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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-Q



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(Mark one)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 19, 2005



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



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SMART & FINAL INC.

(Exact name of registrant as specified in its charter)



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



|                                              |  |           
|--------------------------------------------- |  | ----------
|600 Citadel DriveCity of Commerce, California |  | 90040     
|(Address of principal executive offices)      |  | (Zip Code)



(323) 869-7500

(Registrants telephone number, including area code)



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes  x    No ̈.



As of July 15, 2005, the registrant had outstanding 30,998,515 shares of common stock.



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SMART & FINAL INC.

Index



|                           |  |                                                                                       |  |     
|-------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|Caption                    |  |                                                                                       |  | Page
|Forward-Looking Statements |  | 2                                                                                    
|                           |  |                                                                                      
|PART I                     |  | FINANCIAL INFORMATION                                                                 |  |     
|                           |  |                                                                                      
|Item 1.                    |  | Financial Statements                                                                  |  |     
|                           |  |                                                                                      
|                           |  | Unaudited Consolidated Balance Sheets                                                 |  | 3   
|                           |  |                                                                                      
|                           |  | Unaudited Consolidated Statements of Operations                                       |  | 4   
|                           |  |                                                                                      
|                           |  | Unaudited Consolidated Statements of Cash Flows                                       |  | 5   
|                           |  |                                                                                      
|                           |  | Notes to Unaudited Consolidated Financial Statements                                  |  | 6   
|                           |  |                                                                                      
|Item 2.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19  
|                           |  |                                                                                      
|Item 3.                    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 30  
|                           |  |                                                                                      
|Item 4.                    |  | Controls and Procedures                                                               |  | 31  
|                           |  |                                                                                      
|Part II                    |  | OTHER INFORMATION                                                                     |  |     
|                           |  |                                                                                      
|Item 1.                    |  | Legal Proceedings                                                                     |  | 32  
|                           |  |                                                                                      
|Item 2.                    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 33  
|                           |  |                                                                                      
|Item 3.                    |  | Defaults upon Senior Securities                                                       |  | 33  
|                           |  |                                                                                      
|Item 4.                    |  | Submission of Matters to a Vote of Security Holders                                   |  | 33  
|                           |  |                                                                                      
|Item 5.                    |  | Other Information                                                                     |  | 34  
|                           |  |                                                                                      
|Item 6.                    |  | Exhibits                                                                              |  | 35  
|                           | 
|SIGNATURES                 |  | 36                                                                                   



1



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Forward-Looking Statements



When
used in this quarterly 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 and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are subject to certain risks and uncertainties, including known and unknown factors as included
in the periodic filings by Smart & Final Inc. with the Securities and Exchange Commission and 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:



| |  | increased competitive pressures;
|- |  | --------------------------------



| |  | deterioration in national or regional economic conditions;
|- |  | ----------------------------------------------------------



| |  | inability to fund or execute our store expansion plan;
|- |  | ------------------------------------------------------



| |  | interruption and/or inability to obtain adequate supplies of products;
|- |  | ----------------------------------------------------------------------



| |  | resolution of litigation matters; and
|- |  | -------------------------------------



| |  | adverse state or federal legislation or regulation that increases the costs of compliance or adverse findings by a regulator with respect to existing operations.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



Many of these factors are beyond our control.
Comparability of current and future operating trends and results may be also impacted by other important factors, including the effect of the labor action against the three largest southern California retail supermarket chains which commenced early
in the 2003 fourth quarter and which was settled in February 2004. 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 of our
2004 Annual Report on Form 10-K. Except as specifically set forth herein, we undertake no obligation to update any such forward-looking or other statement.



2



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SMART & FINAL INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share amounts)



|                                                                                                                                       |  |              |         |   |                |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | -------------- | - | ------- | -
|                                                                                                                                       |  | June 19,2005 |         |   | January 2,2005 |  
|                                                                                                                                       |  | (Unaudited)  |         |   |                |  
|ASSETS                                                                                                                                 |  |              |         |   |                |   |         |  
|Current assets:                                                                                                                        |  |              |         |   |                |   |         |  
|Cash and cash equivalents                                                                                                              |  | $            | 37,544  |   |                | $ | 28,672  |  
|Accounts receivable, less allowance for doubtful accounts of $226 in 2005 and $254 in 2004                                             |  |              | 12,638  |   |                |   | 16,717  |  
|Inventories                                                                                                                            |  |              | 143,952 |   |                |   | 142,360 |  
|Prepaid expenses and other current assets                                                                                              |  |              | 13,780  |   |                |   | 16,428  |  
|Deferred tax assets                                                                                                                    |  |              | 11,646  |   |                |   | 11,646  |  
|Assets of discontinued operations                                                                                                      |  |              | 2,131   |   |                |   | 2,129   |  
|                                                                                                                                       |  |              |         |   |                |   |         |  
|Total current assets                                                                                                                   |  |              | 221,691 |   |                |   | 217,952 |  
|Property, plant and equipment:                                                                                                         |  |              |         |   |                |   |         |  
|Land                                                                                                                                   |  |              | 71,603  |   |                |   | 66,275  |  
|Buildings and improvements                                                                                                             |  |              | 62,583  |   |                |   | 62,583  |  
|Leasehold improvements                                                                                                                 |  |              | 127,279 |   |                |   | 125,206 |  
|Fixtures and equipment                                                                                                                 |  |              | 200,878 |   |                |   | 194,554 |  
|                                                                                                                                       |  |              |         |   |                |   |         |  
|                                                                                                                                       |  |              | 462,343 |   |                |   | 448,618 |  
|Less  Accumulated depreciation and amortization                                                                                       |  |              | 209,910 |   |                |   | 197,443 |  
|                                                                                                                                       |  |              |         |   |                |   |         |  
|Net property, plant and equipment                                                                                                      |  |              | 252,433 |   |                |   | 251,175 |  
|Assets under capital leases, net of accumulated amortization of $7,610 in 2005 and $7,669 in 2004                                      |  |              | 1,796   |   |                |   | 2,085   |  
|Goodwill                                                                                                                               |  |              | 34,775  |   |                |   | 34,775  |  
|Deferred tax assets                                                                                                                    |  |              | 18,271  |   |                |   | 18,237  |  
|Equity investment in joint venture                                                                                                     |  |              | 6,465   |   |                |   | 6,258   |  
|Cash held in real estate trust                                                                                                         |  |              | 118     |   |                |   | 116     |  
|Other assets                                                                                                                           |  |              | 60,047  |   |                |   | 56,833  |  
|                                                                                                                                       |  |              |         |   |                |   |         |  
|Total assets                                                                                                                           |  | $            | 595,596 |   |                | $ | 587,431 |  
|                                                                                                                                       |  |              |         |   |                |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                   |  |              |         |   |                |   |         |  
|Current liabilities:                                                                                                                   |  |              |         |   |                |   |         |  
|Current maturities of long-term debt and capital leases                                                                                |  | $            | 1,154   |   |                | $ | 1,353   |  
|Accounts payable                                                                                                                       |  |              | 93,857  |   |                |   | 83,103  |  
|Accrued salaries and wages                                                                                                             |  |              | 12,874  |   |                |   | 20,166  |  
|Other accrued liabilities                                                                                                              |  |              | 34,212  |   |                |   | 47,863  |  
|Liabilities of discontinued operations                                                                                                 |  |              | 1,436   |   |                |   | 2,476   |  
|                                                                                                                                       |  |              |         |   |                |   |         |  
|Total current liabilities                                                                                                              |  |              | 143,533 |   |                |   | 154,961 |  
|Long-term liabilities:                                                                                                                 |  |              |         |   |                |   |         |  
|Obligations under capital leases                                                                                                       |  |              | 2,273   |   |                |   | 2,638   |  
|Bank debt                                                                                                                              |  |              | 30,000  |   |                |   | 25,000  |  
|Notes payable                                                                                                                          |  |              | 53,336  |   |                |   | 53,396  |  
|Notes payable to affiliate                                                                                                             |  |              | 33,134  |   |                |   | 33,133  |  
|Other long-term liabilities                                                                                                            |  |              | 31,190  |   |                |   | 30,324  |  
|Postretirement and postemployment benefits                                                                                             |  |              | 37,281  |   |                |   | 35,566  |  
|                                                                                                                                       |  |              |         |   |                |   |         |  
|Total long-term liabilities                                                                                                            |  |              | 187,214 |   |                |   | 180,057 |  
|Commitments and contingencies                                                                                                          |  |              |         |   |                |   |         |  
|Stockholders equity:                                                                                                                  |  |              |         |   |                |   |         |  
|Preferred stock, $1 par value (authorized 10,000,000 shares; no shares issued)                                                         |  |              |        |   |                |   |        |  
|Common stock, $0.01 par value (authorized 100,000,000 shares; 31,171,056 shares issued and outstanding in 2005 and 30,752,118 in
2004) |  |              | 312     |   |                |   | 308     |  
|Additional paid-in capital                                                                                                             |  |              | 223,127 |   |                |   | 219,768 |  
|Retained earnings                                                                                                                      |  |              | 57,443  |   |                |   | 46,157  |  
|Accumulated other comprehensive loss                                                                                                   |  |              | (12,305 | ) |                |   | (12,361 | )
|Notes receivable for common stock                                                                                                      |  |              | (18     | ) |                |   | (75     | )
|Treasury stock, at cost, 261,725 shares in 2005 and 86,475 in 2004                                                                     |  |              | (3,710  | ) |                |   | (1,384  | )
|                                                                                                                                       |  |              |         |   |                |   |         |  
|Total stockholders equity                                                                                                             |  |              | 264,849 |   |                |   | 252,413 |  
|                                                                                                                                       |  |              |         |   |                |   |         |  
|Total liabilities and stockholders equity                                                                                             |  | $            | 595,596 |   |                | $ | 587,431 |  
|                                                                                                                                       |  |              |         |   |                |   |         |  



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



3



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SMART & FINAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share amounts)



|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|------------------------------------------------------------------------ |  | ------------------ | ---------- | - | ----------------------- | - | ---------- | ------------ |  | - | ------------ | - |  | - | ---------- | -
|                                                                         |  | Twelve Weeks Ended |            |   | Twenty-four Weeks Ended |  
|                                                                         |  | June 19,2005       |            |   | June 13,2004            |   |            | June 19,2005 |  |   | June 13,2004 |  
|                                                                         |  | (Unaudited)        |            |   | (Unaudited)             |  
|Sales                                                                    |  | $                  | 484,105    |   |                         | $ | 457,794    |              |  | $ | 911,730      |   |  | $ | 881,267    |  
|Cost of sales, buying and occupancy                                      |  |                    | 404,373    |   |                         |   | 380,603    |              |  |   | 763,823      |   |  |   | 731,101    |  
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Gross margin                                                             |  |                    | 79,732     |   |                         |   | 77,191     |              |  |   | 147,907      |   |  |   | 150,166    |  
|Operating and administrative expenses                                    |  |                    | 64,324     |   |                         |   | 60,352     |              |  |   | 124,541      |   |  |   | 118,462    |  
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Income from operations                                                   |  |                    | 15,408     |   |                         |   | 16,839     |              |  |   | 23,366       |   |  |   | 31,704     |  
|Interest expense, net                                                    |  |                    | 2,171      |   |                         |   | 3,722      |              |  |   | 4,380        |   |  |   | 7,411      |  
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Income from continuing operations before income taxes                    |  |                    | 13,237     |   |                         |   | 13,117     |              |  |   | 18,986       |   |  |   | 24,293     |  
|Income tax provision                                                     |  |                    | (5,211     | ) |                         |   | (5,247     | )            |  |   | (7,449       | ) |  |   | (9,721     | )
|Equity earnings of joint venture                                         |  |                    | 165        |   |                         |   | 460        |              |  |   | 155          |   |  |   | 354        |  
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Income from continuing operations                                        |  |                    | 8,191      |   |                         |   | 8,330      |              |  |   | 11,692       |   |  |   | 14,926     |  
|Discontinued operations, net of tax                                      |  |                    | (100       | ) |                         |   | (221       | )            |  |   | (406         | ) |  |   | (620       | )
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Net income                                                               |  | $                  | 8,091      |   |                         | $ | 8,109      |              |  | $ | 11,286       |   |  | $ | 14,306     |  
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Earnings per common share*                                               |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Earnings per common share from continuing operations                     |  | $                  | 0.27       |   |                         | $ | 0.28       |              |  | $ | 0.38         |   |  | $ | 0.50       |  
|Loss per common share from discontinued operations                       |  |                    |           |   |                         |   | (0.01      | )            |  |   | (0.01        | ) |  |   | (0.02      | )
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Earnings per common share                                                |  | $                  | 0.26       |   |                         | $ | 0.27       |              |  | $ | 0.37         |   |  | $ | 0.48       |  
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Weighted average common shares                                           |  |                    | 30,742,029 |   |                         |   | 30,051,810 |              |  |   | 30,691,318   |   |  |   | 29,961,360 |  
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Earnings per common share, assuming dilution*                            |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Earnings per common share, assuming dilution, from continuing operations |  | $                  | 0.26       |   |                         | $ | 0.26       |              |  | $ | 0.36         |   |  | $ | 0.48       |  
|Loss per common share, assuming dilution, from discontinued operations   |  |                    |           |   |                         |   | (0.01      | )            |  |   | (0.01        | ) |  |   | (0.02      | )
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Earnings per common share, assuming dilution                             |  | $                  | 0.25       |   |                         | $ | 0.26       |              |  | $ | 0.35         |   |  | $ | 0.46       |  
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Weighted average common shares and common share equivalents              |  |                    | 31,830,075 |   |                         |   | 31,557,253 |              |  |   | 32,051,658   |   |  |   | 31,408,287 |  
|                                                                         |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  



|* | Totals may not aggregate due to rounding.
|- | -----------------------------------------



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



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SMART & FINAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)



|                                                                                                          |  |                         |         |   |              |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                          |  | Twenty-four Weeks Ended |        
|                                                                                                          |  | June 19,2005            |         |   | June 13,2004 |  
|                                                                                                          |  | (Unaudited)             |        
|Cash Flows from Operating Activities:                                                                     |  |                         |         |   |              |   |         |  
|Income from continuing operations                                                                         |  | $                       | 11,692  |   |              | $ | 14,926  |  
|Adjustments to reconcile income from continuing operations to net cash provided by continuing activities: |  |                         |         |   |              |   |         |  
|Gain on disposal of property, plant and equipment                                                         |  |                         | (35     | ) |              |   | (600    | )
|Depreciation                                                                                              |  |                         | 8,464   |   |              |   | 8,400   |  
|Amortization                                                                                              |  |                         | 6,309   |   |              |   | 5,987   |  
|Amortization of deferred financing costs                                                                  |  |                         | 132     |   |              |   | 1,326   |  
|Deferred tax (benefit) provision                                                                          |  |                         | (33     | ) |              |   | 478     |  
|Equity earnings of joint venture                                                                          |  |                         | (155    | ) |              |   | (354    | )
|Decrease (increase) in:                                                                                   |  |                         |         |   |              |   |         |  
|Accounts receivable                                                                                       |  |                         | 4,079   |   |              |   | 2,126   |  
|Inventories                                                                                               |  |                         | (1,592  | ) |              |   | (6,944  | )
|Prepaid expenses and other assets                                                                         |  |                         | 2,063   |   |              |   | 5,556   |  
|Increase (decrease) in:                                                                                   |  |                         |         |   |              |   |         |  
|Accounts payable                                                                                          |  |                         | 10,754  |   |              |   | (5,068  | )
|Accrued salaries and wages                                                                                |  |                         | (7,292  | ) |              |   | 292     |  
|Other accrued liabilities                                                                                 |  |                         | (1,813  | ) |              |   | (10,660 | )
|                                                                                                          |  |                         |         |   |              |   |         |  
|Net cash provided by continuing activities                                                                |  |                         | 32,573  |   |              |   | 15,465  |  
|Net cash used in discontinued activities                                                                  |  |                         | (1,447  | ) |              |   | (2,444  | )
|                                                                                                          |  |                         |         |   |              |   |         |  
|Net cash provided by operating activities                                                                 |  |                         | 31,126  |   |              |   | 13,021  |  
|                                                                                                          |  |                         |         |   |              |   |         |  
|Cash Flows from Investing Activities:                                                                     |  |                         |         |   |              |   |         |  
|Acquisition of property, plant and equipment                                                              |  |                         | (21,749 | ) |              |   | (6,962  | )
|Proceeds from disposal of property, plant and equipment                                                   |  |                         | 21      |   |              |   | 2,662   |  
|Investment in capitalized software                                                                        |  |                         | (5,025  | ) |              |   | (4,451  | )
|Change in cash held in real estate trust                                                                  |  |                         | (2      | ) |              |   | 14,241  |  
|Other                                                                                                     |  |                         | (97     | ) |              |   | 4,559   |  
|                                                                                                          |  |                         |         |   |              |   |         |  
|Net cash (used in) provided by continuing activities                                                      |  |                         | (26,852 | ) |              |   | 10,049  |  
|Net proceeds from divestitures                                                                            |  |                         |        |   |              |   | 325     |  
|Net cash provided by discontinued activities                                                              |  |                         |        |   |              |   | 79      |  
|                                                                                                          |  |                         |         |   |              |   |         |  
|Net cash (used in) provided by investing activities                                                       |  |                         | (26,852 | ) |              |   | 10,453  |  
|                                                                                                          |  |                        
|Cash Flows from Financing Activities:                                                                     |  |                         |         |   |              |   |         |  
|Payments on bank line of credit                                                                           |  |                         | (5,000  | ) |              |   | (30,000 | )
|Borrowings on bank line of credit                                                                         |  |                         | 10,000  |   |              |   | 5,000   |  
|Payments on notes payable                                                                                 |  |                         | (622    | ) |              |   | (900    | )
|Proceeds from issuance of common stock, net of costs                                                      |  |                         | 220     |   |              |   | 1,513   |  
|                                                                                                          |  |                         |         |   |              |   |         |  
|Net cash provided by (used in) financing activities                                                       |  |                         | 4,598   |   |              |   | (24,387 | )
|                                                                                                          |  |                         |         |   |              |   |         |  
|Increase (decrease) in cash and cash equivalents                                                          |  |                         | 8,872   |   |              |   | (913    | )
|Cash and cash equivalents at beginning of the period                                                      |  |                         | 28,672  |   |              |   | 36,592  |  
|                                                                                                          |  |                         |         |   |              |   |         |  
|Cash and cash equivalents at end of the period                                                            |  | $                       | 37,544  |   |              | $ | 35,679  |  
|                                                                                                          |  |                         |         |   |              |   |         |  



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



5



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##### Table of Contents



SMART & FINAL INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



1. Accounting Policies



Basis of presentation



Smart & Final Inc. is a Delaware corporation and at June 19, 2005 was a 54.0 percent owned subsidiary of Casino USA, Inc. (Casino USA), a
California corporation. References in this report to we, our and us are to Smart & Final Inc. and its subsidiaries, collectively.



Casino Guichard-Perrachon, S.A. (Groupe Casino), a publicly traded French joint stock limited liability company,
is the principal shareholder of Casino USA. Collectively, Groupe Casino and its subsidiaries own approximately 56.9 percent of our common stock as of June 19, 2005.



The accompanying consolidated financial statements are unaudited except for the consolidated balance sheet as of January 2,
2005 which was derived from audited financial statements. In the opinion of management, these financial statements include all adjustments, which consisted of normal recurring items necessary for a fair presentation for such periods in conformity
with accounting principles generally accepted in the United States, but should not be considered as indicative of results for a full year. Certain reclassifications have been made to prior periods to conform to current presentations. Accordingly,
these unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2004 Annual Report on Form 10-K.



Fiscal years



Our fiscal year ends on the Sunday closest to December 31. Each fiscal year consists of twelve-week periods in the first,
second and fourth quarters and a sixteen-week period in the third quarter. Our fiscal year 2004 consists of 53 weeks, with thirteen weeks in the fourth quarter.



Treasury stock



Our Long-Term Equity Compensation Plan permits the exercise price of options granted under this plan to be paid by our acceptance of our common stock
previously held by the participants exercising the options. In connection with any option exercise, the plan also allows us to accept our common stock resulting from the option exercise and/or cash in payment of applicable payroll taxes due on the
transactions. These shares are recorded as Treasury Stock using the cost method under Stockholders equity on our consolidated balance sheets.



At the beginning of our fiscal year 2005, the balance of the treasury stock was $1.4 million, or 86,475 shares of our common
stock, representing the shares we accepted from our Chairman upon his option exercise during 2004. During the 24 weeks ended June 19, 2005, our Chairman exercised options to purchase 247,750 shares of our common stock. The exercise price for the
options was paid by our Chairmans transfer to us of 153,750 shares of our common stock previously held by him. In connection with the stock option exercises, we also accepted from our Chairman 21,500 shares of our common stock resulting from
the exercises, plus cash for a remainder amount, in payment of applicable payroll taxes due on the transaction. These



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##### Table of Contents

shares were recorded using the cost method at a cost per-share-price of $13.65 for 45,250 shares and $13.14 for 130,000 shares, for a total of $2.3 million.
At June 19, 2005, the balance of treasury stock was $3.7 million.



Stock
options



In 1996, we adopted Statement of Financial
Accounting Standards (SFAS) No. 123 Accounting for Stock-Based Compensation, which encourages, but does not require, the recognition of compensation expense for employee stock-based compensation arrangements using the fair
value method of accounting. In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123.
SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for companies that change from the intrinsic value method to the fair value method of accounting for stock-based compensation and requires additional disclosure of pro
forma information when a company uses the intrinsic value method.



We account for stock-based compensation using the intrinsic value method as allowed under Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees. Disclosures of pro forma information regarding net
income and earnings per share are required under SFAS No. 123, which uses the fair value method, as well as the additional disclosure requirements required under SFAS No. 148. 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:



|                                               |  |                    |           |   |                         |   |           |              |  |   |              |   |  |   |           |  
|---------------------------------------------- |  | ------------------ | --------- | - | ----------------------- | - | --------- | ------------ |  | - | ------------ | - |  | - | --------- | -
|                                               |  | Twelve Weeks Ended |           |   | Twenty-four Weeks Ended |  
|                                               |  | June 19,2005       |           |   | June 13,2004            |   |           | June 19,2005 |  |   | June 13,2004 |  
|Dividend yield                                 |  |                    | 0.0       | % |                         |   | 0.0       | %            |  |   | 0.0          | % |  |   | 0.0       | %
|Expected volatility                            |  |                    | 39        | % |                         |   | 39        | %            |  |   | 39           | % |  |   | 39        | %
|Risk-free interest rates                       |  |                    | 3.8       | % |                         |   | 4.7       | %            |  |   | 4.1          | % |  |   | 2.8       | %
|Weighted average expected lives                |  |                    |           |   |                         |   |           |              |  |   |              |   |  |   |           |  
|Executives                                     |  |                    | 5.2 years |   |                         |   | 4.9 years |              |  |   | 5.2 years    |   |  |   | 4.9 years |  
|Non-executives                                 |  |                    | 4.8 years |   |                         |   | 4.6 years |              |  |   | 4.8 years    |   |  |   | 4.6 years |  
|Weighted average fair value of options granted |  | $                  | 4.35      |   |                         | $ | 7.89      |              |  | $ | 5.85         |   |  | $ | 4.96      |  



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##### Table of Contents

The following is the pro forma information had the fair value method under SFAS No. 123, as amended by
SFAS No. 148, been adopted, dollars in thousands except per share amounts:



|                                                                                                                             |  |                    |       |                         |   |              |  |              |        |  |   |       
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ----------------------- | - | ------------ |  | ------------ | ------ |  | - | ------
|                                                                                                                             |  | Twelve Weeks Ended |       | Twenty-four Weeks Ended
|                                                                                                                             |  | June 19,2005       |       | June 13,2004            |   | June 19,2005 |  | June 13,2004
|Net income as reported                                                                                                       |  | $                  | 8,091 |                         | $ | 8,109        |  | $            | 11,286 |  | $ | 14,306
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                   |  |                    | 261   |                         |   | 35           |  |              | 297    |  |   | 77    
|Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects |  |                    | 371   |                         |   | 393          |  |              | 752    |  |   | 737   
|                                                                                                                             |  |                    |       |                         |   |              |  |              |        |  |   |       
|Pro forma net income                                                                                                         |  | $                  | 7,981 |                         | $ | 7,751        |  | $            | 10,831 |  | $ | 13,646
|                                                                                                                             |  |                    |       |                         |   |              |  |              |        |  |   |       
|Earnings per common share:                                                                                                   |  |                    |       |                         |   |              |  |              |        |  |   |       
|Basic, as reported                                                                                                           |  | $                  | 0.26  |                         | $ | 0.27         |  | $            | 0.37   |  | $ | 0.48  
|                                                                                                                             |  |                    |       |                         |   |              |  |              |        |  |   |       
|Basic, pro forma                                                                                                             |  | $                  | 0.26  |                         | $ | 0.25         |  | $            | 0.34   |  | $ | 0.44  
|                                                                                                                             |  |                    |       |                         |   |              |  |              |        |  |   |       
|Diluted, as reported                                                                                                         |  | $                  | 0.25  |                         | $ | 0.26         |  | $            | 0.35   |  | $ | 0.46  
|                                                                                                                             |  |                    |       |                         |   |              |  |              |        |  |   |       
|Diluted, pro forma                                                                                                           |  | $                  | 0.25  |                         | $ | 0.24         |  | $            | 0.33   |  | $ | 0.42  
|                                                                                                                             |  |                    |       |                         |   |              |  |              |        |  |   |       



The impact of applying
SFAS No. 123, as amended by SFAS No. 148, in this pro forma disclosure is not necessarily indicative of the effect on income in the future. SFAS No. 123, as amended by SFAS No. 148, does not apply to awards granted prior to 1995.



On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment. Generally the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to
be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. In March 2005, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No.
107, which expresses views of the SEC staff and provides interpretive guidance regarding the application of SFAS No. 123(R). Additional discussion regarding SFAS No. 123(R) and SAB No. 107 is included in Note 2 New Accounting
Pronouncements below.



Earnings per common share



Earnings per common share is calculated based on the weighted average common
shares outstanding. Earnings per common share, assuming dilution, is based on the weighted average common shares and common share equivalents outstanding. Common share equivalents relate to stock options for our common stock and restricted stock.
The number of shares issued upon exercise during the 24 weeks ended June 19, 2005 was 333,910.



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##### Table of Contents

In accordance with SFAS No. 128, Earnings Per Share, the following table reconciles share
amounts utilized to calculate earnings per common share and earnings per common share, assuming dilution:



|                                                            |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|----------------------------------------------------------- |  | ------------------ | ---------- | - | ----------------------- | - | ---------- | ------------ |  | - | ------------ | - |  | - | ---------- | -
|                                                            |  | Twelve Weeks Ended |            |   | Twenty-four Weeks Ended |  
|                                                            |  | June 19,2005       |            |   | June 13,2004            |   |            | June 19,2005 |  |   | June 13,2004 |  
|Net income, in thousands                                    |  | $                  | 8,091      |   |                         | $ | 8,109      |              |  | $ | 11,286       |   |  | $ | 14,306     |  
|                                                            |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Earnings per common share                                   |  | $                  | 0.26       |   |                         | $ | 0.27       |              |  | $ | 0.37         |   |  | $ | 0.48       |  
|Effect of dilutive stock options                            |  |                    | (0.01      | ) |                         |   | (0.01      | )            |  |   | (0.02        | ) |  |   | (0.02      | )
|                                                            |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Earnings per common share, assuming dilution                |  | $                  | 0.25       |   |                         | $ | 0.26       |              |  | $ | 0.35         |   |  | $ | 0.46       |  
|                                                            |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Weighted average common shares                              |  |                    | 30,742,029 |   |                         |   | 30,051,810 |              |  |   | 30,691,318   |   |  |   | 29,961,360 |  
|Effect of dilutive stock options                            |  |                    | 1,088,046  |   |                         |   | 1,505,443  |              |  |   | 1,360,340    |   |  |   | 1,446,927  |  
|                                                            |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  
|Weighted average common shares and common share equivalents |  |                    | 31,830,075 |   |                         |   | 31,557,253 |              |  |   | 32,051,658   |   |  |   | 31,408,287 |  
|                                                            |  |                    |            |   |                         |   |            |              |  |   |              |   |  |   |            |  



2. New Accounting Pronouncements



SFAS No. 123(R)



On December 16, 2004, the FASB issued SFAS No. 123 (R), which is a revision
of SFAS No. 123. SFAS No. 123(R) supersedes APB No. 25, and amends SFAS No. 95, Statement of Cash Flows. Generally the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires
all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.



SFAS No. 123(R) permits public companies to adopt its requirements using one
of two methods:



| | 1. | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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We plan to adopt SFAS No. 123(R) using the modified prospective method beginning in fiscal year 2006.



As permitted by SFAS No. 123, we currently account for
share-based payments to employees using APB Opinion 25s intrinsic value method and as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)s fair value method will have a
significant impact on our reported results of operations. The impact of adopting SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R)
in prior periods, the impact of that standard could reasonably be expected to have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 Accounting Policies 
Stock options in this report. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financial cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we can not estimate what those amounts will be in the future, the amount of such excess tax deductions
from option exercises were $0.7 million for the first half of 2005 and $0.3 million for the first half of 2004.



We are currently evaluating our business practices regarding the magnitude or form of share-based compensation to employees and the choice of the
option-pricing model in the future. We are also analyzing other potential impacts of adopting SFAS No. 123(R) and presently, do not expect any other potential impact will be significant.



In March 2005, the SEC issued SAB No. 107, which expresses views of the SEC staff regarding the interaction between SFAS No.
123(R) and certain SEC rules and regulations. Additionally, SAB No. 107 provides the staffs view regarding the valuation of share-based payment arrangements for public companies and interpretive guidance in implementation of SFAS No. 123(R)
and disclosures in MD&A subsequent to adoption of SFAS No. 123(R). SAB No. 107 does not change the accounting required by SFAS No. 123(R).



The FASB required SFAS No. 123(R) be adopted in the first interim or annual period beginning after June 15, 2005. On April 14, 2005, the SEC issued a
press release amending compliance dates for SFAS No. 123(R). Under the SECs new rule, SFAS No. 123(R) will become effective for us beginning in fiscal year 2006.



Interpretation No. 47



In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No.
143 Accounting for Asset Retirement Obligations. Interpretation No. 47 clarifies that an entity is required to recognize a liability for the fair value of conditional asset retirement obligation when incurred if the liabilitys fair
value can be reasonably estimated and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We are required to adopt Interpretation No. 47 as of January 1, 2006. We do not
believe the adoption of Interpretation No. 47 will have a material impact on our results of operations or financial condition.



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SFAS No. 154



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 requires retrospective application to prior
periods financial statements of a voluntary change in accounting principle and that a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets be accounted for as a change in accounting estimate that is
effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not believe the adoption of SFAS No. 154 will have a material
impact on our results of operations or financial condition.



3. Discontinued
Operations



During 2003, we completed the sale and
divestiture of our Florida broadline foodservice operations and our Florida stores businesses (collectively, the Florida Operations) and our broadline foodservice operations in northern California (Northern California Foodservice
Operations). This allowed us to focus on our core store operations, concentrate our resources to strengthen our balance sheet and continue development of our two store formats. We retained certain residual assets, liabilities and contingencies
in conjunction with the sale transactions and divestitures. In accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the accompanying consolidated financial statements reflect the
results of operations and financial position of the Florida Operations and the Northern California Foodservice Operations separately as discontinued operations.



The assets of the discontinued operations represent primarily the land and building improvements retained in the Northern California Foodservice
Operations and are presented in the consolidated balance sheets under the caption Assets of discontinued operations. The liabilities of the discontinued operations are comprised of the remaining accounts payable and accrued
liabilities.



Loss from discontinued operations for each
period primarily represents the residual activities in the Northern California Foodservice Operations and other adjustments to reserves of exiting the foodservice operations.



The following table sets forth the activities and the remaining balances as of June 19, 2005, related to reserves for
exiting the Florida Operations and the Northern California Foodservice Operations, in thousands.



|                                           |  |                          |       |             |   |          |  |   |                        |   |  |   |      
|------------------------------------------ |  | ------------------------ | ----- | ----------- | - | -------- |  | - | ---------------------- | - |  | - | -----
|                                           |  | Balance atJanuary 2,2005 |       | Adjustments |   | Payments |  |   | Balance atJune 19,2005
|Lease termination costs                    |  | $                        | 2,791 |             | $ | 270      |  | $ | (657                   | ) |  | $ | 2,404
|Employee severance and related obligations |  |                          | 672   |             |   |         |  |   | (316                   | ) |  |   | 356  
|                                           |  |                          |       |             |   |          |  |   |                        |   |  |   |      
|                                           |  | $                        | 3,463 |             | $ | 270      |  | $ | (973                   | ) |  | $ | 2,760
|                                           |  |                          |       |             |   |          |  |   |                        |   |  |   |      



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4. Debt



Amended Credit Facility



Effective November 18, 2004, we entered into a $150.0 million Amended and Restated Credit Facility (Amended Credit Facility) with a syndicate
of banks. The Amended Credit Facility replaced a senior secured revolving credit facility. The Amended Credit Facility has a five-year term expiring on November 18, 2009. Interest for the Amended Credit Facility is at the base rate or at the reserve
adjusted Eurodollar rate plus, in each case, an applicable margin. Commitment fees are charged on the undrawn amount at rates ranging from 0.15 percent to 0.50 percent. At June 19, 2005, the six-month Eurodollar LIBOR rate was 2.12 percent.



At our option, the Amended Credit Facility can be used to
support up to $15.0 million of commercial letters of credit. 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. At June 19, 2005, $30.0 million of revolving loan and $5.6 million of letters of credit were outstanding. At June 19, 2005, we had $114.4 million available under our Amended Credit Facility.



Lease Agreement



In November 2001, we entered into a five-year operating lease agreement (Lease Agreement) with a national
banking association as a real estate trust. Participants in the Lease Agreement structure include several banks and financing institutions as well as Casino USA. 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. As of June 19, 2005, the Lease Agreement as amended, with a value of $86.6 million and a composite interest rate of 9.07 percent, provides for the financing of two
distribution facilities and 20 store locations.



The Lease
Agreement is considered a variable interest entity and subject to consolidation under Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, as amended. Therefore, the related properties and
notes payable are included in our consolidated balance sheets under Property, plant and equipment, Current maturities of long-term debt and capital leases, Notes payable and, for the Casino USA participation,
Notes payable to affiliate.



As of June 19, 2005,
there was $0.1 million cash funds in the real estate trust that are restricted as to their use which were reflected on our consolidated balance sheets as Cash held in real estate trust. These cash funds are the remainder of proceeds
generated in 2003 from the sale of a Florida distribution facility and a Florida store property originally owned by the real estate trust that were subsequently used in 2004 to purchase six of our owned store properties by the real estate trust.



12



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Collateral



Borrowings under both the Amended Credit Facility and the Lease Agreement are collateralized by security interests in our receivables, inventory and owned
properties. Principal collateral for our obligations under the Lease Agreement includes specific properties and their fixtures and equipment, and additionally a collateral position, subordinate to the Amended Credit Facility, on receivables,
inventory and owned properties not serving as principal collateral under the Lease Agreement. The Amended Credit Facility has as principal collateral, our receivables, inventory and owned properties that are not part of the principal collateral of
the Lease Agreement, and has a subordinate collateral position on the properties and related assets that are the principal collateral of the Lease Agreement.



Covenants



The Amended Credit Facility 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.



We were in compliance with the covenants
within both the Amended Credit Facility as amended and the Lease Agreement as amended as of June 19, 2005 and January 2, 2005. The Amended Credit Facility expires on November 18, 2009 and the Lease Agreement expires on November 30, 2006;
accordingly, our obligations under these agreements were classified as long-term debt in our consolidated balance sheets at June 19, 2005 and January 2, 2005.



Interest



Interest paid on our long-term debt aggregated $4.1 million for the 24 weeks ended June 19, 2005 and $7.9 million for the 24 weeks ended June 13, 2004.



The fair value of our debt, estimated based upon current
interest rates offered for debt instruments of the same remaining maturity, approximates the carrying amount.



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5. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations



Defined benefit plan



We have a funded noncontributory defined benefit retirement plan covering substantially all of our full time employees
following a vesting period of five years of service. We fund this plan with contributions as required by the Employee Retirement Income Security Act of 1974 (ERISA). The components included in the net periodic benefit cost for the
periods indicated are as follows, in thousands:



|                                   |  |                    |        |   |                         |   |        |              |  |   |              |   |  |   |        |  
|---------------------------------- |  | ------------------ | ------ | - | ----------------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                   |  | Twelve Weeks Ended |        |   | Twenty-four Weeks Ended |  
|                                   |  | June 19,2005       |        |   | June 13,2004            |   |        | June 19,2005 |  |   | June 13,2004 |  
|Service cost                       |  | $                  | 825    |   |                         | $ | 747    |              |  | $ | 1,596        |   |  | $ | 1,515  |  
|Interest cost                      |  |                    | 1,273  |   |                         |   | 1,134  |              |  |   | 2,461        |   |  |   | 2,301  |  
|Expected return on plan assets     |  |                    | (1,345 | ) |                         |   | (1,074 | )            |  |   | (2,557       | ) |  |   | (2,179 | )
|Amortization of prior service cost |  |                    | 90     |   |                         |   | 90     |              |  |   | 173          |   |  |   | 183    |  
|Amortization of net actuarial loss |  |                    | 568    |   |                         |   | 481    |              |  |   | 1,099        |   |  |   | 976    |  
|                                   |  |                    |        |   |                         |   |        |              |  |   |              |   |  |   |        |  
|Net periodic benefit cost          |  | $                  | 1,411  |   |                         | $ | 1,378  |              |  | $ | 2,772        |   |  | $ | 2,796  |  
|                                   |  |                    |        |   |                         |   |        |              |  |   |              |   |  |   |        |  



As we previously
disclosed in our 2004 Annual Report on Form 10-K, we are not required to make any contributions for the 2005 plan year pursuant to the minimum funding requirements of ERISA; however, we may elect to contribute up to $10.0 million to this plan in
2005. During the first half of 2005, we made a $2.0 million contribution to this plan.



Supplemental Executive Retirement Plan



We
have in place a noncontributory supplemental executive retirement plan (SERP), which provides supplemental income payments for certain officers in retirement. We have invested in corporate-owned life insurance policies, which provide
partial funding for the SERP.



The components included in the
net periodic benefit cost for the periods indicated are as follows, in thousands:



|                                   |  |                    |     |                         |   |              |  |              |     |  |   |    
|---------------------------------- |  | ------------------ | --- | ----------------------- | - | ------------ |  | ------------ | --- |  | - | ---
|                                   |  | Twelve Weeks Ended |     | Twenty-four Weeks Ended
|                                   |  | June 19,2005       |     | June 13,2004            |   | June 19,2005 |  | June 13,2004
|Service cost                       |  | $                  | 83  |                         | $ | 89           |  | $            | 166 |  | $ | 178
|Interest cost                      |  |                    | 175 |                         |   | 145          |  |              | 350 |  |   | 290
|Amortization of prior service cost |  |                    | 30  |                         |   | 30           |  |              | 60  |  |   | 60 
|Amortization of net actuarial loss |  |                    | 54  |                         |   | 24           |  |              | 108 |  |   | 48 
|                                   |  |                    |     |                         |   |              |  |              |     |  |   |    
|Net periodic benefit cost          |  | $                  | 342 |                         | $ | 288          |  | $            | 684 |  | $ | 576
|                                   |  |                    |     |                         |   |              |  |              |     |  |   |    



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Postretirement and postemployment benefit obligations



We provide certain health care benefits for retired employees. Substantially
all of our full time employees may become eligible for those benefits if they reach retirement age while still working for us. This postretirement health care plan is contributory with participants contributions adjusted annually. The plan
limits benefits 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, we provide certain disability-related benefits to our employees.



In December 2003, the Medical Prescription Drug Improvement
and Modernization Act of 2003 (the Act) was enacted. The Act established a prescription drug benefit under Medicare, known as Medicare Part D, and a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D. In January 2004, the FASB issued FASB Staff Position (FSP) 106-1, which permitted a sponsor of a postretirement health care plan that provides a prescription
drug benefit to make a one-time election to defer accounting for the effects of the Act. FSP 106-1 was effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The election to defer accounting for the Act
was a one-time election that must have been made before net periodic postretirement benefit costs for the period that includes the Acts enactment date were first included in reported financial information pursuant to the requirements of SFAS
No. 106. In accordance with FSP 106-1, we elected to defer accounting for the Act. FSP 106-2 superseded FSP 106-1 when it became effective for our fourth quarter of 2004. We have not yet determined whether the current benefits provided to certain
participants are actuarially equivalent to Medicare Part D. Accordingly, the measurement of the accumulated pension benefit obligation and net periodic postretirement benefit cost in our consolidated financial statements and accompanying notes do
not reflect the effects of the Act.



The components included in
the postretirement benefit cost for the periods indicated are as follows, in thousands:



|                                   |  |                    |     |              |                         |     |              |  |              |     |  |   |     |  
|---------------------------------- |  | ------------------ | --- | ------------ | ----------------------- | --- | ------------ |  | ------------ | --- |  | - | --- | -
|                                   |  | Twelve Weeks Ended |     |              | Twenty-four Weeks Ended |    
|                                   |  | June 19,2005       |     | June 13,2004 |                         |     | June 19,2005 |  | June 13,2004 |    
|Service cost                       |  | $                  | 143 |              | $                       | 131 |              |  | $            | 285 |  | $ | 262 |  
|Interest cost                      |  |                    | 232 |              |                         | 230 |              |  |              | 464 |  |   | 460 |  
|Amortization of prior service cost |  |                    | 4   |              |                         | 3   |              |  |              | 8   |  |   | 6   |  
|Amortization of net actuarial gain |  |                    |    |              |                         | (18 | )            |  |              |    |  |   | (36 | )
|                                   |  |                    |     |              |                         |     |              |  |              |     |  |   |     |  
|Net periodic benefit cost          |  | $                  | 379 |              | $                       | 346 |              |  | $            | 757 |  | $ | 692 |  
|                                   |  |                    |     |              |                         |     |              |  |              |     |  |   |     |  



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6. Comprehensive Income



Comprehensive income or loss was computed as follows, in thousands:



|                                                                 |  |                    |       |                         |              |   |              |  |              |        |  |   |       
|---------------------------------------------------------------- |  | ------------------ | ----- | ----------------------- | ------------ | - | ------------ |  | ------------ | ------ |  | - | ------
|                                                                 |  | Twelve Weeks Ended |       | Twenty-four Weeks Ended
|                                                                 |  | June 19,2005       |       |                         | June 13,2004 |   | June 19,2005 |  | June 13,2004
|Net income                                                       |  | $                  | 8,091 |                         |              | $ | 8,109        |  | $            | 11,286 |  | $ | 14,306
|Other comprehensive (loss) income:                               |  |                    |       |                         |              |   |              |  |              |        |  |   |       
|Net gain on derivative instruments, net of tax                   |  |                    |      |                         |              |   | 235          |  |              |       |  |   | 184   
|Reclassification adjustments, net of tax, included in net income |  |                    |      |                         |              |   | 261          |  |              |       |  |   | 533   
|Foreign currency translation adjustments                         |  |                    | (19   | )                       |              |   | 137          |  |              | 56     |  |   | 60    
|                                                                 |  |                    |       |                         |              |   |              |  |              |        |  |   |       
|Total other comprehensive (loss) income                          |  |                    | (19   | )                       |              |   | 633          |  |              | 56     |  |   | 777   
|                                                                 |  |                    |       |                         |              |   |              |  |              |        |  |   |       
|Total comprehensive income                                       |  | $                  | 8,072 |                         |              | $ | 8,742        |  | $            | 11,342 |  | $ | 15,083
|                                                                 |  |                    |       |                         |              |   |              |  |              |        |  |   |       



We had an interest
rate collar agreement at June 13, 2004 that was designed as a cash flow hedge and was considered fully effective. This agreement was marked to market every quarter, with the changes in fair value recorded as other comprehensive income
(OCI) and the ineffective portion reclassified from OCI to current earnings and included under Interest expense, net on our consolidated statement of operations. This agreement expired in November 2004.



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



7. Income Taxes



Smart & Final Inc. and Casino USA are parties to a tax sharing arrangement covering income tax obligations in the state of California. Under this
arrangement, we make tax sharing payments to, or receive benefits from, Casino USA based upon pre-tax income or loss for financial reporting purposes adjusted for certain agreed upon items.



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Tax payments made to governments and Casino USA for the periods indicated are as follows, in thousands:



|                                                            |  |                         |       |   |              |   |      
|----------------------------------------------------------- |  | ----------------------- | ----- | - | ------------ | - | -----
|                                                            |  | Twenty-four Weeks Ended
|                                                            |  | June 19,2005            |       |   | June 13,2004
|Tax sharing (benefits received from) payments to Casino USA |  | $                       | (574  | ) |              | $ | 1,638
|Taxes paid to states other than California                  |  |                         | 73    |   |              |   | 17   
|Taxes paid to federal government                            |  |                         | 4,950 |   |              |   | 5,000
|                                                            |  |                         |       |   |              |   |      
|Total taxes paid                                            |  | $                       | 4,449 |   |              | $ | 6,655
|                                                            |  |                         |       |   |              |   |      



8. Legal Actions



In May 2001, we were named as a defendant in a suit filed in the Orange
County Superior Court of the State of California. This suit, Olivas vs. Smart & Final Inc.,was filed by the plaintiff and another former hourly store employee, on their behalf and on behalf of all hourly store employees in California,
alleging that we failed to pay proper overtime, failed to pay for all hours worked, failed to pay for certain meal and rest periods, and failed to pay for other compensation. The action seeks to be classified as a class action and seeks
unspecified monetary damages and statutory penalties thereon. On August 9, 2001, we filed a general denial to these claims and asserted numerous defenses. A hearing on plaintiffs motion for class certification was heard and certification as to
nine sub-classes was granted on January 22, 2004. We continue to believe the merits of this action do not warrant class action status and we believe we have certain defenses to the claim. The class consists of approximately 13,200 current and former
hourly store employees in California and the suit covers the period May 1997 through January 2004. Discovery is now underway in the case. In February 2005, the court ordered the parties to commence mediation. In March 2005, the court set a trial
date of March 6, 2006. Mediations have been held on April 27, 2005, June 6, 2005 and July 14, 2005 with no resolution to the matter reached. The court has ordered the parties to engage in further settlement discussions.



We have not recorded any charges during the first and second quarters of 2005
associated with the Olivasaction. This case and its claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each
particular sub-class and claim and the ultimate determination of liability and the applicability of statutory penalties. For certain of the sub-classes we believe there is a reasonable possibility that resolution of the matter could result in a loss
which could be materially in excess of presently established reserves or which individually or in the aggregate could result in a material loss for which there is no reserve. Litigation matters are subject to inherent uncertainties; and accordingly,
with respect to the Olivasaction we are not able to quantify the estimated amount or range of such additional loss or loss. However, such additional loss or loss, either individually or in the aggregate, could have a material adverse effect
upon our results of operations and net cash flows in the period in which it is recorded or paid.



We are named as a 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



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ultimate determination of these other cases will either individually or in the aggregate have a material adverse effect on our results of operations or
financial position.



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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the
accompanying unaudited consolidated financial statements and notes thereto and our 2004 Annual Report on Form 10-K. Our MD&A provides an overview of our results of operations for the 12 weeks and 24 weeks ended June 19, 2005 as compared to the
equivalent periods of 2004. This is followed by a discussion and analysis of our cash flows, capital requirements and financing activities. Lastly, we discuss new accounting pronouncements and critical accounting policies incorporated in our
reported financial statements.



Each of our 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. Our fiscal year 2004 consists of 53 weeks, with thirteen weeks in the fourth quarter.



Summary



The major factors that impacted our results of operations and financial position for the 12-week quarters ended June 19,
2005 and June 13, 2004 are as follows:



| |  |  | Our second quarter 2005 sales increased 5.7 percent over the second quarter 2004, driven by an increase in our average transaction supported by promotional activities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gross margin for the second quarter 2005 was adversely impacted by the increased distribution costs due to the increased volume, labor costs, fuel costs and expenditures associated
with improving our distribution network to efficiently support the increased volume.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We opened one new store during the second quarter 2005 and at June 19, 2005, operated 227 stores, as compared to 220 stores at June 13, 2004. Additionally, one store was relocated
since the end of the second quarter 2004. While the sales increase attributable to the new and relocated stores helped improve our total sales performance in the second quarter 2005, the operating loss from these stores reduced our operating income
generated from existing stores.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense, net decreased in the second quarter 2005 as compared to the second quarter 2004 as a result of lower average debt outstanding and lower effective interest rate.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cash flows provided by operating activities increased over the equivalent period in 2004 and was reinvested in our expansion plan and technology improvement to support our future
growth.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We reported income from continuing
operations of $8.2 million, or $0.26 per diluted share, for the 12 weeks ended June 19, 2005, a slight decrease from the $8.3 million, or $0.26 per diluted share, reported for the 12 weeks ended June 13, 2004.



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We reported net income of $8.1 million, or $0.25 per diluted share, for the 12 weeks ended June 19, 2005,
compared to net income of $8.1 million, or $0.26 per diluted share, for the 12 weeks ended June 13, 2004. The year-to-year increase in sales and decrease in interest expense were offset by the lower gross margin rate, primarily attributable to the
increased distribution costs, other volume-driven costs and spending in information technology and legal fees.



We reported income from continuing operations of $11.7 million, or $0.36 per diluted share, for the first half of 2005, a $3.2 million decrease from the
$14.9 million, or $0.48 per diluted share, reported for the first half of 2004.



We reported net income of $11.3 million, or $0.35 per diluted share, for the first half of 2005, compared to net income of $14.3 million, or $0.46 per diluted share, for the first half of 2004. The year-to-year
increase in sales and decrease in interest expense were offset by the lower gross margin rate, primarily attributable to the increased distribution costs and lower product margins, and increases in other volume-driven costs, spending in information
technology and legal fees.



We believe that our future growth
depends on our ability to expand by opening new and relocated stores, undergoing remodels in the current stores to better serve our customers, and increasing our market presence by expanding our store formats. With the increasing competition within
the retail grocery market, there is no assurance that our sales growth will maintain at the current level and our profitability is dependent upon our leveraging sales growth while implementing effective cost controls.



Results of Operations



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



|                                                      |  |                    |   |  |                         |   |  |              |   |  |              |  
|----------------------------------------------------- |  | ------------------ | - |  | ----------------------- | - |  | ------------ | - |  | ------------ | -
|                                                      |  | Twelve Weeks Ended |   |  | Twenty-four Weeks Ended |  
|                                                      |  | June 19,2005       |   |  | June 13,2004            |   |  | June 19,2005 |   |  | June 13,2004 |  
|Sales                                                 |  | 100.0              | % |  | 100.0                   | % |  | 100.0        | % |  | 100.0        | %
|Cost of sales, buying and occupancy                   |  | 83.5               |   |  | 83.1                    |   |  | 83.8         |   |  | 83.0         |  
|                                                      |  |                    |   |  |                         |   |  |              |   |  |              |  
|Gross margin                                          |  | 16.5               |   |  | 16.9                    |   |  | 16.2         |   |  | 17.0         |  
|Operating and administrative expenses                 |  | 13.3               |   |  | 13.2                    |   |  | 13.7         |   |  | 13.4         |  
|                                                      |  |                    |   |  |                         |   |  |              |   |  |              |  
|Income from operations                                |  | 3.2                |   |  | 3.7                     |   |  | 2.6          |   |  | 3.6          |  
|Interest expense, net                                 |  | 0.4                |   |  | 0.8                     |   |  | 0.5          |   |  | 0.8          |  
|                                                      |  |                    |   |  |                         |   |  |              |   |  |              |  
|Income from continuing operations before income taxes |  | 2.7                |   |  | 2.9                     |   |  | 2.1          |   |  | 2.8          |  
|Income tax provision                                  |  | (1.1               | ) |  | (1.1                    | ) |  | (0.8         | ) |  | (1.1         | )
|Equity earnings of joint venture                      |  |                   |   |  | 0.1                     |   |  |             |   |  |             |  
|                                                      |  |                    |   |  |                         |   |  |              |   |  |              |  
|Income from continuing operations                     |  | 1.7                |   |  | 1.8                     |   |  | 1.3          |   |  | 1.7          |  
|Discontinued operations, net of tax                   |  |                   |   |  |                        |   |  |             |   |  | (0.1         | )
|                                                      |  |                    |   |  |                         |   |  |              |   |  |              |  
|Net income                                            |  | 1.7                | % |  | 1.8                     | % |  | 1.2          | % |  | 1.6          | %
|                                                      |  |                    |   |  |                         |   |  |              |   |  |              |  



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Comparison of Twelve Weeks Ended June 19, 2005 with Twelve Weeks Ended June 13, 2004.



Sales



Sales from continuing operations in the second quarter 2005 were $484.1 million, an increase of 5.7 percent over the second
quarter 2004 sales of $457.8 million. Our second quarter 2005 comparable store sales increased by 4.1 percent compared to the 2004 level. We define comparable stores as those that have been in operation for 52 full weeks, including stores that have
been remodeled or relocated within their same market area.



The
year-to-year increase in comparable store sales was primarily attributable to an increase in our average transaction supported by promotional activities. In the second quarter 2005, the comparable average transaction increased by 4.0 percent to
$43.74 from $42.06 for the second quarter 2004 while the comparable customer transaction counts increased by 0.1 percent.



The year-to-year increase in comparable stores sales of 4.1 percent is noteworthy considering that our sales in the second quarter 2004 were favorably
impacted by the residual effect of a labor action directed against three southern California supermarket chains that ended in late February 2004. Furthermore, the retail grocery market in southern California has become increasingly competitive as
the three major supermarket chains undergo market repositioning to rebuild their sales and market share after the labor action. Therefore, there is no assurance that our sales growth will maintain at the current level.



Gross margin



Gross margin represents sales less cost of sales, buying and occupancy. The major categories of costs included in cost of
sales, buying and occupancy are cost of goods, distribution costs, costs of our buying department and store occupancy costs, net of earned vendor rebates and other allowances. Distribution costs consist of all warehouse receiving and inspection
costs, warehousing costs, all transportation costs associated with shipping goods from our warehouses to our stores, and other costs of our distribution network. We do not exclude any portion of these costs from cost of sales.



Gross margin from continuing operations increased $2.5 million, or 3.3
percent, to $79.7 million for the second quarter 2005 as compared to $77.2 million for the second quarter 2004. The increase in gross margin was the result of increased sales, partially offset by the increased distribution and occupancy costs and
lower merchandise margins.



As a percentage of sales, gross
margin decreased to 16.5 percent for the second quarter 2005 compared to 16.9 percent for the second quarter 2004. The 0.4 percentage point decrease was partially attributable to a 0.35 percent increase in distribution costs due to increased volume,
labor costs, fuel costs and expenditures associated with improving our distribution network to efficiently support the increased volume. Additionally, an approximate 0.06 percent decrease in margin was due to a sales mix change resulting from
stronger sales growth in Cash & Carry stores that target only business customers and generate lower gross margins.



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Operating and administrative expenses



The major categories of operating and administrative expenses include store direct expenses associated with displaying and
selling at the store level (primarily labor and related fringe benefit costs) advertising and marketing costs, overhead costs and corporate office costs.



Operating and administrative expenses from continuing operations increased $3.9 million, or 6.6 percent, to $64.3 million for the second quarter 2005 as
compared to $60.4 million for the second quarter 2004.



As a
percentage of sales, operating and administrative expenses increased to 13.3 percent for the second quarter 2005 from 13.2 percent for the second quarter 2004. The 0.1 percent increase primarily related to a 0.37 percent increase in corporate
expenses including information technology spending and legal fees, partially offset by a 0.26 percent decrease in incentive compensation costs. The second quarter 2005 expenses for store operations as a percentage of sales decreased slightly from
the second quarter 2004.



Interest expense, net



Interest expense, net decreased to $2.2 million for the second quarter 2005
as compared to $3.7 million for the second quarter 2004. The year-to-year decrease was primarily due to the lower average debt outstanding and lower effective rate resulting from the expiration of an interest collar agreement in the fourth quarter
2004. At the end of the second quarter 2005, the outstanding balance on the revolving credit facility was $30.0 million, compared with $35.0 million at the end of the second quarter 2004.



Income tax provision



Income tax expense was $5.2 million for both the second quarter 2005 and the second quarter 2004. The effective tax rate for the second quarter 2005 was
39.4 percent and the effective tax rate for the second quarter 2004 was 40.0 percent.



Equity earnings of joint venture



Our
100-percent owned subsidiary, Smart & Final de Mexico S.A. de C.V. (Smart & Final Mexico), is a Mexico holding company that owns 50 percent of a joint venture with the operators of the Calimax store chain. The joint venture
operated 11 stores in Mexico as a Mexican domestic corporation as of June 19, 2005. Our interest in the joint venture is not consolidated and is reported on the equity basis of accounting. During the second quarter 2005, the equity earnings from the
joint venture was $0.2 million, as compared to the equity earnings of $0.5 million in the second quarter 2004.



Discontinued Operations



During 2003, we completed the sale and divestiture of our Florida broadline foodservice operations and our Florida stores businesses (collectively, the Florida Operations) and our broadline foodservice operations in northern
California (Northern California Foodservice



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Operations). This allowed us to focus on our core store operations, concentrate our resources to strengthen our balance sheets and continue development
of our two store formats. We retained certain residual assets, liabilities and contingencies in conjunction with the sale transactions and divestitures. In accordance with the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the accompanying consolidated financial statements reflect the results of operations and financial position of the Florida Operations and the Northern California Foodservice separately as discontinued operations.



Loss from discontinued operations was $0.1 million, net of tax
benefit of $0.1 million, for the second quarter 2005 and $0.2 million, net of tax benefit of $0.1 million, for the second quarter 2004. Loss from discontinued operations primarily represented the run-off activities in the foodservice operations.



Comparison of Twenty-Four Weeks Ended June 19, 2005 with Twenty-Four Weeks
Ended June 13, 2004.



Sales



Sales from continuing operations in the first half of 2005 were $911.7
million, an increase of 3.5 percent over the first half of 2004 sales of $881.3 million. Our first half of 2005 comparable store sales increased by 2.0 percent compared to the 2004 level. The year-to-year increase in comparable store sales was
primarily attributable to an increase in our comparable average transaction of 4.6 percent to $42.89 for the first half of 2005 as compared to $40.99 for the first half of 2004 while the year-to-year comparable transaction counts decreased by 2.5
percent.



The year-to-year increase in comparable store sales
of 2.0 percent is noteworthy considering that our sales in the first and second quarters of 2004 were favorably impacted by the effect of a labor action and its residual effect, against three southern California supermarket chains that ended in late
February 2004.



Gross margin



Gross margin from continuing operations decreased $2.3 million, or 1.5
percent, to $147.9 million for the first half of 2005 as compared to $150.2 million for the first half of 2004. The decrease in gross margin was primarily related to increased distribution costs and lower merchandise margins.



As a percentage of sales, gross margin decreased to 16.2 percent for the
first half of 2005 compared to 17.0 percent for the first half of 2004. The 0.8 percentage point decrease was partially attributable to a 0.49 percent increase in distribution costs primarily due to increased volume, labor costs and fuel costs.
Other decreases included a 0.18 percent decline in merchandise margins, particularly in beverage and fresh meat, and a 0.13 percent decrease in margin due to a sales mix change resulting from strong sales growth in Cash & Carry stores that
target only business customers and generate lower gross margins.



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Operating and administrative expenses



Operating and administrative expenses from continuing operations increased $6.0 million, or 5.1 percent, to $124.5 million
for the first half of 2005 as compared to $118.5 million for the first half of 2004.



As a percentage of sales, operating and administrative expenses increased to 13.7 percent for the first half of 2005 from 13.4 percent for the first half of 2004. The 0.3 percent increase is primarily comprised of a
0.51 percent increase in corporate expenses, including information technology spending and legal fees, and expenses for store operations, partially offset by a 0.24 percent decrease in incentive compensation costs.



Interest expense, net



Interest expense, net decreased to $4.4 million for the first half of 2005
as compared to $7.4 million for the first half of 2004. The year-to-year decrease was primarily due to the lower average debt outstanding and lower effective rate resulting from the expiration of an interest collar agreement in the fourth quarter
2004.



Income tax provision



Income tax expense was $7.4 million for the first half of 2005 as compared
to $9.7 million for the first half of 2004. The effective tax rate for the first half of 2005 was 39.2 percent and the effective tax rate for the first half of 2004 was 40.0 percent.



Equity earnings of joint venture



During the first half of 2005, the equity earnings from our Smart & Final Mexico joint venture was $0.2 million, as compared to the equity earnings of
$0.4 million in the first half of 2004.



Discontinued Operations



Loss from discontinued operations was $0.4 million,
net of tax benefit of $0.3 million, for the first half of 2005 and $0.6 million, net of tax benefit of $0.4 million, for the first half of 2004.



Liquidity and Capital Resources



Cash flows and financial positions



Net cash provided by operating activities from continuing operations was $32.6 million in the first half of 2005, an increase of $17.1 million compared to
$15.5 million in the comparable 2004 period. The increase or decrease in cash provided by operating activities reflects our operating performance and the timing of receipts and disbursements. In the first half of 2004, we utilized cash to increase
inventory levels to support the higher sales and to achieve higher levels of store inventory in-stock conditions. In the first half of 2004, we also utilized cash to fund the payment of a litigation settlement and the divestiture
activities and lower our accounts



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payable balance from 2003 which was atypically higher due to our increased inventory purchases in the fourth quarter 2003 in response to the labor action in
southern California. Accounts payable balance was higher at June 19, 2005, reflecting increased inventory purchases toward the end of the second quarter 2005 and the timing of related payments.



Net cash used in investing activities from continuing operations was $26.9
million in the first half of 2005 compared to net cash provided by investing activities from continuing operations of $10.0 million in the comparable 2004 period. In the first half of 2005, our capital expenditures increased by $15.4 million as
compared to the first half of 2004, including property investment for future store sites, investment in store construction and equipment and investment in hardware and software to improve our information technology systems. In the first half of
2004, the redemption of a certificate of deposit and sale of certain municipal bonds and increased proceeds from disposal of closed or relocated store properties generated cash of approximately $7.2 million. For the first half of 2004, additional
cash of $14.2 million was released from a real estate trust in payment for six of our owned store properties sold to the real estate synthetic lease facility discussed in Bank credit facility, lease facility and other financial activities
 Lease Agreement below.



Net cash provided by
financing activities was $4.6 million in the first half of 2005 compared to net cash used in financing activities of $24.4 million in the comparable 2004 period, primarily due to the borrowing and payment on our outstanding obligation under a
revolving bank credit facility. A net borrowing of $5.0 million was made in the first half of 2005 to increase the total borrowing under this credit facility, from $25.0 million at the beginning of 2005 to $30.0 million at June 19, 2005. During the
first half of 2004, there was a net payment of $25.0 million toward this credit facility and at June 13, 2004, the total borrowing under this credit facility was $35.0 million. Part of the repayment to the revolving bank credit facility during the
first half of 2004 was funded by the proceeds from the sale of six of our owned store properties to the real estate synthetic lease facility discussed under Bank credit facility, lease facility and other financing activities  Lease
Agreement below.



At June 19, 2005, we had cash and cash
equivalents of $37.5 million, stockholders equity of $264.8 million and debt, excluding capital leases, of $116.6 million. At June 19, 2005, current assets were $221.7 million, $78.2 million more than our current liabilities of $143.5 million.



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, investment in capitalized software and hardware as well as general working capital requirements.



During the first half of 2005, we opened four new stores. New store growth
and store remodeling are planned to continue in the remainder of 2005. We plan to open or relocate a total of 15 to 20 stores during 2005 and to continue at this pace of development for 2006. We estimate that the capital expenditure requirement for
improvements and equipment for a new store is approximately $1.2 million to $2.2 million. We typically enter into lease arrangements



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for our store properties. From time to time we may purchase the properties for an additional capital investment that depends on the property location and
market value. During the first quarter 2005, we made $5.3 million in property investments for our future store sites. Working capital investment related to a new store is approximately $0.2 million and primarily relates to inventory net of trade
vendor accounts payable. We also plan to perform approximately ten major remodels to existing stores in 2005 which generally require capital expenditures in excess of $400,000 per major remodel. Total capital expenditures for 2005, including
investment in capitalized software, are currently estimated at $50 million to $60 million. However, we cannot assure that these estimates will be realized and our capital program plans are subject to change upon our further review.



We have various retirement plans, which subject us to various funding
obligations. Our noncontributory defined benefit retirement plan covers substantially all of our full time employees. We fund this plan with contributions as required by the Employee Retirement Income Security Act of 1974 (ERISA). As we
previously disclosed in our 2004 Annual Report on Form 10-K, we are not required to make any contributions for the 2005 plan year pursuant to the minimum funding requirements of ERISA; however, we may elect to contribute up to $10.0 million to this
plan in 2005. During the first half of 2005, we made a $2.0 million contribution to this plan.



Bank credit facility, lease facility and other financing activities



Amended Credit Facility



Effective November 18, 2004, we entered into a $150.0 million Amended and Restated Credit Facility (Amended Credit Facility) with a syndicate
of banks. The Amended Credit Facility replaced a senior secured revolving credit facility. The Amended Credit Facility has a five-year term expiring on November 18, 2009. Interest for the Amended Credit Facility is at the base rate or at the reserve
adjusted Eurodollar rate plus, in each case, an applicable margin. Commitment fees are charged on the undrawn amount at rates ranging from 0.15 percent to 0.50 percent. At June 19, 2005, the six-month Eurodollar LIBOR rate was 2.12 percent.



At our option, the Amended Credit Facility can be used to
support up to $15.0 million of commercial letters of credit. 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. At June 19, 2005, $30.0 million of revolving loan and $5.6 million of letters of credit were outstanding. At June 19, 2005, we had $114.4 million available under our Amended Credit Facility.



Lease Agreement



In November 2001, we entered into a five-year operating lease agreement (Lease Agreement) with a national
banking association as a real estate trust. Participants in the Lease Agreement structure include several banks and financing institutions as well as Casino USA. 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



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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. As of June 19, 2005,
the Lease Agreement as amended, with a value of $86.6 million and a composite interest rate of 9.07 percent, provides for the financing of two distribution facilities and 20 store locations.



The Lease Agreement is considered a variable interest entity and subject to
consolidation under Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, as amended. Therefore, the related properties and notes payable are included in our consolidated balance sheets
under Property, plant and equipment, Current maturities of long-term debt and capital leases, Notes payable and, for the Casino USA participation, Notes payable to affiliate.



As of June 19, 2005, there was $0.1 million cash funds in the real estate
trust that are restricted as to their use which were reflected on our consolidated balance sheets as Cash held in real estate trust. These cash funds are the residual of $14.3 million proceeds generated in 2003 from the sale of a Florida
distribution facility and a Florida store property previously owned by the real estate trust that were subsequently utilized in 2004 for the purchase of six of our owned store properties by the real estate trust in the amount of $14.2 million.



Collateral



Borrowings under both the Amended Credit Facility and the Lease Agreement
are collateralized by security interests in our receivables, inventory and owned properties. Principal collateral for our obligations under the Lease Agreement includes specific properties and their fixtures and equipment, and additionally a
collateral position, subordinate to the Amended Credit Facility, on receivables, inventory and owned properties not serving as principal collateral under the Lease Agreement. The Amended Credit Facility has as principal collateral, our receivables,
inventory and owned properties that are not part of the principal collateral of the Lease Agreement, and has a subordinate collateral position on the properties and related assets that are the principal collateral of the Lease Agreement.



Covenants



The Amended Credit Facility 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.



We
were in compliance with the covenants within both the Amended Credit Facility as amended and the Lease Agreement as amended as of June 19, 2005 and January 2, 2005. The Amended Credit Facility expires on November 18, 2009 and the Lease Agreement
expires on November 30, 2006; accordingly, our obligations under these agreements were classified as long-term debt in our consolidated balance sheets at June 19, 2005 and January 2, 2005.



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



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future capital expenditures 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.



New Accounting Pronouncements



SFAS No. 123(R)



On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally the approach in
SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative.



SFAS
No. 123(R) permits public companies to adopt its requirements using one of two methods:



| | 1. | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We plan to adopt SFAS No. 123(R) using the modified prospective method
beginning in fiscal year 2006.



As permitted by SFAS No. 123,
we currently account for share-based payments to employees using APB Opinion 25s intrinsic value method and as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)s fair
value method will have a significant impact on our reported results of operations. The impact of adopting SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had
we adopted SFAS No. 123(R) in prior periods, the impact of that standard could reasonably be expected to have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1
Accounting Policies - Stock options in this report. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financial cash flow, rather than as an operating cash
flow



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as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.
While we can not estimate what those amounts will be in the future, the amount of such excess tax deductions from option exercises were $0.7 million for the first half of 2005 and $0.3 million for the first half of 2004.



We are currently evaluating our business practices regarding the magnitude or
form of share-based compensation to employees and the choice of the option-pricing model in the future. We are also analyzing other potential impacts of adopting SFAS No. 123(R) and presently, do not expect any other potential impact will be
significant.



In March 2005, the SEC issued SAB No. 107, which
expresses views of the SEC staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations. Additionally, SAB No. 107 provides the staffs view regarding the valuation of share-based payment arrangements for public
companies and interpretive guidance in implementation of SFAS No. 123(R) and disclosures in MD&A subsequent to adoption of SFAS No. 123(R). SAB No. 107 does not change the accounting required by SFAS No. 123(R).



The FASB required SFAS No. 123(R) be adopted in the first interim or annual
period beginning after June 15, 2005. On April 14, 2005, the SEC issued a press release amending compliance dates for SFAS No. 123(R). Under the SECs new rule, SFAS No. 123(R) will become effective for us beginning in fiscal year 2006.



Interpretation No. 47



In March 2005, the FASB issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143 Accounting for Asset Retirement Obligations. Interpretation No. 47 clarifies that an entity is required to recognize a liability for the fair value of
conditional asset retirement obligation when incurred if the liabilitys fair value can be reasonably estimated and clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement
obligation. We are required to adopt Interpretation No. 47 as of January 1, 2006. We do not believe the adoption of Interpretation No. 47 will have a material impact on our results of operations or financial condition.



SFAS No. 154



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 requires
retrospective application to prior periods financial statements of a voluntary change in accounting principle and that a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets be accounted for as a
change in accounting estimate that is effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not believe the adoption of
SFAS No. 154 will have a material impact on our results of operations or financial condition.



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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. These critical accounting policies, under different conditions or using different assumption or estimates, could show materially different
results on our financial condition and results of operations. Our critical accounting policies are described in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting
Policies in our 2004 Annual Report on Form 10-K. As of June 19, 2005, we did not make any changes in our critical accounting policies.



Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We are exposed to market risks relating to fluctuations in interest rates and the foreign exchange rates between the U.S. Dollar and foreign currencies primarily the Mexican Peso. Our primary market risk management
objective is to minimize the negative impact of interest rate fluctuations on our earnings and cash flows. As of June 19, 2005, our exposure to foreign currency risk was limited.



Interest Rate Risk



We may manage interest rate risk through the use of interest rate collar agreements to limit the effect of interest rate fluctuations from time to time.
We presently have no program in place. An earlier interest rate collar agreement was terminated in November 2004.



Credit Risk



We are exposed to credit risk on accounts receivable through the ordinary course of business and we perform ongoing credit evaluations. Concentrations of
credit risk with respect to accounts receivable are limited due to the number of customers comprising our customer base. We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks.



Foreign Currency Risk



Our exposure to foreign currency risk is limited to our operations under Smart & Final Mexico and the equity earnings of
its Mexico joint venture. As of June 19, 2005, such exposure was the $6.8 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 fluctuations 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 4.
CONTROLS AND PROCEDURES



We
carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial
officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) that is required to be included in our periodic Securities and
Exchange Commission reports. There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.



Additional information regarding a
report of managements assessment of the effectiveness of our internal control as of January 2, 2005 and our independent registered public accounting firms report dated March 2, 2005 on managements assessment as of January 2, 2005
were included in Item 8. Financial Statements and Supplementary Data of our 2004 Annual Report on Form 10-K.



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PART II - OTHER INFORMATION



Item 1.
Legal Proceedings



In May 2001, we
were named as a defendant in a suit filed in the Orange County Superior Court of the State of California. This suit, Olivas vs. Smart & Final Inc.,was filed by the plaintiff and another former hourly store employee, on their behalf and
on behalf of all hourly store employees in California, alleging that we failed to pay proper overtime, failed to pay for all hours worked, failed to pay for certain meal and rest periods, and failed to pay for other compensation. The action seeks to
be classified as a class action and seeks unspecified monetary damages and statutory penalties thereon. On August 9, 2001, we filed a general denial to these claims and asserted numerous defenses. A hearing on plaintiffs motion for
class certification was heard and certification as to nine sub-classes was granted on January 22, 2004. We continue to believe the merits of this action do not warrant class action status and we believe we have certain defenses to the claim. The
class consists of approximately 13,200 current and former hourly store employees in California and the suit covers the period May 1997 through January 2004. Discovery is now underway in the case. In February 2005, the court ordered the parties to
commence mediation. In March 2005, the court set a trial date of March 6, 2006. Mediations have been held on April 27, 2005, June 6, 2005 and July 14, 2005 with no resolution to the matter reached. The court has ordered the parties to engage in
further settlement discussions.



We have not recorded any
charges during the first and second quarters of 2005 associated with the Olivasaction. This case and its claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not
limited to, the facts and circumstances of each particular sub-class and claim and the ultimate determination of liability and the applicability of statutory penalties. For certain of the sub-classes we believe there is a reasonable possibility that
resolution of the matter could result in a loss which could be materially in excess of presently established reserves or which individually or in the aggregate could result in a material loss for which there is no reserve. Litigation matters are
subject to inherent uncertainties; and accordingly, with respect to the Olivasaction we are not able to quantify the estimated amount or range of such additional loss or loss. However, such additional loss or loss, either individually or in
the aggregate, could have a material adverse effect upon our results of operations and net cash flows in the period in which it is recorded or paid.



We are named as a 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 other cases will either individually or in the aggregate have a material adverse effect on our results of operations or financial position.



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Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds



As described below in Part II - Item 4, Submission of Matters to a Vote of Security Holders, our stockholders on May 19, 2005 approved our Long-Term Equity Compensation Plan for Non-Employee Directors (the
Non-Employee Director Plan). We sought approval of such plan because our Amended and Restated Non-Employee Director Stock Plan expired February 22, 2005. Concurrently with such approval, and in accordance with our policy regarding
compensation of non-employee directors for their service as members of our Board and its committees, five of our non-employee directors each received a grant of 1,839 shares of our restricted common stock.



We intend to register all shares available for award under our Non-Employee
Director Plan, including registering for resale the shares which have been issued to our non-employee directors as described above, as soon as practicable.



The shares of restricted common stock granted to our non-employee directors in May were issued in reliance upon the exemption from registration provided
in Section 4(2) of the Securities Act of 1933, as amended (the Securities Act). Each of the non-employee directors that received such a grant is an accredited investor, as that term is defined in Rule 501 promulgated under
the Securities Act, and was provided with all material financial and other information concerning us at the time of such grant.



Item 3.
Defaults upon Senior Securities



Not applicable.



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



The Annual Meeting of Stockholders of Smart & Final Inc. was held on May 19, 2005. At the meeting, stockholders



| | 1. | elected eight directors, each for a term of one year to serve on our Board of Directors until the 2006 Annual Meeting of Stockholders and until their successors have been duly
elected and qualified; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | approved the Long-Term Equity Compensation Plan for Non-Employee Directors.
| | -- | ---------------------------------------------------------------------------



Six of the nominees listed below were serving on our Board before the 2005 Annual Meeting and two nominees, Pascal Announ and Thierry Bourgeron had never
previously served on our Board.



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The votes cast for or withheld for each nominee for office as a director were as follows:



|                    |  |            |  |          
|------------------- |  | ---------- |  | ---------
|                    |  | VOTES     
|                    |  | For        |  | Withheld 
|Pascal Announ       |  | 24,479,580 |  | 4,359,418
|Thierry Bourgeron   |  | 24,479,730 |  | 4,359,268
|Timm F. Crull       |  | 26,801,515 |  | 2,037,483
|David J. McLaughlin |  | 26,803,126 |  | 2,035,872
|Joël-André Ornstein |  | 24,424,325 |  | 4,414,673
|Ross E. Roeder      |  | 23,757,157 |  | 5,081,841
|Etienne Snollaerts  |  | 23,742,970 |  | 5,096,028
|Stephen E. Watson   |  | 27,106,386 |  | 1,732,612



The votes cast for or
against, as well as the number of abstentions for the approval of the Long-Term Equity Compensation Plan for Non-Employee Directors was as follows:



|                                                                          |  |            |  |                 |  |             |  |          
|------------------------------------------------------------------------- |  | ---------- |  | --------------- |  | ----------- |  | ---------
|                                                                          |  | VOTES      |  | Broker Non-Vote
|                                                                          |  | For        |  | Against         |  | Abstentions | 
|Approval of Long-Term Equity Compensation Plan For Non-Employee Directors |  | 19,348,828 |  | 4,771,690       |  | 456,186     |  | 4,262,294



Item 5.
Other Information



Not
applicable.



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Item 6.
Exhibits



|               |  |                                                                                                                                                                                                                     
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                              
|               | 
|10.57**        |  | Smart & Final Inc. Long-Term Equity Compensation Plan For Non-Employee Directors, incorporated by reference to Appendix B from our Definitive Proxy Statement on Schedule 14A, filed with
the SEC on April 20, 2005.
|               | 
|10.58* **      |  | Form of Award Agreement for Smart & Final Inc. Long-Term Equity Compensation Plan For Non-Employee Directors                                                                                                        
|               | 
|10.59* **      |  | Consulting Agreement dated May 19, 2005 between Smart & Final Inc. and Ross Roeder                                                                                                                                  
|               | 
|31.1*          |  | Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer                                                                                                                                                 
|               | 
|31.2*          |  | Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer                                                                                                                                                 
|               | 
|32.1*          |  | Section 1350 Certification of Chief Executive Officer                                                                                                                                                               
|               | 
|32.2*          |  | Section 1350 Certification of Chief Financial Officer                                                                                                                                                               

---

|* | Filed herewith.
|- | ---------------



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



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SIGNATURES



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



|                    |  |  |  |                    |  |                        |  |                          
|------------------- |  |  |  | ------------------ |  | ---------------------- |  | -------------------------
|                    |  |  |  | SMART & FINAL INC.
|                    |  |  | 
|Date: July 20, 2005 |  |  |  | By:                |  | /s/ RICHARD N. PHEGLEY
|                    |  |  |  |                    |  |                        |  | Richard N. Phegley       
|                    |  |  |  |                    |  |                        |  | Senior Vice President and
|                    |  |  |  |                    |  |                        |  | Chief Financial Officer  



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