SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM 10-K/A
Amendment No. 2
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2001
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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 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 11, 2002, the aggregate market value of Common Stock held by
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nonaffiliates of the registrant based on the closing price of the Common Stock
on the New York Stock Exchange composite tape was $106,683,441 ("nonaffiliates"
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excludes for this purpose executive officers, directors and the registrant's
majority shareholder).
As of March 11, 2002, the registrant had outstanding 29,394,841 shares of Common
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Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SMART & FINAL INC.
INDEX TO ANNUAL REPORT ON FORM 10-K/A Amendment No. 2
For the Fiscal Year Ended December 30, 2001
Caption Page
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PART I
Item 1. Business ...................................................................... 3
Item 2. Properties .................................................................... 12
Item 3. Legal Proceedings ............................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders ........................... 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ......... 14
Item 6. Selected Financial Data ....................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................... 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .................... 23
Item 8. Financial Statements and Supplementary Data ................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .................................................................... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .............. 59
2
PART I
Item 1. Business
General
Smart & Final Inc. (the "Company") is a Delaware corporation,
headquartered in Los Angeles, California. The Company's predecessors began
operations in 1871 in Southern California, where it pioneered the
"cash-and-carry" concept in the wholesale grocery business. The Company was
incorporated in 1991 and its operations include non-membership warehouse grocery
stores and a broadline foodservice distribution business. In 2001, the Company
had total sales of $1,946.7 million and at the end of 2001, had approximately
5,800 employees.
The Company's business includes two operating segments, Stores and
Foodservice. Management believes the operations of the Stores and Foodservice
segments are complementary and that ownership of broadline foodservice
distributors facilitates store expansion in new markets because it reduces
product costs and distribution expenses inherent in new markets. Financial
information about the Company's operating segments is incorporated herein by
reference from Note 15 to the Consolidated Financial Statements included in this
report.
Recent Developments
On April 22, 2002 the Company announced it had identified certain
accounting issues that would cause it to restate its financial statements. The
Company is restating by means of this filing on Form 10-K/A Amendment No. 2 its
audited financial statements for fiscal years 2001, 2000 and 1999 including the
cumulative effect of prior-years restated results. The cumulative effect of the
accounting adjustments on net income through fiscal 2001 was an aggregate
reduction of $5.8 million. Of that amount, previously reported net income for
2001 and 2000 was reduced by $2.4 million and $1.5 million, respectively.
Previously reported net income for 1999 was increased by $0.7 million and the
cumulative effect on net income of prior-years restated results through 1998 was
a reduction of $2.6 million. Please refer to Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 2 to the
Consolidated Financial Statements included in this filing for further
information concerning this restatement. The Company's previously issued
financial statements for these periods should not be relied upon. The dollar
amounts for the 1997 through 2001 periods presented in this Form 10-K/A reflect
the aforementioned restatement adjustments, as applicable.
Stores
The Company operated 224 non-membership warehouse grocery stores in
Arizona, California, Florida, Idaho, Nevada, Oregon, and Washington at fiscal
year end 2001 through its principal subsidiary, Smart & Final Stores
Corporation, a California corporation and related entities (collectively "Smart
& Final"). These stores operate under the trade names "Smart & Final" and
"United Grocers Cash & Carry" ("Cash & Carry"). In 2001, Smart & Final stores
had total sales of $1,542.9 million.
The Company's 100%-owned subsidiary, Smart & Final de Mexico S.A. de
C.V. ("Smart & Final Mexico"), is a Mexican holding company that owns 50% of a
joint venture with the operators of the Calimax store chain. The joint venture
operates eight stores in Mexico as a
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Mexican domestic corporation under the name Smart & Final del Noroeste, S.A. de
C.V. and is reported on the equity basis of accounting.
Smart & Final stores offer a consistent selection of approximately
10,000 food items, supplies and equipment, primarily in institutional sizes and
quantities, targeted at small foodservice businesses and other customer groups.
Most stores also attract value-oriented retail customers who prefer to purchase
items in large sizes or quantities. The Company believes that Smart & Final
stores are strategically positioned in a substantial niche market between
membership warehouse clubs and traditional foodservice operators. With an
average size of 17,209 square feet, the stores' smaller footprint enables the
Company to locate a greater number of stores in urban and suburban neighborhoods
than warehouse club operators, which in turn provides a faster, more convenient
shopping experience for the customer.
Smart & Final stores have experienced significant sales growth despite
the expansion of the warehouse club industry in the Company's geographic
markets. The Company attributes sales growth in this segment to its commitment
to be a key supplier for the needs of small and mid-sized independent
foodservice operators. Smart & Final positions itself competitively by offering
convenience, attractive pricing, a wide and consistent assortment including high
quality corporate brand items, and a high level of customer service. The
Company's specific focus on foodservice operators, while being attentive to the
needs of its retail customers, enables Smart & Final to react quickly to
changing market requirements and customer needs. Management believes these
strategies, together with its unique retail/wholesale concept, provides greater
overall value than the competition.
In recent years, Smart & Final has begun operating stores in new
geographic areas. In May 1998, the Company acquired 39 Cash & Carry stores,
operating mainly in the Pacific Northwest, and currently operates 45 stores
under that banner. Smart & Final opened stores in Florida in 1996 and as of
fiscal year end 2001, operated twelve stores in Southern Florida. Although its
operations in Florida are not yet profitable, the Company believes the state,
with its vibrant economy, its significant Hispanic population, and its
concentration of small independent restaurants and businesses, is an attractive
growth market for its store concept.
During the early to mid 1990's, the Company focused on opening stores
in its existing markets and expanding in northern California. In 1999 and 2000,
Smart & Final concentrated on assimilating the Cash & Carry stores. In 2001,
Smart & Final opened thirteen new and relocated stores in its existing markets.
The Company plans to continue expansion in its mature market areas through
relocations and remodels of existing stores and new store openings.
4
The following table shows certain information regarding the Company's
stores for the years indicated:
Fiscal Fiscal Fiscal Fiscal Fiscal
2001 2000 1999 1998 1997
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STORE COUNT:
USA
Beginning store count 214 212 209 167 168
Stores opened:
New stores 11 2 3 5 4
Relocations 2 1 - 3 7
Acquired - - - 39 -
Stores relocated or closed (3) (1) - (5) (12)
--------- --------- --------- --------- ---------
Ending store count 224 214 212 209 167
--------- --------- --------- --------- ---------
MEXICO
Beginning store count 7 6 6 5 5
New stores opened 1 1 - 1 -
--------- --------- --------- --------- ---------
Ending store count 8 7 6 6 5
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Total Ending Store Count 232 221 218 215 172
========= ========= ========= ========= =========
OPERATIONAL DATA:
Average selling square feet
per store at end of period:
USA 17,209 16,851 16,736 16,662 15,448
MEXICO 18,130 17,681 17,350 17,350 16,946
New store data:
Average selling square feet:
USA 20,146 18,453 20,900 21,079 21,462
MEXICO 18,692 19,667 - 19,368 -
Mexico operations are not consolidated and are reported on the equity
basis of accounting.
Developing new stores, from initiation of construction to store
opening, requires an average of approximately nine months. On average during the
past three years, each new and relocated store cost approximately $650,000 in
buildings and improvements and required approximately $480,000 and $390,000 for
equipment and inventory, respectively. Remodel costs over the past three years
have averaged approximately $3,500,000 each year or approximately $394,000 per
store remodel. The primary objective of remodelings is to improve the
profitability of the stores by increasing sales and generating increased
margins.
Management continually assesses each store's profitability on a pre-tax
profit basis after allocation of corporate expenses. Stores not meeting
strategic management objectives for profitability, market penetration, and/or
other measures are evaluated for closure or relocation. 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
5
stores in a timely manner; to hire, train and integrate employees; to continue
locating and obtaining favorable store sites; and to adapt distribution,
management information and other operating systems sufficiently to support new
store growth in a successful and profitable manner.
Merchandising
Customers. Smart & Final-format stores serve two primary customer
bases: businesses and household consumers. Many restaurants, caterers,
businesses, clubs and organizations shop at Smart & Final stores for their
foodservice product needs. Household consumers shop at Smart & Final stores for
the same features that foodservice professionals enjoy: everyday low warehouse
prices, smaller warehouse format to facilitate quick and easy shopping, and
professional-quality products.
Product Assortment and Quality. Each Smart & Final store carries
approximately 10,000 assorted food and related items in bulk sizes and
quantities. Smart & Final stores offer customers a wide product selection in a
hybrid, retail/wholesale format, including frozen and refrigerated foods,
delicatessen products, fresh produce, paper products, janitorial supplies,
restaurant equipment, tobacco, candy, snacks, beverages, and party supplies.
Products are regularly scheduled to undergo a formalized profitability review
that identifies items that should be added or removed. The Company is continuing
the expansion of perishable products by adding meat and produce items. The
Company believes the size, consistency, and depth of its product assortment
satisfies customers' needs.
Product quality is important in the Smart & Final stores product
assortment. The Company's quality assurance department strives to insure that
its high standards are maintained for all corporate brands and products.
Corporate Brand Positioning. Smart & Final stores utilize the Company's
corporate brands within most merchandise categories, providing a competitive
alternative to national brands. Corporate brands are positioned to create brand
loyalty and establish an ongoing customer relationship. Furthermore, management
believes foodservice customers make purchases based on a quality/value/price
perception. Smart & Final stores' corporate brands target leading competitive
brands with attention to quality and value. In addition, the margin contribution
from corporate brands is generally higher than the comparable national brand
product.
During 2001, the sales and margin contribution of the Company's
corporate brands program continued to grow. The core program consists of a
three-quality-tiered structure, analogous to competitive programs. The
SmartBuy(R) Brand is a standard grade brand positioned as "the price leader";
Smart & Final(R), the Company's national brand quality equivalent, is a
consistent, quality-driven, competitively priced brand; and Smart & Final
Premium Brand(R) represents the highest quality within the product line. There
are approximately 1,500 stock keeping units represented by these brands.
In addition to the core corporate brand program, the Company actively
markets its assortment of signature brands. The Montecito(R) line of Hispanic
products and the La Romanella(R) line of Italian products represent signature
brands designed to reach niche ethnic markets while enhancing our core products.
6
Another key signature brand, Snack'rs(TM), was introduced in 2000. This
rapidly expanding brand is designed to significantly enhance sales and gross
margins in the snack food category. In addition, a new signature brand of
spices, Tradewinds(TM), was introduced in 2000.
Two additional signature brands were introduced during 2001. Rushing
Springs(TM) bottled water and First Street Deli(TM) delicatessen products have
expanded the Company's signature brand product reach into new categories. The
Company is developing additional signature brands for introduction in 2002.
Pricing. Smart & Final attempts to identify and establish competitive
pricing on key items in local markets including competitive pricing against
warehouse club stores. The Company's pricing strategy is carefully coordinated
with its overall assortment strategy and with other marketing programs.
Incentives encourage customers to purchase the largest sizes and case
quantities, which helps maximize operating efficiencies within the distribution
system. In addition, Smart & Final corporate brand items offer distinct price
and value advantages over comparable national brands.
Customer Service. Smart & Final focuses on customer service and
convenience to encourage more frequent store visits and greater average purchase
size. For example, stores offer convenient locations, operating hours and front
door parking lots, along with logical layouts and highly readable signage. Smart
& Final also maintains a high in-stock service rate; high product quality; clean
stores; friendly, responsible and knowledgeable personnel; and specialized
point-of-sale support. In addition, stores take customers' special orders for a
wide variety of products not carried regularly in its assortment.
Smart & Final utilizes customer service centers and representatives,
provides informative customer materials, and emphasizes employee training that
builds customer loyalty. The Company has an employee training program designed
to increase store employees' retailing expertise and product knowledge. The
Company's in-house training center provides employees with the opportunity to
build their knowledge and acquire additional skills.
Marketing. Smart & Final's marketing efforts are focused on building
brand awareness to encourage trial and retrial and on strengthening customer
relationships to build repeat visits and increase average purchase. Brand
awareness is built with broad-reach advertising, public relations efforts and
strong, market-entry promotional programs. Customer relationships are enhanced
with loyalty card programs, targeted marketing and local store events. Suppliers
are encouraged to participate in the Company's marketing programs, thereby
reducing Smart & Final's net marketing costs.
Store Design and Size. Smart & Final stores are designed as convenient
warehouse stores dedicated to easing the shopping experience. For the last three
years, new and relocated stores have ranged from 12,000 to 26,000 square feet.
Smart & Final stores are organized into dry grocery, beverages, frozen foods,
janitorial, equipment and supplies, candy, snacks, party supplies and other
departments. In addition, prototype designs are improved continually to enhance
traffic flow, space utilization, departmentalization, adjacencies of
merchandise, and overall visual appeal without diluting the convenient warehouse
image. Each Smart & Final store normally has three to six checkout counters and
is staffed by an average of 11 employees.
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Operations
Procurement. The Company believes Smart & Final's purchasing policies
and procedures result in costs that are comparable to other companies purchasing
similar quantities and types of merchandise. Service level goals and investment
buying strategies are integral to the purchasing program. In addition, Smart &
Final continually utilizes the efficiencies provided by cooperative buying
organizations to facilitate low cost purchasing. These buying alliances
supplement the normal buying activities of each distribution center. Smart &
Final also strives to maintain close working relationships with its major
suppliers to reduce its product and distribution costs. The Company is
continuing the process of consolidating procurement of national brand products,
corporate brand products and signature brand products for all Stores and
broadline Foodservice operating units. In 2001, several national procurement
agreements were negotiated with suppliers, which reduced costs and contributed
to increased margins.
Smart & Final buys its products from approximately 1,800 different
suppliers. The Company has not had any difficulty in the past, and does not
expect any difficulties in the future, in obtaining products from suppliers.
Distribution. Smart & Final supports 127 stores in southern California
from a 445,000 square foot distribution center in Commerce, California that
began operations in February 1999. This facility replaced older warehouses and,
because of its higher ceiling height, has approximately double the aggregate
storage capacity of the older facilities.
The 45 Cash & Carry stores in the Pacific Northwest are primarily
served through a service agreement with Unified Western Grocers, Inc., a grocery
cooperative. The Company's Foodservice distribution facilities located in
Stockton, California and Miami, Florida serve 40 northern California stores and
twelve Florida stores, respectively. Other methods of distribution include a
service agreement with an outside freezer facility for distribution of frozen
and deli products and direct shipments from suppliers to Smart & Final stores
that deliver mostly bakery, soda, dairy and produce.
Smart & Final utilizes computerized inventory management systems, radio
frequency technology, and integrated labor management systems in its warehouses.
Smart & Final operates a fleet of 35 tractors and 131 trailers that are
either owned or leased. When possible, the Company increases the efficiency of
its fleet by filling outbound trucks to capacity and utilizing a backhaul
program for inbound deliveries.
8
Foodservice
The Company operates its northern California and Florida broadline
foodservice distribution businesses through a holding company, American
Foodservice Distributors, a California corporation ("American Foodservice").
American Foodservice owns Port Stockton Food Distributors, Inc., a California
corporation, Henry Lee Company, a Florida corporation, and two meat processing
and distribution divisions in Florida, Southern Foods and Orlando Foodservice.
Port Stockton Food Distributions, Inc., headquartered in Stockton, California,
conducts business under the name Smart & Final Foodservice Distributors ("Smart
& Final Foodservice"). Smart & Final Foodservice also owns Davis Lay and Craig
and Hamilton branded operations that operate produce and meat processing
facilities, respectively, in northern California. Henry Lee Company,
headquartered in Miami, Florida, and American Foodservice's two Florida
operating divisions, Southern Foods and Orlando Foodservice, are collectively
referred to as "Florida Foodservice". In 2001, American Foodservice had total
sales of $403.8 million.
Customers and Market. American Foodservice's core business is
distribution of food and non-food products to approximately 7,200 foodservice
customers such as restaurants, coffee shops, hotels, cruise ships, and
institutions. In northern California, Smart & Final Foodservice's market area
includes the Bay Area on the west to Reno, Nevada on the East, Eureka on the
North and Bakersfield on the South. Florida Foodservice serves foodservice
operator customers primarily located in the State of Florida and certain markets
in the Caribbean and central and south America.
Product Assortment and Quality. American Foodservice's full-line
assortment features dry grocery, frozen foods, fresh meat, deli products,
produce, health and beauty aids, paper and packaging, janitorial supplies, and
restaurant equipment and supplies. American Foodservice distributes
national-brand, private-labeled, and Smart & Final's corporate brand and
signature brand merchandise and products. The Company believes the quality,
consistency and depth of its product assortment satisfies its customers' needs.
Customer Service. In addition to a broadline assortment, American
Foodservice provides its customers primary services including product delivery,
extension of credit and ancillary services such as restaurant equipment and
supplies. The Company believes the ability to accurately deliver a full-line
assortment of products and services on a dependable basis is critical to
securing new customers and retaining existing customer market share.
Procurement. The Company believes American Foodservice's purchasing
policies and procedures result in costs that are comparable to other broadline
foodservice distributors. American Foodservice, through its Henry Lee Company
and Smart & Final Foodservice subsidiaries, is a large member of UniPro
Foodservice, Inc., a buying group with annual member sales of over $13 billion.
American Foodservice is also a member of the DMA Major Account sales group.
American Foodservice utilizes the efficiencies provided by these buying
organizations as well as the Company's consolidated procurement program for
national brand products, corporate brand products and signature brand products.
Distribution. In northern California, Smart & Final Foodservice
operates three dry grocery facilities in Stockton totaling 460,000 square feet
and a 23,000-square-feet meat processing facility. Additionally, Smart and Final
Foodservice has a service agreement to provide frozen and
9
refrigerated distribution to its customers. These facilities and the service
agreement serve Smart and Final Foodservice's 4,000 customers, as well as 40
northern California Smart & Final stores. Smart & Final Foodservice operates a
fleet of 113 tractors, 100 trailers and 24 vans that are either owned or leased.
In Florida, the Florida Foodservice serves its 3,200 customers and
twelve Smart & Final stores from a 230,000 square foot dry and refrigerated
grocery distribution center and a 99,000 square foot frozen food facility in
Miami, Florida. Florida Foodservice operates a fleet of 70 tractors, 84 trailers
and three vans that are either owned or leased.
Competition
The Company participates in the dynamic and highly competitive $170
billion annual sales domestic food distribution industry. Its competitors
include membership and non-membership warehouse stores, wholesale distributors,
supermarkets, supercenters, and other retailers. Many of the Company's
competitors have greater financial, distribution and marketing resources, as
well as greater name recognition than the Company.
The warehouse club industry generated sales of approximately $71
billion in 2001, over 60% of which were in food and related products. The
Company's three major warehouse club competitors are Costco Wholesale
Corporation, BJ's Wholesale Club and the SAM's Club division of Wal-Mart Stores.
The industry has experienced intense price competition, product innovation and
rapid store growth over the past several years. The Company believes that it
competes effectively with membership clubs by offering a broader and more
consistent foodservice assortment, more convenient shopping facilities and
locations, a high level of customer service and competitive pricing.
The traditional foodservice distribution market, in which American
Foodservice operates and in which Smart & Final competes to a lesser extent, is
very competitive and highly fragmented. Major competition consists of national
operators such as Sysco Corporation, Performance Food Group, the U.S.
Foodservice division of Ahold USA and many smaller, regional distributors. The
top 50 broadline distributors are believed to represent approximately 35% of the
total foodservice market.
Competition from supermarket chains continues to increase as such
chains emphasize price, service and convenient locations, while widening their
assortment of goods and lowering certain prices to more effectively compete with
warehouse clubs and supercenters.
Management Information Systems
The Company has made substantial investments in new systems during the
past several years, and expects to continue to invest in business technology as
a means to enhance its competitive position.
The Company will continue its investment in customer relationship
management systems and data warehousing and will streamline data collection and
reporting systems across all lines of the business. These new systems are
designed to enhance the customer purchasing experience,
10
help to better understand the Company's customers and to focus on the most
important needs of customers while enabling the Company to be more efficient and
responsive to current business trends.
The Company's purchasing system enables buyers to manage turnover, buy
inventory efficiently, achieve targeted gross margin objectives, track rebates
and allowances by vendor, and maintain targeted service levels. The
merchandising system enables store assortment to be customized to the needs and
characteristics of individual market areas, maximizes gross margin return on
investment by item and product category, and increases inventory turn. The
distribution system manages warehouse inventories and store order selection, and
measures enterprise labor productivity.
Human Resources
The Company strongly emphasizes career development and retention of its
employees. The Company strives to maintain the culture of a highly focused,
innovative organization that maximizes employee productivity and contributions.
The Company actively recruits and offers training opportunities to employees in
order to develop qualified candidates for managerial positions as vacancies
occur.
Employee training and development programs through the Company's own
training facilities encompass all levels of store operations, from entry through
management, and emphasize merchandising techniques and customer service goals to
ensure top associate quality and productivity. Company mechanisms, such as
incentive pay and stock option programs, reward superior performance and
motivate employees. In addition, approximately 8.2% of each Smart & Final
store's pre-tax profit, after allocation of corporate costs, is paid out as
monthly bonuses to the store's full-time employees and selected part-time
employees. Cash & Carry store managers and employees receive annual bonuses
based on the achievement of specific operating goals. There are also sales
incentives for the Foodservice sales employees and productivity incentives for
the distribution center employees.
Hourly employees employed by 17 Cash and Carry stores are party to a
labor contract between the International Brotherhood of Teamsters ("Teamsters")
and the Company. Approximately 100 employees are covered by this contract. Smart
& Final Foodservice is party to an agreement with its Food Distribution
Associates Association, representing approximately 300 employees, which contains
certain procedures and policies with respect to management and employee
relations.
At fiscal year end, the Company and its subsidiaries employed
approximately 5,800 employees, including 4,710 at Smart & Final, 620 at Smart &
Final Foodservice, and 470 at Florida Foodservice. About one-half of the
Company's employees are part-time employees. The Company considers relations
with its employees to be good.
11
Government Regulation
The Company is subject to regulations enacted by federal, state and
local regulatory agencies, including the U.S. Food and Drug Administration and
U.S. Department of Agriculture. These regulations include, but are not limited
to, trade practices, labor, health, safety, transportation, environmental
protection and regulations related to the sale and distribution of alcoholic
beverages, tobacco products, milk, agricultural products, meat products and
other food products. Compliance with these regulations has not had a material
effect on the financial position or results of operations of the Company.
Website
Smart & Final's site on the World Wide Web,
http://www.smartandfinal.com, enables online purchases and provides information
- ----------------------------
about the Company, menus, recipes and general tips on cooking and entertaining.
The Company's site features a catalog of 5,000 professional-quality kitchen
equipment and supply items and a broad assortment of Tradewinds spices for sale
online. Customers also can locate their nearest store, view current product
specials and sample menus and recipes for entertaining, learn about the
Company's foodservice distribution business and review the Company's history,
financial information and job opportunities. The Company's website is updated on
a regular basis.
Item 2. Properties
As of fiscal year end 2001, the Company leased 142 store properties
directly from third party lessors and had eight stores on real property that is
ground leased from third party lessors. These leases had an average remaining
lease term of nine years as of fiscal year end 2001. At year end, the Company
leased 15 store properties under a lease agreement described below. The
remaining 59 store properties are owned.
The Company occupies a 445,000 square foot distribution facility in
Commerce, California that is leased under the lease agreement described below.
The Company maintains its headquarters in an 81,000 square foot leased facility
in Commerce, California.
American Foodservice supports its northern California customers from a
285,000 square foot distribution facility for dry grocery and produce leased
under the lease agreement described below. Additional dry grocery warehouse
space in northern California includes a 100,000 square foot facility with a
six-month remaining term under a three-year lease that is currently under
negotiation for lease renewal, and a 75,000 square foot facility under a
five-year lease started in 2001. American Foodservice also operates its Craig
and Hamilton branded meat processing from a leased facility of 23,000 square
feet, with a remaining term of four and a half years. These facilities are
located in Stockton, California.
In Florida, American Foodservice operates a 230,000 square foot
warehouse in Miami, Florida, including 22,000 square feet of office space.
American Foodservice also occupies 7,600 square feet of space used as a
maintenance facility for its fleet. Both of these facilities are leased from the
former owners of Henry Lee Company. These leases expire in August 2005. American
12
Foodservice also operates a 99,000 square foot frozen food facility in Miami,
Florida that is leased under the lease agreement described below.
The Company plans to continue to lease properties, but also may elect
to own some of its new stores on an interim or permanent basis. Effective
November 30, 2001, the Company entered into a lease agreement that covers the
lease of 15 store locations and three distribution facilities located in
California and Florida. Total value under this agreement aggregates $87.1
million. See Liquidity and Capital Resources in Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, for further
discussion regarding this lease agreement.
Item 3. Legal Proceedings
The Company has been named as defendant in a suit filed on September
13, 2001 in the Superior Court of the State of California for the County of Los
Angeles. This suit, Sergio Camacho vs. Smart & Final Inc., was filed by the
plaintiff, on his behalf and on behalf of all other Company store managers and
assistant managers in California, alleging that the Company misclassified the
status of store managers and assistant managers in California as exempt
employees for employment purposes. The action seeks to be classified as a "class
action" and seeks unspecified monetary damages. The Company is actively
investigating the merits of this action and believes that (a) the merits of this
action do not warrant class action status; (b) The Company has certain defenses
to the claim; and (c) the ultimate determination of this action will not have a
material adverse effect on the Company's results of operations or financial
position.
The Company is a defendant in a number of other lawsuits or is
otherwise a party to certain litigation arising in the ordinary course from its
operations. The Company does not believe that the ultimate determination of
these cases will either individually or in the aggregate have a material adverse
effect on the Company's results of operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the security holders of the Company
for a vote during the quarter ended December 30, 2001.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is listed on the New York Stock Exchange
("NYSE") under the symbol SMF. As of March 11, 2002 there were approximately 185
registered holders of the common stock and the closing price per share of the
common stock as listed on the NYSE composite tape was $9.25. The following table
sets forth the high and low sales prices of the common stock as reported on the
NYSE composite tape for the periods indicated. There were no cash dividends
declared during the Company's two most recent fiscal years.
High Low
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First Quarter of 2000 $ 8.1250 $ 5.5000
Second Quarter of 2000 8.6875 6.6875
Third Quarter of 2000 8.1250 6.1875
Fourth Quarter of 2000 8.8125 6.3750
First Quarter of 2001 10.9500 8.0625
Second Quarter of 2001 11.7500 8.5000
Third Quarter of 2001 11.9000 9.6000
Fourth Quarter of 2001 10.6000 9.0500
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 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. Information
concerning certain dividend restrictions under the Company's Credit Agreement
and Lease Agreement is included under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
14
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(in thousands, except per share and statistical data)
Fiscal Year (A)
---------------------------------------------------------------------
2001 2000 1999 1998 (C) 1997 (B)
(restated) (restated) (restated) (restated) (restated)
----------- ----------- ----------------- ------------- ------------
Income Statement Data:
Sales $ 1,946,723 $ 1,863,895 $ 1,793,142 $ 1,661,629 $ 1,453,020
Gross margin 274,598 257,511 235,342 207,080 192,241
Income from operations 29,738 27,453 25,722 1,888 14,043
Interest expense, net 12,500 13,368 17,997 13,304 8,117
Income (loss) before provision for income taxes,
minority share of net income, extraordinary item
and cumulative effect of accounting change 17,238 14,085 7,725 (11,416) 5,926
Net income (loss) 12,029 9,557 5,376 (8,224) 5,526
Earnings (loss) per common share, assuming dilution 0.41 0.33 0.20 (0.36) 0.24
Dividends per common share (D) $ - $ - $ - $ 0.20 $ 0.20
Weighted average diluted common shares outstanding 29,660 29,244 26,321 (E) 22,596 22,753
Financial Data (at fiscal year end):
Cash and cash equivalents $ 23,016 $ 22,028 $ 42,936 $ 20,887 $ 22,891
Working capital (deficit) 122,134 27,062 133,614 (15,242) 65,775
Total assets 631,124 580,351 580,976 580,127 484,631
Long-term debt and capital leases, excluding
current maturities 144,875 35,472 157,470 78,712 80,024
Stockholders' equity 271,581 261,499 251,568 (E) 186,757 197,365
Other Operational Data (F):
Comparable store sales growth 3.9% 5.5% 5.3% (0.2)% 2.0%
Stores at year end 232 221 218 215 172
Total retail square footage at year end (thousands) 4,000 3,730 3,652 3,586 2,610
Sales per selling square foot $ 412 $ 410 $ 391 $ 396 $ 389
Store customer transactions (thousands) 40,252 38,493 37,289 33,048 33,538
Employees at year end 5,800 5,640 5,308 5,447 5,205
The Company has restated its financial statements for fiscal years 1996 through
2001 to reflect the correction of various accounting issues. The cumulative
effect of the accounting adjustments on net income through fiscal 2001 was an
aggregate reduction of $5.8 million. Of that amount, previously reported net
income for 2001 was reduced by $2.4 million, previously reported net income for
2000 was reduced by $1.5 million, previously reported net income for 1999 was
increased by $0.7 million, previously reported net loss for 1998 was reduced
by $0.4 million, previously reported net income for 1997 was reduced by $1.1
million and previously reported net income for 1996 was reduced by $1.9 million.
Please refer to Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 2 to the Consolidated Financial
Statements included in this report for further information concerning this
restatement. The Company's previously issued financial statements for these
periods should not be relied upon.
(A) For all years, 52 weeks except fiscal year 1997, which had 53 weeks.
(B) Amounts include results of Davis Lay division from May 1997 and results of
Orlando Foodservice Inc., Capricorn Foods of Central Florida, Inc. and
Southern Foods since their dates of asset acquisitions in September 1997.
(C) Amounts include results of United Grocers Cash & Carry store operations
from the date of its acquisition in May 1998.
(D) Dividends on common stock have been suspended indefinitely by the Company's
Board of Directors effective following the payment of the fourth quarter
1998 dividend paid on January 29, 1999.
(E) 6,496,000 of common shares were issued during the equity offering in June
1999 and increased stockholders' equity by $57.9 million.
(F) Other Operational Data does not include data related to the Mexico joint
venture except for "Stores at year end" and "Total retail square footage at
year end".
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
"Selected Financial Data" and the financial statements and related notes thereto
included elsewhere in this Form 10-K/A. The following table sets forth the
consolidated restated statements of operations data. Percentages may not
aggregate due to rounding.
52 Weeks 52 Weeks 52 Weeks
(Dollars in millions, except per share amounts) 2001 2000 1999
===================================================================================================================
Sales:
Stores $ 1,542.9 79.3% $ 1,463.7 78.5% $ 1,382.0 77.1%
Foodservice 403.8 20.7 400.2 21.5 411.1 22.9
Sales, consolidated total 1,946.7 100.0 1,863.9 100.0 1,793.1 100.0
- -------------------------------------------------------------------------------------------------------------------
Cost of sales, buying and occupancy:
Stores 1,297.8 84.1 1,240.1 84.7 1,182.7 85.6
Foodservice 374.3 92.8 366.3 91.5 375.1 91.2
Total cost of sales, buying and occupancy 1,672.1 85.9 1,606.4 86.2 1,557.8 86.9
===================================================================================================================
Gross margin 274.6 14.1 257.5 13.8 235.3 13.1
- -------------------------------------------------------------------------------------------------------------------
Operating and administrative expenses 244.9 12.6 230.0 12.3 209.6 11.7
- -------------------------------------------------------------------------------------------------------------------
Income from operations 29.7 1.5 27.5 1.5 25.7 1.4
- -------------------------------------------------------------------------------------------------------------------
Interest expense, net 12.5 0.6 13.4 0.7 18.0 1.0
- -------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes
and extraordinary item 17.2 0.9 14.1 0.8 7.7 0.4
- -------------------------------------------------------------------------------------------------------------------
Provision for income taxes 6.3 0.3 5.4 0.3 2.9 0.2
- -------------------------------------------------------------------------------------------------------------------
Income from consolidated subsidiaries 10.9 0.6 8.7 0.5 4.8 0.3
- -------------------------------------------------------------------------------------------------------------------
Equity earnings in unconsolidated subsidiary 1.1 0.1 0.8 - 0.7 -
- -------------------------------------------------------------------------------------------------------------------
Extraordinary loss on extinguishment of debt,
net of tax effect - - - - 0.1 -
- -------------------------------------------------------------------------------------------------------------------
Net income $ 12.0 0.6% $ 9.6 0.5% $ 5.4 0.3%
===================================================================================================================
Earnings per common share $ 0.41 $ 0.33 $ 0.20
===================================================================================================================
Earnings per common share,
assuming dilution $ 0.41 $ 0.33 $ 0.20
===================================================================================================================
16
================================================================================
Results of operations
The Company's restated net income was $12.0 million, or $0.41 per
diluted share, in 2001, compared with restated net income of $9.6 million, or
$0.33 per diluted share, in 2000, and restated net income of $5.4 million, or
$0.20 per diluted share, in 1999. The following table sets forth restated
pre-tax income or loss, in millions, for each of the Company's various
reportable segments:
2001 2000 1999
------------- ------------- -------------
Stores $ 41.3 $ 37.3 $ 32.6
Foodservice (14.6) (8.2) (7.1)
------------- ----------- -------------
Segment totals 26.7 29.1 25.5
Interest and other corporate expenses (9.5) (15.0) (17.8)
------------- ----------- -------------
Consolidated pre-tax income $ 17.2 $ 14.1 $ 7.7
============= =========== =============
The basis for allocating distribution expense to Stores was changed in
2001. If the new allocation method had been used in fiscal years 2000 and 1999,
Foodservice pre-tax loss and Stores pre-tax income would have been approximately
$2.6 million and $3.2 million greater in 2000 and 1999, respectively.
Restatement of Financial Statements
On April 22, 2002 the Company announced it had identified certain
accounting issues at its Stockton, California broadline foodservice subsidiary
impacting prior-years previously reported operating results that would cause it
to restate its financial statements. The Company's investigation of these
matters has resulted in the Company restating by means of this filing on Form
10-K/A Amendment No. 2 its audited financial statements for fiscal years 2001,
2000 and 1999 including the cumulative effect of prior-years restated results.
The Company's previously issued financial statements for these periods should
not be relied upon. For restated unaudited quarterly financial data for 2001 and
2000, see Item 8, Financial Statements and Supplementary Data - Summary of
Quarterly Results of Operations.
The cumulative effect of the accounting adjustments on net income
through fiscal 2001 was an aggregate reduction of $5.8 million. Of that amount,
previously reported net income for 2001 and 2000 was reduced by $2.4 million and
$1.5 million, respectively. Previously reported net income for 1999 was
increased by $0.7 million, and the cumulative effect on net income of
prior-years restated results through 1998 was a reduction of $2.6 million.
Restated net income and diluted earnings per share for 2001 are $12.0 million
and $0.41, respectively, as compared to $14.4 million and $0.49 previously
reported. Restated net income and diluted earnings per share for 2000 are $9.6
million and $0.33, respectively, as compared to $11.0 million and $0.38
previously reported. Restated net income and diluted earnings per share for 1999
are $5.4 million and $0.20, respectively, as compared to $4.7 million and $0.18
previously reported.
In its investigation and review of the accounting issues in the
Company's northern California foodservice subsidiary, the Company identified
various accounting errors which resulted primarily from the failure of the
principal accounting staff at this subsidiary to properly reconcile its
accounting records to supporting detail and their failure to appropriately
account for marketing
17
and vendor rebate programs, inventory transactions and intercompany
transactions. The cumulative effect of these accounting errors on net income
through fiscal 2001 was an aggregate reduction of $4.4 million. In addition, in
conjunction with the review of previously reported financial statements, the
Company adjusted its accounting for certain marketing programs which resulted in
a restatement to previously recorded marketing program income recognition. The
cumulative effect of these adjustments on net income through fiscal 2001 was an
aggregate reduction of $1.4 million.
The cumulative effect of the accounting adjustments on net income
through fiscal 2001 was an aggregate reduction of $5.8 million of which $4.6
million resulted from a net increase in previously reported cost of sales and
$1.2 million resulted from a net increase in operating and administrative
expenses. The increase in previously reported cost of sales was primarily
related to inventory adjustments and marketing and vendor program revenue
recognition adjustments. The increase in previously reported operating and
administrative expenses was primarily related to adjustments for intercompany
transactions and payroll and benefits accruals.
In addition to the restatement of net income, and the related
Consolidated Statements of Income, the correction of many of these accounting
issues also required adjustment to previously reported Consolidated Balance
Sheets. Please refer to Note 2 to the Consolidated Financial Statements for a
schedule reconciling the restatement-related adjustments to previously reported
income statement data for 2001, 2000 and 1999 and to previously reported balance
sheet data for 2001 and 2000. In addition please refer to Item 6, Selected
Financial Data.
A number of factors impacted the results of operations in 2001 and 2000:
Factors affecting 2001 results:
. Strong sales growth and improved margins at the Store segment
attributable to the national procurement program, expanded
corporate brands and store assortment mix.
. Targeted marketing programs and continuing strong same store sales
growth.
. Costs related to restructuring, building sales force and other
higher than anticipated charges at Smart & Final Foodservice.
. Adverse impact on the Company's Foodservice segment sales due in
part to the events of September 11, 2001 and their aftermath, as
this segment is more dependent upon the tourism and travel
industries.
Factors affecting 2000 results:
. Improved margins as a result of the national procurement program,
expanded corporate brands, store assortment mix changes and
reduced distribution costs.
. Expanded marketing programs and related strong same store sales
growth.
. Increased incentive compensation based on the Company's better
performance.
. Decreased interest expense primarily due to the $60 million common
stock offering completed in June 1999 and $35 million of
additional debt reduction from cash flows in 2000.
18
The Company experienced strong sales growth in both Stores and
Foodservice segments in the first quarter of 2001 compared to a weaker first
quarter of 2000. Second quarter sales growth continued to be strong despite
decreases at Smart & Final Foodservice. Third and fourth quarters sales growth
remained strong in the Stores segment but the events of September 11, 2001
adversely impacted sales growth in the Foodservice segment. Earnings improved in
fiscal 2001 as compared to prior year, primarily due to strong sales growth and
improved margins at Stores and reduced interest expense. Stores restated pre-tax
income for 2001 increased by $4.0 million or 10.8% as compared to fiscal year
2000. Foodservice experienced a $14.6 million pre-tax loss for 2001. The Company
believes that substantial operational progress has been made in the
restructuring of its Foodservice operations during fiscal years 2000 and 2001,
and that the key operational measures of efficiency and order fulfillment
reflect these efforts. The Company believes that additional operational progress
will continue during fiscal year 2002; however, there can be no assurance that
the Foodservice operations will reach breakeven in fiscal year 2002.
During 2000, sales increased only moderately in the first quarter
because customer Year 2000 stockpiling late in 1999 and heavy rainfall in the
Company's primary markets during the first quarter of 2000 significantly reduced
sales. Earnings improved consistently in all quarters of 2000 due to better
gross margins at both Stores and Foodservice, reduced interest expense and, in
the last three quarters, strong Stores sales growth.
The improvement in 1999 earnings was attributable to higher sales,
primarily from the acquisition of the Cash & Carry stores in May 1998, improved
gross margins, and reduced operating expenses.
Quarterly restated earnings per common share, assuming dilution:
First Second Third Fourth Year
------------ ------------- -------------- ------------ -------------
2001 $ 0.02 $ 0.12 $ 0.13 $ 0.13 $ 0.41
2000 0.02 0.11 0.14 0.06 0.33
1999 (0.02) 0.06 0.08 0.08 0.20
Seasonality
Historically, the Company's sales have followed a seasonal pattern in
which first quarter sales tend to be the weakest. Third quarter sales are high
because the third quarter includes four four-week periods, whereas the other
quarters include three four-week periods. Sales distribution by quarter in 2001
was 22% in the first quarter, 24% in the second quarter, 31% in the third
quarter, and 23% in the fourth quarter.
Sales. Sales were $1,946.7 million in 2001, $1,863.9 million in 2000, and
$1,793.1 million in 1999. Total sales increased 4.4% in 2001, 3.9% in 2000 and
7.9% in 1999.
Stores sales increased 5.4% in 2001, 5.9% in 2000 and 14.6% in 1999 as
compared to the prior fiscal year. Nineteen new and relocated stores, thirteen
in 2001, three in 2000 and three in 1999, respectively, were opened during the
three-year period. Same store sales increased 3.9% in 2001, compared to a 5.5%
increase in 2000 and a 5.3% increase in 1999. Sales growth in 2001 and 2000 was
attributable to the increased spending in marketing and improved product
assortment.
19
Lower sales growth in 2001, as a comparison to 2000, reflected the
economic downturn nationwide and in California.
Foodservice sales increased 0.9% in 2001, primarily due to the
increased cruise line sales at Florida Foodservice, partially offset by
decreased sales at Smart & Final Foodservice. Sales growth in 2001 was adversely
affected by the events of September 11, 2001 and resultant decreased travel
patterns as well as the general economic downturn. Foodservice sales decreased
2.7% in 2000 and 9.8% in 1999, respectively, in part due to adoption of tighter
credit policies in late 1998 and elimination of unprofitable sales.
Gross margin. As a percentage of sales, gross margin was 14.1% in 2001, 13.8% in
2000 and 13.1% in 1999.
Gross margins, as a percentage of sales, at Stores improved in 2001 and
2000 due to the continuing effort in the national procurement program, better
store assortment mix, expanded corporate brands and signature brands, improved
distribution efficiency and a change in the basis of allocating distribution
expense that reduced costs for stores served by both Foodservice units in the
beginning of 2001.
Gross margins, as a percentage of sales, at Foodservice decreased in
2001 primarily due to higher costs at Smart & Final Foodservice, including the
costs of re-racking its facilities, restructuring its operations, inventory
shrink and increased occupancy costs. The decrease was also attributable to
changes in sales mix due to the increased cruise line sales that generate lower
margins and decreased distribution expense allocated to Stores due to a change
in the basis of allocating such expenses in 2001.
Operating and administrative expenses. Operating and administrative expenses
were 12.6% of sales in 2001, 12.3% in 2000, and 11.7% in 1999.
Operating and administrative expenses at Stores increased in 2001,
primarily driven by a greater number of new and relocated stores opened during
2001 than in prior years, increased marketing expense, higher utility rates and
increased store labor in support of the program to improve service and support
sales. These increases were partially offset by the continued control in other
expenditures. The expense increased in 2000 due to several targeted programs
including increased marketing expense that was a factor in the strong sales
growth, higher provision for performance-based incentive compensation, increased
store labor to provide increased store service levels and other employee benefit
charges recorded in 2000.
Expenses increased at Foodservice in 2001 and 2000 due to the costs
related to restructuring northern California operations and increased provision
for bad debts despite continuing rigid expense controls at the Florida
foodservice unit. Selling expenses increased from $19.8 million in 2000 to $21.2
million in 2001 in an effort to create new sales.
The decrease in expenses in 2001 at Corporate was primarily due to the
$2.5 million consulting fees incurred in 2000 related to improving procurement
programs. No similar consulting fees were recorded in the same period of 2001.
Additionally in 2001, the Company
20
recorded a $1.3 million gain related to the distributions received from
insurance company demutualization transactions.
Interest expense, net. Interest expense, net decreased in 2001 to $12.5 million,
compared to $13.4 million in 2000 and $18.0 million in 1999. Interest expense,
net decreased in 2001 as a result of rate reductions due to the Company's
improved financial ratios and lower market interest rates. The decrease in 2000
was primarily due to the debt reduction as a result of the $60 million common
stock offering completed in June 1999 and an additional $35 million debt
reduction from cash flows in 2000.
Equity earnings in unconsolidated subsidiary
The Company has a 50% interest in a Mexico joint venture that operates
eight stores in Mexico and produced $1.1 million in equity earnings in 2001,
$0.8 million in 2000 and $0.7 million in 1999. Two new stores were opened in the
three-year period between 2001 and 1999.
Liquidity and capital resources
Historically, the Company's primary source of liquidity has been cash
flows from operations. Additionally, the Company has availability under bank
credit facilities. In 2001, net cash provided by operating activities was $33.0
million as compared to $41.9 million in 2000. The decrease in cash provided by
operating activities generally reflects the timing of receipts and
disbursements. Increases in trade notes and accounts receivable, inventories and
prepaid expenses and other current assets as well as a decrease in accrued
salaries and wages were partially offset by increases in accounts payable and
other accrued liabilities. Capital expenditures for 2001 totaled $45.0 million,
which consisted of $37.6 million in support of the Stores segment and $7.4
million in support of the Foodservice segment. The aggregate amount that will be
required for the Company's stores expansion program and other capital
expenditures in 2002 is estimated to be approximately $41.9 million. This
consists of $38.9 million in support of the Stores segment and $3.0 million in
support of the Foodservice segment.
Effective November 30, 2001, the Company entered into a $175.0 million
three-year senior secured revolving credit facility ("Credit Agreement") with a
syndicate of banks. The Credit Agreement replaced the $104.5 million revolving
loan outstanding under the Senior Secured Credit Facilities that commenced in
November 1998 ("1998 Credit Facilities") and a $16.0 million note from Casino
USA, Inc. (the "Parent" or "Casino USA"), which owned 56.8 percent of the
Company's common stock at fiscal year end 2001. At the Company's option, the
Credit Agreement can be used to support up to $15.0 million of commercial
letters of credit. Availability under the Credit Agreement is subject to a
formula based on the value of eligible accounts receivable and inventory. As of
December 30, 2001, $127.0 million of revolving loan and $3.0 million of letter
of credit were outstanding and the remaining availability based on the formula
was $35.0 million. Interest for the Credit Agreement is at Eurodollar LIBOR or
the Administrative Agent's reference rate, plus designated amounts. Commitment
fees are charged on the undrawn amounts at rates ranging between 0.30% to 0.50%.
The Credit Agreement expires on November 30, 2004. Principal repayments may be
required prior to the final maturity. Additionally, under certain conditions,
pay-downs toward the facility are treated as permanent reductions to the amount
committed.
21
As of December 30, 2001, the six-month Eurodollar LIBOR rate was 1.98%.
Effective November 30, 2001, the Company entered into a five-year
operating lease agreement ("Lease Agreement") with a national banking
association. There are several banks and financing institutions as well as
Casino USA that are participants in this transaction. Casino USA's share of
participation is $16.1 million. The Lease Agreement, with a value of $87.1
million and at the interest rate of 9.07%, covers 18 leased properties. The
Lease Agreement replaced the Secured Lease Facility under the 1998 Credit
Facilities. The Lease Agreement provides for the financing of three distribution
facilities, located in Commerce, California for dry goods distribution to
Stores; Stockton, California for Smart & Final Foodservice distribution and
Stores; and Miami, Florida for Florida Foodservice distribution and Stores; and
15 store locations. At the end of the term, the Lease Agreement provides that
the Company must elect to purchase all the properties by a final payment of
$86.4 million or sell all the properties to a third party. If the properties are
sold to a third party and the aggregate sales price is less than $69.2 million,
the Company is obligated to pay the difference of the aggregate sales price and
$69.2 million. The aggregate minimum future lease payments including the final
obligation of $69.2 million under the Lease Agreement, along with other lease
obligations of the Company, are included in the total contractual obligations in
the table below and under Note 6 to the Consolidated Financial Statements
included in this report.
Both the Credit Agreement and the Lease Agreement contain various
customary and restrictive covenants, including restrictions on cash dividends
declared or paid, additional debt and capital expenditures and require the
Company to maintain certain fixed charge coverage ratios and other financial
ratios under each agreement. The covenants do not require the Company to
maintain a public debt rating nor do they require the Company to maintain a
certain liquidity level. As a result of the restatement of the Company's
financial statements and the related impact on the Company's compliance with the
financial and non-financial covenants contained in the two agreements, the
Company believed it was appropriate to obtain waivers of certain possible
breaches or failures to comply with the covenants included in the Credit
Agreement and Lease Agreement. The Company obtained such waivers.
The Company had cash and cash equivalents of $23.0 million,
stockholders' equity of $271.6 million and debt, excluding capital leases, of
$137.0 million at the end of fiscal year 2001. The debt consists of $127.0
million outstanding under the Credit Agreement and a $10.0 million five-year
unsecured note issued to United Grocers, Inc. as a result of the Company's
acquisition of its Cash & Carry stores. The weighted average interest rate,
including all associated fees, on the Company's variable rate debt for 2001 was
9.50%.
The Company's future contractual obligations include (dollars in
thousands):
Less Than
One Year 2003 2004 2005 2006 Thereafter Total
--------- --------- ----------- --------- --------- ---------- ----------
Long-term debt $ 5,035 $ 5,004 $ 127,000 $ -- $ -- $ -- $ 137,039
Capital lease obligations 4,307 4,046 3,646 3,405 1,423 3,408 20,235
Operating leases 38,693 37,664 34,635 31,759 98,335 153,042 394,128
Other long-term obligations 1,955 1,455 362 -- -- -- 3,772
---------- --------- ----------- --------- --------- ---------- ----------
Total contractual obligations $ 49,990 $ 48,169 $ 165,643 $ 35,164 $ 99,758 $ 156,450 $ 555,174
========== ========= =========== ========= ========= ========== ==========
The Company expects to be able to fund future acquisitions and other
cash requirements by a combination of available cash, cash from operations and
other borrowings and proceeds from the issuance of equity securities. The
Company believes that its sources of funds are adequate to
22
provide for working capital, capital expenditures, and debt service requirements
for the foreseeable future.
Inflation
The Company's primary costs, merchandise and labor, as well as utility
and transportation costs are affected by a number of factors that are beyond the
Company's control. These factors include the price of merchandise, the
competitive climate, and the general and regional economic conditions. As is
typical in the food industry, the Company has generally been able to maintain
margins by adjusting its selling prices. But competitive conditions may, from
time to time, render it unable to do so while maintaining or increasing its
market share.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risks relating to fluctuations in
interest rates and the exchange rate between the U.S. dollar and Mexican Peso.
The Company's financial risk management objective is to minimize the negative
impact of interest rate fluctuations on the Company's earnings and cash flows.
As of fiscal year end 2001, the Company's exposure to foreign exchange rates was
limited.
Additionally, the Company is exposed to the market fluctuations
associated with stock the Company received as a result of the demutualization
transactions of a mutual insurance company in December 2001. At December 30,
2001, the fair market value of the stock was $1.3 million.
Interest rate risk is managed through the use of interest rate collar
agreements to limit the effect of interest rate fluctuations on principal
amounts of an aggregate of $100 million in floating rate debt. These agreements
are entered into with major financial institutions thereby minimizing risk of
credit loss. See Note 4 to the Consolidated Financial Statements included in
this report for a more complete description of the Company's interest rate
collars.
Interest Rate Sensitivity Analysis
The following analysis presents the earnings sensitivity of the Company
if a certain interest rate change occurred at December 30, 2001. The change
chosen for this analysis reflects the Company's view of a change that is
reasonably possible over a one-year period. These forward-looking disclosures
are selective in nature and only address the potential impact from financial
instruments. They do not include other potential effects that could impact the
Company's business as a result of these changes in interest.
At December 30, 2001, the Company had debt, excluding capital leases,
totaling $137.0 million and interest rate collar agreements with a notional
value of $100 million. The interest rate collar agreements limit LIBOR
fluctuations to interest rate ranges from 4.74% to 8.00% and expire during
various periods from October 2002 to November 2004. As of December 30, 2001, the
six-month Eurodollar LIBOR rate was 1.98%.
At December 30, 2001, the Company had $127.0 million of variable rate
debt and $10.0 million of fixed rate debt. Holding other variables constant
(such as debt levels), the earnings and
23
cash flows impact of a one-percentage point change in interest rates would be
approximately $0.2 million.
Foreign Currency Risk
The Company's exposure to foreign currency risk is limited to the
Company's operations under Smart & Final Mexico and the equity earnings in its
Mexico joint venture. At fiscal year end 2001, such exposure was the $3.9
million net investment in Smart & Final Mexico, which was comprised primarily of
its Mexico joint venture. The Company's other transactions are conducted in U.S.
dollars and are not exposed to fluctuation in foreign currency. The Company does
not hedge its foreign currency exposure and therefore is not exposed to such
hedging risk.
Credit Risk
The Company is exposed to credit risk on trade notes and accounts
receivable. The Company provides credit primarily to foodservice distribution
customers in the ordinary course of business and performs ongoing credit
evaluations. Concentrations of credit risk with respect to trade notes and
accounts receivables are limited due to the number of customers comprising the
Company's customer base. The Company currently believes its allowance for
doubtful accounts is sufficient to cover customer credit risks.
New Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements included in this
report for the discussion of new accounting pronouncements.
Forward-Looking and Cautionary Statements
When used in this report, the words "believe," "expect," "anticipate"
and similar expressions, together with other discussion of future trends or
results, are intended to identify forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such statements are subject to certain risks and uncertainties,
including those discussed below, that could cause actual results to differ
materially from those projected. These forward-looking statements speak only as
of the date hereof. All of these forward-looking statements are based on
estimates and assumptions made by management of the Company which, although
believed to be reasonable, are inherently uncertain and difficult to predict;
therefore, undue reliance should not be placed upon such statements. Actual
results may differ materially and adversely from such statements due to known
and unknown factors. The following important factors, among others, could cause
the Company's results of operations to be materially and adversely affected in
future periods: (i) increased competitive pressures from existing competitors
and new entrants, including price-cutting strategies, store openings and
remodels; (ii) loss of customers or sales weakness; (iii) inability to achieve
projected future sales levels or other operating results; (iv) interruption
and/or inability to obtain adequate supplies of foodservice and other products;
(v) operational inefficiencies in distribution or other Company systems; (vi)
unexpected increases in fuel or other transportation-related costs; (vii)
adverse state or federal legislation or regulation that increases the costs of
compliance, or adverse findings by a regulator with respect to existing
operations; (viii) the unavailability of funds for capital
24
expenditures; (ix) increases in interest rates or the Company's cost of
borrowing or a default under any material debt agreement; (x) continued downturn
in tourism and travel industries; (xi) deterioration in national or regional
economic conditions; and (xii) costs and uncertainties associated with known or
potential legal actions. Many of such factors are beyond the control of the
Company. There can be no assurance that the Company will not incur new or
additional unforeseen costs in connection with the ongoing conduct of its
business. Accordingly, any forward-looking statements included herein do not
purport to be predictions of future events or circumstances and may not be
realized. In addition, assumptions relating to budgeting, marketing,
advertising, litigation and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause the
Company to alter its marketing, capital expenditure or other budgets, which may
in turn materially affect the Company's financial position and results of
operations. On April 22, 2002 the Company announced it had identified certain
accounting issues that would cause it to restate its financial statements. The
Company is restating by means of this filing on Form 10-K/A Amendment No. 2 its
audited financial statements for fiscal years 2001, 2002 and 1999 including the
cumulative effect of prior-years restated results. While no claims have been
made to date, it is possible that claims may be brought by shareholders against
the Company in connection with the accounting adjustments; costs related to the
claims, including defense costs, could have an adverse effect on the Company's
financial position and results of operations.
25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information is included in this section:
Page
----
Report of Independent Public Accountants 27
Consolidated Balance Sheets 28
Consolidated Statements of Income 29
Consolidated Statements of Stockholders' Equity 30
Consolidated Statements of Cash Flows 31
Notes to Consolidated Financial Statements 32
Supplementary Data - Summary of Quarterly Results of Operations 57
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Smart & Final Inc.:
We have audited the accompanying consolidated balance sheets of Smart & Final
Inc. (a Delaware corporation and a 56.8 percent owned subsidiary of Casino USA,
Inc.) and subsidiaries as of December 30, 2001 and December 31, 2000, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three fiscal years in the period ended December 30, 2001 as
restated (see Note 2 to the Consolidated Financial Statements). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Smart & Final Inc. and
subsidiaries as of December 30, 2001 and December 31, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 30, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
June 4, 2002
27
SMART & FINAL INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
December 30, December 31,
2001 2000
ASSETS (restated) (restated)
- ------ -------------- --------------
Current assets:
Cash and cash equivalents $ 23,016 $ 22,028
Trade notes and accounts receivable, less allowance for
doubtful accounts of $3,817 in 2001 and $3,182 in 2000 78,744 66,212
Inventories 175,302 170,212
Prepaid expenses and other current assets 7,303 6,426
Deferred tax asset 16,145 12,853
-------------- --------------
Total current assets 300,510 277,731
Property, plant and equipment:
Land 36,329 36,338
Buildings and improvements 30,209 29,028
Leasehold improvements 123,742 104,646
Fixtures and equipment 196,461 182,678
-------------- --------------
386,741 352,690
Less - Accumulated depreciation and amortization 168,514 146,826
-------------- --------------
Net property, plant and equipment 218,227 205,864
Assets under capital leases, net of accumulated
amortization of $9,196 in 2001 and $8,098 in 2000 12,038 6,877
Goodwill, net of accumulated amortization of $6,767 in 2001 and $5,247 in 2000 52,432 53,952
Deferred tax asset 7,110 6,051
Other assets 40,807 29,876
-------------- --------------
Total assets $ 631,124 $ 580,351
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt and capital leases $ 8,096 $ 91,209
Accounts payable 104,615 103,514
Accrued salaries and wages 14,383 15,538
Other accrued liabilities 51,282 40,408
-------------- --------------
Total current liabilities 178,376 250,669
Long-term liabilities:
Notes payable, net of current maturities 5,004 10,117
Notes payable to Parent - 15,965
Bank debt 127,000 -
Obligations under capital leases 12,871 9,390
Other long-term liabilities 15,349 12,632
Workers' compensation reserve, postretirement and postemployment benefits 20,943 20,079
-------------- --------------
Total long-term liabilities 181,167 68,183
Commitments and Contingencies - -
Stockholders' equity:
Preferred stock, $1 par value (authorized 10,000,000 shares; no shares issued) - -
Common stock, $0.01 par value (authorized 100,000,000 shares;
29,393,449 shares issued and outstanding in 2001 and 29,203,114 in 2000) 294 292
Additional paid-in capital 206,874 204,898
Notes receivable for common stock (100) (100)
Accumulated other comprehensive loss (4,840) (915)
Retained earnings 69,353 57,324
-------------- --------------
Total stockholders' equity 271,581 261,499
-------------- --------------
Total liabilities and stockholders' equity $ 631,124 $ 580,351
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
28
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
Fiscal Year
-----------------------------------------------------
2001 2000 1999
(restated) (restated) (restated)
--------------- ---------------- ---------------
Sales $ 1,946,723 $ 1,863,895 $ 1,793,142
Cost of sales, buying and occupancy 1,672,125 1,606,384 1,557,800
--------------- ---------------- ---------------
Gross margin 274,598 257,511 235,342
Operating and administrative expenses 244,860 230,058 209,620
--------------- ---------------- ---------------
Income from operations 29,738 27,453 25,722
Interest expense, net 12,500 13,368 17,997
--------------- ---------------- ---------------
Income before provision for income taxes and extraordinary item 17,238 14,085 7,725
Provision for income taxes 6,335 5,361 2,931
--------------- ---------------- ---------------
Income from consolidated subsidiaries 10,903 8,724 4,794
Equity earnings in unconsolidated subsidiary 1,126 833 748
--------------- ---------------- ---------------
Income before extraordinary item 12,029 9,557 5,542
Extraordinary loss on extinguishment of debt, net of tax effect of $147 - - 166
--------------- ---------------- ---------------
Net income $ 12,029 $ 9,557 $ 5,376
=============== ================ ===============
Earnings per common share:
Earnings per common share before extraordinary item $ 0.41 $ 0.33 $ 0.21
Extraordinary loss on extinguishment of debt per common share - - (0.01)
--------------- ---------------- ---------------
Earnings per common share $ 0.41 $ 0.33 $ 0.20
=============== ================ ===============
Weighted average common shares 29,331,991 29,191,420 26,282,704
=============== ================ ===============
Earnings per common share, assuming dilution:
Earnings per common share, assuming dilution, before extraordinary
item $ 0.41 $ 0.33 $ 0.21
Extraordinary loss on extinguishment of debt per common share - - (0.01)
--------------- ---------------- ---------------
Earnings per common share, assuming dilution $ 0.41 $ 0.33 $ 0.20
=============== ================ ===============
Weighted average common shares and common share equivalents 29,660,311 29,244,451 26,321,476
=============== ================ ===============
The accompanying notes are an integral part of these consolidated financial
statements.
29
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended December 30, 2001, December 31, 2000 and January 2,
2000
(in thousands, except share amounts)
Common Stock Accumulated
---------------------- Additional Notes Other Total
Number of Paid-in Receivable Comprehensive Retained Stockholders'
Shares Amount Capital for Stock Loss Earnings Equity
(restated) (restated)
---------- --------- ---------- ---------- ------------- ---------- -------------
Balance, fiscal year end 1998 22,527,179 $ 225 $ 144,987 $ - $ (835) $ 42,380 $ 186,757
Issuance of common stock 6,609,816 66 58,925 - - - 58,991
Notes receivable for stock subscription - - - (100) - - (100)
Restricted stock accrual - - 538 - - - 538
Dividend (for restricted stock canceled) - - - - - 6 6
Net income - - - - - 5,376 5,376
---------- --------- ---------- --------- --------- ---------- ----------
Balance, fiscal year end 1999 29,136,995 291 204,450 (100) (835) 47,762 251,568
Issuance of common stock 66,119 1 75 - - - 76
Restricted stock accrual - - 373 - - - 373
Dividend (for restricted stock canceled) - - - - - 5 5
Comprehensive income (loss):
Net income - - - - - 9,557 9,557
Other comprehensive loss:
Foreign currency translation loss - - - - (80) - (80)
---------- --------- ---------- --------- --------- ---------- ----------
Other comprehensive loss - - - - (80) - (80)
---------- --------- ---------- --------- --------- ---------- ----------
Comprehensive income (loss) - - - - (80) 9,557 9,477
---------- --------- ---------- --------- --------- ---------- ----------
Balance, fiscal year end 2000 29,203,114 292 204,898 (100) (915) 57,324 261,499
Issuance of common stock 190,335 2 925 - - - 927
Restricted stock accrual - - 1,009 - - - 1,009
Tax benefit associated with options
exercised - - 42 - - - 42
Comprehensive income (loss):
Net income - - - - - 12,029 12,029
Other comprehensive loss:
Cumulative effect of accounting
change, net of tax of $175 - - - - (305) - (305)
Net loss on derivative instruments,
net of tax of $1,454 - - - - (2,139) - (2,139)
Foreign currency translation loss - - - - (166) - (166)
Minimum pension liability,
net of tax of $877 - - - - (1,315) - (1,315)
---------- --------- ---------- --------- --------- ---------- ----------
Other comprehensive loss - - - - (3,925) - (3,925)
---------- --------- ---------- --------- --------- ---------- ----------
Comprehensive income (loss) - - - - (3,925) 12,029 8,104
---------- --------- ---------- --------- --------- ---------- ----------
Balance, fiscal year end 2001 29,393,449 $ 294 $ 206,874 $ (100) $ (4,840) $ 69,353 $ 271,581
========== ========= ========== ========= ========= ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
30
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Fiscal Year
------------------------------------------------
2001 2000 1999
(restated) (restated) (restated)
-------------- ------------- -------------
Cash Flows From Operating Activities:
Net income $ 12,029 $ 9,557 $ 5,376
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain (loss) on disposal of property, plant and equipment (1,420) 64 (608)
Depreciation and amortization 34,125 32,883 31,326
Deferred tax provision (benefit) (4,351) (2,189) 1,343
Amortization of deferred financing costs 1,640 1,784 1,869
Extraordinary loss on extinguishment of debt, net of taxes - - 166
Equity earnings in unconsolidated subsidiary (1,126) (833) (748)
Decrease (increase) in:
Trade notes and accounts receivable (12,532) (5,894) 5,961
Inventories (5,090) (15,694) 3,160
Prepaid expenses and other current assets (4,034) 1,409 8,796
Increase (decrease) in:
Accounts payable 3,774 6,380 (4,749)
Accrued salaries and wages (1,155) 2,411 2,547
Other accrued liabilities 11,101 11,986 54
-------------- ------------- -------------
Net cash provided by operating activities 32,961 41,864 54,493
-------------- ------------- -------------
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment (45,034) (23,942) (26,169)
Proceeds from disposal of property, plant and equipment 2,857 549 3,142
Other (4,602) (4,662) (4,310)
-------------- ------------- -------------
Net cash used in investing activities (46,779) (28,055) (27,337)
-------------- ------------- -------------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net of costs 1,008 - 20,163
Payments on bank line of credit (117,500) (30,500) (36,000)
Borrowings on bank line of credit 157,500 - 20,000
Payment on note payable to Parent (15,965) - -
Payments on notes payable (4,393) (4,217) (6,462)
Change in payable to Parent and affiliates - - (1,681)
Quarterly dividend paid - - (1,127)
Fees paid in connection with debt restructure (5,844) - -
-------------- ------------- -------------
Net cash provided by (used in) financing activities 14,806 (34,717) (5,107)
-------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 988 (20,908) 22,049
Cash and cash equivalents at beginning of year 22,028 42,936 20,887
-------------- ------------- -------------
Cash and cash equivalents at end of year $ 23,016 $ 22,028 $ 42,936
============== ============= =============
Noncash Investing and Financing Activities:
Equipment acquired as capital lease $ 6,648 $ - $ 4,891
Note received in connection with fixed assets retired 562 - 1,145
Notes to affiliates extinguished for common stock issued - - 39,423
Construction in progress costs incurred but not paid 3,294 5,967 397
-------------- ------------- -------------
Total noncash transactions $ 10,504 $ 5,967 $ 45,856
============== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
31
SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of presentation
Smart & Final Inc. (the "Company") is a Delaware corporation and at
fiscal year end 2001 was a 56.8 percent owned subsidiary of Casino USA, Inc.
(the "Parent" or "Casino USA"), a California corporation. Casino
Guichard-Perrachon, S.A. ("Casino France"), a publicly traded French joint stock
limited liability company, is the principal shareholder of the Parent.
Collectively, Casino France and its subsidiaries currently own approximately
59.8 percent of the Company's common stock. The Company's principal subsidiary
is Smart & Final Stores Corporation, a California corporation; the Company also
operates a Cash & Carry division (collectively, "Smart & Final Stores"). The
Company owns American Foodservice Distributors ("American Foodservice"), a
holding company, which owns 100% of Port Stockton Food Distributors, Inc. ("Port
Stockton"), a California corporation, and 100% of Henry Lee Company ("Henry
Lee"), a Florida company, and two operating divisions in Florida, Orlando
Foodservice and Southern Foods. Henry Lee, Orlando Foodservice and Southern
Foods are collectively referred to as "Florida Foodservice". The Company is
engaged in the business of distributing food and related non-food items through
wholesale outlets under the trade names "Smart & Final" and "United Grocers Cash
& Carry" ("Cash & Carry") and by delivery, under the trade names "Smart & Final
Foodservice Distributors", formerly "Port Stockton", and "Henry Lee." The
Company also owns 100% of Smart & Final de Mexico S.A. de C.V. ("Smart & Final
Mexico"), a Mexican holding company through which the Company owns 50% of a
joint venture, Smart & Final del Noroeste S.A. de C.V. ("SFDN"), in Mexico.
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. The Company's 50%-owned joint
venture in Mexico, which commenced store operations in December 1993, is
accounted for by the equity method of accounting.
All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain prior years' amounts have been reclassified
to conform to the fiscal year 2001 presentation.
Fiscal years
The Company's fiscal year ends on the Sunday closest to December 31.
Fiscal year 2001, 2000 and 1999 each included 52 weeks. Fiscal years 2001, 2000
and 1999 ended on December 30, 2001, December 31, 2000 and January 2, 2000,
respectively. 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. The fourth quarter of a 53-week year consists of
thirteen weeks.
32
Cash and cash equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. The carrying
amount of cash equivalents is approximately the same as their fair value because
of the short maturity of these instruments.
Credit risk
The Company is exposed to credit risk on trade notes and 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 notes and accounts receivable 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.
Inventories
The majority of the Company's inventories consist of merchandise
purchased for resale which are stated at the lower of FIFO (first-in, first-out)
cost or market.
Prepaid expenses and other current assets
Prepaid expenses and other current assets primarily include expenses
prepaid and the fair market value of stock the Company received from the
demutualization transactions of a mutual insurance company in December 2001.
These shares of stock were classified as trading securities and had a fair
market value of $1,264,000 at fiscal year end 2001.
Property, plant and equipment
Property, plant and equipment owned by the Company are stated at cost
and are depreciated or amortized using the straight-line method. Leased property
meeting certain criteria is capitalized and the amortization is based on the
straight-line method over the term of the lease. The estimated useful lives are
as follows:
Buildings and improvements 5-25 years
Fixtures and equipment 3-10 years
Leasehold improvements Lesser of lease term or useful
life of improvement
Costs of normal maintenance and repairs and minor replacements are
charged to expense when incurred. Major replacements or betterments of
properties are capitalized. When assets are sold or otherwise disposed of, the
costs and related accumulated depreciation and amortization are removed from the
accounts, and any resulting gain or loss is included in the income statement.
33
Long-lived assets and certain identifiable intangibles to be held and
used by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Also included in property, plant and equipment are costs associated
with selection and procurement of real estate sites of $1,421,000 and $1,078,000
as of fiscal year end 2001 and 2000, respectively. These costs are amortized
over the remaining lease term of the site with which they are associated.
Goodwill
Through fiscal year end 2001, goodwill has been amortized on a
straight-line basis over a period not exceeding 40 years. The Company assessed
the recoverability of goodwill based on expected future cash flows. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets", issued by the Financial Accounting
Standards Board ("FASB"), goodwill amortization will be discontinued beginning
in fiscal year 2002.
Other assets
Other assets include a certificate of deposit of $1,500,000 and
municipal bonds aggregating $3,930,000 at fiscal year end 2001 and municipal
bonds aggregating $5,430,000 at fiscal year end 2000, which secure the Company's
workers' compensation reserves. The fair value of the municipal bonds, estimated
based on quoted market prices for similar investments, approximates their
carrying amounts. These municipal bonds have varying maturity dates ranging from
2006 through 2019.
Other assets include financing issuance costs, net of amortization, of
$5,665,000 and $1,460,000 at year end 2001 and 2000, respectively relating to
fees paid in connection with the debt restructuring of the Company's revolving
facility and lease facility (see Note 5 "Long Term Debt" and Note 6 "Lease
Obligations"). These costs are being amortized over the term of the related
obligations.
Capitalized software costs, net of amortization, of $4,572,000 and
$4,741,000 are included in other assets at fiscal year end 2001 and 2000,
respectively. These costs include third party purchased software costs, direct
labor associated with internally developed software, and installation costs.
Such costs are being amortized over a three to five year period using the
straight-line method, and reflects the period over which the benefits of the
software are fully realizable and enhance the operations of the business.
Accounts payable
Accounts payable included outstanding checks of $27.8 million and $28.9
million at fiscal year end 2001 and 2000, respectively.
34
Stock options
In 1996, the Company adopted SFAS No. 123 "Accounting for Stock-Based
Compensation", which encourages, but does not require, the recognition of
compensation expense for employee stock-based compensation arrangements using
the fair value method of accounting. The Company has elected the disclosure only
alternative, and has disclosed the pro forma net income per share amounts in the
notes to the consolidated financial statements using the fair-value method (See
Note 13 "Stock Compensation Plans").
Significant accounting estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period.
Revenue recognition
Revenue is recognized at the point of sale for store sales and at the
time of shipment for foodservice sales. Substantially all shipments to
foodservice customers are received by the customers the same day as shipped.
Contingent rebates
As a component of its consolidated procurement program, the Company
enters into certain contracts, which provide for rebates or other allowances
that are contingent upon the Company meeting specified performance measures.
Such rebates and allowances are recognized in the financial statements at the
point in which the specified performance measures have been achieved.
Shipping and handling costs
The Company classifies shipping and handling costs in Cost of Sales,
Buying and Occupancy.
Income taxes
The Company recognizes deferred tax assets and liabilities based on the
liability method, which requires an adjustment to the deferred tax asset or
liability to reflect income tax rates currently in effect. When income tax rates
increase or decrease, a corresponding adjustment to income tax expense is
recorded by applying the rate change to the cumulative temporary differences.
35
Foreign currency translations
Assets and liabilities recorded in foreign currencies, as well as the
Company's investment in the Mexico joint venture, are translated at the exchange
rate on the balance sheet date. Revenues and expenses of the Company's
consolidated foreign operations are translated at average rates of exchange
prevailing during the year. Beginning in January 2000, in accordance with
generally accepted accounting principles, the functional currency for the
Company's Mexico operations is the Mexican Peso. As such, foreign currency
translation gains and losses are included in other comprehensive income (loss)
("OCI") and reflected in Accumulated Other Comprehensive Loss within
Stockholders' Equity. During fiscal year 1999, in accordance with generally
accepted accounting principles, the functional currency was the U.S. dollar and
as such, foreign currency translation gains and losses were included in results
of operations for that fiscal year.
Accounting pronouncements
Effective January 1, 2001, the Company adopted SFAS No. 133, as amended
by SFAS No. 138, which established accounting and reporting standards for
derivative instruments and hedging activities. All derivative instruments are
required to be measured at fair values and recognized on the balance sheet.
Changes in fair values of derivative instruments designated as fair value hedges
are recognized in current earnings. The effective portions of changes in fair
values of derivative instruments designated as cash flow hedges are recorded as
other comprehensive income and are reported on the statement of income when the
hedged forecasted transaction affects earnings or the hedged item becomes
ineffective. The ineffective portions of cash flow hedges are recognized in
current earnings.
The Company uses interest rate collar agreements to minimize the
negative impact of interest rate fluctuations on the Company's cash flows. These
agreements are designated as cash flow hedges and are considered fully
effective. The adoption of SFAS No. 133 on January 1, 2001 resulted in a
cumulative pre-tax reduction of $480,000 recorded to OCI, representing
cumulative losses since inception on the fair values of these derivative
instruments as of January 1, 2001.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
all business combinations be accounted for under the purchase method. The
statement further requires separate recognition of intangible assets that meet
one of two criteria. The statement applies to all business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a
material impact on the Company's results of operations or financial position.
SFAS No. 142 requires that an intangible asset that is acquired shall
be initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. SFAS No.
142 is effective for fiscal periods beginning after December 15, 2001. The
Company has adopted SFAS No. 142 with respect to existing goodwill and other
intangible
36
assets effective December 31, 2001, the first day of its fiscal year 2002. In
accordance with SFAS No. 142, the Company will perform a transitional impairment
test on its existing goodwill and other intangible assets and expects to
complete the aforementioned test by the second quarter of 2002. The Company is
currently evaluating the impact of the new accounting standard and while the
ultimate impact of the new accounting standard has yet to be determined,
goodwill amortization expense for the fiscal years 2001, 2000 and 1999 was
$1,520,000, $1,573,000 and $1,590,000, respectively.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires the
recognition and measurement of the impairment of long-lived assets to be held
and used and the measurement of long-lived assets to be disposed by sale. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001. The
Company does not expect a material impact on its results of operations or
financial condition as a result of the adoption of SFAS No. 144.
2. Restatement of Financial Statements
On April 22, 2002 the Company announced it had identified certain
accounting issues at its Stockton, California broadline foodservice subsidiary
impacting prior-years previously reported operating results that would cause it
to restate its financial statements. The Company's investigation of these
matters has resulted in the Company restating its audited financial statements
for fiscal years 2001, 2000 and 1999 including the cumulative effect of
prior-years restated results. The Company's previously issued financial
statements for these periods should not be relied upon.
The cumulative effect of the accounting adjustments on net income
through fiscal 2001 was an aggregate reduction of $5.8 million. Of that amount,
previously reported net income for 2001 and 2000 was reduced by $2.4 million and
$1.5 million, respectively. Previously reported net income for 1999 was
increased by $0.7 million, and the cumulative effect on net income of
prior-years restated results through 1998 was a reduction of $2.6 million.
Restated net income and diluted earnings per share for 2001 are $12.0 million
and $0.41, respectively, as compared to $14.4 million and $0.49 previously
reported. Restated net income and diluted earnings per share for 2000 are $9.6
million and $0.33, respectively, as compared to $11.0 million and $0.38
previously reported. Restated net income and diluted earnings per share for 1999
are $5.4 million and $0.20, respectively, as compared to $4.7 million and $0.18
previously reported.
In its investigation and review of the accounting issues in the
Company's northern California foodservice subsidiary, the Company identified
various accounting errors which resulted primarily from the failure of the
principal accounting staff at this subsidiary to properly reconcile its
accounting records to supporting detail and their failure to appropriately
account for marketing and vendor rebate programs, inventory transactions and
intercompany transactions. In addition in conjunction with the review of
previously reported financial statements, the Company adjusted its accounting
for certain marketing programs which resulted in a restatement to previously
recorded marketing program income recognition.
37
The cumulative effect of the accounting adjustments on net income
through fiscal 2001 was an aggregate reduction of $5.8 million of which $4.6
million resulted from a net increase in previously reported cost of sales and
$1.2 million resulted from a net increase in operating and administrative
expenses. The increase in previously reported cost of sales was primarily
related to inventory adjustments and marketing and vendor program revenue
recognition adjustments. The increase in previously reported operating and
administrative expenses was primarily related to adjustments for intercompany
transactions and payroll and benefits accruals.
The following statements of income reconcile previously reported and
restated financial information for fiscal years 2001, 2000 and 1999, amounts in
thousands.
Fiscal Year 2001
---------------------------------------------
As reported Adjustments Restated
------------- -------------- -------------
Sales $ 1,946,723 $ - $ 1,946,723
Cost of sales, buying and occupancy 1,668,191 3,934 1,672,125
------------ ------------ -------------
Gross margin 278,532 (3,934) 274,598
Operating and administrative expenses 244,732 128 244,860
------------ ------------ -------------
Income from operations 33,800 (4,062) 29,738
Interest expense, net 12,500 - 12,500
------------ ------------ -------------
Income before provision for income taxes 21,300 (4,062) 17,238
Provision for income taxes 8,001 (1,666) 6,335
------------ ------------ -------------
Income from consolidated subsidiaries 13,299 (2,396) 10,903
Equity earnings in unconsolidated subsidiary 1,126 - 1,126
------------ ------------ -------------
Net income $ 14,425 $ (2,396) $ 12,029
============ ============ =============
Fiscal Year 2000
---------------------------------------------
As reported Adjustments Restated
------------ -------------- -------------
Sales $ 1,863,895 $ - $ 1,863,895
Cost of sales, buying and occupancy 1,605,812 572 1,606,384
------------ ------------ -------------
Gross margin 258,083 (572) 257,511
Operating and administrative expenses 228,109 1,949 230,058
------------ ------------ -------------
Income from operations 29,974 (2,521) 27,453
Interest expense, net 13,368 - 13,368
------------ ------------ -------------
Income before provision for income taxes 16,606 (2,521) 14,085
Provision for income taxes 6,395 (1,034) 5,361
------------ ------------ -------------
Income from consolidated subsidiaries 10,211 (1,487) 8,724
Equity earnings in unconsolidated subsidiary 833 - 833
------------ ------------ -------------
Net income $ 11,044 $ (1,487) $ 9,557
============ ============ =============
38
Fiscal Year 1999
---------------------------------------------------------
As reported Adjustments Restated
----------------- ------------------ ------------------
Sales $ 1,793,142 $ - $ 1,793,142
Cost of sales, buying and occupancy 1,558,782 (982) 1,557,800
----------------- ------------------- ------------------
Gross margin 234,360 982 235,342
Operating and administrative expenses 209,740 (120) 209,620
----------------- ------------------ ------------------
Income from operations 24,620 1,102 25,722
Interest expense, net 17,997 - 17,997
----------------- ------------------ ------------------
Income before provision for income taxes
and extraordinary item 6,623 1,102 7,725
Provision for income taxes 2,479 452 2,931
----------------- ------------------ ------------------
Income from consolidated subsidiaries 4,144 650 4,794
Equity earnings in unconsolidated subsidiary 748 - 748
----------------- ------------------ ------------------
Income before extraordinary item 4,892 650 5,542
Extraordinary loss on extinguishment of debt,
net of tax effect of $147 166 - 166
----------------- ------------------ ------------------
Net income $ 4,726 $ 650 $ 5,376
================= ================== ==================
The following condensed balance sheets reconcile previously reported and
restated financial information for the 2001 fiscal year ended December 30, 2001
and the 2000 fiscal year ended December 31, 2000, amounts in thousands.
December 30, 2001
---------------------------------------------------------
As reported Adjustments Restated
----------------- ------------------ ------------------
ASSETS
Total current assets $ 301,952 $ (1,442) $ 300,510
Net property, plant and equipment 218,680 (453) 218,227
Other assets 111,969 418 112,387
----------------- ------------------ ------------------
Total assets $ 632,601 $ (1,477) $ 631,124
================= ================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities $ 174,091 $ 4,285 $ 178,376
Total long-term liabilities 181,167 - 181,167
Total stockholders' equity 277,343 (5,762) 271,581
----------------- ------------------ ------------------
Total liabilities and stockholders' equity $ 632,601 $ (1,477) $ 631,124
================= ================== ==================
39
December 31, 2000
---------------------------------------
As reported Adjustments Restated
----------- ----------- ----------
ASSETS
Total current assets $ 279,696 $ (1,965) $ 277,731
Net property, plant and equipment 206,317 (453) 205,864
Other assets 96,328 428 96,756
----------- ---------- ----------
Total assets $ 582,341 $ (1,990) $ 580,351
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities $ 249,293 $ 1,376 $ 250,669
Total long-term liabilities 68,183 - 68,183
Total stockholders' equity 264,865 (3,366) 261,499
----------- ---------- ----------
Total liabilities and stockholders' equity $ 582,341 $ (1,990) $ 580,351
=========== ========== ==========
3. Investments in Subsidiaries
The Company's Retained Earnings included undistributed earnings of SFDN
of $3,564,000 and $2,438,000 at fiscal year end 2001 and 2000, respectively.
These earnings are considered retained indefinitely for reinvestment and,
accordingly, no provision is provided for United States federal and state income
taxes and foreign income taxes.
4. Derivatives
As of December 30, 2001, the Company had interest rate collar agreements
with various banks to limit the impact of interest rate fluctuations on floating
rate debt. These agreements hedge principal amounts of an aggregate of $100
million. The agreements limit the effect of LIBOR fluctuations to interest rate
ranges from 4.74% to 8.00% and expire during various periods from October 2002
to November 2004. As of December 30, 2001, these agreements had a cumulative
loss of $4,073,000 recorded to OCI as a result of net changes in their fair
market values, of which, $480,000 was the cumulative loss as of the beginning of
fiscal year 2001. The decrease in fair values of these cash flow hedges during
the current reporting period is attributable to the declining market interest
rates. For the fiscal year ended December 30, 2001, net derivative loss
recognized in results of operations was $1,073,000. The Company estimates that
$1,900,000 of net derivative loss included in OCI will be recognized in results
of operations within the next twelve months.
5. Long-Term Debt
Credit Agreement
Effective November 30, 2001, the Company entered into a $175.0 million
three-year senior secured revolving credit facility ("Credit Agreement") with a
syndicate of banks. The Credit Agreement replaced the $104.5 million revolving
loan outstanding under the Senior Secured Credit Facilities that commenced in
November 1998 ("1998 Credit Facilities") and a $16.0 million note ("Casino
Note") from Casino USA. At the Company's option, the Credit Agreement can be
used to support up to $15.0 million of commercial letters of credit.
40
Availability under the Credit Agreement is subject to a formula based on the
value of eligible accounts receivable and inventory. As of December 30, 2001,
$127.0 million of revolving loan and $3.0 million of letter of credit were
outstanding and the remaining availability based on the formula was $35.0
million. Interest for the Credit Agreement is at six-month Eurodollar LIBOR or
the Administrative Agent's reference rate, plus designated amounts. Commitment
fees are charged on the undrawn amounts at rates ranging between 0.30% to 0.50%.
The Credit Agreement expires on November 30, 2004. Principal repayments may be
required prior to the final maturity. Additionally, under certain conditions,
pay-downs toward the facilities are treated as permanent reductions to the
amount committed.
As of December 30, 2001, the six-month Eurodollar LIBOR rate was 1.98%.
As of December 31, 2000, the revolving loan balance under the 1998 Credit
Facilities was $87.0 million. The 1998 Credit Facilities expired on November 30,
2001 and therefore, the $87.0 million borrowing under the revolving loan as of
December 31, 2000 was classified as a current liability. Interest for the
revolving loan balance under the 1998 Credit Facilities was at Eurodollar LIBOR
or the Administrative Agent's reference rate, plus designated amounts.
The Credit Agreement contains various customary and restrictive
covenants, including restrictions on cash dividends declared or paid, additional
debts and capital expenditures and require the Company to maintain certain fixed
charge coverage ratios and other financial ratios under the agreement. The
covenants do not require the Company to maintain a public debt rating nor do
they require the Company to maintain a certain liquidity level. As a result of
the restatement of the Company's financial statements and the related impact on
the Company's compliance with the financial and non-financial covenants
contained in the Credit Agreement, the Company believed it was appropriate to
obtain waivers of certain possible breaches or failures to comply with the
covenants included in the Credit Agreement. The Company has obtained such
waivers.
Casino Note
In November 2001, outstanding amounts under the Credit Agreement were
used to pay off the borrowing under the Casino Note. Interest for the Casino
Note was the sum of the rate under the revolving loan balance under the 1998
Credit Facilities plus 25 basis points.
Other long-term debt
In connection with the acquisition of the Cash & Carry operating business
of United Grocers, Inc., the Company issued a $17.5 million five-year unsecured
note. At December 30, 2001, the outstanding balance was $10.0 million. This note
is payable in two remaining annual installments of $5.0 million in 2002 and
2003, respectively. This note bears interest at 6.50%. Accrued interest is
payable quarterly. Other unsecured notes payable of $39,000 and $249,000 at
fiscal year end 2001 and 2000, respectively, bear interest at various rates
ranging from 6.50% to 8.00%.
Interest
Interest paid on the Company's long-term debt aggregated $11,202,000,
$13,829,000, and $20,119,000 for the fiscal years ended 2001, 2000 and 1999,
respectively. The effective interest
41
rates on the Company's variable rate debt at December 30, 2001 ranged between
4.43% and 6.25% and at December 31, 2000, between 9.03% and 10.75%.
Aggregate future principal payments are as follows:
Fiscal Year:
2002 .......................... $ 5,035,000
2003 .......................... 5,004,000
2004 .......................... 127,000,000
-------------
$ 137,039,000
=============
The fair value of the Company's long-term debt, estimated based upon
current interest rates offered for debt instruments of the same remaining
maturities, approximates the carrying amount.
6. Lease Obligations
As of fiscal year end 2001, the principal properties that the Company
leased included store, office and warehouse buildings and delivery and computer
equipment. Of the Company's operating stores, 142 store properties were leased
directly from third party lessors and eight stores were on real property that is
ground leased from third party lessors. These leases had an average remaining
lease term of nine years as of fiscal year end 2001.
Effective November 30, 2001, the Company entered into a five-year
operating lease agreement ("Lease Agreement") with a national banking
association. There are several banks and financing institutions as well as
Casino USA that are participants in this transaction. Casino USA's share of
participation is $16.1 million. The Lease Agreement replaced the Secured Lease
Facility under the 1998 Credit Facilities. The Lease Agreement, with a value of
$87.1 million and at the interest rate of 9.07%, provides for the financing of
three distribution facilities and 15 store locations. At the end of the term,
the Lease Agreement provides that the Company must elect to purchase all the
properties by a final payment of $86.4 million or sell all the properties to a
third party. If the properties are sold to a third party and the aggregate sales
price is less than $69.2 million, the Company is obligated to pay the difference
of the aggregate sales price and $69.2 million. The table of aggregate minimum
future lease payments below includes the final obligation of $69.2 million.
The Lease Agreement contains various customary and restrictive covenants,
including restrictions on cash dividends declared or paid, additional debts and
capital expenditures and require the Company to maintain certain fixed charge
coverage ratios and other financial ratios under the agreement. The covenants do
not require the Company to maintain a public debt rating nor do they require the
Company to maintain a certain liquidity level. As a result of the restatement of
the Company's financial statements and the related impact on the Company's
compliance with the financial and non-financial covenants contained in the Lease
Agreement, the Company believed it was appropriate to obtain waivers of certain
possible breaches or failures to comply with the covenants included in the Lease
Agreement. The Company has obtained such waivers.
American Foodservice's Miami dry goods warehouse is leased from the
former owners of Henry Lee. The Company guarantees $1,007,000 of obligations of
the former owners of Henry
42
Lee. These obligations are related to properties leased by Henry Lee.
Lease expense for operating leases included in the accompanying financial
statements were $41,485,000 for 2001, $39,208,000 for 2000 and $34,104,000 for
1999. All lease expenses were paid to the third party lessors.
Aggregate minimum future lease payments for real property, as well as
equipment and other property at fiscal year end 2001 are as follows:
Fiscal Year: Operating Leases Capital Leases
---------------- ---------------
2002 .......................................... $ 38,693,000 $ 4,307,000
2003 .......................................... 37,664,000 4,046,000
2004 .......................................... 34,635,000 3,646,000
2005 .......................................... 31,759,000 3,405,000
2006 .......................................... 98,335,000 1,423,000
Subsequent to 2006 ............................ 153,042,000 3,408,000
---------------- ---------------
Future minimum lease payments ......................... $ 394,128,000 20,235,000
================
Less amount representing interest ..................... 4,303,000
---------------
Present value of future lease payments ................ $ 15,932,000
===============
Capital lease obligations vary in amount with interest rates ranging from
5.74% to 19.91%. Interest paid in relation to capital leases aggregated
$1,071,000, $1,166,000 and $849,000 for fiscal years ended 2001, 2000 and 1999,
respectively.
7. Retirement Plans
Defined benefit plans
The Company has a noncontributory pension plan covering substantially all
full time employees, except for those employees of American Foodservice. The
Company funds this plan with annual contributions as required by the Employee
Retirement Income Security Act of 1974 (ERISA). Plan assets are held by the
trustee, and consist of a diversified portfolio of fixed-income investments and
equity securities, including U.S. Government instruments, corporate bonds, money
market funds and common stock.
Effective January 1, 1998 the Company adopted a noncontributory
supplemental executive retirement plan ("SERP") which provides supplemental
income payments for certain Company officers in retirement. The Company has
invested in corporate owned life insurance policies, which provide partial
funding for these benefits. The cash surrender value of these policies amounted
to $5,274,000 and $4,286,000 at year end 2001 and 2000, respectively and, is
included in Other Assets in the accompanying consolidated balance sheets.
43
The following tables set forth the changes in benefit obligation and plan
assets of these plans for 2001 and 2000:
2001 2000
------------ ------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 46,105,000 $ 37,921,000
Service cost 2,492,000 1,833,000
Interest cost 3,755,000 3,153,000
Plan amendment - 124,000
Actuarial loss 4,161,000 4,625,000
Benefits paid (1,606,000) (1,551,000)
------------ ------------
Benefit obligation at end of year 54,907,000 46,105,000
------------ ------------
Change in Plan Assets
Fair value of plan assets at 37,076,000 39,667,000
beginning of year (3,689,000) (1,326,000)
Actual return on plan assets 674,000 286,000
Employer contribution (1,606,000) (1,551,000)
Benefits paid ------------ ------------
32,455,000 37,076,000
Fair value of plan assets at end of year ------------ ------------
Funded Status (22,452,000) (9,029,000)
Unrecognized prior service cost 2,687,000 3,044,000
Unrecognized net transition obligation 195,000 293,000
Unrecognized actuarial loss 12,180,000 1,283,000
------------ ------------
Accrued benefit cost $ (7,390,000) $ (4,409,000)
============ ============
44
Amounts recognized in the consolidated balance sheets at year end 2001
and 2000 consist of:
2001 2000
------------- -------------
Accrued benefit cost $ (7,390,000) $ (4,409,000)
Additional minimum liability (4,588,000) (1,711,000)
Intangible asset 2,396,000 1,711,000
Accumulated other comprehensive income 2,192,000 -
------------- -------------
Net amount recognized $ (7,390,000) $ (4,409,000)
============= =============
The weighted average assumptions used in accounting for these plans at
year end 2001 and 2000 were as follows:
2001 2000
----------- ----------
Discount rate 7.25% 7.50%
Rate of increase in compensation levels 4.50% 4.50%
Expected long-term rate of return on plan assets 9.00% 9.00%
The net periodic benefit cost for fiscal years 2001, 2000, and 1999
includes the following components:
2001 2000 1999
------------- ------------- ------------
Service cost component $ 2,492,000 $ 1,833,000 $ 2,227,000
Interest cost component 3,755,000 3,153,000 2,921,000
Expected return on plan assets (3,330,000) (3,546,000) (3,173,000)
Amortization of prior service cost 357,000 347,000 348,000
Amortization of transition obligation 98,000 99,000 97,000
Amortization of actuarial gain - (439,000) -
------------- ------------- ------------
Net expense $ 3,372,000 $ 1,447,000 $ 2,420,000
============= ============= ============
The Company contributes to a multi-employer pension plan administered
by a trustee on behalf of its 100 union employees. Contributions to this plan
are based upon negotiated labor contracts. Information relating to benefit
obligations and fund assets as they may be allocable to the Company at December
30, 2001 is not available. Pension expense for this plan was $484,000 for 2001,
$507,000 for 2000 and $400,000 for 1999.
Defined contribution plans
The Company offers all qualified full time employees participation in
defined contribution plans ("the 401(k) Savings Plans") which are qualified
under the requirements of Section 401(k) of the Internal Revenue Code of 1986,
as amended. The Smart & Final 401(k) Savings Plan covers all employees of Smart
& Final Stores Corporation and related entities which includes the Cash & Carry
division employees. This 401(k) Savings Plan allows participants to contribute
for fiscal year 2001 up to 15% of their eligible compensation or $10,500,
whichever is lower. The Company automatically matched 33% in 2001 and 25% in
2000 and 1999 of each dollar contributed up to 6% of the participant's eligible
compensation.
45
Additionally, the Company may at its discretion match up to an additional 75% of
each dollar contributed up to 6% of the participants' eligible compensation if
the Company exceeds certain financial and profitability goals. The Company
provided $250,000 additional match in 2000 and no additional match in 2001 or
1999. The Company provided $1,137,000, $1,051,000, and $785,000 for
contributions to this 401(k) Savings Plan for fiscal years 2001, 2000, and 1999,
respectively.
The Company also maintains 401(k) Savings Plans for its Smart & Final
Foodservice and Henry Lee subsidiaries. For 2001, these plans allowed
participants to contribute up to 15% of their compensation or $10,500, whichever
was lower. Under these plans, the Company automatically matches from 50% to 75%
of each dollar contributed up to 6% of the participant's eligible compensation,
depending on the plan. The amounts contributed to these plans were $971,000,
$788,000 and $752,000 for 2001, 2000 and 1999, respectively.
Deferred compensation plan
Effective January 1, 1995, the Company adopted a nonqualified deferred
compensation program, which permits key employees and members of the Board of
Directors to annually elect individually to defer up to 100% of their current
year compensation until retirement. The retirement benefit to be provided is a
function of the amount of compensation deferred. The Company has invested in
corporate owned life insurance policies with death benefits aggregating to
$39,611,000, and $30,031,000 as of fiscal year end 2001 and 2000, respectively.
The cash surrender value of these policies amounted to $5,955,000 and $4,388,000
as of fiscal year end 2001 and 2000, respectively and is included in Other
Assets in the accompanying consolidated balance sheets. The Company anticipates
that this plan will have no material financial impact to the consolidated
financial statements.
8. Postretirement and Postemployment Benefit Obligations
The Company provides certain health care benefits for retired
employees. Substantially all of the Company's full time employees may become
eligible for those benefits if they reach retirement age while still working for
the Company. Benefits are limited to the lesser of actual cost for the medical
coverage selected or a defined dollar benefit based on years of service. In
addition, on a postemployment basis, the Company provides certain
disability-related benefits to its employees.
46
All plans are defined benefit plans and the reconciliation of benefit
obligation and plan assets for 2001 and 2000 are aggregated as follows:
2001 2000
------------ ------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 10,447,000 $ 9,905,000
Service cost 280,000 252,000
Interest cost 790,000 750,000
Actuarial (gain) loss 152,000 (41,000)
Benefits paid (428,000) (419,000)
------------ ------------
Benefit obligation at end of year 11,241,000 10,447,000
------------ ------------
Funded Status (11,241,000) (10,447,000)
Unrecognized actuarial gain (4,637,000) (5,010,000)
------------ ------------
Accrued benefit cost $(15,878,000) $(15,457,000)
============ ============
The weighted average discount rate used in accounting for these plans
at fiscal year end 2001 and 2000 was 7.25% and 7.50%, respectively.
The accumulated postretirement benefit obligation is reflected on the
fiscal year end 2001 balance sheet as a current liability of $0.6 million and a
long-term liability of $15.3 million. For measurement purposes, a 9.0% and 9.5%
annual rate of increase in the per capita cost of covered claims was assumed for
2001 and 2000, respectively. The rate is assumed to decrease by 0.5% per year
until an ultimate rate of 6% is reached and remains at that level thereafter.
The expense for postretirement benefits for fiscal years 2001, 2000 and
1999 includes the following components:
2001 2000 1999
----------- ----------- ----------
Service cost component $ 280,000 $ 252,000 $ 262,000
Interest cost component 790,000 750,000 703,000
Amortization of gain (240,000) (308,000) (241,000)
----------- ----------- -----------
Net postretirement benefit expense $ 830,000 $ 694,000 $ 724,000
=========== =========== ==========
47
The Company offers a defined dollar benefit plan providing a maximum
fixed dollar amount of coverage which does not increase with medical inflation.
A one-percentage-point change in assumed health care cost trend rates would have
the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost
components of net periodic expense $ 23,000 $ (25,000)
Effect on accumulated postretirement benefit
obligation 240,000 (268,000)
9. Income Taxes
The effective tax rate for 2001, 2000 and 1999 was 36.8%, 38.1% and
37.9%, respectively. Reconciliation between the federal statutory income tax
rate of 35.0% for 2001 and 2000 and 34.0% for 1999 with the effective tax rate
is as follows:
2001 2000 1999
------------- ------------- ------------
Income tax at federal statutory rate $ 6,633,000 $ 4,930,000 $ 2,627,000
State income taxes, net of federal
tax benefit 813,000 382,000 463,000
Tax credits (1,111,000) - -
Other - 49,000 (159,000)
------------- ------------- ------------
Income taxes $ 6,335,000 $ 5,361,000 $ 2,931,000
============= ============= ============
As of fiscal year end 2001, the Company had total tax credits of
$1,111,000 available. These tax credits include $600,000 of California state tax
incentives for businesses operating in the enterprise zones, $240,000 of federal
tax incentive program designed to encourage employers hiring from targeted
groups and $271,000 of various other tax credits.
The Company's provision for income taxes consists of the following:
2001 2000 1999
------------- ------------ ------------
Current
Federal $ 9,170,000 $ 6,338,000 $ 1,256,000
State 1,516,000 1,212,000 332,000
------------- ------------ ------------
10,686,000 7,550,000 1,588,000
Deferred
Federal (4,351,000) (2,189,000) 1,343,000
------------- ------------ ------------
Income taxes $ 6,335,000 $ 5,361,000 $ 2,931,000
============= ============ ============
48
A deferred tax liability or asset is recognized for the tax
consequences of temporary differences in the timing of the recognition of
revenues and expenses for financial and tax reporting purposes. The components
of the net deferred income tax asset consist of the following:
2001 2000
------------- -------------
Property, plant and equipment depreciation
differences $ (4,977,000) $ (6,212,000)
Employee benefits including postretirement
and postemployment reserves 14,526,000 13,535,000
Operating reserves and accruals 11,301,000 11,199,000
Other 2,405,000 382,000
------------- -------------
Net deferred tax asset $ 23,255,000 $ 18,904,000
============= =============
The deferred tax asset is reflected on the fiscal year end 2001 balance
sheet as a current asset of $16.2 million and a long-term asset of $7.1 million.
As of December 30, 2001, the Company had approximately $41.0 million of
state net operating loss carryforwards which expire through 2021 and have not
been benefited through the provision.
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 has made tax sharing payments to, or received benefits
from, Casino USA, based upon pre-tax income for financial reporting purposes
adjusted for certain agreed upon items. Tax sharing payments made by the Company
to Casino USA were $2,381,000 and $739,000 in 2001 and 2000, respectively. Tax
sharing benefits received by the Company from Casino USA were $598,000 in 1999.
Taxes paid for states other than California were $226,000, $80,000 and $65,000
in 2001, 2000 and 1999, respectively. Federal income taxes paid during 2001,
2000 and 1999 were $7,750,000, $6,085,000, and $400,000, respectively. Foreign
income taxes paid were immaterial during 2001, 2000 and 1999.
10. Related Party Transactions
Intercompany services
The Company performs various services for Casino USA. These services
include various administrative functions including accounting, human resources,
and systems development work, the cost of which has been charged to the
benefited affiliated company. These charges amounted to $287,000, $274,000, and
$261,000 for the fiscal years 2001, 2000 and 1999, respectively. It is
anticipated that the Company will continue to provide these administrative
services to its affiliates at its estimated cost.
49
Charges among affiliates result from an undertaking to provide the
respective service in the most cost-effective manner, taking advantage of each
entity's internal administrative structure. Management believes that the
allocation method is reasonable. Intercompany charges for each period are
settled in the following period.
Intercompany rental charges
The Company received $111,000 in rental payments from SFDN during fiscal
year 2001 for a store location under a ground lease from an unrelated third
party.
Intercompany interest charges
Intercompany interest charges from affiliates were $91,000, $7,000 and
$4,000 during 2001, 2000 and 1999, respectively. These charges relate to
intercompany advances from affiliates. Interest expense incurred on loans from
Casino USA (see Note 5) was $1,060,000, $1,530,000 and $3,397,000 in 2001, 2000
and 1999, respectively.
Other related party transactions
The Company has a five-year operating lease agreement with a national
banking association. There are several banks and financing institutions as well
as Casino USA that are participants in this transaction. Casino USA's share of
participation is $16.1 million.
Pursuant to a contractual employment agreement, the Company's Chief
Executive Officer borrowed $273,149 from the Company by a note dated July 23,
1999, bearing interest at 4.84% per year, and $61,951 by a note dated March 27,
2000, bearing interest at 6.35% per year. Interest is payable annually each July
31. These unsecured notes are due December 31, 2001 and will be canceled by a
bonus payment pursuant to the employment agreement.
11. Employment/Consulting Agreements
In January 1999, the Company's former Chairman and Chief Executive
Officer retired. The Company has a consulting arrangement with its former
Chairman that provides for his services for a period expiring in 2003. Other
employment and consulting agreements were also in effect during 2001 including
an employment agreement with the Company's current Chief Executive Officer.
These agreements contain provisions for base salary and bonuses, and expire
during fiscal years 2002 through 2004. Annual payments under these agreements
were approximately $2,503,000 and $2,958,000 in fiscal 2001 and 2000,
respectively, and will total approximately $1,794,000 in fiscal 2002. Most of
these employment agreements contain provisions in the event of a change in
control whereby the employees are entitled to lump sum cash payments and bonuses
and certain other benefits.
50
The Company has severance agreements with certain former employees. These
severance agreements provide for cash payments and continuation of certain
Company benefits, which may include health insurance and stock options. Annual
cash payments under these agreements were approximately $1,251,000 and
$1,792,000 in fiscal 2001 and 2000, respectively, and will total approximately
$161,000 in fiscal 2002.
12. Common Stock
During the second quarter of 1999, the Company issued 6,486,406 shares of
common stock at a fixed subscription price of $9.25 per share. In addition,
10,000 shares were issued to the Company's Parent as a fee for acting as a
standby purchaser. The offering increased Stockholders' equity approximately
$57.9 million after expenses of the offering. The Company's Parent exercised all
of its subscription rights and acted as a standby purchaser of shares not
subscribed for by other stockholders. As a result, the Parent increased its
ownership by 4,271,935 shares. Consideration for shares subscribed by the Parent
was the exchange of $39.4 million of its $55.4 million loan to the Company.
Pursuant to an agreement dated March 7, 1989, ("Agreement"), the
Company's former Chairman was obligated to purchase 100,000 common shares by
1999. 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.
13. Stock Compensation Plans
During 1997, the Company adopted and thereafter amended in 1999, a
Long-Term Equity Compensation Plan, under which 2,470,000 shares of common stock
are available for award as stock options, stock appreciation rights, restricted
stock awards, performance units or performance shares. In the fourth quarter of
2000, the Company's Board of Directors approved a program for the voluntary
exchange (the "Exchange Program") of certain outstanding options having an
exercise price of $14.00 or higher per share for shares of common stock issued
as restricted stock under the terms of the Company's Long-Term Equity
Compensation Plan. All options surrendered as a result of an election under the
Exchange Program were canceled and returned to the respective plan under which
the canceled options were first granted. The Exchange Program expired on March
9, 2001 and a total of 860,114 options were surrendered in exchange for the
issuance of 178,510 shares of restricted stock. The related compensation expense
to be recognized over the vesting periods of one year or three years was
$1,641,000. Through the period ended December 30, 2001, the related compensation
expense recognized was $518,000. In May 2001, the Company amended the Long-Term
Equity Compensation Plan to increase the number of shares for which options,
restricted stock awards, performance units and/or performance shares may be
awarded from 2,470,000 to 3,600,000 and extended the expiration of this plan
from December 31, 2006 to December 31, 2010.
Other than the shares issued pursuant to the Exchange Program, the
Company did not grant other shares of restricted stock during fiscal year 2001.
During fiscal year 2000 and 1999, the Company granted 91,850 shares and 50,000
shares, respectively of restricted stock under
51
Long-Term Equity Compensation Plan. Compensation expense is computed based on
the market price on the grant date and recognized over the vesting periods.
Compensation expense associated with the restricted stock grants, other than the
issuance associated with the Exchange Program, was $491,000, $373,000 and
$538,000 in fiscal 2001, 2000 and 1999, respectively. Vesting periods under the
Long-Term Equity Compensation Plan range from one to five years or until
specified performance objectives are satisfied.
In addition to options available under the Long-Term Equity Compensation
Plan, the Company has a Stock Incentive Plan. The Stock Incentive Plan, as
amended, allows the maximum amount of shares for which options may be granted to
be 2,450,000 shares of the Company's common stock. In June 2001, the Stock
Incentive Plan expired and no future grants can be made under this plan. Option
prices under both plans may be established by the compensation committee of the
Board of Directors at no less than 85% of the fair market value of the common
stock at the time the option is granted. Options for officers and directors
granted at the time of the Company's initial public offering were granted at 85%
of fair market value. Options for directors elected subsequent to the Company's
initial public offering and options granted to officers and management have been
granted at fair market value at the time of grant. Options granted prior to 1999
under these plans vest over a four-year period. Options granted in 1999 and
thereafter, generally vest over a five-year period for management and a
three-year period for directors. All options may be exercised for up to ten
years from the date of grant.
A summary of changes in the shares under option follows:
Weighted
Shares Average Price
------------------ ------------------
Shares under option at fiscal year end 1998 2,473,427 $ 15.90
------------------ ------------------
Fiscal year 1999:
Options granted 1,258,905 9.27
Options exercised - -
Options canceled (430,642) 15.50
------------------
Shares under option at fiscal year end 1999 3,301,690 13.42
------------------ ------------------
Shares exercisable at fiscal year end 1999 1,546,978 14.79
Fiscal year 2000:
Options granted 1,263,175 10.83
Options exercised - -
Options canceled (1,208,295) 13.51
------------------
Shares under option at fiscal year end 2000 3,356,570 12.42
------------------ ------------------
Shares exercisable at fiscal year end 2000 1,785,323 14.41
Fiscal year 2001:
Options granted 896,450 10.17
Options exercised (96,164) 10.48
Options canceled (1,144,534) 16.47
------------------
Shares under option at fiscal year end 2001 3,012,322 10.27
------------------ ------------------
Shares exercisable at fiscal year end 2001 1,075,070 $ 12.16
52
Stock options outstanding at December 30, 2001 are as follows:
Number Weighted Average Weighted
Range of Outstanding Remaining Average
Exercise Prices as of 12/30/01 Contractual Life Exercise Price
-----------------------------------------------------------------------------------------------
$6.3750 - $ 6.8750 349,450 8.10 $ 6.7977
$7.6880 - $ 8.8750 210,150 8.68 7.9185
$9.2500 781,408 7.34 9.2500
$9.3750 - $ 9.8130 79,000 7.65 9.7598
$10.1320 805,250 9.74 10.1320
$10.1880 - $10.7700 333,950 5.84 10.5944
$11.0000 - $17.6250 418,314 6.80 15.6162
$17.8750 - $22.1250 33,100 5.81 19.0767
$22.6250 1,500 5.14 22.6250
$22.8750 200 4.36 22.8750
-----------------------------------------------------------------------------------------------
$ 6.3750 - $22.8750 3,012,322 7.91 $10.2704
Stock options exercisable as of December 30, 2001 are as follows:
Range of Number Weighted Average
Exercise Prices Exercisable Exercise Price
-----------------------------------------------------------------------------------------------
$ 6.3750 - $ 6.8750 14,691 $ 6.3750
$ 7.6880 - $ 8.8750 2,051 8.8750
$ 9.2500 396,904 9.2500
$ 9.3750 - $ 9.8130 26,675 9.7550
$10.1880 - $10.7700 248,814 10.6991
$11.0000 - $17.6250 355,132 16.2606
$17.8750 - $22.1250 29,303 19.2051
$22.6250 1,300 22.6250
$22.8750 200 22.8750
-----------------------------------------------------------------------------------------------
$ 6.3750 - $22.8750 1,075,070 $12.1638
Shares of common stock available for future award under the Long-Term
Equity Compensation Plan at fiscal year end 2001, 2000 and 1999 were 906,751,
400,408 and 529,705, respectively.
53
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions:
2001 2000 1999
------------- ------------ ------------
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 37% 37% 35%
Risk-free interest rates 6.7% 4.7% 6.4%
Weighted average expected lives
Executives 4.91 years 4.94 years 4.94 years
Non executives 4.55 years 4.54 years 4.55 years
Weighted-average fair value of
options granted $ 4.17 $ 1.62 $ 3.60
The Company accounts for options under these plans under Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Had
compensation costs for these plans been determined under SFAS No. 123,
"Accounting For Stock-Based Compensation," pro forma net income and earnings per
share would have been $11,043,000 and $0.37, respectively for fiscal year 2001;
$8,187,000 and $0.28, respectively for fiscal year 2000; and $4,167,000 and
$0.16, respectively for fiscal year 1999.
The impact of applying SFAS No. 123 in this pro forma disclosure is not
necessarily indicative of the effect on income in the future. SFAS No. 123 does
not apply to awards granted prior to 1995. The Company anticipates making
additional stock-based compensation awards in the future.
14. Earnings per Common Share
Earnings per common share is computed on the basis of the weighted
average number of shares of common stock outstanding each year. Common stock
equivalents relate to the employee stock options and a stock purchase agreement.
Earnings per common share computation, as restated:
2001 2000 1999
-------------- -------------- --------------
Numerator:
Net Income $ 12,029,000 $ 9,557,000 $ 5,376,000
============== ============== ==============
Denominator:
Weighted average common shares
outstanding 29,331,991 29,191,420 26,282,704
============== ============== ==============
Earnings per common share $ 0.41 $ 0.33 $ 0.20
============== ============== ==============
54
Earnings per common share, assuming dilution computation, as restated:
2001 2000 1999
-------------- -------------- --------------
Numerator:
Net Income $ 12,029,000 $ 9,557,000 $ 5,376,000
============== ============== ==============
Denominator:
Weighted average common shares
outstanding 29,331,991 29,191,420 26,282,704
Dilutive effect of stock options
outstanding 328,320 53,031 38,772
-------------- -------------- --------------
Weighted average common shares,
assuming dilution 29,660,311 29,244,451 26,321,476
============== ============== ==============
Earnings per common share,
assuming dilution $ 0.41 $ 0.33 $ 0.20
============== ============== ==============
15. Segment Reporting
The Company has two reportable segments: Stores and broadline
Foodservice. The Stores segment provides food and related items in bulk sizes
and quantities through non-membership grocery warehouse stores. The broadline
Foodservice distribution segment provides delivery of food, restaurant equipment
and supplies to mainly restaurant customers and Smart & Final stores. Corporate
Expense is comprised primarily of the Company's corporate expenses incidental to
the activities of the reportable segments and rental income from Smart & Final
stores and Smart & Final Mexico. The Company's 50%-owned joint venture in Mexico
is reported on the equity basis of accounting. 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 accounting policies of the segments are consistent with those
described in the summary of significant accounting policies. The Company
evaluates performance based on profit or loss from operations before income
taxes not including nonrecurring gains and losses.
55
The revenues, restated profit or loss and other information of each segment
are as follows, amounts in thousands:
For fiscal year 2001:
Corporate
Stores Foodservice Expense Total
----------- ---------------- --------------- ----------------
Revenues from external customers $ 1,542,945 $ 403,778 $ - $ 1,946,723
Intercompany real estate
charge (income) 15,494 413 (15,907) -
Interest income - - 538 538
Interest expense - - 13,038 13,038
Depreciation and amortization 25,535 4,985 3,605 34,125
Pre-tax income (loss) 41,338 (14,584) (9,516) 17,238
Equity in net income of
unconsolidated subsidiaries - - 1,126 1,126
Income taxes - - 6,335 6,335
For fiscal year 2000:
Corporate
Stores Foodservice Expense Total
----------- ---------------- --------------- -------------
Revenues from external customers $ 1,463,676 $ 400,219 $ - $ 1,863,895
Intercompany real estate
charge (income) 13,816 - (13,816) -
Interest income - - 1,406 1,406
Interest expense - - 14,774 14,774
Depreciation and amortization 24,902 5,159 2,822 32,883
Pre-tax income (loss) 37,314 (8,179) (15,050) 14,085
Equity in net income of
unconsolidated subsidiaries - - 833 833
Income taxes - - 5,361 5,361
For fiscal year 1999:
Corporate
Stores Foodservice Expense Total
----------- ---------------- --------------- -------------
Revenues from external customers $ 1,381,989 $ 411,153 $ - $ 1,793,142
Intercompany real estate
charge (income) 13,745 - (13,745) -
Interest income - - 1,004 1,004
Interest expense - - 19,001 19,001
Depreciation and amortization 22,745 5,333 3,248 31,326
Pre-tax income (loss) 32,580 (7,087) (17,768) 7,725
Equity in net income of
unconsolidated subsidiaries - - 748 748
Income taxes - - 2,931 2,931
Extraordinary items, net of taxes - - 166 166
56
The basis for allocating distribution expense to Stores was changed in
2001. If the new allocation method had been used in fiscal years 2000 and 1999,
Foodservice pre-tax loss and Stores pre-tax income would have been approximately
$2,600,000 greater in 2000 and $3,200,000 greater in 1999.
16. Advertising Expense
The Company expenses the costs of advertising as incurred. Total
advertising expense was $22,300,000, $20,300,000 and $15,400,000 in 2001, 2000
and 1999, respectively.
17. Legal Actions
The Company has been named as a defendant in various legal actions
arising in the normal conduct of its business. The Company has also been named
as defendant in a suit filed on September 13, 2001 in the Superior Court of the
State of California for the County of Los Angeles. This suit, Sergio Camacho vs.
Smart & Final Inc., was filed by the plaintiff, on his behalf and on behalf of
all other Company store managers and assistant managers in California, alleging
that the Company misclassified the status of store managers and assistant
managers in California as exempt employees for employment purposes. The action
seeks to be classified as a "class action" and seeks unspecified monetary
damages. The Company is actively investigating the merits of this action and
believes that (a) the merits of this action do not warrant class action status;
(b) the Company has certain defenses to the claim; and (c) the ultimate
determination of this action will not have a material adverse effect on the
Company's results of operations or financial position.
The Company is a defendant in a number of other lawsuits or is
otherwise a party to certain litigation arising in the ordinary course from its
operations. The Company does not believe that the ultimate determination of
these cases will either individually or in the aggregate have a material adverse
effect on the Company's results of operations or financial position.
57
Smart & Final Inc.
Summary of Quarterly Results of Operations
(dollars in thousands, except per share amounts)
Fiscal Year 2001 (A)
------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
12 12 16 12 52
Weeks Weeks Weeks Weeks Weeks
(restated) (restated) (restated) (restated) (restated)
----------- ----------- ------------ ------------ -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Income Statement Data:
Sales $ 424,168 $ 463,594 $ 609,329 $ 449,632 $ 1,946,723
Cost of sales, buying and occupancy 366,380 398,254 520,962 386,529 1,672,125
------------ ------------ ------------ ------------ ------------
Gross margin 57,788 65,340 88,367 63,103 274,598
Operating and administrative expenses 54,082 57,001 78,928 54,849 244,860
------------ ------------ ------------ ------------ ------------
Income from operations 3,706 8,339 9,439 8,254 29,738
Interest expense, net 3,067 2,845 3,633 2,955 12,500
------------ ------------ ------------ ------------ ------------
Income before provision for income taxes 639 5,494 5,806 5,299 17,238
Provision for income taxes 205 2,127 2,151 1,852 6,335
------------ ------------ ------------ ------------ ------------
Income from consolidated subsidiaries 434 3,367 3,655 3,447 10,903
Equity earnings in unconsolidated subsidiary 120 276 274 456 1,126
------------ ------------ ------------ ------------ ------------
Net income $ 554 $ 3,643 $ 3,929 $ 3,903 $ 12,029
============ ============ ============ ============ ============
Earnings per common share $ 0.02 $ 0.12 $ 0.13 $ 0.13 $ 0.41
============ ============ ============ ============ ============
Weighted average common shares 29,216,756 29,316,731 29,387,111 29,388,994 29,331,991
============ ============ ============ ============ ============
Earnings per common share, assuming dilution $ 0.02 $ 0.12 $ 0.13 $ 0.13 $ 0.41
============ ============ ============ ============ ============
Weighted average common shares and
common share equivalents (B) 29,492,458 29,660,429 29,783,608 29,663,650 29,660,311
============ ============ ============ ============ ============
(A) Fiscal year 2001 consists of twelve-week periods in the first, second and
fourth quarters, and one sixteen-week period in the third quarter.
(B) The weighted average shares includes the common stock equivalents related to
employee stock options.
March 25, 2001 June 17, 2001 Oct. 7, 2001 Dec. 30, 2001
( restated ) ( restated ) ( restated ) ( restated )
--------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
Financial Data (at quarter end):
Cash and cash equivalents $ 25,624 $ 23,691 $ 20,760 $ 23,016
Working capital 28,545 29,171 28,433 122,134
Total assets 586,353 584,909 595,302 631,124
Long-term debt and capital leases, excluding
current maturities 35,109 29,797 29,224 144,875
Stockholders' equity 261,504 265,988 268,845 271,581
58
Smart & Final Inc.
Summary of Quarterly Results of Operations
(dollars in thousands, except per share amounts)
Fiscal Year 2000 (A)
-------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
12 12 16 12 52
Weeks Weeks Weeks Weeks Weeks
(restated) (restated)
-------------- -------------- ---------------- -------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Income Statement Data:
Sales $ 399,361 $ 442,998 $ 587,313 $ 434,223 $ 1,863,895
Cost of sales, buying and occupancy 345,138 382,842 504,767 373,637 1,606,384
-------------- -------------- ---------------- -------------- ---------------
Gross margin 54,223 60,156 82,546 60,586 257,511
Operating and administrative expenses 50,013 52,205 71,958 55,882 230,058
-------------- -------------- ---------------- -------------- ---------------
Income from operations 4,210 7,951 10,588 4,704 27,453
Interest expense, net 3,245 3,237 4,170 2,716 13,368
-------------- -------------- ---------------- -------------- ---------------
Income before provision for income taxes 965 4,714 6,418 1,988 14,085
Provision for income taxes 373 1,616 2,452 920 5,361
-------------- -------------- ---------------- -------------- ---------------
Income from consolidated subsidiaries 592 3,098 3,966 1,068 8,724
Equity earnings in unconsolidated subsidiary 44 94 129 566 833
-------------- -------------- ---------------- -------------- ---------------
Net income $ 636 $ 3,192 $ 4,095 $ 1,634 $ 9,557
============== ============== ================ ============== ===============
Earnings per common share $ 0.02 $ 0.11 $ 0.14 $ 0.06 $ 0.33
============== ============== ================ ============== ===============
Weighted average common shares 29,163,185 29,192,368 29,203,114 29,203,114 29,191,420
============== ============== ================ ============== ===============
Earnings per common share, assuming dilution $ 0.02 $ 0.11 $ 0.14 $ 0.06 $ 0.33
============== ============== ================ ============== ===============
Weighted average common shares and
common share equivalents (B) 29,176,666 29,264,238 29,268,181 29,260,807 29,244,451
============== ============= ================ ============== ===============
(A) Fiscal year 2000 consists of twelve-week periods in the first, second and
fourth quarters, and one sixteen-week period in the third quarter.
(B) The weighted average shares includes the common stock equivalents related to
employee stock options.
59
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements : Page
----
Report of Independent Public Accountants ................................................. 27
Consolidated Balance Sheets .............................................................. 28
Consolidated Statements of Income ........................................................ 29
Consolidated Statements of Stockholders' Equity .......................................... 30
Consolidated Statements of Cash Flows .................................................... 31
Notes to Consolidated Financial Statements ............................................... 32
Supplementary Data - Summary of Quarterly Results of Operations .......................... 57
(a)(2) Financial Statement Schedules:
Report of Independent Public Accountants ................................................. 63
II - Valuation and Qualifying Accounts ................................................... 64
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
60
(a)(3) and (c) EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Certificate of Incorporation of the Company, including all
amendments thereto (1)
3.2 Bylaws of the Company, including all amendments thereto (1)
10.1 Tax Termination Agreement, dated as of August 6, 1991, by and
between the Company and Casino USA, as amended (including as an
exhibit thereto the Tax Sharing Agreement, dated as of November
5, 1984, by and between the Company and Casino USA, as amended)
(10)
10.2 Intercompany Agreement, dated August 6, 1991, by and between
Casino USA, Casino Realty, Inc. and the Company (12)
10.3 Truck Lease and Service Agreement, dated December 13, 1991,
between Smart & Final and Ryder Truck Rental, Inc. [Commerce
Distribution Center] (13)
10.4 Employment Agreement between the Company and Mr. Lynch, as
extended and amended (14) (35)*
10.5 Smart & Final Inc. Supplemental Deferred Compensation Plan, as
amended (18) (32)*
10.6 Smart & Final Inc. Directors Deferred Compensation Plan, as
amended (18)*
10.7 Agreement between Port Stockton Food Distributors, Inc. and Food
Distribution Employees Association (19)
10.8 Vehicle Lease Service Agreement with Penske Truck Leasing
Company, LP [Port Stockton Distribution Center] (19)
10.9 Smart & Final Inc. Trust for Deferred Compensation Plans (20)*
10.10 Supplemental Executive Retirement Plan Master Plan Document (22)*
10.11 Long-Term Equity Compensation Plan of the Company, as amended
(24)*
10.12 Agreement Between Smart & Final Foodservice Distributors and Food
Distributors Employee Association dated as of April 1, 1998 (26)
10.13 Asset Purchase Agreement dated May 15, 1998 by and among the
Company and United Grocers, Inc. (27)
10.14 Employment Agreement between the Company and Ross E. Roeder dated
May 11, 1999, as amended (30) (34)*
10.15 Smart & Final Non-Employee Director Stock Plan, as amended (30)
10.16 First Amendment to Deferred Compensation Agreements dated as of
October 23, 2000(33)*
10.17 Truck Lease and Service Agreement dated August 24, 2001 between
the Company and Primms, L.P. [Florida Distribution Center]
10.18 Participation Agreement dated as of November 30, 2001 by and
among the Company as Lessee and various parties as Guarantors,
Holders and Lenders and Wells Fargo Bank NW, N.A. as Owner
Trustee and Fleet Capital Corporation as Administrative Agent and
Arranger and Natexis Banques Populaires as Documentation Agent.
10.19 Credit Agreement dated as of November 30, 2001 among Wells Fargo
Bank, NW, N.A. as the Owner Trustee and various parties as the
Lenders and Fleet Capital Corporation as the Agent.
10.20 Lease Agreement dated as of November 30, 2001 between Wells Fargo
Bank, NW, N.A. as the Owner Trustee and Lessor and the Company as
Lessee.
10.21 Credit Agreement dated as of November 30, 2001 among the Company
and various parties as Lenders, BNP Paribas as the Administrative
Agent and Lead Arranger, Harris Trust & Savings Bank as
Syndication Agent and Cooperative Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland" as
Documentation Agent.
10.22 Form of 2001 Executive Severance Plan between the Company and
various Company Executives.*
21 Subsidiaries
23 Consent of Arthur Andersen LLP
99 Letter to Securities and Exchange Commission regarding Arthur
Andersen's assurances
__________________
61
(1) Incorporated by reference to the corresponding Exhibit number in
the Company's Annual Report for the fiscal year ended January 2,
1994 on Form 10-K, filed on April 4, 1994.
(10) Incorporated by reference to Exhibit 10.22 in the Company's
Annual Report for the fiscal year ended January 2, 1994 on Form
10-K, filed on April 4, 1994.
(12) Incorporated by reference to Exhibit 10.24 in the Company's
Annual Report for the fiscal year ended December 29, 1991 on Form
10-K, filed on March 24, 1992.
(13) Incorporated by reference to Exhibit 10.25 in the Company's Form
8 - Amendment No. 1 to its Annual Report for the fiscal year
ended December 29, 1991 on Form 10-K, filed on March 30, 1992.
(14) Incorporated by reference to Exhibit 10.29 in the Company's
Definitive Proxy Statement dated May 9, 1997, in connection with
the Annual Meeting of Shareholders of the Company held May 9,
1997, filed on April 8, 1997; the extension is incorporated
herein by reference to Exhibit 10.124 in the Company's Annual
Report for the year ended January 2, 1999 on Form 10-K, filed on
March 13, 2000.
(18) Incorporated by reference to Exhibits 10.56 and 10.57 in the
Company's quarterly report for the quarter ended March 26, 1995
on Form 10-Q, filed on May 4, 1995; amendments are incorporated
by reference to Exhibits 10.56 and 10.57 in the Company's
Quarterly Report for the quarter ended March 28, 1999 on Form
10-Q, filed on May 3, 1999.
(19) Incorporated by reference to Exhibits 10.61 and 10.62 in the
Company's quarterly report for the quarter ended March 26, 1995
on Form 10-Q, filed on May 4, 1995.
(20) Incorporated by reference to Exhibit 10.68 in the Company's
Annual Report for the year ended December 29, 1996 on Form 10-K,
filed on March 25, 1997.
(22) Incorporated by reference to Exhibit 10.86 in the Company's
Annual Report for the year ended January 4, 1998 on Form 10-K,
filed on April 13, 1998; amendments are incorporated by reference
to Exhibit 10.86 in the Company's Quarterly Report for the
quarter ended March 28, 1999 on Form 10-Q, filed on May 3, 1999.
(24) Incorporated by reference to Exhibit 10.89 in the Company's
Quarterly Report for the quarter ended March 28, 1999 on Form
10-Q, filed on May 3, 1999.
(26) Incorporated by reference to Exhibit 10.91 in the Company's
Quarterly Report for the quarter ended March 29, 1998 on Form
10-Q, filed on May 12, 1998.
(27) Incorporated by reference to Exhibit 10.93 in the Company's
Quarterly Report for the quarter ended June 21, 1998 on Form
10-Q, filed on August 12, 1998.
(30) Incorporated by reference to Exhibits 10.119, 10.120, 10.121,
10.122, and 10.123 in the Company's Quarterly Report for the
quarter ended June 20, 1999 on Form 10-Q, filed on August 3,
1999.
(32) Incorporated by reference to Exhibit 10.126 in the Company's
Quarterly Report for the quarter ended June 18, 2000 on Form
10-Q, filed on July 28, 2000.
(33) Incorporated by reference to Exhibits 10.127 and 10.128 in the
Company's Quarterly Report for the quarter ended October 8, 2000
on Form 10-Q, filed on November 11, 2000.
(34) Incorporated by reference to Exhibit 10.53 in the Company's
Quarterly Report for the quarter ended June 17, 2001 on Form
10-Q, filed on July 26, 2001.
(35) Incorporated by reference to Exhibit 10.54 in the Company's
Quarterly Report for the quarter ended June 17, 2001 on Form
10-Q, filed on July 26, 2001.
*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, dated
November 12, 2001 announcing the extension of its Revolving
Credit Agreement and its Lease Agreement until November 30,
2001.
2. The Company filed a Current Report on Form 8-K, dated
December 3, 2001, announcing the successful completion of
its credit facility refinancing prior to the extended
expiration date of the prior credit facilities.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Los
Angeles, State of California, on May 7, 2002.
-----------
Smart & Final Inc.
By: /s/ Richard N. Phegley
--------------------------------
Richard N. Phegley
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons, on behalf of the Registrant and in the
capacities indicated on May 7, 2002.
-----------
/s/ Ross E. Roeder Chairman of the Board and Chief Executive Officer
-------------------------------- (Principal Executive Officer)
Ross E. Roeder
/s/ Richard N. Phegley Senior Vice President and Chief Financial Officer
-------------------------------- (Principal Financial Officer)
Richard N. Phegley
/s/ Richard A. Link Vice President, Controller and Chief Accounting Officer
-------------------------------- (Principal Accounting Officer)
Richard A. Link
/s/ Pierre Bouchut
-------------------------------- Director
Pierre Bouchut
/s/ Christian Couvreau
-------------------------------- Director
Christian Couvreux
/s/ Timm F. Crull
-------------------------------- Director
Timm F. Crull
/s/ James S. Gold
-------------------------------- Director
James S. Gold
/s/ Antoine Guichard
-------------------------------- Director
Antoine Guichard
/s/ David J. McLaughlin
-------------------------------- Director
David J. McLaughlin
________________________________ Director
Joel-Andre Ornstein
/s/ Thomas G. Plaskett
-------------------------------- Director
Thomas G. Plaskett
/s/ Etienne Snollaerts Director
--------------------------------
Etienne Snollaerts
63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Smart & Final Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Smart & Final Inc. and
subsidiaries included in this Form 10-K/A and have issued our report thereon
dated June 4, 2002. Our audits were made for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. The schedule
listed in the index in Item 14 is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
June 4, 2002
64
SMART & FINAL INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended December 30, 2001, December 31, 2000
and January 2, 2000
Balance Balance at
Beginning of End of
Period Additions Deductions Period
----------------- ----------------- ----------------- -----------------
Fiscal year 2001:
Allowance for doubtful accounts $ 3,182,000 $ 2,860,000 $ 2,225,000 $ 3,817,000
================ ================ ================ ================
Inventory realizable value allowance $ 3,091,000 $ 178,000 $ 995,000 $ 2,274,000
================ ================ ================ ================
Fiscal year 2000:
Allowance for doubtful accounts $ 4,687,000 $ 2,508,000 $ 4,013,000 $ 3,182,000
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Inventory realizable value allowance $ 2,955,000 $ 1,065,000 $ 929,000 $ 3,091,000
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Fiscal year 1999:
Allowance for doubtful accounts $ 3,660,000 $ 4,039,000 $ 3,012,000 $ 4,687,000
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Inventory realizable value allowance $ 2,937,000 $ 418,000 $ 400,000 $ 2,955,000
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