SMART & FINAL INC/DE - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
____________________

FORM 10-K

(Mark one)

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
------ OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2000
---------------

OR

____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission File Number 001-10811

SMART & FINAL INC.
(Exact name of registrant as specified in its charter)

Delaware 95-4079584
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

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
------------------- -------------------
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 No X .
--- ---

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. [ ]

As of March 10, 2000, the aggregate market value of Common Stock held by
--------------
nonaffiliates of the registrant based on the closing price of the Common Stock
on the New York Stock Exchange composite tape was $82,619,933 ("nonaffiliates"
-----------
excludes for this purpose executive officers, directors and the registrant's
majority shareholder).

As of March 10, 2000, the registrant had outstanding 29,186,995 shares of
--------------
Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held May 17, 2000 are incorporated by reference into Part III
of this Form 10-K.

SMART & FINAL INC.

INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended January 2, 2000
---------------

Caption Page
- ------- ----

PART I

Item 1 Business....................................................... 3

Item 2 Properties..................................................... 11

Item 3 Legal Proceedings.............................................. 12

Item 4 Submission of Matters to a Vote of Security Holders............ 12

PART II

Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters.................................... 12

Item 6 Selected Financial Data........................................ 13

Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 14

Item 7A Quantitative and Qualitative Disclosures About Market Risk..... 20

Item 8 Financial Statements and Supplementary Data.................... 22

Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 51

PART III

Item 10 Directors and Executive Officers of the Registrant............. 51

Item 11 Executive Compensation......................................... 51

Item 12 Security Ownership of Certain Beneficial Owners
and Management................................................. 51

Item 13 Certain Relationships and Related Transactions................. 51

PART IV

Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................... 51

2

PART I

Item 1. Business

General

Smart & Final Inc. (the "Company") operated 212 non-membership warehouse
grocery stores in Arizona, California, Florida, Idaho, Nevada, Oregon, and
Washington at fiscal year end 1999 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"). The Company
also operates six stores in Mexico through a joint venture with the operators of
the Calimax store chain. The joint venture operates as a 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.
The Company believes that Smart & Final is strategically positioned in a
substantial niche market between membership warehouse clubs and traditional
foodservice operators.

The Company also owns American Foodservice Distributors, a California
corporation ("AFD"), which is a holding company for traditional broadline
foodservice distributors. At year-end, AFD owned 100% of Port Stockton Food
Distributors, Inc., a California corporation, an institutional full-line food
distributor in northern California, doing business under the name Smart & Final
Foodservice Distributors ("Smart & Final Foodservice"). In 1997, AFD acquired
the assets of its current Davis Lay produce business, operating as part of Smart
& Final Foodservice. At year-end AFD also owned 100% of the Henry Lee Company,
a Florida corporation. In 1997, AFD acquired the assets of Orlando
Foodservice, Inc., Capricorn Foods of Central Florida, Inc. and Southern Foods,
meat processing and distribution companies operating in Florida (all Florida
foodservice operations are collectively referred to as "Henry Lee").

The Company is a Delaware corporation headquartered in Los Angeles, and
at fiscal year end 1999, had 5,308 associates. In fiscal 1999, the Company had
sales of $1,793 million.

Financial information about the Company's segments is incorporated herein
by reference from Note 13 to the Consolidated Financial Statements included in
this report.

Smart & Final Stores

Smart & Final stores specialize in providing merchandise and customer
services to meet the foodservice and related needs of restaurants, caterers,
clubs, organizations and small and mid-sized businesses. Most stores also
attract value-oriented retail customers who prefer to purchase items in large
sizes or quantities. Smart & Final stores carry a broad selection of items in a
hybrid, retail/wholesale format. With an average size of 16,736 square feet,
the stores' smaller footprint enables the Company to locate a greater number of
stores in urban and suburban

3

neighborhoods than warehouse club operators, which in turn provides a faster,
more convenient shopping experience for the customer.

Smart & Final has experienced significant sales growth despite the
expansion of the warehouse club industry in the Company's geographic markets.
The Company attributes its store growth to its commitment to be a primary
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 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 explored new geographic areas for
expansion. In May 1998, the Company acquired 39 Cash & Carry stores, operating
mainly in the Pacific Northwest. Smart & Final opened stores in Florida in 1996
and currently operates ten 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 presence, 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. The Company plans to
continue expansion in its mature market areas through relocations and remodels
of existing stores and new store openings. In 1999, Smart & Final concentrated
on assimilating the Cash & Carry stores and also opened three new stores.

During the 1990's, the Company acquired several traditional foodservice
distribution companies (See American Foodservice Distributors). Product for
stores and foodservice customers is being handled from the same distribution
facilities. Management believes that ownership of foodservice distributors
facilitates store expansion in new markets because it reduces product costs and
distribution expenses inherent in new markets.

4

The following table shows certain information regarding the Company's
stores for the years indicated:

Fiscal Fiscal Fiscal Fiscal Fiscal
1999 1998 1997 1996 1995
------ ------- ------- ------- -------

USA
Beginning store count 209 167 168 155 144
Stores opened:
New stores 3 5 4 13 11
Relocations - 3 7 6 4
Acquired - 39 - - -
Stores relocated or closed - (5) (12) (6) (4)
------ ------ ------ ------ ------
Ending store count 212 209 167 168 155
------ ------ ------ ------ ------
MEXICO
Beginning store count 6 5 5 3 3
New stores opened - 1 - 2 -
------ ------ ------ ------ ------
Ending store count 6 6 5 5 3
------ ------ ------ ------ ------

Total Ending Store Count 218 215 172 173 158
====== ====== ====== ====== ======
STATISTICAL DATA:

Average selling square feet
per store at end of period:
USA 16,736 16,662 15,448 14,859 14,431
MEXICO 17,350 17,350 16,946 16,946 16,473
New store data:
New markets stores (USA) 1 1 1 10 5
Average selling square feet
USA 20,900 21,079 21,462 16,788 14,698
MEXICO - 19,368 - 17,656 16,473

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

Developing new stores, from initiation of construction to store opening,
requires approximately nine months for new locations and four months for
retrofitting of existing buildings. Equipment and inventory for each new store
averages $550,000 and $370,000, respectively. On average, each retrofitted
store costs approximately $430,000 in leasehold improvements and requires up to
$620,000 of equipment.

Management continually assesses each store's profitability on a pre-tax
profit basis after allocation of all 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; and to adapt
distribution, management information and other operating systems sufficiently to
grow in a successful and profitable manner.

5

Merchandising

Customers. Smart & Final's broad customer base includes foodservice
professionals, small businesses, households, clubs and organizations.
Foodservice customers include independent restaurants, sandwich shops, bakeries,
caterers, catering trucks, concessionaires, mini-marts, and bars that do not
require delivery and have consistent needs for institutional size food and
related supplies. Most stores also attract retail customers who appreciate the
value of purchasing items in large sizes or quantities. Customers with
foodservice needs, such as clubs and organizations, find the Smart & Final
stores well suited to meet their needs. In addition, large chain restaurants
and other major foodservice operators use Smart & Final as a fill-in or a backup
supplier.

Product Assortment and Quality. Each Smart & Final store carries
approximately 10,000 assorted food and related items in bulk sizes and
quantities. The Company offers customers a wide product selection, including
frozen and refrigerated foods, delicatessen products, fresh produce, paper
products, janitorial supplies, restaurant equipment, tobacco, candy, snacks,
beverages, and party supplies. Products regularly undergo a formalized
profitability review that identifies items that should be added or removed. The
Company is in the process of expanding its fresh assortment by adding items to
the selection of meat and produce. The Company believes the size, consistency,
and depth of its product assortment satisfies customers' needs.

Product quality is paramount in the Smart & Final product assortment. The
Company's quality assurance department insures that its high standards are
maintained for all corporate brands and products.

Corporate Brand Positioning. Smart & Final utilizes its own corporate
brands within most merchandise categories, providing an alternative to national
brands and other corporate and private label brands. Corporate brands are
positioned to create brand loyalty and establish an ongoing customer franchise.
Furthermore, management believes foodservice customers make purchases based on a
quality/value/price perception. Smart & Final corporate brands target leading
competitive brands with attention to quality and value. In addition, the profit
contribution from corporate brands is generally higher than the comparable
national brand product.

During 1999, the Company continued to grow the sales and gross profit
contribution of the corporate brands program. Each operating company actively
markets the program. The program consists of a three-quality-tier core program.
The SmartBuy(R) Brand is a standard grade, quality controlled label positioned
as "the price leader"; Smart & Final(R), the Company's national brand
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 2,200 stock keeping units (SKUs) represented by
these brands.

In addition to the core corporate brand program, the Montecito(R) and La
Romanella(R) corporate brands are designed to reach niche ethnic markets while
enhancing our core products. The Company's authentic Hispanic-style brand,
Montecito, represents over 100 SKUs. The La Romanella brand, a high quality
line of Italian-style products, consists of approximately 175 SKUs.

6

Management believes that the assortment and value of the Company's
corporate brands are an important element in Smart & Final's market positioning.

Pricing. Smart & Final attempts to identify and establish competitive
pricing on key items in local markets including competitive pricing against
warehouse clubs. 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, thereby
maximizing operating efficiencies within the distribution system. In addition,
Smart & Final corporate brands 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, averaging 97%; high product
quality; clean stores; friendly, responsible and knowledgeable personnel; and
specialized point-of-sale support.

Smart & Final utilizes customer service centers and representatives,
provides informative customer materials, and emphasizes associate training that
builds customer loyalty. In addition, stores take customers' special orders for
a wide variety of products not carried regularly in its assortment. The Company
also provides customers with telephone and fax order service, enhancing its in-
store capability. The Company also has an associate training program designed to
increase store associates' retailing expertise and product knowledge. Smart
University, the Company's in-house training center, provides all associates with
the opportunity to build their knowledge and acquire additional skills.

Marketing. Smart & Final's marketing efforts are focused on building brand
awareness and enhancing customer relationships. Brand awareness is built with
broad-reach advertising and strong market entry programs. Customer
relationships are enhanced with loyalty card programs, targeted marketing and
local store events. Suppliers participate in the Company's bi-monthly product
circular and other marketing vehicles, thereby reducing Smart & Final's cost for
those vehicles.

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 stores have ranged between 13,000 and 34,000 square feet.
Smart & Final stores are organized into dry grocery, beverages, frozen foods,
janitorial, 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 10 associates.

Website. The Company has a site on the World Wide Web at
http://www.smartandfinal.com. The Company's site features information for
various audiences, presented in an engaging format. Customers can locate their
nearest stores or view
7

current product specials on the site. Expanded product assortment and new store
services are featured regularly. Other features of the Company's site include a
complete history of the Company, financial information and job opportunities.
The Company's website is updated on a regular basis.

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 or distribution costs. The Company is in the
process of consolidating procurement of national brand products for all
operating units.

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 the largest percentage of its western
U.S. store network from a 445,000 square foot distribution center in Commerce,
California that began operations in February 1999. This new facility replaced
the older primary and satellite warehouses and, because of its higher ceiling,
has approximately double the aggregate storage capacity of the older facilities.

In northern California, the Company operates a 270,000 square foot
distribution facility, a 33,000 square foot freezer facility, an additional
100,000 square foot warehouse, and two smaller facilities for fresh meat and
produce operations. These facilities serve approximately 5,000 foodservice
customers and 37 northern California stores. In Florida, the Company serves
approximately 2,900 foodservice customers and the 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. The Cash & Carry
stores are served through a service agreement with Unified Western Grocers,
Inc., a grocery cooperative distributor.

Smart & Final utilizes computerized inventory management systems, radio
frequency technology, and integrated labor management systems in its warehouses.

The Company operates a fleet of 237 tractors and 367 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.

Management Information Systems. The Company has made substantial
investments in new systems during the past several years, and expects to
continue to investment in business technology for the foreseeable future.

8

The Company's investments included more than $8 million dollars to replace
and upgrade the Point of Sale and Marketing Customer Relationship Management
systems. These new systems are designed to enhance the customer shopping
experience, help to better understand who customers are and to focus on the most
important customers' needs while positioning the company for implementation of
electronic commerce.

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, maximize gross margin return on
investment by item and product category, and increase inventory turn. The
distribution system manages warehouse inventories, store order selection, and
measures enterprise labor productivity.

American Foodservice Distributors

American Foodservice Distributors ("AFD") is a holding company for the
Company's two institutional broadline foodservice distributors, Smart & Final
Foodservice and Henry Lee Company, and for its Southern Foods and Orlando
Foodservice divisions operating in Florida. Smart & Final Foodservice also owns
Davis Lay and Craig and Hamilton branded operations that operate produce and
meat processing facilities, respectively. AFD's 1999 sales were $411.1 million.
In addition to a broadline assortment, AFD provides its customers primary
services including product delivery, extension of credit and ancillary services
such as restaurant equipment and supplies. The full-line assortment for these
distributors features dry grocery, frozen foods, fresh meat, deli products,
produce, tobacco, health and beauty aids, paper and packaging, janitorial
supplies, and restaurant equipment and supplies.

AFD has distribution facilities and offices in Stockton and Modesto,
California and serves northern California markets from the Bay Area on the west
to the Sierra on the East, Eureka on the North and Fresno on the South. AFD's
northern California operations also serve 37 northern California Smart & Final
stores. During 1999, approximately 14% of AFD's northern California sales were
Smart & Final Corporate Brand products.

AFD, through its Henry Lee and Smart & Final Foodservice subsidiaries, is a
large member of the Foresight Partners, Inc., the operator of the All Kitchens
foodservice brand buying group which has annual member sales of over $7.2
billion. Subsequent to year-end, AFD has given notice of its intention to
replace the All Kitchens purchasing relationship with a similar relationship
with a competitor organization. AFD is also a member of the DMA Major Account
sales group.

AFD's Florida operations are headquartered in Miami, Florida and serves
foodservice operator customers primarily located in the State of Florida and
certain markets in the Caribbean, and southern and central America. AFD's
distribution center in Miami provides the infrastructure to service Smart &
Final stores in Florida. During 1999, approximately 11% of AFD's Florida sales
were Smart & Final Corporate Brand products. AFD serves approximately

9

7,900 foodservice customers such as restaurants, coffee shops, hotels, cruise
ships, and institutions. At year end AFD employed approximately 1,261
associates.

Competition

The Company participates in the highly competitive $147 billion annual
sales domestic food distribution industry. Its competitors include membership
and non-membership warehouse stores, wholesale distributors, supermarkets, 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.

Intense price competition, product innovation and rapid store growth have
characterized the membership warehouse club segment of the industry over the
past several years. The Company's three major warehouse club competitors are
Costco Companies, BJ's Wholesale and the Sam's Club division of Wal-Mart.

The Company believes 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 Distributors 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 Corp., Alliant, U.S.
Foodservice(TM) and many smaller, regional distributors. The Company believes
that about 95% of all distributors have annual revenues less than $30 million
and that fewer than 4% have annual revenues in excess of $50 million. The top
50 broad-line distributors are believed to represent approximately 30% of the
total foodservice market.

Competition from supermarket chains continues to increase as such chains
emphasize price and service, while widening their assortment of goods and
lowering certain prices to more effectively compete with warehouse clubs.

Human Resources

The Company strongly emphasizes the career development and retention of its
associates. The Company strives to maintain the culture of a highly focused,
innovative organization that maximizes associate productivity and contributions.
The Company actively recruits and offers training opportunities to associates in
order to develop qualified candidates for managerial positions as vacancies
occur.

Associate training and development programs through the Company's own Smart
University 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 associates. In addition, approximately 8.2% of each Smart & Final
store's pre-tax profit, after allocation of corporate costs, is paid out as
monthly

10

bonuses to the store's full-time associates and selected part-time associates.
Cash & Carry store managers and associates receive annual bonuses based on the
achievement of specific operating goals.

At fiscal year end, the Company and its subsidiaries employed approximately
5,308 persons, including 4,047 at Smart & Final, 719 at Smart & Final
Foodservice, and 542 at Henry Lee.

Hourly associates employed by 16 Cash and Carry stores are party to a labor
contract previously negotiated between the United Brotherhood of Teamsters and
United Grocers, Inc. The Cash and Carry Stores were acquired from United
Grocers, Inc. in 1998 and Smart & Final assumed the Teamster Contract.
Approximately 100 associates are covered by this plan. Smart & Final
Foodservice is a party to an agreement with its Food Distribution Associates
Association, representing approximately 260 associates, which contains certain
procedures and policies with respect to management and associate relations. The
Company considers relations with its associates to be good.

Item 2. Properties

As of fiscal year end 1999, the Company leased 130 store properties
directly from third party lessors, with an average remaining lease term of ten
years. The Company leased 14 store properties, at year end, under its secured
lease facility described below. In addition, the Company has eight stores on
real property that is ground leased from third party lessors. The remaining 60
store properties are owned.

The Company occupies a 445,000 square foot distribution facility in
Commerce, California that is leased under the secured lease facility described
below. The Company maintains its headquarters in an 81,000 square foot leased
facility in Commerce, California.

AFD supports its northern California customers from an owned 33,000 square
foot freezer facility and a 270,000 square foot distribution facility leased
under the secured lease facility described below. Additionally, the Company has
two years remaining under a three-year lease for 100,000 square feet of
additional warehouse space and leases two smaller facilities for meat and
produce distribution. These facilities are located in Stockton and Modesto,
California.

In Florida, AFD operates a 230,000 square foot warehouse in Miami, Florida,
including 22,000 square feet of office space. AFD 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. The remaining terms
of these leases are six years. The leases contain terms and rates that are
considered equivalent to those available from unrelated third party lessors.
AFD also operates a 99,000 square foot frozen food facility in Miami, Florida
that is leased under the secured lease facility 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. The Company has a
$90 million secured lease facility, which provides for the lease of the
distribution center in Stockton, California and for

11

store expansion and distribution facilities in California and Florida. As of
January 2, 2000, $82.9 million had been utilized under this facility for various
store and distribution facilities.

Item 3. Legal Proceedings

The Company is from time to time involved in litigation incidental to the
conduct of its business. While the outcome of lawsuits and other proceedings
against the Company cannot be predicted with certainty, in the opinion of
management, none of the litigation which the Company is currently involved in,
individually or in the aggregate, is expected to result in a material effect on
the Company's financial position or results of operations.

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 January 2, 2000.

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 10, 2000 there were 218 registered
holders of the common stock and the closing price per share of the common stock
as listed on the NYSE composite tape was $7.125. The following table sets forth
the high and low sales prices of the common stock as reported on the NYSE
composite tape, together with the amount of cash dividends declared per share
for each quarter of the Company's two most recent fiscal years.

Cash
Dividend
High Low Declared
- ---------------------------------------------------------------------------
First Quarter of 1998 19 13/16 16 9/16 $0.05
Second Quarter of 1998 19 9/16 16 11/16 $0.05
Third Quarter of 1998 17 5/16 7 1/16 $0.05
Fourth Quarter of 1998 11 1/8 7 15/16 $0.05
First Quarter of 1999 10 1/8 8 -
Second Quarter of 1999 12 9/16 8 3/4 -
Third Quarter of 1999 10 15/16 9 1/8 -
Fourth Quarter of 1999 9 7/8 6 -

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 Senior Secured
Credit Facility is included under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

12

Item 6. Selected Financial Data

SELECTED FINANCIAL DATA
(in thousands, except per share and statistical data)

Fiscal Year (A)
------------------------------------------------------------------
1999 1998 (D) 1997 (C) 1996 1995
----------- ----------- ----------- ----------- -----------

Income Statement Data:
Sales.................................................... $ 1,793,142 $ 1,661,629 $ 1,453,020 $ 1,302,561 $ 1,173,325
Gross margin............................................. 234,360 205,688 194,663 190,395 171,732
Income from operations................................... 24,620 1,151 15,930 42,588 32,465
Interest expense, net.................................... 17,997 13,304 8,117 3,373 2,028
Income (loss) before provision for income taxes,
minority share of net income and cumulative effect
of accounting change................................ 6,623 (12,153) 7,813 39,215 30,437
Net income (loss)........................................ 4,726 (8,659) 6,636 24,334 18,296
Earnings (loss) per common share, assuming dilution...... 0.18 (0.38) 0.29 1.15 0.88
Dividend per share....................................... $ --(E) $ 0.20 $ 0.20 $ 0.20 $ 0.20
Weighted average diluted common shares outstanding....... 26,321(F) 22,596 22,753 21,206 20,751

Financial Data (at fiscal year-end):
Cash and cash equivalents................................ $ 42,936 $ 20,887 $ 22,891 $ 16,795 $ 15,415
Working capital (deficit)................................ 130,698 (12,385) 68,482 79,245 79,493
Total assets............................................. 582,599 582,264 488,145 441,424 314,656
Long-term debt and capital leases, excluding
current maturities.................................. 157,470 78,712 80,024 82,644 43,586
Stockholders' equity..................................... 253,447(F) 189,286 200,329 195,655(B) 140,052

Other Statistical Data:
Comparable store sales growth............................ 5.3% (0.2)% 2.0% 2.7% 5.0%
Stores at year end (including Mexico).................... 218 215 172 173 158
Total retail square footage at year end (thousands)...... 3,652 3,586 2,610 2,496 2,237
Sales per selling square foot............................ $ 391 $ 396 $ 389 $ 406 $ 441
Store customer transactions (thousands).................. 37,289 33,048 33,538 31,132 29,097
Employees at year end.................................... 5,308 5,447 5,205 4,577 4,341

- ---------------------------
(A) For all years, 52 weeks except fiscal year 1997, which had 53 weeks.

(B) 1,625,000 of common shares were issued on December 29, 1996 to affiliated
companies for $38 million in connection with acquisition of 91 properties
and leasehold interests.

(C) Amounts include results of Davis Lay division from May 1997. Amounts
include results of Orlando Foodservice Inc., Capricorn Foods of Central
Florida, Inc. and Southern Foods since their dates of asset acquisitions in
September 1997.

(D) Amounts include results of United Grocers Cash & Carry store operations
from the date of its acquisition in May 1998.

(E) 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.

(F) 6,496,000 of common shares were issued during the equity offering in June
1999 and increased stockholders' equity by $57.9 million.

13

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. The following table sets forth the consolidated
statements of operations data. (Percentages do not aggregate due to rounding.)

52 Weeks 52 Weeks 53 Weeks
(Dollars in millions, except per share amounts) 1999 1998 1997
==========================================================================================================

Sales:
Stores $1,382.0 77.1% $1,205.6 72.6% $1,049.0 72.2%
Foodservice 411.1 22.9 456.0 27.4 404.0 27.8
Sales, consolidated total 1,793.1 100.0 1,661.6 100.0 1,453.0 100.0
- ----------------------------------------------------------------------------------------------------------
Cost of sales, buying and occupancy:
Stores 1,183.3 85.6 1,027.4 85.2 884.9 84.4
Foodservice 375.5 91.3 428.5 94.0 373.4 92.4
Total cost of sales, buying and occupancy 1,558.8 86.9 1,455.9 87.6 1,258.3 86.6
==========================================================================================================
Gross margin 234.3 13.1 205.7 12.4 194.7 13.4
- ----------------------------------------------------------------------------------------------------------
Operating and administrative expenses 209.7 11.7 204.5 12.3 169.9 11.7
- ----------------------------------------------------------------------------------------------------------
One-time charges - - - - 8.9 0.6
- ----------------------------------------------------------------------------------------------------------
Income from operations 24.6 1.4 1.2 0.1 15.9 1.1
- ----------------------------------------------------------------------------------------------------------
Interest expense, net 18.0 1.0 13.3 0.8 8.1 0.6
==========================================================================================================
Income (loss) before provision for income taxes,
minority share of net income and cumulative
effect of accounting change 6.6 0.4 (12.1) (0.7) 7.8 0.5
- ----------------------------------------------------------------------------------------------------------
Income taxes 2.5 0.1 (4.3) (0.3) 1.9 0.1
- ----------------------------------------------------------------------------------------------------------
Minority share of net income (loss) - - - - (0.5) -
==========================================================================================================
Income (loss) from consolidated subsidiaries 4.1 0.2 (7.8) (0.5) 6.4 0.4
- ----------------------------------------------------------------------------------------------------------
Equity earnings in unconsolidated subsidiary 0.7 - 0.2 - 0.2 -
- ----------------------------------------------------------------------------------------------------------
Extraordinary loss 0.1 - - - - -
- ----------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change - - 1.1 0.1 - -
==========================================================================================================
Net income (loss) $ 4.7 0.3% $ (8.7) (0.5)% $ 6.6 0.5%
==========================================================================================================
Earnings (loss) per common share $ 0.18 $ (0.39) $ 0.30
==========================================================================================================
Earnings (loss) per common share,
assuming dilution $ 0.18 $ (0.38) $ 0.29
==========================================================================================================

14

===============================================================================
Results of operations

The Company's net income was $4.7 million, or $0.18 per diluted share, in
1999, compared with net loss of $8.7 million, or $(0.38) per diluted share, in
1998, and net income of $6.6 million, or $0.29 per diluted share, in 1997. The
following table sets forth pre-tax income or loss, in millions, for each of the
Company's various reportable segments:

1999 1998 1997
------- ------- ------
Stores $ 31.9 $ 23.1 $ 21.9
Foodservice (7.5) (18.0) (8.6)
------- ------- ------
Segment totals 24.4 5.1 13.3
Interest and other corporate expenses (17.8) (17.2) (5.5)
------- ------- ------

Consolidated pre-tax income (loss) $ 6.6 $ (12.1) $ 7.8
======= ======= ======

Change in management

In November 1998 the Company announced that Robert J. Emmons would retire
from his position as Chief Executive Officer and would resign from the Company's
Board of Directors effective January 4, 1999. The Board requested one of its
members, Ross Roeder, to assume the position of Chairman of the Board and Chief
Executive Officer, replacing Emmons. Roeder immediately proceeded with an
assessment of the overall business and developed a plan to redirect the
Company's business and improve operating efficiency. As a result, a number of
specific actions were taken late in 1998 that reduced earnings for the 1998
fourth quarter and year and contributed to the earnings improvement in 1999.

A number of factors impacted the results of operations in 1999 and 1998:

Factors affecting 1999 results:
. Significantly higher interest expense primarily due to higher interest
rates as a result of the Company's debt restructuring in late 1998. The
increased interest expense moderated in the second half of 1999 due to
the debt reduction resulting from the $60 million common stock offering
in June 1999.
. Outside consulting fees of $1.5 million were incurred in the third and
fourth quarters of 1999.

Factors affecting 1998 results:
. Actions taken late in 1998 by new executive management:
. A decision to sell non-core properties resulted in a $3.4 million
pretax reduction to estimated realizable values.
. A pretax charge of $3.2 million was established to provide for
severance costs incurred in connection with the downsizing of
management.
. Certain activities in the Florida foodservice operations were
discontinued and administrative functions were consolidated,
resulting in a pretax charge of $3.0 million.
. In-store bakery operations were discontinued, causing a pretax
write-off of $1.5 million.

15

. Focus on northern California foodservice changed from aggressive
sales growth to credit quality of customers and improved margins
resulting in related accounts receivable losses and inventory
write-downs of $3.7 million, pretax.
. Re-racking of the northern California distribution center and other
charges resulted in write-downs of $1.6 million, pretax.
. Adoption of a new retirement program and other increased benefits at
the northern California unit resulted in pretax charges of $1.4
million.
. Henry Lee operating results declined sharply as service levels
deteriorated due to inadequate distribution capacity starting in the
third quarter of 1997. The distribution inefficiencies continued into
1998. Service problems reduced sales as customers chose other
alternatives, reduced gross margins as prices were cut to retain
customers, and sharply increased distribution costs in both foodservice
and store operations. Distribution capacity was increased during 1998.
. 1998 results included a cumulative effect of accounting change, pretax
charge of $1.9 million, related to adoption of the American Institute
of Certified Public Accountants ("AICPA") Statement of position 98-5,
which requires the write-off of start-up costs.

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.

During 1998, earnings improved from a small loss in the first quarter to
modest earnings in the second quarter, strong earnings in the third quarter and
a sizeable loss in the fourth quarter. The strong earnings of the third quarter
of 1998 were in part due to a vendor support program that contributed earnings
of approximately $0.07 per diluted share in the quarter and real estate gains
that contributed approximately $0.03 per diluted share. These factors also
caused the lower comparative earnings in the third quarter of 1999. As described
above, the earnings decline in the fourth quarter of 1998 and the improved
earnings for the 1999 fiscal year reflect the actions taken by new executive
management.

Quarterly earnings per common share, assuming dilution:

First Second Third Fourth Year
------- ------ ----- ------ ------
1999 $ (0.02) $ 0.05 $0.08 $ 0.06 $ 0.18
1998 (0.09) 0.06 0.25 (0.60) (0.38)

Sales. Sales were $1,793.1 million in 1999, $1,661.6 million in 1998, and
$1,453.0 million in 1997. Sales include those of the Cash & Carry store
operations following its acquisition in May 1998. Cash & Carry sales were $253.7
million in 1999 and $164.5 million in 1998 following the acquisition. Total
sales increased 7.9% in 1999, 14.4% in 1998, and 11.6% in 1997. The Company
follows a 52-53 week fiscal year and 1997 included a fifty-third week.

Store sales, including Cash & Carry, increased 14.6% in 1999, 14.9% in
1998, and 5.7% in 1997. Same store sales increased 5.3% in 1999, compared to a
0.2% decline in 1998 and a 2.0% increase in 1997. Twenty-three new stores,
including relocations and one in Mexico, were opened during the three years,
three in 1999, nine in 1998, and 11 in 1997. Additionally, 39 stores were
acquired from United Grocers, Inc. in 1998. Foodservice sales decreased 9.8% in

16

1999 and increased 12.9% and 30.3% in 1998 and 1997, respectively. Foodservice
sales declined in part due to adoption of tighter credit policies in late 1998.

Gross margin. As a percentage of sales, gross margin was 13.1% in 1999, 12.4%
in 1998, and 13.4% in 1997. The increase in gross margin in 1999 was due to a
number of factors: reduced product costs negotiated with vendors, higher
foodservice margins achieved by a focus on improved credit quality and
profitability, and a lower overall mix of foodservice sales which carry lower
margins than store sales. The decline in gross profit in 1998 was caused in
part by the increased mix of foodservice distribution business and decreased
margins at the foodservice companies compared to 1997 due to increased meat
processing and chain account sales which generate lower margins. Additionally,
gross margins were lower in 1999 and 1998 due to the acquisition of the Cash &
Carry stores that generate lower gross margins than Smart & Final stores but
also operate at lower expense levels than Smart & Final stores. Increased store
occupancy costs due to new and relocated stores also reduced gross margin.

Operating and administrative expenses. Operating and administrative expenses
were 11.7% of sales in 1999, 12.3% in 1998, and 11.7% in 1997. The major
factors in this comparison were the charges incurred in late 1998 described
above. Other reasons for the decrease were the inclusion of Cash & Carry
operations, which operate at lower expense levels, and the intensive corporate-
wide expense-reduction program implemented in 1999.

Interest expense, net. Interest expense, net increased to $18.0 million in 1999
compared to $13.3 million in 1998 and $8.1 million in 1997. The increases in
1999 and 1998 were primarily the result of higher interest rates as a result of
the Company's debt restructuring in late 1998. Increases in interest expense
moderated in the second half of 1999 due to debt reduction resulting from the
proceeds of the $60 million stock offering in June 1999.

Equity earnings in unconsolidated subsidiary

The Company's 50% interest in the Mexico joint venture operates six stores
in Mexico and produced $0.7 million in equity earnings in 1999 and $0.2 million
in both 1998, and 1997. One new store was opened in 1998.

Liquidity and capital resources

Historically, the Company's primary source of liquidity has been cash flow
from operations and retained earnings. In addition, the Company has
availability under bank facilities. In 1999, net cash provided by operating
activities was $54.4 million. The aggregate amount required for the Company's
expansion program and other capital expenditures in 2000 is currently estimated
to be approximately $36.1 million.

During second quarter 1999, the Company completed its equity offering
pursuant to a registration statement on Form S-3 filed in April 1999. The
offering increased stockholders' equity by $57.9 million after expenses of the
offering. The Company's majority shareholder increased its ownership by
4,271,935 shares and paid for its subscribed shares by exchanging $39.4 million
of its $55.4 million loan to the Company. The Company used the $19.0 million net
proceeds from other stockholders to pay down its revolving loan.

17

The Company has Senior Secured Credit Facilities with a group of banks
totaling $240 million, including a $150 million Revolving Credit Facility
("Revolving Loan") and a $90 million Secured Lease Facility. These facilities
expire on November 13, 2001. At the Company's option, the Revolving Loan can be
used to support up to $10 million of commercial letters of credit. Interest for
these facilities is at LIBOR, or the Administrative Agent's reference rate, plus
designated amounts. No principal repayments are due prior to the final
maturity. However, under certain conditions, pay-downs toward the facilities
are treated as permanent reductions to the amount available. As of January 2,
2000, the total amount available under these facilities was $219 million
reflecting $21 million of permanent pay-downs during the year. At fiscal year
end 1999, $117.5 million was outstanding under the Revolving Loan and $82.9
million was utilized under the Secured Lease Facility. The Senior Secured
Credit Facilities contain restrictions on cash dividends declared or paid and
capital expenditures and require the Company to maintain certain fixed charge
coverage ratios and other financial ratios.

At fiscal year end 1999, the Company's Loan Agreement ("Casino Loan") with
Casino USA, Inc. had an outstanding balance of $16.0 million. The Casino Loan
matures on February 15, 2002. No principal repayments are due prior to the
final maturity. Interest for this loan is the sum of the rate under Revolving
Loan plus 25 basis points. The Casino Loan agreement contains covenants
requiring the Company to maintain certain financial ratios.

At fiscal year end 1999, the Company was in compliance with financial
covenants contained in the Senior Secured Credit Facilities and Casino Loan, as
amended.

The Company had cash and cash equivalents of $42.9 million, stockholders'
equity of $253.4 million and debt, excluding capital leases, of $149.0 million
at the end of fiscal year 1999. The debt consists of $117.5 million outstanding
on the revolving credit line, the $16.0 million Casino Loan, a $15.0 million
five-year unsecured note issued to United Grocers, Inc. as a result of
acquisition of its Cash & Carry stores and $0.5 million other notes payable. The
weighted average interest rate on the Company's variable rate debt for 1999 was
10.83%.

The Company expects to be able to fund future acquisitions and other cash
requirements by a combination of available cash, cash from operations, lease
financings and other borrowings and proceeds from the issuance of equity
securities. The Company believes that its sources of funds are adequate to
provide for working capital, other capital expenditures, and debt service
requirements for the foreseeable future.

Year 2000

The Company relies on a diverse assortment of computer hardware and
software, the integrated operation of which is essential to the successful
implementation of the Company's operations. In 1996, the Company began a
comprehensive review of its information technology systems and other systems and
equipment and developed a Year 2000 implementation program. Full compliance and
testing was completed before the end of 1999.

The entire implementation program was divided into three broad systems, the
corporate systems, the store systems and the foodservice systems and the program
had two phases, the

18

impact analysis phase and the modification or replacement phase. Additionally,
the Company monitored all vendors for last-minute Year 2000 issues.

Except for the cost of replacement systems, the Company expensed, as
incurred, the cost of the Year 2000 program. The Year 2000 program was funded
through operating cash flows. The Company incurred approximately $2.6 million
in costs with respect to the Year 2000 program.

Subsequent to the end of 1999, the Company's operations are fully
functioning and have not experienced any significant issues related to the Year
2000. While the Company is encouraged by the results of its Year 2000 efforts,
monitoring for any potential problems will continue throughout 2000.

As part of the Year 2000 program, the Company identified relationships with
third parties, including vendors, suppliers and service providers, which the
Company believes are critical to its business operations. The Company
communicated with these third parties through questionnaires, letters and
interviews in an effort to determine the extent to which they are addressing
their Year 2000 issues. Since the beginning of 2000, the Company has not
received any reports from third parties indicating any material Year 2000
incidents. The Company will continue to communicate with and assess and monitor
any potential Year 2000 issues of these third parties throughout 2000. The
Company cannot assure that there will not be an adverse impact on the Company if
third parties do not appropriately address their Year 2000 issues in a timely
manner.

Although the Company does not believe any continued exposure exists, the
Company has a contingency plan for possible Year 2000 issues and will continue
to update these plans based on assessments of any subsequent Year 2000 issues as
additional information becomes available.

The company experienced sales increases in the final weeks of fiscal 1999,
estimated to be less than $10 million, due to customers' stockpiling in
preparation for possible year end interruptions in product availability.
Consequently, the Company experienced minor sales decreases in the first few
weeks of fiscal 2000.

Seasonality

Historically, the Company's sales have followed a seasonal pattern.
Generally, third and fourth quarter sales are greater than those of the first
and second quarter, due to strong demand from foodservice customers in the
summer and winter holiday periods. Third quarter sales are also high because
the third quarter includes four four-week periods, whereas the other quarters
include three four-week periods. Sales distribution by quarter in 1999 was 22%
in the first quarter, 23% in the second, 31% in the third, and 24% in the
fourth.

Inflation

The Company's primary costs, merchandise and labor, 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

19

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. The Company's objective of financial risk management is to
minimize the negative impact of interest rate fluctuations on the Company's
earnings and cash flows.

Interest rate risk is managed through the use of interest rate collar
agreements to hedge principal amounts of up to $100 million. These agreements
are entered into with major financial institutions thereby minimizing risk of
credit loss. See Note 3 to the consolidated financial statements for a more
complete description of the Company's interest rate collars.

The following analysis presents the sensitivity to the earnings of the
Company if these changes occurred at January 2, 2000. The range of changes
chosen for this analysis reflects the Company's view of changes which are
reasonably possible over a one-year period. These forward-looking disclosures
are selective in nature and only address the potential impacts from financial
instruments. They do not include other potential effects which could impact the
Company's business as a result of these changes in interest.

Interest Rate Sensitivity Analysis

At January 2, 2000, the Company had debt, excluding capital leases,
totaling $149.0 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 4.7% to 8.0%. As of January 2, 2000,
the LIBOR rate was 6.13%.

At January 2, 2000, the Company had $133.5 million of variable rate debt
and $15.5 million of fixed rate debt. Holding other variables constant (such as
debt levels), the earnings and cash flow impact of a one-percentage point
change in interest rates would be approximately $0.8 million.

Credit Risk

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

Forward-Looking 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

20

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.
The following important factors, among others, could cause the Company's results
of operations to be adversely affected in future periods: (i) increased
competitive pressures from existing competitors and new entrants, including
price-cutting strategies, store openings and remodels; (ii) increases in
interest rates or the Company's cost of borrowing or a default under any
material debt agreements; (iii) deterioration in general or regional economic
conditions (iv) adverse state or federal legislation or regulation that
increases the costs of compliance, or adverse findings by a regulator with
respect to existing operations; (v) loss of customers or sales weakness; (vi)
inability to achieve future sales levels or other operating results; (vii) the
unavailability of funds for capital expenditures; and (viii) operational
inefficiencies in distribution or other Company systems. 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 affect the Company's financial positions and results
of operations.

21

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following information is included in this section:

Report of Independent Public Accountants 23

Consolidated Balance Sheets 24

Consolidated Statements of Operations 25

Consolidated Statements of Stockholders' Equity 26

Consolidated Statements of Cash Flows 27

Notes to Consolidated Financial Statements 28

Supplementary Data - Summary of Quarterly Results of Operations 49

22

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 57.3 percent owned subsidiary of
Casino USA, Inc.) and subsidiaries as of January 2, 2000 and January 3, 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three fiscal years in the period ended January 2,
2000. 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 January 2, 2000 and January 3, 1999, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 2, 2000, in conformity with accounting principles generally
accepted in the United States.

/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP

Los Angeles, California
February 15, 2000

23

SMART & FINAL INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)

ASSETS January 2, January 3,
- ------ 2000 1999
---------- ----------

Current assets:
Cash & cash equivalents $ 42,936 $ 20,887
Trade notes and accounts receivable, less
allowance for doubtful accounts of
$4,687 in 1999 and $3,660 in 1998 63,494 70,155
Inventories 154,550 157,678
Prepaid expenses 7,835 21,053
Deferred tax asset 10,834 11,511
---------- ----------
Total current assets 279,649 281,284

Property, plant and equipment:
Land 35,742 36,387
Buildings and improvements 29,116 29,625
Leasehold improvements 95,337 85,501
Fixtures and equipment 166,234 162,148
---------- ----------
326,429 313,661
Less - Accumulated depreciation and amortization 122,499 108,588
---------- ----------
Net property, plant and equipment 203,930 205,073

Assets under capital leases, net of accumulated
amortization of $7,233 in 1999 and $6,669 in 1998 8,343 4,016
Goodwill, net of accumulated amortization
of $3,640 in 1999 and $2,060 in 1998 55,087 56,667
Deferred tax asset 4,734 5,018
Other assets 30,856 30,206
---------- ----------
Total assets $ 582,599 $ 582,264
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt $ 3,928 $ 139,680
Accounts payable 92,513 97,568
Payable to Parent -- 1,681
Accrued salaries and wages 18,360 13,951
Other accrued liabilities 34,150 40,789
---------- ----------
Total current liabilities 148,951 293,669

Long-term liabilities:
Notes payable, net of current maturities 12,865 15,839
Notes payable to Parent 15,965 55,388
Bank debt 117,500 --
Obligations under capital leases 11,140 7,485
Other long-term liabilities 3,946 3,033
Workers' compensation reserve, postretirement
and postemployment benefits 18,785 17,564
---------- ----------
Total long-term liabilities 180,201 99,309

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; 29,136,995 shares issued
and outstanding in 1999 and 22,527,179 in 1998) 291 225
Additional paid-in capital 204,450 144,987
Notes receivable for stock (100) --
Cumulative translation loss (835) (835)
Retained earnings 49,641 44,909
---------- ----------
Total stockholders' equity 253,447 189,286
---------- ----------
Total liabilities and stockholders' equity $ 582,599 $ 582,264
========== ==========

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

24

SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)

Fiscal Year
------------------------------------------
1999 1998 1997
------------ ------------ ------------

Sales ............................................................. $ 1,793,142 $ 1,661,629 $ 1,453,020
Cost of sales, buying and occupancy ............................... 1,558,782 1,455,941 1,258,357
------------ ------------ ------------

Gross margin ...................................................... 234,360 205,688 194,663
Operating and administrative expenses ............................. 209,740 204,537 169,849
Special charges ................................................... -- -- 8,884
------------ ------------ ------------

Income from operations ..................................... 24,620 1,151 15,930

Interest expense, net ............................................. 17,997 13,304 8,117
------------ ------------ ------------

Income (loss) before income taxes, minority share of net loss,
extraordinary item, and cumulative effect of accounting
change ..................................................... 6,623 (12,153) 7,813
Income taxes ...................................................... 2,479 (4,397) 1,940
Minority share of net loss ........................................ -- -- (563)
------------ ------------ ------------
Income (loss) from consolidated subsidiaries ............... 4,144 (7,756) 6,436
Equity earnings in unconsolidated subsidiary ...................... 748 187 200
------------ ------------ ------------
Income (loss) before extraordinary item and
cumulative effect of accounting change .................... 4,892 (7,569) 6,636

Extraordinary loss on extinguishment of debt, net of
tax effect of $147 ......................................... 166 -- --
Cumulative effect of accounting change (start-up costs, net of
tax effect of $758) ........................................ -- 1,090 --
------------ ------------ ------------

Net income (loss) .......................................... $ 4,726 $ (8,659) $ 6,636
============ ============ ============

Earnings (loss) per common share:
Earnings (loss) per common share before extraordinary item and
cumulative effect of accounting change ....................... $ 0.19 $ (0.34) $ 0.30
Extraordinary loss on extinguishment of debt per common share .. (0.01) -- --
Cumulative effect of accounting change per common share ........ -- (0.05) --
------------ ------------ ------------
Earnings (loss) per common share ............................... $ 0.18 $ (0.39) $ 0.30
============ ============ ============

Weighted average common shares .................................... 26,282,704 22,474,048 22,158,673
============ ============ ============

Earnings (loss) per common share, assuming dilution:
Earnings (loss) per common share, assuming dilution, before
extraordinary item and cumulative effect of accounting change $ 0.19 $ (0.33) $ 0.29
Extraordinary loss on extinguishment of debt per common share .. (0.01) -- --
Cumulative effect of accounting change per common share ........ -- (0.05) --
------------ ------------ ------------
Earnings (loss) per common share, assuming dilution ............ $ 0.18 $ (0.38) $ 0.29
============ ============ ============

Weighted average common shares
and common share equivalents .................................. 26,321,476 22,595,705 22,753,333
============ ============ ============

Dividend per common share ......................................... $ -- $ 0.20 $ 0.20
============ ============ ============

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

25

SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the fiscal years 1999, 1998 and 1997
(dollars in thousands, except per share amounts)

Common Stock
------------------- Additional Notes Cumulative Total
Number of Paid-in Receivable Retained Translation Stockholders'
Shares Amount Capital for Stock Earnings Loss Equity
---------- ------- ----------- --------- --------- ----------- ------------

Balance, fiscal year-end 1996 ........... 21,976,406 $ 220 $ 140,371 $ -- $ 55,899 $ (835) $ 195,655
Issuance of common stock ................ 409,775 4 5,706 -- -- -- 5,710
Restricted stock accrual ................ -- -- 208 -- -- -- 208
Tax benefit associated with stock options
exercised ........................... -- -- 1,776 -- -- -- 1,776
Capital lease and deferred rent transfer -- -- (5,196) -- -- -- (5,196)
Dividend ($0.20 per share) .............. -- -- -- -- (4,460) -- (4,460)
Net income .............................. -- -- -- -- 6,636 -- 6,636
---------- ------- ----------- ------- --------- ------- ----------
Balance, fiscal year-end 1997 ........... 22,386,181 224 142,865 -- 58,075 (835) 200,329
Issuance of common stock ................ 140,998 1 1,772 -- -- -- 1,773
Restricted stock accrual ................ -- -- 167 -- -- -- 167
Tax benefit associated with stock options
exercised ........................... -- -- 183 -- -- -- 183
Dividend ($0.20 per share) .............. -- -- -- -- (4,507) -- (4,507)
Net income (loss) ....................... -- -- -- -- (8,659) -- (8,659)
---------- ------- ----------- ------- --------- ------- ----------
Balance, fiscal year-end 1998 ........... 22,527,179 225 144,987 -- 44,909 (835) 189,286
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 stocks canceled) -- -- -- -- 6 -- 6
Net income .............................. -- -- -- -- 4,726 -- 4,726
---------- ------- ----------- ------- --------- ------- ----------
Balance, fiscal year-end 1999 ........... 29,136,995 $ 291 $ 204,450 $ (100) $ 49,641 $ (835) $ 253,447
========== ======= =========== ======= ========= ======= ==========

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

26

SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

Fiscal Year
-------------------------------
1999 1998 1997
-------- --------- --------

Cash Flows From Operating Activities:
Net income (loss) ............................................... $ 4,726 $ (8,659) $ 6,636
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on disposal of fixed assets .............................. (608) (3,126) (843)
Asset valuation adjustments ................................... -- 1,175 --
Depreciation and amortization ................................. 31,316 29,353 25,761
Deferred tax provision (benefit) .............................. 961 (3,781) (800)
Amortization of deferred financing costs ...................... 1,869 -- --
Extraordinary loss on extinguishment of debt, net of taxes .... 166 -- --
Cumulative effect of accounting change, net of taxes .......... -- 1,090 --
Minority share of net loss .................................... -- -- (563)
Equity earnings in unconsolidated subsidiary .................. (748) (187) (200)
Decrease (increase), net of business acquisition, in:
Trade notes and accounts receivable ........................ 6,779 8,634 (3,771)
Inventories ................................................ 3,128 (6,646) (2,504)
Prepaid expenses and other ................................. 8,796 (3,540) (11,546)
Increase (decrease), net of business acquisition, in:
Accounts payable ........................................... (4,749) 14,224 4,601
Accrued liabilities ........................................ 4,409 4,423 (412)
Other liabilities .......................................... (1,672) 6,319 4,210
-------- --------- --------

Net cash provided by operating activities ..................... 54,373 39,279 20,569
-------- --------- --------

Cash Flows From Investing Activities:
Acquisition of property, plant and equipment .................... (26,169) (39,622) (29,427)
Proceeds from disposal of property, plant and equipment ......... 3,142 3,658 10,471
Acquisition of business ......................................... -- (44,401) (11,300)
Other ........................................................... (4,190) (7,557) (3,573)
-------- --------- --------

Net cash used in investing activities ......................... (27,217) (87,922) (33,829)
-------- --------- --------

Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net of costs ............ 20,163 1,737 5,135
Payments on bank line of credit ................................. (36,000) (82,000) --
Borrowings on bank line of credit ............................... 20,000 133,500 20,000
Payments on notes payable ....................................... (6,462) (3,796) (11,161)
Change in payable to Parent and affiliates ...................... (1,681) 7,288 9,830
Quarterly dividend paid ......................................... (1,127) (4,492) (4,448)
Fees paid in connection with debt restructure ................... -- (5,598) --
-------- --------- --------

Net cash (used in) provided by financing activities ........... (5,107) 46,639 19,356
-------- --------- --------

Increase (decrease) in cash and cash equivalents ....................... 22,049 (2,004) 6,096

Cash and cash equivalents at beginning of year ........................ 20,887 22,891 16,795
-------- --------- --------

Cash and cash equivalents at end of year ............................... $ 42,936 $ 20,887 $ 22,891
======== ========= ========

Noncash Investing and Financing Activities:
Fees in connection with note restructure ....................... $ -- $ (953) $ --
Equipment acquired as capital lease ............................. 4,891 -- --
Note issued in connection with note restructure ................. -- 55,388 --
Note received in connection with fixed assets retired ........... 1,145 -- --
Note retired in connection with note restructure ................ -- (30,400) --
Payable to affiliates retired in connection with note restructure -- (24,035) --
Note to affiliates extinguished for common stock issued ......... 39,423 -- --
Note issued in connection with acquisition of business .......... -- 17,500 1,000
Construction in progress costs incurred but not paid ............ 397 2,320 763
-------- --------- --------

Total noncash transactions .................................... $ 45,856 $ 19,820 $ 1,763
======== ========= ========

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

27

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Lines of business

Smart & Final Inc. (the "Company") is a Delaware corporation and at fiscal
year end 1999 was a 57.3 percent owned subsidiary of Casino USA, Inc. (the
"Parent" or "Casino USA"), a California corporation. Prior to November 1998,
Casino Realty, Inc. ("Casino Realty"), a wholly owned subsidiary of Casino USA,
owned a portion of the 57.3 percent now owned by the Parent. On November 2,
1998, Casino Realty, Inc. was dissolved and its remaining assets were
transferred to the Parent. The Company's principal subsidiary is Smart & Final
Stores Corporation, a California corporation, which operates a Cash & Carry
division (collectively, "Smart & Final"). The Company owns American Foodservice
Distributors ("AFD"), a holding company, which owns 100% of Port Stockton Food
Distributors, Inc. ("Port Stockton"), and 100% of Henry Lee Company ("Henry
Lee"). In late 1997, AFD acquired the assets of Orlando Foodservice, Inc. and
Capricorn Foods of Central Florida, Inc. (collectively "Orlando Foodservice")
and the assets of Southern Foods. 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."

Principles of consolidation

The consolidated financial statements include the accounts of the Company
and all of its majority owned subsidiaries. The Company's 50 percent owned
subsidiary in Mexico, Smart & Final Del Noroeste S.A. de C.V., which commenced
store operations in December 1993, is accounted for by the equity method of
accounting. The foreign currency translation loss resulted from the translation
of the foreign affiliate's functional currency balance sheet into U.S. dollars
for all periods prior to January 1997 and is reflected in stockholders' equity.
Beginning in fiscal year 1997, in accordance with generally accepted accounting
principles, the functional currency has been the U.S. dollar. As such, changes
in foreign currency exchange rates are included in results of operations.

All significant intercompany accounts and transactions have been eliminated
in consolidation. Certain prior years' amounts have been reclassified to conform
to the fiscal year 1999 presentation.

Fiscal years

The Company's fiscal year ends on the Sunday closest to December 31. Fiscal
year 1999 included 52 weeks, fiscal year 1998 included 52 weeks and fiscal year
1997 included 53 weeks. Fiscal years 1999, 1998 and 1997 ended on January 2,
2000, January 3, 1999 and January 4, 1998, 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.

28

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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

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.

Property, plant and equipment

Property, plant and equipment are stated at cost and are depreciated or
amortized using the straight-line method. 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.

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 $789,000 and $939,000 as of
fiscal year end 1999 and 1998, respectively. These costs are amortized over the
remaining lease term of the site with which they are associated.

29

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Other assets

Other assets include municipal bonds aggregating $5,430,000 at each fiscal
year end 1999 and 1998, which secure the Company's workers' compensation
reserves. The fair value of the municipal bonds, estimated based on quoted
market prices for similar investments, approximate their carrying amounts.
These municipal bonds have varying maturity dates ranging from 2006 through
2019.

Other assets included debt issuance costs of $3,486,000 and $6,238,000 at
year end 1999 and 1998, respectively relating to fees paid in connection with
the debt restructuring. These costs are being amortized over the term of the
related debt.

Capitalized software costs, net of amortization, of $5,844,000 and
$6,452,000 are included in other assets at fiscal year end 1999 and 1998,
respectively. These costs include third party purchased software costs, direct
labor associated with internally developed software, and installation costs.
Amortization is being recognized 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.

Goodwill

Goodwill is amortized on a straight-line basis over a period not exceeding
40 years. The Company assesses the recoverability of goodwill based on
forecasted operating income.

Stock options

In 1996, the Company adopted Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), 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 proforma net income per share amounts in the notes to the
consolidated financial statements using the fair-value method.

Significant accounting estimates

The preparation of financial statements in conformity with generally
accepted accounting principles 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. Management has made significant estimates in the determination of the
reserve for workers' compensation expense. These reserves totaled $6,383,000 and
$5,779,000 at fiscal year end 1999 and 1998, respectively. The estimate is
sensitive to change based upon certain factors including healthcare costs, the
Company's experience rate and severity of claims filed. The Company maintains a
stop-loss limit of $300,000 per claim.

Revenue Recognition

Revenue is recognized at the point of sale for store sales and at the time
of shipment for foodservice sales.

30

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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.

Accounting pronouncements

During the first quarter of 1998, the Company adopted the provisions of the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 98-5, "Reporting on the Costs of Start-up activities". This statement
requires that costs of start-up activities and organization costs be expensed as
incurred. Adoption of this statement resulted in a cumulative effect of
accounting change, net of tax, charge of $1.1 million, or $0.05 per diluted
share.

2. Acquisition of Businesses

On May 15, 1998, the Company acquired the Cash & Carry operating business
of United Grocers, Inc. which included 39 stores operating primarily in the
Pacific Northwest. The purchase price consisted of $42.5 million in cash, plus
a $17.5 million five-year unsecured note. The cash payment was financed by a
bridge loan from the Company's major commercial bank. The results of store
operations for fiscal year 1998 include the results of operations of the
acquired Cash & Carry stores since May 15, 1998. The acquisition has been
accounted for using the purchase method of accounting. The excess of the
aggregate purchase price over the fair market values of the net assets acquired,
of $38.2 million, has been reflected in the balance sheet as "goodwill" and is
amortized over forty years.

In January 1998, AFD purchased the remaining 10% of the stock of Henry Lee
for $1.9 million. On September 26, 1997, AFD acquired the net assets of two
Florida foodservice distributors, Orlando Foodservice Inc. and Capricorn Foods
of Central Florida, Inc. for a total purchase price of $1.3 million cash and a
$0.5 million note. On September 29, 1997, AFD acquired the net assets of
Southern Foods, a foodservice distributor, for $5.0 million in cash. On May 30,
1997, Smart & Final Foodservice purchased the assets of the Davis Lay, a produce
distributor, for $5.0 million cash and a $0.5 million note.

The Company recorded these acquisitions using the purchase method of
accounting. The total assets acquired from these acquisitions and the results
of operations at the dates of the asset acquisitions are immaterial relative
to the Company's consolidated financial statements.

31

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

3. Long-Term Debt

Revolving Loan

Effective November 13, 1998, the Company entered into Senior Secured Credit
Facilities totaling $240 million with a group of banks. The Senior Secured
Credit Facilities include a $150 million Revolving Credit Facility ("Revolving
Loan") and a $90 million Secured Lease Facility ("Secured Lease Facility").
These facilities expire on November 13, 2001. At the Company's option, the
Revolving Loan can be used to support up to $10 million of commercial letters of
credit. The Revolving Loan replaced the Company's $65 million Bridge Loan, its
$50 million unsecured long-term revolving line of credit, and its $50 million
short-term unsecured line of credit. The Secured Lease Facility replaced the
Company's three $30 million lease facilities. Borrowings under the Senior
Secured Credit Facilities are collateralized by a security interest in the
Company's receivables, inventory and fixed assets. Interest for these
facilities is at LIBOR, or the Administrative Agent's reference rate, plus
designated amounts. No principal repayments are due prior to the final
maturity. However, under certain conditions, pay-downs toward the facilities
are treated as permanent reductions to the amount available. As of January 2,
2000, the total amount available under the Revolving Loan was $129 million
reflecting $21 million of permanent pay-downs during the year. At fiscal year
end 1999, $117.5 million was outstanding under the Revolving Loan. As of
January 2, 2000, the LIBOR rate was 6.13%.

These facilities require the Company to maintain certain financial ratios.
The Company was not in compliance with these covenants at year-end 1998 and as
such, the borrowing under the Revolving Loan was reclassified to current
liabilities as of January 3, 1999. After the completion of its common stock
offering during second quarter 1999, the Company's overall debt was reduced,
including the pay-down of $19.0 million on the Revolving Loan and a reduction of
$39.4 million on the Casino Loan. As of January 2, 2000, the Company was in
compliance with the covenants and provisions of the Senior Secured Credit
Facilities, as amended.

Casino Loan

On November 13, 1998, the Company entered into a $55.4 million Loan
Agreement ("Casino Loan") with Casino USA. The Casino Loan replaced the
Company's two unsecured promissory notes that were issued in conjunction with
the 1996 acquisition of real property from Casino USA and Casino Realty that had
an outstanding balance of $30.4 million. It also replaced all then outstanding
advances made to the Company from Casino USA. Interest for this loan was at
LIBOR plus 4.50%. The Casino Loan matures on February 15, 2002.

During the second quarter of 1999, $39.4 million of the Casino Loan was
exchanged as consideration for shares subscribed by Casino USA in conjunction
with the Company's common stock offering. The Company subsequently issued an
addendum to the Casino Loan to reduce the loan principal from $55.4 million to
$16.0 million and the interest rate from LIBOR plus 4.5%, to the sum of the rate
under Revolving Loan plus 25 basis points. The Casino

32

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Loan requires that the Company maintain certain financial ratios. As of the end
of fiscal year 1999, the Company was in compliance with these covenants, as
amended.

Other Long-Term Debt

The Company has guaranteed $697,000 of Smart & Final Del Noroeste S.A. de
C.V. debt under a Standby Letter of Credit.

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 January 2, 2000, the outstanding balance was $15.0 million. This note
is payable in four remaining annual installments of $2.5 million in each of 2000
and 2001 followed by installments of $5.0 million in 2002 and 2003. This note
bears interest at 6.5%. Accrued interest is payable quarterly. Other unsecured
notes payable of $520,000 and $3,834,000 at fiscal year end 1999 and 1998,
respectively, bear interest at various rates ranging from 6.5% to 8.0%.

Interest

Interest paid on these notes and bank lines of credit aggregated
$20,119,000, $10,042,000, and $7,416,000 for the fiscal years ended 1999, 1998
and 1997, respectively. The weighted average interest rate for the Company's
variable rate debt for 1999 was 10.83%.

Aggregate future principal payments are as follows:

Fiscal Year:
2000..................................... $ 2,655,000
2001..................................... 120,327,000
2002..................................... 21,000,000
2003..................................... 5,003,000
-------------
$ 148,985,000
=============

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.

The Company's involvement with derivative financial instruments has been
limited to interest rate collar agreements to limit the impact of interest rate
fluctuations on revolving debt. The Company has entered into interest rate
collar agreements with various banks to hedge principal amounts of up to $100
million. The agreements limit LIBOR fluctuations to interest rate ranges from
4.7% to 8.0% and extend to September 2004.

33

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

4. Lease Obligations

As of fiscal year end 1999, the Company leased 130 store properties
directly from third party lessors, with an average remaining lease term of ten
years. The Company leased 14 store properties, at year-end, under its Secured
Lease Facility. In addition, the Company has eight stores on real property that
is ground leased from third party lessors.

On November 13, 1998, the Company entered into a Secured Lease Facility as
mentioned in Long-Term Debt. The Secured Lease Facility provided for the lease
of a distribution center for Smart & Final Foodservice and for store expansion
and distribution facilities in California and Florida. During fiscal years 1999
and 1998, the Company leased assets valued at approximately $82.9 million and
$71.2 million, respectively, under this facility. The related minimum lease
obligation is included in the table below, in accordance with its original
expiration date.

AFD's Miami dry and refrigerated warehouse is leased from the former owners
of Henry Lee. The lease contains terms and rates considered equivalent to those
available from unrelated third party lessors. The Company guarantees $1,406,000
of obligations of the former owners of Henry Lee. These obligations are related
to properties leased by Henry Lee.

Lease expense for operating leases included in the accompanying financial
statements were $34,104,000 for 1999, $32,248,000 for 1998 and $23,819,000 for
1997. 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 1999 are as follows:

Fiscal Year: Operating Leases Capital Leases
---------------- --------------

2000...................................... $ 36,271,000 $ 2,625,000
2001...................................... 118,002,000 2,675,000
2002...................................... 24,614,000 2,656,000
2003...................................... 23,283,000 2,446,000
2004...................................... 21,934,000 2,221,000
Subsequent to 2004........................ 149,032,000 5,012,000
---------------- --------------
Future minimum lease payments $ 373,136,000 17,635,000
================
Less amount representing interest................................. 5,222,000
--------------
Present value of future lease payments............................ $ 12,413,000
==============

Capital lease obligations vary in amount with interest rates ranging from
7.50% to 12.00%. Interest paid relating to capital leases aggregated $849,000,
$882,000 and $763,000 for fiscal years ended 1999, 1998 and 1997, respectively.

34

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

5. Retirement Plans

Defined benefit plans

The Company has a noncontributory pension plan covering substantially all
full time employees, except for those employees of AFD. 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 as a portion of the funding
for these benefits. The cash surrender value of these policies amounted to
$3,248,000 and $1,682,000 at year end 1999 and 1998, respectively and are
included in other assets in the accompanying consolidated balance sheets.

The following tables set forth the changes in benefit obligation and plan
assets of these plans for 1999 and 1998:

1999 1998
------------- -------------

Change in Benefit Obligation
Benefit obligation at beginning of year $ 42,829,000 $ 37,079,000
Service cost 2,227,000 1,829,000
Interest cost 2,921,000 2,759,000
Actuarial (gain) loss (6,803,000) 3,132,000
Benefits paid (3,253,000) (1,970,000)
------------- -------------
Benefit obligation at end of year 37,921,000 42,829,000
------------- -------------

Change in Plan Assets
Fair value of plan assets at
beginning of year 35,173,000 29,299,000
Actual return on plan assets 6,483,000 5,160,000
Employer contribution 1,264,000 2,684,000
Benefits paid (3,253,000) (1,970,000)
------------- -------------
Fair value of plan assets at end of year 39,667,000 35,173,000
------------- -------------

Funded Status 1,746,000 (7,656,000)
Unrecognized prior service cost 3,267,000 3,509,000
Unrecognized net transition obligation 392,000 489,000
Unrecognized actuarial loss (8,441,000) 1,874,000
------------- -------------
Accrued benefit cost $ (3,036,000) $ (1,784,000)
============= =============

35

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Amounts recognized in the statement of financial position at year end 1999
and 1998 consist of:
1999 1998
----------- -----------
Accrued benefit cost $(3,036,000) $(1,784,000)
Additional minimum liability (368,000) -
Intangible asset 368,000 -
----------- -----------
Net amount recognized $(3,036,000) $(1,784,000)
=========== ===========

The weighted average assumptions used in accounting for these plans at year-
end 1999 and 1998 were as follows:

1999 1998
----------- -----------
Discount rate 8.00% 6.75%
Rate of increase in compensation levels 4.50% 4.00%
Expected long-term rate of return on plan assets 9.00% 9.00%

The net periodic benefit cost for fiscal years 1999, 1998, and 1997 includes
the following components:

1999 1998 1997
----------- ----------- -----------

Service cost component $ 2,227,000 $ 1,829,000 $ 1,285,000
Interest cost component 2,921,000 2,759,000 2,362,000
Expected return on plan assets (3,173,000) (2,685,000) (2,163,000)
Amortization of prior service cost 348,000 335,000 214,000
Amortization of transition obligation 97,000 98,000 98,000
----------- ----------- -----------
Net expense $ 2,420,000 $ 2,336,000 $ 1,796,000
=========== =========== ===========

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 January
2, 2000 is not available. Pension expense for this plan was $400,000 and
$330,000 for 1999 and 1998, respectively.

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 1999 up to 15% of their compensation or $10,000, whichever is
lower. The Company automatically matches 25% of each dollar contributed up to
6% of the participant's eligible compensation. Additionally, the Company may at
its discretion match up to an additional 75% of each dollar contributed up to 6%
of the participants' eligible

36

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

compensation if the Company exceeds certain financial and profitability goals.
The Company provided no additional match in 1999, 1998 or 1997. The Company has
provided $785,000, $708,000, and $713,000 for contributions to this 401(k)
Savings Plan for fiscal years 1999, 1998, and 1997, respectively.

The Company also maintains 401(k) Savings Plans for its Smart & Final
Foodservice and Henry Lee subsidiaries. For 1999, these plans allowed
participants to contribute up to 15% of their compensation or $10,000, whichever
was lower. Under these plans, the Company automatically matches 50% of each
dollar contributed up to 6% of the participant's eligible compensation. In
2000, the Smart & Final Foodservice plan provides that the Company will
automatically match 75% of each dollar contributed up to 6% of the participant's
compensation. The amounts contributed to these plans were $752,000, $549,000
and $569,000 for 1999, 1998 and 1997, 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
$28,143,000, and $21,015,000 as of fiscal year end 1999 and 1998, respectively.
The cash surrender value of these policies amount to $4,266,000 and $3,160,000
as of fiscal year end 1999 and 1998, respectively and are 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.

6. 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.

37

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

All plans are defined benefit plans and the reconciliation of benefit
obligation and plan assets for 1999 and 1998 are aggregated as follows:

1999 1998
------------- -------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 11,042,000 $ 10,365,000
Service cost 262,000 236,000
Interest cost 703,000 705,000
Actuarial (gain) loss (1,693,000) 286,000
Benefits paid (409,000) (550,000)
------------ ------------
Benefit obligation at end of year 9,905,000 11,042,000
------------ ------------

Funded Status (9,905,000) (11,042,000)
Unrecognized actuarial loss (5,524,000) (4,142,000)
------------ ------------
Accrued benefit cost $(15,429,000) $(15,184,000)
============ ============

The weighted average discount rate used in accounting for these plans at
year-end 1999 and 1998 was 8.00% and 6.75%, respectively.

The accumulated postretirement benefit obligation is reflected on the
fiscal year end 1999 balance sheet as a current liability of $0.5 million and a
long-term portion of $14.9 million. For measurement purposes, a 10.0% and 10.5%
annual rate of increase in the per capita cost of covered claims was assumed for
1999 and 1998, 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 1999, 1998 and
1997 includes the following components:

1999 1998 1997
---------- ---------- ----------
Service cost component $262,000 $236,000 $234,000
Interest cost component 703,000 705,000 685,000
Amortization of loss (241,000) (266,000) (282,000)
---------- ---------- ----------
Net postretirement benefit expense $724,000 $675,000 $637,000
========== ========== ==========

38

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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 $ 36,000 $ (40,000)
Effect on accumulated postretirement
benefit obligation 380,000 (405,000)

7. Income Taxes

A reconciliation between the federal statutory income tax rate and the
Company's effective tax rate consists of the following:

1999 1998 1997
----------- ------------ -----------

Income tax at federal statutory rate $2,252,000 $(4,132,000) $2,735,000
State income taxes, net of federal tax benefit 386,000 (709,000) 448,000
Revitalization zone credit - - (884,000)
Other (159,000) 444,000 (359,000)
---------- ----------- ----------
Income taxes $2,479,000 $(4,397,000) $1,940,000
========== =========== ==========

The Company's provision for income taxes consists of the following:

1999 1998 1997
---------- ----------- ----------
Current
Federal $1,256,000 $(1,535,000) $3,520,000
State 262,000 919,000 (780,000)
---------- ----------- ----------
1,518,000 (616,000) 2,740,000
Deferred
Federal 961,000 (3,781,000) (800,000)
---------- ----------- ----------

Income taxes $2,479,000 $(4,397,000) $1,940,000
========== =========== ==========

39

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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:

1999 1998
------------ ------------
Property, plant and equipment depreciation
differences $(6,290,000) $(5,716,000)
Employee benefits including postretirement
and postemployment reserves 11,508,000 10,360,000
Operating reserves and accruals 10,194,000 11,097,000
Other 156,000 788,000
----------- -----------
Net deferred tax asset $15,568,000 $16,529,000
=========== ===========

The deferred tax asset is reflected on the fiscal year end 1999 balance
sheet as a current asset of $10.9 million and a long-term portion of $4.7
million.

As of January 2, 2000, the Company had approximately $40 million of state
net operating loss carryforwards which expire through 2020.

A tax benefit of $183,000 associated with the Company's stock option plan
has been credited to additional paid-in capital in 1998.

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 benefits received by the
Company from Casino USA were $598,000 and $742,000 in 1999 and 1998,
respectively. Tax sharing payments made by the Company to Casino USA were
$2,213,000 in 1997. Taxes paid for states other than California were $65,000,
$37,000 and $140,000 in 1999, 1998 and 1997, respectively. Federal income taxes
paid during 1999, 1998, and 1997 were $400,000, $250,000, and $11,575,000,
respectively .

8. Related Party Transactions

Intercompany services

The Company performs various services for Casino USA. Prior to its
dissolution in 1998, the Company also provided services to Casino Realty.
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 $261,000,
$285,000, and $300,000 for the fiscal years 1999, 1998, and 1997, respectively.
It is anticipated that the Company will continue to provide these administrative
services to its affiliates at its estimated cost.

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.

40

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Intercompany interest charges

Intercompany interest charges from affiliates were $4,000, $1,064,000 and
$563,000 during 1999, 1998, and 1997, respectively. These charges relate to
intercompany advances from affiliates.

In November 1998, the Casino Loan replaced the outstanding advances with
affiliates of $23,734,000; therefore, only minimal intercompany interest was
charged from affiliates during 1999. The outstanding advance as of fiscal year
end 1997 was $21,001,000.

Other related party transactions

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. This unsecured note bears interest at 4.84% per year payable annually each
July 31. The note is due December 31, 2001.

During 1997, the Company's former President and Chief Executive Officer
borrowed $29,965 from the Company by a note dated October 22, 1997. The note is
secured by his deferred compensation account. The note bears interest at 8.50%
per year and the entire balance and accrued interest on the note is due on
October 21, 2002.

9. Employment/Consulting Agreements

On December 1, 1998, the Company announced the retirement in January, 1999
of its Chairman and Chief Executive Officer and the appointment of his
replacement. Until his retirement, the former Chairman and CEO was compensated
pursuant to an employment agreement which terminated upon his retirement. The
Company has a consulting arrangement with its now former Chairman that provides
for his services for a ten-year period expiring in 2004. Other employment
agreements were also in effect during 1999. These agreements contain provisions
for base salary and bonuses, and expire during fiscal year 2000, 2001, 2002 and
2003. Annual payments under these agreements were approximately $2,163,000 in
1999 and will total approximately $2,047,000 in fiscal 2000.

Most 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.

The Company has a consulting agreement with the former President of Henry
Lee, which expires at the end of 2000. Payments under this agreement were
approximately $50,000 in 1999 and will total approximately $50,000 in 2000.

The Company has severance agreements with certain former employees. These
severance

41

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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 $1,527,000 in fiscal 1999 and
will total approximately $1,488,000 in fiscal 2000.

10. Common Stock

During the second quarter of 1999, the Company completed its equity
offering pursuant to its Registration Statement on Form S-3. 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 and increased its
ownership interest in the Company to 57.3 percent. 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.

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. During fiscal year 1999
and 1998, the Company issued 50,000 shares and 4,600 shares, respectively of
restricted stock under this plan. Compensation expense is computed based on the
market price on the grant date. Compensation expense associated with the
restricted stock was $538,000 and $167,000 in fiscal years 1999 and 1998,
respectively.

11. Stock Options

In addition to options available under the Long-Term Equity Compensation
Plan, the Company has a Stock Incentive Plan. During 1997, the Stock Incentive
Plan was amended to increase the maximum amount of shares for which options may
be granted to 2,450,000 shares from 2,250,000 shares of the Company's common
stock. 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

42

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

time of grant. Options granted prior to 1999 under these plans vest over a four-
year period. Options granted in 1999, 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 1996 1,997,227 $ 14.19
--------- -------------
Fiscal year 1997:
Options granted 499,057 $ 21.33
Options exercised (405,131) 12.68
Options canceled (54,309) 16.79
---------
Shares under option at fiscal year end 1997 2,036,844 16.17
--------- -------------
Shares exercisable at fiscal year end 1997 964,616 13.33
Fiscal year 1998:
Options granted 809,750 $ 15.69
Options exercised (92,967) 13.60
Options canceled (280,200) 18.06
---------
Shares under option at fiscal year end 1998 2,473,427 15.90
--------- -------------
Shares exercisable at fiscal year end 1998 1,292,017 14.07
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

Stock options outstanding at January 2, 2000 are as follows:

Number Weighted Average Weighted
Range of Outstanding Remaining Average
Exercise Prices as of 1/2/00 Contractual Life Exercise Price
- --------------------------------------------------------------------------------
$6.3750 - $8.8750 72,900 9.83 $ 6.6871
$9.2500 890,295 9.33 9.2500
$9.3750 - $10.7700 613,350 5.07 10.4243
$12.1250 - $13.8750 88,631 7.96 12.3869
$14.0000 465,763 4.11 14.0000
$14.5000 - $17.5000 268,766 5.03 15.9392
$17.6250 405,400 8.13 17.6250
$17.8750 - $22.1250 421,667 6.99 19.9666
$22.6250 - $23.0000 53,334 7.49 22.9475
$23.6250 21,584 6.69 23.6250
- --------------------------------------------------------------------------------

$ 6.3750 - $23.6250 3,301,690 6.93 $13.4226

43

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Stock options exercisable as of January 2, 2000 are as follows:

Range of Number Weighted Average
Exercise Prices Exercisable Exercise Price
- --------------------------------------------------------------------------------
$9.2500 66,667 $ 9.2500
$9.3750 - $10.7700 321,150 10.7700
$12.1250 - $13.8750 23,531 13.1116
$14.0000 465,763 14.0000
$14.5000 - $17.5000 268,766 15.9392
$17.6250 200,000 17.6250
$17.8750 - $22.1250 165,621 20.1307
$22.6250 - $23.0000 21,041 22.9707
$23.6250 14,439 23.6250
- --------------------------------------------------------------------------------

$ 9.2500 - $23.6250 1,546,978 $14.7850

Common stock shares available for future grant under the Stock Incentive
Plan at fiscal year end 1999, 1998 and 1997 were 279,129, 118,398 and 86,904,
respectively. Shares of common stock available for future award under the Long-
Term Equity Compensation Plan at fiscal year end 1999 and 1998 were 529,705 and
308,700, respectively.

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:

1999 1998 1997
----------- ----------- -----------
Dividend yield 0% 1.1% 1.0%
Expected volatility 35% 32% 24%
Risk-free interest rates 6.4% 4.7% 5.7%
Weighted average expected lives
Executives 4.94 years 4.96 years 5.06 years
Non executives 4.55 years 4.55 years 4.53 years
Weighted-average fair value of
options granted $3.60 $4.79 $6.04

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 (loss) and
earnings (loss) per share would have been $3,517,000 and $0.13, respectively for
fiscal year 1999; $(9,905,000) and $(0.44), respectively for fiscal year 1998;
and $6,016,000 and $0.26, respectively for fiscal year 1997.

44

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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.

12. 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:

1999 1998 1997
----------- ------------ -----------

Numerator:
Net Income (Loss) $ 4,726,000 $(8,659,000) $ 6,636,000
=========== =========== ===========

Denominator:
Weighted average common shares
outstanding 26,282,704 22,474,048 22,158,673
=========== =========== ===========

Earnings (loss) per common share $ 0.18 $ (0.39) $ 0.30
=========== =========== ===========

Earning per common share, assuming dilution computation:

1999 1998 1997
----------- ----------- -----------
Numerator:
Net Income (Loss) $ 4,726,000 $(8,659,000) $ 6,636,000
=========== =========== ===========

Denominator:
Weighted average common shares
outstanding 26,282,704 22,474,048 22,158,673
Dilutive effect of stock options
outstanding 38,772 121,657 594,660
----------- ----------- -----------
Weighted average common shares,
assuming dilution 26,321,476 22,595,705 22,753,333
=========== =========== ===========

Earnings (loss) per common share,
assuming dilution $ 0.18 $ (0.38) $ 0.29
=========== =========== ===========

45

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

13. Segment Reporting

The Company has two reportable segments: Stores and Foodservice. The
stores segment provides food and related items in bulk sizes and quantities
through non-membership grocery warehouse stores. The foodservice distribution
segment provides delivery of food, restaurant equipment and supplies to mainly
restaurant customers and Smart & Final stores. Corporate expense is comprised
of primarily the Company's corporate expenses incidental to the activities of
the reportable segments and rental income from Smart & Final stores. The
Company's reportable segments are strategic business units that offer different
products and services. They are managed separately because each segment
requires different technology and marketing strategies.

The accounting policies of the segments are the same as 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.

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

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 5,323 3,248 31,316
Pre-tax income (loss) 31,882 (7,491) (17,768) 6,623
Equity in net income of
unconsolidated subsidiaries - - 748 748
Income taxes - - 2,479 2,479
Extraordinary items, net of taxes - - 166 166

46

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

For fiscal year 1998:
Corporate
Stores Foodservice Expense Total
----------- ------------ ---------- -----------

Revenues from external
customers $1,205,618 $456,011 $ - $1,661,629
Intercompany real estate
charge (income) 13,801 - (13,801) -
Interest income - - 448 448
Interest expense - - 13,752 13,752
Depreciation and
amortization 20,353 6,044 2,956 29,353
Pre-tax income (loss) 23,148 (18,057) (17,244) (12,153)
Equity in net income of
unconsolidated subsidiaries - - 187 187
Income taxes (benefit) - - (4,397) (4,397)
Accounting change, net of taxes - - 1,090 1,090

For fiscal year 1997:

Corporate
Stores Foodservice Expense Total
---------- ----------- --------- ----------

Revenues from external
customers $1,048,966 $404,054 $ - $1,453,020
Intercompany real estate
charge (income) 13,976 - (13,976) -
Interest income - - 715 715
Interest expense - - 8,832 8,832
Depreciation and
amortization 17,911 4,442 3,408 25,761
Pre-tax income (loss) 21,880 (8,596) (5,471) 7,813
Equity in net income of
unconsolidated subsidiaries - - 200 200
Income taxes - - 1,940 1,940

The only foreign operation is the joint venture in Mexico, which is
reported on the equity basis of accounting.

14. Advertising Expense

The Company expenses the costs of advertising as incurred. Total
advertising expense was $15.4 million, $15.4 million and $14.2 million in 1999,
1998 and 1997, respectively.

47

SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. Legal Actions

The Company has been named as defendant in various legal actions in the
normal conduct of its business. In the opinion of management, after consultation
with counsel, none of these actions are expected to result in a material effect
on the Company's financial position or results of operations.

16. Special Charge

During the fourth quarter of 1997, the Company decided to close two Florida
stores, replace certain distribution software systems, and reorganize the
Company. An $8.9 million provision was recorded to write down related store
assets and computer software to estimated realizable values and to accrue for
related lease and severance obligations. As of January 2, 2000 and January 3,
1999, this reserve had a balance of $2.0 million and $3.6 million, respectively.
Of the total $6.9 million of costs and payments recorded against the reserve,
$4.9 million represents asset write-downs and lease obligations of closed stores
and $2.0 million represents severance and other related expenses.

48

Smart & Final Inc.
Summary of Quarterly Results of Operations
(in thousands, except per share amounts)

Fiscal year 1999 (A)
------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
12 12 16 12 52
Weeks Weeks Weeks Weeks Weeks
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Income Statement Data:
Sales ................................................. $ 398,337 $ 418,608 $ 555,890 $ 420,307 $ 1,793,142
Cost of sales, buying and occupancy ................... 348,259 365,391 482,483 362,649 1,558,782
------------ ------------ ----------- ----------- -----------
Gross margin .......................................... 50,078 53,217 73,407 57,658 234,360
Operating and administrative expenses ................. 46,102 45,880 65,931 51,827 209,740
------------ ------------ ----------- ----------- -----------
Income from operations ................................ 3,976 7,337 7,476 5,831 24,620
Interest expense, net ................................. 5,081 5,027 4,510 3,379 17,997
------------ ------------ ----------- ----------- -----------
Income (loss) before income taxes and cumulative
effect of accounting change .......................... (1,105) 2,310 2,966 2,452 6,623
Income taxes .......................................... (419) 893 1,089 916 2,479
------------ ------------ ----------- ----------- -----------
Income (loss) from consolidated subsidiaries .......... (686) 1,417 1,877 1,536 4,144
Equity earnings in unconsolidated subsidiary .......... 212 71 343 122 748
------------ ------------ ----------- ----------- -----------

Income (loss) before cumulative effect of
accounting change .................................... (474) 1,488 2,220 1,658 4,892
Extraordinary loss on extinguishment of debt,
net of tax effect of $147 ............................ -- 166 -- -- 166
------------ ------------ ----------- ----------- -----------

Net Income (loss) ..................................... $ (474) $ 1,322 $ 2,220 $ 1,658 $ 4,726
============ ============ =========== =========== ===========

Earnings (loss) per common share:
Earnings (loss) per common share before
cumulative effect of accounting change ........... $ (0.02) $ 0.06 $ 0.08 $ 0.06 $ 0.19
Extraordinary loss on extinguishment of debt per
common share ..................................... -- (0.01) -- -- (0.01)
------------ ------------ ----------- ----------- -----------
Earnings (loss) per common share ...................... $ (0.02) $ 0.05 $ 0.08 $ 0.06 $ 0.18
============ ============ =========== =========== ===========

Weighted average common shares ........................ 22,527,179 23,378,215 29,136,995 29,136,995 26,282,704
============ ============ =========== =========== ===========

Earnings (loss) per common share, assuming dilution:
Earnings (loss) per common share, assuming dilution,
before cumulative effect of accounting change .... $ (0.02) 0.06 $ 0.08 $ 0.06 $ 0.19
Extraordinary loss on extinguishment of debt per
common share ..................................... -- (0.01) -- -- (0.01)
------------ ------------ ----------- ----------- -----------
Earnings (loss) per common share, assuming dilution ... $ (0.02) $ 0.05 $ 0.08 $ 0.06 $ 0.18
============ ============ =========== =========== ===========

Weighted average common shares and
common share equivalents (B)..................... 22,527,179 23,451,919 29,204,499 29,141,301 26,321,476
============ ============ =========== =========== ===========

(A) 1999 fiscal year 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 and a stock purchase agreement.

49

Smart & Final Inc
Summary of Quarterly Results of Operations
(in thousands, except per share amounts)

Fiscal year 1998 (A)
--------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
12 12 16 12 52
Weeks Weeks Weeks Weeks (C) Weeks
------------ ----------- ----------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Income Statement Data:
Sales ................................................. $ 334,278 $ 380,577 $ 546,434 $ 400,340 $ 1,661,629
Cost of sales, buying and occupancy ................... 294,538 332,697 473,566 355,140 1,455,941
------------ ----------- ----------- ------------ ------------
Gross margin .......................................... 39,740 47,880 72,868 45,200 205,688
Operating and administrative expenses ................. 39,418 43,458 59,619 62,042 204,537
------------ ----------- ----------- ------------ ------------
Income (loss) from operations ......................... 322 4,422 13,249 (16,842) 1,151
Interest expense, net ................................. 2,128 2,438 4,044 4,694 13,304
------------ ----------- ----------- ------------ ------------
Income (loss) before income taxes and cumulative
effect of accounting change .......................... (1,806) 1,984 9,205 (21,536) (12,153)
Income taxes .......................................... (780) 753 3,573 (7,943) (4,397)
------------ ----------- ----------- ------------ ------------
Income (loss) from consolidated subsidiaries .......... (1,026) 1,231 5,632 (13,593) (7,756)
Equity earnings in unconsolidated subsidiary .......... 130 57 3 (3) 187
------------ ----------- ----------- ------------ ------------
Income (loss) before cumulative effect of
accounting change .................................... (896) 1,288 5,635 (13,596) (7,569)
Cumulative effect of accounting change (start-up
costs, net of tax effect of $758) .................... 1,090 -- -- -- 1,090
------------ ----------- ----------- ------------ ------------
Net Income (loss) ..................................... $ (1,986) $ 1,288 $ 5,635 $ (13,596) $ (8,659)
============ =========== =========== ============ ============
Earnings (loss) per common share:
Earnings (loss) per common share before
cumulative effect of accounting change ........... $ (0.04) $ 0.06 $ 0.25 $ (0.60) $ (0.34)
Cumulative effect of accounting change per
common share ..................................... (0.05) -- -- -- (0.05)
------------ ----------- ----------- ------------ ------------
Earnings (loss) per common share ...................... $ (0.09) $ 0.06 $ 00.25 $ (0.60) $ (0.39)
============ =========== =========== ============ ============
Weighted average common shares ........................ 22,395,653 22,446,511 22,513,649 22,527,179 22,474,048
============ =========== =========== ============ ============
Earnings (loss) per common share, assuming dilution:
Earnings (loss) per common share, assuming dilution,
before cumulative effect of accounting change .... $ (0.04) $ 0.06 $ 0.25 $ (0.60) $ (0.33)
Cumulative effect of accounting change per
common share ..................................... (0.05) -- -- -- (0.05)
------------ ----------- ----------- ------------ ------------
Earnings (loss) per common share, assuming dilution ... $ (0.09) $ 0.06 $ 0.25 $ (0.60) $ (0.38)
============ =========== =========== ============ ============
Weighted average common shares and
common share equivalents (B) .................... 22,395,653 22,865,913 22,594,482 22,527,179 22,595,705
============ =========== =========== ============ ============

(A) 1998 fiscal year 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 and a stock purchase agreement.

(C) Includes year end adjustments See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

50

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

The information required by Part III of Form 10-K (Items 10-13) is set
forth in the Company's definitive Proxy Statement (the "Proxy Statement") for
its Annual Meeting of Stockholders to be held on May 17, 2000, which will be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the Company's last fiscal year end. For Item 10, Directors
and Executive Officers of the Registrant, the sections of the Proxy Statement
entitled "Nominees," "Continuing Directors," "Executive Officers" and "Section
16(a) Beneficial Ownership Reporting Compliance" are incorporated herein by this
reference. For Item 11, Executive Compensation, the sections of the Proxy
Statement entitled "Executive Compensation," "Compensation Committee Interlocks
and Insider Participation," and "Compensation of Directors" are incorporated
herein by this reference. For Item 12, Security Ownership of Certain Beneficial
Owners and Management, the section of the Proxy Statement entitled "Security
Ownership of Certain Beneficial Owners and Management" is incorporated herein by
this reference. For Item 13, "Certain Relationships and Related Transactions,"
the section of the Proxy Statement entitled "Compensation Committee Interlocks
and Insider Participation" is incorporated herein by this reference.

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements : Page
------
Report of Independent Public Accountants.............. 23

Consolidated Balance Sheets........................... 24

Consolidated Statements of Operations................. 25

Consolidated Statements of Stockholders' Equity....... 26

Consolidated Statements of Cash Flows................. 27

Notes to Consolidated Financial Statements............ 28

Supplementary Data - Summary of Quarterly
Results of Operations................................ 49

(a)(2) Financial Statement Schedules:

Report of Independent Public Accountants.............. 59

II - Valuation and Qualifying Accounts................ 60

51

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.

(a)(3) EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------

3.1 Certificate of Incorporation of the Company, including all amendments
thereto (6)
3.2 Bylaws of the Company, including all amendments thereto (6)
10.1 [Intentionally Blank]
10.2 Loan Agreement, dated January 24, 1995, between First Interstate Bank of
California and the Company, as renewed (12)
10.3 Amended and Restated Employment Agreement, dated June 1, 1991, between
Mr. Emmons and the Company (1), as amended* (21)
10.4 [Intentionally Blank]
10.5 Agreement Terminating Partnership Equivalency Program for Robert Emmons,
dated June 1, 1991, by and among Mr. Emmons, Casino USA and Casino
France (1)
10.6 Stock Purchase Agreement, dated March 7, 1989, by and among Mr. Emmons,
Casino USA, Casino France and the Company (1), as amended (16) (21)*
10.7 Stock Purchase Agreement, dated as of November 5, 1990, by and among
American Foodservice Distributors, Casino USA and Mr. Del Prete, et
al. (1)
10.8 [Intentionally Blank]
10.9 Lease, dated June 3, 1991, by and between Casino Realty and S&F Stores
(1)
10.10 Form of Master Lease with Casino Realty as lessor (1)
10.11 Form of Master Sublease with either Casino USA or Casino Realty as
sublessor (1)
10.12 Form of Lease between lessor and Port Stockton (1)
10.13 Lease by and between ADP Properties and Port Stockton, dated May 14,
1990 (1)
10.14 Amendment to Leases, dated November 5, 1990, by and between Mr. Del
Prete, Miner Avenue and Nancy L. Del Prete, and Port Stockton (1)
10.15 Description of Certain Management Compensatory Plans and Arrangements*
10.16 Amended and Restated Stock Incentive Plan of the Company* (21)
10.17 Smart & Final Pension Plan, as amended (12)*
10.18 Adoption Agreement #004, Nonstandardized Profit Sharing Plan for Port
Stockton, dated August 28, 1990 (1)
10.19 Guaranty of Casino USA, dated as of June 7, 1991(1)
10.20 Smart & Final Amended and Restated 401(k) Savings Plan (12)*
10.21 Registration Rights Agreement, dated August 6, 1991, by and among the
Company, Casino USA and Mr. Emmons (3), as amended (16)*
10.22 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) (6)
10.23 Adoption Agreement #008, Nonstandardized Code (S)401(k) Profit Sharing
Plan for Port Stockton, dated August 4, 1992 (12)
10.24 Intercompany Agreement, dated August 6, 1991, by and between Casino
USA, Casino Realty, Inc. and the Company (3)
10.25 Truck Lease and Service Agreement, dated December 13, 1991, between
Smart & Final and Ryder Truck Rental, Inc. (2)
10.26 Agreement to Sell and Purchase Real Property and Escrow Instructions By
and Between Mr. Del Prete, individually and doing business as "ADP
Properties," and Mrs. Del Prete and Port Stockton Food Distributors,
Inc., dated August 25, 1992 (4)
10.27 Agreement to Sell and Purchase Real Property and Escrow Instructions By
and Between Mr. Del Prete and Port Stockton Food Distributors, Inc.
dated August 25, 1992 (4)
10.28 Employment Agreement between the Company and Mr. Laverty (16)*

52

10.29 Employment Agreement between the Company and Mr. Lynch (17)*
10.30 Severance Agreement between the Company and Mr. Alvarado (5)*
10.31 Severance Agreement between the Company and Mr. Chiavelli (5)*
10.32 [Intentionally Blank]
10.33 [Intentionally Blank]
10.34 Severance Agreement between the Company and Mr. Goneau (5)*
10.35 Severance Agreement between the Company and Mr. Griffin (5)*
10.36 Stock Purchase Agreement dated November 8, 1994, among the Company,
Sternlieb Family Investments, Ltd., and Edward I. Sternlieb, Henry
Sternlieb and Rose Sternlieb (8)
10.37 Severance Agreement between the Company and Mr. Magruder (5)*
10.38 Severance Agreement between the Company and Mr. Martin (5)*
10.39 Severance Agreement between the Company and Ms. Mullins (5)*
10.40 Severance Agreement between the Company and Mr. Shah (5)*
10.41 Severance Agreement between the Company and Mr. Taylor (5)*
10.42 Deferred Compensation Agreement between the Company and Mr. Laverty
(6)*
10.43 Deferred Compensation Agreement between the Company and Mr. Lynch (6)*
10.44 Non-Negotiable Promissory Note dated November 8, 1994, of the Company
for the benefit of Sternlieb Family Investments, Ltd. (8)
10.45 Stockholders' Agreement dated as of November 8, 1994, among the
Company, Sternlieb Family Investments, Ltd. and Henry Lee (8)
10.46 Employment Agreement dated as of November 8, 1994, between Henry Lee
and Edward I. Sternlieb (8)*
10.47 Consulting Agreement dated as of November 8, 1994, between Henry Lee
and Sternlieb Consulting, Inc. (8), as amended (21)
10.48 Lease dated as of November 8, 1994, between Henry Sternlieb and Henry
Lee (8)
10.49 Lease dated as of July 2, 1985, as amended by First Amendment of Lease,
between Edward I. Sternlieb and Henry Lee (8)
10.50 Lease dated as of August 1, 1980, and related Agreement dated as of
November 8, 1994, between Henry and Rose Sternlieb and Henry Lee (8)
10.51 Purchase and Sale Agreement dated October 7, 1994, between Nestle Food
Company and Port Stockton (8)
10.52 Revolving Credit and Reimbursement Agreement dated November 21, 1991
between Henry Lee and NCNB National Bank of Florida, as amended (8)
10.53 Henry Lee Company Second Profit Sharing Plan and Trust, as amended (12)
10.54 Henry Lee Company Guaranty of Edward I. Sternlieb, dated October 1,
1993 (12)
10.55 Henry Lee Company Guaranty of Henry and Rose Sternlieb, dated August 1,
1980 (12)
10.56 Smart & Final Inc. Supplemental Deferred Compensation Plan (9), as
amended (26)*
10.57 Smart & Final Inc. Directors Deferred Compensation Plan (9), as amended
(26)*
10.58 Participation Agreement dated December 15, 1994, among the Company,
Smart & Final, Port Stockton, Shawmut Bank Connecticut, National
Association, Credit Lyonnais Cayman Island Branch and Credit Lyonnais
New York Branch; with the associated Loan Agreement among Shawmut Bank
Connecticut, National Association, Credit Lyonnais Cayman Island
Branch and Credit Lyonnais New York Branch, and Trust Agreement
between Shawmut Bank Connecticut, National Association and Credit
Lyonnais New York Branch (12), as amended (19)

10.59 Agency Agreement dated December 15, 1994, between Shawmut Bank
Connecticut, National Association and the Company (12), as amended
(19)
10.60 Lease Agreement dated December 15, 1994, between Shawmut Bank
Connecticut, National Association and the Company (12), as amended
(19)
10.61 Agreement between Port Stockton Food Distributors, Inc. and Food
Distribution Employees Association (9)
10.62 Vehicle Lease Service Agreement (9)
10.63 Consulting Agreement dated October 1, 1995 between Yves Guichard and
the Company (10)
10.64 Consulting Agreement dated October 1, 1995 between Gilles Pinoncely and
the Company (10)
10.65 Credit Agreement dated November 20, 1995 between Credit Lyonnais-Los
Angeles Branch and the Company (10)
10.66 Asset Purchase Agreement between Falcone & Italia Foods, Inc.,
Salvatore J. Falcone, Mark Gilden, and Henry Lee Company (13)

53

10.67 Asset Purchase Agreement between Craig & Hamilton Meat Co., Inc.,
Patrick D. Craig and Port Stockton Food Distributors, Inc. (14)
10.68 Smart & Final Inc. Trust for Deferred Compensation Plans (16)*
10.69 Agreement for Conveyance of Real Property dated as of October 31, 1996
by and among the Company, Casino USA and Casino Realty, Inc. and the
First Amendment thereto dated December 19, 1996 (15)

10.70 Letter Agreement dated as of December 10, 1996, among the Company and
Wells Fargo Bank, N.A. (16)

10.71 Participation Agreement dated as of April 16, 1997, among the Company,
Smart & Final Stores Corporation, Port Stockton Food Distributors,
Inc., Fleet National Bank, a national banking association, not in its
individual capacity but solely as the Owner Trustee under the Trust
Agreement, Credit Lyonnais New York Branch, Credit Lyonnais Leasing
Corp. and the Lenders named therein (18), as amended (20)

10.75 First Amendment and Restatement dated as of June 20, 1997, to
Participation Agreement dated December 15, 1994, among the Company,
Smart & Final Stores Corporation, Port Stockton Food Distributors
Inc., Fleet National Bank, a national banking association, not in its
individual capacity but solely as the Owner Trustee under the Trust
Agreement, Credit Lyonnais Los Angeles Branch, Bank Leumi Le-Israel
B.M, The Fuji Bank Limited, Los Angeles Agency, The Industrial Bank of
Japan, Limited, Los Angeles Agency, Via Banque, Credit Lyonnais New
York Branch and Credit Lyonnais Leasing Corp. (19), as amended (20)
10.76 First Amendment and Restatement dated as of June 20, 1997 to Agency
Agreement dated December 15, 1994 (19)
10.77 First Amendment and Restatement dated as of June 20, 1997 to Loan
Agreement dated December 15, 1994 (19)
10.78 First Amendment and Restatement dated as of June 20, 1997 to Lease
Agreement dated December 15, 1994 (19)
10.79 Asset Purchase Agreement dated as of May 30, 1997, among American
Foodservice Distributors and Mallard's Food Products, Inc. (19)
10.80 1997 Executive Severance Agreement (20)*
10.81 Agreement to Sell and Purchase Real Property and Escrow Instructions
dated as of September 1, 1997, among the Company and Fred Kayne, as
amended (20)
10.82 Agreement to Sell and Purchase Real Property and Escrow Instructions
dated as of September 12, 1997, among Smart & Final Stores Corporation
and Certified Grocers of California, Ltd. (20), as amended (22) (23)
10.83 Letter Agreement dated as of September 18, 1997 among the Company and
Wells Fargo Bank, N.A. (20)
10.84 Asset Purchase Agreement dated as of September 26, 1997 among American
Foodservice Distributors, Orlando Foodservice, Inc., Capricorn Foods
of Central Florida, Inc., Michael Altif and Frederick Coe (20)
10.85 Asset Purchase Agreement dated as of September 26, 1997, among American
Foodservice Distributors and Continental Grain Company (20)
10.86 Supplemental Executive Retirement Plan Master Plan Document (26)*
10.87 Stock Purchase Agreement dated as of January 5, 1998, among American
Foodservice Distributors and Sternlieb Family Investments, Ltd. (21)
10.88 Consulting Agreement dated as of January 5, 1998, among Henry Lee
Company and Edward I. Sternlieb (21)
10.89 Long-Term Equity Compensation Plan of the Company (26)*
10.90 Separation Agreement and Mutual General Release among the Company and
Mr. Laverty (21)*
10.91 Agreement Between Smart & Final Foodservice Distributors and Food
Distributors Employee Association dated as of April 1, 1998 (22)
10.92 Credit Agreement (Bridge Loan) dated as of April 30, 1998 by and among
the Company and Credit Lyonnais Los Angeles Branch (23)
10.93 Asset Purchase Agreement dated May 15, 1998 by and among the Company and
United Grocers, Inc. (23)
10.94 Office Lease dated as of April, 1998 by and among the Commerce Citadel
Development Authority and Smart & Final Stores Corporation (23)

54

10.95 Participation Agreement dated as of May 20, 1998 by and among the
Company, Smart & Final Realty Trust 1998, Credit Lyonnais Los Angeles
Branch, as Agent, and the Lenders named therein (Certified Property)
(23)
10.96 Trust Agreement dated as of May 13, 1998, by and among Credit Lyonnais
Leasing Corp. and Wilmington Trust Company (23)
10.97 Lease and Agreement dated as of May 20, 1998 by and among Smart & Final
Realty Trust 1998 and Smart & Final Inc. (23)
10.98 Loan Agreement dated as of May 20, 1998 by and among Smart & Final
Realty Trust 1998, Credit Lyonnais Los Angeles Branch, as Agent, and
the Lenders named therein (23)
10.99 First Waiver (Credit Agreement) dated as of July 22, 1998 by and among
the Company and Credit Lyonnais Los Angeles Branch, as Agent (24)
10.100 First Waiver (Bridge Loan Credit Agreement) dated as of July 22, 1998
by and among the Company and Credit Lyonnais Los Angeles Branch, as
Agent (24)
10.101 First Waiver (1994 Participation Agreement) dated as of July 22, 1998 by
and among the Company, Smart & Final Stores Corporation, Port Stockton
Food Distributors, Inc., State Street Bank and Trust Company of
California, N.A., Credit Lyonnais Leasing Corp., Credit Lyonnais Los
Angeles Branch, as Agent, and various lenders named therein (24)
10.102 First Waiver (1997 Participation Agreement) dated as of July 22, 1998 by
and among the Company, Smart & Final Stores Corporation, Port Stockton
Food Distributors, Inc., State Street Bank and Trust Company of
California, N.A., Credit Lyonnais Leasing Corp., and Credit Lyonnais
Los Angeles Branch, as Agent (24)
10.103 First Waiver (1998 Participation Agreement) dated as of July 22, 1998 by
and among the Company, Smart & Final Realty Trust 1998-1, Wilmington
Trust Company, Credit Lyonnais Leasing Corp., and Credit Lyonnais Los
Angeles Branch, as Agent (24)
10.104 Employment Agreement dated as of September 1, 1998 by and among Smart &
Final Inc. and Phillip E. Hawkins* (24)
10.105 Second Waiver (Credit Agreement) dated as of October 1, 1998 by and
among the Company and Credit Lyonnais Los Angeles Branch, as Agent
(24)
10.106 Second Waiver (Bridge Loan Credit Agreement) dated as of October 1,
1998 by and among the Company and Credit Lyonnais Los Angeles Branch,
as Agent (24)
10.107 Second Waiver (1994 Participation Agreement) dated as of October 1, 1998
by and among the Company, Smart & Final Stores Corporation, Port
Stockton Food Distributors, Inc., State Street Bank and Trust Company
of California, N.A., Credit Lyonnais Leasing Corp., Credit Lyonnais
Los Angeles Branch, as Agent, and various lenders named therein (24)
10.108 Second Waiver (1997 Participation Agreement) dated as of October 1, 1998
by and among the Company, Smart & Final Stores Corporation, Port
Stockton Food Distributors, Inc., State Street Bank and Trust Company
of California, N.A., Credit Lyonnais Leasing Corp., and Credit
Lyonnais Los Angeles Branch, as Agent (24)
10.109 Second Waiver (1998 Participation Agreement) dated as of October 1, 1998
by and among the Company, Smart & Final Realty Trust 1998-1,
Wilmington Trust Company, Credit Lyonnais Leasing Corp., and Credit
Lyonnais Los Angeles Branch, as Agent (24)
10.110 Loan Agreement dated as of November 13, 1998 by and among the Company
and Casino USA, Inc. (24)
10.111 Promissory Note dated as of November 13, 1998 (24)
10.112 Credit Agreement dated as of November 13, 1998 by and among the Company,
the financial institutions and other entities listed as Lenders,
Credit Lyonnais Los Angeles Branch, as Administrative Agent, and as
Co-Lead Arranger, Nationsbanc Montgomery Securities LLC, as
Syndication Agent and Credit Lyonnais New York Branch, as L/C Bank
(24), as amended
10.113 Participation Agreement dated as of November 13, 1998 by and among the
Company as Lessee and Construction Agent, various parties from time to
time as Guarantors, First Security Bank, National Association, various
banks and other lending institutions as Holders and Lenders, and
Credit Lyonnais Los Angeles Branch as Administrative Agent (24)
10.114 Stock Warrant Agreement dated as of February 17, 1998, by and among the
Company and Mr. Emmons, as amended(25)*
10.115 First Amendment to Revolving Credit Agreement and Synthetic Lease Credit
Agreement dated as of December 23, 1998(25)

55

10.116 First Waiver and Consent to Extension of Time in connection with
Revolving Credit Agreement and Synthetic Lease Credit Agreement dated
as of January 13, 1999(25)
10.117 Waiver to Loan Agreement dated as of February 17, 1999 between the
Company and Casino USA, Inc.(25)
10.118 Second Amendment and Conditional Waiver in connection with Revolving
Credit Agreement and Participation Agreement dated as of March 12,
1999(25)
10.119 Employment Agreement between the Company and Ross E. Roeder dated May
11, 1999(27)*
10.120 Smart & Final Non-Employee Director Stock Plan, as amended(27)
10.121 Standby Purchase Agreement between the Company and Casino USA, inc.
dated as of May 10, 1999(27)
10.122 Third Amendment to Participation Agreement and Amendment to Revolving
Credit Agreement dated as of June 23, 1999(27)
10.123 Addendum to Promissory Note, dated June 11, 1999 by Smart & Final Inc.
on Behalf of Casino USA, Inc.(27)
10.124 Extension of Employment Agreement between the Company and Mr. Lynch
dated September 10, 1999*
21 Subsidiaries
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule

- -------------------

(1) Incorporated herein by reference to the corresponding Exhibit number in
the Company's Registration Statement on Form S-1 (Registration No. 33-
41103) which became effective on July 30, 1991.
(2) Incorporated herein by reference to the corresponding Exhibit number
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, which was filed on
March 30, 1992.
(3) Incorporated herein by reference to the corresponding Exhibit number
in the Company's Annual Report for the fiscal year ended December 29,
1991 on Form 10-K, which was filed on March 24, 1992.
(4) Incorporated herein by reference to the corresponding Exhibit number
in the Company's Annual Report for the fiscal year ended January 3,
1993 on Form 10-K, which was filed on March 30, 1993.
(5) Incorporated herein by reference to the corresponding Exhibit number
in the Company's Quarterly Report for the quarter ended October 10,
1993 on Form 10-Q, which was filed on November 22, 1993.
(6) Incorporated herein 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, which was filed on April 4, 1994.
(7) Incorporated herein by reference to the corresponding Exhibit number
in the Company's Quarterly Report for the quarter ended March 27, 1994
on Form 10-Q, which was filed on May 5, 1994.
(8) Incorporated herein by reference to the corresponding Exhibit number
(except for Exhibit number 10.36 which was filed as Exhibit number 2)
in the Company's Quarterly Report for the quarter ended October 9,
1994 on Form 10-Q, which was filed on November 23, 1994.
(9) Incorporated herein by reference to the corresponding Exhibit number
in the Company's quarterly report for the quarter ended March 26, 1995
on Form 10-Q which was filed on May 4, 1995.
(10) Incorporated herein by reference to the corresponding Exhibit number
in the Company`s Quarterly Report for the quarter ended October 8,
1995 on Form 10-Q which was filed on November 22, 1995.
(11) Incorporated by reference to the corresponding Exhibit number in the
Company's Annual Report for the year ended January 1, 1995 on Form 10-
K which was filed on April 3, 1995.
(12) Incorporated by reference to the corresponding Exhibit number in the
Company's Annual Report for the year ended December 31, 1995 on Form
10-K which was filed on March 29, 1996.
(13) Incorporated herein by reference to the corresponding Exhibit number
in the Company's quarterly report for the quarter ended March 24, 1996
on Form 10-Q which was filed on May 1, 1996.
(14) Incorporated herein by reference to the corresponding Exhibit number in
the Company's quarterly report for the quarter ended June 16, 1996 on
Form 10-Q which was filed on July 31, 1996.

56

(15) Incorporated herein by reference to the corresponding Exhibit number in
the Company's Definitive Proxy Statement dated February 19, 1997 in
connection with a Special Meeting of Shareholders of the Company held
March 19, 1997, which was filed on February 19, 1997.
(16) Incorporated by reference to the corresponding Exhibit number in the
Company's Annual Report for the year ended December 29, 1996 on Form
10-K which was filed on March 25, 1997.
(17) Incorporated herein by reference to the corresponding Exhibit number
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, which was filed on April 8, 1997.
(18) Incorporated herein by reference to the corresponding Exhibit number
in the Company's Quarterly Report for the quarter ended March 23, 1997
on Form 10-Q, which was filed on May 2, 1997.
(19) Incorporated herein by reference to the corresponding Exhibit number
in the Company's Quarterly Report for the quarter ended June 15, 1997
on Form 10-Q, which was filed on July 29, 1997.
(20) Incorporated herein by reference to the corresponding Exhibit number in
the Company's Quarterly Report for the quarter ended October 5, 1997 on
Form 10-Q, which was filed on January 4, 1998.
(21) Incorporated by reference to the corresponding Exhibit number in the
Company's Annual Report for the year ended January 4, 1998 on Form 10-
K which was filed on April 13, 1998.
(22) Incorporated herein by reference to the corresponding Exhibit number
in the Company's Quarterly Report for the quarter ended March 29, 1998
on Form 10-Q, which was filed on May 12, 1998.
(23) Incorporated herein by reference to the corresponding Exhibit number
in the Company's Quarterly Report for the quarter ended June 21, 1998
on Form 10-Q, which was filed on August 12, 1998.
(24) Incorporated herein by reference to the corresponding Exhibit number in
the Company's Quarterly Report for the quarter ended October 11, 1998 on
Form 10-Q, which was filed on November 25, 1998.
(25) Incorporated herein by reference to the corresponding Exhibit number in
the Company's Annual Report for the year ended January 3, 1999 on Form
10-K which was filed on March 24, 1999
(26) Incorporated herein by reference to the corresponding Exhibit number in
the Company's Quarterly Report for the quarter ended March 28, 1999 on
Form 10-Q, which was filed on May 3, 1999
(27) Incorporated herein by reference to the corresponding Exhibit number in
the Company's Quarterly Report for the quarter ended June 20, 1999 on
Form 10-Q, which was filed on August 3, 1999

*Management contracts and compensatory plans, contracts and arrangements of the
Company.

(b) Reports on Form 8-K:

None

57

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 March 13, 2000.
---------------

Smart & Final Inc.

By: /s/ Martin A. Lynch
----------------------
Martin A. Lynch
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on March
-----
13, 2000.
- --------

/s/ Ross E. Roeder Chairman of the Board and Chief Executive
------------------ Officer
Ross E. Roeder

/s/ Martin A. Lynch Executive Vice President, Chief Financial
------------------- Officer, and Principal Accounting Officer
Martin A. Lynch

Director
------------------
Pierre Bouchut

/s/ Christian Couvreux Director
----------------------
Christian Couvreux

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

/s/ Joel-Andre Ornstein Director
-----------------------
Joel-Andre Ornstein

Director
----------------------
Thomas G. Plaskett

/s/ Etienne Snollaerts Director
----------------------
Etienne Snollaerts

58

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Smart & Final Inc.:

We have audited in accordance with generally accepted auditing standards in
the United States, the consolidated financial statements of Smart & Final Inc.
and subsidiaries included in this Form 10-K and have issued our report thereon
dated February 15, 2000. 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
February 15, 2000

59

SMART & FINAL INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

For the Fiscal Years 1999, 1998 and 1997

Balance at
Beginning Acquisition Balance at
of Period of Business Additions Deductions End of Period
------------- ------------- ------------- ------------- -------------

Fiscal year 1999:
Allowance for doubtful accounts....... $ 3,660,000 $ -- $ 4,039,000 $ 3,012,000 $ 4,687,000
============= ============= ============= ============= =============
Inventory realizable value allowance.. $ 2,937,000 $ -- $ 418,000 $ 400,000 $ 2,955,000
============= ============= ============= ============= =============

Fiscal year 1998:
Allowance for doubtful accounts....... $ 5,518,000 $ 334,000 $ 3,777,000 $ 5,969,000 $ 3,660,000
============= ============= ============= ============= =============
Inventory realizable value allowance.. $ 1,851,000 $ 1,000,000 $ 1,148,000 $ 1,062,000 $ 2,937,000
============= ============= ============= ============= =============

Fiscal year 1997:
Allowance for doubtful accounts....... $ 2,568,000 $ 507,000 $ 4,354,000 $ 1,911,000 $ 5,518,000
============= ============= ============= ============= =============
Inventory realizable value allowance.. $ 765,000 $ 100,000 $ 1,000,000 $ 14,000 $ 1,851,000
============= ============= ============= ============= =============

60