<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 October 8, 2000
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 29,203,114 shares of common stock outstanding as of November
15, 2000.
================================================================================
<PAGE>
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 17
Part II
Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
1
<PAGE>
SMART & FINAL INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
October 8, January 2,
ASSETS 2000 2000
------ ---------- ----------
Current assets: (Unaudited)
<S> <C> <C>
Cash & cash equivalents $ 30,954 $ 42,936
Trade notes and accounts receivable, less
allowance for doubtful accounts of
$2,924 in 2000 and $4,687 in 1999 65,396 63,494
Inventories 161,645 154,550
Prepaid expenses 9,284 7,835
Deferred tax asset 10,834 10,834
---------- ----------
Total current assets 278,113 279,649
Property, plant and equipment:
Land 35,742 35,742
Buildings and improvements 29,116 29,116
Leasehold improvements 99,037 95,337
Fixtures and equipment 176,501 166,234
---------- ----------
340,396 326,429
Less - Accumulated depreciation and amortization 142,391 122,499
---------- ----------
Net property, plant and equipment 198,005 203,930
Assets under capital leases, net of accumulated
amortization of $7,752 in 2000 and $7,233 in 1999 7,222 8,343
Goodwill, net of accumulated amortization
of $4,863 in 2000 and $3,640 in 1999 53,864 55,087
Deferred tax asset 4,734 4,734
Other assets 28,518 30,856
---------- ----------
Total assets $ 570,456 $ 582,599
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 4,033 $ 3,928
Accounts payable 90,103 92,513
Accrued salaries and wages 22,915 18,360
Other accrued liabilities 39,288 34,150
---------- ----------
Total current liabilities 156,339 148,951
Long-term liabilities:
Notes payable, net of current maturities 10,224 12,865
Notes payable to Parent 15,965 15,965
Bank debt 92,000 117,500
Obligations under capital leases 9,838 11,140
Other long-term liabilities 3,818 3,946
Workers' compensation reserve, postretirement
and postemployment benefits 20,414 18,785
---------- ----------
Total long-term liabilities 152,259 180,201
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; 29,203,114 shares issued
and outstanding in 2000 and 29,136,995 in 1999) 292 291
Additional paid-in capital 204,878 204,450
Notes receivable for stock (100) (100)
Accumulated other comprehensive loss (780) (835)
Retained earnings 57,568 49,641
---------- ----------
Total stockholders' equity 261,858 253,447
---------- ----------
Total liabilities and stockholders' equity $ 570,456 $ 582,599
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Sixteen Weeks Ended Forty Weeks Ended
------------------------------ -----------------------------
October 8, October 10, October 8, October 10,
2000 1999 2000 1999
-------------- ------------- -------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 587,313 $ 555,890 $ 1,429,672 $ 1,372,835
Cost of sales, buying and occupancy 504,767 482,483 1,232,747 1,196,133
-------------- ------------- -------------- -------------
Gross margin 82,546 73,407 196,925 176,702
Operating and administrative expenses 71,958 65,931 174,176 157,913
-------------- ------------- -------------- -------------
Income from operations 10,588 7,476 22,749 18,789
Interest expense, net 4,170 4,510 10,652 14,618
-------------- ------------- -------------- -------------
Income before income tax provision and extraordinary item 6,418 2,966 12,097 4,171
Income tax provision 2,452 1,089 4,441 1,563
-------------- ------------- -------------- -------------
Income from consolidated subsidiaries 3,966 1,877 7,656 2,608
Equity earnings in unconsolidated subsidiary 129 343 267 626
-------------- ------------- -------------- -------------
Income before extraordinary item 4,095 2,220 7,923 3,234
Extraordinary loss on extinguishment of debt,
net of tax effect of $147 - - - 166
-------------- ------------- -------------- -------------
Net income $ 4,095 $ 2,220 $ 7,923 $ 3,068
============== ============= ============== =============
Earnings per common share:
Earnings per common share before extraordinary item $ 0.14 $ 0.08 $ 0.27 $ 0.13
Extraordinary loss on extinguishment of
debt per common share - - - (0.01)
-------------- ------------- -------------- -------------
Earnings per common share $ 0.14 $ 0.08 $ 0.27 $ 0.12
============== ============= ============== =============
Weighted average common shares 29,203,144 29,136,995 29,187,912 25,426,416
============== ============= ============== =============
Earnings per common share, assuming dilution:
Earnings per common share, assuming dilution,
before extraordinary item $ 0.14 $ 0.08 $ 0.27 $ 0.13
Extraordinary loss on extinguishment of
debt per common share - - - (0.01)
-------------- ------------- -------------- -------------
Earnings per common share, assuming dilution $ 0.14 $ 0.08 $ 0.27 $ 0.12
============== ============= ============== =============
Weighted average common shares
and common share equivalents 29,268,181 29,204,499 29,239,544 25,475,529
============== ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Forty Weeks Ended
----------------------------------
October 8, October 10,
2000 1999
-------------- ---------------
Cash Flows From Operating Activities: (Unaudited)
<S> <C> <C>
Net income $ 7,923 $ 3,068
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on disposal of fixed assets (129) (999)
Depreciation and amortization 25,628 23,868
Amortization of deferred financing costs 1,393 1,579
Extraordinary loss on extinguishment of debt - 166
Equity earnings in unconsolidated subsidiary (267) (626)
Decrease (increase) in:
Trade notes and accounts receivable (1,902) 10,034
Inventories (7,095) 9,219
Prepaid expenses and other (1,449) 8,234
Increase (decrease) in:
Accounts payable (2,013) (18,979)
Accrued liabilities 4,555 2,963
Other liabilities 7,482 (4,278)
------------- -------------
Net cash provided by operating activities 34,126 34,249
------------- -------------
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment (15,602) (20,389)
Proceeds from disposal of property, plant and equipment 149 2,920
Other (1,317) (1,985)
------------- -------------
Net cash used in investing activities (16,770) (19,454)
------------- -------------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net of costs - 20,163
Payments on bank line of credit (25,500) (31,000)
Borrowings on bank line of credit - 10,000
Payments on notes payable (3,838) (5,661)
Change in payable to Parent and affiliates - (1,681)
Quarterly dividend paid - (1,127)
------------- -------------
Net cash used in financing activities (29,338) (9,306)
------------- -------------
Increase (decrease) in cash and cash equivalents (11,982) 5,489
Cash and cash equivalents at beginning of period 42,936 20,887
------------- -------------
Cash and cash equivalents at end of period $ 30,954 $ 26,376
============= =============
Noncash Investing and Financing Activities:
Note to affiliates extinguished for common stock issued $ - $ 39,423
------------- -------------
Total noncash transactions $ - $ 39,423
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Smart & Final Inc. (the "Company") is a Delaware corporation and is a 57.1
percent owned subsidiary of Casino USA, Inc. (the "Parent"). Casino Guichard-
Perrachon, S.A. ("Casino France"), a publicly traded French joint stock limited
liability company, is the principal shareholder of the Parent. Collectively,
Casino France and its subsidiaries currently own approximately 60.2 percent of
the Company's common stock.
The consolidated balance sheet as of October 8, 2000, the consolidated
statements of income and cash flows for the sixteen and forty weeks ended
October 8, 2000 and October 10, 1999 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 2, 2000.
2. Recent Accounting Pronouncements
In June 1998, Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which established accounting and reporting
standards for derivative instruments and for hedging activities. SFAS No. 133
was amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133," which deferred the
implementation of SFAS No. 133 until fiscal years beginning after June 15, 2000.
In June 2000, SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" amended SFAS No. 133. Currently, the Company has
limited use of derivative financial instruments and believes that adoption of
SFAS No. 133, as amended by SFAS No. 138, will not have a material impact on its
results of operations or financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", which summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 was amended by SAB 101A and then SAB 101B, which delays the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on its financial position or
results of operations when implemented.
5
<PAGE>
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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. Comprehensive income
Beginning in January 2000, 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 other comprehensive income (loss) and reflected in Accumulated other
comprehensive loss within Stockholders' equity. During fiscal years 1997, 1998
and 1999, in accordance with generally accepted accounting principles, the
functional currency had been the U.S. dollar and as such, foreign currency
translation gains and losses were included in results of operations for those
fiscal years.
Comprehensive income was computed as follows, amounts in thousands:
<TABLE>
<CAPTION>
Sixteen Weeks Ended Forty Weeks Ended
------------------------ -----------------------
October 8, October 10, October 8, October 10,
---------- ----------- ---------- -----------
2000 1999 2000 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income $ 4,095 $ 2,220 $ 7,923 $ 3,068
Other comprehensive income:
Foreign currency translation adjustments (164) - $ 55 $ -
---------- ----------- ---------- -----------
Total comprehensive income $ 3,931 $ 2,220 $ 7,978 $ 3,068
========== =========== ========== ===========
</TABLE>
5. Interest expense
Interest expense was incurred primarily on borrowings under the Company's
revolving credit facilities and loans from its Parent. The Company paid $11.6
million and $17.2 million in interest expense in the forty weeks ended October
8, 2000 and October 10, 1999, respectively.
6. 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 or loss, the Company has made tax sharing
payments of $534,000 to the Parent in the forty weeks ended October 8, 2000 and
received tax sharing benefits of $1,174,000 in the forty weeks ended October 10,
1999 from the Parent. The Company paid $60,000 and $55,000 of income taxes to
states other than California in the forty weeks ended October 8, 2000 and
October 10, 1999, respectively. The Company paid $3,685,000 of federal income
taxes in the forty weeks ended October 8, 2000. The Company did not pay any
federal income taxes in the forty weeks ended October 10, 1999 due to taxable
losses in the first three quarters of 1999.
6
<PAGE>
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. 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.
8. 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 sixteen weeks ended October 8, 2000:
Corporate
Stores Foodservice Expense Total
--------- ------------ -------- --------
Revenues from external
customers $468,859 $118,454 $ - $587,313
Intercompany real estate
charge (income) 4,260 - (4,260) -
Interest income - - 485 485
Interest expense - - 4,655 4,655
Pre-tax income (loss) 13,055 (1,983) (4,654) 6,418
7
<PAGE>
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the sixteen weeks ended October 10, 1999:
Corporate
Stores Foodservice Expense Total
---------- ------------ --------- ---------
Revenues from external
customers $ 436,002 $119,888 $ - $555,890
Intercompany real estate
charge (income) 4,213 - (4,213) -
Interest income - - 344 344
Interest expense - - 4,854 4,854
Pre-tax income (loss) 10,946 (3,736) (4,244) 2,966
For the forty weeks ended October 8, 2000:
Corporate
Stores Foodservice Expense Total
---------- ------------ --------- ----------
Revenues from external
customers $1,120,398 $309,274 $ - $1,429,672
Intercompany real estate
charge (income) 10,607 - (10,607) -
Interest income - - 1,179 1,179
Interest expense - - 11,831 11,831
Pre-tax income (loss) 27,073 (2,682) (12,294) 12,097
For the forty weeks ended October 10, 1999:
Corporate
Stores Foodservice Expense Total
---------- ----------- --------- ----------
Revenues from external
customers $1,053,891 $318,944 $ - $1,372,835
Intercompany real estate
charge (income) 10,555 - (10,555) -
Interest income - - 745 745
Interest expense - - 15,363 15,363
Pre-tax income (loss) before
extraordinary item 23,409 (5,007) (14,231) 4,171
Cost allocation for servicing stores was revised in 2000. If we had used
the new allocation method, Foodservice pre-tax income would have been
approximately $200,000 and $900,000 lower for the sixteen weeks and forty weeks
ended October 10, 1999, respectively and Stores pre-tax
8
<PAGE>
SMART & FINAL INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
income would have been approximately $200,000 and $900,000 higher for the
sixteen weeks and forty weeks ended October 10, 1999, respectively.
9. 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.
9
<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 2, 2000.
Summary
Smart & Final Inc. (the "Company") reported net income of $4.1 million, or
$0.14 per diluted share, for the sixteen weeks ended October 8, 2000, compared
to net income of $2.2 million, or $0.08 per diluted share, in the sixteen-week
period ended October 10, 1999.
For the forty weeks ended October 8, 2000, the Company reported net income
of $7.9 million, or $0.27 per diluted share, compared to net income of $3.1
million, or $0.12 per diluted share, in the forty weeks ended October 10, 1999.
The 1999 results include an extraordinary loss on extinguishment of debt, net of
tax, of $0.2 million, or $0.01 per diluted share.
Operating earnings increased from $18.8 million in the first three quarters
of the prior year to $22.7 million in the same period of the current year. The
improvement is attributed to increased sales and improved gross margin rates,
partially offset by increased operating and administrative expenses.
Interest expense, net decreased $4.0 million in the first three quarters of
2000 primarily as a result of debt reduction from the proceeds of a $60 million
common stock offering completed in June 1999.
10
<PAGE>
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.
<TABLE>
<CAPTION>
Sixteen Weeks Ended Forty Weeks Ended
------------------------- -------------------------
October 8, October 10, October 8, October 10,
2000 1999 2000 1999
-------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Sales:
Store 79.8% 78.4% 78.4% 76.8%
Foodservice distribution sales 20.2 21.6 21.6 23.2
----- ----- ----- -----
Sales, consolidated total 100.0 100.0 100.0 100.0
Cost of sales, buying and occupancy 85.9 86.8 86.2 87.1
----- ----- ----- -----
Gross margin 14.1 13.2 13.8 12.9
Operating and administrative expenses 12.3 11.9 12.2 11.5
----- ----- ----- -----
Income from operations 1.8 1.3 1.6 1.4
Interest expense, net 0.7 0.8 0.7 1.1
----- ----- ----- -----
Income before income tax provision
and extraordinary item 1.1 0.5 0.8 0.3
Income tax provision 0.4 0.2 0.3 0.1
----- ----- ----- -----
Income from consolidated subsidiaries 0.7 0.3 0.5 0.2
Equity earnings in unconsolidated
subsidiary - 0.1 - -
----- ----- ----- -----
Income before extraordinary item 0.7 0.4 0.6 0.2
Extraordinary loss on extinguishment
of debt, net of tax - - - -
----- ----- ----- -----
Net income 0.7% 0.4% 0.6% 0.2%
===== ===== ===== =====
</TABLE>
The following table sets forth pre-tax profit or loss, in millions,
for each of the Company's various reportable segments:
<TABLE>
<CAPTION>
Sixteen Weeks Ended Forty Weeks Ended
------------------------- -------------------------
October 8, October 10, October 8, October 10,
2000 1999 2000 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Stores $13.1 $10.9 $27.1 $23.4
Foodservice (2.0) (3.7) (2.7) (5.0)
----- ----- ----- -----
Segment totals 11.1 7.2 24.4 18.4
Interest and other corporate expenses 4.7 4.2 12.3 14.2
----- ----- ----- -----
Consolidated pre-tax income before
extraordinary item $ 6.4 $ 3.0 $12.1 $ 4.2
===== ===== ===== =====
</TABLE>
Cost allocation for servicing stores was revised in 2000. If we had used
the new allocation method, Foodservice pre-tax income would have been
approximately $0.2 million and $0.9 million lower for the sixteen weeks and
forty weeks ended October 10, 1999, respectively and Stores pre-tax income would
have been approximately $0.2 million and $0.9 million higher for the sixteen
weeks and forty weeks ended October 10, 1999, respectively.
11
<PAGE>
Background
The Company plans to continue its store expansion program in the
remainder of fiscal 2000. In fiscal 1999, the Company's primary emphasis was on
assimilating the 39 stores in the Pacific Northwest acquired in 1998:
<TABLE>
<CAPTION>
Sixteen Weeks Ended Forty Weeks Ended Year Ended
----------------------- ------------------------- ------------
October 8, October 10, October 8, October 10, January 2,
2000 1999 2000 1999 2000
---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
USA:
Beginning store count 213 212 212 209 209
Stores opened:
New stores - - 1 3 3
Relocations - - 1 - -
Stores relocated or closed - - (1) - -
---------- ----------- ---------- ----------- ------------
Ending store count 213 212 213 212 212
---------- ----------- ---------- ----------- ------------
MEXICO:
Beginning store count 6 6 6 6 6
New stores opened 1 - 1 - -
---------- ----------- ---------- ----------- ------------
Ending store count 7 6 7 6 6
---------- ----------- ---------- ----------- ------------
Grand Total 220 218 220 218 218
========== =========== ========== =========== ============
</TABLE>
Mexico operations are not consolidated and are reported on the equity
basis.
Management continually assesses each store's profitability on a pre-tax
profit basis after allocation of administrative 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.
Comparison of Sixteen Weeks Ended October 8, 2000 with Sixteen Weeks Ended
October 10, 1999.
Sales. Third quarter 2000 sales were $587.3 million, up 5.7% over the
comparable 1999 period.
12
<PAGE>
Store sales increased 7.5%, from $436.0 million in third quarter 1999 to
$468.9 million in third quarter 2000. Comparable store sales for the third
quarter of 2000 increased 7.3% over the prior year period. Average comparable
transaction size also increased by 3.8%, to $39.01 in the third quarter of 2000.
Store sales reflect the three new stores opened in 1999 and two new and
relocated stores opened in the first half of 2000.
Foodservice distribution sales decreased 1.2% from $119.9 million in the
third quarter of 1999 to $118.5 million in the current year third quarter.
Gross Margin. Gross margin improved 12.4% from $73.4 million in the third
quarter of 1999 to $82.5 million in the current year quarter. As a percentage
of sales, gross margin improved from 13.2% in the prior year quarter to 14.1% in
third quarter 2000. 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.
Operating and Administrative Expenses. Operating and administrative
expenses for the third quarter of 2000 were $72.0 million, up $6.0 million, or
9.1%, over the third quarter of 1999. These expenses, as a percentage of sales,
increased from 11.9% in the third quarter of 1999 to 12.3% in the third quarter
of 2000. Expenses increased mainly due to $1.4 million increase in marketing
spending and $1.1 million increase in provision for performance-based incentive
compensation. Without these increases, expenses, as a percentage of sales,
decreased slightly to 11.8%. Increased marketing spending has been a factor in
the strong sales increase in 2000. The provision for performance-based incentive
compensation increased over prior year due to the improvement in Company
performance. Additionally, the higher utility rates in California, due to
deregulation, and a reduction in gains on sales of property in the current year
caused an increase in expenses. These increases were offset by reduced expenses
at foodservice that resulted from cost-cutting measures taken in the latter part
of the prior year and lower consulting fees mainly related to improving
procurement programs initiated during the third quarter of 1999.
Interest expense, net. Interest expense, net decreased from $4.5 million
in the third quarter of 1999 to $4.2 million in the third quarter of 2000.
Comparison of Forty Weeks Ended October 8, 2000 with Forty Weeks Ended October
10, 1999.
Sales. Sales in the first three quarters of 2000 were $1,429.7 million, up
4.1% from the comparable 1999 period.
Store sales increased 6.3%, from $1,053.9 million to $1,120.4 million in
the first three quarters of 2000. Comparable store sales increased 5.9% in the
first three quarters of 2000 over the prior year period. Average comparable
transaction size also increased 2.9% to $38.15 in the first three quarters of
2000. Sales early in 2000 were soft due to customer Y2K stockpiling late in
1999 and heavy rainfall also impacted sales in the first quarter of the year.
13
<PAGE>
Foodservice distribution sales decreased 3.0% to $309.3 million for the
first three quarters of 2000, but the rate of decline in the third quarter was
lower than in the first half of 2000.
Gross Margin. Gross margin improved 11.4% from $176.7 million in the first
three quarters of 1999 to $196.9 million in the same period in 2000. As a
percentage of sales, gross margin increased from 12.9% of sales for the first
three quarters of 1999 to 13.8% in the comparable 2000 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. Other than savings from the new national procurement
program, improvement of foodservice margin rates was also attributable to a
continuing focus on improved credit quality and profitability.
Operating and Administrative Expenses. Operating and administrative
expenses for the first three quarters of 2000 were $174.2 million, or 12.2% of
sales, compared with $157.9 million, or 11.5% of sales, in the same period of
1999. Expenses increased, compared to the first three quarters of 1999, due to
$3.0 million increase in marketing expense, $3.0 million increase in provision
for performance-based incentive compensation and $1.3 million increase in
consulting fees incurred mainly related to improving procurement programs. In
addition, $1.0 million of retroactive medical insurance and other benefit
charges were recorded in the forty-week period of 2000. No similar retroactive
medical insurance and other benefit charges were recorded in the comparable
period of 1999. Excluding these items, expenses, as a percentage of sales,
increased slightly to 11.7%. Additionally, utility expenses increased due to
higher rates in California as a result of deregulation but foodservice expenses
decreased due to the cost reduction measures taken in the latter part of the
prior year.
Interest Expense, net. Interest expense, net decreased from $14.6 million,
or 1.1% of sales, in the first three quarters of 1999 to $10.7 million, or 0.7%
of sales, in the comparable 2000 period. This decrease was primarily a result of
debt reduction from the net proceeds of a $60 million common stock offering
completed in June 1999.
Financial Condition
Cash and cash equivalents were $42.9 million on January 2, 2000 and $31.0
million at October 8, 2000. Operating activities provided cash of $34.1 million
for the forty weeks ended October 8, 2000. For the first forty weeks of 2000,
payments on bank and other debt were $29.3 million and investments in fixed
asset and other additions were $16.7 million.
During the forty weeks ended October 8, 2000, inventories increased by $7.1
million. The related accounts payable decreased $2.0 million. Trade notes and
accounts receivable increased $1.9 million. Other changes in operating assets
and liabilities generally reflect the timing of receipts and disbursements.
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Stockholders' equity increased $8.5 million to $261.9 million at October 8,
2000. This increase includes $7.9 million of income for the first forty weeks of
2000, $0.5 million from the issuance of stock and other stock agreements and a
$0.1 million gain in translation adjustment.
Liquidity and Capital Resources
Historically, the Company's primary source of liquidity has been cash flow
from operations. Cash provided by operating activities was $34.1 million in the
first forty weeks of 2000. At October 8, 2000, the Company had cash of $31.0
million, compared to $42.9 million at January 2, 2000. The Company had $120.8
million of debt, excluding capital leases, and stockholders' equity of $261.9
million at October 8, 2000.
The Company had $219.0 million committed under its Senior Secured Credit
Facilities ("Credit Facilities") at October 8, 2000 and January 2, 2000. At
October 8, 2000, the Company's borrowings under these facilities totaled $174.9
million compared with $200.4 million at January 2, 2000. At October 8, 2000,
the Company had available $44.1 million of unused credit under these facilities.
As of the end of third quarter, 2000, 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 plans to
restructure and extend these facilities early in 2001. 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
financings and other borrowings and proceeds from the issuance of equity
securities. 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
Full compliance of the Company's Year 2000 program was completed before the
end of 1999. Except for the cost of replacement systems, the Company expensed,
as incurred, the cost of the Year 2000 program. The Year 2000 program was funded
through operating cash flows. The Company incurred approximately $2.6 million in
costs with respect to the Year 2000 program.
Subsequent to the end of 1999, the Company believes that its operations are
fully functioning and have not experienced any significant issues related to the
Year 2000 or received any reports from third parties indicating any material
Year 2000 incidents. The Company will continue monitoring for any potential
problems and continue communicating with the third parties to assess any
potential
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Year 2000 issues throughout 2000. 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 any continued exposure exists, the Company has a contingency plan for
possible Year 2000 issues and will continue to update these plans based on
assessments of any subsequent Year 2000 issues as additional information becomes
available.
The Company experienced sales increases in the final weeks of fiscal 1999,
which it believes were due to customers' stockpiling in preparation for possible
year end interruptions in product availability. Consequently, the Company
experienced minor sales decreases in the first few weeks of fiscal 2000.
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 (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.
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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 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.
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.
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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
-------------- ----------------------
10.127 Third Amendment to Participation Agreement
dated as of August 25, 2000
10.128 First Amendment to Deferred Compensation
Agreements dated as of October 23, 2000*
27 Financial Data Schedule
________
* Management contracts and compensatory plans, contracts and
arrangements of the Company.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMART & FINAL INC.
By:
Date: November 16, 2000 /s/ MARTIN A. LYNCH
-------------------------------------------
Martin A. Lynch
Executive Vice President,
Chief Financial Officer, and
Principal Accounting Officer of the Company
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SMART & FINAL INC.
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- ----------------------
10.127 Third Amendment to Participation Agreement dated as of
August 25, 2000
10.128 First Amendment to Deferred Compensation Agreements dated as
of October 23, 2000*
27 Financial Data Schedule
________
* Management contracts and compensatory plans, contracts and arrangements of
the Company.
20
