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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 OCTOBER 11, 1998
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 22,531,179 shares of common stock outstanding as of November
20, 1998.
Number of Sequentially Numbered Pages: 19
Exhibit Index at Page: 18
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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 8
and Results of Operations
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
1
SMART & FINAL INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
OCTOBER 11, JANUARY 4,
ASSETS 1998 1998
- ------ ----------------- ----------------
Current assets: (Unaudited)
Cash & cash equivalents $ 23,916 $ 22,891
Trade notes and accounts receivable, less
allowance for doubtful accounts of
$2,781 in 1998 and $5,518 in 1997 79,879 75,995
Inventories 146,405 129,761
Prepaid expenses 14,942 15,906
Deferred tax asset 9,600 9,600
----------------- ----------------
Total current assets 274,742 254,153
Property, plant and equipment:
Land 36,387 35,631
Buildings and improvements 29,625 29,530
Leasehold improvements 75,963 67,821
Fixtures and equipment 156,515 139,316
----------------- ----------------
298,490 272,298
Less - Accumulated depreciation and amortization 102,941 85,808
----------------- ----------------
Net property, plant and equipment 195,549 186,490
Assets under capital leases, net 4,135 4,535
Goodwill 53,723 18,940
Deferred tax asset 3,148 3,148
Other assets 20,497 20,879
----------------- ----------------
Total Assets $ 551,794 $ 488,145
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt $ 6,103 $ 3,576
Current maturities of notes payable to affiliates 7,600 7,600
Bank line of credit 65,000 37,000
Accounts payable 86,163 77,116
Payable to Parent and affiliates 26,174 18,589
Accrued salaries and wages 12,195 9,528
Other accrued liabilities 30,376 32,262
----------------- ----------------
Total current liabilities 233,611 185,671
Long-term liabilities:
Notes payable, net of current maturities 16,659 4,061
Notes payable to affiliates 22,800 22,800
Bank debt 45,000 45,000
Obligations under capital leases 7,620 8,163
Other long-term liabilities 3,011 2,937
Workers' compensation reserve, postretirement
and postemployment benefits 19,156 18,068
----------------- ----------------
Total long-term liabilities 114,246 101,029
Minority interest - 1,116
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 1998 and 22,386,181 in 1997) 225 224
Additional paid-in capital 144,920 142,865
Cumulative translation loss (835) (835)
Retained earnings 59,627 58,075
----------------- ----------------
Total stockholders' equity 203,937 200,329
----------------- ----------------
Total liabilities and stockholders' equity $ 551,794 $ 488,145
================= ================
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)
Sixteen Weeks Ended Forty Weeks Ended
---------------------------- ----------------------------
October 11, October 5, October 11, October 5,
1998 1997 1998 1997
------------- ------------ ------------ ------------
(Unaudited) (Unaudited)
Sales.............................................................. $ 546,434 $ 442,522 $ 1,261,289 $ 1,084,454
Cost of sales, buying and occupancy................................ 473,566 381,236 1,100,801 928,883
------------- ------------ ------------ ------------
Gross margin....................................................... 72,868 61,286 160,488 155,571
Operating and administrative expenses.............................. 59,619 47,746 142,495 119,750
------------- ------------ ------------ ------------
Income from operations...................................... 13,249 13,540 17,993 35,821
Interest expense, net.............................................. 4,044 2,613 8,610 5,877
------------- ------------ ------------ ------------
Income before income taxes, minority share
of net income, and cumulative effect of accounting change..... 9,205 10,927 9,383 29,944
Provision for income taxes......................................... 3,573 4,227 3,546 11,505
Minority share of net income....................................... - (140) - (24)
------------- ------------ ------------ ------------
Income from consolidated subsidiaries........................ 5,632 6,840 5,837 18,463
Equity earnings in unconsolidated subsidiary....................... 3 - 190 200
------------- ------------ ------------ ------------
Income before cumulative effect of accounting change......... 5,635 6,840 6,027 18,663
Cumulative effect of accounting change (start-up costs, net of
tax effect of $758)........................................... - - 1,090 -
------------- ------------ ------------ ------------
Net income................................................... $ 5,635 $ 6,840 $ 4,937 $ 18,663
============= ============ ============ ============
Earnings per common share:
Earnings per common share before cumulative effect of
accounting change............................................. $ 0.25 $ 0.31 $ 0.27 $ 0.84
Cumulative effect of accounting change per common share......... - - (0.05) -
------------- ------------ ------------ ------------
Earnings per common share....................................... $ 0.25 $ 0.31 $ 0.22 $ 0.84
============= ============ ============ ============
Weighted average common shares..................................... 22,513,649 22,196,781 22,458,109 22,093,548
============= ============ ============ ============
Earnings per common share, assuming dilution:
Earnings per common share, assuming dilution, before
cumulative effect of accounting change........................ $ 0.25 $ 0.30 $ 0.27 $ 0.82
Cumulative effect of accounting change per common share......... - - (0.05) -
------------- ------------ ------------ ------------
Earnings per common share, assuming dilution.................... $ 0.25 $ 0.30 $ 0.22 $ 0.82
============= ============ ============ ============
Weighted average common shares
and common share equivalents................................... 22,594,482 23,014,019 22,746,812 22,881,474
============= ============ ============ ============
Dividend per common share.......................................... $ 0.05 $ 0.05 $ 0.15 $ 0.15
============= ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FORTY WEEKS ENDED
------------------------------------
OCTOBER 11, OCTOBER 5,
1998 1997
------------- -------------
Cash Flows From Operating Activities: (UNAUDITED)
Net income........................................................ $ 4,937 $ 18,663
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on disposal of fixed assets................................ (3,021) (1,840)
Depreciation and amortization................................... 22,409 19,411
Cumulative effect of accounting change, net of taxes............ 1,090 -
Minority share of net income.................................... - (24)
Equity earnings in unconsolidated subsidiary.................... (190) (200)
Decrease (increase) in:
Trade notes and accounts receivable.......................... (890) (13,120)
Inventories.................................................. 6,189 (8,630)
Prepaid expenses and other................................... 1,618 (2,913)
Increase (decrease) in:
Accounts payable............................................. 3,381 (5,903)
Accrued liabilities.......................................... 2,667 (1,416)
Other liabilities............................................ 333 1,462
------------- -------------
Net cash provided by operating activities....................... 38,523 5,490
------------- -------------
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment...................... (26,033) (26,022)
Proceeds from disposal of property, plant and equipment........... 3,580 10,416
Acquisition of business........................................... (44,401) (11,300)
Other............................................................. (1,845) (2,752)
------------- -------------
Net cash used in investing activities........................... (68,699) (29,658)
------------- -------------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock............................ 1,737 3,260
Borrowings on bank line of credit................................. 65,000 25,000
Payments on bank line of credit................................... (37,000) -
Payments on notes payable......................................... (2,918) (2,054)
Increase in payable to Parent and affiliates...................... 7,746 3,835
Quarterly dividend paid........................................... (3,364) (3,321)
------------- -------------
Net cash provided by financing activities....................... 31,201 26,720
------------- -------------
Increase in cash and cash equivalents................................... 1,025 2,552
Cash and cash equivalents at beginning of period........................ 22,891 16,795
------------- -------------
Cash and cash equivalents at end of period.............................. $ 23,916 $ 19,347
============= =============
Noncash Investing and Financing Activities:
Note issued in connection with acquisition of business............ $ 17,500 $ 1,000
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
4
(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"), and Casino Realty,
Inc., a wholly owned subsidiary of Casino USA. On November 2, 1998, Casino
Realty, Inc. was dissolved and its remaining assets were transferred to the
Parent.
The consolidated balance sheet as of October 11, 1998, the consolidated
statements of income for the sixteen and forty weeks ended October 11, 1998 and
October 5, 1997, and cash flows for the forty weeks ended October 11, 1998 and
October 5, 1997 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 statement for the year ended January 4, 1998.
(2) EARNINGS PER COMMON SHARE
Earnings per common share is based on the weighted average number of shares
of common stock 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.
(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) DIVIDEND
On September 28, 1998, the Company declared a dividend of $0.05 per share
to stockholders of record at October 2, 1998. The dividend was paid on October
30, 1998.
5
SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(5) INCOME TAXES
Tax sharing payments for state income taxes made by the Company to the
Parent were $2,224,000 in the forty weeks ended October 5, 1997. In the forty
weeks ended October 11, 1998, the Company received a refund of $1,509,000 from
the Parent for state income taxes overpaid, due to the loss for 1997 and the
first half of 1998. The Company paid $8,075,000 in federal income taxes in the
forty-week period ended October 5, 1997 and did not pay any taxes in the forty-
week period ended October 11, 1998 due to losses in the first half of 1998.
(6) 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.
(7) ACCOUNTING STANDARDS
During the first quarter of 1998, the Company adopted the provisions of the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities". This statement
requires that costs of start-up activities and organization costs be expensed as
incurred. Adoption of this statement resulted in a cumulative effect of
accounting change, net of tax, charge of $1.1 million, or $0.05 per diluted
share.
The Company adopted the provisions of AICPA Statement of Position 98-1,
"Accounting for the costs of Computer Software Developed or Obtained for
Internal Use" during the first quarter of 1998. This statement provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. Adoption of this statement had no material impact on the Company's
consolidated financial statements.
During the first quarter of 1998, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive
Income". This statement establishes standards for reporting and display of
comprehensive income. There was no difference between comprehensive income and
net income for the periods presented.
6
SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(8) ACQUISITION OF BUSINESS
On May 15, 1998, the Company acquired the Cash & Carry operating business
of United Grocers, Inc. which included 39 stores operating in the Pacific
Northwest. The purchase price consisted of $42.5 million in cash, plus a $17.5
million five-year unsecured note. The cash payment was financed by a bridge
loan from the Company's major commercial bank. The results of operations for
the sixteen and forty weeks ended October 11, 1998 include the results of
operations of the acquired Cash & Carry stores since May 15, 1998. The
acquisition has been accounted for using the purchase method of accounting. The
purchase price has been allocated to assets acquired based on preliminary
estimates subject to change when additional information and studies are
completed. The excess of the aggregate purchase price over the fair market
values of the net assets acquired, of approximately $34.7 million, has been
reflected in the balance sheet as "goodwill" and will be amortized over forty
years.
(9) BRIDGE LOAN
Effective April 30, 1998, the Company entered into a Credit Agreement
("Bridge Loan") with Credit Lyonnais Los Angeles Branch for $65 million. The
Bridge Loan has an interest rate structure similar to the Company's $50 million
long-term revolving unsecured line of credit. Proceeds from the Bridge loan
were used to fund the cash payment associated with the United Grocers Cash &
Carry store operations acquisition and to reduce other outstanding debt. The
Bridge loan matures on April 29, 1999.
(10) SUBSEQUENT EVENTS
Effective November 13, 1998, the Company entered into a $55.4 million Loan
Agreement ("Casino Loan") with Casino USA, Inc. The Casino Loan replaces the
Company's existing unsecured promissory note that was issued in conjunction with
the 1996 acquisition of real property from Casino USA, Inc. and Casino Realty,
affiliated parties, that had an outstanding balance of $30.4 million. It also
replaces all outstanding advances made to the Company from Casino USA, Inc. and
Casino Realty. Interest for this loan is at LIBOR plus 4.50%. The Casino Loan
matures on February 15, 2002.
Effective November 13, 1998, the Company entered into Senior Secured Credit
Facilities with a group of banks totaling $240 million. The Senior Secured
Credit Facilities include a $150 million Revolving Credit Facility ("Revolving
Loan") and a $90 million Secured Lease Facility. These facilities expire on
November 13, 2001. At the Company's option, the Revolving Loan can be used to
support daily borrowings up to $15 million and up to $10 million of commercial
letters of credit. The Revolving Loan replaces the Company's existing $65
million Bridge Loan and its existing $50 million revolving line of credit. The
Secured Lease Facility replaces the Company's three existing $30 million lease
facilities. Interest for these facilities is at LIBOR, or the Administrative
Agent's reference rate, plus designated amounts.
7
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 annual report on Form 10-K for the year ended January 4, 1998.
SUMMARY
Smart & Final Inc. (the "Company") reported net income of $5.6 million, or
$0.25 per diluted share, for the sixteen weeks ended October 11, 1998, compared
to net income of $6.8 million, or $0.30 per diluted share, in the sixteen weeks
ended October 5, 1997.
For the forty weeks ended October 11, 1998, the Company reported net income
of $4.9 million, or $0.22 per diluted share, compared to net income of $18.7
million, or $0.82 per diluted share, for the forty weeks ended October 5, 1997.
The 1998 period reflects a net of tax charge of $1.1 million, or $0.05 per
diluted share, which represents the cumulative effect of accounting change
related to adoption of the American Institute of Certified Public Accountants
("AICPA") Statement of Position 98-5.
The decline in operating earnings for the third quarter and for the first
three quarters of the year was attributed primarily to a decline in year to year
earnings from Florida foodservice operations and reductions in vendor rebate and
allowance income. Florida operations began encountering distribution problems
early in the third quarter of 1997. Distribution efficiencies have improved in
1998, but comparative first three-quarters earnings are substantially lower due
to these problems. Vendor income is recognized as earned and, although down in
the comparative results for the first three-fourths of the year, is expected to
rise in the last quarter comparative results. Year-to-date results in 1998 were
also affected by slow sales growth as a result of record rainfall early in the
year.
RESULTS OF OPERATIONS
The following table shows, for the periods indicated, certain condensed
consolidated income statement data, expressed as a percentage of total sales.
Sixteen Weeks Ended Forty Weeks Ended
------------------------- -------------------------
October 11, October 5, October 11, October 5,
1998 1997 1998 1997
------------ ----------- ------------ -----------
Sales:
Store sales 75.2% 72.8% 71.9% 73.3%
Foodservice distribution sales 24.8 27.2 28.1 26.7
----- ----- ----- -----
Total Sales........................................ 100.0 100.0 100.0 100.0
Cost of sales, buying and occupancy... 86.7 86.2 87.3 85.7
----- ----- ----- -----
Gross margin...................................... 13.3 13.8 12.7 14.3
Operating and administrative expenses 10.9 10.8 11.3 11.0
----- ----- ----- -----
Income from operations........................... 2.4 3.0 1.4 3.3
Interest expense, net.............................. 0.7 0.6 0.7 0.5
----- ----- ----- -----
Income before income taxes, minority
share of net income, and cumulative
effect of accounting change...................... 1.7 2.5 0.7 2.8
Income taxes....................................... 0.7 1.0 0.3 1.1
Minority share of net income....................... -- -- -- --
----- ----- ----- -----
Income before cumulative effect of
accounting change................................ 1.0 1.5 0.5 1.7
Cumulative effect of accounting
change (start-up costs).......................... -- -- 0.1 --
----- ----- ----- -----
Net income......................................... 1.0% 1.5% 0.4% 1.7%
===== ===== ===== =====
* Totals do not aggregate due to rounding.
8
Background
The Company continued its expansion and acquisition program in 1998 and
1997 as shown in the following table:
Three
Quarter Ended Quarters Ended Year Ended
------------------------- ------------------------- -----------
October 11, October 5, October 11, October 5, January 4,
1998 1997 1998 1997 1998
------------ ----------- ------------ ----------- -----------
USA
Store count beginning 208 168 167 168 168
Stores opened:
In new markets -- -- 1 -- 1
In mature markets 1 -- 2 2 3
Stores acquired -- -- 39 -- --
---- ---- ---- ---- ----
Total 1 -- 42 2 4
Relocations -- 2 3 5 7
Stores relocated/(closed) (2) (2) (5) (7) (12)
---- ---- ---- ---- ----
Store count ending 207 168 207 168 167
MEXICO
Store count beginning 6 5 5 5 5
New stores opened -- -- 1 -- --
---- ---- ---- ---- ----
Store count ending 6 5 6 5 5
Grand Total 213 173 213 173 172
==== ==== ==== ==== ====
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. In recent years new stores opened in
existing market areas generally have achieved break even (after full allocation
of all corporate expenses) within the first six to eighteen months and new
stores opened in new market areas, which mature more slowly, generally have
achieved break even in approximately three years.
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 11, 1998 WITH SIXTEEN WEEKS ENDED
OCTOBER 5, 1997.
Sales. Third quarter 1998 sales were $546.4 million, up 23.5% from the
comparable 1997 period. Sales reflect the May 15, 1998 acquisition of the United
Grocers Cash & Carry ("Cash & Carry") store operations. Cash and Carry sales
were $84.3 million for the third quarter of 1998. Excluding Cash & Carry, Smart
& Final Stores Corporation ("Smart & Final") store sales increased 1.4%.
Comparable store sales for the third quarter of 1998 increased 0.7% from
9
the prior year period. Average comparable transaction size increased 1.5% to
$31.80 in third quarter 1998.
Foodservice distribution sales increased from $120.4 million in the third
quarter of 1997 to $135.6 million in the current year third quarter. Growth was
strong at both Smart & Final Foodservice, formerly Port Stockton Food
Distributors, Inc., where sales increased 10.0% over the prior year quarter and
in Florida foodservice operations, where sales increased by 15.4% over the prior
year quarter.
Gross Margin. Gross margin increased 18.9% from $61.3 million in the third
quarter of 1997 to $72.9 million in the current year quarter. As a percentage of
sales, gross margin declined from 13.8% to 13.3%. The decline was primarily due
to the following: acquisition of Cash & Carry store operations which generate
lower gross margins than Smart & Final stores, lower foodservice gross margins
compared to 1997 caused by increased meat processing and chain account sales and
higher occupancy cost related to new and relocated facilities. These increases
were partially offset by increased vendor rebate and allowance income recognized
in the third quarter, compared to the 1997 third quarter.
Operating and Administrative Expenses. Operating and administrative
expenses for the third quarter of 1998 were $59.6 million, up $11.9 million, or
24.9%, over the third quarter of 1997. These expenses, as a percentage of sales,
increased from 10.8% in the third quarter of 1997 to 10.9% in the third quarter
of 1998. The increased expense levels were the result of increased marketing
costs in an effort to promote sales growth, and increased fringe benefit costs.
These increases were substantially offset by the Cash & Carry operations that
operate at lower expense levels.
Interest Expense, net. Interest expense, net increased from $2.6 million in
the third quarter of 1997 to $4.0 million in the third quarter of 1998 primarily
as the result of higher weighted average borrowings, as well as higher weighted
average interest cost on variable rate debt. Revolving debt borrowings and notes
payable increased primarily due to the Cash & Carry acquisition.
COMPARISON OF FORTY WEEKS ENDED OCTOBER 11, 1998 WITH FORTY WEEKS ENDED OCTOBER
5, 1997.
Sales. For the first three quarters of 1998, sales were $1,261.3 million,
up 16.3% from the comparable 1997 period. Cash & Carry sales were $111.0 million
since their May 1998 acquisition. Smart & Final store sales increased 0.1%.
Comparable store sales decreased 0.9% in the first three quarters of 1998
primarily as a result of the decision to eliminate high discount tobacco sales
in the third quarter of 1997. This decision reduced comparative sales for the
first three quarters of 1998 by approximately 2.3%. Record rainfall in the first
half of 1998 also reduced sales growth. Average comparable transaction size,
also impacted by elimination of high discount tobacco transactions, decreased
0.2% to $31.51 in the first three quarters of 1998.
Foodservice distribution sales increased 22.5% to $354.0 million for the
first three quarters of 1998. Significant sales growth was achieved at Smart &
Final Foodservice where sales increased 27.9% over the 1997 forty-week period.
The Florida foodservice operations experienced strong sales growth of 18.2% over
the first three quarters of 1997.
10
Gross Margin. Gross margin increased 3.2% from $155.6 million in the first
three quarters of 1997 to $160.5 million in the 1998 forty-week period. As a
percentage of sales, gross margin declined from 14.3% of sales for the first
three quarters of 1997 to 12.7% in the comparable 1998 period. The major factors
in the lower gross margin percentage were the reduced vendor rebate and
allowance income, acquisition of Cash & Carry store operations which generate
lower gross margins and lower expense levels, increased occupancy costs due to
new and relocated stores, a higher mix of foodservice sales which generate lower
gross margins, and lower foodservice gross margins compared to 1997 caused by
increased meat processing and chain account sales.
Operating and Administrative Expenses. Operating and administrative
expenses for the first three quarters of 1998 were $142.5 million, or 11.3% of
sales, compared with $119.8 million, or 11.0% of sales, in the first three
quarters of 1997. The increased expenses were increased marketing costs, and
increased fringe benefits. These increases were partially offset by the Cash &
Carry operations that operate at lower expense levels.
Interest Expense, net. Interest expense, net increased from $5.9 million,
or 0.5% of sales, in the first three quarters of 1997 to $8.6 million, or 0.7%
of sales, in the comparable 1998 period. This increase was a result of higher
weighted average borrowings in the first three quarters of 1998 compared to the
first three quarters of 1997, as well as increased weighted average interest
cost on variable rate debt.
FINANCIAL CONDITION
Cash and cash equivalents were $22.9 million at January 4, 1998, and $23.9
million at October 11, 1998. Cash provided by operating activities for the forty
weeks ended October 11, 1998 was $38.5 million and other changes in financing
activities provided $9.5 million of cash for the forty-week period. The net
increase in debt was $25.1 million for the first three quarters of 1998. The
acquisition of the United Grocers Cash & Carry store operations and investments
in fixed assets and other additions during the first three quarters of 1998
required cash of $68.7 million. During the first three quarters of 1998, $3.4
million of dividends were paid.
Excluding the impact of the acquisition of the United Grocers Cash & Carry
store operations, inventories declined by $6.2 million as a result of a
comprehensive turnover analysis at all operating levels to achieve lower
carrying costs. Other changes in operating assets and liabilities generally
reflect the timing of receipts and disbursements. Prepaid expenses decreased
$1.6 million, accounts payable increased $3.4 million, accrued liabilities
increased $2.7 million, other liabilities increased $0.3 million, and trade
notes and accounts receivable increased $0.9 million in the first three quarters
of 1998.
Stockholders' equity increased by $3.6 million to $203.9 million at October
11, 1998 as a result of the $4.9 million net income for the first three quarters
of 1998 plus $2.1 million proceeds from issuance of stock less the quarterly
cash dividend of $3.4 million.
11
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flow from operations.
Cash provided by operating activities was $41.5 million in the first three
quarters of 1998, up from $7.3 million in the comparable 1997 period. At October
11, 1998, the Company had cash of $23.9 million, compared to $22.9 million at
January 4, 1998. The Company had $97.5 million of long-term debt and
stockholders' equity of $203.9 million at October 11, 1998.
As a result of the Cash & Carry acquisition and a temporary decline in
earnings, the Company has not complied fully with financial covenants in certain
of its loan agreements. The Company's lending institutions granted the Company a
waiver from compliance with these covenants until November 15, 1998. On November
13, 1998, the Company completed a restructuring of its existing debt with its
lenders.
Effective November 13, 1998, the Company entered into Senior Secured Credit
Facilities with a group of banks totaling $240 million. The Senior Secured
Credit Facilities include a $150 million Revolving Credit Facility ("Revolving
Loan") and a $90 million Secured Lease Facility. These facilities expire on
November 13, 2001. At the Company's option, the Revolving Loan can be used to
support daily borrowings up to $15 million and up to $10 million of commercial
letters of credit. The Revolving Loan replaces the Company's existing $65
million Bridge Loan and its existing $50 million revolving line of credit. The
Secured Lease Facility replaces the Company's three existing $30 million lease
facilities. Interest for these facilities is at LIBOR, or the Administrative
Agent's reference rate, plus designated amounts.
Effective November 13, 1998, the Company entered into a $55.4 million Loan
Agreement ("Casino Loan") with Casino USA, Inc. The Casino Loan replaces the
Company's existing unsecured promissory note that was issued in conjunction with
the 1996 acquisition of real property from Casino USA, Inc. and Casino Realty,
affiliated parties, that had an outstanding balance of $30.4 million. It also
replaces all outstanding advances made to the Company from Casino USA, Inc. and
Casino Realty. Interest for this loan is at LIBOR plus 4.50%. The Casino Loan
matures on February 15, 2002.
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. The Company is constructing a new distribution facility that will be
used to serve its Southern California operations. The facility and related
fixtures and equipment, which are expected to be operational in the first
quarter of 1999, will cost approximately $37 million, most of which will be
financed by the Company's new lease credit facility. During the quarter, the
Company completed the relocation of its corporate headquarters to a new leased
office facility. The amount budgeted for capital expenditures is approximately
$40.0 million for fiscal 1998.
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. The Company has undertaken a
comprehensive review of its information technology systems and other systems and
equipment and has developed a Year 2000 implementation
12
program. The implementation program has been reviewed by the Company's Board of
Directors. Full compliance and testing is scheduled to be completed by mid-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 first 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
$2.0 million. At the end of the third quarter, the Company had incurred
approximately $0.7 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 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.
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
13
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, availability of capital
resources and its Year 2000 program.
14
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
- ------ ----------------------
10.99 First Waiver (Credit Agreement) dated as of July 22, 1998 by and among
the Company and Credit Lyonnais Los Angeles Branch, as Agent
10.100 First Waiver (Bridge Loan Credit Agreement) dated as of July 22, 1998
by and among the Company and Credit Lyonnais Los Angeles Branch, as
Agent
10.101 First Waiver (1994 Participation Agreement) dated as of July 22, 1998
by and among the Company, Smart & Final Stores Corporation, Port
Stockton Food Distributors, Inc., State Street Bank and Trust Company
of California, N.A., Credit Lyonnais Leasing Corp., Credit Lyonnais
Los Angeles Branch, as Agent, and various lenders named therein
10.102 First Waiver (1997 Participation Agreement) dated as of July 22, 1998
by and among the Company, Smart & Final Stores Corporation, Port
Stockton Food Distributors, Inc., State Street Bank and Trust Company
of California, N.A., Credit Lyonnais Leasing Corp., and Credit
Lyonnais Los Angeles Branch, as Agent
10.103 First Waiver (1998 Participation Agreement) dated as of July 22, 1998
by and among the Company, Smart & Final Realty Trust 1998-1,
Wilmington Trust Company, Credit Lyonnais Leasing Corp., and Credit
Lyonnais Los Angeles Branch, as Agent
15
10.104 Employment Agreement dated as of September 1, 1998 by and among Smart
& Final Inc. and Phillip E. Hawkins*
10.105 Second Waiver (Credit Agreement) dated as of October 1, 1998 by and
among the Company and Credit Lyonnais Los Angeles Branch, as Agent
10.106 Second Waiver (Bridge Loan Credit Agreement) dated as of October 1,
1998 by and among the Company and Credit Lyonnais Los Angeles Branch,
as Agent
10.107 Second Waiver (1994 Participation Agreement) dated as of October 1,
1998 by and among the Company, Smart & Final Stores Corporation, Port
Stockton Food Distributors, Inc., State Street Bank and Trust Company
of California, N.A., Credit Lyonnais Leasing Corp., Credit Lyonnais
Los Angeles Branch, as Agent, and various lenders named therein
10.108 Second Waiver (1997 Participation Agreement) dated as of October 1,
1998 by and among the Company, Smart & Final Stores Corporation, Port
Stockton Food Distributors, Inc., State Street Bank and Trust Company
of California, N.A., Credit Lyonnais Leasing Corp., and Credit
Lyonnais Los Angeles Branch, as Agent
10.109 Second Waiver (1998 Participation Agreement) dated as of October 1,
1998 by and among the Company, Smart & Final Realty Trust 1998-1,
Wilmington Trust Company, Credit Lyonnais Leasing Corp., and Credit
Lyonnais Los Angeles Branch, as Agent
10.110 Loan Agreement dated as of November 13, 1998 by and among the Company
and Casino USA, Inc.
10.111 Promissory Note dated as of November 13, 1998
10.112 Credit Agreement dated as of November 13, 1998 by and among the
Company, the financial institutions and other entities listed as
Lenders, Credit Lyonnais Los Angeles Branch, as Administrative Agent,
and as Co-Lead Arranger, Nationsbanc Montgomery Securities LLC, as
Syndication Agent, and Credit Lyonnais New York Branch, as L/C Bank
10.113 Participation Agreement dated as of November 13, 1998 by and among the
Company as Lessee and Construction Agent, various parties from time to
time as Guarantors, First Security Bank, National Association, various
banks and other lending institutions as Holders and Lenders, and
Credit Lyonnais Los Angeles Branch as Administrative Agent
27 Financial Data Schedule
* Management contract and compensatory plans, contracts and arrangements of the
Company.
(b) Reports on Form 8-K:
A Form 8-K was filed by the Company, dated August 17, 1998, to report
the appointment of a new President and Chief Operating Officer,
Phillip E. Hawkins.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMART & FINAL INC.
By:
DATE: NOVEMBER 23, 1998
/s/ MARTIN A. LYNCH
__________________________________
Martin A. Lynch
Executive Vice President,
PrincipaL Financial Officer, And
Principal Accounting Officer of the Company
17
SMART & FINAL INC.
EXHIBIT INDEX
Sequentially
Numbered
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT Page
- -------------- ---------------------- ----
10.99 First Waiver (Credit Agreement) dated as of July 22, 1998 by
and among the Company and Credit Lyonnais Los Angeles Branch,
as Agent
10.100 First Waiver (Bridge Loan Credit Agreement) dated as of July
22, 1998 by and among the Company and Credit Lyonnais Los
Angeles Branch, as Agent
10.101 First Waiver (1994 Participation Agreement) dated as of July
22, 1998 by and among the Company, Smart & Final Stores
Corporation, Port Stockton Food Distributors, Inc., State
Street Bank and Trust Company of California, N.A., Credit
Lyonnais Leasing Corp., Credit Lyonnais Los Angeles Branch,
as Agent, and various lenders named therein
10.102 First Waiver (1997 Participation Agreement) dated as of July
22, 1998 by and among the Company, Smart & Final Stores
Corporation, Port Stockton Food Distributors, Inc., State
Street Bank and Trust Company of California, N.A., Credit
Lyonnais Leasing Corp., and Credit Lyonnais Los Angeles
Branch, as Agent
10.103 First Waiver (1998 Participation Agreement) dated as of July
22, 1998 by and among the Company, Smart & Final Realty Trust
1998-1, Wilmington Trust Company, Credit Lyonnais Leasing
Corp., and Credit Lyonnais Los Angeles Branch, as Agent
10.104 Employment Agreement dated as of September 1, 1998 by and
among Smart & Final Inc. and Phillip E. Hawkins
10.105 Second Waiver (Credit Agreement) dated as of October 1, 1998
by and among the Company and Credit Lyonnais Los Angeles
Branch, as Agent
10.106 Second Waiver (Bridge Loan Credit Agreement) dated as of
October 1, 1998 by and among the Company and Credit Lyonnais
Los Angeles Branch, as Agent
10.107 Second Waiver (1994 Participation Agreement) dated as of
October 1, 1998 by and among the Company, Smart & Final
Stores Corporation, Port Stockton Food Distributors, Inc.,
State Street Bank and Trust Company of California, N.A.,
Credit Lyonnais Leasing Corp., Credit Lyonnais Los Angeles
Branch, as Agent, and various lenders named therein
10.108 Second Waiver (1997 Participation Agreement) dated as of
October 1, 1998 by and among the Company, Smart & Final
Stores Corporation, Port Stockton Food Distributors, Inc.,
State Street Bank and Trust Company of California, N.A.,
Credit Lyonnais Leasing Corp., and Credit Lyonnais Los
Angeles Branch, as Agent
18
SMART & FINAL INC.
EXHIBIT INDEX
(continued)
Sequentially
Numbered
Exhibit Number Description of Exhibit Page
- -------------- ---------------------- ----
10.109 Second Waiver (1998 Participation Agreement) dated as of
October 1, 1998 by and among the Company, Smart & Final
Realty Trust 1998-1, Wilmington Trust Company, Credit
Lyonnais Leasing Corp., and Credit Lyonnais Los Angeles
Branch, as Agent
10.110 Loan Agreement dated as of November 13, 1998 by and among
the Company and Casino USA, Inc.
10.111 Promissory Note dated as of November 13, 1998
10.112 Credit Agreement dated as of November 13, 1998 by and among
the Company, the financial institutions and other entities
listed as Lenders, Credit Lyonnais Los Angeles Branch, as
Administrative Agent, and as Co-Lead Arranger, Nationsbanc
Montgomery Securities LLC, as Syndication Agent, and Credit
Lyonnais New York Branch, as L/C Bank
10.113 Participation Agreement dated as of November 13, 1998 by and
among the Company as Lessee and Construction Agent, various
parties from time to time as Guarantors, First Security
Bank, National Association, various banks and other lending
institutions as Holders and Lenders, and Credit Lyonnais Los
Angeles Branch as Administrative Agent
27 Financial Data Schedule
19