##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION


Washington D.C. 20549





---




FORM 10-Q





(Mark one)


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | -------------------------------------------------------

| |  | SECURITIES EXCHANGE ACT OF 1934
| |  | -------------------------------




For the quarterly period ended June 16, 2002





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | --------------------------------------------------------

| |  | SECURITIES EXCHANGE ACT OF 1934
| |  | -------------------------------




For the transition period from 
to





Commission File Number 001-10811





---




SMART & FINAL INC.


(Exact name of registrant as specified in its charter)





Delaware

No. 95-4079584(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification
No.)600 Citadel DriveCity of Commerce, California

90040(Address of principal executive offices)

(zip code)





(323) 869-7500


Registrants telephone number, including area code:





---




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ̈ .





The registrant had 29,428,429 shares of common stock outstanding as of July 26, 2002.





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##### Table of Contents

SMART & FINAL INC.





INDEX





PART I





FINANCIAL INFORMATION





PageItem 1.

Financial StatementsUnaudited Consolidated Balance Sheets

2Unaudited Consolidated Statements of Income

3Unaudited Consolidated Statements of Cash Flows

4Notes to Unaudited Consolidated Financial Statements

5Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

11Item 3.

Quantitative and Qualitative Disclosure about Market Risk

18PART IIOTHER INFORMATIONItem 1.

Legal Proceedings

20Item 2.

Changes in Securities and Use of Proceeds

20Item 3.

Defaults upon Senior Securities

20Item 4.

Submission of Matters to a Vote of Security Holders

20Item 5.

Other Information

20Item 6.

Exhibits and Reports on Form 8-K

20






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##### Table of Contents




SMART & FINAL INC.





CONSOLIDATED BALANCE SHEETS


(dollars in thousands, except share amounts)





June 16, 2002


December 30, 2001(Unaudited)


(restated)ASSETSCurrent assets:Cash and cash equivalents

$
27,068


$
23,016Trade notes and accounts receivable, less allowance for doubtful accounts of $4,070 in 2002 and $3,817 in
2001


69,283



78,744Inventories


166,781



175,302Prepaid expenses and other current assets


6,620



7,303Deferred tax asset


16,129



16,145Total current assets


285,881



300,510Property, plant and equipment:Land


34,784



36,329Buildings and improvements


30,436



30,209Leasehold improvements


126,501



123,742Fixtures and equipment


202,596



192,599394,317



382,879LessAccumulated depreciation and amortization


176,589



166,448Net property, plant and equipment


217,728



216,431Assets under capital leases, net of accumulated amortization of $9,846 in 2002 and $9,196 in 2001


10,345



12,038Goodwill, net of accumulated amortization of $6,767 in 2002 and 2001


52,432



52,432Deferred tax asset


7,110



7,110Other assets


46,599



42,603Total assets

$
620,095


$
631,124LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Current maturities of long-term debt and capital leases

$
7,969


$
8,096Accounts payable


91,837



104,615Accrued salaries and wages


11,729



14,383Other accrued liabilities


45,044



51,282Total current liabilities


156,579



178,376Long-term liabilities:Notes payable, net of current maturities






5,004Bank debt


139,000



127,000Obligations under capital leases


10,601



12,871Other long-term liabilities


16,943



15,349Workers' compensation reserve, postretirement and postemployment benefits


22,156



20,943Total long-term liabilities


188,700



181,167Commitments and contingencies






Stockholders' equity:Preferred stock, $1 par value (authorized 10,000,000 shares; no shares issued)






Common stock, $0.01 par value (authorized 100,000,000 shares; 29,394,841 shares issued and outstanding in 2002 and
29,393,449 in 2001)


294



294Additional paid-in capital


207,183



206,874Notes receivable for common stock


(100
)


(100
)Accumulated other comprehensive loss


(4,563
)


(4,840
)Retained earnings


72,002



69,353Total stockholders' equity


274,816



271,581Total liabilities and stockholders' equity

$
620,095


$
631,124





The accompanying notes are an integral part of these unaudited consolidated
financial statements.




2




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##### Table of Contents




SMART & FINAL INC.





CONSOLIDATED STATEMENTS OF INCOME


(dollars in thousands, except per share amounts)





Twelve Weeks Ended

Twenty-four Weeks EndedJune 16, 2002

June 17, 2001

June 16, 2002

June 17, 2001(restated)



(restated)(Unaudited)

(Unaudited)Sales

$
476,129

$
463,594

$
920,953

$
887,762Cost of sales, buying and occupancy


411,367


398,254


796,627


764,634Gross margin


64,762


65,340


124,326


123,128Operating and administrative expenses


58,986


57,001


114,412


111,083Income from operations


5,776


8,339


9,914


12,045Interest expense, net


2,932


2,845


5,875


5,912Income before provision for income taxes


2,844


5,494


4,039


6,133Provision for income taxes


1,055


2,127


1,583


2,332Income from consolidated subsidiaries


1,789


3,367


2,456


3,801Equity earnings in unconsolidated subsidiary


273


276


193


396Net income

$
2,062

$
3,643

$
2,649

$
4,197Earnings per common share

$
0.07

$
0.12

$
0.09

$
0.14Weighted average common shares


29,394,841


29,316,731


29,394,656


29,266,744Earnings per common share, assuming dilution

$
0.07

$
0.12

$
0.09

$
0.14Weighted average common shares and common share equivalents


29,582,465


29,660,429


29,631,574


29,576,444








The accompanying notes are an
integral part of these unaudited consolidated financial statements.




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##### Table of Contents

SMART & FINAL INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(dollars in thousands)





Twenty-four Weeks EndedJune 16, 2002


June 17, 2001(restated)(Unaudited)Cash Flows From Operating Activities:Net income

$
2,649


$
4,197Adjustments to reconcile net income to net cash provided by operating activities:Gain on disposal of fixed assets


(1,163
)


(426
)Depreciation and amortization


16,380



15,667Deferred tax provision (benefit)


16



(1,264
)Amortization of deferred financing costs


795



781Equity earnings in unconsolidated subsidiary


(193
)


(396
)Decrease (increase) in:Trade notes and accounts receivable


9,461



(3,734
)Inventories


8,521



1,857Prepaid expenses and other current assets


(1,164
)


425Increase (decrease) in:Accounts payable


(9,484
)


(6,520
)Accrued salaries and wages


(2,654
)


(3,646
)Other accrued liabilities


(2,305
)


1,013Net cash provided by operating activities


20,859



7,954Cash Flows From Investing Activities:Acquisition of property, plant and equipment


(23,031
)


(21,996
)Proceeds from disposal of property, plant and equipment


4,121



944Other


(3,470
)


(217
)Net cash used in investing activities


(22,380
)


(21,269
)Cash Flows From Financing Activities:Proceeds from issuance of common stock, net of costs


11



821Payments on bank line of credit


(8,000
)


(5,000
)Borrowings on bank line of credit


20,000



22,500Payments on notes payable


(6,438
)


(3,343
)Net cash provided by financing activities


5,573



14,978Increase in cash and cash equivalents


4,052



1,663Cash and cash equivalents at beginning of period


23,016



22,028Cash and cash equivalents at end of period

$
27,068


$
23,691





The accompanying notes are an integral part of these unaudited consolidated
financial statements.




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##### Table of Contents

SMART & FINAL INC.





NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





1.    Basis of Presentation





Smart & Final Inc. (the Company) is a Delaware corporation and is a 56.8 percent owned
subsidiary of Casino USA, Inc. (the Parent). Casino Guichard-Perrachon, S.A. (Casino France), a publicly traded French joint stock limited liability company, is the principal shareholder of the Parent. Collectively, Casino
France and its subsidiaries own approximately 59.8 percent of the Companys common stock as of June 16, 2002.





The consolidated balance sheet as of June 16, 2002 and the consolidated statements of income and cash flows for the twelve weeks and twenty-four weeks ended June 16, 2002 and June 17, 2001 are unaudited. In the opinion of management,
all adjustments which consisted of normal recurring items necessary for a fair presentation of these financial statements in conformity with accounting principles generally accepted in the United States have been included.





These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto
included in the Companys Form 10-K for the year ended December 30, 2001, as amended.





2.    Restatement of
Financial Statements





On April 22, 2002 the Company announced it had identified certain accounting issues at
its Stockton, California broadline foodservice subsidiary impacting prior years previously reported operating results that would cause it to restate its financial statements. The Companys investigation of these matters has resulted in the
Company restating its audited financial statements for fiscal years 2001, 2000 and 1999 including the cumulative effect of prior-years restated results in the Companys filing on Form 10-K/A Amendment No. 2. The dollar amounts for the 2001
periods presented in this Form 10-Q reflect the aforementioned restatement adjustments, as applicable.





3.    Fiscal Years





The Companys fiscal year ends on the Sunday
closest to December 31. Each fiscal year consists of twelve-week periods in the first, second and fourth quarters and a sixteen-week period in the third quarter.




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##### Table of Contents



SMART & FINAL INC.





NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







4.    Goodwill





Effective December 31, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. Accordingly, the Company performed a transitional impairment test on its existing goodwill
and found no impairment as of June 16, 2002.





The following pro forma information presents the impact on net
income and earnings per share had SFAS No. 142 been effective for the twelve weeks and twenty-four weeks ended June 17, 2001, dollars in thousands except per share amounts. Adjusted earnings per common share or adjusted earnings per common share,
assuming dilution, may not aggregate due to rounding:





Twelve-Weeks Ended June 17, 2001

Twenty-four Weeks Ended June 17, 2001(restated)

(restated)Net income, as reported

$
3,643

$
4,197Amortization of goodwill, net of tax


162


408Net income, adjusted

$
3,805

$
4,605Earnings per common share, as reported

$
0.12

$
0.14Amortization of goodwill, net of tax


0.01


0.01Earnings per common share, adjusted

$
0.13

$
0.16Earnings per common share, assuming dilution, as reported

$
0.12

$
0.14Amortization of goodwill, net of tax


0.01


0.01Earnings per common share, assuming dilution, adjusted

$
0.13

$
0.16





5.    Derivatives





As of June 16, 2002, the Company had interest rate collar agreements with various banks to limit the impact of interest rate fluctuations
on floating rate debt. These agreements, expiring during various periods from October 2002 to November 2004, hedge principal amounts of an aggregate of $100 million and limit the effect of LIBOR fluctuations to interest rate ranges from 4.74% to
8.00%. These agreements are designated as cash flow hedges and are considered fully effective. Accordingly, the effective portions of changes in fair values of these agreements are




6




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##### Table of Contents



SMART & FINAL INC.





NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







recorded as other comprehensive income (OCI) and are reported on the statement
of income when the hedged forecasted transaction affects earnings or the hedged item becomes ineffective.





As of
June 16, 2002, these agreements had a cumulative loss of $4,030,000 recorded to OCI as a result of net changes in their fair market values. For the twenty-four weeks ended June 16, 2002, the reduction in the cumulative loss that was recorded to OCI
was $43,000. Net derivative loss reclassified from OCI and recognized in results of operations was $1,551,000 and $47,000 in the twenty-four weeks ended June 16, 2002 and June 17, 2001, respectively. 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.





6.    Comprehensive Income





Comprehensive income was computed as
follows, amounts in thousands:





Twelve Weeks Ended


Twenty-Four Weeks EndedJune 16,


June 17,


June 16,

June 17,2002


2001


2002

2001(restated)




(restated)Net income

$
2,062


$
3,643


$
2,649

$
4,197Other comprehensive income (loss):Cumulative effect of accounting change, net of tax













(305
)Net gain (loss) on derivative instruments, net of tax


(473
)


(203
)


26


(788
)Foreign currency translation adjustments


51



31



251


(97
)Total other comprehensive income (loss)


(422
)


(172
)


277


(1,190
)Total comprehensive income

$
1,640


$
3,471


$
2,926

$
3,007





See Note 5 for change in OCI during the reporting period due to
changes in fair values of derivative instruments designated as cash flow hedges.





In accordance with generally
accepted accounting principles, the functional currency for the Companys Mexico operations has been the Mexican Peso. As such, foreign currency translation gains and losses are included in OCI.





7.    Interest Expense





Interest expense was incurred primarily on borrowings under the Companys revolving credit facilities and a loan from its Parent which was paid off in the fourth quarter of 2001. The Company paid $6.9 million and $5.2
million in interest in the twenty-four weeks ended June 16, 2002 and June 17, 2001, respectively.




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##### Table of Contents



SMART & FINAL INC.





NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







8.    Income Taxes





The Company and the Parent are parties to a tax sharing arrangement covering income tax obligations in the state of California. Under this
arrangement, the Company has made tax sharing payments to, or received benefits from, the Parent based upon pre-tax income for financial reporting purposes adjusted for certain agreed upon items. Tax sharing payments made by the Company to the
Parent were $218,000 and $349,000 in the twenty-four weeks ended June 16, 2002 and June 17, 2001, respectively. The Company paid $55,000 and $36,000 state income taxes for states other than California in the twenty-four weeks ended June 16, 2002 and
June 17, 2001, respectively. The Company paid $1,070,000 and $2,150,000 of federal income taxes in the twenty-four weeks ended June 16, 2002 and June 17, 2001, respectively.





9.    Earnings per Common Share





Earnings per common share is based on the weighted average number of common shares outstanding. Earnings per common share, assuming dilution includes the weighted average number of common stock equivalents outstanding related to
employee stock options and other stock agreements.





10.    Segment Reporting





The Company has two reportable segments: Stores and broadline Foodservice. The Stores segment provides food and related items in bulk
sizes and quantities through non-membership grocery warehouse stores. The broadline Foodservice distribution segment provides delivery of food, restaurant equipment and supplies to mainly restaurant customers and Smart & Final stores. Corporate
Expense is comprised primarily of the Companys corporate expenses incidental to the activities of the reportable segments and rental income from Smart & Final stores and Smart & Final de Mexico S.A. de C.V. (the Companys
100%-owned subsidiary that holds 50% of a joint venture operating in Mexico). The Companys reportable segments are strategic business units that offer different products and services. They are managed separately because each segment requires
different technology and marketing strategies.





The Company does not allocate interest, income taxes or
nonrecurring gains and losses to the reportable segments. These costs are included in Corporate Expense below. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses.




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##### Table of Contents



SMART & FINAL INC.





NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The revenues, profit or loss and other information of each segment
are as follows, amounts in thousands:





For the twelve weeks ended June 16, 2002:





Stores

Foodservice


Corporate Expense


TotalRevenues from external customers

$
386,646

$
89,483


$



$
476,129Intercompany real estate charge (income)


3,164


8



(3,172
)


Interest income









129



129Interest expense









3,061



3,061Pre-tax income (loss)


7,878


(3,122
)


(1,912
)


2,844





For the twelve weeks ended June 17, 2001, as restated:





Stores

Foodservice


Corporate Expense


TotalRevenues from external customers

$
365,891

$
97,703


$



$
463,594Intercompany real estate charge (income)


3,644


119



(3,763
)


Interest income









142



142Interest expense









2,987



2,987Pre-tax income (loss)


10,325


(1,984
)


(2,847
)


5,494





For the twenty-four weeks ended June 16, 2002:





Stores

Foodservice


Corporate Expense


TotalRevenues from external customers

$
736,606

$
184,347


$



$
920,953Intercompany real estate charge (income)


6,220


(15
)


(6,205
)


Interest income









254



254Interest expense









6,129



6,129Pre-tax income (loss)


13,773


(4,790
)


(4,944
)


4,039




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##### Table of Contents



SMART & FINAL INC.





NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







For the twenty-four weeks ended June 17, 2001, as restated:





Stores

Foodservice


Corporate Expense


TotalRevenues from external customer

$
690,464

$
197,298





$
887,762Intercompany real estate charge (income)


6,855


119


(6,974
)


Interest income








267



267Interest expense








6,179



6,179Pre-tax income (loss)


17,263


(4,850
)

(6,280
)


6,133








11.    Legal Actions





The Company has been named as a defendant in various legal actions arising in the normal conduct of its
business. The Company has also been named as defendant in a suit filed on September 13, 2001 in the Superior Court of the State of California for the County of Los Angeles. This suit, Sergio Camacho vs. Smart & Final Inc., was filed by
the plaintiff, on his behalf and on behalf of all other Company store managers and assistant managers in California, alleging that the Company misclassified the status of store managers and assistant managers in California as exempt employees for
employment purposes. The action seeks to be classified as a class action and seeks unspecified monetary damages. The Company is actively investigating the merits of this action and believes that (a) the merits of this action do not
warrant class action status; (b) the Company has certain defenses to the claim; and (c) the ultimate determination of this action will not have a material adverse effect on the Companys results of operations or financial position.





The Company is a defendant in a number of other lawsuits or is otherwise a party to certain litigation arising in
the ordinary course from its operations. The Company does not believe that the ultimate determination of these cases will either individually or in the aggregate have a material adverse effect on the Companys results of operations or financial
position.




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##### Table of Contents




Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations





Managements discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and notes thereto and the Companys Form 10-K for the year ended December 30,
2001, as amended.





Summary





Smart & Final Inc. (the Company) reported net income of $2.1 million, or $0.07 per diluted share, for the twelve weeks ended June 16, 2002, compared to net income of $3.6 million, or
$0.12 per diluted share, for the twelve weeks ended June 17, 2001. For the twenty-four weeks ended June 16, 2002, the Company reported net income of $2.6 million, or $0.09 per diluted share, compared to net income of $4.2 million, or $0.14 per
diluted share, in the twenty-four weeks ended June 17, 2001.





Operating income decreased 30.7%, or $2.6 million,
from $8.3 million in last years same quarter to $5.8 million in the twelve weeks ended June 16, 2002. Operating income decreased 17.7%, or $2.1 million, to $9.9 million in the twenty-four weeks ended June 16, 2002 from last years same
period. Stores operating income decreased $2.4 million in second quarter 2002 and $3.5 million in the first half of 2002, respectively, when compared to the same quarter of 2001 and first half of 2001 due to decreased gross margins and increased
store operating expenses. Foodservice operating loss increased $1.1 million in second quarter 2002 due to decreased sales and gross margins. Foodservice operating loss decreased $0.1 million in the first half of 2002.





Interest expense, net increased $0.1 million in the second quarter of 2002 compared to second quarter 2001 as a result of higher average
outstanding debt level partially offset by rate reductions caused by the declining market rates.




11




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##### Table of Contents




Results of Operations





The following table shows, for the periods indicated, certain condensed consolidated income statement data, expressed as a percentage of sales. Totals may not aggregate due
to rounding.





Twelve Weeks Ended


Twenty-Four Weeks EndedJune 16, 2002


June 17, 2001


June 16, 2002


June 17, 2001(restated)





(restated)Sales:Stores


81.2
%


78.9
%


80.0
%


77.8
%Foodservice


18.8



21.1



20.0



22.2Sales, consolidated total


100.0



100.0



100.0



100.0Cost of sales, buying and occupancy


86.4



85.9



86.5



86.1Gross margin


13.6



14.1



13.5



13.9Operating and administrative expenses


12.4



12.3



12.4



12.5Income from operations


1.2



1.8



1.1



1.4Interest expense, net


0.6



0.6



0.6



0.7Income before provision for income taxes


0.6



1.2



0.4



0.7Provision for income taxes


0.2



0.5



0.2



0.3Income from consolidated subsidiaries


0.4



0.7



0.3



0.4Equity earnings in unconsolidated subsidiary


0.1



0.1







Net income


0.4
%


0.8
%


0.3
%


0.5
%The following table sets forth pre-tax profit or loss, in millions, for each of the
Companys various reportable segments:Twelve Weeks Ended


Twenty-Four Weeks EndedJune 16, 2002


June 17, 2001


June 16, 2002


June 17, 2001(restated)





(restated)Stores

$
7.9


$
10.4


$
13.8


$
17.3Foodservice


(3.1
)


(2.0
)


(4.8
)


(4.9
)Segment totals


4.8



8.4



9.0



12.4Interest and other corporate expenses


(2.0
)


(2.9
)


(5.0
)


(6.3
)Consolidated pre-tax income

$
2.8


$
5.5


$
4.0


$
6.1





Stores segment declined as a result of lower margin rates and
increased store operating expenses. Foodservice segment loss increased as a result of decreased sales and gross margin rates.




12




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##### Table of Contents




Background





During the first half of 2002, the Company opened five new stores and relocated one store. New store growth is planned to continue in the remainder of fiscal 2002.





Twelve Weeks Ended

Twenty-Four Weeks Ended


Year EndedJune 16, 2002


June 17, 2001

June 16, 2002


June 17, 2001


December 30, 2001USA:Beginning store count

227


218

224


214


214Stores opened:New stores

2


1

5


5


11Relocations






1


1


2Stores relocated or closed

(2
)



(3
)

(1
)

(3
)Ending store count

227


219

227


219


224MEXICO:Beginning store count

8


7

8


7


7New stores opened












1Ending store count

8


7

8


7


8Total Ending Store Count

235


226

235


226


232





Mexico operations are not consolidated and are reported on the
equity basis of accounting.





Management continually assesses each stores profitability on a pre-tax profit
basis after allocation of corporate expenses. Stores not meeting strategic management objectives for profitability, market penetration, and/or other measures are evaluated for closure or relocation. Generally, stores opened in mature markets are
expected to achieve profitability within 18 months of operations. However, there can be no assurance that the Company will be able to open new stores in a timely manner; to hire, train and integrate employees; to continue locating and obtaining
favorable store sites; or to adapt distribution, management information and other operating systems sufficiently to support store growth in a successful and profitable manner.





Each of the Companys fiscal years consists of twelve-week periods in the first, second and fourth quarters of the fiscal year and a sixteen-week period in the third
quarter.





Comparison of Twelve Weeks Ended June 16, 2002 with Twelve Weeks Ended June 17, 2001.





Sales.Second quarter 2002 sales were $476.1 million, up 2.7% from $463.6 million in the second quarter of
2001.





Store sales increased 5.7%, from $365.9 million in second quarter 2001 to $386.6 million in second
quarter 2002. Comparable store sales for the second quarter of 2002 increased 3.5%




13




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##### Table of Contents

over the prior years same quarter. Average comparable transaction size decreased by 0.3% to $38.69 in the second quarter of 2002.





Foodservice sales decreased 8.4%, from $97.7 million in the second quarter of 2001 to $89.5 million in the
current years second quarter. Sales growth in the second quarter of 2002 was adversely affected by the continuation of decreased travel and tourism following the events of September 11, 2001 as well as the general economic downturn.





Gross Margin.Gross margin decreased 0.9%, from $65.3 million in the second quarter
of 2001 to $64.8 million in the current year quarter. As a percentage of sales, gross margin decreased from 14.1% in the prior years second quarter to 13.6% in second quarter 2002.





Gross margins in the Stores segment increased $1.6 million to $58.5 million, but as a percentage of sales, decreased compared to the prior years same quarter.
The decrease in gross margins as a percentage of sales primarily reflects the lower merchandise margins and higher occupancy costs associated with new and relocated stores opened since the second quarter of 2001.





Gross margins in the Foodservice segment decreased $2.2 million to $6.3 million. Gross margins as a percentage of sales decreased at both
the Florida and northern California units. Warehouse and transportation costs as a percentage of sales increased due to decreased sales and were partially offset by increased merchandise margins. The decrease in gross margin rate in the northern
California unit was also impacted by an unfavorable sales mix.





Operating and Administrative
Expenses.Operating and administrative expenses for the second quarter of 2002 were $59.0 million, up $2.0 million, or 3.5%, over the second quarter of 2001. These expenses, as a percentage of sales, increased from 12.3%
in the second quarter of 2001 to 12.4% in the second quarter of 2002. Operating and administrative expenses increased in the Stores segment due to increased store labor in support of the program to improve service and support sales as well as
increased fringe benefit and utility costs. Operating and administrative expenses decreased in the Foodservice segment due to overall expense reductions in the northern California unit and the continuing cost control in the Florida unit. Corporate
expenses decreased primarily due to the gain from sale of property recorded in the second quarter of 2002.





Interest expense, net.Interest expense, net increased from $2.8 million recorded in second quarter 2001 to $2.9 million in the second quarter of 2002 due to higher average outstanding debt level that
was partially offset by rate reductions as a result of the declining market rates.





Comparison of Twenty-Four Weeks Ended June
16, 2002 with Twenty-Four Weeks Ended June 17, 2001.





Sales.Sales were $921.0
million, up 3.7% from $887.8 million, for the twenty-four weeks ended June 16, 2002.





Store sales increased
6.7%, from $690.5 million in the first half of 2001 to $736.6 million in first half of 2002. Comparable store sales for the first half of 2002 increased 4.1% over the




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prior years same period. Average comparable transaction size decreased by 0.9% to $38.14 in the first half of 2002.





Foodservice sales decreased 6.6%, from $197.3 million in the first half of 2001 to $184.3 million in the current years
same period. Sales growth in the first half of 2002 was adversely affected by the continuation of decreased travel and tourism following the events of September 11, 2001 as well as the general economic downturn.





Gross Margin.    Gross margin increased 1.0%, from $123.1 million in the first half of 2001 to $124.3 million
in the current years same period. As a percentage of sales, gross margin decreased from 13.9% in the first half of prior year to 13.5% in the first half of 2002.





Gross margins in the Stores segment increased $2.5 million to $109.7 million in the first half of 2002, but as a percentage of sales, decreased compared to the first half
of 2001. The decrease in gross margins as a percentage of sales primarily reflects the lower merchandise margins and higher occupancy costs associated with new and relocated stores opened during 2001 and in the first two quarters of 2002.





Gross margins in the Foodservice segment decreased $1.3 million to $14.6 million in the first half of 2002 when
compared to the same period of 2001. Warehouse and transportation costs decreased slightly in the first half of 2002 but as a percentage of sales, increased due to decreased sales and were partially offset by increased merchandise margins. The gross
margin rates were also impacted by an unfavorable sales mix in the northern California unit.





Operating and
Administrative Expenses.    Operating and administrative expenses for the first half of 2002 were $114.4 million, up $3.3 million, or 3.0%, over the first half of 2001. These expenses, as a percentage of sales, decreased from
12.5% in the equivalent period of 2001 to 12.4% in the first half in 2002. Operating and administrative expenses increased in the Stores segment due to increased store labor in support of the program to improve service and support sales as well as
increased fringe benefit and utility costs. Operating and administrative expenses increased slightly in the Foodservice segment as the increase in northern California unit was offset by the decrease in the Florida unit. Corporate expenses decreased
primarily due to increased gain from sale of property in the first half of 2002.





Interest expense,
net.    Interest expense, net was $5.9 million in the first half of 2002, same as in the equivalent period of 2001 as the impact of the increase in the average outstanding debt level was offset by rate reductions as a result
of the declining market rates.




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Financial Condition





Cash and cash equivalents were $23.0 million at December 30, 2001, and $27.1 million at June 16, 2002. Operating activities provided cash of $20.9 million for the
twenty-four weeks ended June 16, 2002. For the first half of 2002, net cash used in investing activities was $22.4 million, comprised of $23.0 million in capital expenditures in support of Stores and Foodservice segments and $3.5 million used in
other investing activities, partially offset by $4.1 million proceeds from the sale of store properties. For the first half of 2002, net cash provided by financing activities was $5.6 million.





During the twenty-four weeks ended June 16, 2002, inventories decreased by $8.5 million and the related accounts payable decreased $9.5 million. Trade notes and
accounts receivable decreased $9.5 million. Decreases in inventories and trade notes and accounts receivable were partially offset by decreases in accounts payable, accrued salaries and wages and other accrued liabilities and increased prepaid
expenses and other current assets. Changes in operating assets and liabilities generally reflect the timing of receipts and disbursements.





Stockholders equity increased by $3.2 million to $274.8 million at June 16, 2002 as a result of the $2.6 million net income for the first half of 2002 plus $0.3 million amortization resulting from restricted stock
agreements and $0.3 million decrease in accumulated OCI. The decrease in accumulated OCI includes primarily the foreign currency translation adjustment.





Liquidity and Capital Resources





Historically, the Companys primary source of
liquidity has been cash flows from operations. Additionally, the Company has availability under bank credit facilities. Net cash provided by operating activities was $20.9 million in the first half of 2002 as compared to $8.0 million in the first
half of 2001. The $20.9 million cash provided by operations was due primarily to $9.5 million decreased accounts receivable, in both Stores and Foodservice segments, and $8.5 million decreased inventory. Inventory decreased $5.8 million in the
Stores segment and $2.7 million in the Foodservice segment. At June 16, 2002, the Company had cash of $27.1 million, compared to $23.0 million at December 30, 2001. The Company had $144.0 million of debt, excluding capital leases, at June 16, 2002,
compared to $137.0 million at December 30, 2001, and stockholders equity of $274.8 million at June 16, 2002.





The Company has in place a $175.0 million three-year senior secured revolving credit facility (Credit Agreement) with a syndicate of banks that expires on November 30, 2004. As of June 16, 2002, $139.0 million of
revolving debt and $3.6 million of letters of credit were outstanding. At June 16, 2002, the remaining availability under the Credit Agreement was $9.5 million according to a formula based on the value of eligible accounts receivable and inventory.
As of June 16, 2002, the Company also has in place a five-year operating lease agreement (Lease Agreement) that provides for financing of three distribution facilities and 15 store locations. There are several banks and financing
institutions as well as Casino USA that are participants in the Lease Agreement. Casino USAs share of participation is $16.1 million.





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




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adequate to provide for working capital, capital expenditures, and debt service requirements for the foreseeable future.





New Accounting Pronouncements





See Note 4 Goodwill for discussion of the Companys adoption of SFAS No. 142.




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Item 3.Quantitative and Qualitative Disclosure about Market Risk





The Company is
exposed to market risks relating to fluctuations in interest rates and the exchange rate between the U.S. Dollar and Mexican Peso. The Companys financial risk management objective is to minimize the negative impact of interest rate
fluctuations on the Companys earnings and cash flows. As of June 16, 2002, the Companys exposure to foreign currency risk was limited. Additionally, the Company is exposed to the market fluctuations associated with stock the Company
received as a result of the demutualization transactions of a mutual insurance company in December 2001. As of June 16, 2002, the fair market value of the stock was $1.3 million.





Interest Rate Risk





Interest
rate risk is managed through the use of interest rate collar agreements to limit the impact of interest rate fluctuations on floating rate debt. These agreements, expiring during various periods from October 2002 to November 2004, hedge principal
amounts of an aggregate of $100 million and limit the effect of LIBOR fluctuations to interest rate ranges from 4.74% to 8.00%. These agreements are entered into with major financial institutions thereby minimizing risk of credit loss.





Foreign Currency Risk





The Companys exposure to foreign currency risk is limited to the Companys operations under Smart & Final de Mexico S.A. de C.V. (Smart & Final Mexico) and the equity
earnings in its Mexico joint venture. As of June 16, 2002, such exposure was the $4.4 million net investment in Smart & Final Mexico, comprised primarily of its Mexico joint venture. The Companys other transactions are conducted in U.S.
dollars and are not exposed to fluctuations in foreign currency. The Company does not hedge its foreign currency and therefore is not exposed to such hedging risk.





Credit Risk





The Company is
exposed to credit risk on trade notes and accounts receivable. The Company provides credit primarily to foodservice distribution customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with
respect to trade notes and accounts receivables are limited due to the number of customers comprising the Companys customer base. The Company currently believes its allowance for doubtful accounts is sufficient to cover customer credit risks.





Forward-Looking and Cautionary Statements





When used in this report, the words believe, expect, anticipate and similar expressions, together with other discussion of future trends or results, are intended to
identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such
statements are subject to certain risks and uncertainties,




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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 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.




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PART IIOTHER INFORMATION





Item 1.Legal Proceedings





The Company has been named as defendant in a suit filed on
September 13, 2001 in the Superior Court of the State of California for the County of Los Angeles. This suit, Sergio Camacho vs. Smart & Final Inc., was filed by the plaintiff, on his behalf and on behalf of all other Company store
managers and assistant managers in California, alleging that the Company misclassified the status of store managers and assistant managers in California as exempt employees for employment purposes. The action seeks to be classified as a class
action and seeks unspecified monetary damages. The Company is actively investigating the merits of this action and believes that (a) the merits of this action do not warrant class action status; (b) the Company has certain defenses to the
claim; and (c) the ultimate determination of this action will not have a material adverse effect on the Companys results of operations or financial position.





The Company is a defendant in a number of other lawsuits or is otherwise a party to certain litigation arising in the ordinary course from its operations. The Company does
not believe that the ultimate determination of these cases will either individually or in the aggregate have a material adverse effect on the Companys results of operations or financial position.





Item 2.Changes in Securities and Use of Proceeds





Not applicable.





Item 3.Defaults upon Senior Securities





Not applicable





Item 4.Submission of Matters to a Vote of Security Holders





Not applicable





Item 5.Other Information





Not applicable.





Item 6.Exhibits and Reports on Form 8-K





(a)  Exhibits:





Exhibit Number

Description of ExhibitNone




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(b)  Reports on Form 8-K





On April 24, 2002, the Company filed a Current Report on Form 8-K, dated April 22, 2002, with the Securities and Exchange Commission
attaching a press release regarding the Company discovering certain accounting issues and the rescheduling of the Companys annual meeting, which information was reported under Item 5, Other Events and Item 7, Financial
Statements and Exhibits.





On May 8, 2002, the Company filed a Current Report on Form 8-K, dated May 6, 2002,
with the Securities and Exchange Commission attaching a press release regarding the Companys earnings for the first Quarter of 2002 and the restatement of prior financial statements, which information was reported under Item 5, Other
Events and Item 7, Financial Statements and Exhibits.





On June 10, 2002, the Company filed a
Current Report on Form 8-K, dated June 4, 2002, with the Securities and Exchange Commission regarding the Company entering into certain agreements with its lenders to waive the Companys non-compliance and made certain adjustments to required
financial covenants for future fiscal periods, which information was reported under Item 5, Other Events and Item 7, Financial Statements and Exhibits.





On June 12, 2002, the Company filed a Current Report on Form 8-K, dated June 7, 2002, with the Securities and Exchange Commission regarding the Companys decision to
change its certified public accountants, which information was reported under Item 4, Changes in Certifying Accountant and Item 7 Financial Statements and Exhibits.




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.





SMART & FINAL INC.By:

/s/    RICHARD N.
PHEGLEYRichard N. Phegley Senior Vice
President and Chief Financial Officer Principal Financial
Officer of the Company





Date: July 29, 2002




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