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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-K

(Mark one)

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.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

As of June 16, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of Common Stock held by non-affiliates of the registrant based on the closing price of the Common Stock on the New York Stock Exchange composite tape was  $89,383,000 (“non-affiliates” excludes for this purpose executive officers, directors and the registrant’s majority shareholder).

As of March 11, 2003, the registrant had outstanding 29,443,198 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Smart & Final Inc.’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held May 22, 2003 are incorporated by reference into Parts II & III of this Form 10-K.

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SMART & FINAL INC.

INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 29, 2002

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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 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 our management which, although believed to be reasonable, are inherently uncertain and difficult to predict; therefore, undue reliance should not be placed upon such statements. Actual results may differ materially and adversely from such statements due to known and unknown factors.  The following important factors, among others, could cause our results of operations to be materially and adversely affected in future periods:

          Many of these factors are beyond our control.  There can be no assurance that we will not incur new or additional unforeseen costs in connection with the ongoing conduct of our business.  Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized.  Additional information regarding these factors and other risks is included in Item 1. Business - Risk Factors.

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PART I

Item 1.     Business

General

          Smart & Final Inc. is a Delaware corporation incorporated in 1991 and headquartered in Commerce, California that conducts its business through various subsidiaries.  References in this report to “we”, “our” and “us” are to Smart & Final Inc. and its subsidiaries, collectively.

          Our predecessors began operations in 1871 in Southern California and pioneered the “cash-and-carry” concept in the wholesale grocery business.  We sell food, foodservice products and professional-quality culinary equipment through warehouse stores, wholesale stores and broadline foodservice distribution businesses.  In 2002, we had total sales of $2.0 billion and at the end of 2002, we had approximately 5,900 employees.

          Our operations include the non-membership warehouse grocery stores segment (“Stores”) and the broadline foodservice distribution segment (“Foodservice”).

          The following table shows the approximate percentage of our sales accounted for by each major category of items sold during fiscal years 2002 and 2001:

          We present financial information about our Stores and broadline Foodservice operating segments in Note 12 to the Consolidated Financial Statements included in this report.

Stores

          We operated 231 non-membership warehouse grocery stores at fiscal year end 2002 through our principal subsidiary, Smart & Final Stores Corporation, a California corporation and related entities.  These stores operate under the banners “Smart & Final” and “United Grocers Cash & Carry” (“Cash & Carry”).  In 2002, our Stores’ sales totaled $1.6 billion.

          Our 100%-owned subsidiary, Smart & Final de Mexico S.A. de C.V. (“Smart & Final Mexico”), is a Mexican holding company that owns 50% of a joint venture with the operators of the Calimax store chain.  The joint venture operates nine stores in Mexico as a Mexican domestic corporation under the name Smart & Final del Noroeste, S.A. de C.V. and the average selling

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square feet of these stores as of the end of 2002 was 17,952.  The Mexico joint venture operations are not consolidated and are reported on the equity basis of accounting.

          Our stores offer a consistent selection of approximately 7,000 to 9,000 food items, supplies and equipment, primarily in institutional sizes and quantities, targeted at small foodservice businesses and other business customer groups.  Our Smart & Final stores also attract value-oriented retail customers who prefer to purchase items in larger sizes or quantities.  We strategically position our stores in a substantial niche market between membership warehouse clubs and traditional foodservice operators.  With an average size of approximately 17,500 square feet, our stores’ smaller footprint enables us to locate a greater number of stores in urban neighborhoods than warehouse club operators, which in turn provides a faster, more convenient shopping experience for our customer. 

          We have experienced significant sales growth despite the expansion of the warehouse club industry in the same geographic markets.  We attribute such sales growth to our commitment as a key supplier for the needs of small and mid-sized independent foodservice operators.  Our stores are competitive by offering convenience, attractive pricing, a wide and consistent assortment including high quality corporate brand items, and a high level of customer service.  Our specific focus on foodservice operators, while being attentive to the needs of retail customers, enables us to react quickly to changing market requirements and customer needs.  We believe these strategies, together with our unique retail/wholesale concept, provide greater overall value than the competition.

          Stores under the Smart & Final banner include 186 stores primarily located in California with others in Florida, Arizona and Nevada.   Our Cash & Carry stores currently operate 45 stores in Washington, Oregon, northern California and Idaho.

          The following is a summary of our stores by state as of the end of the fiscal years indicated:

          During 2002, we opened ten new stores and relocated two stores.  Additionally, we remodeled 36 existing stores.  We continually evaluate the strategic potential and performance of each store and overall market outlook, including consideration of planned new stores within the same market areas to determine if any store should be closed or relocated.  During 2002, we closed five stores, of which two were relocated within their same market areas.  We plan to continue expansion through relocations and remodels of existing stores and new store openings.

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Merchandising

Customers and market

          Smart & Final stores serve two primary customer bases: businesses and household consumers.  Many restaurants, caterers, businesses, clubs and organizations shop at Smart & Final stores for their foodservice product needs.  Household consumers shop at Smart & Final stores for the same features that foodservice professionals enjoy: everyday low warehouse prices, smaller warehouse format to facilitate quick and easy shopping, and professional-quality products.  Our Cash & Carry stores are targeted to serve only business customers, primarily restaurants, caterers and small businesses.  The Cash & Carry stores feature low prices, convenient locations and broad product assortment for both primary and fill-in needs.

Product assortment and quality

          Each of our stores carries approximately 7,000 to 9,000 assorted food and related items in bulk sizes and quantities.  The stores offer customers a wide product selection in a hybrid, retail/wholesale format for our Smart & Final stores and a wholesale only format for our Cash & Carry stores.  Our product selection includes grocery, frozen and refrigerated foods, delicatessen products, fresh produce, paper products, janitorial supplies, restaurant equipment, tobacco, candy, snacks, beverages and party supplies.  We evaluate our products regularly based on formalized profitability reviews and identify items that should be added or removed.  We believe the size, consistency and depth of our product assortment satisfies our customers’ needs.

          Product quality is important for our stores product assortment.  Our quality assurance department strives to insure that our high standards are maintained for all corporate brands and products.

Corporate brand positioning

          Our stores sell our corporate brands within most merchandise categories, providing a competitive alternative to national brands.  We position our corporate brands to create brand loyalty and establish an ongoing customer relationship.  Furthermore, we believe foodservice customers purchase based on a quality/value/price perception.  Our corporate brands target leading competitive brands with attention to quality and value.  In addition, the margin contribution from corporate brands is generally higher than the comparable national brand product.

          During 2002, the sales and margin contribution of our corporate brands program continued to grow.  The core program consists of a three-quality-tiered structure, analogous to competitive programs.  The SmartBuy® Brand is a standard grade brand positioned as “the price leader”; Smart & Final®, our national brand quality equivalent, is a consistent, quality-driven, competitively priced brand; and Smart & Final Premium Brand® represents the highest quality within the product line.  There are approximately 1,300 stock keeping units represented by these brands.

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          In addition to the core corporate brands program, we actively market our assortment of signature brands.  The Montecito® line of Hispanic products and the La Romanella® line of Italian products represent signature brands designed to reach niche ethnic markets while enhancing our core products.  Other key signature brands include First Street Deli™, a full line of delicatessen products, First Street Butcher Shop™ meats and First Street Dairy™, which includes milk and other dairy products.  In addition, Snack’rs®, a full line of salty snacks, along with Tradewinds™ spices and seasonings complete our signature brands offering.

          Three additional signature brands were introduced in 2002, including Ambiance®, a complete coffee and hot beverage program; Davis Lay™ produce and Signature Bakeries, a full line of baked goods.  We plan to develop additional signature brands and brand enhancements in 2003.

Pricing

          We attempt to identify and establish competitive pricing on key items in local markets including competitive pricing against warehouse club stores.  Our pricing strategy is carefully coordinated with our overall assortment strategy and with other marketing programs.  Incentives encourage customers to purchase the largest sizes and case quantities, which helps maximize operating efficiencies within the distribution system.  In addition, our corporate brand items offer distinct price and value advantages over comparable national brands.

Customer service

          Our stores focus 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 easy to read signage.  Our stores also maintain a high in-stock service rate; high product quality; high level of cleanliness; friendly, responsible and knowledgeable personnel; and point-of-sale support.  In addition, we take customers’ special orders for a wide variety of products not carried regularly in our product assortment.

          We utilize customer service representatives, provide informative customer materials, and emphasize employee training that builds customer loyalty. We have an employee training program designed to increase store employees’ retailing expertise and product knowledge. Our in-house training center provides employees with the opportunity to build their knowledge and acquire additional skills.

Marketing

          Our marketing efforts for Smart & Final stores are focused on building brand awareness to encourage trial and retrial and on strengthening customer relationships to build repeat visits and to increase average purchase dollars.  We build brand awareness with broad-reach advertising, public relations efforts and strong, market-entry promotional programs.  We enhance our customer relationships with loyalty card programs, targeted marketing and local store events.  Our strong advertising and direct mail program focuses on our key strengths: value, convenience and professional-quality products.  These attributes make our Smart & Final stores the smaller,

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faster warehouse stores where customers save time and money.  Our Cash & Carry stores primarily utilize direct mail advertising to reach our business customers and targeted new customers.  We encourage our suppliers to participate in our marketing programs, thereby reducing our net marketing costs.

Store design and size

          Our stores are designed as convenient warehouse stores dedicated to easing the shopping experience.  For the last three years, new and relocated stores have ranged from 11,000 to 27,000 square feet.  Our stores are organized into dry grocery, beverages, frozen foods, dairy/deli, janitorial, equipment and supplies, candy, snacks, party supplies and other departments.  In addition, prototype designs are improved continually to enhance traffic flow, space utilization, departmentalization, adjacencies of merchandise, and overall visual appeal without diluting the convenient warehouse image.

Operations

Procurement

          We believe our 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 integrated to the purchasing program. 

          Our Smart & Final stores continually utilize the efficiencies provided by cooperative buying organizations to facilitate low cost purchasing.  These buying alliances supplement the normal buying activities of each distribution center.  We strive to maintain close working relationships with our major suppliers to reduce product and distribution costs. During 2002, we bought from approximately 1,800 different suppliers.   We are continuing a process of consolidating procurement of national brand products, corporate brand products and signature brand products for all Stores and broadline Foodservice units.  In 2002, we negotiated several national procurement agreements with suppliers, which reduced costs and increased merchandise margins.

          Our Cash & Carry stores buy the majority of their products through a service agreement with Unified Western Grocers, Inc. (“UWG”), a grocery cooperative located in Portland, Oregon.  During 2002, Cash & Carry stores purchased approximately 77% of their product requirements from UWG.   The service agreement with UWG expires in May 2003.  We are currently evaluating various options regarding future product procurement for our Cash & Carry stores, including entering into a new service agreement with UWG.

          We have not had any significant difficulties in the past, and do not expect any difficulties in the future, in obtaining products from suppliers or distributors.

Distribution

          We support 133 Smart & Final stores in southern California, Arizona and Nevada and nine Smart & Final Mexico stores from a 445,000 square foot distribution center in Commerce,

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California.  Our Commerce distribution center operates a fleet of 37 tractors and 156 trailers that are either owned or leased.  When possible, we increase the efficiency of our fleet by filling outbound trucks to capacity and utilizing a backhaul program for inbound deliveries.

          Our broadline Foodservice distribution facilities located in Stockton, California serve 39 Smart & Final stores.  Our broadline Foodservice distribution facilities located in Miami, Florida serve 14 Florida Smart & Final stores.

          The 45 Cash & Carry stores in the Pacific Northwest are primarily served through a service agreement with UWG.

          Other methods of distribution to our stores include service agreements with outside freezer facilities for distribution of frozen and deli products and direct shipments from suppliers to the stores that include mostly bakery, soda, dairy and produce.

          We utilize computerized inventory management systems, radio frequency technology, and integrated labor management systems in our warehouses.

Broadline Foodservice

          We operate our northern California and Florida broadline foodservice distribution businesses through a holding company, American Foodservice Distributors, a California corporation.  American Foodservice Distributors owns Port Stockton Food Distributors, Inc., a California corporation, Henry Lee Company, a Florida corporation, and two meat processing and distribution divisions in Florida, Southern Foods and Orlando Foodservice.  The operations of Southern Foods were combined with the operations of Orlando Foodservice and Henry Lee Company as of the end of 2002.  Port Stockton Food Distributors, Inc., headquartered in Stockton, California, conducts business under the name Smart & Final Foodservice Distributors (“Smart & Final Foodservice”).  Smart & Final Foodservice also owns Davis Lay and Craig and Hamilton branded operations that operate produce and meat processing facilities, respectively, in northern California.  Henry Lee Company, headquartered in Miami, Florida, and American Foodservice Distributor’s two Florida operating divisions, Southern Foods and Orlando Foodservice, are collectively referred to as “Florida Foodservice”.  In 2002, our broadline Foodservice operations had total sales of $385.4 million.

Merchandising

Customers and market

          Our broadline Foodservice’s core business is distribution of food and non-food products to approximately 5,500 foodservice customers such as restaurants, coffee shops, hotels, cruise ships and institutions.  In northern California, Smart & Final Foodservice’s market area covers mainly northern and central California.  Florida Foodservice serves foodservice operator customers primarily located in the State of Florida and certain markets in the Caribbean and central and South America.

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Product assortment and quality

          Our broadline Foodservice’s full-line assortment features dry grocery, frozen foods, fresh meat, deli products, produce, health and beauty aids, paper and packaging, janitorial supplies and restaurant equipment and supplies. Our broadline Foodservice distributes national-brand, private-label, and our corporate brand and signature brand merchandise and products.  We believe the quality, consistency and depth of our product assortment satisfy our broadline Foodservice customers’ needs.

Customer service

          In addition to a broadline assortment, our broadline Foodservice provides to the customers services including product delivery, extension of credit and ancillary services such as restaurant equipment and supplies.  We believe the ability to accurately deliver a full-line assortment of products and services on a dependable basis is critical to securing new customers and retaining existing customer market share.

Operations

Procurement

          Our purchasing policies and procedures result in costs that we believe are comparable to other broadline foodservice distributors.  Through Henry Lee Company and Smart & Final Foodservice subsidiaries, we are a large member of UniPro Foodservice, Inc., a buying group with annual member sales of over $16 billion.  We are also a member of the DMA Major Account sales group.  Our broadline Foodservice utilizes the efficiencies provided by these buying organizations as well as our consolidated procurement program for national brand products, corporate brand products and signature brand products.

Distribution

          In northern California, Smart & Final Foodservice operates two dry grocery facilities in Stockton totaling 385,000 square feet and a 23,000 square-foot meat processing facility.  Additionally, Smart & Final Foodservice has leased space with warehouse services to provide frozen and refrigerated distribution to its customers.  These facilities serve our broadline Foodservice’s 2,500 customers in northern and central California, as well as 39 Smart & Final stores.  Smart & Final Foodservice operates a fleet of 70 tractors, 98 refrigerated trailers and 29 vans that are either owned or leased.

          In Florida, Florida Foodservice serves its 3,000 customers and 14 Smart & Final stores from a 230,000 square foot dry and refrigerated grocery distribution center and a 99,000 square foot frozen food facility in Miami, Florida.  Florida Foodservice operates a leased fleet of 57 tractors, 75 refrigerated trailers and three refrigerated straight trucks.

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Competition

          We participate in the dynamic and highly competitive $180 billion annual sales, domestic food distribution industry.  Our competitors include

          Many of our competitors have greater financial, distribution, marketing and other resources.

          Our three major warehouse stores competitors are Costco Wholesale Corporation, BJ’s Wholesale Club and the SAM’s Club division of Wal-Mart Stores, all of which require membership.  The warehouse stores industry has experienced intense price competition, product innovation and rapid store growth over the past several years.  We believe that we compete effectively with membership warehouse stores by offering a broader and more consistent foodservice assortment, more convenient shopping facilities and locations, a high level of customer service and competitive pricing. 

          Competition from supermarket chains continues to increase as such chains emphasize price, service and convenient locations, while widening their assortment of goods, lowering prices and increasing promotion, to more effectively compete with warehouse stores and supercenters.

          The traditional wholesale foodservice distribution market, in which our broadline Foodservice segment and Cash & Carry stores operate and in which Smart & Final stores compete to a lesser extent, is very competitive and highly fragmented.  Major competition consists of national wholesale distributors such as Sysco Corporation, Performance Food Group, the U.S. Foodservice division of Ahold USA and many smaller, regional distributors and independent wholesalers.  The top 50 broadline distributors are believed to represent approximately 35% of the total foodservice distribution market.

Management Information Systems

          We have made substantial investments in new systems during the past several years, and expect to continue to invest in business technology as a means to enhance our competitive position.

          Our investment focus is on operational systems and data warehousing that streamline data collection and reporting systems across all lines of the business.   We expect these new systems will help increase profitability, better position our pricing strategy and focus on the most important needs of customers while enabling us to be more efficient and responsive to current business trends.

          Our purchasing system enables buyers to manage turnover, buy inventory efficiently, achieve targeted gross margin objectives, track rebates and allowances by vendor, and maintain

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targeted service levels. The merchandising system enables store assortment to be customized to the needs and characteristics of individual market areas, maximizes gross margin return on investment by item and product category and increases inventory turn.  The pricing systems allow the assortment to be managed in accordance with the marketplace. The distribution system manages warehouse inventories and store order selection and measures enterprise labor productivity.  We believe that the past year’s efforts which have primarily focused on the point of sale systems and the timely availability of detailed transactional data have established us as a leader in the customer information management arena. These systems will allow us to address individual customer’s needs, improve margin and react to both cost and market changes.

Human Resources

          We strongly emphasize career development and retention of our employees.  We strive to maintain the culture of a highly focused and innovative organization that maximizes employee productivity and contributions.  We actively recruit and offer training opportunities to employees in order to develop qualified candidates for managerial positions as vacancies occur.

          Employee training and development programs through our own training facilities encompass all levels of store operations, from entry through management, and emphasize merchandising techniques and customer service goals to ensure top employee quality and productivity.  We reward superior performance and motivate employees with incentive pay and stock option programs.  Stores managers and employees receive periodic or annual bonuses based on the achievement of specific operating goals. Sales employees in the broadline Foodservice segment receive sales incentives and employees at the distribution centers receive productivity incentives.

          Approximately 100 hourly employees employed by 17 Cash & Carry stores are covered by a labor contract with the International Brotherhood of Teamsters.  Smart & Final Foodservice is party to an agreement with its Food Distribution Associates Association, representing approximately 230 employees, which contains certain procedures and policies with respect to management and employee relations. 

          At the end of fiscal year 2002, we employed approximately 5,940 employees, including 4,610 at Smart & Final stores, 350 at Cash & Carry stores, 510 at Smart & Final Foodservice, and 470 at Florida Foodservice.  About one-half of our employees are part-time employees.  We consider our relations with our employees to be good.

Government Regulation

          We are subject to regulations enacted by federal, state and local regulatory agencies, including the U.S. Food and Drug Administration and U.S. Department of Agriculture.  These regulations include, but are not limited to, trade practices, labor, health, safety, transportation, environmental protection and regulations related to the sale and distribution of alcoholic beverages, tobacco products, milk, agricultural products, meat products and other food products.  Compliance with these regulations has not had a material effect on our financial position or results of operations.

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Risk Factors

Competition

          We operate in the highly competitive warehouse grocery stores and broadline foodservice distribution industry.  If we fail to successfully respond to competitive pressures in this industry, or to effectively implement our strategies to respond to these pressures, our operating results may be negatively affected.  Many of our competitors have greater financial, distribution, marketing and other resources.  Heightened competition among our suppliers, increased shopping alternatives and trends toward vertical integration could create additional competitive pressures. These factors could result in price reductions, reduced sales and margins or loss of market share, any of which could negatively impact our results of operations.

Susceptibility to changes in business and economic conditions

          We operate in an industry characterized as high sales volume and low profit margin which is sensitive to national and regional business and economic conditions.  We cannot fully foresee the changes in business and economic conditions, which may result from domestic reasons or foreign unrest.  Our profitability is dependent on sales growth and control over merchandise, distribution and occupancy costs and operating and administrative expenses.

Changes in legislation or regulation

          Changes in legislation and regulations related to accounting standards, taxation laws, labor laws, environment laws and the sale and distribution of food products may have a material impact on our financial conditions or results of operations.

Operational inefficiencies

          Our efforts to maintain and improve our operational efficiency are largely dependent on the expertise and experience of our senior management and various key employees.  The failure to attract and retain qualified employees in the future could have a material adverse effect on our business.

Inability to execute our stores expansion plan

          An element of our growth strategy is to continue expansion through new store openings and relocations and remodels of existing stores.  Our success in executing this expansion plan is dependent on our ability to locate and obtain favorable store sites, open new or relocated stores in a timely manner and adapt distribution, management information and other operating systems sufficiently to support store expansion in an efficient and profitable manner.

Unforeseen claims and litigation matters

          We may face various claims and litigation in the future and if proven the impact may be serious.  These claims could arise from 1) our employees, including wage disputes, discrimination, working condition and work-related injuries; 2) our customers, including

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problems with the quality, safety or integrity of the food products we sell or our services; 3) governments for non-compliance of legislation and regulations; and 4) our suppliers for non-compliance of any purchase agreement.  Any of these events could result in significant costs, loss of customers and/or could harm our ability to market and sell our food and related products.

Debt and capital resources

          Our bank credit facility and lease facility contain financial covenants and other restrictions that limit our operating flexibility.  As of December 29, 2002, we were not in compliance with certain of these covenants.  In February 2003, we obtained waivers of non-compliance as of December 29, 2002 and an amendment of certain covenants for the first quarter of 2003.  We intend to negotiate and enter into amended bank credit facility and lease facility agreements during 2003.  If we are unable to negotiate and enter into amended bank credit facility and lease facility agreements, we may be required to renegotiate the terms of the waivers or seek alternative means of financing such obligations.  If we are unable to generate sufficient cash flows to service our debt and lease obligations, or if future borrowings or equity financing are not available to us for the payment or refinancing of our debt, our operating results may be adversely impacted.

Website

          Our website on the World Wide Web, http://www.smartandfinal.com, enables online purchases and provides information about us, menus, recipes and general tips on cooking and entertaining.  Our website features a catalog of professional-quality kitchen equipment and supply items; janitorial, maintenance and safety supplies; and a broad assortment of Tradewinds™ spices for sale online.  Customers also can locate their nearest store, view current product specials and sample menus and recipes for entertaining, learn about our broadline Foodservice distribution business and review our history, financial information and job opportunities

Available Information

          We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (“Exchange Act”).  The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Also, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC.  The public can obtain any documents that we file with the SEC at http://www.sec.gov.  We also make available free of charge on, or through our Internet website  http://www.smartandfinal.com, these reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC:

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Item 2.     Properties

          As of fiscal year end 2002, our Stores segment leased 153 store properties directly from third party lessors and had eight stores on real property that is ground leased from third party lessors.  These leases had an average remaining lease term of nine years as of fiscal year end 2002.  At year end, we leased 15 store properties under a lease agreement described below.  The remaining 55 store properties are owned.

          We occupy a 445,000 square foot distribution facility in Commerce, California that is leased under the lease agreement described below.  We maintain our headquarters in an 81,000 square foot leased facility in Commerce, California.

          In northern California, Smart & Final Foodservice supports its customers from a 285,000 square foot distribution facility for dry grocery and produce leased under the lease agreement described below. Additional dry grocery warehouse space in northern California includes a 100,000 square foot facility that is currently under negotiation for lease renewal.  Smart & Final Foodservice also operates its Craig and Hamilton branded meat processing from a leased facility of 23,000 square feet, with a remaining term of three and a half years.  These facilities are located in Stockton, California.  In Tracy, California, Smart & Final Foodservice leases freezer space with warehouse services provided by the lessor for frozen food receiving and storage under a three-year lease started in 2002.

          In Florida, Florida Foodservice operates a 230,000 square foot warehouse in Miami, Florida, including 22,000 square feet of office space.  Florida Foodservice also occupies 7,600 square feet of space used as a maintenance facility for its fleet.  Both of these facilities are leased from the former owners of Henry Lee Company.  These leases expire in August 2005.  Florida Foodservice also operates a 99,000 square foot frozen food facility in Miami, Florida that is leased under the lease agreement described below.

          We plan to continue to lease properties, but also may elect to own some of the new stores on an interim or permanent basis.  We have a lease facility that covers the lease of 15 store locations and three distribution facilities located in California and Florida.  The total value under this lease facility aggregates $87.0 million.  See “Liquidity and Capital Resources” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a further discussion of this lease facility.

Item 3.     Legal Proceedings

          We have been named as a defendant in a suit filed on September 13, 2001 in the Superior Court of the State of California for the County of Los Angeles.  This suit, Sergio Camacho vs. Smart & Final Inc., was filed by the plaintiff, on his behalf and on behalf of all other store managers and assistant managers in California, alleging that we misclassified the status of store managers and assistant managers in California as exempt employees for employment purposes.  The action seeks to be classified as a “class action” and seeks unspecified monetary damages.

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The merits of this action are being actively investigated and (a) we believe that the merits of this action do not warrant class action status; (b) we believe we have certain defenses to the claim; and (c) we are unable to assess the ultimate determination of this action and what effect, if any, that may result.

          We are the defendant in a number of other lawsuits or are otherwise a party to certain litigation arising in the ordinary course from our operations.  We do not believe that the ultimate determination of these cases will either individually or in the aggregate have a material adverse effect on our results of operations or financial position.

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

          There were no matters submitted to our security holders for a vote during the quarter ended December 29, 2002.

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PART II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information and Holders

          Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol SMF.  As of March 11, 2003, there were approximately 240 registered holders of the common stock and the closing price per share of the common stock as listed on the NYSE composite tape was $3.85.  The following table sets forth the high and low sales prices of the common stock as reported on the NYSE composite tape for the periods indicated. 

Dividends

          The declaration and payment of dividends is subject to the discretion of our Board of Directors, and there can be no assurance whether or when dividends will be paid in the future.  We have not paid dividends since the payment of the fourth quarter 1998 dividend paid on January 29, 1999.  Please see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for information concerning the dividend restrictions under our bank credit facility and lease facility.

Securities Authorized for Issuance under Equity Compensation Plans

          The information required by Part II, Item 5 of Form 10-K is incorporated herein by reference to the definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A for our Annual Meeting of Stockholders to be held on May 22, 2003.  We intend to file the Proxy Statement not later than 120 days after our last fiscal year end.  If the Proxy Statement is not filed with the SEC within such 120-day period, the items comprising the Part II, Item 5 information will be filed as an amendment to this Form 10-K not later than the end of the 120-day period.

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Item 6.     Selected Financial Data

          The information below is only a summary and should be read in conjunction with our consolidated financial statements and related notes to consolidated financial statements contained elsewhere in this Form 10-K.

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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”, our consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.  The following table sets forth the consolidated statements of income data.  Amounts and percentages may not aggregate due to rounding.

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Results of Operations

          Our net income was $6.8 million, or $0.23 per diluted share, in 2002, compared with net income of $12.0 million, or $0.41 per diluted share, in 2001, and net income of $9.6 million, or $0.33 per diluted share, in 2000.  The following table sets forth pre-tax income or loss, in millions, for each of our reportable segments:

          The basis for allocating distribution expense to Stores was changed in 2001.  If the new allocation method had been used in fiscal year 2000, broadline Foodservice pre-tax loss and Stores pre-tax income would have been approximately $2.6 million greater in 2000.

A number of factors impacted the results of operations in 2002 and 2001:

Factors affecting 2002 results:

Factors affecting 2001 results:

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Sales

          Sales were $2,016.0 million in 2002, $1,946.7 million in 2001 and $1,863.9 million in 2000.  Total sales increased 3.6% in 2002 and 4.4% in 2001.  Historically, sales have followed a seasonal pattern in which first quarter sales tend to be the weakest.  Third quarter sales are comparatively high because the third quarter includes four four-week periods, whereas the other quarters include three four-week periods.

Stores

          The following table sets forth the sales and sales growth of our Stores segment for 2002, 2001 and 2000, as compared to the previous year:

          Total Stores sales increased in 2002 and 2001 due to

          Improved same store sales growth during 2002 and 2001 was due to

          Sales growth for 2002 and 2001 was adversely affected by the effect of the nationwide economic downturn as compared to 2000.

Foodservice

          The following table sets forth the sales and sales growth of our broadline Foodservice segment for 2002, 2001 and 2000, as compared to the previous year:

          Broadline Foodservice sales decreased in 2002 as compared to 2001 largely due to

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          Broadline Foodservice sales increased in 2001 as compared to 2000, due to increased cruise line sales at Florida Foodservice.  Such increase was partially offset by

Gross margin

          As a percentage of sales, gross margin was 13.9% in 2002, 14.1% in 2001 and 13.8% in 2000.  Gross margins decreased in 2002 as compared to 2001 due to decreased gross margins at Stores, partially offset by improvement at broadline Foodservice and a favorable mix as a result of the shift to Stores sales as broadline Foodservice sales fell.  Gross margin improved in 2001 from 2000 due to improved gross margins at Stores and the improved sales mix.

Stores

          Gross margins as a percentage of sales for the Stores segment were 15.4% in 2002, 15.9% in 2001 and 15.3% in 2000.

          Gross margins, as a percentage of sales, for Stores decreased in 2002 primarily due to

          Gross margins, as a percentage of sales, for Stores improved in 2001 due to

          Additionally, beginning in 2001, a change in the basis of allocating distribution expense reduced costs for stores served by our broadline Foodservice units in 2001, as compared to 2000.

Foodservice

          Gross margins, as a percentage of sales, for the broadline Foodservice segment were 7.7% in 2002, 7.3% in 2001 and 8.5% in 2000. 

          Gross margins, as a percentage of sales, for broadline Foodservice increased in 2002 largely due to

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          Gross margins, as a percentage of sales, for broadline Foodservice decreased in 2001 primarily due to

Operating and administrative expenses

          Operating and administrative expenses were 12.8% of sales in 2002, 12.6% in 2001, and 12.3% in 2000.

Stores

          Operating and administrative expense increases for Stores in 2002 and 2001 were attributable to

          These increases were partially offset by the continued control in other expenditures, primarily reductions in performance-based compensation. 

Foodservice

          Operating and administrative expenses increased at broadline Foodservice in 2002 primarily due to increased operating expenses at Smart & Final Foodservice despite its reduced selling expenses and provision for bad debts.  Expenses in 2001 increased, despite continuing rigid expense controls at Florida Foodservice, due to the costs related to restructuring Smart & Final Foodservice, increased selling expenses in an effort to create new sales, and increased provision for bad debts.

Corporate Expense

          Corporate expense increased in 2002, due to a $1.3 million pre-tax charge reflecting the costs associated with the settlement of a contractual dispute with a vendor and increased professional fees, partially offset by increased gain recognized on the sale of unused property.  The decrease in corporate expenses in 2001 was primarily due to non-recurring consulting fees of $2.5 million incurred in 2000 related to improving procurement programs.  No similar consulting

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fees were recorded in the same period of 2001.  Additionally in 2001, we recorded a $1.3 million gain related to the distributions received from an insurance company demutualization transaction.

Interest expense, net

          Interest expense, net increased in 2002 to $12.7 million, compared to $12.5 million in 2001 and $13.4 million in 2000.  Interest expense, net increased in 2002 due to the higher average outstanding debt levels, partially offset by decreased average interest rates.  Interest expense, net decreased in 2001 as a result of rate reductions due to our improved financial ratios and lower market interest rates.

Equity earnings in unconsolidated subsidiary

          Smart & Final Mexico owns a 50% interest in a Mexico joint venture that operates nine stores in Mexico and produced $0.9 million in equity earnings in 2002, $1.1 million in 2001 and $0.8 million in 2000.  This Mexico joint venture opened three new stores during the last three years.

Liquidity and Capital Resources

Cash flows and financial positions

          Net cash provided by operating activities was $53.1 million in 2002 compared to $33.0 million in 2001 and $41.9 million in 2000.  The increase or decrease in cash provided by operating activities reflects our operating performance and the timing of receipts and disbursements.  In 2002, as compared to 2001, decreases in trade notes and accounts receivable and inventories and an increase in other accrued liabilities were partially offset by decreases in accounts payable and accrued salaries and wages as well as an increase in prepaid expenses and other current assets.

          Net cash used in investing activities was $44.6 million in 2002 compared to $46.8 million in 2001 and $28.1 million in 2000.  The increases in 2002 and 2001, as compared to 2000, were primarily due to capital expenditure requirements for an increased number of new and relocated stores.  Capital expenditures for 2002 totaled $47.8 million, which consisted of $45.7 million in support of the Stores segment and $2.1 million in support of the broadline Foodservice segment.  For 2001, capital expenditures totaled $45.0 million, which consisted of $37.6 million in support of the Stores segment and $7.4 million in support of the broadline Foodservice segment.  These increases in capital expenditures were partially offset by increased proceeds from disposal of closed or relocated store properties in 2002 and 2001. 

          Net cash used in financing activities was $5.0 million in 2002 compared to $14.8 million net cash provided by financing activities in 2001 and $34.7 million net cash used in financing activities in 2000.  Net cash used in financing activities in 2002 primarily reflected payments on notes and capital leases.  Net cash provided by financing activities increased in 2001 primarily due to the refinancing activities in November 2001 that provided the additional net cash.

          At December 29, 2002, we had cash and cash equivalents of $26.5 million, stockholders’ equity of $271.5 million and debt, excluding capital leases, of $135.0 million.  The debt consists

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of $130.0 million outstanding under a revolving bank credit facility and a $5.0 million remaining balance under a five-year unsecured note as a result of the acquisition of Cash & Carry stores in 1998.  The weighted average interest rate, including all associated fees, on our variable rate debt for 2002 was 5.70%.

          Our working capital was a $20.6 million deficit at December 29, 2002 compared to a positive working capital position of $122.7 million at December 30, 2001.  The $143.3 million decrease in working capital was primarily the result of reclassification of the $130.0 million outstanding borrowings under a revolving bank credit facility from long-term liability to short-term liability.  Further discussion regarding this reclassification is included in “Bank credit facility, lease facility and other financing activities” below.

Capital expenditure and other capital requirements

          Our primary requirement for capital is the financing of the building, leasehold improvements, equipment and initial set-up expenditures for new, relocated and remodeled stores as well as general working capital requirements.  We estimate that new capital expenditures for 2003 will aggregate approximately $38.0 million, including $36.5 million in support of the Stores segment and $1.5 million in support of the broadline Foodservice segment.  However, we cannot assure that these estimates will be realized and our capital program plans are subject to change upon our further review.

          On average during the past three years, each new and relocated store cost approximately $620,000 in buildings and improvements and required approximately $530,000 and $370,000 for equipment and inventory, respectively.  Remodel costs over the past three years have averaged approximately $4.5 million each year or approximately $265,000 per store remodel.  The primary objective of remodelings is to improve the profitability of the stores by increasing sales and generating increased margins.

          We have various retirement plans, which subject us to various funding obligations.  Our noncontributory pension plan covers substantially all of our full time employees, except for those employees of our broadline Foodservice segment.  We fund this plan with contributions as required by the Employee Retirement Income Security Act of 1974.  Recent changes in the benefit plan assumptions as well as the funded status of the plan have impacted the funding and expense levels for fiscal year 2002 and future periods.  We contributed $4.0 million to the plan in 2002 and estimate that these changes may require further cash contributions to the plan of approximately $6 million to $8 million by fiscal year end 2003.  Additionally, we recognized an additional minimum liability for the pension plan at fiscal year end 2002, which resulted in a non-cash charge to other comprehensive loss of  $6.2 million, net of tax.

Bank credit facility, lease facility and other financing activities

          In November 2001, we entered into a $175.0 million three-year senior secured revolving credit facility (“Credit Agreement”) with a syndicate of banks.  At our option, the Credit Agreement can be used to support up to $15.0 million of commercial letters of credit.  Availability under the Credit Agreement is subject to a formula based on the value of eligible accounts receivable and inventory.  As of December 29, 2002, $130.0 million of revolving loan

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and $4.2 million of letters of credit were outstanding and the remaining availability based on the formula was $19.2 million.  Interest for the Credit Agreement is at Eurodollar LIBOR or the Administrative Agent’s reference rate, plus designated amounts.  Commitment fees are charged on the undrawn amounts at rates ranging between 0.30% to 0.50%.  The Credit Agreement expires on November 30, 2004.  Principal repayments may be required prior to the final maturity.  Additionally, under certain conditions, pay-downs toward the facility are treated as permanent reductions to the amount committed.  As of December 29, 2002, the six-month Eurodollar LIBOR rate was 1.39%.

          In November 2001, we entered into a five-year operating lease agreement (“Lease Agreement”) with a national banking association.  Participants in this transaction include several banks and financing institutions as well as Casino USA, Inc. (“Casino USA”) which owned 56.7 percent of our common stock at fiscal year end 2002.  Casino USA’s share of participation is $16.1 million.  The Lease Agreement, with a value of $87.0 million and an interest rate of 9.07%, covers 18 leased properties.  The Lease Agreement provides for the financing of the following three distribution facilities: (a) Commerce, California warehouse for dry goods distribution to Stores; (b) Stockton, California, a dry goods warehouse for Smart & Final Foodservice distribution and Stores; and (c) Miami, Florida, a frozen foods warehouse for Florida Foodservice distribution and Stores; and for 15 store locations.  The Lease Agreement expires on November 30, 2006.  At the end of the term, the Lease Agreement requires us to elect to purchase all the properties by a final payment of $86.4 million or sell all the properties to a third party.  If the properties are sold to a third party and the aggregate sales price is less than $69.2 million, we are obligated to pay the difference of the aggregate sales price and $69.2 million.  The aggregate minimum future lease payments, including the final obligation of $69.2 million under the Lease Agreement, along with our other lease obligations, are included in the total contractual obligations in the table below and under Note 5 to the Consolidated Financial Statements included in this report.

          Both the Credit Agreement and the Lease Agreement contain various customary and restrictive covenants, including restrictions on cash dividends declared or paid and additional debt and capital expenditures, and require us to maintain certain fixed charge coverage ratios and other financial ratios under each agreement.  The covenants do not require us to maintain a public debt rating or a certain liquidity level.  As of December 29, 2002, we were not in compliance with certain of these financial covenants.  In February 2003, we obtained waivers of non-compliance as of December 29, 2002 and an amendment of certain covenants for the first quarter of 2003.  We intend to negotiate and enter into an amended Credit Agreement and Lease Agreement during 2003.  Pending the execution of an amended Credit Agreement, our obligation under the revolving credit facility has been classified as a current liability in our consolidated balance sheet as of December 29, 2002.  If we are unable to negotiate and enter into an amended Credit Agreement and Lease Agreement, we may be required to renegotiate the terms of the waivers or seek alternative means of financing such obligations.  Additionally, we may negotiate and restructure the Lease Agreement in response to the new accounting requirements contained in Interpretation No. 46, “Consolidation of Variable Interest Entities” released by the Financial Accounting Standards Board (“FASB”) in January 2003.  See related discussion in New Accounting Pronouncements below.

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          Historically, our primary source of liquidity has been cash flows from operations.  Additionally, we have availability under bank credit facilities.  We expect to be able to fund future acquisitions and other cash requirements by a combination of available cash, cash from operations and other borrowings and proceeds from the issuance of equity securities.  We believe that our sources of funds are adequate to provide for working capital, capital expenditures, and debt service requirements for the foreseeable future.

Contractual obligations

          The following table sets forth our future contractual obligations, dollars in thousands:

Inflation

          Our primary costs, merchandise and labor, as well as utility and transportation costs are affected by a number of factors that are beyond our control.  These factors include the price of merchandise and fuel, the competitive climate, and the general and regional economic conditions.  As is common practice within the food industry, we have generally been able to maintain margins by adjusting selling prices and through procurement efficiencies.  But competitive conditions may, from time to time, render us unable to do so while maintaining or increasing our market share.

New Accounting Pronouncements

          In June 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations” which addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost.  SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002.  We do not expect a material impact on our results of operations or financial condition as a result of the adoption of SFAS No. 143.

          In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, “Accounting for Leases”, and Technical corrections.”  SFAS No. 145 requires most gains and losses on extinguishment of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required.  SFAS No. 145 also amends SFAS No. 13 to require certain lease modifications to be treated as sale-leaseback transactions.  Certain provisions of SFAS No. 145 are effective for transactions occurring after May 15, 2002, while other provisions are effective for fiscal years beginning after May 15, 2002.  We do not expect a material impact on our results of operations or financial condition as a result of the adoption of SFAS No. 145.

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          In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” which requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.  SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002.  We do not expect a material impact on our results of operations or financial condition as a result of the adoption of SFAS No. 146.

          In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  Interpretation No. 45 requires that a guarantor recognize a liability for the fair value of guarantee obligations issued after December 31, 2002.  We will record the fair value of future material guarantees, if any.

          On January 17, 2003 the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.”  The objective of Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities.   Interpretation No. 46 changes certain consolidation requirements by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both.  The consolidation requirements apply to entities created before February 1, 2003, no later than the beginning of the first fiscal year or interim period beginning after June 15, 2003.  Under Interpretation No. 46, as it is currently structured, the assets and debt underlying the Lease Agreement would need to be consolidated.  We may negotiate and restructure the Lease Agreement in response to the new accounting requirements under Interpretation No. 46.

Critical Accounting Policies

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported assets, liabilities, sales and expenses in the accompanying financial statements.  Critical accounting policies are those that require the most subjective and complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain.  The following are considered our most critical accounting policies that, under different conditions or using different assumption or estimates, could show materially different results on our financial condition and results of operations.         

Allowance for doubtful accounts

          We evaluate the collectibility of accounts receivable and determine the appropriate reserve for doubtful accounts based on analysis of historical trends of write-offs and recoveries on various levels of aged receivables.  When we become aware of the deteriorated collectibility of a specific account, additional reserves are made to reduce the net recognized receivables to the amount reasonably expected to be collectible or zero.  When the specific account is determined uncollectible, the net recognized receivables are written off in its entirety against such reserves.

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Inventory

          We record the majority of our inventories at the lower of FIFO (first-in, first-out) cost or market method.  Approximately 58% of our inventories are held at the stores and the remaining 42% are held in our various warehouse locations.  These inventories are subject to frequent periodic counting.  Losses, including theft, damages and other casualties are written off when identified.  Reserves for inventory losses are provided based on analysis of historical trends including the results from the most recent periodic counting.  We evaluate the adequacy of these reserves every four-week period.

Goodwill

          SFAS 142, “Goodwill and Other Intangible Assets,” requires that we test goodwill for impairment based on a comparison of fair values to the carrying values of our reporting units.  The determination of fair values of reporting units involves the use of assumptions and estimates such as the future performance of the operations of the reporting units and discount rates for determining the current values of expected future cash flows.  Any change in these assumptions and estimates may cause the fair values of our operating units to decrease significantly and hence affect our results of operations and financial condition. 

Self-insurance program

          We maintain a self-insurance program covering the majority of our California workers’ compensation costs and deductibles.  The amounts in excess of the self-insured levels are fully insured.  We maintain insured deductible programs for other workers’ compensation and general liability exposures.  Amounts in excess of deductibles are fully insured.  Self-insurance accruals are calculated by outside actuaries and are based on claims filed and include estimates for claims incurred but not yet reported.  Projections of future loss are inherently uncertain because of the random nature of insurance claims occurrences and could be significantly affected if future occurrences and claims differ significantly from these assumptions and historical trends.

Pension plans

          We maintain defined benefit and defined contribution retirement plans for our employees.  The defined benefit pension plans pay benefits to employees at retirement using formulas based on various estimates and assumptions.  We account for the defined benefit pension plans in accordance with SFAS No. 87 “Employer’s Accounting for Pensions.”  SFAS No. 87 requires that the amounts recognized in the financial statements be determined on an actuarial basis and include assumptions such as the expected rate of return on plan assets, a discount rate for determining the current value of plan benefits and the rate of increase in future compensation levels.  Any change in these assumptions may cause the future pension and postretirement benefit expenses to increase or decrease significantly and hence affect our results of operations or financial condition.

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Contingencies and litigation

          In the ordinary course of our business, we are periodically named as a defendant in various lawsuits, claims and pending actions. The principal risks that we insure against are workers’ compensation, general liability, automobile liability, property damage, alternative staffing errors and omissions, fiduciary liability and fidelity losses. If a potential loss arising from these lawsuits, claims and actions is probable and reasonably estimable, we record the estimated liability based on circumstances and assumptions existing at the time. Whereas we believe the recorded liabilities are adequate, there are inherent limitations in the estimation process whereby future actual losses may exceed projected losses, which could materially adversely affect our results of operations or financial condition.

Off balance sheet financing

          The Lease Agreement mentioned above could generally be described as an off-balance sheet financing activity.  This agreement currently qualifies for operating lease accounting treatment under SFAS No.13, “Accounting for Leases”, and, as such, the buildings and improvements, and the debt incurred to construct them, are not included on our balance sheet.  Accounting policies related to such practices have changed by the issuance of FASB Interpretation No. 46.  The discussion of these changes and their impact in the future is included under “New Accounting Pronouncements.”

Item 7A.     Quantitative and Qualitative Disclosure about Market Risk

          We are exposed to market risks relating to fluctuations in interest rates and the exchange rate between the U.S. dollar and Mexican Peso.  Our financial risk management objective is to minimize the negative impact of interest rate fluctuations on our earnings and cash flows.  As of fiscal year end 2002, our exposure to foreign exchange rates was limited.

          Additionally, we are exposed to the market fluctuations associated with stock we received as a result of the demutualization transactions of a mutual insurance company in December 2001.  At December 29, 2002, the fair market value of the stock was $1.2 million.

          Interest rate risk is managed through the use of an interest rate collar agreement to limit the effect of interest rate fluctuations on principal amounts of an aggregate of $70 million in floating rate debt.  This agreement was entered into with a major financial institution thereby minimizing risk of credit loss.  See Note 3 to the Consolidated Financial Statements included in this report for a more complete description of our interest rate collar.

Interest Rate Sensitivity Analysis

          The following analysis presents our earnings sensitivity if a certain interest rate change occurred at December 29, 2002.  The change chosen for this analysis reflects our view of a change that is reasonably possible over a one-year period.  These forward-looking disclosures are selective in nature and only address the potential impact from financial instruments.  They do not include other potential effects that could impact our business as a result of these changes in interest.

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          At December 29, 2002, we had debt, excluding capital leases totaling $135.0 million, of which $130.0 million was variable-rate debt and $5.0 million was fixed-rate debt.  We also had an interest rate collar agreement with a notional value of $70 million.  This interest rate collar agreement limits LIBOR fluctuations to interest rate ranges from 5.48% to 8.00% and expires in November 2004.  As of December 29, 2002, the six-month Eurodollar LIBOR rate was 1.39%.

          Holding other variables constant, such as debt levels, the earnings, net of taxes and cash flows impact of a one-percentage point change in interest rates would be approximately $0.4 million.

Credit Risk

          We are exposed to credit risk on trade notes and accounts receivable.  We provide credit primarily to foodservice distribution customers in the ordinary course of business and perform ongoing credit evaluations.  Concentrations of credit risk with respect to trade notes and accounts receivable are limited due to the number of customers comprising our customer base.  We currently believe that our allowance for doubtful accounts is sufficient to cover customer credit risks.

Foreign Currency Risk

          Our exposure to foreign currency risk is limited to the operations under Smart & Final Mexico and the equity earnings in its Mexico joint venture.  At fiscal year end 2002, such exposure was the $4.6 million net investment in Smart & Final Mexico, which was comprised primarily of the Mexico joint venture.  Our other transactions are conducted in U.S. dollars and are not exposed to fluctuation in foreign currency.  We do not hedge our foreign currency exposure and therefore are not exposed to such hedging risk.

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Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following information is included in this section:

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REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
Smart & Final Inc.

We have audited the accompanying consolidated balance sheet of Smart & Final Inc. (a Delaware corporation and a 56.7 percent owned subsidiary of Casino USA, Inc.) and subsidiaries (the “Company”) as of December 29, 2002, and the related consolidated statements of income, stockholders’ equity and cash flows for the fiscal year ended December 29, 2002. Our audit also included the financial schedule for the fiscal year ended December 29, 2002 listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audit.  The accompanying consolidated financial statements of the Company as of December 30, 2001 and for each of the two fiscal years ended December 30, 2001 and December 31, 2000 were audited by other auditors who have ceased operations and whose report dated June 4, 2002 expressed an unqualified opinion on those statements before the revisions described in Note 1.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Smart & Final Inc. and subsidiaries as of December 29, 2002, and the consolidated results of their operations and their cash flows for the fiscal year ended December 29, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule for the fiscal year ended December 29, 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective December 31, 2001, the Company changed its method of accounting for goodwill.

As discussed above, the consolidated financial statements of the Company as of December 30, 2001 and for each of the two fiscal years in the period ended December 30, 2001 were audited by other auditors who have ceased operations. As described in Note 1, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards (“Statement”) No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of December 31, 2001. Our audit procedures with respect to the disclosures in Note 1 with respect to 2001 and 2000 included (a) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects), recognized in those periods related to goodwill, which is no longer being amortized as a result of initially applying Statement No. 142 to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 1 are appropriate. However, we were not engaged to audit, review or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such disclosures and accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

Los Angeles, California
February 7, 2003

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THIS REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP.  THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP NOR HAS ARTHUR ANDERSEN LLP PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THIS FORM 10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Smart & Final Inc.:

          We have audited the accompanying consolidated balance sheets of Smart & Final Inc. (a Delaware corporation and a 56.8 percent owned subsidiary of Casino USA, Inc.) and subsidiaries as of December 30, 2001 and December 31, 2000, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three fiscal years in the period ended December 30, 2001 as restated (see Note 2 to the Consolidated Financial Statements).  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

          We conducted our audits in accordance with auditing standards generally accepted in the United States.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

          In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Smart & Final Inc. and subsidiaries as of December 30, 2001 and December 31, 2000, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 2001, in conformity with accounting principles generally accepted in the United States.

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