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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)



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



FOR THE QUARTERLY PERIOD ENDED MARCH 27, 2004



OR



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



FOR THE TRANSITION PERIOD FROM              TO



Commission file number 0-10815



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UNIFIED WESTERN GROCERS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



(323) 264-5200

(Registrants telephone number, including area code)



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



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



The number of shares outstanding of each of the registrants classes of common stock, as of May 3,
2004, were as follows:



Class A: 83,250 shares   Class B:
501,033 shares   Class C: 16 shares   Class E: 36,924 shares



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##### Table of Contents

Table of Contents



|           |  |                                                                                       |  |     
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|          
|Item       |  |                                                                                       |  | Page
|          
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  |     
|           |  |                                                                                      
|Item 1.    |  | Financial Statements (Unaudited)                                                      |  | 3   
|           |  | Consolidated Condensed Balance Sheets                                                 |  | 3   
|           |  | Consolidated Condensed Statements of Earnings and Comprehensive Earnings              |  | 4   
|           |  | Consolidated Condensed Statements of Cash Flows                                       |  | 5   
|           |  | Notes to Consolidated Condensed Financial Statements                                  |  | 7   
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15  
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 35  
|Item 4.    |  | Controls and Procedures                                                               |  | 35  
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |     
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 36  
|Item 2.    |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |  | 37  
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 37  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 37  
|Item 5.    |  | Other Information                                                                     |  | 37  
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  | 37  
|           | 
|Signatures |  | 38                                                                                   



2



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##### Table of Contents

PART I.    FINANCIAL INFORMATION



ITEM 1.    FINANCIAL STATEMENTS (UNAUDITED)



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Unified Western Grocers, Inc. and Subsidiaries



Consolidated
Condensed Balance Sheets  Unaudited



(dollars in thousands)



|                                                                                                                                           |  |               |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                           | 
|                                                                                                                                           |  | March 27,2004 |         |   | September 27,2003 |  
|                                                                                                                                           | 
|Assets                                                                                                                                     |  |               |         |   |                   |   |         |  
|                                                                                                                                           |  |              
|Current assets:                                                                                                                            |  |               |         |   |                   |   |         |  
|Cash and cash equivalents (including $3,394 held at a variable interest entity at March 27, 2004) (Note 4)                                 |  | $             | 27,984  |   |                   | $ | 16,715  |  
|Accounts and notes receivable, net of allowances of $1,690 and $1,474 at March 27, 2004 and September 27, 2003, respectively               |  |               | 143,762 |   |                   |   | 152,349 |  
|Inventories                                                                                                                                |  |               | 191,737 |   |                   |   | 197,106 |  
|Prepaid expenses                                                                                                                           |  |               | 4,763   |   |                   |   | 5,195   |  
|Deferred income taxes                                                                                                                      |  |               | 10,076  |   |                   |   | 10,076  |  
|                                                                                                                                           | 
|Total current assets                                                                                                                       |  |               | 378,322 |   |                   |   | 381,441 |  
|Properties, net                                                                                                                            |  |               | 182,606 |   |                   |   | 186,786 |  
|Investments                                                                                                                                |  |               | 59,003  |   |                   |   | 56,565  |  
|Notes receivable, net of allowances of $383 and $333 atMarch 27, 2004 and September 27, 2003, respectively                                 |  |               | 22,162  |   |                   |   | 24,267  |  
|Goodwill                                                                                                                                   |  |               | 29,135  |   |                   |   | 29,589  |  
|Other assets, net                                                                                                                          |  |               | 41,533  |   |                   |   | 41,351  |  
|                                                                                                                                           | 
|Total Assets                                                                                                                               |  | $             | 712,761 |   |                   | $ | 719,999 |  
|                                                                                                                                           | 
|Liabilities and Shareholders Equity                                                                                                       |  |               |         |   |                   |   |         |  
|                                                                                                                                           |  |              
|Current liabilities:                                                                                                                       |  |               |         |   |                   |   |         |  
|Accounts payable                                                                                                                           |  | $             | 136,743 |   |                   | $ | 142,510 |  
|Accrued liabilities                                                                                                                        |  |               | 114,212 |   |                   |   | 103,045 |  
|Current portion of notes payable                                                                                                           |  |               | 10,652  |   |                   |   | 12,110  |  
|Patrons excess deposits and declared patronage dividends                                                                                  |  |               | 16,944  |   |                   |   | 11,621  |  
|Net current liabilities of discontinued operations                                                                                         |  |               | 1,995   |   |                   |   | 2,777   |  
|                                                                                                                                           | 
|Total current liabilities                                                                                                                  |  |               | 280,546 |   |                   |   | 272,063 |  
|Notes payable, due after one year                                                                                                          |  |               | 211,793 |   |                   |   | 232,374 |  
|Long-term liabilities, other                                                                                                               |  |               | 99,440  |   |                   |   | 94,234  |  
|Net long-term liabilities of discontinued operations                                                                                       |  |               | 690     |   |                   |   | 2,126   |  
|Patrons deposits and certificates:                                                                                                        |  |               |         |   |                   |   |         |  
|Patrons required deposits                                                                                                                 |  |               | 15,791  |   |                   |   | 13,999  |  
|Subordinated patronage dividend certificates                                                                                               |  |               | 3,141   |   |                   |   | 3,141   |  
|Commitments and contingencies                                                                                                              |  |               |         |   |                   |   |         |  
|                                                                                                                                           |  |              
|Shareholders equity:                                                                                                                      |  |               |         |   |                   |   |         |  
|Class A Shares: 500,000 shares authorized, 83,900 and 101,625 shares outstanding at March 27, 2004 and September 27, 2003, respectively    |  |               | 12,439  |   |                   |   | 15,348  |  
|Class B Shares: 2,000,000 shares authorized, 501,249 and 501,867 shares outstanding at March 27, 2004 and September 27, 2003,
respectively |  |               | 77,498  |   |                   |   | 78,371  |  
|Class E Shares: 2,000,000 shares authorized, 36,924 shares outstanding atMarch 27, 2004 and September 27, 2003                             |  |               | 3,692   |   |                   |   | 3,692   |  
|Retained earnings after elimination of accumulated deficit of $26,976 effective September 28, 2002                                         |  |               | 8,162   |   |                   |   | 5,279   |  
|Accumulated other comprehensive loss                                                                                                       |  |               | (431    | ) |                   |   | (628    | )
|                                                                                                                                           | 
|Total shareholders equity                                                                                                                 |  |               | 101,360 |   |                   |   | 102,062 |  
|                                                                                                                                           | 
|Total Liabilities and Shareholders Equity                                                                                                 |  | $             | 712,761 |   |                   | $ | 719,999 |  
|                                                                                                                                           | 



The accompanying notes are an
integral part of these statements.



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Unified Western Grocers, Inc. and Subsidiaries



Consolidated
Condensed Statements of Earnings

and Comprehensive Earnings  Unaudited



(dollars in thousands)



|                                                               |  |                                               |         |   |                                                 |   |         |               |  |   |               |   |  |   |           |  
|-------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | ----------------------------------------------- | - | ------- | ------------- |  | - | ------------- | - |  | - | --------- | -
|                                                              
|                                                               |  | Post Quasi-ReorganizationThirteen Weeks Ended |         |   | Post Quasi-ReorganizationTwenty-Six Weeks Ended |  
|                                                               |  | March 27,2004                                 |         |   | March 29,2003                                   |   |         | March 27,2004 |  |   | March 29,2003 |  
|                                                               | 
|Net sales                                                      |  | $                                             | 739,218 |   |                                                 | $ | 634,372 |               |  | $ | 1,537,418     |   |  | $ | 1,313,880 |  
|Cost of sales                                                  |  |                                               | 665,610 |   |                                                 |   | 565,446 |               |  |   | 1,386,197     |   |  |   | 1,172,311 |  
|Distribution, selling and administrative expenses              |  |                                               | 61,714  |   |                                                 |   | 58,400  |               |  |   | 126,345       |   |  |   | 118,957   |  
|                                                               | 
|Operating income                                               |  |                                               | 11,894  |   |                                                 |   | 10,526  |               |  |   | 24,876        |   |  |   | 22,612    |  
|Interest expense                                               |  |                                               | (4,231  | ) |                                                 |   | (5,941  | )             |  |   | (9,015        | ) |  |   | (11,882   | )
|                                                               | 
|Earnings before estimated patronage dividends and income taxes |  |                                               | 7,663   |   |                                                 |   | 4,585   |               |  |   | 15,861        |   |  |   | 10,730    |  
|Estimated patronage dividends                                  |  |                                               | (5,759  | ) |                                                 |   | (2,808  | )             |  |   | (10,812       | ) |  |   | (6,768    | )
|                                                               | 
|Earnings before income taxes                                   |  |                                               | 1,904   |   |                                                 |   | 1,777   |               |  |   | 5,049         |   |  |   | 3,962     |  
|Income taxes                                                   |  |                                               | (686    | ) |                                                 |   | (760    | )             |  |   | (1,880        | ) |  |   | (1,647    | )
|                                                               | 
|Net earnings                                                   |  |                                               | 1,218   |   |                                                 |   | 1,017   |               |  |   | 3,169         |   |  |   | 2,315     |  
|Other comprehensive earnings (loss), net of income taxes:      |  |                                               |         |   |                                                 |   |         |               |  |   |               |   |  |   |           |  
|Unrealized (loss) gain on valuation of interest rate collar    |  |                                               |        |   |                                                 |   | 340     |               |  |   |              |   |  |   | 550       |  
|Unrealized holding gain (loss) on investments                  |  |                                               | 210     |   |                                                 |   | (73     | )             |  |   | 197           |   |  |   | (58       | )
|                                                               | 
|Comprehensive earnings                                         |  | $                                             | 1,428   |   |                                                 | $ | 1,284   |               |  | $ | 3,366         |   |  | $ | 2,807     |  
|                                                               | 





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)



|                                                                                    |  |                                                 |         |   |               |   |         |  
|----------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------- | - | ------------- | - | ------- | -
|                                                                                   
|                                                                                    |  | Post Quasi-ReorganizationTwenty-Six Weeks Ended |        
|                                                                                    |  | March 27,2004                                   |         |   | March 29,2003 |  
|                                                                                    | 
|Cash flows from operating activities:                                               |  |                                                 |         |   |               |   |         |  
|Net earnings                                                                        |  | $                                               | 3,169   |   |               | $ | 2,315   |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                                                 |         |   |               |   |         |  
|Depreciation and amortization                                                       |  |                                                 | 14,246  |   |               |   | 12,738  |  
|Provision for doubtful accounts                                                     |  |                                                 | 221     |   |               |   | 1,602   |  
|Gain on sale of properties                                                          |  |                                                 | (7      | ) |               |   | (275    | )
|Deferred income taxes                                                               |  |                                                 | 1,366   |   |               |   | 1,617   |  
|Purchases of trading securities                                                     |  |                                                 | (840    | ) |               |   | (1,553  | )
|Proceeds from maturities or sales of trading securities                             |  |                                                 | 940     |   |               |   | 4,492   |  
|(Increase) decrease in assets:                                                      |  |                                                 |         |   |               |   |         |  
|Accounts and notes receivable                                                       |  |                                                 | 8,016   |   |               |   | 36,287  |  
|Inventories                                                                         |  |                                                 | 5,369   |   |               |   | 29,523  |  
|Prepaid expenses                                                                    |  |                                                 | 432     |   |               |   | 458     |  
|Increase (decrease) in liabilities:                                                 |  |                                                 |         |   |               |   |         |  
|Accounts payable                                                                    |  |                                                 | (5,767  | ) |               |   | (23,049 | )
|Accrued liabilities                                                                 |  |                                                 | 10,412  |   |               |   | 1,057   |  
|Long-term liabilities, other                                                        |  |                                                 | 5,231   |   |               |   | 1,326   |  
|                                                                                    | 
|Net cash provided by operating activities                                           |  |                                                 | 42,788  |   |               |   | 66,538  |  
|                                                                                    | 
|Cash flows from investing activities:                                               |  |                                                 |         |   |               |   |         |  
|Purchases of properties                                                             |  |                                                 | (3,808  | ) |               |   | (1,883  | )
|Purchases of securities and other investments                                       |  |                                                 | (5,392  | ) |               |   | (5,346  | )
|Proceeds from maturities or sales of securities and other investments               |  |                                                 | 4,119   |   |               |   | 8,336   |  
|Decrease (increase) in notes receivable                                             |  |                                                 | 2,187   |   |               |   | (5,682  | )
|Proceeds from sales of properties                                                   |  |                                                 |        |   |               |   | 280     |  
|Increase in other assets                                                            |  |                                                 | (4,428  | ) |               |   | (2,440  | )
|                                                                                    | 
|Net cash provided (utilized) by investing activities                                |  |                                                 | (7,322  | ) |               |   | (6,735  | )
|                                                                                    | 
|Cash flows from financing activities:                                               |  |                                                 |         |   |               |   |         |  
|Additions to long-term notes payable                                                |  |                                                 | 3,000   |   |               |   | 1,000   |  
|Reduction of long-term notes payable                                                |  |                                                 | (19,061 | ) |               |   | (30,696 | )
|Reduction of short-term notes payable                                               |  |                                                 | (6,148  | ) |               |   | (11,458 | )
|Payment of deferred financing fees                                                  |  |                                                 | (2,556  | ) |               |   | (445    | )
|Patrons excess deposits and declared patronage dividends                           |  |                                                 | 5,323   |   |               |   | (1,572  | )
|Redemption of patronage dividend certificates                                       |  |                                                 |        |   |               |   | (1,868  | )
|Increase in patrons required deposits                                              |  |                                                 | 1,782   |   |               |   | 3,292   |  
|Repurchase of shares from members                                                   |  |                                                 | (3,710  | ) |               |   |        |  
|Issuance of shares to members                                                       |  |                                                 | 546     |   |               |   | 79      |  
|                                                                                    | 
|Net cash provided (utilized) by financing activities                                |  |                                                 | (20,824 | ) |               |   | (41,668 | )
|                                                                                    | 
|Net increase in cash and cash equivalents from continuing operations                |  |                                                 | 14,642  |   |               |   | 18,135  |  
|Net cash utilized by discontinued operations                                        |  |                                                 | (3,373  | ) |               |   | (7,129  | )
|Cash and cash equivalents at beginning of period                                    |  |                                                 | 16,715  |   |               |   | 9,957   |  
|                                                                                    | 
|Cash and cash equivalents at end of period                                          |  | $                                               | 27,984  |   |               | $ | 20,963  |  
|                                                                                    | 



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  Continued



(dollars in
thousands)





|                                                                                                               |  |                                                 |       |               |   |       
|-------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ----- | ------------- | - | ------
|                                                                                                              
|                                                                                                               |  | Post Quasi-ReorganizationTwenty-Six Weeks Ended
|                                                                                                               |  | March 27,2004                                   |       | March 29,2003
|                                                                                                              
|Supplemental disclosure of cash flow information:                                                              |  |                                                 |       |               |   |       
|Cash paid during the period for:                                                                               |  |                                                 |       |               |   |       
|Interest                                                                                                       |  | $                                               | 8,873 |               | $ | 11,497
|Income taxes                                                                                                   |  | $                                               | 27    |               | $ | 18    
|                                                                                                              
|Supplemental disclosure of non-cash items:                                                                     |  |                                                 |       |               |   |       
|Conversion of Class B Shares to Class A Shares and patrons excess deposits                                    |  | $                                               | 61    |               |   |      
|Capital leases                                                                                                 |  |                                                 |      |               | $ | 4,367 
|Reduction in purchase accounting reserve against goodwill                                                      |  | $                                               | 454   |               |   |      
|Increase to pre quasi-reorganization discontinued operations and lease reserves, net of deferred taxes of $586 |  | $                                               | 894   |               |   |      
|                                                                                                              





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 (unaudited)



1.    BASIS OF PRESENTATION



The consolidated
condensed financial statements include the accounts of Unified Western Grocers, Inc. and all 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 SEC). 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 SEC rules and regulations; nevertheless, management believes
that the disclosures are adequate to make the information presented not misleading. These consolidated condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the
Companys latest annual report on Form 10-K filed with the SEC. The results of operations for the interim period are not necessarily indicative of the results for the full year.



The accompanying consolidated condensed financial statements reflect all adjustments that, in the opinion of management, are both of a normal and
recurring nature and necessary for the fair presentation of the results for the interim period presented. The preparation of the consolidated condensed financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated condensed financial statements and accompanying notes. As a result, actual results could differ from those estimates.



Certain amounts in the prior periods consolidated condensed financial statements
have been reclassified to conform to the current periods presentation.



2.    DISCONTINUED OPERATIONS



On September 25, 2002, the Companys Board of Directors (the Board) approved a plan to exit the Companys unprofitable retail operations. The decision resulted in an impairment of the underlying assets and the accrual
of exit-related costs and liabilities in accordance with Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions (APB Opinion No. 30). Pursuant to APB Opinion No. 30, the Company recognized asset impairments and established reserves for certain exit-related costs including estimated operating
losses expected to be incurred over the disposal period, lease reserves and settlements, severance and contract termination costs. The reserves are periodically analyzed and adjustments are recorded against additional paid-in capital. The Company
has reclassified certain accounts in the consolidated condensed financial statements to reflect its exit from the retail business. Accordingly, certain assets and liabilities and cash flows relating to the Companys retail operations were
segregated and the resulting net liabilities and net cash flows of the retail operations were reported as discontinued operations in the accompanying consolidated condensed financial statements.



The components of the net liabilities of discontinued operations included in the consolidated condensed
balance sheets are as follows:



|                                                     |  |               |        |   |                   |   |        |  
|---------------------------------------------------- |  | ------------- | ------ | - | ----------------- | - | ------ | -
|(dollars in thousands)                               |  |               |        |   |                   |  
|                                                     | 
|                                                     |  | March 27,2004 |        |   | September 27,2003 |  
|                                                     | 
|Accounts receivable                                  |  | $             |       |   |                   | $ | 8      |  
|Inventories                                          |  |               |       |   |                   |   | 1,206  |  
|Prepaid expenses and deposits                        |  |               |       |   |                   |   | 318    |  
|Accounts payable                                     |  |               |       |   |                   |   | (267   | )
|Accrued liabilities                                  |  |               | (1,995 | ) |                   |   | (4,042 | )
|                                                     | 
|Net current liabilities of discontinued operations   |  | $             | (1,995 | ) |                   | $ | (2,777 | )
|                                                     | 
|Properties, net                                      |  | $             |       |   |                   | $ | 481    |  
|Other assets                                         |  |               | 60     |   |                   |   | 189    |  
|Long-term liabilities, other                         |  |               | (750   | ) |                   |   | (2,796 | )
|                                                     | 
|Net long-term liabilities of discontinued operations |  | $             | (690   | ) |                   | $ | (2,126 | )
|                                                     | 



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Unified Western Grocers, Inc. and Subsidiaries



Notes to Consolidated Condensed Financial Statements (Unaudited)(Continued)



3.    QUASI-REORGANIZATION



Concurrent with the decision to dispose of its retail operations as discussed in Note 2, the Board adopted a resolution approving a
quasi-reorganization of the Companys accounts for financial reporting purposes effective September 28, 2002. A quasi-reorganization is an accounting procedure that eliminates an accumulated deficit in retained earnings and permits a company to
proceed on much the same basis as if it had been legally reorganized. A quasi-reorganization requires that a companys long-term assets and liabilities be adjusted to fair value. Any remaining deficit in retained earnings is then eliminated by
a transfer of amounts from paid-in capital and capital stock, if necessary, giving a company a fresh start and a zero balance in retained earnings. The quasi-reorganization process resulted in the adjustment of the Companys assets
and liabilities to fair value at September 28, 2002 and the elimination of the Companys accumulated deficit by a reduction of $18.1 million against additional paid-in capital, $1.1 million against Class A Shares and $7.7 million against Class
B Shares. The fair value adjustments pursuant to quasi-reorganization accounting rules did not result in a net write-up of assets.



4.    VARIABLE INTEREST ENTITY



On November 26, 2003, the Company signed a purchase and sale agreement with an unrelated business property developer to transfer and assign the leasehold and sub-leasehold
interests and certain assets relating to eight closed store locations for which the Company is contingently liable for the lease payments. The Company paid approximately $4.1 million including brokers commissions (which approximated the
Companys recorded lease liabilities for these locations at the date of transfer) to transfer its leasehold and sub-leasehold interests in these properties but remains secondarily liable until such time as the leases expire or the Company is
released from all liabilities and obligations under the leases. The net present value of the Companys potential obligation for the remaining leasehold and sub-leasehold interests for the eight stores totals approximately $8.9 million at March
27, 2004 with the last lease expiring in 2014.



The Financial Accounting Standards Board
(FASB) issued in January 2003 and revised December 2003 FASB Interpretation No. (FIN) 46R, Consolidation of Variable Interest Entities  an Interpretation of Accounting Research Bulletin (ARB) No. 51,
Consolidated Financial Statements. FIN 46R requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Although the Company has no ownership interest in the unrelated third party that assumed
the leasehold and sub-leasehold interests from the Company, that third party is considered a variable interest entity pursuant to FIN 46R. Since the primary investor in the variable interest entity currently does not have sufficient equity at risk,
the Company is considered the primary beneficiary. Accordingly, the Company is required to consolidate the assets, liabilities and non-controlling interests of the variable interest entity. At March 27, 2004, the Company consolidated the variable
interest entitys accounts, including total assets of $3.6 million, comprised primarily of $3.4 million in cash and $0.2 million in other assets, to be used in the development of the properties and for payment of lease obligations with lease
reserves of approximately $4.1 million.



5.    ACQUISITIONS



On September 27, 1999, the Company merged with United Grocers, Inc., a grocery
cooperative headquartered in Milwaukie, Oregon (the Merger). The effective date of the Merger was September 29, 1999. In connection with the Merger, the Company established reserves for the anticipated lease payments and expected closure
of various facilities. Periodic charges against the reserve represent both lease payments on facilities not subleased and rental income shortfalls on subleased properties. The amount of reserve and current period charges against the reserve for the
twenty-six week period ended March 27, 2004 are presented below.



|                              |  |   |        |  
|----------------------------- |  | - | ------ | -
|(dollars in thousands)        |  |   |       
|                              | 
|Balance at September 27, 2003 |  | $ | (2,972 | )
|Charges to the reserve        |  |   | 495    |  
|Charges to earnings           |  |   | (126   | )
|                              | 
|Balance at March 27, 2004     |  | $ | (2,603 | )
|                              | 



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Notes to Consolidated Condensed Financial Statements (Unaudited)(Continued)



6.    SEGMENT INFORMATION



Unified is a grocery wholesaler serving grocery operators in California, Oregon, Washington, Idaho, Nevada, Arizona, Hawaii, Colorado, Utah and
certain U.S. territories in the South Pacific and elsewhere. The Company sells a wide variety of products to its customers, including dry grocery, frozen food, deli, meat, dairy, eggs, produce, bakery, gourmet, specialty foods and general
merchandise products. The Company also provides support services to its patrons, including member financing and insurance. Specific products and services available to patrons vary depending on their location.



The Companys management regularly reviews operating results to evaluate segment performance. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company has determined that it has two reportable business segments.



The Companys wholesale distribution segment represents approximately 99% of the
Companys total sales and includes the results of operations from the sale of food and general merchandise products to both member and non-member independent and chain supermarket operators.



The insurance category includes the results of operations for the Companys three insurance
subsidiaries whose services are provided to a common customer base. The Companys insurance category collectively accounts for approximately 1% of the Companys total sales and 11.9% of total assets.



The all other category includes the results of operations for the Companys other
support businesses, including its finance subsidiary, whose services are provided to a common customer base, none of which individually meets the quantitative thresholds of a reportable segment. The Companys all other category collectively
accounts for less than 1% of the Companys total sales.



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Notes to Consolidated Condensed Financial Statements (Unaudited)(Continued)



Information about the Companys operating segments is summarized below.



|                                    |  |                      |         |   |                        |   |         |               |  |   |               |   |  |   |           |  
|----------------------------------- |  | -------------------- | ------- | - | ---------------------- | - | ------- | ------------- |  | - | ------------- | - |  | - | --------- | -
|(dollars in thousands)              |  |                      |         |   |                        |   |         |               |  |   |               |  
|                                   
|                                    |  | Thirteen Weeks Ended |         |   | Twenty-Six Weeks Ended |  
|                                    |  | March 27,2004        |         |   | March 29,2003          |   |         | March 27,2004 |  |   | March 29,2003 |  
|                                    | 
|Net sales                           |  |                      |         |   |                        |   |         |               |  |   |               |   |  |   |           |  
|Wholesale distribution              |  | $                    | 731,330 |   |                        | $ | 631,250 |               |  | $ | 1,523,359     |   |  | $ | 1,311,002 |  
|Insurance                           |  |                      | 8,611   |   |                        |   | 9,958   |               |  |   | 18,125        |   |  |   | 18,616    |  
|All other                           |  |                      | 391     |   |                        |   | 386     |               |  |   | 815           |   |  |   | 3,097     |  
|Inter-segment eliminations          |  |                      | (1,114  | ) |                        |   | (7,222  | )             |  |   | (4,881        | ) |  |   | (18,835   | )
|                                    | 
|Total net sales                     |  | $                    | 739,218 |   |                        | $ | 634,372 |               |  | $ | 1,537,418     |   |  | $ | 1,313,880 |  
|                                    | 
|Operating income                    |  |                      |         |   |                        |   |         |               |  |   |               |   |  |   |           |  
|Wholesale distribution              |  | $                    | 13,127  |   |                        | $ | 9,829   |               |  | $ | 25,932        |   |  | $ | 20,796    |  
|Insurance                           |  |                      | (1,444  | ) |                        |   | (210    | )             |  |   | (1,606        | ) |  |   | 462       |  
|All other                           |  |                      | 211     |   |                        |   | 907     |               |  |   | 550           |   |  |   | 1,354     |  
|                                    | 
|Total operating income              |  | $                    | 11,894  |   |                        | $ | 10,526  |               |  | $ | 24,876        |   |  | $ | 22,612    |  
|                                    | 
|Interest expense                    |  | $                    | (4,231  | ) |                        | $ | (5,941  | )             |  | $ | (9,015        | ) |  | $ | (11,882   | )
|Estimated patronage dividends       |  |                      | (5,759  | ) |                        |   | (2,808  | )             |  |   | (10,812       | ) |  |   | (6,768    | )
|Income taxes                        |  |                      | (686    | ) |                        |   | (760    | )             |  |   | (1,880        | ) |  |   | (1,647    | )
|                                    | 
|Net earnings                        |  | $                    | 1,218   |   |                        | $ | 1,017   |               |  | $ | 3,169         |   |  | $ | 2,315     |  
|                                    | 
|Depreciation and amortization       |  |                      |         |   |                        |   |         |               |  |   |               |   |  |   |           |  
|Wholesale distribution              |  | $                    | 7,099   |   |                        | $ | 6,348   |               |  | $ | 14,079        |   |  | $ | 12,508    |  
|Insurance                           |  |                      | 69      |   |                        |   | 80      |               |  |   | 144           |   |  |   | 151       |  
|All other                           |  |                      | 12      |   |                        |   | 12      |               |  |   | 23            |   |  |   | 79        |  
|                                    | 
|Total depreciation and amortization |  | $                    | 7,180   |   |                        | $ | 6,440   |               |  | $ | 14,246        |   |  | $ | 12,738    |  
|                                    | 
|Capital expenditures                |  |                      |         |   |                        |   |         |               |  |   |               |   |  |   |           |  
|Wholesale distribution              |  | $                    | 1,953   |   |                        | $ | 1,538   |               |  | $ | 3,750         |   |  | $ | 6,182     |  
|Insurance                           |  |                      | 32      |   |                        |   | 32      |               |  |   | 58            |   |  |   | 68        |  
|All other                           |  |                      |        |   |                        |   |        |               |  |   |              |   |  |   |          |  
|                                    | 
|Total capital expenditures          |  | $                    | 1,985   |   |                        | $ | 1,570   |               |  | $ | 3,808         |   |  | $ | 6,250     |  
|                                    | 
|Identifiable assets                 |  |                      |         |   |                        |   |         |               |  |   |               |   |  |   |           |  
|Wholesale distribution              |  | $                    | 596,792 |   |                        | $ | 596,979 |               |  | $ | 596,792       |   |  | $ | 596,979   |  
|Insurance                           |  |                      | 84,977  |   |                        |   | 73,332  |               |  |   | 84,977        |   |  |   | 73,332    |  
|All other                           |  |                      | 30,992  |   |                        |   | 33,370  |               |  |   | 30,992        |   |  |   | 33,370    |  
|                                    | 
|Total identifiable assets           |  | $                    | 712,761 |   |                        | $ | 703,681 |               |  | $ | 712,761       |   |  | $ | 703,681   |  
|                                    | 



7.    CONTINGENCIES



During fiscal 2002, the Company became involved in litigation in the state of
Hawaii stemming from the Companys 1996 sale of a subsidiary to a private investor, events subsequent to the sale, 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. 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 name 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
$10.0 million and other unspecified damages. In September 2003, the court



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Notes to Consolidated Condensed Financial Statements (Unaudited)(Continued)



dismissed the fraudulent transfer and fraud claims against Certified and Grocers Specialty Company. 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 1-10on May 17, 2002.In March 2003, the Trustee amended its complaint to add Bruce Barber and
Sheppard Mullin Richter & Hampton LLP, as defendants. 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 (Grocers Specialty Company) and the controlling shareholders parent corporation (Certified), and breach of fiduciary duties by
defendants Goodsill, Loeffler, RHL, Inc., and Robbe. Current and former officers of the Company were officers or 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. All of the above referenced matters are now pending in the Federal District Court for the District of Hawaii.
The Company is vigorously defending this litigation.



The Company is a party to various
litigation, claims and disputes, some of which, including the HGS litigation, are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the Company believes
the outcome of these matters will not result in a material adverse effect on its financial condition or results of operations.



8.    PENSION AND OTHER POSTRETIREMENT BENEFITS



The Companys employees participate in a cash balance pension plan (the Plan) sponsored by the Company. Under the Plan, participants are credited with an annual
accrual based on years of service with the Company. The Plan balance receives an annual interest credit, currently tied to the 30-year Treasury rate that is in effect the previous November, but in no event shall the rate be less than 5%. On
retirement, participants will receive a lifetime annuity based on the total cash balance in their account. The Company makes contributions to the Plan in amounts that are at least sufficient to meet the minimum funding requirements of applicable
laws and regulations, but no more than amounts deductible for federal income tax purposes. Benefits under the Plan are provided through a trust and also through annuity contracts.



The Company also has an Executive Salary Protection Plan (ESPP II) that provides supplemental post-termination retirement income based on
each participants final salary and years of service as an officer of the Company and is financed from life insurance policies purchased by the Company.



The Company sponsors postretirement benefit plans that cover both non-union and union employees. Retired non-union employees currently are eligible for a plan providing medical
benefits, and a certain group of retired non-union employees currently participate in a plan providing life insurance benefits for which active non-union employees are no longer eligible. Additionally, certain eligible union and non-union employees
have separate plans providing a lump-sum payout for unused sick days. The plans are not funded.



The components of net periodic cost for pension and other postretirement benefits for the twenty-six weeks ended March 27, 2004, and March 29, 2003 consist of the following:



|                                   |  |                  |        |   |                              |   |        |               |  |               |       |  |   |      
|---------------------------------- |  | ---------------- | ------ | - | ---------------------------- | - | ------ | ------------- |  | ------------- | ----- |  | - | -----
|                                  
|                                   |  | Pension Benefits |        |   | OtherPostretirement Benefits
|                                   |  | March 27,2004    |        |   | March 29,2003                |   |        | March 27,2004 |  | March 29,2003
|                                  
|Service cost                       |  | $                | 2,147  |   |                              | $ | 1,583  |               |  | $             | 711   |  | $ | 607  
|Interest cost                      |  |                  | 2,904  |   |                              |   | 2,899  |               |  |               | 1,543 |  |   | 1,415
|Expected return on plan assets     |  |                  | (2,409 | ) |                              |   | (2,299 | )             |  |               |      |  |   |     
|Amortization of prior service cost |  |                  | 120    |   |                              |   |       |               |  |               |      |  |   |     
|Recognized actuarial loss (gain)   |  |                  | 34     |   |                              |   |       |               |  |               | 115   |  |   |     
|                                  
|Net periodic cost (benefit)        |  | $                | 2,796  |   |                              | $ | 2,183  |               |  | $             | 2,369 |  | $ | 2,022
|                                  



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Notes to Consolidated Condensed Financial Statements (Unaudited)(Continued)



The Company expects to contribute $4.0 million to the pension plans by September 15, 2004 for the 2003 plan year. In addition,
the Company expects to make quarterly contributions of $0.8 million in April, July and October 2004 for the 2004 plan year. Any remaining 2004 plan year contributions, which will be determined when the 2004 actuarial valuation is completed, will be
due on January 15, 2005 and September 15, 2005.



9.    RELATED
PARTY TRANSACTIONS



On December 19, 2000, the Company initially purchased 80,000
shares of preferred stock (the Series A-1 Preferred Shares) of C&K Market, Inc. (C&K) for $8.0 million. Douglas A. Nidiffer, a director of the Company, is a shareholder, director and an 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 the occurrence of designated events
including the nonpayment of permitted dividends or permitted mandatory redemption payments. The preferred stock bore a 9.5% cumulative dividend rate, with the payment of cash dividends deferred until after November 15, 2002, and then payable
quarterly only if permitted by applicable loan agreements. The preferred stock was convertible into 15% of the common stock of C&K under certain circumstances. The Company received cash dividends of $0.2 million during the thirteen weeks ended
December 27, 2003 and $0.7 million during the fiscal year ended September 27, 2003 in connection with the Series A-1 Preferred Shares.



During the second quarter of fiscal 2004, the Company and an unrelated third party lender approved a change in the capital structure of C&K. In connection with the
recapitalization, the Company exchanged its 80,000 Series A-1 Preferred Shares valued at $8.0 million and deferred dividends of approximately $1.5 million with respect to such shares for 95,000 shares of Series A-2 Preferred Shares. The Series A-2
Preferred Shares have an 8% cumulative dividend rate, with cash dividend payments payable quarterly beginning in May 2004, subject to applicable loan agreements. The dividend rate will be adjusted on December 31, 2008 to the greater of 8% or the
then current five-year U.S. Treasury Bill rate plus 5%. The carrying value of the Series A-2 Preferred Shares is $8.0 million and will accrete to the redemption value of $9.5 million over 10 years. Separately, the Company also executed a new
ten-year supply agreement with C&K. The Series A-2 Preferred Shares are eligible for redemption, at the Companys option in an amount of up to 19,000 shares per year, beginning in December 2009 and concluding in December 2013. The
controlling shareholders of C&K have provided the Company with personal guarantees with respect to the redemption of preferred shares and the payment of dividends.



10.    NEW ACCOUNTING PRONOUNCEMENTS



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity (SFAS No. 150). This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires certain financial
instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. Many of these instruments previously were classified as equity or temporary equity and as such, SFAS No. 150
represents a significant change in the practice in the accounting for a number of mandatorily redeemable equity instruments. SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments at
the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of non-public entities. For non-public entities that are SEC registrants, the implementation of the provisions of the
statement with regard to mandatorily redeemable financial instruments is effective for the first fiscal period beginning after December 15, 2003. Pursuant to this statement, the Company is considered a non-public entity that is an SEC registrant.
Accordingly, the Company implemented the provisions of this statement regarding mandatorily redeemable financial instruments effective with its second quarter in fiscal 2004. The adoption of this accounting pronouncement did not have a material
impact on the Companys consolidated financial statements.



In January 2003, the
FASB issued FIN 46, Consolidation of Variable Interest Entities  an Interpretation of ARB No. 51, Consolidated Financial Statements. This interpretation addresses consolidation by business enterprises of entities in which equity
investors do not have the characteristics of a controlling financial interest or do not have



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Notes to Consolidated Condensed Financial Statements (Unaudited)(Continued)



sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Variable interest entities are
required to be consolidated by their primary beneficiaries if they do not effectively disperse risks among the parties involved. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the entitys expected
losses or receives a majority of its expected residual returns. In December 2003, the FASB amended FIN 46, now referred to as FIN 46 Revised (FIN 46R). The requirements of FIN 46R are effective no later than the end of the first
reporting period that ends after March 15, 2004. Additionally, certain new disclosure requirements apply to all financial statements issued after December 31, 2003. During the thirteen weeks ended December 27, 2003, the Company became involved with
a variable interest entity. The Company consolidated the variable interest entity at March 27, 2004 and has included the disclosure requirements of FIN 46R in Note 4 to the consolidated condensed financial statements.



In December 2003, the FASB issued revised SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits (the Statement), which replaces existing SFAS No. 132 of the same title. All disclosure requirements now required in the existing SFAS No. 132 have been retained in the revised version.
The Statement requires additional disclosures regarding types of plan assets held, investment strategies, measurement dates, plan obligations, cash flows and components of net periodic benefit cost (expense). The Statement also calls for certain
information to be disclosed in financial statements for interim periods. The interim period disclosures required by this Statement were adopted by the Company for the quarter ended March 27, 2004 and are included in Note 8 to the consolidated
condensed financial statements. The annual disclosures required by this Statement are effective for the Company for the fiscal year ending October 2, 2004.



In January 2004, the FASB issued FASB Staff Position No. FAS 106-1 (FSP 106-1) Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, (the Act). FSP 106-1 addresses the accounting impact of the Act, which was signed into law on December 8, 2003. Among other features, the Act introduces a prescription drug benefit under
Medicare Part D and a federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Companies sponsoring affected postretirement benefit plans may elect to defer
recognition of the impact of the Act until (1) final FASB guidance on accounting for the federal subsidy provision of the Act is issued, or (2) a significant event calling for remeasurement of a plans assets and obligations occurs. FSP 106-1
is effective for interim or annual financial statements of fiscal years ending after December 7, 2003. The Company has elected to defer (1) recognizing the effects of the Act, if any, on postretirement benefit expense and on the accumulated
projected benefit obligation (APBO) pursuant to SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions, and (2) providing the information related to the plan called for in SFAS No. 132,
Employers Disclosures about Pensions and Postretirement Benefits. The adoption of this accounting interpretation is not expected to have a material impact on the Companys consolidated financial statements.



In March 2004, the FASB proposed FASB Staff Position No. FAS 106-b (FSP 106-b)
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 that would supersede FSP 106-1. If the Companys prescription drug benefit were to be determined actuarially
equivalent to Medicare Part D, the subsidy under the Act would initially be accounted for as an actuarial experience gain that would reduce its APBO under SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than
Pensions. The subsidy would reduce the service cost component of postretirement benefit expense on a go-forward basis. No special disclosures are required if an employer determines that its drug benefit is not actuarially equivalent. FSP 106-b
is effective for the first interim or annual period beginning after June 15, 2004. Adoption of this revised accounting interpretation, when issued, is not expected to have a material impact on the Companys consolidated financial statements.



In November 2002, the Emerging Issues Task Force (EITF) released EITF Issue
No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor (Issue No. 02-16). Issue No. 02-16 provides guidance on how a reseller should characterize the cash consideration
received from a vendor and when and how the cash consideration should be recorded in its income statements. Issue No. 02-16 requires that cash consideration received from the vendor be accounted for as a reduction of inventory cost at the time of
receipt and as a credit to cost of sales when the inventory is sold. If the cash consideration received from the vendor is



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Unified Western Grocers, Inc. and Subsidiaries



Notes to Consolidated Condensed Financial Statements (Unaudited)(Continued)



considered a direct, specific and incremental reimbursement of costs incurred by the reseller to sell the vendors products, the cash consideration is treated as
a reduction of such selling costs. Pursuant to Issue No. 02-16, allowances that relate to specific purchase quantities are recorded as a component of inventory cost and recognized as a credit to cost of sales when the item is sold based on a
systematic and rational methodology. The adoption of Issue No. 02-16 did not have a material impact on the Companys consolidated financial statements.



In November 2003, the EITF reached a consensus on EITF Issue No. 03-10, Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by
Manufacturers (Issue No. 03-10). Issue No. 03-10 addresses the accounting for manufacturer sales incentives offered directly to consumers, including manufacturer coupons. According to Issue No. 03-10, manufacturers sales
incentives offered directly to consumers that do not meet certain criteria should be reflected as a reduction of revenue in the financial statements of a reseller. The consensus applies to new arrangements, including modifications to existing
arrangements, entered into in fiscal periods beginning after November 25, 2003. Accordingly, $20.6 million and $18.8 million of such consideration in the 13-week period of fiscal 2004 and 13-week period of fiscal 2003, respectively, and $44.8
million and $41.0 million for the 26-week period of fiscal 2004 and the 26-week period of fiscal 2003, respectively, have been classified as a reduction in cost of sales with a corresponding reduction in net sales.



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##### Table of Contents

|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



FORWARD-LOOKING INFORMATION



This report contains 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, or (c) embody assumptions that may prove to have been inaccurate. Also, when we use words such as believes, expects,
anticipates or similar expressions, we are making forward-looking statements. Although Unified Western Grocers, Inc. (the Company or 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. Future results are subject to numerous factors, many of which are beyond our control. Important factors that could cause actual results to differ
materially from the Companys expectations include, without limitation, the factors discussed under the captions Risk Factors and Critical Accounting Policies below and elsewhere in the Companys documents filed
with the Securities and Exchange Commission. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the factors that may cause actual results to differ materially from anticipated results. The Company
assumes no obligation to update or correct the forward-looking statements in this report to reflect subsequent events or actual results.



COMPANY OVERVIEW



General



Unified is a grocery wholesaler serving grocery operators in
California, Oregon, Washington, Idaho, Nevada, Arizona, Hawaii, Colorado, Utah and certain U.S. territories in the South Pacific and elsewhere. The Company sells a wide variety of products to its customers, who are primarily independent grocers.
Products sold include dry grocery, frozen food, deli, meat, dairy, eggs, produce, bakery, gourmet, specialty foods and general merchandise products. The Company also provides support services to its patrons, including member financing for the
purchase of inventory, equipment and leasehold improvements, and various insurance products including workers compensation, general liability, auto, and directors and officers insurance. The Companys marketing platform is
built on offering its customers better value than is available elsewhere by combining competitive pricing with superior selection, quality, timely delivery, service and convenience. Specific products and services available to patrons vary depending
on their location.



Unified does business primarily with those customers that qualify and
have been accepted as member-patrons. To realize the benefits of membership in the cooperative, member-patrons are required to meet specific member capitalization requirements. Member capitalization requirements, as set forth in the
Companys Bylaws, include a combination of capital stock ownership, required cash deposits and patronage dividend certificates. Unified establishes for its member-patrons minimum purchase requirements. A patron that does not meet member-patron
purchase requirements may conduct business with Unified either as an associate-patron or as a customer on a non-patronage basis. The earnings of the Companys subsidiaries and non-patronage business of the cooperative are retained
by the Company, while the earnings of the parent company attributable to patronage business conducted with its member-patrons and associate-patrons (collectively the members) are generally distributed to its patrons in the form of
patronage dividends.



The Companys wholesale distribution segment represents
approximately 99% of the Companys total sales and includes the results of operations from the sale of food and general merchandise products to both member and non-member independent and chain supermarket operators. The Companys insurance
segment accounts for approximately 1% of total sales. The Companys other support businesses, including its finance subsidiary, collectively account for less than 1% of total sales. The Company also operates its own bakery and fluid milk
bottling manufacturing facilities in Southern California. Patronage earnings are based on the combined results of the Companys three patronage earnings divisions: the Southern California and Pacific Northwest Dairy Divisions and the
Cooperative Division. The Company also does business on a non-patronage basis in the wholesale distribution segment through its specialty food company and international sales division and with non-member customers of the cooperative.



The Company distributes its products from warehouse and manufacturing facilities located in Los
Angeles, Commerce, Santa Fe Springs, Stockton, Hayward, Livermore and Fresno, California and Milwaukie, Oregon.



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##### Table of Contents

The Grocery Industry



The grocery industry, including the wholesale food distribution business, is highly competitive and characterized by relatively high volume and low profit margins. As a result of
heightened competition, the grocery industry has trended towards vertical integration, alternative format grocery stores (including warehouse club stores and super-centers) and consolidation among competing organizations. The drivers of
consolidation include the need to globalize as a defensive move and to increase efficiency, sales and resource sharing. All of these drivers are central to enabling an organization to achieve its strategic and financial objectives easier than it
could on its own.



Technology has played a significant role in the shift of market share
and the overall shape of the grocery industry as companies continue to use technology to gain efficiencies and reduce costs. As chain supermarkets increase in size and alternative format grocery stores gain market share, the Companys members,
consisting primarily of independent grocers, are further challenged to compete.



In
helping its customers remain competitive, the Company places emphasis on providing a high quality and diverse line of products, competitive service fees and timely and reliable deliveries. The Company also provides a wide range of other services,
such as member financing and insurance to further support the members business. Despite the competitive environment, certain members have been successful in competing to maintain or grow market share by focusing on niche markets.



Looking Ahead



In order to grow and strengthen its sales volume, the Company is continually expanding and replenishing its member base by adding new members to the
cooperative, providing support to existing members who are remodeling or opening new stores and helping retailers introduce new products to meet changing consumer demand. For fiscal 2004, Unified is putting new emphasis on the sale of perishable
products and other merchandise generally found in the perimeter layout of retail grocery stores. Such items include produce, service deli, meat and seafood. The Companys new perishables initiative will not only help retailers improve their
competitiveness in the marketplace, it will funnel more sales through Unified and enhance its ability to serve as a single source for its members and customers.



Demographic changes are also supporting the growth of the Company. For example, while the vast majority of Unifieds Southern California members
and customers operating retail stores are in Los Angeles and San Diego metropolitan areas, many retailers are looking to the eastern portion of the region for new opportunities to grow their businesses, such as Las Vegas, Phoenix and Tucson.



Unified supports growth throughout the region by working closely with vendors to offer
promotions on fast-moving products to the membership, by supporting and sponsoring major events that help promote grocery sales at the retail level, and by improving the efficiency of its distribution system. The Company is creating a new
distribution model designed to allow orders to be filled and delivered more efficiently than before. Keeping the Companys distribution system efficient enables Unified to continue to offer products and services to retailers at the lowest cost
possible.



Specific improvements in the Companys various divisions include the
investment by the Companys dairy in new material handling equipment for the loading dock, enabling employees to handle product more efficiently. Investments in research and development resulted in a redesigned milk container that was
introduced to retailers during fiscal 2003. Additionally, a flavored milk program is in process and is expected to be the dairys next major product roll-out. In the Los Angeles bakery, the introduction of several new upscale and Hispanic
products drove an increase in sales in fiscal 2003 and is expected to continue to do so in the coming year.



Both the dairy and bakery continue to partner with large food manufacturers, building sales in the category, providing a wider selection of quality products, and capitalizing on deals or promotional allowances.



16



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##### Table of Contents

RESULTS OF OPERATIONS



The following table sets forth the percentage of total revenues represented by certain items reflected in the Companys statements of earnings for the periods indicated and
the percentage increase or decrease in such items over the prior period.



|                                                  |  |                      |   |  |               |   |  |                        |   |  |               |   |  |               |   |  |                 |  
|------------------------------------------------- |  | -------------------- | - |  | ------------- | - |  | ---------------------- | - |  | ------------- | - |  | ------------- | - |  | --------------- | -
|                                                  | 
|                                                  |  | Thirteen Weeks Ended |   |  | % Change      |   |  | Twenty-Six Weeks Ended |   |  | % Change      |  
|Fiscal Period Ended                               |  | March 27,2004        |   |  | March 29,2003 |   |  | ThirteenWeeks          |   |  | March 27,2004 |   |  | March 29,2003 |   |  | Twenty-SixWeeks |  
|                                                  | 
|Net sales                                         |  | 100.0                | % |  | 100.0         | % |  | 16.5                   | % |  | 100.0         | % |  | 100.0         | % |  | 17.0            | %
|Cost of sales                                     |  | 90.0                 |   |  | 89.1          |   |  | 17.7                   |   |  | 90.2          |   |  | 89.2          |   |  | 18.2            |  
|Distribution, selling and administrative expenses |  | 8.3                  |   |  | 9.2           |   |  | 5.7                    |   |  | 8.2           |   |  | 9.1           |   |  | 6.2             |  
|                                                  | 
|Operating income                                  |  | 1.7                  |   |  | 1.7           |   |  | 13.0                   |   |  | 1.6           |   |  | 1.7           |   |  | 10.0            |  
|Interest expense                                  |  | (0.6                 | ) |  | (0.9          | ) |  | (28.8                  | ) |  | (0.6          | ) |  | (0.9          | ) |  | (24.1           | )
|Estimated patronage dividends                     |  | (0.8                 | ) |  | (0.5          | ) |  | 105.1                  |   |  | (0.7          | ) |  | (0.5          | ) |  | 59.8            |  
|Income taxes                                      |  | (0.1                 | ) |  | (0.1          | ) |  | (9.7                   | ) |  | (0.1          | ) |  | (0.1          | ) |  | 14.1            |  
|                                                  | 
|Net earnings                                      |  | 0.2                  | % |  | 0.2           | % |  | 19.8                   | % |  | 0.2           | % |  | 0.2           | % |  | 36.9            | %
|                                                  | 



POST QUASI-REORGANIZATION



THIRTEEN WEEK PERIOD ENDED MARCH 27, 2004 (2004 PERIOD) COMPARED TO
THE THIRTEEN WEEK PERIOD ENDED MARCH 29, 2003 (2003 PERIOD)



Overview of the 2004 Period.    The Companys consolidated operating income improved by $1.4 million to $11.9 million in the 2004 Period compared to $10.5 million in the 2003 Period. The operating
income for the Companys Wholesale Distribution segment improved over the 2003 Period, but was offset in part by a decline in the Insurance and All Other business segments. As discussed in Note 10 of the Notes to Consolidated Condensed
Financial Statements in Item 1, the Company adopted EITF Issue No. 03-10 as of the beginning of its second fiscal quarter, which requires manufacturers sales incentives offered directly to consumers that do not meet certain criteria to be
reflected as a reduction of revenue in the financial statements of a reseller. Accordingly, $20.6 million and $18.8 million of such consideration has been classified as a reduction in cost of sales with a corresponding reduction in net sales for the
13-week 2004 and 2003 Periods, respectively.



| | · |  | Wholesale Distribution Segment:    The Wholesale Distribution segment realized an overall net improvement in operating income of $3.3 million to $13.1
million in the 2004 Period compared to $9.8 million in the 2003 Period due to higher net sales and continued improvement in facility productivity, offset in part by an increase in cost of sales and workers compensation expense.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company operates primarily within three marketing
areas made up of its Southern California, Northern California and Pacific Northwest Divisions. Each division experienced sales growth through a combination of new membership, new stores added by existing members net of closed stores, and same store
sales growth.



On October 5, 2003 a multi-employer union labor contract
between the United Food and Commercial Workers (UFCW) and various retailers including three major Southern California grocery retailers expired. On October 11, 2003, members of the UFCW in Southern California went on strike against one
of the grocery retailers. In response, the other two major grocery retailers locked out the UFCW workers until a contract settlement was reached. On February 29, 2004, the UFCW announced that its members had ratified a new contract with the three
major retailers. Some of the Companys employees and a small number of the Companys member-patrons employees, none of whom were on strike, are members of the UFCW. As a result of the strike, the Company estimates that sales
increased approximately $55.0 million during the 2004 Period as consumers continued patronizing the Companys independent grocery retailers rather than the larger grocery retail chains targeted by the strike.



17



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##### Table of Contents

The sales volume increases in the Northern California and Pacific Northwest Divisions were not impacted by the
strike.



The Companys sales mix changed slightly to accommodate
the volume increase related to the strike as its customers began ordering a different mix of products to accommodate the new retail customers. The increase in cost of sales and expenses related to efforts to support the additional strike volume is
not expected to continue beyond the strike period.



The Company
experienced a net increase in distribution, selling and administrative expenses during the 2004 Period. Labor costs increased at the Companys distribution centers to support the additional sales volume in each of the Companys three
Divisions. Higher costs were also incurred for workers compensation, employee health and welfare, and general cost of living increases.



| | · |  | Insurance Segment:    Operating income declined $1.2 million in the Companys Insurance segment to a loss of $1.4 million in the 2004 Period compared to
a loss of $0.2 million in the 2003 Period. The decrease was primarily due to increased workers compensation reserve requirements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | All Other Segment:    The All Other segment primarily consists of the Companys finance subsidiary and the consolidation of the third party entity as
discussed in Note 4 of the Notes to Consolidated Condensed Financial Statements in Item 1. Operating income declined $0.7 million to $0.2 million in the 2004 Period compared to income of $0.9 million in the 2003 Period. The decline in earnings is
due to $0.4 million of expenses related to closed retail store sites that have been sold to a third party noted above and a reduction in earnings at the Companys finance subsidiary of $0.4 million. These reductions were partially offset by the
closure of certain unprofitable subsidiaries in the 2003 Period, resulting in expense reductions of $0.1 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following tables summarize the performance of each business segment for the 2004 and 2003 Periods.



|                                                       |  |                      |         |   |               |   |         |            |  |   |         |  
|------------------------------------------------------ |  | -------------------- | ------- | - | ------------- | - | ------- | ---------- |  | - | ------- | -
|Wholesale Distribution Segment  (dollars in thousands) |  |                      |         |   |               |   |         |            |  |   |         |  
|                                                       | 
|                                                       |  | Thirteen Weeks Ended |         |   |               |  
|                                                       |  | March 27,2004        |         |   | March 29,2003 |   |         | Difference | 
|                                                       | 
|Gross sales                                            |  | $                    | 731,330 |   |               | $ | 631,250 |            |  | $ | 100,080 |  
|Inter-segment eliminations                             |  |                      | 13      |   |               |   | (4,357  | )          |  |   | 4,370   |  
|                                                       | 
|Net sales                                              |  |                      | 731,343 |   |               |   | 626,893 |            |  |   | 104,450 |  
|Cost of sales                                          |  |                      | 658,665 |   |               |   | 559,851 |            |  |   | 98,814  |  
|Distribution, selling and administrative expenses      |  |                      | 59,551  |   |               |   | 57,213  |            |  |   | 2,338   |  
|                                                       | 
|Operating income                                       |  | $                    | 13,127  |   |               | $ | 9,829   |            |  | $ | 3,298   |  
|                                                       | 
|                                                       |  |                      |        
|Insurance Segment  (dollars in thousands)              |  |                      |         |   |               |   |         |            |  |   |         |  
|                                                       | 
|                                                       |  | Thirteen Weeks Ended |         |   |               |  
|                                                       |  | March 27,2004        |         |   | March 29,2003 |   |         | Difference | 
|                                                       | 
|Gross sales                                            |  | $                    | 8,611   |   |               | $ | 9,958   |            |  | $ | (1,347  | )
|Inter-segment eliminations                             |  |                      | (1,106  | ) |               |   | (2,799  | )          |  |   | 1,693   |  
|                                                       | 
|Net sales                                              |  |                      | 7,505   |   |               |   | 7,159   |            |  |   | 346     |  
|Cost of sales                                          |  |                      | 6,945   |   |               |   | 5,596   |            |  |   | 1,349   |  
|Distribution, selling and administrative expenses      |  |                      | 2,004   |   |               |   | 1,773   |            |  |   | 231     |  
|                                                       | 
|Operating income (loss)                                |  | $                    | (1,444  | ) |               | $ | (210    | )          |  | $ | (1,234  | )
|                                                       | 



18



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##### Table of Contents

|                                                  |  |                      |     |   |               |   |      |            |  |   |      |  
|------------------------------------------------- |  | -------------------- | --- | - | ------------- | - | ---- | ---------- |  | - | ---- | -
|                                                  |  |                      |    
|All Other Segment  (dollars in thousands)         |  |                      |     |   |               |   |      |            |  |   |      |  
|                                                  | 
|                                                  |  | Thirteen Weeks Ended |     |   |               |  
|                                                  |  | March27, 2004        |     |   | March29, 2003 |   |      | Difference | 
|                                                  | 
|Gross sales                                       |  | $                    | 391 |   |               | $ | 386  |            |  | $ | 5    |  
|Inter-segment eliminations                        |  |                      | (21 | ) |               |   | (66  | )          |  |   | 45   |  
|                                                  | 
|Net sales                                         |  |                      | 370 |   |               |   | 320  |            |  |   | 50   |  
|Cost of sales                                     |  |                      |     |   |               |   | (1   | )          |  |   | 1    |  
|Distribution, selling and administrative expenses |  |                      | 159 |   |               |   | (586 | )          |  |   | 745  |  
|                                                  | 
|Operating income (loss)                           |  | $                    | 211 |   |               | $ | 907  |            |  | $ | (696 | )
|                                                  | 



Net
sales.    Consolidated net sales increased $104.8 million to $739.2 million in the 2004 Period compared to the 2003 Period.



| | · |  | Wholesale Distribution Segment:    Net wholesale distribution sales increased $104.5 million to $731.3 million in the 2004 Period compared to the 2003
Period. Wholesale distribution sales increased by approximately $48.6 million due primarily to new membership, the distribution volume of existing member-patrons expansion to new store locations, and growth in perimeter-store products such as
meat, produce and other perishable products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sales to
stores competing with the three major grocery retailers that were on strike were estimated to be approximately $55.0 million higher compared to the 2003 Period. However, an exact measurement of the impact of the strike on sales cannot be easily
determined due to the many variables involved.



The Company also
experienced a reduction in sales due to transitional non-member chain customers that began sourcing specialty grocery products from other suppliers resulting in reduced sales of approximately $3.5 million compared to the 2003 Period.



The Companys exit from its retail operations, described in Note 2 of the Notes
to Consolidated Condensed Financial Statements in Item 1, resulted in a decrease of $4.4 million in inter-segment eliminations.



| | · |  | Insurance Segment:    Net sales increased $0.3 million to $7.5 million in the 2004 Period compared to the 2003 Period. The increase was the result of an
increase in premium rates on insurance policies written by the Companys insurance subsidiaries.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | All Other Segment:    Net sales for the 2004 period were $0.4 million and were comparable to the 2003 period.
| | - |  | -------------------------------------------------------------------------------------------------------------



Cost of sales.    Consolidated cost of sales were $665.6 million for
the 2004 Period and $565.4 million for the 2003 Period and comprised 90.0% and 89.1% of consolidated net sales for the 2004 and 2003 Periods, respectively.



| | · |  | Wholesale Distribution Segment:    Cost of sales increased by $98.8 million to $658.7 million in the 2004 Period. As a percentage of net wholesale sales,
cost of sales was 90.1% and 89.3% for the 2004 and 2003 Periods, respectively. The increase in cost of sales as a percentage of net wholesale sales was primarily due to the efforts to support the additional volume in Southern California related to
the UFCW strike. As a result of the strike, customers from the larger grocery retail chains began patronizing stores supplied by the Company. This influx of new customers altered the Companys normal sales mix. This resulted in an overall
increase in the cost of sales and had the temporary effect of lowering the overall gross profit percentage.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Insurance Segment:    Cost of sales increased by $1.3 million to $6.9 million in the 2004 Period compared to the 2003 Period. The increase was primarily
attributable to an increase in workers compensation insurance reserves due to higher development on claim losses.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



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##### Table of Contents

Distribution, selling and administrative.    Consolidated distribution, selling and
administrative expenses were $61.7 million and $58.4 million in the 2004 Period and 2003 Period respectively and comprised 8.3% and 9.2% of net sales for the 2004 and 2003 Periods, respectively.



| | · |  | Wholesale Distribution Segment:    Distribution, selling and administrative expenses of $59.6 million for the 2004 Period were $2.3 million higher than in
the 2003 Period and comprised 8.1% and 9.1% of net wholesale sales for the 2004 and 2003 Periods, respectively. Several factors contributed to this overall change.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The increase in sales allowed the Company to leverage fixed costs, thereby reducing costs as a percent of sales. Workers
compensation costs increased $2.7 million in the 2004 period compared to the 2003 period. The Company is self insured up to $300,000 per incident with a stop loss coverage policy over that amount. The increase was due to higher development on claim
losses. Wage and benefit costs increased $1.8 million, primarily in the Companys warehouse and transportation operations as a result of the increased sales volume.



Offsetting these increases, the Company experienced a $1.4 million decrease in equipment, supplies and utility costs.



The remaining decrease of $0.8 million was made up of other less significant expense
changes.



| | · |  | Insurance Segment:    Distribution, selling and administrative expenses for the Insurance segment were $2.0 million for the 2004 Period, which were $0.2
million higher than the 2003 Period due to general inflationary cost increases.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | All Other Segment:    Distribution, selling and administrative expenses for the Companys All Other business segment for the 2004 Period were $0.2
million compared to a credit of $0.6 million for the 2003 Period. The Companys finance subsidiary expenses increased $0.4 million compared to the 2003 Period due to loan collection activity that occurred in the 2003 Period but did not recur in
the 2004 Period. In addition, the Company reserved an additional $0.4 million related to leases on closed retail store sites that have been sold to a third party as discussed in Note 4 of the Notes to Consolidated Condensed Financial Statements in
Item 1. The need for additional reserves is dependent upon the third partys ability to develop the sites and subsequently sell or sublease them to an outside party.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest.    Interest expense was $4.2 million and $5.9 million and comprised 0.6% and 0.9% of consolidated net
sales for the 2004 and 2003 Periods, respectively.



Interest expense on the
Companys primary debt instruments declined $0.9 million over the 2003 Period. Of the $0.9 million decline in expense, $0.4 million related to a reduction in the weighted average borrowings and $0.5 million related to a reduction in rates.



| | · |  | Weighted Average Borrowings:    Borrowings declined $29.5 million related to working capital improvements, the Companys equity enhancement program, the exit from the
Companys retail operations and improved cash flow from operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Interest Rate Reduction:    The Companys effective borrowing rates for the 2004 and 2003 Periods were 5.3% and 6.1%, respectively. Two factors contributed equally to
the decline in interest rates. First, the Company realized a reduction in rates due to its achieving certain financial results, and secondarily, the overall market rate of interest declined over the 2003 Period. The Company believes it will be able
to sustain the financial performance measures required to maintain the current interest rate margins.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Estimated patronage dividends.    Estimated patronage dividends for the 2004 Period were $5.8 million, compared to $2.8 million in the 2003
Period. Estimated patronage dividends for the 2004 Period consisted of the patronage earnings from the Companys three patronage pools: the Southern California and Pacific Northwest Dairy Divisions and the Cooperative Division. For the 2004
Period, the Company had patronage earnings of $2.6 million in the Southern California Dairy Division, $0.1 million in the Pacific Northwest Dairy Division and $3.1 million in the Cooperative Division. In the 2003 Period, the Company had patronage
earnings of $2.5 million in the Southern California Dairy Division, $0.1 million in the Pacific Northwest Dairy Division and $0.2 million in the Cooperative Division.



20



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##### Table of Contents

Income taxes.    Income tax expense was $0.7 million for the 2004 Period compared to $0.8 million
for the 2003 Period. The Companys effective income tax rate was 36% for the 2004 Period compared to 43% for the 2003 Period. The lower effective income tax rate in the 2004 Period reflects the impact of permanent differences between book and
taxable income.



TWENTY-SIX WEEK PERIOD ENDED MARCH 27, 2004 (2004
PERIOD) COMPARED TO THE TWENTY-SIX WEEK PERIOD ENDED MARCH 29, 2003 (2003 PERIOD)



Overview of the 2004 Period.    The Companys consolidated operating income improved by $2.3 million to $24.9 million in the 2004 Period
compared to $22.6 million in the 2003 Period. The operating income for the Companys Wholesale Distribution segment improved over the 2003 Period but was offset in part by a decline in the Insurance and All Other business segments. As discussed
in Note 10 of the Notes to Consolidated Condensed Financial Statements in Item 1, the Company adopted EITF Issue No. 03-10 as of the beginning of its second fiscal quarter, which requires manufacturers sales incentives offered directly to
consumers that do not meet certain criteria to be reflected as a reduction of revenue in the financial statements of a reseller. Accordingly, $44.8 million and $41.0 million of such consideration has been classified as a reduction in cost of sales
with a corresponding reduction in net sales for the 26-week 2004 and 2003 Periods, respectively.



| | · |  | Wholesale Distribution Segment:    The Wholesale Distribution segment realized an overall net improvement in operating income of $5.1 million to $25.9
million in the 2004 Period compared to $20.8 million in the 2003 Period due to higher net sales and continued improvement in facility productivity offset in part by an increase in cost of sales.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company operates primarily within three marketing areas made up of its Southern
California, Northern California and Pacific Northwest Divisions. Each Division experienced sales growth through a combination of new membership, new stores added by existing members, and same store sales growth.



As a result of the UFCW strike the Company estimates that sales increased
approximately $115.0 million during the 2004 Period as consumers began patronizing the Companys independent grocery retailers rather than the larger grocery retail chains targeted by the strike.



The sales volume increases in the Northern California and Pacific Northwest Divisions
were not impacted by the strike.



The Companys sales mix changed
slightly to accommodate the volume increase related to the strike as its customers began ordering a different mix of products to accommodate the new retail customers. The increase in cost of sales and expenses related to efforts to support the
additional strike volume is not expected to continue beyond the strike period.



The Company experienced a net increase in distribution, selling and administrative expenses during the 2004 Period. Labor costs increased at the Companys distribution centers to support the additional sales volume in each of the
Companys three Divisions. Higher costs were also incurred for workers compensation, employee health and welfare, and general cost of living increases.



| | · |  | Insurance Segment:    The Insurance segment experienced further claims loss development activity in the 2004 Period, resulting in an operating loss of $1.6
million in the 2004 Period versus an operating profit of $0.4 million in the 2003 Period. This change resulted in a net decline in operating income of $2.0 million. The increase in losses is primarily due to increased workers compensation
reserve requirements.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | All Other Segment:    The All Other Segment primarily consists of the Companys finance subsidiary and the consolidation of a third party entity as
discussed in Note 4 of the Notes to Consolidated Condensed Financial Statements in Item 1. Operating income declined $0.8 million to $0.6 million in the 2004 Period compared to income of $1.4 million in the 2003 Period. The decline in earnings is
due to $0.4 million of expenses related to closed retail store sites that have been sold to a third party noted above and a reduction in earnings at the Companys finance subsidiary of $0.4 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



---

##### Table of Contents

The following tables summarize the performance of each business segment for the 2004 and 2003 Periods.



Wholesale Distribution Segment



|                                                  |  |                        |           |   |               |   |           |            |  |   |         |  
|------------------------------------------------- |  | ---------------------- | --------- | - | ------------- | - | --------- | ---------- |  | - | ------- | -
|(dollars in thousands)                            |  |                        |           |   |               |   |           |            | 
|                                                  | 
|                                                  |  | Twenty-Six Weeks Ended |           |   |               |  
|                                                  |  | March 27,2004          |           |   | March 29,2003 |   |           | Difference | 
|                                                  | 
|Gross sales                                       |  | $                      | 1,523,359 |   |               | $ | 1,311,002 |            |  | $ | 212,357 |  
|Inter-segment eliminations                        |  |                        | (540      | ) |               |   | (12,476   | )          |  |   | 11,936  |  
|                                                  | 
|Net sales                                         |  |                        | 1,522,819 |   |               |   | 1,298,526 |            |  |   | 224,293 |  
|Cost of sales                                     |  |                        | 1,374,528 |   |               |   | 1,162,432 |            |  |   | 212,096 |  
|Distribution, selling and administrative expenses |  |                        | 122,359   |   |               |   | 115,298   |            |  |   | 7,061   |  
|                                                  | 
|Operating income                                  |  | $                      | 25,932    |   |               | $ | 20,796    |            |  | $ | 5,136   |  
|                                                  | 
|                                                  |  |                        |          
|Insurance Segment                                 |  |                        |           |   |               |   |           |            |  |   |         |  
|                                                  |  |                        |          
|(dollars in thousands)                            |  |                        |           |   |               |   |           |            | 
|                                                  | 
|                                                  |  | Twenty-Six Weeks Ended |           |   |               |  
|                                                  |  | March 27,2004          |           |   | March 29,2003 |   |           | Difference | 
|                                                  | 
|Gross sales                                       |  | $                      | 18,125    |   |               | $ | 18,616    |            |  | $ | (491    | )
|Inter-segment eliminations                        |  |                        | (4,297    | ) |               |   | (5,373    | )          |  |   | 1,076   |  
|                                                  | 
|Net sales                                         |  |                        | 13,828    |   |               |   | 13,243    |            |  |   | 585     |  
|Cost of sales                                     |  |                        | 11,669    |   |               |   | 9,319     |            |  |   | 2,350   |  
|Distribution, selling and administrative expenses |  |                        | 3,765     |   |               |   | 3,462     |            |  |   | 303     |  
|                                                  | 
|Operating income (loss)                           |  | $                      | (1,606    | ) |               | $ | 462       |            |  | $ | (2,068  | )
|                                                  | 
|                                                  |  |                        |          
|All Other Segment                                 |  |                        |           |   |               |   |           |            |  |   |         |  
|                                                  |  |                        |          
|(dollars in thousands)                            |  |                        |           |   |               |   |           |            | 
|                                                  | 
|                                                  |  | Twenty-Six Weeks Ended |           |   |               |  
|                                                  |  | March 27,2004          |           |   | March 29,2003 |   |           | Difference | 
|                                                  | 
|Gross sales                                       |  | $                      | 815       |   |               | $ | 3,097     |            |  | $ | (2,282  | )
|Inter-segment eliminations                        |  |                        | (44       | ) |               |   | (986      | )          |  |   | 942     |  
|                                                  | 
|Net sales                                         |  |                        | 771       |   |               |   | 2,111     |            |  |   | (1,340  | )
|Cost of sales                                     |  |                        | 0         |   |               |   | 560       |            |  |   | (560    | )
|Distribution, selling and administrative expenses |  |                        | 221       |   |               |   | 197       |            |  |   | 24      |  
|                                                  | 
|Operating income                                  |  | $                      | 550       |   |               | $ | 1,354     |            |  | $ | (804    | )
|                                                  | 



Net
sales.    Consolidated net sales increased $223.5 million to $1.5 billion in the 2004 Period compared to the 2003 Period.



| | · |  | Wholesale Distribution Segment:    Net wholesale distribution sales increased $224.3 million to $1.5 billion in the 2004 Period compared to the 2003 Period.
Wholesale distribution sales increased by approximately $106.3 million due primarily to new membership, the distribution volume of existing member-patrons expansion to new store locations, and growth in perimeter-store products such as meat,
produce and other perishable products.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sales to stores
competing with the three major grocery retailers were estimated to be approximately $115.0 million higher compared to the 2003 Period. However, an exact measurement of the impact of the strike on sales cannot be easily determined due to the many
variables involved.



The Company also experienced a reduction in sales
due to transitional non-member chain customers that began sourcing specialty grocery products from other suppliers resulting in reduced sales of approximately $8.9 million compared to the 2003 Period.



22



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##### Table of Contents

The Companys exit from its retail operations resulted in a decrease of $11.9 million in inter-segment
eliminations.



| | · |  | Insurance Segment:    Insurance revenues increased $0.6 million to $13.8 million for the 2004 Period compared to the 2003 Period. The increase in revenues is
primarily due to higher premiums on workers compensation coverage in the State of California.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | All Other Segment:    Net sales decreased $1.4 million to $0.8 million in the 2004 Period compared to the 2003 Period. The decline in net sales is due to the
Company closing its printing, transportation and security subsidiaries pursuant to the Boards resolution on December 28, 2002 to exit all unprofitable subsidiaries.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cost of sales.    Consolidated cost of sales was $1.4 billion for the 2004 Period and $1.2 billion for the 2003
Period and comprised 90.2% and 89.2% of consolidated net sales for the 2004 and 2003 Periods, respectively.



| | · |  | Wholesale Distribution Segment:    Cost of sales increased by $212.1 million to $1.4 billion in the 2004 Period. As a percentage of net wholesale sales, cost
of sales was 90.3% and 89.5% for the 2004 and 2003 Periods, respectively. The increase in cost of sales as a percentage of net wholesale sales was primarily due to the efforts to support the additional volume in Southern California related to the
UFCW strike. As a result of the strike, customers from the larger grocery retail chains began patronizing stores supplied by the Company. This influx of new customers altered the Companys normal sales mix. The increase in cost of sales related
to efforts to support the additional strike volume is not expected to continue beyond the strike period.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Insurance Segment:    Cost of sales increased by $2.4 million to $11.7 million in the 2004 Period compared to the 2003 Period. The insurance subsidiary
recorded a $2.4 million increase primarily related to the workers compensation reserve requirements due to increasing development on claim losses.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | All Other Segment:    Cost of sales decreased by $0.6 million for the 2004 Period as compared to the 2003 Period. The decrease is due to the closure of
certain unprofitable subsidiaries in the 2003 Period.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Distribution,
selling and administrative.    Consolidated distribution, selling and administrative expenses were $126.4 million and $119.0 million and comprised 8.2% and 9.1% of net sales for the 2004 and 2003 Periods, respectively.



| | · |  | Wholesale Distribution Segment:    Distribution, selling and administrative expenses of $122.4 million for the 2004 Period were $7.1 million higher than in
the 2003 Period and comprised 8.0% and 8.9% of net wholesale sales for the 2004 and 2003 Periods, respectively. Several factors contributed to this overall change.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The increase in sales allowed the company to leverage fixed costs, thereby reducing costs as a percent of sales. Workers
compensation costs increased $5.6 million in the 2004 period compared to the 2003 period. The company is self insured up to $300,000 per incident with a stop loss coverage policy over that amount. The increase was due to higher cost development on
loss claims.



Wage and benefit costs increased $3.5 million in the
Companys warehouse and transportation operations as a result of the increased sales volume due to the strike.



Offsetting these increases the Company experienced a $2.7 million decrease in equipment, supplies and utility costs.



The remaining increase of $0.7 million was made up of other less significant expense
changes.



| | · |  | Insurance Segment:    Distribution, selling and administrative expenses for the Insurance segment were $3.8 million for the 2004 Period, which were $0.3
million higher than the 2003 Period due to general inflationary cost increases.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | All Other Segment:    Distribution, selling and administrative expenses for the Companys All Other business segment for the 2004 Period were $0.2
million and were comparable to the 2003 Period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest.    Interest expense was $9.0 million and $11.9 million and comprised 0.6% and 0.9% of consolidated net sales for the 2004 and 2003 Periods, respectively.



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Interest expense on the Companys primary debt instruments declined $1.7 million over the 2003 Period. Of the $1.7 million
decline in expense, $0.9 million related to a reduction in the weighted average borrowings and $0.8 million related to a reduction in rates.



| | · |  | Weighted Average Borrowings:    Borrowings declined $32.6 million related to working capital improvements, the Companys equity enhancement program, the exit from the
Companys retail operations and improved cash flow from operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Interest Rate Reduction:    The Companys effective borrowing rates for the 2004 and 2003 Periods were 5.5% and 6.2%, respectively. Two factors contributed equally to
the decline in interest rates. First, the Company realized a reduction in rates due to its achieving certain financial results and secondarily, the overall market rate of interest declined over the 2003 Period. The Company believes it will be able
to sustain the financial performance measures required to maintain the current interest rate margins.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Estimated patronage dividends.    Estimated patronage dividends for the 2004 Period were $10.8 million, compared to $6.8 million in the 2003
Period. Estimated patronage dividends for the 2004 Period consisted of the patronage earnings from the Companys three patronage pools: the Southern California and Pacific Northwest Dairy Divisions and the Cooperative Division. For the 2004
Period, the Company had patronage earnings of $5.4 million in the Southern California Dairy Division, $0.2 million in the Pacific Northwest Dairy Division and $5.2 million in the Cooperative Division. In the 2003 Period, the Company had patronage
earnings of $5.2 million in the Southern California Dairy Division, $0.2 million in the Pacific Northwest Dairy Division and $1.4 million in the Cooperative Division.



Income taxes.    Income tax expense was $1.9 million for the 2004 Period compared to $1.6 million for the 2003
Period. The Companys effective income tax rate was 37% for the 2004 Period compared to 42% for the 2003 Period. The lower effective income tax rate in the 2004 Period reflects permanent differences between book and taxable income.



LIQUIDITY AND CAPITAL RESOURCES



The Company believes that the combination of cash flows from operations, current cash balances, plus
its equity enhancement plan, and available lines of credit, will be sufficient to meet liquidity and capital resource requirements in fiscal 2004.



In fiscal 2002, the Company implemented the first part of its equity enhancement plan for the purpose of retaining more equity in the Company for future investment in the business
and other infrastructure improvements. In November 2002, the Company amended its Bylaws, increasing the required holdings of Class A Shares from 100 Shares in fiscal 2002 to 350 Shares by the end of fiscal 2007. In addition, in fiscal 2003, the
Company introduced a new class of capital stock, denominated Class E Shares. The new Class E Shares were issued as part of the patronage dividends issued in fiscal 2003 for the Cooperative Division and may be issued in future years at
the discretion of the Board. Accordingly, improvement in member capital is expected to continue in future years as more cash is retained by the Company rather than paid as a component of the patronage dividend for the Cooperative Division. In
addition, the infusion of cash from the increased Class A Share requirement is expected to continue the improvement in member capital in future years.



In addition, the Company refinanced its $200.0 million revolving credit agreement on December 5, 2003 with a new $225.0 million revolving credit agreement. The expanded facility,
combined with borrowing levels under the new facility of $99.0 million at March 27, 2004, increases the availability of capital accessible by the Company.



The Companys exit from its retail business in fiscal 2003 further benefited the Companys cash position by allowing it to preserve working capital that would otherwise
have been used to fund the unprofitable retail operations. Net cash used by retail operations was approximately $7.1 million during the first twenty-six weeks of fiscal 2003 and $3.4 million during the first twenty-six weeks of fiscal year 2004.



CASH FLOW



The positive impact of initiatives implemented in the 2003 Period was retained and further improved in the 2004 Period (twenty-six weeks). As a
result, overall, net cash consisting of cash and cash equivalents generated from



24



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##### Table of Contents

operations was $14.6 million for the 2004 Period compared to $18.1 million for the 2003 Period. The decrease in net cash from continuing operations for the 2004 Period
consisted of cash provided from operating activities of $42.7 million offset by amounts used in investing activities of $7.3 million and financing activities of $20.8 million. Cash used by discontinued operations was $3.4 million and $7.1 million
for the 2004 and 2003 Periods, respectively (See Note 2 of the Notes to Consolidated Condensed Financial Statements in Item 1). Working capital was $97.8 million and $109.4 million and the current ratio was 1.3 and 1.4 at March 27, 2004 and
September 27, 2003, respectively.



Operating
Activities:    Net cash provided by operating activities decreased by $23.8 million to $42.7 million for the 2004 Period compared to $66.5 million for the 2003 Period. The lower operating cash compared to the 2003 Period
was attributable to the impact of initiatives implemented in the 2003 Period that continued to benefit the 2004 Period, but at a reduced amount as the Company achieved improved inventory and accounts receivable levels relative to its operational
requirements. While the Company will continue to improve its operations, the impact of these improvements will not be as dramatic as was experienced previously in the 2003 Period. During the 2004 Period, the Company experienced positive cash flows
as a result of decreases in accounts and notes receivable, inventories and prepaid expenses of $13.8 million and a net increase in accounts payable, accrued liabilities and other long-term liabilities of $9.9 million.



Investing Activities:    Net cash used in investing activities
increased by $0.6 million to $7.3 million for the 2004 Period compared to $6.7 million utilized in the 2003 Period. The increase in investing activities was due mainly to increases in net investments of $4.3 million by the Companys insurance
subsidiary, consisting of the purchase and sale of securities to replace maturing investments in its portfolio and to finance increased reserve requirements, as well as increases in other assets of $2.0 million primarily for increases in insurance
deposit requirements and increases in other capital expenditures of $2.2 million. Additionally, cash provided by long-term notes receivable decreased by $7.9 million, reflecting a reduction in new loans extended to member-patrons and principal
payments received on existing loans with member-patrons by the Companys financing subsidiary. The Company presently has no material commitments for capital expenditures and expects that fiscal 2004 capital expenditures will be consistent with
those of fiscal 2003. Spending on investing activities is expected to be funded by existing cash balances, cash generated from operations or additional borrowings.



Financing Activities:    Net cash utilized by financing activities was approximately $20.8 million for the 2004
Period compared to $41.7 million for the 2003 Period. The decrease in financing activities reflected the Companys ability to meet operating and capital spending requirements using cash provided by operating activities.



CONTRACTUAL OBLIGATIONS



At March 27, 2004, the Company was contingently liable with respect to 19 lease guarantees for certain member-patrons with commitments expiring
through 2017. The Company believes the locations underlying these leases are marketable and, accordingly, that it will be able to recover a substantial portion of the guaranteed amounts in the event the Company is required to satisfy its obligations
under the guarantees. In addition to the lease guarantees, the Company also guarantees certain third-party loans issued to member-patrons and standby letters of credit to certain vendors. Accordingly, the Company would be required to pay these
obligations in the event of default by the member-patron.



During the twenty-six weeks
ended March 27, 2004, the Company entered into a lease guarantee with one of its member-patrons. The guarantee has a ten-year term, and as of March 27, 2004, the maximum potential amount of future payments that the Company could be required to make
as a result of the member-patrons non-payment of rent is approximately $3.2 million. Pursuant to Financial Accounting Standards Board Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, Unified has recorded a liability in connection with this guarantee arrangement. This liability, which amounts to approximately $0.1 million at March 27, 2004, represents the premium
receivable from the member-patron as consideration for the guarantee, and is deemed to be the fair value of the lease guarantee. The Company does not believe, based on historical experience and information currently available, that it is probable
that any amounts will be required to be paid under this guarantee arrangement.



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##### Table of Contents

The Companys contractual obligations and commercial commitments at March 27, 2004 are summarized as follows:



|                                                                      |  |                        |         |                 |   |           |  |           |        |                  |   |         |  |   |       
|--------------------------------------------------------------------- |  | ---------------------- | ------- | --------------- | - | --------- |  | --------- | ------ | ---------------- | - | ------- |  | - | ------
|(dollars in thousands)                                                |  |                        |         |                 |   |           |  |           |        |                 
|                                                                     
|                                                                      |  | Payments due by period
|Contractual Obligations                                               |  | Total                  |         | Less than1 year |   | 1-3 years |  | 4-5 years |        | More than5 years
|                                                                     
|Senior secured notes                                                  |  | $                      | 101,649 |                 | $ | 5,672     |  | $         | 12,748 |                  | $ | 43,131  |  | $ | 40,098
|Revolving lines of credit                                             |  |                        | 99,000  |                 |   |          |  |           |       |                  |   | 99,000  |  |   |      
|Capital lease obligations                                             |  |                        | 1,845   |                 |   | 1,462     |  |           | 383    |                  |   |        |  |   |      
|Other long-term obligations                                           |  |                        | 15,855  |                 |   | 2,952     |  |           | 12,287 |                  |   | 616     |  |   |      
|Secured borrowings to banks, including standby repurchase obligations |  |                        | 4,096   |                 |   | 566       |  |           | 3,513  |                  |   | 17      |  |   |      
|                                                                     
|Total contractual cash obligations                                    |  | $                      | 222,445 |                 | $ | 10,652    |  | $         | 28,931 |                  | $ | 142,764 |  | $ | 40,098
|                                                                     



|                             |  |                        |        |                 |   |           |  |          |        |                  |   |       |  |   |      
|---------------------------- |  | ---------------------- | ------ | --------------- | - | --------- |  | -------- | ------ | ---------------- | - | ----- |  | - | -----
|(dollars in thousands)       |  |                        |        |                 |   |           |  |          |        |                 
|                            
|                             |  | Payments due by period
|Other Commercial Commitments |  | Total                  |        | Less than1 year |   | 1-3 years |  | 4-5years |        | More than5 years
|                            
|Standby letters of credit    |  | $                      | 8,173  |                 |   |          |  | $        | 8,173  |                  |   |      |  |   |     
|Lease and loan guarantees    |  |                        | 33,119 |                 |   | 6,180     |  |          | 15,487 |                  |   | 6,992 |  |   | 4,460
|                            
|Total commercial commitments |  | $                      | 41,292 |                 | $ | 6,180     |  | $        | 23,660 |                  | $ | 6,992 |  | $ | 4,460
|                            



OUTSTANDING DEBT AND OTHER FINANCING
ARRANGEMENTS



The Companys notes payable and scheduled maturities are
summarized as follows:



|                                                                                                                                                                                                                                                                                                                                 |  |               |         |                   |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|(dollars in thousands)                                                                                                                                                                                                                                                                                                           |  |               |         |                  
|                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                 |  | March 27,2004 |         | September 27,2003
|                                                                                                                                                                                                                                                                                                                                
|Senior secured notes expiring April 1, 2008, (interest rate of 7.72% and 7.97% at March 27, 2004 and September 27, 2003, respectively) approximately
$854 principal and interest payable monthly through April 1, 2008, remaining $36.0 million due April 1, 2008                                                                |  | $             | 60,568  |                   | $ | 63,146 
|                                                                                                                                                                                                                                                                                                                                 |  |              
|Senior secured notes expiring October 1, 2009, payable monthly, interest only (interest rate of 8.71% and 8.96% at March 27, 2004 and September 27,
2003, respectively)                                                                                                                                                          |  |               | 41,081  |                   |   | 41,180 
|                                                                                                                                                                                                                                                                                                                                 |  |              
|Notes to banks under the new $225.0 million secured revolving credit agreement expiring December 5, 2007 and the former $200.0 million secured revolving
credit agreement, interest rate at the lenders base rate plus 0. 50% or adjusted LIBOR (1.10% plus 1.75% at March 27, 2004 and 1.14% plus 2.50% at September 27, 2003) |  |               | 99,000  |                   |   | 118,000
|                                                                                                                                                                                                                                                                                                                                 |  |              
|Secured borrowings to banks, collateralized by member loans receivable, repayment based on terms of underlying collateral                                                                                                                                                                                                        |  |               | 4,096   |                   |   | 1,543  
|                                                                                                                                                                                                                                                                                                                                 |  |              
|Capital stock subordinated residual notes, payable in twenty quarterly installments plus interest at a variable interest rate based on the current
capital investment note (subordinated) rate of 5.0%                                                                                                                           |  |               | 110     |                   |   | 522    
|                                                                                                                                                                                                                                                                                                                                 |  |              
|Redemption subordinated notes, payable in twenty quarterly installments plus interest at 6.0%                                                                                                                                                                                                                                    |  |               | 1,281   |                   |   | 1,792  
|                                                                                                                                                                                                                                                                                                                                 |  |              
|Capital investment notes (subordinated), interest at 5.0%, maturity dates through 2007                                                                                                                                                                                                                                           |  |               | 14,464  |                   |   | 15,462 
|                                                                                                                                                                                                                                                                                                                                 |  |              
|Obligations under capital leases                                                                                                                                                                                                                                                                                                 |  |               | 1,845   |                   |   | 2,839  
|                                                                                                                                                                                                                                                                                                                                
|Total notes payable                                                                                                                                                                                                                                                                                                              |  |               | 222,445 |                   |   | 244,484
|Less portion due within one year                                                                                                                                                                                                                                                                                                 |  |               | 10,652  |                   |   | 12,110 
|                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                 |  | $             | 211,793 |                   | $ | 232,374
|                                                                                                                                                                                                                                                                                                                                



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At September 27, 2003, the Company had a $200.0 million secured revolving credit facility (Former Revolving Credit
Agreement) with a group of banks for which Cooperative Central Raiffeisen-Boerenleen Bank B.A., Rabobank Nederland, New York Branch, served as Administrative Agent. In December 2003, the Company refinanced the Former Revolving
Credit Agreement with a $225.0 million secured revolving credit facility (New Revolving Credit Agreement) with a group of banks for which Harris Trust and Savings Bank is serving as Administrative Agent. The New Revolving Credit
Agreement expires on December 5, 2007 and bears interest at either LIBOR plus an applicable margin (1.00% to 2.00%) or the lenders base rate plus an applicable margin (0.00% to 0.75%). In each case, the applicable margin is based on the ratio
of funded debt to operating cash flow. The New Revolving Credit Agreement permits advances of up to 85% of eligible accounts receivable and 65% of eligible inventories. The New Revolving Credit Agreement is collateralized by the accounts receivable
and inventories of the Company and certain subsidiaries. The Company had $99.0 million outstanding under the New Revolving Credit Agreement and $118.0 million outstanding under the Former Revolving Credit Agreement at March 27, 2004 and September
27, 2003, respectively.



In addition, the Company had a total of $101.6 million and
$104.3 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) at March 27, 2004 and September 27,
2003, respectively. During the thirteen weeks ended December 27, 2003, the interest rate on these notes was reduced 25 basis points as a result of the Company achieving improved performance in fiscal 2003.



The New Revolving Credit Agreement and the Senior Note Agreement as amended each contain customary
representations, warranties, financial covenants and default provisions for these types of financing. Obligations under these credit agreements are senior to the rights of members with respect to required deposits, patronage dividend certificates
and subordinated notes. Both the New Revolving Credit Agreement and the Senior Note Agreement limit the incurrence of additional funded debt and the incurrence of liens except permitted liens. 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
earnings before interest, income taxes, depreciation, amortization and patronage dividends, EBITDAP). The New Revolving Credit Agreement and the Senior Note Agreement both limit distributions to shareholders (including the repurchase of
shares) to designated permitted redemptions, and prohibit all distributions and payments on Patronage Dividend Certificates when an event of default has occurred and is continuing.



In February 1999, the Company entered into a five-year interest rate collar agreement to partially offset interest rate fluctuations associated with
its variable interest rate borrowings on its Former Revolving Credit Agreement. The collar agreement expired in February 2004 and the related fair value was written off to interest expense at expiration.



A $10.0 million credit agreement is collateralized by Grocers Capital Companys (GCC)
member loan receivables. GCC is a wholly owned subsidiary of the Company whose primary function is to provide financing to member-patrons who meet certain credit requirements. Funding for loans is derived from the cash reserves of GCC, as well as
the $10.0 million credit facility. The credit agreement, as amended and restated, matures on October 31, 2004. Amounts advanced under the credit agreement bear interest at prime (4.00% at March 27, 2004 and September 27, 2003) or Eurodollar (1.11%
at March 27, 2004 and September 27, 2003) plus 2.50%. The unused portion of the credit line is subject to a commitment fee of 0.125%. The applicable rate is determined at the Companys discretion. GCC had $3.0 million and $0 outstanding at
March 27, 2004 and September 27, 2003, respectively.



Member loan receivables are
periodically sold by GCC to an unrelated third party bank through a loan purchase agreement. This loan purchase agreement, as amended and restated, extends through October 31, 2004. Total loan purchases under the agreement are limited to a total
aggregate principal amount outstanding of $70.0 million. In January 1999, GCC entered into another loan purchase agreement with another unrelated third party bank. This additional loan purchase agreement had no maximum limitation on the loan
purchases and was terminated on December 31, 2002. The loan purchase agreements do not qualify for sale treatment pursuant to Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities  a replacement FASB Statement No. 125, and, accordingly, the Company accounts for the transfer of these financial assets as a secured borrowing with a pledge of collateral. The
aggregate amount



27



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##### Table of Contents

of secured borrowings with the banks was $1.1 million and $1.5 million at March 27, 2004 and September 27, 2003, respectively. The pledged collateral included in
current notes receivable were $0.6 million and $0.7 million and non-current amounts were $0.5 million and $0.8 million at March 27, 2004 and September 27, 2003, respectively. The notes receivable generally bear interest at rates averaging prime plus
2.00%, are paid monthly and have maturity dates ranging from 2004 to 2008.



PATRON
DEPOSITS AND PATRONAGE DIVIDENDS



Most of the Companys patrons are required to
maintain deposits with Unified in amounts specified by the Board in proportion to the volume of purchases made from Unified and may also maintain deposits with Unified in excess of such required amounts. All such deposits of a patron are maintained
in the patrons deposit account. The amount of the required deposit account for most patrons is equal to the greater of twice the amount of the patrons average weekly purchases or twice the amount of the patrons average purchases if
purchases are not made on a regular basis. Former United shareholders that did not have sufficient amounts in their deposit accounts immediately following the Merger were provided with alternatives to eliminate the deficiency over time. Over time,
the requirement for a member-patron to maintain the subordinated deposit account may be eliminated if the member-patron holds sufficient Class B Shares to satisfy the deposit requirement. This is accomplished by acquiring and holding Class B Shares
with original issuance values equal, in the aggregate, to the dollar value of the required cash deposit. The original issuance value of Class B Shares is equal to the purchase price for the shares, which is the book value per share of the
Companys outstanding shares at the close of the fiscal year end prior to purchase.



Patrons are required to execute subordination agreements providing for the pledging of their required deposit accounts to Unified and the subordination of the patrons right to repayment of their required deposit to the prior payment
in full of senior indebtedness of Unified.



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 any shares held by such withdrawing member-patron are subject to repurchase as described under
Redemption of Capital Stock.



Prior to the fiscal year ended September 28,
2002, Unified typically distributed at least 20% of the non-dairy patronage dividends in cash and 80% in Class B Shares to its member-patrons. For fiscal 2002, patronage dividends for the Cooperative Division were paid in Class B Shares and
Patronage Certificates.



In fiscal 2003, the Company issued $3.3 million of Patronage
Certificates as a portion of its patronage dividends for fiscal 2002. The Company offset approximately $0.1 million in Patronage Certificates against a portion of amounts owed to the Company by the holders in fiscal 2003. The remaining Patronage
Certificates are included in subordinated patronage dividend certificates in the consolidated condensed balance sheets.



In December 2002, as part of its fiscal 2003 equity enhancement plan, the Board and the shareholders authorized the creation of a new class of equity, denominated Class E
Shares. The new Class E Shares were issued as a portion of the patronage dividends issued for the Cooperative Division in 2003 and may be issued as a portion of the patronage dividends issued for the Cooperative Division in future periods, as
determined annually at the discretion of the Board. The Class E Shares have a stated value of $100 per share, and are non-voting and non-dividend bearing equity securities. Class E Shares are transferable only with the consent of the Company.
Pursuant to the Companys redemption policy, Class E Shares cannot be repurchased for ten years from their date of issuance unless approved by the Board or upon sale or liquidation of the Company. The shares, when redeemed, will be redeemed at
stated value. Thereafter, shares may be repurchased by the Company subject to the limitations of Section 500 of the California General Corporation Law (Section 500), its credit agreements and approval by the Board.



For fiscal 2003, patronage dividends in the Cooperative Division were paid to member-patrons in the
form of:



| | · |  | Class B Shares to the extent there existed any deficiency of a member-patron in meeting the requirements for holding Class B Shares specified in the Bylaws of the Company; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Class E Shares for the remainder.
| | - |  | ---------------------------------



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Associate-Patrons were paid patronage dividends in the form of cash or patronage dividend certificates or a combination of each in
a manner determined by the Board.



Patronage dividends generated by the dairy divisions
continue to be paid in cash.



REDEMPTION OF CAPITAL STOCK



The Articles of Incorporation and Bylaws currently provide that Unified has the right to repurchase
any Class A Shares, Class B Shares or Class E Shares held by a former member-patron, and any excess Class B Shares held by a current member-patron, whether or not the shares have been tendered for repurchase. In December 2003 the Board amended the
Companys redemption policy to clarify that the repurchase of any Class A Shares, Class B Shares or Class E Shares is solely at the discretion of the Board. Ten years after the issuance of Class E Shares, and not before, the holder may request
that the Company, at its sole discretion repurchase Class E Shares, even if the membership of the holder has not terminated.



Subject to the Boards determination to redeem shares, any repurchase of shares will be on the terms, and subject to restrictions, if any, set forth in:



| | · |  | The California General Corporation Law, including Section 500;
| | - |  | --------------------------------------------------------------



| | · |  | The Companys Articles of Incorporation and Bylaws;
| | - |  | ---------------------------------------------------



| | · |  | Any credit or other agreement to which the Company is a party; and
| | - |  | ------------------------------------------------------------------



| | · |  | The Companys redemption policy.
| | - |  | --------------------------------



The Board has the discretion to modify the redemption policy from time to time.



The Companys redemption policy also currently provides that the number of Class B Shares that Unified may redeem in any fiscal year will be typically limited to approximately 5% of the sum of:



| | · |  | The number of Class B Shares outstanding at the close of the preceding fiscal year end; and
| | - |  | -------------------------------------------------------------------------------------------



| | · |  | The number of Class B Shares issuable as a part of the patronage dividend distribution for such preceding fiscal year.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



The Board has the right to amend the Companys redemption policy at any time, including, but not
limited to, changing the order in which repurchases will be made or suspending or further limiting the number of shares repurchased, except as otherwise may be expressly provided in the Articles of Incorporation. A copy of the Bylaws, which contains
the Companys redemption policy, was filed as Exhibit 3.2 to the Companys Annual Report on Form 10-K for fiscal 2003.



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 make 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 equal or exceed the amount of any proposed distribution or an alternative asset/liability ratio test is met.



On December 10, 2003, the Board authorized the repurchase on December 22, 2003 of 19,825 shares of the Companys Class A Shares that had been tendered and were pending
redemption. The Company paid approximately $3.4 million to redeem the shares. On February 17, 2004, the Board authorized the repurchase on February 20, 2004 of 1,600 shares of the Companys Class A Shares that had been tendered and were pending
redemption. The Company paid approximately $0.3 million to redeem the shares. At March 27, 2004 and subsequent to the redemption of the Class A Shares, the Company had retained earnings of $8.2 million. On April 21, 2004, the Board authorized the
repurchase of 1,700 Class A Shares with an approximate redemption value of $0.3 million.



29



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PENSION PLANS



The Companys non-union employees participate in a defined benefit pension plan (benefit plan) sponsored by the Company. Effective January 1, 2002, the
Companys two non-contributory defined benefit pension plans were combined into a single cash balance plan. Under the cash balance plan, participants are credited with an annual accrual based on years of service with the Company. In addition,
the Company has an Executive Salary Protection Plan (ESPP II) that provides supplemental post-termination retirement income based on each participants final salary and years of service as an officer of the Company and is financed
from life insurance policies purchased by the Company.



The Companys benefit plan
and ESPP II are accounted for in accordance with SFAS No. 87, Employers Accounting for Pensions, which requires the Company to make actuarial assumptions that are used to calculate the carrying value of the related assets and
liabilities and the amount of expenses to be recorded in the Companys consolidated financial statements.



The Companys fiscal 2004 pension expense was calculated based upon a number of actuarial assumptions, including an expected long-term rate of return on plan assets of 8.5%. In developing the long-term rate of return
assumption, the Company evaluated historical asset class returns based on broad equity and bond indices. The expected long-term rate of return on plan assets assumes an asset allocation of approximately 65% equity and 35% fixed income financial
instruments. The Company regularly reviews with its third party advisors the asset allocation and periodically rebalances the investment mix to achieve certain investment goals when considered appropriate. Actuarial assumptions, including the
expected rate of return, are reviewed at least annually, and are adjusted as necessary. Lowering the expected long-term rate of return on the Companys plan assets by 0.5% (from 8.5% to 8.0%) would have increased its pension expense for fiscal
2004 by approximately $0.3 million.



The discount rate that was utilized for determining
the Companys fiscal 2004 pension obligation was based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. As a result of a general decline in interest rates, the discount rate was
reduced from 6.75% at September 28, 2002 to 6.00% at June 28, 2003. Assuming a long-term rate of return on plan assets of 8.5%, a discount rate of 6.00% and certain other assumptions the Company estimates that pension expense for fiscal 2004 will be
approximately $3.6 million for the benefit plan and $2.0 million for the ESPP II. Future pension expense will be affected by future investment performance, discount rates and other variables such as expected rate of compensation increases and
mortality rates relating to plan participants. Decreasing both the discount rate and projected salary increase assumptions by 0.5% would have increased the Companys fiscal 2004 pension expense for the benefit plan by approximately $0.1
million.



The Companys net periodic benefit cost for its combined pension and other
postretirement benefits was approximately $5.2 million for the twenty-six week period ended March 27, 2004 compared to $4.2 million for the twenty-six week period ended March 29, 2003.



The Company expects to contribute $4.0 million to the pension plans by September 15, 2004 for the 2003 plan year. In addition, the Company expects to
make quarterly contributions of $0.8 million in April, July and October 2004 for the 2004 plan year. Any remaining 2004 plan year contributions, which will be determined when the January 1, 2004 actuarial valuation is completed, will be due on
January 15, 2005 and September 15, 2005.



At March 27, 2004, the fair value of the
benefit plan assets increased to $64.7 million from $56.9 million at September 27, 2003.



RISK FACTORS



The Companys management deals with many risks and
uncertainties in the normal course of business. You should be aware that the occurrence of the risks, uncertainties and events described in the risk factors below and elsewhere in this Form 10-Q could have a material adverse effect on the
Companys business, results of operations and financial position.



Competitive
Industry.    The wholesale food distribution and retail grocery industries are highly competitive and characterized by relatively high volume and low profit margins. The shifting of market share among competitors is



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typical of the wholesale food business as competitors attempt to increase sales in various markets. A significant portion of the Companys sales are made at
prices based on the cost of products it sells plus a markup. As a result, the Companys profit levels may be negatively impacted if it is forced to respond to competitive pressure by reducing prices.



The increased competition has caused the industry to undergo changes as participants seek to lower
costs, further increasing pressure on the industrys already low profit margins. In addition to price competition, food wholesalers also compete with regard to quality, variety and availability of products offered, strength of private label
brands offered, schedules and reliability of deliveries and the range and quality of services provided. In addition, the Companys members face increasing competition at the retail distribution level with several large fully integrated chain
store organizations, as well as alternative format food stores including warehouse stores and supercenters. These supercenters have benefited from concentrated buying power and low-cost distribution technology, and have increasingly gained market
share at the expense of traditional grocery operators, including some independent operators, many of whom are the Companys customers. The market share of such alternative format stores is expected to grow in the future.



Continued consolidation in the industry, heightened competition among the Companys suppliers, new
entrants and trends toward vertical integration could create additional competitive pressures that reduce margins and adversely affect the Companys business, financial condition and results of operations.



On October 5, 2003 a multi-employer union labor contract between the UFCW and various retailers
including three major southern California grocery retailers expired. On October 11, 2003, members of the UFCW union in Southern California went on strike against one of the grocery retailers. At the time of the strike, the retailers other two
bargaining partners agreed to lock out workers until a contract settlement was reached. Some of the Companys employees and a small number of the Companys member-patrons employees, none of whom were on strike, are members of the
UFCW. As a result of the strike, which was settled on February 26, 2004, the Company experienced higher sales during the quarters ended December 27, 2003 and March 27, 2004 as consumers began patronizing independent retailers rather than the larger
grocery retail chains targeted by the strike. Due to the uncertainty in predicting whether customers will return to their prior shopping patterns, the impact on the Company and its members sales has not been determined following resolution of
the strike.



Economy.    The Company is affected by
certain economic factors that are beyond its control including inflation and deflation. The degree to which the acquisition cost of products purchased by the Company for resale to customers is stable or deflating could have an adverse effect on the
Companys business and results of operations. The Company operates in a highly competitive marketplace and passing on cost increases to customers is difficult. The Company has historically experienced certain higher operating expenses,
including but not limited to energy, fuel and employee wage, benefits and workers compensation insurance.



Changes in the economic environment 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 commitments for which the Company may be at risk of default. Under certain circumstances, 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. In addition, the level of
unemployment has a direct impact on retail customers buying patterns, which further affect our member-patrons and the Companys business.



The Company holds investments in the common and preferred stock of certain member retailers. These investments are periodically evaluated for impairment. As a result, adverse
changes in the economic environment that adversely affect the business of these retailers could result in the write-down of these investments.



Litigation.    During the normal course of business, the Company may become involved in litigation. In the event that management determines that
the probability of an adverse judgment in a pending litigation is likely and that



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the exposure can be reasonably estimated, appropriate reserves are recorded at that time pursuant to SFAS No. 5 Accounting for Contingencies. Although the
Company believes its reserves to be adequate, the final outcome of any litigation could adversely affect operating results if the actual settlement amount exceeds established reserves and insurance coverage.



Environmental.    The Company owns and operates various facilities
for the manufacture, warehousing and distribution of products to its members. Accordingly, the Company is subject to increasingly stringent federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may
have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of
past spills, disposals or other releases of hazardous materials. In particular, under applicable environmental laws, the Company may be responsible for remediation of environmental conditions and may be subject to associated liabilities (including
liabilities resulting from lawsuits brought by private litigants) relating to its facilities and the land on which the Company facilities are situated, regardless of whether the Company leases or owns the facilities or land in question and
regardless of whether such environmental conditions were created by it or by a prior owner or tenant. The Company believes it is in full compliance with all such laws and regulations and has established reserves for known and anticipated costs of
remediation.



Product Liability.    The packaging,
marketing and distribution of food products purchased from others involve an inherent risk of product liability, product recall and adverse publicity. Such products may contain contaminants that may be inadvertently redistributed by the Company.
These contaminants may result in illness, injury or death if such contaminants are not eliminated. Accordingly, the Company maintains stringent quality standards on the products it purchases from suppliers, as well as products manufactured by the
Company itself. The Company generally seeks contractual indemnification and insurance coverage from parties supplying its products and rigorously tests its private brands and manufactured products to ensure the Companys quality standards are
met. In addition, the Company is insured for product liability claims and believes its coverage to be adequate. However, product liability claims in excess of available reserves and insurance coverage, as well as the negative publicity surrounding
any assertion that the Companys products caused illness or injury could have a material adverse effect on its reputation and on the Companys business, financial condition and results of operations.



Debt Covenants.    In December 2003, the Company refinanced its
Former Revolving Credit Agreement with the New Revolving Credit Agreement that expires on December 5, 2007. The New Revolving Credit Agreement also requires compliance with certain financial covenants, including minimum tangible net worth, fixed
charge coverage ratio and total funded debt to EBITDAP. The Company relies on internal cash and the revolving loan agreement to fund its daily operating activities. Consequently, the inability to access these sources of cash could adversely affect
the Companys operations.



Cash Flow.    The
Company relies primarily upon cash flow from its operations, patron deposits and shareholdings to fund its operating activities. In the event that these sources of cash are not sufficient to meet the Companys requirements, additional sources
of cash are expected to be obtained from the Companys credit facilities. The Companys New Revolving Credit Agreement permits advances of up to 85% of eligible accounts receivable and up to 65% of eligible inventory up to a maximum of
$225 million. As of March 27, 2004, the Company believes it has sufficient cash flow from operations and availability under the New Revolving Credit Agreement to meet operating needs and capital spending requirements through fiscal 2004. However, if
access to operating cash or to the New Revolving Credit Agreement becomes restricted, the Company may be compelled to seek alternate sources of cash. The Company cannot assure that alternate sources will provide cash on terms favorable to the
Company.



Management Information Systems.    Despite
system redundancy, the implementation of security measures and the existence of a Disaster Recovery Plan for the Companys internal information systems, these systems are vulnerable to damage from computer viruses, unauthorized access, energy
blackouts, natural disasters, terrorism, war and telecommunication failures. It is possible that a system failure, accident or security breach could result in a material disruption to the Companys business. In addition, substantial costs may
be incurred to remedy the damages caused by these disruptions or security breaches. From time to time, the Company installs new or upgraded business management systems. To the extent that a critical system fails or is not properly implemented and
the failure cannot be corrected in a timely manner, the Company may experience material disruptions to the business that could have a material adverse effect on the Companys results of operations.



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Acts of God and Other Events.    In addition to normal business risks, the Company is also
subject to acts of God such as adverse weather conditions, earthquakes, fires, epidemics and other natural disasters that could have an adverse effect on the Companys operations and financial results. Knowing that such events cannot
necessarily be prevented, the Company believes it maintains adequate insurance coverage to recover and rebuild critical facilities in the event that such a catastrophe occurs. The Company has developed contingency plans that provide for alternate
sites to warehouse and distribute products if primary facilities are disabled, while mitigating the effect to its member-patrons.



In addition, the Companys business is dependent on the free flow of products and services through its distribution channels. The recent rise in terrorist activities
domestically and abroad has resulted in an increase in security measures taken by governmental authorities that could delay or impede the distribution of products and/or services to the Companys member-patrons and could also have an adverse
effect on the Companys operations and financial results.



CRITICAL ACCOUNTING
POLICIES



The preparation of the Companys consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates, assumptions and judgments that affect the amount of assets and liabilities reported in the consolidated financial
statements, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and reported amounts of revenues and expenses during the period. The Company believes its estimates and assumptions are
reasonable; however, future results could differ from those estimates under different assumptions or conditions.



Critical accounting policies are policies that reflect material judgment and uncertainty and may result in materially different results using different assumptions or conditions.
The Companys critical accounting policies and important accounting practices are described below.



Insurance Reserves.    The Companys insurance subsidiaries provide various types of insurance products to its members including workers compensation, general liability, auto,
directors and officers and others. The Companys insurance subsidiaries are regulated by the State of California and are subject to the rules and regulations promulgated by the appropriate state regulatory agencies. There are many factors that
contribute to the variability in estimating insurance loss reserves and related costs. On certain occasions, changes in state regulations will have a direct impact on workers compensation cost and reserve requirements. In fiscal 2004,
mandatory contributions to the California Workers Compensation Fund for California based companies was reduced to somewhat mitigate the impact of the rising workers compensation cost to these businesses. The cost of insurance and the
sufficiency of loss reserves are also impacted by actuarial estimates based on a detailed analysis of health care cost trends, mortality rates, claims history, demographics and industry trends. As a result, the amount of the loss reserve and the
related expense is significantly affected by these variables, as well as the periodic changes in state and federal law. The Company regularly assesses the sufficiency of its loss reserves, which represent potential future claims and settlements to
policyholders. Insurance reserves are recorded based on estimates and assumptions made by management using data available at the valuation date and are validated by third party actuaries to ensure such estimates are within acceptable ranges. In
addition, the Companys wholesale distribution segment is self insured for workers compensation of up to $300,000 per incident. Insurance reserves maintained by the Companys insurance subsidiaries and the Companys reserve for
workers compensation payouts totaled approximately $52.4 million as of March 27, 2004 and $45.4 million as of September 27, 2003.



Allowance for Uncollectible Accounts and Notes Receivable.    The preparation of the Companys consolidated financial statements requires
management to make estimates of the collectibility of its accounts and notes receivable. Management regularly analyzes its accounts and notes receivable for changes in the credit-worthiness of customers, economic trends and other variables that may
affect the adequacy of recorded reserves for potential bad debt. In determining the appropriate level of reserves to establish, the Company utilizes several techniques including specific account identification, percentage of aged receivables and
historical collection and write-off trends. In addition, the Company considers in its reserve calculations collateral such as redemption notes, member shareholdings, cash deposits and personal guarantees. A bankruptcy or financial loss associated
with several major customers could have a material adverse effect on the Companys sales and operating results. The Companys allowance for doubtful accounts for trade and short-term notes receivable was approximately $1.7



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million and $1.5 million at March 27, 2004 and September 27, 2003, and $0.4 million and $0.3 million for long-term notes receivable at March 27, 2004 and September 27,
2003, respectively. As a result of the quasi-reorganization on September 28, 2002, the Companys accounts and notes receivable were adjusted to fair value. The related allowance for doubtful accounts were eliminated and offset against the trade
and notes receivable accounts at September 28, 2002. The adjustment to fair value represents gross accounts and notes receivable that were netted against allowances for uncollectible accounts of $12.7 million at September 28, 2002.



Lease Loss Reserves.    The Company has historically subleased store
sites to independent retailers who meet certain credit requirements, at rates that are at least as high as the rent paid by the Company. The Company also leases sites for its discontinued retail business. Under the terms of the original lease
agreements, the Company remains primarily liable for any financial commitments a retailer may no longer be able to satisfy, including those stores that are part of the Companys discontinued retail business. Should a retailer be unable to
perform under the term of the sublease, the Company would record a charge to earnings for the cost of the remaining term of the lease, less any expected sublease income, at net present value. The Company is also contingently liable for certain
subleased facilities. Variables affecting the level of lease reserves recorded include the remaining lease term, vacancy rates of leased property, the state of the economy, property taxes, common area maintenance costs and the time required to
sublease the property. The Companys lease reserves for all leased locations were approximately $18.0 million and $20.1 million as of March 27, 2004 and September 27, 2003, respectively.



Investments.    The Company holds investments in the common and
preferred stock of certain retailers. These investments are periodically evaluated for impairment. This evaluation involves performing fair value analyses of the respective investments. If an investments carrying amount exceeds its fair value
and the shortfall is not deemed recoverable, an impairment loss would be recorded pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As a result, adverse changes in the economic environment that
adversely affect the business of these retailers could result in the write-down of these investments.



Goodwill.    The Companys operating results are highly dependent upon either maintaining or growing its distribution volume to its customers. The Companys top ten member and
non-member customers constituted approximately 32% of total sales at March 27, 2004. A significant loss in membership or volume could adversely affect the Companys operating results. The Merger with United resulted in the recording of goodwill
representing the intangible assets of the acquired business. The book value of the goodwill was approximately $25.4 million at March 27, 2004. Although the sales volume and member base of the combined entity continue to remain strong, significant
reductions in the distribution volume in the future could potentially impair the carrying amount of goodwill necessitating a write-down of this asset.



The Company evaluates its goodwill for impairment pursuant to SFAS No. 142, Goodwill and Other Intangible Assets, which provides that goodwill and other intangible
assets with indefinite lives will no longer be amortized but tested for impairment annually, or more frequently if circumstances indicate potential impairment. The impairment test is comprised of two steps: (1) a reporting units fair value is
compared to its carrying value; if the fair value is less than its carrying value, goodwill impairment is indicated; and (2) if impairment is indicated in the first step, it is measured by comparing the implied fair value of goodwill to its carrying
value at the reporting unit level. In determining fair value, the Company uses the discounted cash flow method, which assumes a certain growth rate projected over a period of time in the future and then discounted to net present value using the
Companys estimated cost of capital. The Company evaluates its goodwill for impairment the third quarter of each fiscal year. Accordingly, the Company tested its goodwill and noted no impairment for the fiscal quarter ended June 28, 2003.



Tax Valuation Allowances.    The Company accounts for
income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS No. 109), 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 net deferred tax asset will not
be realized. In accordance with SFAS No. 109 and post quasi-reorganization accounting, valuation allowance reductions are accounted for as an adjustment to additional paid-in capital, while increases to the valuation allowance are accounted for as
an adjustment to the income tax provision. The Company had approximately $13.5 million and $14.2 million in net deferred tax assets that are net of tax valuation allowances of $2.0 million at March 27, 2004



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and September 27, 2003, respectively. Of the net deferred tax assets, $10.1 million are classified as current assets in deferred income taxes and $3.4 million and $4.1
million are included in other assets in the accompanying consolidated condensed balance sheets as of March 27, 2004 and September 27, 2003, respectively. Management evaluated the available positive and negative evidence in assessing the
Companys ability to realize the benefits of the net deferred tax assets at September 27, 2003 and concluded it is more likely than not that the Company will realize a portion of its net deferred tax assets. In reaching this conclusion,
significant weight was given to the Companys exit from the retail business and other unprofitable subsidiary operations and the continued quarterly and fiscal 2003 profitability of its continuing operations. Accordingly, at September 27, 2003,
the valuation allowance was reduced by $4.4 million to $2.0 million and pursuant to quasi-reorganization accounting rules, the reduction in the valuation allowance was recorded as an increase to Class A and Class B Shares.



The remaining balance of the net deferred tax assets should be realized through future operating
results and the reversal of taxable temporary differences.



Pension and
Postretirement Benefit Plans.    The Companys non-union employees participate in Company sponsored defined benefit pension and postretirement benefit plans. Officers of the Company also participate in a Company
sponsored Executive Salary Protection Plan (ESPP II), which provides supplemental post-termination retirement income based on each participants final salary and years of service as an officer of the Company. The Company accounts
for these benefit plans in accordance with SFAS No. 87, Employers Accounting for Pensions, SFAS No. 106 Employers Accounting for Postretirement Benefits Other Than Pensions and SFAS No. 112 Employers
Accounting for Postemployment Benefitsan amendment of FASB Statements No. 5 and 43 which require the Company to make actuarial assumptions that are used to calculate the carrying value of the related assets and liabilities and the amount
of expenses to be recorded in the Companys consolidated financial statements. Assumptions include the expected return on plan assets, discount rates, projected life expectancies of plan participants, anticipated salary increases and health
care cost trend. The assumptions are regularly evaluated by management in consultation with outside actuaries who are relied upon as experts. While the Company believes the underlying assumptions are appropriate, the carrying value of the related
assets and liabilities and the amount of expenses recorded in the consolidated financial statements could differ if other assumptions are used.



AVAILABILITY OF SEC FILINGS



Unified makes available, free of charge, through its website (www.uwgrocers.com) its Forms 10-K, 10-Q and 8-K, as well as its registration and proxy statements, as soon as reasonably practicable after those reports are
electronically filed with the Securities and Exchange Commission (the SEC). A copy of any of the reports filed with the SEC can be obtained from the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. A
copy may also be obtained by calling the SEC at 1-800-SEC-0330. All reports filed electronically with the SEC are available on the SECs web site at http://www.sec.gov.



ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Company has only limited involvement with derivative financial instruments that are used to manage well-defined interest rate risks. In February 1999, the Company entered into
a five-year interest rate collar agreement to partially offset interest rate fluctuations associated with its variable interest rate borrowings on its Former Revolving Credit Agreement. The collar agreement expired in February 2004.



Unified is subject to interest rate changes on its notes payable under the Companys credit
agreements that may affect the fair value of the notes payable, as well as cash flow and earnings. Based on the notes payable outstanding at March 27, 2004 and the current market condition, a one percent increase in the applicable interest rates
would decrease the Companys annual cash flow and earnings before estimated patronage dividends and income taxes by approximately $1.0 million. Conversely, a one percent decrease in the applicable interest rates would increase annual cash flow
and earnings before estimated patronage dividends and income taxes by $1.0 million.



ITEM 4.    CONTROLS AND PROCEDURES



The
Companys Chief Executive Officer, Alfred A. Plamann, and Chief Financial Officer, Richard J. Martin, with the participation of the Companys management, carried out an evaluation of the effectiveness of the Companys



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disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief
Financial Officer believe that, as of the end of the period covered by this report, the Companys disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated
subsidiaries) required to be included in this report.



Disclosure controls and
procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entitys disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure
controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the
established processes.



There was no change in the Companys internal control over
financial reporting, known to the Chief Executive Officer or the Chief Financial Officer, that occurred during the thirteen week period ended March 27, 2004 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.



Companies considered
non-accelerated filers are required to comply with the internal control reporting and disclosure requirements of Section 404 of the Sarbanes-Oxley Act for fiscal years ending on or after July 15, 2005. Accordingly, the Company will comply with these
disclosure requirements commencing with its fiscal year ending October 1, 2005.



PART II.    OTHER INFORMATION



ITEM 1.    LEGAL PROCEEDINGS



During
fiscal 2002, the Company became involved in litigation in the state of Hawaii stemming from the Companys 1996 sale of a subsidiary to a private investor, events subsequent to the sale, 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. 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 name 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 $10.0 million and other unspecified damages. In September 2003, the court dismissed the fraudulent transfer and fraud claims against Certified and Grocers Specialty Company. 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 1-10on May 17, 2002.In March
2003, the Trustee amended its complaint to add Bruce Barber and Sheppard Mullin Richter & Hampton LLP, as defendants. 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 (Grocers Specialty Company) and the controlling shareholders parent
corporation (Certified), and breach of fiduciary duties by defendants Goodsill, Loeffler, RHL, Inc., and Robbe. Current and former officers of the Company were officers or 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. All of the above referenced matters are now pending
in the Federal District Court for the District of Hawaii. The Company is vigorously defending this litigation.



The Company is a party to various litigation, claims and disputes, some of which, including the HGS litigation, are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions
cannot be predicted with certainty, the Company believes the outcome of these matters will not result in a material adverse effect on its financial condition or results of operations.



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|ITEM 2.    CHANGES |  | IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------------------ |  | ------------------------------------------------------------------------



|                            |  |                                 |  |                             |       
|--------------------------- |  | ------------------------------- |  | --------------------------- | ------
|                           
|Period                      |  | Total Number ofShares Purchased |  | Average PricePaid Per Share
|                           
|Dec 28, 2003  Jan 24, 2004 |  |                                |  |                             |      
|Jan 25, 2004  Feb 21, 2004 |  | 1,600                           |  | $                           | 163.00
|Feb 22, 2004  Mar 27, 2004 |  | 194                             |  | $                           | 162.10
|                           
|Total                       |  | 1,794                           |  | $                           | 162.90
|                           



|ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES
|------- |  | -------------------------------



None.



|ITEM 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- |  | ---------------------------------------------------



(a) Date of Meeting: February 17, 2004 (Annual Meeting)



(b) The matters voted upon at the meeting and the results of each vote are as follows:



Election of Directors



|                           |  |           |  |                  
|-------------------------- |  | --------- |  | -----------------
|                          
|Class A Directors          |  | Votes For |  | WithheldAuthority
|                          
|Louis A. Amen              |  | 58,950    |  | 7,800            
|David M. Bennett           |  | 60,150    |  | 6,600            
|John Berberian             |  | 59,400    |  | 7,350            
|Edmund Kevin Davis         |  | 59,700    |  | 7,050            
|Deiter Huckestein          |  | 59,550    |  | 7,200            
|Darioush Khaledi           |  | 58,950    |  | 7,800            
|John D. Lang               |  | 59,700    |  | 7,050            
|Jay T. McCormack           |  | 59,700    |  | 7,050            
|Peter J. ONeal            |  | 59,850    |  | 6,900            
|Michael A. Provenzano, Jr. |  | 59,550    |  | 7,200            
|Thomas S. Sayles           |  | 59,700    |  | 7,050            
|Kenneth Ray Tucker         |  | 60,150    |  | 6,600            
|Richard L. Wright          |  | 59,850    |  | 6,900            
|                          
|Class B Directors          |  | Votes For |  | WithheldAuthority
|                          
|Douglas A. Nidiffer        |  | 353,705   |  | 25,243           
|Mimi R. Song               |  | 346,422   |  | 32,526           
|Robert E. Stiles           |  | 362,732   |  | 16,216           



ITEM 5.    OTHER INFORMATION



None.



ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits



|     |  |                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------
|31.1 |  | Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|31.2 |  | ChiefFinancial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 
|     | 
|32.1 |  | Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|(b)  |  | Reports on Form 8-K                                                                             
|     | 
|     |  | None                                                                                            



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



UNIFIED WESTERN GROCERS, INC.



By

/s/    ALFRED A.
PLAMANNAlfred A. PlamannPresident and Chief Executive Officer (Principal Executive Officer)By

/s/    RICHARD J.
MARTINRichard J. MartinExecutive Vice President, Finance & Administration and Chief Financial Officer (Principal Financial and
Accounting Officer)By

/s/    WILLIAM O.
COTÉWilliam O. CotéVice President and Controller




Dated: May 7, 2004



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