion, may amend
or terminate these deferral options related to the Company's common stock,
with such amendment or termination to take effect at the beginning of the
following Plan Year."
IN WITNESS WHEREOF, this Fifth Amendment has been executed by duly authorized
persons, as of the effective date written above.
By: /s/ James E. Robinson By: /s/ Richard N. Phegley
--------------------- ----------------------
Title: Senior Vice President Title: Vice President & Treasurer
Smart & Final Stores Corporation
<PAGE>
EXHIBIT 10.57
THIRD AMENDMENT
TO THE
SMART & FINAL
DIRECTORS DEFERRED COMPENSATION PLAN
The Smart & Final Directors Deferred Compensation Plan (the "Plan") is hereby
amended, effective as of March 31, 1999, as follows:
1. Section 2.8 of the Plan is amended to read as follows:
"2.8 "Covered Compensation" means directors' fees received by a
Participant from the Company, whether in cash or in shares of the Company's
common stock, and any other compensation designated by the Committee. For
the Plan Year effective January 1, 1999 the Committee authorizes the
Deferral at the Participant's election of (i) grants of common stock of the
Company made after January 1, 1999; (ii) common stock of the Company
received in partial or full payment for services rendered to the Company;
(iii) Restricted (common) Stock of the company which becomes irrevocably
vested in the Participant after January 1, 1999; and (iv) shares of common
stock of the Company which become irrevocably vested in the Participant
after January 1, 1999 through the proper exercise of options on such stock
granted by the Company. These deferral options related to the Company's
common stock shall remain effective for succeeding Plan Years, unless
further modified by the Committee. The Committee, in its sole and absolute
discretion, may amend or terminate these deferral options related to the
Company's common stock, with such amendment or termination to take effect
at the beginning of the following Plan Year."
2. Section 4.3 of the Plan is amended to read as follows:
"4.3 The Committee shall specify two or more investment funds which
shall serve as indicies for the investment performance of amounts credited
to the Accounts. The Committee shall also permit the total shareholder
return on the Company's common stock to serve as an index for investment
performance of amounts credited to the Accounts. The Accounts shall be
adjusted to reflect the gain or loss such Accounts would experience had
they actually been invested in the specified funds or in the Company's
common stock at the relevant times. The Committee may vary the available
investment funds from time to time, but not more frequently than quarterly.
Subject to Section 4.5, the Participant may select his investment options
for new Deferrals and contributions, or for amounts already credited to his
Account, once per calendar quarter effective as of the last day of such
quarter."
3. A new Section 4.5 is hereby added to the Plan to read as follows:
Directors Deferred Compensation Plan Page 1 of 2
<PAGE>
"4.5 Notwithstanding any other provision herein, amounts which are
elected to be invested in the Company's common stock may not be moved out
of such investment alternative. Such amounts shall be denominated and paid
solely in shares of the Company's common stock."
4. Section 5.6 of the Plan is amended to read as follows:
"5.6 Subject to Section 4.5, all distributions of a Participant's
Account shall be made in cash, and shall be subject to applicable
withholding for taxes."
IN WITNESS WHEREOF, this Third Amendment has been executed by duly authorized
persons, as of the effective date written above.
By: /s/ James E. Robinson By: /s/ Richard N. Phegley
--------------------- ----------------------
Title: Senior Vice President Title: Vice President & Treasurer
Smart & Final Stores Corporation
Directors Deferred Compensation Plan Page 2 of 2
<PAGE>
EXHIBIT 10.86
FIRST AMENDMENT
TO THE
SMART & FINAL
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Smart & Final Supplemental Executive Retirement Plan (the "Plan") is
hereby amended, effective as of March 31, 1999, as follows:
1. Section 1.29 of the Plan is amended to read as follows:
"1.29 "Standard Benefit" shall mean, for a Participant:
(a) the product of the Standard Benefit Percentage multiplied by
the Participant's Final Average Compensation; less
----
(b) the Actuarial Equivalent of the Participant's benefits under
the Retirement Income Plan, calculated as a single life annuity
at age sixty-five (65); and
(c) For the Participant, Roger M. Laverty III, the Participant has
a vested interest in the Plan as of February 12, 1998 and the
Participant's Standard Benefit shall be determined according to
(a) and (b) above, and using a Standard Benefit Percentage of
50% and Final Average Compensation of $694,000; and
(d) For the Participant, Gerald L. Good, the Participant has a
vested interest in the Plan as of January 1, 1998 and the
Participant's Standard Benefit shall be $76,000 per year,
determined without regard to (a) or (b) above; and
(e) For the Participant, Ross E. Roeder, the Participant's interest
in the Plan will be vested as of January 3, 2002 and the
Participant's Standard Benefit shall be $125,000 per year,
determined without regard to (a) above, but such Standard
Benefit shall be reduced by any amount available to the
Participant under (b) above."
IN WITNESS WHEREOF, this First Amendment has been executed by duly authorized
persons, as of the effective date written above.
By: /s/ James E. Robinson By: /s/ Richard N. Phegley
--------------------- ----------------------
Title: Senior Vice President Title: Vice President & Treasurer
Smart & Final Stores Corporation
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