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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





(Mark One)


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




For the quarterly period ended June 29, 2002





AND





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




Commission file number 0-10815





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UNIFIED WESTERN GROCERS, INC.


(Exact name of
registrant as specified in its charter)


California

95-0615250(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification
No.)5200 Sheila Street, Commerce, CA

90040(Address of principal executive offices)

(Zip Code)





Registrants telephone number, including area code (323) 264-5200





(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)





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  ̈





APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS DURING THE PRECEDING
FIVE YEARS





Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.  Yes    No





APPLICABLE ONLY TO CORPORATE ISSUERS





Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. Outstanding Shares on June 29, 2002:





Class A Shares

69,125Class B Shares

446,081Class C Shares

18





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TABLE OF CONTENTS





PagePART I.    FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited)Consolidated Condensed Balance Sheets

3Consolidated Condensed Statements of Operations

4Consolidated Condensed Statements of Cash Flows

5Notes to Consolidated Condensed Financial Statements

6Item 2.

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

10Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19PART II.    OTHER INFORMATIONItem 1.

Legal Proceedings

21Item 2.

Changes in Securities and use of Proceeds

21Item 3.

Defaults Upon Senior Securities

21Item 4.

Submission of Matters to a Vote of Security Holders

21Item 5.

Other Information

21Item 6.

Exhibits and Reports on Form 8-K

21Signatures

22




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PART I.    FINANCIAL INFORMATION





Item 1.    Financial Statements





UNIFIED WESTERN GROCERS, INC. AND
SUBSIDIARIES





CONSOLIDATED CONDENSED BALANCE SHEETS


(Unaudited)


(dollars in thousands)





September 29, 2001


June 29, 2002ASSETSCurrent Assets:Cash and cash equivalents

$
14,802


$
9,307Accounts and notes receivable, net of allowances of $9,498 at September 29, 2001 and $10,070 at June 29,
2002


193,761



167,088Inventories


224,438



199,148Prepaid expenses


7,533



5,723Deferred taxes


10,043



10,043Total current assets


450,577



391,309Properties, net


122,657



116,904Investments


48,983



53,490Notes receivable, net of allowances of $3,841 at September 29, 2001 and $3,405 at June 29, 2002


33,093



28,063Goodwill, net


56,512



54,572Other assets, net


56,345



65,186TOTAL ASSETS

$
768,167


$
709,524LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
184,810


$
132,307Accrued liabilities


96,824



95,537Current portion of notes payable


10,535



11,862Patrons excess deposits and estimated patronage dividends


18,708



18,319Total current liabilities


310,877



258,025Notes payable, due after one year


288,241



282,073Long-term liabilities, other


63,944



66,142Patrons deposits and certificates:Patrons required deposits


14,804



19,036Subordinated patronage dividend certificates


1,843



Shareholders equity:Class A Shares: 500,000 shares authorized, 69,125 outstanding at September 29, 2001 and June 29, 2002,
respectively


11,576



11,576Class B Shares: 2,000,000 shares authorized, 447,289 and 446,081 outstanding at September 29, 2001 and June 29, 2002,
respectively


79,100



78,800Additional paid-in capital


18,095



18,095Accumulated deficit


(18,708
)


(22,640
)Accumulated other comprehensive loss


(1,605
)


(1,583
)Total shareholders equity


88,458



84,248TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

$
768,167


$
709,524





The accompanying notes are an integral part of these statements.







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UNIFIED WESTERN GROCERS, INC. AND SUBSIDIARIES





CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS


(Unaudited)





Thirteen Weeks Ended


Thirty Nine Weeks EndedJune 30, 2001



June 29, 2002




June 30, 2001




June 29, 2002Net sales

$
723,214


$
721,280


$
2,169,190


$
2,176,485Costs and expenses:Cost of sales


645,814



645,211



1,933,398



1,942,175Distribution, selling and administrative


70,290



68,657



208,859



211,609Operating income


7,110



7,412



26,933



22,701Interest expense


(6,805
)


(6,007
)


(21,642
)


(18,473
)Other income






1,803







1,803Earnings before estimated patronage dividends, income taxes and cumulative effect of a change in accounting
principle


305



3,208



5,291



6,031Estimated patronage dividends


(3,431
)


(4,345
)


(11,001
)


(9,964
)Loss before income taxes and cumulative effect of change in accounting principle


(3,126
)


(1,137
)


(5,710
)


(3,933
)Income taxes














Loss before cumulative effect of a change in accounting principle


(3,126
)


(1,137
)


(5,710
)


(3,933
)Cumulative effect of a change in accounting principle, net of taxes










31



Net loss

$
(3,126
)

$
(1,137
)

$
(5,679
)

$
(3,933
)Other comprehensive earnings (loss), net of income taxes:Cumulative effect of a change in accounting principle










1,143



Unrealized loss on valuation of interest rate collar


(810
)


(619
)


(1,585
)


(128
)Unrealized holding (loss) gain


(267
)


586



419



150Comprehensive loss

$
(4,203
)

$
(1,170
)

$
(5,702
)

$
(3,911
)





The accompanying notes are an integral part of these statements.




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UNIFIED WESTERN GROCERS, INC. AND SUBSIDIARIES





CONSOLIDATED CONDENSED STATEMENTS OF CASH
FLOWS


(Unaudited)


(dollars in thousands)





Thirty Nine Weeks EndedJune 30, 2001


June 29, 2002Cash flows from operating activities:Net loss

$
(5,679
)

$
(3,933
)Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization


18,446



19,839Provision for allowance for doubtful accounts


2,601



1,619(Gain) loss on sale of investments in affiliates, member loan receivables, and properties, net


(134
)


116Gain on sales of Divestiture Stores






(1,803
)Purchases of trading securities


(4,575
)


(1,404
)Proceeds from maturities or sales of trading securities


2,033



1,411(Increase) decrease in assets:Accounts and notes receivable


20,808



25,008Inventories


12,576



25,290Prepaid expenses


(1,176
)


1,810Pension plan assets


(572
)


(299
)Increase (decrease) in liabilities:Accounts payable


(46,696
)


(52,503
)Accrued liabilities


2,981



(1,287
)Long-term liabilities, other


1,579



2,966Net cash provided by operating activities


2,192



16,830Cash flows from investing activities:Purchase of properties


(18,139
)


(8,790
)Purchases of securities and other investments


(21,045
)


(10,326
)Proceeds from maturities or sales of securities and other investments


11,458



5,834(Increase) decrease in notes receivable


(1,249
)


4,998Proceeds from sales of properties


7,401



3,638Increase in other assets


(9,581
)


(14,158
)Net cash utilized by investing activities


(31,155
)


(18,804
)Cash flows from financing activities:Additions to long-term notes payable


39,800



1,599Additions to short-term notes payable


2,125



Reduction of short-term notes payable


(9,074
)


(6,739
)Payment of deferred financing fees






(459
)Patrons excess deposits and estimated patronage dividends


366



108Redemption of patronage dividend certificates


(1,862
)


(2,262
)(Decrease) increase in members required deposits


(2,484
)


4,232Issuance of shares to members


758



Net cash provided (utilized) by financing activities


29,629



(3,521
)Net increase (decrease) in cash and cash equivalents


666



(5,495
)Cash and cash equivalents at beginning of year


10,355



14,802Cash and cash equivalents at end of period

$
11,021


$
9,307Supplemental disclosure of cash flow information:Cash paid during the period for:Interest

$
20,434


$
17,587Income taxes

$
78


$
15Supplemental disclosure of non-cash item:Issuance of subordinated redemption notes to repurchase Class B Shares from members

$
1,423


$
300





The accompanying notes are an integral part of these statements.







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UNIFIED WESTERN GROCERS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS





1.    Basis of Presentation





The consolidated condensed financial statements include the accounts of Unified Western Grocers, Inc. and all
of its subsidiaries (the Company or Unified). Inter-company transactions and accounts with subsidiaries have been eliminated. The interim financial statements included herein have been prepared by the Company without audit,
pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the Commission). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have been omitted pursuant to Commission rules and regulations; nevertheless, management believes that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys latest annual report filed on Form 10-K/A. The results of operations for the
interim periods are not necessarily indicative of the results for the full year.





The accompanying consolidated
condensed financial statements reflect all adjustments which, in the opinion of management, are both of a normal recurring nature and necessary for a fair statement of the results of the interim periods presented. The preparation of the consolidated
condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from those estimates.





Certain reclassifications have been made to prior period financial statements to present them on a basis comparable with the current
periods presentation. In the 2001 period, the retail segment of the business was separated from the all other category to facilitate quarterly comparisons of reportable segments, since the retail segment now meets the quantitative
thresholds of a reportable segment. Previously, the retail segment was grouped in the all other category that included finance, insurance and other services provided to members.





2.    Acquisitions





On
September 27, 1999, the shareholders of Unified and United Grocers, Inc. (United) each approved the provisions of a merger agreement (the Merger). The Merger became effective on September 29, 1999 and was accounted for as a
purchase pursuant to Accounting Principles Board Opinion No. 16, Business Combinations.





As a result
of the Merger, Unified now serves a broader geographic region. The Company serves independent supermarket operators in California, Oregon, Washington, western Idaho, Nevada, Arizona, Hawaii, Colorado, Utah and various countries in the South Pacific
and elsewhere. In addition to offering a complete line of food and general merchandise products, Unified also provides finance, insurance, store equipment, security, payroll, real estate and information technology services to its patrons.





In connection with the Merger, the Company established a reserve for the closure of various facilities. Periodic
charges against the reserve represent lease costs for non-subleased facilities and rental income shortfalls for subleased facilities. The amount of this reserve and current period charges against the reserve are presented below.





Balance at September 29, 2001

$
4,778,000Charges to the reserve


(289,000
)Balance at June 29, 2002

$
4,489,000







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UNIFIED WESTERN GROCERS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)







3.    Segment Information





The Company has identified two reportable segmentsWholesale Distribution and Retail.





| |  |  | Wholesale distribution consists of patronage and non-patronage activities and includes the results of operations from the sale of food and general merchandise
products to independent supermarket operators, both members and non-members, and sales to company-owned retail stores.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | The retail segment includes the results of operations of SavMax Foods, Inc. (SavMax), Thriftway, Apple Markets and stores that were purchased by the
Company in connection with the merger of Albertsons, Inc. and American Stores, Inc. (the Divestiture Stores). The Companys two remaining Divestiture Stores were closed during the first quarter of fiscal 2002 and were subsequently
sold in the third quarter for a gain of $1.8 million. The gain on the sale is reported as Other income in the Consolidated Condensed Statements of Operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The all other category includes the aggregation of finance, insurance and other services provided to a common customer base, none of which individually meets
the quantitative thresholds of a reportable segment.





Information about the Companys operations by segment
is as follows (in thousands):





Thirteen Weeks Ended


Thirty Nine Weeks EndedJune 30, 2001


June 29, 2002


June 30, 2001


June 29, 2002Net salesWholesale distribution

$
696,975


$
697,265


$
2,094,349


$
2,108,155Retail


34,466



29,453



110,578



99,445All other


12,793



10,928



35,153



32,073Intersegment elimination


(21,020
)


(16,366
)


(70,890
)


(63,188
)Total net sales

$
723,214


$
721,280


$
2,169,190


$
2,176,485Operating income (loss)Wholesale distribution

$
9,091


$
10,108


$
31,323


$
28,665Retail


(2,984
)


(3,058
)


(6,625
)


(7,359
)All other


1,003



362



2,235



1,395Total operating income

$
7,110


$
7,412


$
26,933


$
22,701Interest expense


(6,805
)


(6,007
)


(21,642
)


(18,473
)Other income






1,803







1,803Estimated patronage dividends


(3,431
)


(4,345
)


(11,001
)


(9,964
)Loss before income taxes and change in accounting principle

$
(3,126
)

$
(1,137
)

$
(5,710
)

$
(3,933
)Depreciation and amortizationWholesale distribution

$
5,729


$
6,102


$
16,845


$
17,842Retail


462



519



1,244



1,621All other


118



129



357



376Total depreciation and amortization

$
6,309


$
6,750


$
18,446


$
19,839Capital expendituresWholesale distribution

$
7,441


$
786


$
14,978


$
4,661Retail


555



1,326



2,732



3,552All other


84



311



429



577Total capital expenditures

$
8,080


$
2,423


$
18,139


$
8,790Identifiable assetsWholesale distribution

$
603,962


$
568,358


$
603,962


$
568,358Retail


55,202



47,601



55,202



47,601All other


90,852



93,565



90,852



93,565Total identifiable assets

$
750,016


$
709,524


$
750,016


$
709,524




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UNIFIED WESTERN GROCERS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)







4.    Contingencies





We are a party to various litigation, claims and disputes, some of which are for substantial amounts, arising in the ordinary course of
business. While the ultimate effect of such actions cannot be predicted with certainty, we expect that the outcome of these matters will not result in a material adverse effect on our business, financial condition or results of operations.





During the 2002 period, we became involved in litigation in the state of Hawaii stemming from the Companys
1996 sale of a subsidiary to a private investor and the subsequent bankruptcy and liquidation of such business. In re: Hawaiian Grocery Stores, Ltd; and Mark J.C. Yee vs. Unified Western Grocers, Inc., Certified Grocers of California, Ltd., and
Grocers Specialty Company, and KPMG, was filed December 14, 2001, and is pending in the bankruptcy court of the United States District Court for the District of Hawaii. In this case, the Trustee for the bankruptcy estate, who is the plaintiff in
the matter, has asserted preference claims against Certified Grocers of California, Ltd. (Certified), the predecessor of Unified, based on alleged insider relationship, fraudulent transfer claims against Certified and Grocers Specialty
Company, fraud claims against Certified, Grocers Specialty Company and other unnamed parties, and contract and tort claims against KPMG. In its prayer for relief, the plaintiff seeks judgment against the defendants for $13.5 million, plus interest,
punitive damages of $10 million and other unspecified damages. The Trustee also filed a complaint in the Hawaii Circuit Court, First Circuit, entitled Mark J.C. Yee, Trustee for the Bankruptcy Estate of Hawaiian Grocery Stores, Ltd., vs. Unified
Western Grocers, Inc., Certified Grocers of California, Ltd., Grocers Specialty Company, RHL, Inc., Alfred A. Plamann, Charles Pilliter, Daniel T. Bane, Robert M. Ling, David A. Woodward, Richard H. Loeffler, Fletcher Robbe, Goodsill Anderson Quinn
and Stifel, and Does 1-10 on May 17, 2002. This action, which generally arises out of the same transactions that are the subject of the Federal District Court proceeding referenced above, asserts breach of fiduciary duties by the officers and
directors of Hawaiian Grocery Stores, Ltd. (HGS), the controlling shareholder of HGS and the controlling shareholders parent corporation, and breach of fiduciary duties by defendants Goodsill, Loeffler, RHL, Inc., and Robbe.
Officers of the Company were officers and directors of HGS during certain periods and a subsidiary of the Company was a shareholder of HGS during certain periods. The complaint seeks compensatory damages of approximately $13.5 million, plus
interest, punitive damages of $10 million and other unspecified damages. These proceedings are in their very early stages and the Company intends to vigorously defend this litigation.





5.    New Accounting Pronouncements





The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that the Company recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. The Company adopted this statement, as amended by SFAS Nos. 137 and 138, effective October 1, 2000.





The Company entered into a five-year interest rate collar agreement during February 1999 in relation to approximately $50 million of certain borrowings on its variable rate
revolving credit facility. The Company has designated the interest rate collar agreement as a cash flow hedge. Under the provisions of SFAS No. 133, the fair value of the collar must be reflected in the Companys financial statements. On
October 1, 2000 the Company recognized the fair value of the collar, which totaled $1,195,000, as a cumulative effect of a change in accounting principle in other comprehensive earnings (loss). Additionally, SFAS No. 133 requires that the fair value
of the collar be adjusted, with the change in fair value being recorded as an adjustment to other comprehensive earnings (loss). Due to fluctuating interest rates, the fair value of the collar was $(1,918,000) as of June 29, 2002, $(1,299,000) as of
March 30, 2002 and $(1,790,000) as of September 29, 2001. As a result, the Company recorded unrealized losses of $(619,000) and $(128,000) for the thirteen and thirty-nine week periods ended June 29, 2002, respectively.





The Company holds investments in various marketable securities and convertible bonds. Prior to the adoption of SFAS No. 133, the Company
classified its convertible bonds as available for sale, with the changes in the fair value recorded in other comprehensive earnings (loss). With the adoption of SFAS No. 133, the convertible bonds were reclassified to trading securities, which
resulted in the Company recognizing a gain of $52,000 at October 1, 2000. The $52,000 gain was comprised of a $31,000 cumulative effect of a change in accounting principle and a $21,000




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UNIFIED WESTERN GROCERS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)







reclassification of previously unrealized holding gains. For the thirteen and thirty-nine
week periods ended June 29, 2002, the Company recorded a net (loss) and gain, due to the changes in the fair value of the convertible bonds of approximately $(46,000) and $195,000, respectively.





In July 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that all business combinations be accounted for under the purchase method. The statement further requires separate recognition of intangible assets that meet one of two specified criteria. The statement applies to all business combinations initiated
after June 30, 2001. SFAS No. 142 requires that an intangible asset that is acquired be initially recognized and measured based on its fair value. The statement also provides that intangible assets with finite useful lives continue to be amortized
over their estimated economic lives. However, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a
comparison of its implied fair value to its carrying amount. If an impairment is deemed to exist, the impact of the impairment, if any, will be affected by the determination of how the goodwill is allocated to the Companys reporting units as
defined by SFAS No. 142. The statement is effective for fiscal years beginning after December 15, 2001. As a result, the Company will implement the pronouncement beginning in the first quarter of fiscal year 2003. Existing goodwill will continue to
be amortized through the remainder of fiscal 2002 at which time amortization will cease and the Company will perform a transitional goodwill impairment test. The Company is currently evaluating the impact of the new accounting standards on existing
goodwill and other intangible assets. Goodwill amortization expense for the thirty nine-week period ended June 29, 2002 was $1.2 million.





In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, on the accounting for the recognition and measurement of a liability for the costs of asset retirement obligations. Under
SFAS No. 143, the costs of retiring an asset will be recorded as a liability when the retirement obligation arises, and will be amortized over the life of the asset. The Company is currently evaluating the impact of the new accounting standard but
believes the pronouncement will not have a material effect on the Companys consolidated financial statements.





In July 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and
the disposal of discontinued operations. This statement supercedes SFAS No. 121 on the same topic, as well as certain previous releases. This statement also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements,
to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for fiscal periods beginning after December 15, 2001. The Company will implement the pronouncement beginning in the
first quarter of fiscal year 2003. The Company is currently evaluating the impact of the new accounting standards on existing long-lived assets, but believes the pronouncement will not have a material effect on the Companys consolidated
financial statements.





Forward-Looking Information





This document and the documents of Unified incorporated by reference may contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements relate to expectations concerning matters that (a) are not historical facts, (b) predict or forecast future events or results, (c) embody assumptions which may prove to have been inaccurate, including
Unifieds assessment of the probability and materiality of losses associated with litigation and other contingent liabilities; and Unifieds expectations regarding the adequacy of capital and liquidity. Also, when we use words such as
believes, expects, anticipates or similar expressions, we are making forward-looking statements. Although Unified believes that the expectations reflected in such forward-looking statements are reasonable, we
cannot give you any assurance that such expectations will prove correct. Important factors that could cause actual results to differ materially from such expectations include the adverse effects of the changing industry environment and increased
competition; sales decline and loss of customers; exposure to the uncertainties of litigation and other contingent liabilities; the failure of Unified to take steps to stem losses in its retail operations; the inability of the Company to establish
and perform plans to improve its operating performance and equity base in order to meet financial covenants applicable to future periods; and the increased credit risk to Unified caused by the ability of former United members to establish their
required minimum deposits over time through use of patronage dividends to purchase Class B Shares if such members default on their obligations to Unified prior to their deposit requirements being met and the existing deposit proves inadequate to
cover such members obligation. All forward-looking statements attributable to Unified are expressly qualified in their entirety by the factors which may cause actual results to differ materially.




9




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##### Table of Contents




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





Liquidity and Capital Resources





Cash Flow





Unified relies primarily upon cash flow from operations, patron deposits and member shareholdings to fund the Companys operations.
In the event that these sources of cash are not adequate to meet the Companys requirements, additional sources of cash will be obtained from the Companys available credit facilities.The Company believes that both cash flow from
its operations and available credit lines will be sufficient to meet operating needs and capital spending requirements for the fiscal 2002 period. Overall, cash flow improved compared to prior year due to an increase in cash from operating
activities of $14.6 million resulting primarily from decreases in inventory levels and reduced cash needs from investing activities of $12.4 million due to reduced capital spending. These factors, in combination with the utilization of available
cash of $5.5 million, resulted in $32.5 million less cash borrowed from financing activities. For the thirty-nine week period ending June 29, 2002, net cash decreased by $5.5 million. At June 29, 2002, working capital was $133.3 million compared to
$139.7 million at September 29, 2001, and the Companys current ratio was 1.5 to 1 at June 29, 2002 compared to 1.4 to 1 at September 29, 2001.





Operating Activities:  Net cash provided by operating activities totaled $16.8 million for the thirty-nine weeks of fiscal 2002 (the 2002 period), as compared to net cash
provided by operating activities of $2.2 million for the first thirty-nine weeks of fiscal 2001 (the 2001 period). The improvement in net cash provided by operating activities for the 2002 period, as compared to the 2001 period, is due
to managements inventory reduction initiative that resulted in a decrease in overall inventory levels of approximately $25.3 million compared to the 2001 period decrease of $12.6 million. The Company also had reductions in accounts and notes
receivable of $25.0 million and accounts payable of $52.5 million that were comparable with the 2001 period due in part to seasonality factors.





Investing Activities:  Net cash utilized by investing activities was approximately $18.8 million for the 2002 period compared to $31.2 million for the 2001 period. Capital expenditures
totaled $8.8 million in the 2002 period compared to $18.1 million in the 2001 period. The fiscal 2002 expenditures were primarily attributable to leasehold improvements and equipment associated with the remodeling of stores in the Companys
SavMax operation, purchases of computer software and hardware, and warehousing and equipment. In addition, the significant increase in other assets was due to software development costs totaling approximately $5.2 million that were capitalized for
the 2002 period. Significant projects currently in development include a common sales and ordering system for the Pacific Northwest and Southern California regions; implementation of a meat sales and inventory tracking system; and a project to
digitally store accounts payable records. During the 2002 period, the Company paid a member approximately $2.0 million for entering into a ten-year supply and a right of first refusal agreement relating to certain of the members assets and
stock and paid another member $500,000 for a six-year supply agreement. The remaining investing activities result from the investment securities transactions of the Companys insurance subsidiaries. This activity consists of investment
purchases to replace maturing investments in the portfolio.





Financing Activities:  Net cash
utilized by financing activities was approximately $3.5 million for the 2002 period compared to $29.6 million of net cash provided by financing activity for the 2001 period. Sources of cash from financing activities resulted from incremental
borrowings from the Companys revolving credit line of approximately $1.6 million in the 2002 period compared to $39.8 million for the 2001 period, increases in member required deposits of $4.2 million and increases in patrons excess cash
deposits of $0.1 million. This was offset by reductions in short term notes payable of $6.7 million due to scheduled payments of the Companys current portion of long term debt, redemption of patronage dividend certificates of $2.3 million and
payment of deferred financing fees of $0.4 million in connection with the amendment of the Companys debt agreements as discussed below.





Outstanding Debt and Other Financing Arrangements





The
Company issued Patronage Certificates in fiscal years 1993, 1994 and 1995. The outstanding Patronage Certificates have a seven-year term and bear interest payable on December 15 of each year. In the 2002 period, the Company redeemed the Patronage
Certificates issued in 1994 for approximately $2.3 million and in the 2001 period, the Company redeemed the Patronage Certificates issued in 1993 for approximately $1.9 million. The $1.9 million of Patronage Certificates issued in 1995 are due
December 15, 2002 and are included in Patrons excess deposits and estimated patronage dividends on the Consolidated Condensed Balance Sheet.




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Unified has a $200 million secured revolving credit facility with a group of
banks. The revolving credit agreement is secured, expires October 1, 2004 and bears interest at either an adjusted LIBOR rate plus a margin ranging from 2.00% to 3.00% depending on Unifieds leverage ratio or 0.75% plus the higher of the bank
base rate or 0.50% above the banks federal funds borrowing rate. The revolving credit facility permits advances of up to 85% of eligible accounts receivable and 65% of eligible inventories. The Company had approximately $156.2 million in
outstanding revolver debt as of June 29, 2002.





At June 29, 2002, Unified had $70.4 million and $40.0 million
outstanding in senior secured notes to certain insurance companies and pension funds under a note purchase agreement dated September 29, 1999 (as amended, the Senior Note Agreement).





In the 2002 period, Unified amended the Senior Note Agreement and the revolving credit facility. For the Senior Note Agreement, the amendment modified two financial
covenants (consolidated tangible net worth and fixed charge coverage). The amendment assumes that improvements will be made in future performance with respect to both ratios starting in fiscal 2003. In addition, interest rates on both senior secured
notes were increased by 0.25% until such time consolidated tangible net worth increases to $80.0 million after excluding future consolidated net income generated after September 29, 2001. The amendment relating to the revolving credit facility
changed the requirements of certain financial covenants at September 29, 2001 and through fiscal year 2002, with respect to minimum tangible net worth, the fixed charge coverage ratio and the ratio of funded debt to earnings before interest, taxes,
depreciation and amortization, and patronage dividends (EBITDAP). The amendment also increased borrowing costs to either: (i) LIBOR plus an increased applicable margin (the increase is reflected above) based on Unifieds leverage
ratio or (ii) 0.75% plus the higher of the lenders base rate or 0.50% above the lenders borrowing rate. At its December 2001 meeting, the Board of Directors adopted a plan for Equity EnhancementFiscal Year 2002 and, as required by
the amendment, provided the adopted plan to the lenders.





The credit agreements contain customary representations,
warranties, covenants and default provisions for these types of financing. Obligations under the credit agreements are senior to the rights of members with respect to deposits, patronage dividend certificates and subordinated notes. Both the Senior
Note Agreement and the revolving credit facility limit the incurrence of additional funded debt and the incurrence of liens except permitted liens. Additional funded debt is also limited when an event of default has occurred and is continuing.
Examples of default conditions include the failure to pay an installment of principal or interest under the agreements, the making of false representations and warranties, and non-compliance with one or more financial covenants (minimum tangible net
worth, fixed charge coverage ratio and funded debt to EBITDAP). The Senior Note Agreement and the revolving credit facility limit distributions to shareholders (including repurchase of shares) to permitted distributions which include patronage
dividends and repurchases of the Companys Class A Shares and Class B Shares as required by its bylaws, and prohibit all distributions when an event of default has occurred and is continuing. In the event the Company is not in compliance with
the financial covenants of the Senior Note or revolving credit facility, the continued availability of loan funds or the terms upon which such loans would be available could be adversely impacted, and the impact could be material.





In December 2000, the Company purchased 80,000 shares of preferred stock of C&K Market, Inc. (C&K) for $8.0
million. Douglas H. Nidiffer, a director of the Company, is a shareholder, director and officer of C&K. In connection with the stock purchase transaction, C&K executed a ten-year supply agreement and the shareholders of C&K granted to
the Company a put with respect to the preferred stock, exercisable upon occurrence of designated events including the nonpayment of permitted dividends or mandatory redemption payments. The supply agreement serves as a form of collateral for the
Company until C&K redeems their preferred stock in full. As a result, no value was ascribed to the supply agreement. The preferred stock bears a 9.5% cumulative dividend rate, with cash payment of dividends deferred until November 15, 2002, and
then payable only if permitted by applicable loan agreements. The preferred stock is convertible into 15% of the common stock of C&K under certain circumstances.





Patronage Dividends





Historically, Unified has distributed at least 20% of the patronage dividends in cash and distributed Class B Shares as a portion of the patronage dividends distributed to its member-patrons. Dairy patronage dividends were paid in
cash in the periods presented. The Board of Directors has adopted an equity enhancement plan for fiscal year 2002. As part of that plan, the patronage dividend payment policy was modified as follows: net earnings from business transacted on a
patronage basis in the Cooperative Division with member and associate patrons shall be distributed




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##### Table of Contents

on a patronage basis by written notices of allocation as defined in Section 1388 of the Internal Revenue Code in the form of:





| |  |  | Shares of Class B Common Stock to the extent there exists any deficiency of a member-patron in meeting the requirements for holding Class B Shares specified in
the Bylaws of the Company;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Subordinated Patronage Dividend Certificates (Certificates) to the extent of the balance of such patronage dividends for member patrons, such
Certificates to have a minimum term of five years, an interest rate equal to an appropriate benchmark interest rate as such rate exists on the issuance date of the Certificates, such rate to be adjusted annually thereafter to be equal to the same
benchmark interest rate on each anniversary of the date of issuance of the Certificates, with such other terms and conditions as shall be recommended by management and approved by the Board of Directors, which terms may include provision for
conversion of Certificates into Class B Shares for member patrons on a basis to be determined.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Continued net operating losses from the Companys subsidiary and other non-patronage activities, if not offset by gains from other non-patronage activities or, enhancement to the Companys equity by other means could
adversely affect operating results and the Companys equity. The current deficit in the Companys retained earnings has created restrictions on the Companys current ability to redeem its own shares. The Companys inability to
redeem or repurchase Class B Shares could have an adverse effect on the Companys ability to attract new members. In addition to the Equity Enhancement Plan, the Board of Directors continues to consider other alternatives to improve the
Companys shareholder equity.





Patrons are generally required to maintain a subordinated cash deposit with
Unified. Member-patrons may satisfy the minimum deposit requirement through a combination of a cash deposit and the ownership of Class B Shares. In the Merger, former United members were provided the opportunity to build the minimum subordinated
deposit over time, provided that they agreed to assign 80% of patronage dividends received for this purpose and maintain a supply agreement with Unified until the minimum deposit condition is satisfied. Upon termination of patron status, the
withdrawing patron is entitled to recover deposits in excess of its obligations to Unified if permitted by the applicable subordination provisions, and a member-patron also will be entitled to have its shares redeemed, subject to applicable legal
requirements, company policies and credit agreement limitations. With certain exceptions, Unifieds current redemption policy limits the Class B Shares that Unified is obligated to redeem in any fiscal year to 5% of the number of Class B Shares
deemed outstanding at the end of the preceding fiscal year. For fiscal 2000, this limitation was exceeded by repurchases of shares in connection with the Merger. In connection with the Merger, Unified redeemed 71,310 Class B Shares of discontinued
members for a total consideration before set-offs of $13.4 million. As described in the Form 10-K, Unified is not obligated to repurchase Class B Shares of terminated members until after September 27, 2002.





Redemption of all capital stock is subject to limitations imposed by the Articles of Incorporation and Bylaws, credit agreements to which
the Company is a party, and restrictions imposed by law on the ability of a company to redeem its own shares. As a California corporation, the Company is subject to the provisions of the California General Corporation Law including Section 500 which
limits the ability of the Company to make distributions, including distributions to repurchase its own shares and any payments on notes issued to repurchase Unified shares. Section 500 permits such repurchase and note payments only when retained
earnings calculated in accordance with generally accepted accounting principles (GAAP) equals or exceed the amount of any proposed distribution or an alternative asset/liability ratio test is met. Historically through the operations of
its subsidiaries, the Company has maintained sufficient retained earnings to accomplish its share repurchase program. As a result of costs associated with the Merger with United, operating losses of subsidiaries and Company-owned retail stores,
including the Divestiture Stores, the Companys retained earnings have been eliminated and are currently inadequate to permit repurchase of Company shares. The repurchase test permitted under Section 500 based on the ratio of assets to
liabilities determined under GAAP with certain adjustments cannot currently be met since the Company relies heavily on borrowings to finance its operations. The Company is also a party to credit agreements containing financial and other covenants,
which limit the ability of the Company to make purchases of capital stock under certain circumstances. The Company has established a trust for the purpose of facilitating the transfer of shares by Unified members obligated or entitled to sell shares
in accordance with the Companys redemption policy to existing members or new members who are authorized by the Board of Directors to buy shares in accordance with the Bylaws, during periods when the Company is legally unable to buy shares or
otherwise elects to cause or permit outstanding shares to be transferred between members. The trust is not currently active. Funds used to purchase shares from selling members are exclusively sourced from funds provided by buying members.




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Tax Matters





Income taxes are provided using the liability method prescribed by SFAS 109, Accounting for Income Taxes. At June 29, 2002, the Company had net deferred tax
assets totaling $22.0 million, of which $13.8 million related to net operating loss carryforwards that expire in various years through 2020. The Company has established a valuation allowance of $10.3 million to reduce the net deferred tax assets to
their estimated net realizable value as the Company may not realize the entire net operating loss carryforwards before their expiration. The valuation allowance is primarily related to retail store losses which include the Divestiture Stores. The
remaining balance of the net deferred tax asset is expected to be realized through future operating results, reversal of taxable temporary differences, and tax planning strategies. For the 2002 period, the Company reported a net loss of $3.9
million. However, a tax benefit was not recorded because the realization requirement per SFAS 109 of more likely than not was not met during the period.





The Internal Revenue Service (the IRS) is currently examining the Companys consolidated federal income tax returns for the fiscal year ended August 29,
1998, the transition period between August 29, 1999 through October 2, 1999 and fiscal year ended September 30, 2000. The IRS has proposed an adjustment to the federal income tax return filed for the fiscal year ended August 29, 1998 which, while
not significant, will be offset by net operating loss carry backs.





Results of Operations





The following table sets forth selected financial data of the Company expressed as a percentage of net sales for the periods
indicated below:





For the Thirteen Weeks Ended


For the Thirty Nine Weeks EndedJune 30, 2001


June 29, 2002


June 30, 2001


June 29, 2002Net sales

100.0
%

100.0
%

100.0
%

100.0
%Cost of sales

89.3


89.5


89.1


89.2Distribution, selling and administrative

9.7


9.5


9.6


9.7Operating income

1.0


1.0


1.2


1.1Interest expense

0.9


0.8


1.0


0.9Other Income




0.2





0.1Earnings before estimated patronage dividends, income taxes and cumulative effect of change in accounting
principle

0.1


0.4


0.2


0.3Estimated patronage dividends

(0.5
)

(0.6
)

(0.5
)

(0.5
)Loss before income taxes and cumulative effect of a change in accounting principle

(0.4
)

(0.2
)

(0.3
)

(0.2
)Income taxes










Loss before cumulative effect of change in accounting principle

(0.4
)

(0.2
)

(0.3
)

(0.2
)Cumulative effect of a change in accounting principle










Net loss

(0.4
)

(0.2
)

(0.3
)

(0.2
)





Thirteen Week Periods





Net sales. Net sales for the 2002 and 2001 third quarter periods (in this section only, the 2002 period and the
2001 period) were $721.3 million and $723.2 million, respectively. Sales for the 2002 period decreased $1.9 million over the 2001 period. The overall decrease in sales is attributable to the following:





| |  |  | Wholesale Distribution Segment:    Wholesale sales improved in the 2002 period compared to the 2001 period. The Companys
membership continues to add new stores across all of its regions. Distribution volume grew through the addition of 24 stores in southern California, 6 stores in northern California, and 8
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents




| |  |  | stores in the Pacific Northwest by the membership. These new stores added $12.5 million over the 2001 period. Sales also increased $11.4 million as a result of
a supply agreement, effective September 2001, to provide general merchandise products to a wholesaler in the Pacific Northwest. These sales increases were offset by a $13.1 million decline in the California region due to lower store volume and
member store closures, as well as a $7.3 million decline in the Pacific Northwest region due to lower store volume resulting from competitive pressures and economic weakness in the region. In addition, the Company has closed or sold five
company-owned stores resulting in reduced distribution volume of approximately $3.7 million.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Retail Segment:The Companys retail sales decreased $5.0 million in the 2002 period compared to the 2001 period. The Company is currently operating
six SavMax banner stores, two Apple Market banner stores in the northern California region, and two Thriftway banner stores in the Pacific Northwest region. Sales increased $3.8 million related to the two Apple Market banner stores acquired in June
2001. The Company has either closed or sold five stores since the 2001 period. As a result of these closures or sales, the retail sales volume decreased by approximately $7.3 million. Same store sales have also declined $1.5 million or 6.5% compared
to the 2001 period as a result of competitive pressures.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | All Other:Net Sales for the Companys other wholly owned subsidiaries for the 2002 period decreased over the 2001 period by approximately $1.9
million. The decline in sales is attributable to lower financing revenues from the Companys finance subsidiary and lower revenues in the Companys printing and transportation operations. The reduction in sales was partially offset by
higher premiums earned by the Companys insurance subsidiary.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Cost of
Sales.    Cost of sales was $645.2 million (89.5% of net sales) for the fiscal 2002 period compared to $645.9 million (89.3% of net sales) in the 2001 period. Cost of sales were comparable to the 2001 period.





Distribution, selling and administrative. Distribution, selling and administrative expenses were $68.7 million (9.5% of
net sales) in the 2002 period, as compared to $70.2 million (9.7% of net sales) in the 2001 period. During the 2002 period the Company incurred costs associated with non-recurring activities. These non-recurring costs included $2.1 million
associated with the shutdown and closure or sale of two company-owned stores. The overall $1.6 million decrease in expenses is due to the following factors.





| |  |  | Wholesale Distribution Segment: Expenses for the 2002 period were $2.2 million lower than the comparable 2001 period. The Company implemented a work
force reduction in December 2001 as part of a comprehensive expense reduction program resulting in savings of $2.3 million for the 2002 period. Lower costs of $2.6 million were primarily the result of improved operational efficiencies stemming from
a corporate inventory reduction program as well as ongoing labor saving initiatives. Offsetting the cost decreases the Company realized an increase in expenses of $2.3 million due mainly to higher utility costs, medical benefits and insurance
premiums. In addition, the Companys pension expense for the 2002 period was $0.4 million higher due to additional funding requirements associated with a decline in the value of pension plan assets attributable to a decline in the equity
markets in 2001.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Retail Segment: Expenses for the 2002 period were $0.3 million higher than the comparable 2001 period. The Companys two Apple banner stores in
northern California were not in existence for the full 13 week period in 2001. As a result, expenses for the two stores for the 2002 period are $1.3 million higher than the 2001 period. The Company experienced an expense reduction of $1.0 million
associated with store closures.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | All Other:Distribution, selling and administrative expenses for the Companys other wholly owned subsidiaries for the 2002 period were comparable
to the 2001 period.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------




Interest.    Interest expense was $6.0 million
(0.8% of net sales) in the 2002 period as compared to $6.8 million (0.9% of net sales) in the 2001 period. The Companys effective borrowing rates for the 2002 and 2001 periods were 6.4 % and 7.5%, respectively. The decrease in interest expense
is due to the lower effective borrowing rates and lower overall borrowing levels as a result of reduced levels of inventory.





Other income.    During the 2002 period, the Company finalized the sale of the remaining two Divestiture Stores, resulting in a gain of $1.8 million.




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Estimated patronage dividends.    Estimated patronage
dividends for the fiscal 2002 and 2001 periods were $4.3 million and $3.4 million, respectively. Estimated patronage earnings for fiscal 2002 are comprised of the interim patronage earnings from the Companys three patronage pools: the
Cooperative Division and the Southern California and Pacific Northwest Dairy Divisions. For the 2002 period, the Company had interim patronage earnings of $1.7 million in the Cooperative Division, $2.6 million in the Southern California Dairy
Division and $69,000 in the Pacific Northwest Dairy Division. In the 2001 period, the Company had patronage earnings of $0.7 million in the Cooperative Division and $2.7 million in the Dairy Division. The earnings improvement of $0.9 million in the
Cooperative Division, as compared to the 2001 period, is primarily due to managements comprehensive expense reduction and cost recovery actions that more than offset the cost increases experienced as described above.





Net loss.    The net loss for the 2002 period decreased to $1.1 million compared to a net loss of $3.1 million
for the 2001 period. Net profits or losses generated by the Companys subsidiaries and non-patronage activities are not included in patronage earnings distributions of the Cooperative Division.





| |  |  | Wholesale Distribution Segment:The specialty food products, international, and certain other non-patronage distribution activities within the wholesale
distribution segment contributed profits for the 2002 period of $169,000 compared to an $870,000 loss for the 2001 period. The profit improvement is primarily due to the operating efficiencies gained at the Companys specialty food products
activities and the profits from the Companys non-patronage business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Retail Segment:Retail losses for the 2002 period, adjusted to exclude the $1.8 million gain resulting from the sale of the Divestiture Stores, were $3.3
million as compared to $3.2 million for the 2001 period.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | All Other:The Companys other subsidiary activities had earnings of $201,000 for the 2002 period compared to earnings of $946,000 for the 2001
period. The reduction in earnings was due to lower financing revenues from the Companys finance subsidiary and lower sales in the Companys printing and transportation operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Thirty Nine Week Periods





Net sales.    Net sales for both the 2002 and 2001 periods were $2.2 billion. Sales for the 2002 period increased $7.3 million over the 2001 period. The overall increase in
sales is attributable to the following:





| |  |  | Wholesale Distribution Segment:Wholesale sales increased $13.8 million over the 2001 period. The Companys members continue to add new stores
across all regions of the Company. Distribution volume grew through the addition of 36 stores in southern California, 8 stores in northern California, and 15 stores in the Pacific Northwest during the 2002 period. These new stores added $38.1
million in volume over the 2001 period. Sales also increased $34.3 million as a result of a supply agreement, effective September 2001, to provide general merchandise products to a wholesaler in the Pacific Northwest. Sales in the Companys
specialty food products subsidiary and international division increased $7.3 million in the 2002 period, of which $3.5 million was due to new business with a national chain. These improvements were partially offset by a $16.9 million decline in the
California region due to lower store volume and member store closures, as well as a $27.6 million decline in the Pacific Northwest region due to lower store volume resulting from competitive pressures and economic weakness in the region. Sales
improvements were also partially offset by lower distribution volume of approximately $9.2 million resulting from the closure or sale of five Company-owned stores in the 2002 period. In addition, general merchandise sales volume declined $7.1
million due primarily to the loss of a large non-member customer, member store closures as well as competitive pressures and economic weakness in the Pacific Northwest.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Retail Segment:Sales in the 2002 period for the Company-owned retail locations decreased by $11.1 million compared to the 2001 period. Sales declined
$19.0 million due to the closure or sale of five stores in the 2002 period. Same store sales decreased $3.9 million or 5.3% due to competitive pressures.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents




| |  |  | Offsetting the decrease was the addition of two Apple Market stores acquired in June 2001 that contributed $11.8 million in additional sales during the period.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | All Other: Net Sales for the Companys other wholly owned subsidiaries for the 2002 period decreased over the 2001 period by approximately $3.1
million. The decrease in sales is attributable to lower financing revenues from the Companys finance subsidiary and lower revenues in the Companys printing and transportation operations. The reduction in sales was partially
offset by higher premiums earned by the Companys insurance subsidiary.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Cost of
Sales. Cost of sales was $1.9 billion (89.2% of net sales) for the fiscal 2002 period compared to $1.9 billion (89.1% of net sales) in the fiscal 2001 period.





Distribution, selling and administrative.Expenses were $211.6 million (9.7% of net sales) in the 2002 period, as compared to $208.8 million (9.6% of net sales) in
the 2001 period. During the 2002 period the Company incurred costs associated with non-recurring activities. The Company also implemented a work force reduction in December 2001 as part of a comprehensive expense reduction program resulting in
severance costs of $0.6 million. These non-recurring costs include $7.8 million associated with the shutdown and closure or sale of five company-owned stores. The overall $2.8 million increase in expenses is due to the following factors:





| |  |  | Wholesale Distribution Segment: Expense for the 2002 period was comparable to the 2001 period. The Company implemented a work force reduction in December
2001 as part of a comprehensive expense reduction program, resulting in savings of $3.5 million for the period. Lower costs of $3.5 million were also the result of improved operational efficiencies stemming from a corporate inventory reduction
program as well as ongoing labor saving initiatives. Offsetting the cost decreases the Company realized an increase in expenses of $5.9 million due mainly to higher utility costs, medical benefits and insurance premiums. In addition, the
Companys pension expense for the 2002 period was $1.1 million higher due to additional funding requirements associated with a decline in the value of pension plan assets attributable to a decline in the equity markets in 2001.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Retail Segment: Expense for the 2002 period was $3.0 million higher than the comparable 2001 period. The addition of two Apple banner stores in northern
California contributed $3.8 million in cost over the prior year. Additional expenses of $1.4 million attributable to the SavMax banner stores were used to re-merchandise and reset store shelves in the first quarter of 2002. Same store expenses
increased $1.5 million during the 2002 period as a result of higher utilities, advertising and labor costs. Offsetting the higher expense was a $3.7 million reduction in expenses associated with store closures.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | All Other: Distribution, selling and administrative expenses for the Companys other wholly owned subsidiaries for the 2002 period were comparable
to the 2001 period.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------




Interest.    Interest expense was $18.5 million
(0.9% of net sales) in the 2002 period as compared to $21.6 million (1.0% of net sales) in the 2001 period. The Companys effective borrowing rates for the 2002 and 2001 periods were 6.4% and 8.0%, respectively. The decrease in interest expense
is due to the lower effective borrowing rates and lower overall borrowing levels.





Other
income.    During the 2002 period, the Company finalized the sale of the remaining two Divestiture Stores, resulting in a gain of $1.8 million.





Estimated patronage dividends.    Estimated patronage dividends for the fiscal 2002 and 2001 periods were $10.0 million and $11.0 million,
respectively. Estimated patronage earnings for fiscal 2002 are comprised of the interim patronage earnings from the Companys three patronage pools: the Cooperative Division and the Southern California and Pacific Northwest Dairy Divisions. For
the 2002 period, the Company had interim patronage earnings of $1.9 million in the Cooperative Division, $7.9 million in the Southern California Dairy Division and $214,000 in the Pacific Northwest Dairy Division. In the 2001 period, the Company had
patronage earnings of $3.1 million in the Cooperative Division and $7.9 million in the Dairy Division.





Net
loss.    The net loss for the 2002 period was $3.9 million compared to a net loss of $5.7 million for the 2001 period. Net profits or losses generated by the Companys subsidiaries and non-patronage activities are not
included in patronage earnings of the Cooperative.




16




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| |  |  | Wholesale Distribution Segment:The specialty food products, international, and certain other non-patronage distribution activities within the wholesale
distribution segment contributed profits for the 2002 period of $1.4 million compared to $425,000 for the 2001 period. The improvement is attributed to transitioning the source of certain specialty volume from southern to northern California in the
second quarter of the 2001 period and additional sales volume relating to the Companys non-patronage activities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Retail Segment:Retail losses for the 2002 period, adjusted to exclude the $1.8 million gain resulting from the sale of the Divestiture Stores, were $8.2
million as compared to $6.6 million for the 2001 period. Operating losses and shutdown costs from the closed stores contributed to the losses in both years. Losses in the 2002 period were higher than the 2001 period due to weakening sales and the
higher costs associated with re-merchandising and remodeling activities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | All Other:The Companys other subsidiary activities had earnings of $1.4 million for the 2002 period as compared to earnings of $2.2 million for
the 2001 period. The reduction in earnings was due to lower financing revenues from the Companys finance subsidiary and lower revenues in the Companys printing and transportation operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Additional Discussion and Analysis





The Companys management deals with many risks and uncertainties in the course of performing their responsibilities. The Additional Discussion and Analysis section
provides additional information on such issues.





The Companys operating results are highly dependent upon
maintaining and growing its distribution volume to members. The Companys top ten customers constitute approximately 30% of total sales. A significant loss in customers or volume could adversely affect the Companys operating results. The
Merger with United, as described in the Companys Annual Report on Form 10-K/A, created goodwill approximating $29.2 million, net of amortization at June 29, 2002. To date, the sales activity and customer base of the combined entity remain
strong. However, a significant loss in volume from former customers of United could potentially impair the carrying amount of goodwill necessitating a write down in this asset.





Like the wholesale distribution business, the Companys retail business is highly dependent upon increasing sales to its customer base. However, deteriorating sales
and continued operating losses from the Companys retail segment could adversely affect the valuation of the business units and potentially impair the carrying amount of the goodwill related to the Companys acquisition of SavMax. Goodwill
associated with the acquisition of SavMax was approximately $20.8 million, net of amortization at June 29, 2002.





The Company is subject to certain economic factors that are beyond the control of the Company, including inflation and deflation. The degree to which the acquisition cost of products purchased by the Company for resale to customers
is stable and/or deflating could have an adverse effect on the Companys business and results of operations. The Companys pricing programs typically assess a percentage fee above the Companys cost of the product. During periods of
little or no inflation in the cost of goods procured for resale, the Companys ability to maintain the dollar profit margin needed to offset increases in costs is reduced. The Company operates in a highly competitive market place and passing on
cost increases to customers is difficult. The Company has recently experienced higher operating expenses, including but not limited to energy, fuel and employee wages and benefits. The Companys facilities are principally in California and the
Pacific Northwest, regions that have experienced significantly increased utility costs. In the first quarter of fiscal year 2002, the Company implemented an additional charge to its customers to offset the increased cost of energy incurred by the
Company.





In response to the increase in operating costs, the Company has implemented comprehensive expense
reduction initiatives. As part of these initiatives, the Company eliminated approximately 200 budgeted positions impacting nearly all divisions, departments and facilities in the first quarter of fiscal year 2002. The Company expects that the
position elimination will result in a reduction of personnel costs of approximately $6.2 million on an annualized basis.




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Changes in economic conditions could also adversely affect the customers
ability to meet certain obligations to the Company or leave the Company exposed for obligations the Company has guaranteed. Loans to members, trade receivables and lease guarantees could be at risk in a sustained recessionary environment. In
response to this potential risk, the Company establishes reserves for notes receivable, trade receivables, and lease guarantees, net of sub-lease offsets, for which the Company may be at risk for default. In such a situation, the Company would be
required to foreclose on assets provided as collateral or assume payments for leased locations for which the Company has guaranteed payment. Although the Company believes its reserves to be adequate, the Companys operating results could be
adversely affected in the event that actual losses exceed available reserves.





During the normal course of
business, the Company may be involved in litigation. In the event that management determines that the probability of an adverse judgement in pending litigation is likely and that the exposure can be reasonably estimated, appropriate reserves are
recorded. Although the Company believes its reserves to be adequate, the final outcome of any litigation could adversely affect operating results, if the actual liability exceeds recorded reserves and insurance coverage.





The Company owns and operates facilities for the manufacture, warehousing and distribution of products to its members. The facilities and
operations are subject to various laws and regulations concerning the protection of the environment and employee health. Although the Company believes that established reserves are sufficient to satisfy the anticipated costs of remediation,
operating results could be adversely affected if the actual costs of remediation exceed available reserves.





An
inherent risk of the food distribution industry is the risk of exposure to product liability claims in the event people who purchase products from the Company become ill or incur some other form of injury. In response to this potential risk, the
Company purchases liability insurance to protect against product liability claims that may occur. The Company believes that its current liability insurance provides adequate coverage.





The Companys insurance subsidiaries are regulated by the State of California and are subject to the rules and regulations promulgated by the appropriate regulatory
agencies. Reserves are established to fund payments under policies issued to policyholders. The adequacy of the reserves is reviewed annually by actuarial evaluation conducted by a third party actuary. The amount of required reserves is affected by
various assumptions and actuarial calculations including but not limited to health care cost trends, mortality rates, demographics, federal and state law, as well as insurance claim trends. As a result, the amount of reserves required to settle
future claims may vary from year to year. Although the Company believes its reserves to be adequate, significant and adverse changes in the experience of claims settlement could negatively impact operating results if the Companys claim cost
experiences exceed the actuarial calculations.





As disclosed in the Companys Annual Report on Form 10-K/A,
the Companys loan agreements require improved performance in future periods to continue financial covenant compliance. Failure to improve performance could have an adverse affect upon the continued availability of loan funds or the terms upon
which loan funds would continue to be available, and the impact could be material.





Critical Accounting
Policies





The Securities and Exchange Commission (SEC) recently issued disclosure guidance for
critical accounting policies. The SEC defines critical accounting policies as those that require application of managements most difficult, subjective or complex judgments, often as a result of the need to make
estimates about the affect of matters that are inherently uncertain and may change in subsequent periods. We believe that our critical accounting policies and important accounting practices are outlined and described below. For a detailed discussion
on the application of these and other policies, see Note 1 in the Notes to Consolidated Financial Statements in the Companys Form 10-K/A.





Insurance Reserves:    The Companys insurance subsidiaries require management to make estimates of claims anticipated to be made in the future by policy holders and to
establish appropriate reserves for those claims. Insurance reserves are recorded based on estimates made by management and validated by third party actuaries to ensure such estimates are within acceptable ranges. Actuarial estimates are based on
detailed analyses of health care cost trends, mortality rates, claims history, demographics, industry trends and federal and state law. As a result, the amount of reserve and related expense is significantly affected by the outcome of these studies.
Insurance reserves maintained by the Companys insurance subsidiaries were approximately $46.7 million as of June 29, 2002.




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Allowance for Uncollectible Accounts and Notes Receivable: The preparation
of the Companys financial statements requires management to make estimates of the collectability of its accounts and notes receivable. Management specifically analyzes accounts receivable and historical bad debts, customer credit-worthiness,
current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. In determining the appropriate level of reserves to be established, the Company utilizes several techniques
including specific account identification, percentage of aged receivables and historical cash collection trends. In addition, when establishing reserves, the Company takes into consideration collateral such as redemption notes, Class B Shares, cash
deposits and personal guarantees. A bankruptcy or financial loss associated with a major customer could have a material adverse effect on the Companys sales and operating results. The Companys allowance for doubtful accounts was
approximately $13.5 million as of June 29, 2002.





Lease Loss Reserves:The Company must estimate and record
appropriate reserves for leased property for which the Company provides lease guarantees and sub-leases to its member patrons. Variables affecting the level of reserves recorded include the remaining lease term, vacancy rates of leased property,
state of the economy, property taxes, common area maintenance costs and estimated timeframes to sub-let property. In estimating the appropriate level of reserves to record, the Company estimates the amount of losses to be incurred over the remaining
term of the lease and discounts these amounts to their net present value and the reserves are adjusted accordingly. The Companys lease loss reserves were approximately $13.5 million as of June 29, 2002.





Intangibles and Long Lived Assets:The Company assesses, as required by paragraphs 4 and 5 of SFAS No. 121, Accounting for
the Impairment of Long Lived Assets, the recoverability of the carrying amount of its long lived and certain identifiable intangible assets at least annually or when events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If circumstances indicate that the carrying amount of an asset that the Company expects to hold and use may not be recoverable, the Company will estimate the future cash flows (undiscounted and without interest charges)
expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, the Company then would recognize an impairment loss in accordance with SFAS No.
121.





Tax Valuation Allowances:The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS
No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of June 29, 2002, the Company has approximately $22.0
million in deferred tax assets, of which $13.8 million relates to net operating loss carry-forwards that expire in various years through 2020 and a valuation allowance of approximately $10.3 million.





Benefit Plans: Assumptions used in determining projected benefit obligations and the fair value of plan assets for the
Companys pension plans and postretirement benefit plans other than pension plans are regularly evaluated by management in consultation with outside actuaries who are relied upon as experts. In the event that the Company determines that changes
are warranted in the assumptions used, such as the discount rate, expected long term rate of return on plan assets, or health care cost, future pension and postretirement benefit expenses could increase or decrease.





Item 3.    Quantitative and Qualitative Disclosures About Market Risk





Unified has only limited involvement with derivative financial instruments. They are used to manage well defined interest rate risks. Unified entered into a five-year interest rate collar agreement in February 1999 in relation to
certain borrowings on its variable rate revolving credit. The collar agreement was put in place without incurring a fee with respect to the collar transaction. The hedge agreement is structured such that Unified pays a variable rate of interest
between 6% (cap rate) and 4.94% (floor rate) based on a notional amount of $50.0 million. The weighted average interest rate, prior to lenders margin, on borrowings on the revolving credit was 1.96% at June 29, 2002. Due to fluctuating
interest rates, the fair value of the collar was $(1,918,000) as of June 29, 2002, $(1,299,000) as of March 30, 2002 and $(1,790,000) as of September 29, 2001. As a result, the Company recorded unrealized losses of $(619,000) and $(128,000) for the
thirteen and thirty-nine week periods ended June 29, 2002, respectively.




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Unified is subject to interest rate changes on its notes payable under the
Companys credit and note agreements which may affect the fair value of the notes payable. Based on the notes payable outstanding at June 29, 2002 and the current market condition, a 100 basis point increase in interest rates would decrease
cash flow and earnings on an annual basis by approximately $1.6 million. Conversely, a 100 basis point decrease in interest rates would increase cash flow and earnings annually by approximately $1.6 million.





With the adoption of SFAS No. 133, the Companys investments in convertible bonds were reclassified from available for sale
securities to trading securities. As a result of changing the classification of the convertible bonds, the Company is subject to market risk associated with fluctuations in interest rates and the market value of the embedded conversion feature. For
the thirteen and thirty-nine week periods ended June 29, 2002, the Company recorded a net (loss) and gain, due to the changes in the fair value of the convertible bonds of approximately $(46,000) and $195,000, respectively.







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PART II.    OTHER INFORMATION





Item 1.    Legal Proceedings





We are a party to various litigation,
claims and disputes, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, we expect that the outcome of these matters will not result in
a material adverse effect on our business, financial condition or results of operations.





During the 2002 period,
we became involved in litigation in the state of Hawaii stemming from the Companys 1996 sale of a subsidiary to a private investor and the subsequent bankruptcy and liquidation of such business. In re: Hawaiian Grocery Stores, Ltd; and Mark
J.C. Yee vs. Unified Western Grocers, Inc., Certified Grocers of California, Ltd., and Grocers Specialty Company, and KPMG, was filed December 14, 2001, and is pending in the bankruptcy court of the United States District Court for the District
of Hawaii. In this case, the Trustee for the bankruptcy estate, who is the plaintiff in the matter, has asserted preference claims against Certified Grocers of California, Ltd. (Certified), the predecessor of Unified, based on alleged
insider relationship, fraudulent transfer claims against Certified and Grocers Specialty Company, fraud claims against Certified, Grocers Specialty Company and other unnamed parties, and contract and tort claims against KPMG. In its prayer for
relief, the plaintiff seeks judgment against the defendants for $13.5 million, plus interest, punitive damages of $10 million and other unspecified damages. The Trustee also filed a complaint in the Hawaii Circuit Court, First Circuit, entitled
Mark J.C. Yee, Trustee for the Bankruptcy Estate of Hawaiian Grocery Stores, Ltd., vs. Unified Western Grocers, Inc., Certified Grocers of California, Ltd., Grocers Specialty Company, RHL, Inc., Alfred A. Plamann, Charles Pilliter, Daniel T.
Bane, Robert M. Ling, David A. Woodward, Richard H. Loeffler, Fletcher Robbe, Goodsill Anderson Quinn and Stifel, and Does 1-10 on May 17, 2002. This action, which generally arises out of the same transactions that are the subject of the Federal
District Court proceeding referenced above, asserts breach of fiduciary duties by the officers and directors of Hawaiian Grocery Stores, Ltd. (HGS), the controlling shareholder of HGS and the controlling shareholders parent
corporation, and breach of fiduciary duties by defendants Goodsill, Loeffler, RHL, Inc., and Robbe. Officers of the Company were officers and directors of HGS during certain periods and a subsidiary of the Company was a shareholder of HGS during
certain periods. The complaint seeks compensatory damages of approximately $13.5 million, plus interest, punitive damages of $10.0 million and other unspecified damages. These proceedings are in their very early stages and the Company intends to
vigorously defend this litigation.





Item 2.    Changes in Securities and Use of Proceeds





None





Item 3.    Defaults upon Senior Securities





None





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





None





Item 5.    Other Information





None





Item 6.    Exhibits and Reports on Form 8-K





(a) Exhibits





None





(b) Reports on Form 8-K





None







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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.





Dated: August 13, 2002





UNIFIED WESTERN GROCERS, INC. (Registrant)By:

/s/    ALFRED A.
PLAMANNAlfred A. Plamann President
and Chief Executive Officer





By:

/s/    RICHARD J.
MARTINRichard J. Martin Executive
Vice President, Finance & Administration and Chief
Financial Officer





By:

/s/    WILLIAM O. COTÉWilliam O. Coté Vice
President, Controller










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