SMART & FINAL IN DEFAULT ON PAYING LOAN; GETS WAIVER

MICHAEL HARRISON

VERNON, Calif. -- Smart & Final here is in technical default on a loan payment to its majority shareholder. However, the company said last week the creditor is waiving the default in anticipation that several strategic moves will invigorate the bottom line.

The company also said it is suspending dividends on its common stock indefinitely, opting instead to "re-invest" that portion of its future income.

While sales increased for the fourth quarter and the fiscal year and same-store sales rose for the 12-week period, a loss for the quarter and the 52 weeks ended Jan. 3 led to the default on the obligation to Casino USA, which owns 56% of Smart & Final's stock. Casino told the company it would waive the default pending release of fiscal 1999 second-quarter earnings. The company said it is negotiating similar arrangements with other creditors owed a combined debt of $240 million. Of that, payments on $220 million could potentially be defaulted on, the company told SN.

Leanne Reynolds, Smart & Final's director of corporate communications, told SN the company is $55 million in debt to Casino, but that the lender "is waving our default on their loan [because] they're in belief we will improve our situation."

She said the company suspended dividends for the first time since it went public in 1991 after "it was decided at this time it would be better to re-invest in the company. Most growth companies don't offer dividends and that's what we are -- a growth company." Reynolds added that "in light of" the loss, "taking the earnings and putting it back into the company" would be the best way to spur the bottom line.

Fourth-quarter results, which included a $13.6 million net loss and an 11.4% decline in sales in the company's bicoastal food-service operations, did show an 8.6% rise in total sales to $400.3 million and a 2.3% increase in same-store sales. In addition, food-service sales rose 12.9% for the 52 weeks, the company said.

During the quarter, the company decided to eliminate some of its Florida food-service operations and consolidate certain administrative functions there. Its northern California food-service operations were also "refocused," according to Reynolds.

"We were focusing on growing sales but it was really at the expense of some of the margins and profits we needed to generate, so we changed our focus whereby we are going to be much more critical of the accounts we sell to," Reynolds said. "It's more of a refocus on strategy. Our sales growth won't be at the same rate [as it previously was], but in turn, we'll increase our margins," she added.

In other moves, the company:

Is eliminating bakeries in its Plus division stores.

Decided to sell West Coast real estate deemed "not essential to core operations."

Set aside $3.2 million "for a program to downsize corporate management functions." Richard Phegley, vice president and treasurer, told SN the company "is in the process" of completing the downsizing. No further details were made available.

In addition, the company opened a new distribution center in Commerce, Calif., and closed three others in the Los Angeles area. The increase in the cube capacity of the 445,000-square-foot facility, compared with the three closed warehouses combined, is 10-fold, Reynolds said.

The company also opened two new stores -- in Los Angeles and Long Beach, Calif. -- during the fourth quarter. For the year, it opened nine stores, including one in Mexico, acquired 39 Cash & Carry stores from United Grocers and closed five stores. Of the closed stores, three were relocated and opened as new stores and two were consolidated with Cash & Carry stores.

"Fourth-quarter earnings were disappointing and do not reflect the earnings potential of Smart & Final," said Ross Roeder, chairman and chief executive officer.

4TH-QUARTER RESULTS

Qtr Ended 1/3/99 1/4/98

Sales $400.3 million $368.6 million

Change 8.6%

Same-store 2.3%

Net Income ($13.6 million) ($12 million)

Inc/Share (60 cents) (54 cents)

52 Weeks 1999 1998

Sales $1.2 billion $1.05 billion

Change 14.3%

Same-Store - 0.2.%

Net Income ($8.6 million) ($6.6 million)

Inc/Share (38 cents) (29 cents)