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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.
20549



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FORM 10-Q



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(Mark One)



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



FOR THE QUARTERLY PERIOD ENDED JANUARY 1, 2005



OR



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



FOR THE TRANSITION PERIOD FROM              TO



Commission file number 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
January 29, 2005, were as follows:



Class A: 109,800 shares
  Class B: 492,237 shares   Class C: 16 shares   Class E: 92,827 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 |  | 16  
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 39  
|Item 4.    |  | Controls and Procedures                                                               |  | 40  
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |     
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 40  
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 41  
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 41  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 41  
|Item 5.    |  | Other Information                                                                     |  | 41  
|Item 6.    |  | Exhibits                                                                              |  | 41  
|           | 
|Signatures |  | 42                                                                                   



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##### Table of Contents

PART I .    FINANCIAL INFORMATION



ITEM 1.    FINANCIAL STATEMENTS (UNAUDITED)



---

Unified Western Grocers, Inc. and Subsidiaries



Consolidated
Condensed Balance Sheets  Unaudited



(dollars in thousands)



|                                                                                                                                                         |  |                 |         |   |                 |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | --------------- | - | ------- | -
|                                                                                                                                                         |  | January 1, 2005 |         |   | October 2, 2004 |  
|Assets                                                                                                                                                   |  |                 |         |   |                 |   |         |  
|                                                                                                                                                         |  |                
|Current assets:                                                                                                                                          |  |                 |         |   |                 |   |         |  
|Cash and cash equivalents (including $2,361 and $3,060 held at a variable interest entity at January 1, 2005 and October 2, 2004, respectively) (Note
4) |  | $               | 47,245  |   |                 | $ | 43,443  |  
|Accounts and notes receivable, net of allowances of $2,543 and $2,085 at January 1, 2005 and October 2, 2004, respectively                               |  |                 | 145,365 |   |                 |   | 140,769 |  
|Inventories                                                                                                                                              |  |                 | 177,486 |   |                 |   | 191,045 |  
|Prepaid expenses                                                                                                                                         |  |                 | 7,572   |   |                 |   | 7,696   |  
|Deferred income taxes                                                                                                                                    |  |                 | 11,874  |   |                 |   | 11,874  |  
|                                                                                                                                                         | 
|Total current assets                                                                                                                                     |  |                 | 389,542 |   |                 |   | 394,827 |  
|Properties, net                                                                                                                                          |  |                 | 177,897 |   |                 |   | 181,033 |  
|Investments                                                                                                                                              |  |                 | 70,760  |   |                 |   | 66,375  |  
|Notes receivable, net of allowances of $871 and $802 at January 1, 2005 and October 2, 2004, respectively                                                |  |                 | 14,732  |   |                 |   | 14,285  |  
|Goodwill                                                                                                                                                 |  |                 | 28,432  |   |                 |   | 28,732  |  
|Other assets, net                                                                                                                                        |  |                 | 35,045  |   |                 |   | 36,381  |  
|                                                                                                                                                         | 
|Total Assets                                                                                                                                             |  | $               | 716,408 |   |                 | $ | 721,633 |  
|                                                                                                                                                         | 
|Liabilities and Shareholders Equity                                                                                                                     |  |                 |         |   |                 |   |         |  
|                                                                                                                                                         |  |                
|Current liabilities:                                                                                                                                     |  |                 |         |   |                 |   |         |  
|Accounts payable                                                                                                                                         |  | $               | 144,468 |   |                 | $ | 149,615 |  
|Accrued liabilities                                                                                                                                      |  |                 | 118,782 |   |                 |   | 123,324 |  
|Current portion of notes payable                                                                                                                         |  |                 | 9,416   |   |                 |   | 9,639   |  
|Patrons excess deposits and estimated patronage dividends                                                                                               |  |                 | 18,382  |   |                 |   | 12,947  |  
|Net current liabilities of discontinued operations                                                                                                       |  |                 | 792     |   |                 |   | 921     |  
|                                                                                                                                                         | 
|Total current liabilities                                                                                                                                |  |                 | 291,840 |   |                 |   | 296,446 |  
|Notes payable, less current portion                                                                                                                      |  |                 | 185,001 |   |                 |   | 191,694 |  
|Long-term liabilities, other                                                                                                                             |  |                 | 101,613 |   |                 |   | 97,648  |  
|Net long-term liabilities of discontinued operations                                                                                                     |  |                 | 747     |   |                 |   | 739     |  
|Patrons deposits and certificates:                                                                                                                      |  |                 |         |   |                 |   |         |  
|Patrons required deposits                                                                                                                               |  |                 | 16,655  |   |                 |   | 12,786  |  
|Subordinated patronage dividend certificates                                                                                                             |  |                 | 3,141   |   |                 |   | 3,141   |  
|Commitments and contingencies                                                                                                                            |  |                 |         |   |                 |   |         |  
|                                                                                                                                                         |  |                
|Shareholders equity:                                                                                                                                    |  |                 |         |   |                 |   |         |  
|Class A Shares: 500,000 shares authorized, 109,800 and 111,700 shares outstanding at January 1, 2005 and October 2, 2004, respectively                   |  |                 | 16,656  |   |                 |   | 16,947  |  
|Class B Shares: 2,000,000 shares authorized, 492,430 and 524,474 shares outstanding at January 1, 2005 and October 2, 2004, respectively                 |  |                 | 76,469  |   |                 |   | 81,586  |  
|Class E Shares: 2,000,000 shares authorized, 92,827 shares outstanding at January 1, 2005 and October 2, 2004                                            |  |                 | 9,283   |   |                 |   | 9,283   |  
|Retained earnings after elimination of accumulated deficit of $26,976 effective September 28, 2002                                                       |  |                 | 15,790  |   |                 |   | 12,383  |  
|Receivable from sale of Class A Shares to members                                                                                                        |  |                 | (995    | ) |                 |   | (1,047  | )
|Accumulated other comprehensive earnings                                                                                                                 |  |                 | 208     |   |                 |   | 27      |  
|                                                                                                                                                         | 
|Total shareholders equity                                                                                                                               |  |                 | 117,411 |   |                 |   | 119,179 |  
|                                                                                                                                                         | 
|Total Liabilities and Shareholders Equity                                                                                                               |  | $               | 716,408 |   |                 | $ | 721,633 |  
|                                                                                                                                                         | 



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)



|                                                               |  |                      |         |   |                   |   |         |  
|-------------------------------------------------------------- |  | -------------------- | ------- | - | ----------------- | - | ------- | -
|                                                               |  | Thirteen Weeks Ended |        
|                                                               |  | January 1, 2005      |         |   | December 27, 2003 |  
|Net sales                                                      |  | $                    | 729,686 |   |                   | $ | 798,200 |  
|Cost of sales                                                  |  |                      | 649,897 |   |                   |   | 720,587 |  
|Distribution, selling and administrative expenses              |  |                      | 62,351  |   |                   |   | 64,631  |  
|                                                               | 
|Operating income                                               |  |                      | 17,438  |   |                   |   | 12,982  |  
|Interest expense                                               |  |                      | (3,868  | ) |                   |   | (4,784  | )
|                                                               | 
|Earnings before estimated patronage dividends and income taxes |  |                      | 13,570  |   |                   |   | 8,198   |  
|Estimated patronage dividends                                  |  |                      | (8,152  | ) |                   |   | (5,053  | )
|                                                               | 
|Earnings before income taxes                                   |  |                      | 5,418   |   |                   |   | 3,145   |  
|Income taxes                                                   |  |                      | (1,536  | ) |                   |   | (1,194  | )
|                                                               | 
|Net earnings                                                   |  |                      | 3,882   |   |                   |   | 1,951   |  
|Other comprehensive earnings, net of income taxes:             |  |                      |         |   |                   |   |         |  
|Unrealized holding gain (loss) on investments                  |  |                      | 181     |   |                   |   | (13     | )
|                                                               | 
|Comprehensive earnings                                         |  | $                    | 4,063   |   |                   | $ | 1,938   |  
|                                                               | 







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)



|                                                                                    |  |                      |        |   |                   |   |        |  
|----------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ----------------- | - | ------ | -
|                                                                                    |  | Thirteen Weeks Ended |       
|                                                                                    |  | January 1, 2005      |        |   | December 27, 2003 |  
|Cash flows from operating activities:                                               |  |                      |        |   |                   |   |        |  
|Net earnings                                                                        |  | $                    | 3,882  |   |                   | $ | 1,951  |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                      |        |   |                   |   |        |  
|Depreciation and amortization                                                       |  |                      | 6,514  |   |                   |   | 7,065  |  
|Provision for doubtful accounts                                                     |  |                      | 553    |   |                   |   | 25     |  
|Deferred income taxes                                                               |  |                      | 1,410  |   |                   |   | 928    |  
|Purchases of trading securities                                                     |  |                      | (1,375 | ) |                   |   | (561   | )
|Proceeds from maturities or sales of trading securities                             |  |                      | 111    |   |                   |   | 378    |  
|(Increase) decrease in assets:                                                      |  |                      |        |   |                   |   |        |  
|Accounts and notes receivable                                                       |  |                      | (1,442 | ) |                   |   | (7,920 | )
|Inventories                                                                         |  |                      | 13,559 |   |                   |   | 11,807 |  
|Prepaid expenses                                                                    |  |                      | 124    |   |                   |   | (541   | )
|Increase (decrease) in liabilities:                                                 |  |                      |        |   |                   |   |        |  
|Accounts payable                                                                    |  |                      | (5,147 | ) |                   |   | 15,621 |  
|Accrued liabilities                                                                 |  |                      | (4,034 | ) |                   |   | (795   | )
|Long-term liabilities, other                                                        |  |                      | 2,285  |   |                   |   | 4,125  |  
|                                                                                    | 
|Net cash provided by operating activities                                           |  |                      | 16,440 |   |                   |   | 32,083 |  
|                                                                                    | 
|Cash flows from investing activities:                                               |  |                      |        |   |                   |   |        |  
|Purchases of properties                                                             |  |                      | (756   | ) |                   |   | (1,870 | )
|Purchases of securities and other investments                                       |  |                      | (9,066 | ) |                   |   | (4,456 | )
|Proceeds from maturities or sales of securities and other investments               |  |                      | 6,219  |   |                   |   | 2,208  |  
|(Increase) decrease in notes receivable                                             |  |                      | (4,154 | ) |                   |   | 639    |  
|Increase in other assets                                                            |  |                      | (1,199 | ) |                   |   | (2,651 | )
|                                                                                    | 
|Net cash utilized by investing activities                                           |  |                      | (8,956 | ) |                   |   | (6,130 | )
|                                                                                    | 
|Cash flows from financing activities:                                               |  |                      |        |   |                   |   |        |  
|Additions to long-term notes payable                                                |  |                      |       |   |                   |   | 2,000  |  
|Reduction of long-term notes payable                                                |  |                      | (4,504 | ) |                   |   |       |  
|Reduction of short-term notes payable                                               |  |                      | (2,497 | ) |                   |   | (2,914 | )
|Payment of deferred financing fees                                                  |  |                      |       |   |                   |   | (2,551 | )
|Patrons excess deposits and estimated patronage dividends                          |  |                      | 5,435  |   |                   |   | 4,898  |  
|Increase in patrons required deposits                                              |  |                      | 2,516  |   |                   |   | 1,270  |  
|Decrease (increase) in receivable from sale of Class A Shares to members            |  |                      | 52     |   |                   |   | (133   | )
|Repurchase of shares from members                                                   |  |                      | (4,806 | ) |                   |   | (3,398 | )
|Issuance of shares to members                                                       |  |                      | 209    |   |                   |   | 294    |  
|                                                                                    | 
|Net cash utilized by financing activities                                           |  |                      | (3,595 | ) |                   |   | (534   | )
|                                                                                    | 
|Net increase in cash and cash equivalents                                           |  |                      | 3,889  |   |                   |   | 25,419 |  
|Net cash utilized by discontinued operations                                        |  |                      | (87    | ) |                   |   | (2,356 | )
|Cash and cash equivalents at beginning of period                                    |  |                      | 43,443 |   |                   |   | 37,489 |  
|                                                                                    | 
|Cash and cash equivalents at end of period                                          |  | $                    | 47,245 |   |                   | $ | 60,552 |  
|                                                                                    | 



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)



|                                                                                                                                                                                 |  |                      |       |                   |   |      
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ----- | ----------------- | - | -----
|                                                                                                                                                                                 |  | Thirteen Weeks Ended
|                                                                                                                                                                                 |  | January 1, 2005      |       | December 27, 2003
|Supplemental disclosure of cash flow information:                                                                                                                                |  |                      |       |                   |   |      
|Cash paid during the period for:                                                                                                                                                 |  |                      |       |                   |   |      
|Interest                                                                                                                                                                         |  | $                    | 2,762 |                   | $ | 5,002
|Income taxes                                                                                                                                                                     |  | $                    | 6     |                   | $ |     
|                                                                                                                                                                                
|Supplemental disclosure of non-cash items:                                                                                                                                       |  |                      |       |                   |   |      
|Conversion of Class B Shares to Class A Shares and patrons excess deposits                                                                                                      |  | $                    |      |                   | $ | 68   
|Retirement of Class B Shares                                                                                                                                                     |  | $                    | 1,234 |                   |   |     
|Reduction in purchase accounting reserve against goodwill                                                                                                                        |  | $                    | 300   |                   | $ | 129  
|Increase to pre quasi-reorganization discontinued operations and lease reserves, net of deferred taxes of $33 and $609 as of January 1, 2005 and
December 27, 2003, respectively |  | $                    | 52    |                   | $ | 932  
|                                                                                                                                                                                









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.



The Companys banking arrangements allow the Company to fund outstanding checks
when presented to the financial institution for payment. This cash management practice frequently results in total issued checks exceeding available cash balances at a single financial institution. As of January 1, 2005, the Company recorded its
cash disbursement accounts with a cash book overdraft in accounts payable. Previously, the Company reported these balances in accounts payable net of cash maintained in separate accounts. The condensed consolidated balance sheet and statement of
cash flows for the periods ended October 2, 2004 and December 27, 2003, respectively, have been reclassified to conform to this presentation. Net earnings were not impacted by this change. At January 1, 2005 and October 2, 2004, the Company had book
overdrafts of $40.9 million and $40.0 million, respectively, classified in accounts payable.



Certain other 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.



3.    QUASI-REORGANIZATION



Subsequent to the
decision to dispose of its retail operations as discussed in Note 2, the Companys Board adopted a resolution approving the implementation of a quasi-reorganization for financial reporting purposes effective September 28, 2002. A
quasi-reorganization is an accounting procedure that eliminates an accumulated



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Unified Western Grocers, Inc. and Subsidiaries



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





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



In fiscal 2004, 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 eleven closed store locations for which the Company is contingently liable for the lease payments. Four of the locations were
related to the Companys exit from its retail operations. The Company paid approximately $5.4 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 contingently liable until such time as the leases expire or the Company is released from all liabilities and obligations under the leases.



At January 1, 2005, the Company remains contingently liable for the lease payments on nine store
locations. The net present value of the Companys currently estimated obligation for the remaining leasehold and sub-leasehold interests for the nine stores totals approximately $3.5 million at January 1, 2005, with the last lease expiring in
2021. The Companys maximum loss exposure related to these leases is $33.0 million.



The Financial Accounting Standards Board (FASB) issued in January 2003 and revised in December 2003 FASB Interpretation No. 46R (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. Because 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, as well as the results of operations. At January 1, 2005 and October 2, 2004, the Company consolidated the variable interest entitys accounts, including total assets of $3.3 and $4.0 million, respectively, comprised primarily
of $2.4 and $3.1 million in cash, respectively, $0.4 million in properties and $0.5 million in other assets, to be used in the development of the properties and for payment of lease obligations, with lease reserves of approximately $3.5 and $4.0
million, respectively.



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 a reserve for the closure of various facilities. Periodic charges against
the reserve represent lease costs for non-subleased facilities and rental income shortfalls for subleased facilities. The amount of this reserve and current period charges against the reserve for the thirteen-week period ended January 1, 2005
are presented below.



|                           |  |   |        |  
|-------------------------- |  | - | ------ | -
|(dollars in thousands)     |  |   |       
|Balance at October 2, 2004 |  | $ | (1,694 | )
|Charges to the reserve     |  |   | 144    |  
|Charges to earnings        |  |   | (32    | )
|Adjustments to the reserve |  |   | 498    |  
|                           | 
|Balance at January 1, 2005 |  | $ | (1,084 | )
|                           | 



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Unified Western Grocers, Inc. and Subsidiaries



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





In fiscal 2004, the Company reversed excess purchase accounting reserves for two locations whose leases were terminated through
buy-out arrangements with the respective landlords, resulting in a reduction of goodwill. In addition, the Company received sublease income for one facility for which the lease reserve was initially established at the time of the Merger. As a
result, the reserves were considered no longer needed and consequently, were reversed, resulting in a reduction of goodwill.



During the thirteen weeks ended January 1, 2005, the Company negotiated a buy-out agreement for one location. In addition, previously anticipated repair expenses on a second
location were mitigated due to tenant actions. As a result of these activities, the respective reserves were considered no longer needed and consequently, were reversed, resulting in a reduction of goodwill.



6.    SEGMENT INFORMATION



Unified is a retailer-owned, grocery wholesale cooperative serving supermarket operators located
primarily in the western United States and in the South Pacific. Unified sells a wide variety of grocery-related and general merchandise products to its customers. The Companys customers include its owners (member-patrons or
Members) and non-owners (non-members). Unified also provides support services to its customers, including financing and insurance. The availability of specific products and services may vary by geographic region.



Management identifies segments based on the information monitored by the Companys chief
operating decision-makers to manage the business. During fiscal 2004, management identified the insurance business as a separate reportable segment. Accordingly, the Company reclassified its segment information for the fiscal years ended September
27, 2003 and September 28, 2002. As a result, the Company has the following two reportable segments:



| | · |  | Wholesale Distribution 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. As
of January 1, 2005, the Wholesale Distribution segment represents approximately 99% of the Companys total sales and 84.5% of total assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | The Insurance segment includes the results of operations for the Companys three insurance subsidiaries (Grocers and Merchants Insurance Service, Inc., Springfield Insurance Company and
Springfield Insurance Company, Ltd.). These subsidiaries provide insurance and insurance-related services, including workers compensation and liability insurance policies, to both the Company and its Members primarily located in California. As
of January 1, 2005, the Companys Insurance segment collectively accounts for approximately 1% of the Companys total sales and 12.4% 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. As of January 1, 2005, the all other category collectively accounts for less than 1%
of the Companys total sales and 3.1% of total assets.



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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 |        
|                                    |  | January 1, 2005      |         |   | December 27, 2003 |  
|Net sales                           |  |                      |         |   |                   |   |         |  
|Wholesale distribution              |  | $                    | 723,212 |   |                   | $ | 792,029 |  
|Insurance                           |  |                      | 8,301   |   |                   |   | 8,842   |  
|All other                           |  |                      | 342     |   |                   |   | 424     |  
|Inter-segment eliminations          |  |                      | (2,169  | ) |                   |   | (3,095  | )
|                                    | 
|Total net sales                     |  | $                    | 729,686 |   |                   | $ | 798,200 |  
|                                    | 
|Operating income                    |  |                      |         |   |                   |   |         |  
|Wholesale distribution              |  | $                    | 16,059  |   |                   | $ | 12,805  |  
|Insurance                           |  |                      | 1,420   |   |                   |   | (162    | )
|All other                           |  |                      | (41     | ) |                   |   | 339     |  
|                                    | 
|Total operating income              |  | $                    | 17,438  |   |                   | $ | 12,982  |  
|                                    | 
|Interest expense                    |  | $                    | (3,868  | ) |                   | $ | (4,784  | )
|Estimated patronage dividends       |  |                      | (8,152  | ) |                   |   | (5,053  | )
|Income taxes                        |  |                      | (1,536  | ) |                   |   | (1,194  | )
|                                    | 
|Net earnings                        |  | $                    | 3,882   |   |                   | $ | 1,951   |  
|                                    | 
|Depreciation and amortization       |  |                      |         |   |                   |   |         |  
|Wholesale distribution              |  | $                    | 6,440   |   |                   | $ | 6,979   |  
|Insurance                           |  |                      | 72      |   |                   |   | 75      |  
|All other                           |  |                      | 2       |   |                   |   | 11      |  
|                                    | 
|Total depreciation and amortization |  | $                    | 6,514   |   |                   | $ | 7,065   |  
|                                    | 
|Capital expenditures                |  |                      |         |   |                   |   |         |  
|Wholesale distribution              |  | $                    | 727     |   |                   | $ | 1,844   |  
|Insurance                           |  |                      | 29      |   |                   |   | 26      |  
|All other                           |  |                      |        |   |                   |   |        |  
|                                    | 
|Total capital expenditures          |  | $                    | 756     |   |                   | $ | 1,870   |  
|                                    | 
|Identifiable assets                 |  |                      |         |   |                   |   |         |  
|Wholesale distribution              |  | $                    | 605,046 |   |                   | $ | 655,567 |  
|Insurance                           |  |                      | 88,952  |   |                   |   | 73,145  |  
|All other                           |  |                      | 22,410  |   |                   |   | 32,235  |  
|                                    | 
|Total identifiable assets           |  | $                    | 716,408 |   |                   | $ | 760,947 |  
|                                    | 



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 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



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Unified Western Grocers, Inc. and Subsidiaries



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





Mark J.C. Yee (Yee), Trustee for the Bankruptcy Estate of Hawaiian Grocery Stores, Ltd., vs. Unified Western Grocers, Inc., Certified Grocers of
California, Ltd., Grocers Specialty Company, RHL, Inc., Alfred A. Plamann, Charles Pilliter, Daniel T. Bane, Robert M. Ling, David A. Woodward, Richard H. Loeffler, Fletcher Robbe, Goodsill Anderson Quinn and Stifel, and Does 1-10 on May 17,
2002.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. In the third quarter of 2004, the court permitted Value Recovery Group, L.P., as Assignee of the Federal Deposit Insurance Corporation, Receiver of Southern Pacific Bank
(VRG) to join the action as a plaintiff. VRG asserts it was a creditor of HGS at the time of HGS bankruptcy filing. In June 2004, Yee and VRG filed an amended complaint, continuing to assert claims similar to those described above.
In their prayer for relief, the plaintiffs seek damages in an undetermined amount, rescission of certain transactions, restitution to plaintiffs in an unstated amount and punitive and other damages in an unstated amount. 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 (Benefit Plan)
sponsored by the Company. The Benefit Plan is a noncontributory defined benefit pension plan covering substantially all employees of the Company who are not subject to a collective bargaining agreement. Under the Benefit Plan, participants are
credited with an annual accrual based on years of service with the Company. The Benefit 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 Benefit 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 Benefit 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. Depending on when the officer became a participant in the ESPP II, final salary is defined as the
highest compensation of the last three years preceding employment separation or the average of the highest five years of compensation out of the last ten years preceding employment separation. Funds are held in a rabbi trust for the ESPP II
consisting primarily of life insurance policies reported at cash surrender value. In accordance with EITF No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust, the assets and
liabilities of a rabbi trust must be accounted for as if they are assets and liabilities of the Company. The assets held in the rabbi trust are not available for general corporate purposes. In addition, all earnings and expenses of the rabbi trust
are reported in the Companys consolidated statement of earnings. The cash surrender value of such life insurance policies aggregated $11.5 million and $10.9 million at January 1, 2005 and October 2, 2004, respectively, and is included in other
assets in the Companys consolidated balance sheets. The related accrued benefit cost (representing the Companys benefit obligation to participants) of $11.8 million and $11.2 million at January 1, 2005 and October 2, 2004, respectively,
is recorded in other long-term liabilities in the Companys consolidated balance sheets. The rabbi trust is subject to creditor claims in the event of insolvency. The ESPP II accrued benefit cost is included in the pension table below. However,
the trust assets are excluded from Benefit Plan and ESPP II plan assets as they do not qualify as plan assets under SFAS No. 87, Employers Accounting for Pensions (FAS 87).



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Unified Western Grocers, Inc. and Subsidiaries



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





The components of net periodic cost for pension and other postretirement benefits for the thirteen weeks ended January 1, 2005
and December 27, 2003 consist of the following:



|                                   |  |                  |        |   |                               |   |        |                 |  |                   |       |  |   |      
|---------------------------------- |  | ---------------- | ------ | - | ----------------------------- | - | ------ | --------------- |  | ----------------- | ----- |  | - | -----
|                                   |  | Pension Benefits |        |   | Other Postretirement Benefits
|                                   |  | January 1, 2005  |        |   | December 27, 2003             |   |        | January 1, 2005 |  | December 27, 2003
|Service cost                       |  | $                | 1,190  |   |                               | $ | 1,074  |                 |  | $                 | 337   |  | $ | 355  
|Interest cost                      |  |                  | 1,590  |   |                               |   | 1,452  |                 |  |                   | 864   |  |   | 771  
|Expected return on plan assets     |  |                  | (1,424 | ) |                               |   | (1,205 | )               |  |                   |      |  |   |     
|Amortization of prior service cost |  |                  | 60     |   |                               |   | 60     |                 |  |                   |      |  |   |     
|Recognized actuarial loss          |  |                  | 8      |   |                               |   | 17     |                 |  |                   | 108   |  |   | 58   
|                                  
|Net periodic cost                  |  | $                | 1,424  |   |                               | $ | 1,398  |                 |  | $                 | 1,309 |  | $ | 1,184
|                                  



Assuming a long-term rate of return on plan
assets of 8.50%, a discount rate of 6.25% and certain other assumptions, the Company estimates that its combined pension expense for the Benefit Plan and ESPP II for fiscal 2005 will be approximately $5.7 million. 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 increase the Companys projected fiscal 2005 pension expense for the Benefit Plan and ESPP II by approximately $0.1 million.



During fiscal 2004, the Company contributed $4.2 million to the Benefit Plan and ESPP II for the 2003 plan year. At this time, the Company expects to make contributions of $4.7
million in fiscal 2005 for the 2004 plan year, which will be due by September 15, 2005. Due to changes prescribed by the Pension Funding Equity Act of 2004, which changed the interest rate used to calculate the funded current liability percentage
(FCLP) as of January 1, 2003, the Company is not required to make quarterly contributions to the Benefit Plan for the 2004 plan year. For the 2005 plan year, however, due to a FCLP rate below 100% at January 1, 2004, the Company is
required to make contributions on a prescribed quarterly basis. Therefore, commencing April 15, 2005, the Company expects to make contributions of $918,000 per quarter for the 2005 plan year. Subsequent to April 15, 2005, additional contributions
will be due July 15, 2005, October 15, 2005 and January 15, 2006. The Company made no contributions to the plans during the thirteen weeks ended January 1, 2005.



At January 1, 2005, the fair value of the benefit plan assets increased to $72.5 million from $66.1 million at October 2, 2004.



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.



Assuming a discount rate of 6.25% and certain other assumptions, the Company estimates that
postretirement expense for fiscal 2005 will be approximately $5.2 million. Future postretirement expense will be affected by discount rates and other variables such as expected rate of compensation increases and projected health care trend rates.



9.    RELATED PARTY TRANSACTIONS



Prior to fiscal 2004, the Company 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. During 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



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Unified Western Grocers, Inc. and Subsidiaries



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





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 original
carrying value of the Series A-2 Preferred Shares was $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. The Company received scheduled cash dividends of $0.2 million during the first fiscal quarter of 2005.



On December 14, 2004, the Board of Directors approved a loan to KV Mart Co., a related party, in an
amount not to exceed $1.5 million. The loan was funded on December 29, 2004, for $1.1 million. The loan facilitated a lease termination in the amount of $1.1 million for which the Company was contingently liable until 2011. The loan is payable over
48 months commencing from the date of its initial funding and bears interest at the rate of prime plus 1% (currently 6.25%). See Note 20 to Notes to Consolidated Financial Statements in Part II, Item 8 of the Companys Annual Report on Form
10-K for the year ended October 2, 2004 for additional information regarding related party transactions.



10.    NEW ACCOUNTING PRONOUNCEMENTS



In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,(SFAS No. 123R) a revision to SFAS No. 123, Accounting for Stock-Based Compensation. This statement supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees.SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Examples include stock
options and awards of restricted stock in which an employer receives employee services in exchange for equity securities of the company or liabilities that are based on the fair value of the companys equity securities. SFAS No. 123R requires
that the cost of share-based payment transactions be recorded as an expense at their fair value determined by applying a fair value measurement method at the date of the grant, with limited exceptions. Costs will be recognized over the period in
which the goods or services are received. The provisions of SFAS No. 123R are effective as of the first interim reporting period beginning after June 15, 2005 (period ending October 1, 2005). The Company currently believes that SFAS No. 123R will
have no impact on its results of operations and financial condition since the Company does not provide or participate in any form of equity-based compensation.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions,(SFAS No. 153). Previously, APB Opinion No. 29 (APB No. 29) provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. APB No. 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The FASB believes that exception required certain
nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Commercial
substance exists if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of SFAS No. 153 shall be applied prospectively. The Company does not currently believe that SFAS No. 153 will
have a significant impact on its financial condition and results of operations.



In
December 2004, the FASB issued FASB Staff Position No. FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of
2004 (FSP No. 109-1). FSP No. 109-1 clarifies the guidance in FASB Statement of Financial



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Unified Western Grocers, Inc. and Subsidiaries



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





Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109) that applies to the new deduction for qualified domestic
production activities under the American Jobs Creation Act of 2004 (the AJCA). FSP No. 109-1 clarifies that the deduction should be accounted for as a special deduction under SFAS No. 109, not as a tax-rate reduction, because the
deduction is contingent on performing activities identified in the AJCA. As a result, companies qualifying for the special deduction will not have a one-time adjustment of deferred tax assets and liabilities in the period the AJCA is enacted. FSP
No. 109-1 requires that tax benefits resulting from the qualified domestic production activities should be recognized no earlier than the year in which they are reported in the entitys tax return. FSP No. 109-1 is effective upon issuance
(December 21, 2004). Since the tax benefits would not be recognized any earlier than the tax year ended October 1, 2005, the impact, if any, of FSP 109-1 would be reported in the Companys financial statements no earlier than fiscal 2006. The
Company is currently assessing the financial impact of FSP No. 109-1 on its consolidated condensed financial statements.



On October 13, 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) with respect to EITF Issue No. 04-10, Determining Whether
to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds (EITF No. 04-10). EITF No. 04-10 clarified that operating segments can be aggregated only if aggregation is consistent with the objective and basic
principles of FASB Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information(SFAS No. 131), the segments have similar economic characteristics, and the
segments share a majority of the aggregation criteria listed in paragraph 17 of SFAS No. 131. Paragraph 19 of SFAS No. 131 permits an entity to combine information about segments, which individually do not meet the quantitative thresholds in
paragraph 18 of SFAS No. 131 to produce a reportable segment, only if segments share a majority of the aggregation criteria listed in paragraph 17 of SFAS No. 131 (i.e. similarity in the nature of the products and services, the production processes,
the type or class of customers for their products and services, and if applicable the nature of the regulatory environment). Although the FASB ratified the consensus in EITF No. 04-10, the FASB staff is in the process of drafting a proposed FASB
Staff Position (FSP) to provide guidance in determining whether two or more operating segments have similar economic characteristics. The final FSP is expected to carry an effective date for fiscal periods ending after March 15, 2005.
Accordingly, the EITF agreed to delay the effective date of the consensus to coincide with that of the related FSP and has delayed the effective date pending the issuance of this FSP. The Company does not currently believe that EITF No. 04-10 will
have any impact on its currently reportable segments.



In November 2004, the FASB issued
SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, (SFAS No. 151) which amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs and spoilage. SFAS No. 151 requires that these costs be expensed as current period charges. In addition, SFAS No. 151 requires that the allocation of fixed production overhead to the costs of
conversion be based on normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005; hence, the Company will adopt its provisions effective
October 2, 2005, the beginning of its fiscal year 2006. The Company does not currently believe this statement will have any significant impact on the Companys financial position or results of operations.



On March 31, 2004, the FASB ratified the consensus reached by the Task Force on EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF No. 03-1). EITF No. 03-1 provides guidance for determining whether certain investment securities are impaired, and
requires certain additional disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The recognition provisions of this standard have been deferred. The Company included the disclosures required by EITF
No. 03-1 in Note 6 of Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the fiscal year ended October 2, 2004.



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 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



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





certain information to be disclosed in financial statements for interim periods. The Company adopted this Statement in the quarter ended June 26, 2004. The disclosures
required by this Statement are included in Note 8 of Notes to Consolidated Condensed 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 (EITF No. 03-10). EITF
No. 03-10 addresses the accounting for manufacturers sales incentives offered directly to consumers, including manufacturer coupons. According to EITF 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 applied to new arrangements, including modifications to existing arrangements, entered into in fiscal periods beginning
after November 25, 2003. Accordingly, for the thirteen weeks ended January 1, 2005, $23.2 million of such consideration was classified as a reduction in cost of sales, and for the fiscal quarter ended December 27, 2003, $24.2 million of such
consideration was reclassified as a reduction in cost of sales with a corresponding reduction in net sales. In addition, for the thirteen weeks ended January 1, 2005, $0.2 million was classified as a reduction in distribution, selling and
administrative expenses, and for the fiscal quarter ended December 27, 2003, $0.1 million was reclassified as a reduction in distribution, selling and administrative expenses with a corresponding increase in cost of sales. Comparable amounts for
periods prior to fiscal 2003 were not reclassified, as reclassification is not permitted under the transition guidance. The application of the EITF had no effect on net earnings.



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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. These forward-looking statements involve risks, uncertainties and assumptions. When the Company uses words such as
believes, expects, anticipates or similar expressions, the Company is making forward-looking statements. Although Unified believes that the expectations reflected in such forward-looking statements are reasonable,
the Company cannot give readers any assurance that such expectations will prove correct. The actual results may differ materially from those anticipated in the forward-looking statements as a result of numerous factors, many of which are beyond the
Companys control. Important factors that could cause actual results to differ materially from the Companys expectations include, but are not limited to, the factors discussed in the sections entitled Risk Factors and
Critical Accounting Policies and Estimates within Managements Discussion and Analysis of Financial Condition and Results of Operations. All forward-looking statements attributable to Unified are expressly qualified in
their entirety by the factors that may cause actual results to differ materially from anticipated results. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements opinion only as of the
date hereof. The Company undertakes no duty or obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this document as well as in other
documents the Company files from time to time with the Securities and Exchange Commission.



COMPANY OVERVIEW



Unified Western Grocers, Inc. (Unified or
the Company) is a retailer-owned, grocery wholesale cooperative serving supermarket operators located primarily in the western United States and the South Pacific. The Companys customers range in size from single store operators to
multiple store chains. The Company operates its business in two reportable business segments: (1) Wholesale Distribution and (2) Insurance. All remaining business activities are grouped into All Other (see Note 6 of Notes to Consolidated
Condensed Financial Statements.)



The Company sells a wide variety of products typically
found in supermarkets. The Company reports all product sales in its Wholesale Distribution business or segment, which represents approximately 99% of the Companys total sales. The Companys customers include its owners
(member-patrons or Members) and non-owners (non-members). Unified also provides support services to its customers, including insurance and financing. Insurance activities account for approximately 1% of total
sales and are reported in its Insurance business or segment, while finance activities are grouped with the Companys All Other business activities. The availability of specific products and services may vary by geographic region.



A California corporation organized in 1922 and incorporated in 1925, Unified does business primarily
with those customers that have been accepted as Members. Members are required to meet specific member capitalization requirements, which include capital stock ownership and may include required cash deposits. In addition, each Member must meet
minimum purchase requirements that may be modified at the discretion of the Companys Board of Directors (the Board). An entity that does not meet Member purchase requirements or does not desire to become a Member may conduct
business with Unified as a non-member customer on a non-patronage basis. The Company previously conducted business on a patronage basis with entities, known as associate-patrons, that did not desire to become Members. Associate-patrons
had reduced minimum purchase requirements, were required to establish cash deposits and did not own shares of Unifieds capital stock. The Company does not currently have any associate-patron customers and does not intend to sell to non-members
on a patronage basis in the future.



The earnings from business conducted on a patronage
basis are distributed to Members in the form of patronage dividends. The Companys patronage earnings are based on the combined results of the Companys three patronage earnings divisions: the Southern California Dairy Division, the
Pacific Northwest Dairy Division and the Cooperative Division. The Company also does business on a non-patronage basis in the wholesale distribution segment through its non-patronage division, specialty food subsidiary and international sales
subsidiary. These businesses sell products to both Members and non-members. Earnings from the Companys subsidiaries and from business conducted on a non-patronage basis (collectively non-patronage business) are retained by the
Company.



The Company has three separate geographical and marketing regions. The regions
are Southern California, Northern California and the Pacific Northwest.



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##### Table of Contents

The various warehouse and manufacturing facilities operated by the Company are located in Los Angeles, Commerce, Santa Fe Springs,
Stockton, Hayward, Livermore and Fresno, California and Milwaukie, Oregon. The Company also operates a bakery manufacturing facility and a milk processing plant in Los Angeles, which primarily serve the Southern California region.



Sales Activities



The Company experienced an overall sales decline of $68.5 million, or 8.6%, for the thirteen weeks ended January 1, 2005 (the 2005
Period) as compared to the thirteen-week period ended December 27, 2003 (the 2004 Period). Several factors contributed to the change in sales during the 2005 Period.



| | · |  | The 2004 Period included $61.0 million in short-term sales volume increase resulting from the strike/lockout of three major grocery retailers in Southern California (see discussion in
Overview of the 2005 Period below).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Sales to the Companys primary Southern California Dairy Division customer were $11.6 million in the 2004 Period. Subsequently, the customer was purchased by a competitor and began
self-distributing in the 2005 Period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | A reduction in the Companys All Other business activities resulted in a reduction of $0.2 million in sales over the 2004 Period.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| | · |  | Partially offsetting the above declines, the Company benefited from growth in its core business that generated a $4.3 million, or 0.6%, sales increase over the 2004 Period. The sales increase
was driven primarily by growth of existing customers from new store openings and growth in the Companys perishables initiative. The Companys perishables initiative was launched in fiscal 2004 to help customers more effectively compete
with the growing alternatives to the conventional retail grocery store. Successful customers have focused on differentiation strategies in perishable items on the perimeter of the store such as produce, service deli, service bakery and meat
categories. Unified launched the initiative to emphasize the sale of these perimeter store products. This initiative is intended to help retailers improve their competitiveness through enhanced item selection and lower product cost through the
Companys ability to serve as a single source of perimeter store products and other grocery store products for its customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company attributes the sales growth from continuing business, in part, to the programs and services the Company provides to expand and replenish its Member base. The Company
provides real estate services, equipment sales and financing to support existing Members that are remodeling or opening new stores. The Company also helps retailers introduce new products to meet changing consumer demand.



During the 2005 Period, the Company has experienced a decline in total membership due to the number of
Members discontinuing their membership exceeding new Member additions during the first quarter as indicated in the following table:



|                                                           |  |                  |  
|---------------------------------------------------------- |  | ---------------- | -
|Membership Activity                                        |  | Number ofMembers |  
|Membership count (active) as of October 2, 2004            |  | 564              |  
|New members                                                |  | 6                |  
|Members discontinued                                       |  | (8               | )
|Members previously discontinued whose shares were redeemed |  | (21              | )
|                                                           |  |                  |  
|Membership count (active) as of January 1, 2005            |  | 541              |  
|                                                           | 



All eight of the discontinued Members and three
of the new Members were the result of buy/sell arrangements where one Member sells its store to another Member, and the Company continues to supply the store. Although total membership declined, the net change in membership resulted in a $0.3
million increase in sales in the 2005 Period.



The marketplace in which the Company
operates continues to evolve and present challenges both to the Company and its customers. The continued expansion of large box store formats into the Companys marketplace will present challenges for some of the retail grocery stores owned by
customers of the Company. In addition, alternative formats such as discount, drug and convenience stores continue to expand their offering of products that are a core part of the conventional grocery store offering.



17



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To effectively compete with these alternatives to the conventional retail grocery store, successful customers have focused on
differentiation strategies in items on the perimeter of the store such as produce, service deli, service bakery and meat categories. In the 2004 fiscal year, Unified launched an initiative to emphasize the sale of these perimeter store products.
This initiative is intended to help retailers improve their competitiveness through enhanced item selection and lower product cost through the Companys ability to serve as a single source for its customers. We refer to this
initiative as the Companys perishables initiative.



Demographic changes have
created more ethnic diversity in the Companys marketplace and are also supporting the Companys sales growth. The vast majority of Unifieds customers in its Southern California region operate retail stores in the Los Angeles and San
Diego metropolitan areas with diverse ethnic populations. Unifieds customers have developed effective marketing strategies that have attracted the ethnic shopper. Populations in the Companys Northern California and Pacific Northwest
regions have also become more ethnically diverse over time, providing increased growth opportunities for Unifieds customers. Unified supports growth throughout its marketplace by working closely with vendors to offer promotions on fast-moving
products to the Companys customers and by supporting and sponsoring major events that help promote sales at the retail level.



In June 2004, the Company changed its pricing methodology on its Grocery, Frozen Food and Delicatessen lines of products. The new pricing methodology is called Consumer Driven
Pricing (CDP). The new CDP program is designed to align the Companys pricing with the method used by the Companys customers. This change also allows the Company greater flexibility to adapt to changes in the marketplace and
address seasonal demands to help its customers competitiveness.



Economic
Factors



Certain business costs such as workers compensation, medical,
benefits and fuel have risen significantly in recent periods. Additionally, wage increases occur as a result of negotiated labor contracts and the impact of inflationary cost of living adjustments. These cost increases have resulted in economic
pressure on the Companys underlying cost structure. To offset these cost increases, the Company continually develops initiatives aimed at improving business processes and managing costs to achieve reductions. The implementation of these
initiatives has resulted in significant improvements throughout the Company, most notably in the Companys distribution system, which has led to improved warehouse and transportation efficiencies. Labor efficiencies, such as the number of cases
moved in the warehouse per hour of work, have increased 5.3% in the 2005 Period compared to the 2004 Period and 7.8% in the 2004 Period compared to the first fiscal quarter of 2003 due to system and process improvements.



Technology



Technology has played a significant role in shaping the grocery industry as companies continue to use technology to gain efficiencies and reduce
costs. Technology improvements have been an important part of Unifieds strategy to improve service to its customers and lower costs. Technology improvements in its distribution systems have been an area of concentration. The Company expects to
see additional warehouse improvements and order fulfillment accuracy as it continues its warehouse system improvements over the next two years. Additionally, the Company has made improvements to better support its interactions with vendors and
customers. The Companys related vendor activities include improvements to its new item introductions, promotions management and payment support activities that have also helped efforts to improve efficiencies and lower costs. Member focused
efforts have included improvements through its Memberlink technology product that completes the supply chain cycle by improving speed-to-shelf for new items and enhancing retail promotion planning.



Discontinued Operations and Quasi-reorganization



On September 25, 2002, the Board approved managements plan to exit its retail operations. The
Company reclassified certain accounts in the consolidated financial statements to reflect its exit from the retail business. Accordingly, certain accounts such as revenues, costs and expenses, assets and liabilities and cash flows relating to the
Companys retail operations were segregated and the net operating results, net liabilities and net cash flows of the retail operations were reported as Discontinued Operations in the accompanying consolidated condensed financial
statements (see Note 2 of Notes to Consolidated Condensed Financial Statements).



During
fiscal 2004, the Company completed its exit from the retail business. During the fiscal year ended September 27, 2003, the Company closed seven of its remaining nine operating stores and obtained binding commitments for the sale and transfer of the
leasehold rights for the remaining two stores to Members, which stores were either sold or transferred in the first quarter of fiscal 2004.



18



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##### Table of Contents

The Company also evaluated its other subsidiary activities and concluded that it would exit from its unprofitable trucking,
printing and security activities. Subsequent to its decision to exit retail and other unprofitable subsidiary activities, the Board approved a plan to effect a quasi-reorganization as of 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 involves adjusting a companys assets and liabilities to
their fair values. 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. To
reflect these actions, the Company wrote down certain current and non-current assets of its retail and other unprofitable businesses, including goodwill, to net realizable value. In addition, the Company established reserves for certain exit related
costs including estimated operating losses, severance, lease reserves and other necessary costs expected to be incurred over the disposal period. The effect of these two actions resulted in a net accumulated deficit that was eliminated by a transfer
of amounts from paid-in capital, Class A and Class B Shares (see Notes 2 and 3 of Notes to Consolidated Condensed Financial Statements).



RESULTS OF OPERATIONS



The following discussion of the Companys financial condition and results of operations should be read in conjunction with the consolidated condensed financial statements and notes to the consolidated condensed
financial statements, specifically Note 6 to Notes to Consolidated Condensed Financial Statements, Segment Information, included elsewhere in this report. Certain statements in the following discussion are not historical in nature and should be
considered to be forward-looking statements that are inherently uncertain.



The
following table sets forth the percentage of selected consolidated financial data of Unified expressed as a percentage of net sales for the periods indicated and the percentage increase or decrease in such items over the prior period.



|                                                  |  |                      |   |  |                  |   |  |               |   
|------------------------------------------------- |  | -------------------- | - |  | ---------------- | - |  | ------------- | --
|                                                  |  | Thirteen Weeks Ended |   |  | % Change         |  
|Fiscal Period Ended                               |  | January 1,2005       |   |  | December 27,2003 |   |  | ThirteenWeeks |   
|Net sales                                         |  | 100.0                | % |  | 100.0            | % |  | (8.6          | )%
|Cost of sales                                     |  | 89.1                 |   |  | 90.3             |   |  | (9.8          | ) 
|Distribution, selling and administrative expenses |  | 8.5                  |   |  | 8.1              |   |  | (3.5          | ) 
|                                                  | 
|Operating income                                  |  | 2.4                  |   |  | 1.6              |   |  | 34.3          |   
|Interest expense                                  |  | (0.5                 | ) |  | (0.6             | ) |  | (19.1         | ) 
|Estimated patronage dividends                     |  | (1.1                 | ) |  | (0.6             | ) |  | 61.3          |   
|Income taxes                                      |  | (0.3                 | ) |  | (0.2             | ) |  | 28.6          |   
|                                                  | 
|Net earnings                                      |  | 0.5                  | % |  | 0.2              | % |  | 99.0          | % 
|                                                  | 



THIRTEEN WEEK PERIOD ENDED JANUARY 1, 2005
(2005 PERIOD) COMPARED TO THE THIRTEEN WEEK PERIOD ENDED DECEMBER 27, 2003 (2004 PERIOD)



Overview of the 2005 Period.    The Companys consolidated operating income improved by $4.4 million to $17.4 million in the 2005 Period
compared to $13.0 million in the 2004 Period. The operating income for the Companys Wholesale Distribution and Insurance segments improved over the 2004 Period, but was offset in part by a decline in the All Other category.



| | · |  | Wholesale Distribution Segment:    The Wholesale Distribution segment realized an overall net improvement in operating income of $3.3 million to $16.1
million in the 2005 Period compared to $12.8 million in the 2004 Period. Improvements in margin and reductions in costs offset the marginal effect of lower sales, as described under Company Overview  Sales Activities above.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



From October 5, 2003 to February 29, 2004, the United
Food and Commercial Workers (UFCW) in Southern California went on strike against one of the major grocery retailers. In response, two major grocery retailers locked out the UFCW workers until the contract was settled on February 29,
2004. As a result of the strike, the Company experienced higher, non-recurring sales during the 2004 Period. The Company estimates that sales increased approximately $61.0 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.



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The Companys sales mix in Southern California changed slightly to accommodate the volume increase related to
the strike as grocers began ordering a different mix of products to accommodate the new demands at retail. The increase in cost of sales and expenses related to efforts to support the additional strike volume did not continue beyond the strike
period.



The Company experienced lower net expenses in the 2005 Period
compared to the 2004 Period. Lower expenses due to a reduction in volume combined with reduced lease reserves offset increases in fuel and reserves for uncollectible accounts receivable due to non-recurring favorable collection activities on
previously reserved accounts that occurred in the 2004 Period. See additional discussion under Distribution, selling and administrative expenses  Wholesale Distribution Segment below.



| | · |  | Insurance Segment:    Operating income improved $1.6 million in the Companys Insurance segment to $1.4 million in the 2005 Period compared to an
operating loss of $0.2 million in the 2004 Period. The Companys workers compensation claims development stabilized during the 2005 Period. The improvement was attributable to several factors, including improved rate adequacy, legislative
reforms that have mitigated increases in loss expenses (particularly medical costs), and the continued participation of our larger risks in higher deductible policies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | All Other:    All Other business activities primarily consist of the Companys finance subsidiary and the consolidation of a variable interest entity as
discussed in Note 4 of the Notes to Consolidated Condensed Financial Statements in Item 1. Operating income decreased $0.4 million to a loss of $41,000 in the 2005 Period compared to income of $0.34 million in the 2004 Period. The decrease in
earnings is primarily due to non-recurring favorable loan collection activities on previously reserved accounts in the Companys finance subsidiary that occurred in the 2004 Period, resulting in a reduction of expenses that was not repeated in
the 2005 Period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following tables summarize the performance of each
business segment for the 2005 and 2004 Periods.



|                                                       |  |                      |         |   |                  |   |         |            |  |   |         |  
|------------------------------------------------------ |  | -------------------- | ------- | - | ---------------- | - | ------- | ---------- |  | - | ------- | -
|Wholesale Distribution Segment  (dollars in thousands) |  |                      |         |   |                  |   |         |            |  |   |         |  
|                                                       |  | Thirteen Weeks Ended |         |   |                  |  
|                                                       |  | January 1,2005       |         |   | December 27,2003 |   |         | Difference | 
|Gross sales                                            |  | $                    | 723,212 |   |                  | $ | 792,029 |            |  | $ | (68,817 | )
|Inter-segment eliminations                             |  |                      |        |   |                  |   | (553    | )          |  |   | 553     |  
|                                                       | 
|Net sales                                              |  |                      | 723,212 |   |                  |   | 791,476 |            |  |   | (68,264 | )
|Cost of sales                                          |  |                      | 646,855 |   |                  |   | 715,863 |            |  |   | (69,008 | )
|Distribution, selling and administrative expenses      |  |                      | 60,298  |   |                  |   | 62,808  |            |  |   | (2,510  | )
|                                                       | 
|Operating income                                       |  | $                    | 16,059  |   |                  | $ | 12,805  |            |  | $ | 3,254   |  
|                                                       | 
|                                                       |  |                      |        
|Insurance Segment  (dollars in thousands)              |  |                      |         |   |                  |   |         |            |  |   |         |  
|                                                       |  | Thirteen Weeks Ended |         |   |                  |  
|                                                       |  | January 1,2005       |         |   | December 27,2003 |   |         | Difference | 
|Gross sales                                            |  | $                    | 8,301   |   |                  | $ | 8,842   |            |  | $ | (541    | )
|Inter-segment eliminations                             |  |                      | (2,066  | ) |                  |   | (2,519  | )          |  |   | 453     |  
|                                                       | 
|Net sales                                              |  |                      | 6,235   |   |                  |   | 6,323   |            |  |   | (88     | )
|Cost of sales                                          |  |                      | 3,042   |   |                  |   | 4,724   |            |  |   | (1,682  | )
|Distribution, selling and administrative expenses      |  |                      | 1,773   |   |                  |   | 1,761   |            |  |   | 12      |  
|                                                       | 
|Operating income (loss)                                |  | $                    | 1,420   |   |                  | $ | (162    | )          |  | $ | 1,582   |  
|                                                       | 



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|                                                  |  |                      |      |   |                  |   |     |            |  |   |      |  
|------------------------------------------------- |  | -------------------- | ---- | - | ---------------- | - | --- | ---------- |  | - | ---- | -
|All Other  (dollars in thousands)                 |  |                      |      |   |                  |   |     |            |  |   |      |  
|                                                  |  | Thirteen Weeks Ended |      |   |                  |  
|                                                  |  | January 1,2005       |      |   | December 27,2003 |   |     | Difference | 
|Gross sales                                       |  | $                    | 342  |   |                  | $ | 424 |            |  | $ | (82  | )
|Inter-segment eliminations                        |  |                      | (103 | ) |                  |   | (23 | )          |  |   | (80  | )
|                                                  | 
|Net sales                                         |  |                      | 239  |   |                  |   | 401 |            |  |   | (162 | )
|Distribution, selling and administrative expenses |  |                      | 280  |   |                  |   | 62  |            |  |   | 218  |  
|                                                  | 
|Operating (loss) income                           |  | $                    | (41  | ) |                  | $ | 339 |            |  | $ | (380 | )
|                                                  | 



Net
sales.    Consolidated net sales decreased $68.5 million to $729.7 million in the 2005 Period compared to the 2004 Period.



| | · |  | Wholesale Distribution Segment:    Net wholesale distribution sales decreased $68.3 million to $723.2 million in the 2005 Period compared to the 2004 Period.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Wholesale distribution sales decreased approximately $61.0 million due to the temporary non-recurring sales in the 2004 Period as a result of the UFCW strike.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Sales decreased $11.6 million to the Companys largest Southern California Dairy Division customer, who was purchased by a competitor and began self-distributing in the 2005 Period.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Sales increased by approximately $4.3 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. Perimeter-store products drove the growth in sales, while grocery and general merchandise sales declined compared to the 2004 Period. The decline in grocery and general
merchandise was the result of continued competitive pressures in the marketplace from alternate format food stores (warehouse stores and supercenters) that are influencing shoppers buying practices, and certain customers buying more product
directly from manufacturers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Insurance Segment:    Net sales decreased $0.1 million to $6.2 million in the 2005 Period compared to the 2004 Period. The Companys policy volume was
stable while rates declined slightly compared to the 2004 Period. Participation in higher deductible policies also remained stable compared to the 2004 Period.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | All Other:    Net sales decreased $0.2 million to $0.2 million in the 2005 Period compared to the 2004 period.
| | - |  | --------------------------------------------------------------------------------------------------------------



Cost of sales.    Consolidated cost of sales were $649.9 million for
the 2005 Period and $720.6 million for the 2004 Period and comprised 89.1% and 90.3% of consolidated net sales for the 2005 and 2004 Periods, respectively.



| | · |  | Wholesale Distribution Segment:    Cost of sales decreased by $69.0 million to $646.9 million in the 2005 Period compared to the 2004 Period. As a percentage
of net wholesale sales, cost of sales was 89.4% and 90.4% for the 2005 and 2004 Periods, respectively. Several factors contributed to the 1.0% decrease in cost of sales as a percentage of net wholesale sales.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | A change in product and Member sales mix contributed to a 0.54% reduction in cost of sales as a percent of sales.
| | - |  | -----------------------------------------------------------------------------------------------------------------



| | · |  | Efforts to support the sales increase in the 2004 Period resulting from the UFCW strike led to a temporary 0.26% increase in the cost of sales. The Companys sales mix in Southern
California changed slightly to accommodate the volume increase related to the strike as grocers began ordering a different mix of products to accommodate the new demands at retail. The increase in cost of sales related to efforts to support the
additional strike volume did not continue beyond the strike period.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | The Company increased the markup on its Grocery, Frozen Food and Delicatessen product lines due to the implementation of the Companys new Consumer Driven Pricing Program in June 2004,
resulting in a 0.20% reduction in cost of sales as a percent of sales.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · |  | Insurance Segment:    Cost of sales decreased by $1.7 million to $3.0 million in the 2005 Period compared to the 2004 Period. In the 2004 Period, the Company
incurred additional workers compensation losses due to unfavorable claims development for older accident years. However, workers compensation claims losses stabilized during the 2005 Period, resulting in decreased cost of sales.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Distribution, selling and administrative
expenses.    Consolidated distribution, selling and administrative expenses were $62.4 million and $64.6 million in the 2005 Period and 2004 Period, respectively, and comprised 8.5% and 8.1% of net sales for the 2005 and
2004 Periods, respectively.



| | · |  | Wholesale Distribution Segment:    Distribution, selling and administrative expenses of $60.3 million for the 2005 Period were $2.5 million lower than in the
2004 Period and comprised 8.3% and 7.9% of net wholesale sales for the 2005 and 2004 Periods, respectively. Of the $2.5 million decrease, $1.9 million related to decreased volume while the remaining net decrease of $0.6 million was attributable to
specific factors. Certain factors are considered non-recurring in nature while others may represent on-going changes to the Companys cost structure. The following discussion outlines these changes.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The unfavorable factors contributing to the increase in cost as a percent of sales are
as follows:



| | · |  | Cost leveraging:    The decrease in net sales caused fixed costs to be spread over lower sales, thereby increasing costs as a percent of net sales by 0.44%.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Allowances for uncollectible accounts receivable:    Expenses increased $0.6 million, or 0.08% of net sales. The Company provided $0.3 million for uncollectible accounts
receivable in the 2005 Period, while favorable collections on previously reserved accounts receivable in the 2004 Period resulted in a $0.3 million reduction of expenses.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Diesel fuel:    The Companys fuel costs increased $0.4 million, or 0.08% of net sales, to $1.7 million in the 2005 Period compared to the 2004 Period as a result of
increasing fuel prices.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The favorable factor contributing
to the reduction in cost as a percent of sales is as follows:



| | · |  | Lease Reserves:    The Company is contingently liable on leases for various properties and retail stores. Lease reserves have been established for certain of these
properties and retail stores that are not currently utilized for operations. These reserves are adjusted for changes in estimated vacancy periods and projected sublease income. There were no lease reserve expenses for the 2005 period, while lease
reserve expenses were $1.6 million for the 2004 Period, resulting in a decrease in expenses of $1.6 million, or 0.2% of net sales.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Insurance Segment:    Distribution, selling and administrative expenses for the Insurance segment were $1.8 million for the 2005 and 2004 Periods.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | All Other:    Distribution, selling and administrative expenses for the Companys All Other business activities for the 2005 Period were $0.3 million
compared to $0.1 million for the 2004 Period. The Companys finance subsidiary expenses increased $0.2 million compared to the 2004 Period due to non-recurring favorable loan collection activities on previously reserved accounts that occurred
in the 2004 Period, resulting in a reduction of expenses that was not repeated in the 2005 Period.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest.    Interest expense was $3.9 million and $4.8 million and comprised 0.5% and 0.6% of consolidated net sales for the 2005 and 2004
Periods, respectively. Interest expense on the Companys primary debt instruments declined $0.7 million over the 2004 Period related primarily to a reduction in weighted average borrowings.



| | · |  | Weighted Average Borrowings:    Interest expense declined $0.6 million over the 2004 Period due to a reduction in the Companys weighted average borrowings. Weighted
average borrowings were reduced by $42.1 million due to improved cash flow from operations, working capital improvements and the Companys Equity Enhancement Program (see Equity Enhancement Plan below).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | Interest Rates:    Interest expense declined $0.1 million over the 2004 Period due to a reduction in the average borrowing rate for the Companys
revolving line of credit. The Companys average borrowing rate for the combined primary debt, made up of the revolving line of credit and senior secured notes, was 6.0% for both the 2005 and 2004 Periods. Several offsetting factors contributed
to the stable interest rates. First, the Company realized a reduction in its interest rate margin over the base borrowing rate on its revolving line of credit due to achieving certain financial results. Second, the base borrowing rate on the
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | revolver increased over the 2004 Period, partially offsetting the reduction in margin. Third, reductions in borrowings on the lower interest revolver compared to the
senior notes resulted in a higher average borrowing rate. The Company believes it will be able to sustain the financial performance measures required to maintain the current interest rate margins.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys borrowings on its revolving credit agreement are subject to market
rate fluctuations. A 25 basis point change in the market rate of interest over the period would have resulted in a $0.1 million increase or decrease in corresponding interest expense.



Changes in secondary debt instruments resulted in a $0.2 million decrease in expense in the 2005 Period as compared to the 2004 Period.



Estimated patronage dividends.    Estimated patronage dividends for
the 2005 Period were $8.2 million, compared to $5.1 million in the 2004 Period, an increase of 61.3%. Patronage dividends for the 2005 Period consisted of the patronage earnings from the Companys three patronage earnings divisions: the
Southern California Dairy Division, the Pacific Northwest Dairy Division and the Cooperative Division. For the 2005 and 2004 Periods, respectively, the Company had patronage earnings of $2.5 million and $2.9 million in the Southern California Dairy
Division, $0.1 million and $0.1 million in the Pacific Northwest Dairy Division and $5.6 million and $2.1 million in the Cooperative Division.



Income taxes.    The Companys effective income tax rate was 28.3% for the 2005 Period compared to 38.0% for the 2004 Period. During the
first quarter of 2005, the Company recognized a $0.4 million tax benefit with respect to a dividends received deduction. The Company estimates that its effective tax rate will be 37% to 38% for the remainder of fiscal 2005.



LIQUIDITY AND CAPITAL RESOURCES



The Company finances its capital needs through a combination of internal and external sources. These sources include cash from operations, Member
investments, bank borrowings, various types of long-term debt and lease financing. The Company believes that the combination of cash flows from operations, current cash balances, its equity enhancement plan, and available lines of credit, will be
sufficient to service its debt and to meet its anticipated needs for working capital and capital expenditures through at least fiscal 2005.



CASH FLOW



The positive impact of working capital initiatives implemented in fiscal 2003 continued into the 2005 Period. As a result, the Company continued to generate positive cash flow from operations, which was used during the 2005 Period for
investing and financing activities, including increased long-term notes receivable, payment of long-term debt and redemption of Member shares. As a result, net cash consisting of cash and cash equivalents increased by $3.8 million to $47.2 million
for the 2005 Period compared to $43.4 million as of the fiscal year ended October 2, 2004.



The following table summarizes the impact of operating, investing and financing activities from operations, and cash utilized for discontinued operations, on the Companys cash flows for the 2005 and 2004 Periods:



|                                                       |  |      |        |   |      |   |        |            |  |   |         |  
|------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---------- |  | - | ------- | -
|(dollars in thousands)                                 |  |      |        |   |      |   |        |            | 
|Summary of Net Increase (Decrease) in Total Cash Flows |  | 2005 |        |   | 2004 |   |        | Difference | 
|Cash provided by operating activities                  |  | $    | 16,440 |   |      | $ | 32,083 |            |  | $ | (15,643 | )
|Cash utilized by investing activities                  |  |      | (8,956 | ) |      |   | (6,130 | )          |  |   | (2,826  | )
|Cash utilized by financing activities                  |  |      | (3,595 | ) |      |   | (534   | )          |  |   | (3,061  | )
|                                                       | 
|Net increase (decrease) in cash flows from operations  |  |      | 3,889  |   |      |   | 25,419 |            |  |   | (21,530 | )
|Cash utilized by discontinued operations               |  |      | (87    | ) |      |   | (2,356 | )          |  |   | 2,269   |  
|                                                       | 
|Total increase (decrease) in cash flows                |  | $    | 3,802  |   |      | $ | 23,063 |            |  | $ | (19,261 | )
|                                                       | 



Net cash generated from operating, investing and
financing activities decreased by $21.5 million to $3.9 million for the 2005 Period compared to $25.4 million for the 2004 Period. The decrease in net cash for the 2005 Period consisted of a reduction in cash provided from operating activities of
$15.6 million (due primarily to a reduction in accounts payable) in addition to increased amounts used in investing activities of $2.8 million and financing



23



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activities of $3.1 million. Cash used by discontinued operations was reduced to $0.1 million for the 2005 Period compared to $2.4 million for the 2004 Period (see Note
2 of Notes to Consolidated Condensed Financial Statements). Working capital was $97.7 million and $98.4 million and the current ratio was 1.3 at January 1, 2005 and October 2, 2004, respectively.



Operating Activities:    Net cash provided by operating activities
decreased by $15.6 million to $16.4 million for the 2005 Period compared to $32.0 million for the 2004 Period. The decline in cash provided by operating activities compared to the 2004 Period was attributable to the impact of working capital
management initiatives implemented in fiscal 2003 that continued to further benefit the 2005 Period, but at a reduced amount as the Company approached desired levels. The Company continues to make improvements in reducing its inventory and accounts
receivable levels; however, future working capital reductions are not expected to be as pronounced as was experienced in the 2004 and 2003 Periods. During the 2005 Period, the Company experienced positive cash flows as a result of a decrease in
inventories of $13.6 million; subsequently, this cash was used to reduce accounts payable and accrued liabilities by $9.2 million.



Investing Activities:    Net cash used in investing activities increased by $2.8 million to $8.9 million for the 2005 Period compared to $6.1
million utilized in the 2004 Period. The increase in cash used for investing activities during the 2005 Period as compared to the 2004 Period was due mainly to increased long-term notes receivable of $4.8 million, reflecting an increase in new loans
to Members by the Companys Cooperative Division and financing subsidiary, as well as increases in net investments of $0.6 million by the Companys insurance subsidiaries, consisting of the purchase and sale of securities to replace
maturing investments in its portfolio. This $5.4 million increase in cash utilized was partially offset by reduced capital expenditures of $1.1 million and reduced expenditures for other assets of $1.5 million. 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 $3.6 million for the 2005 Period compared to $0.5 million for the 2004 Period. Increased cash used by
financing activities for the 2005 Period as compared to the 2004 Period reflects $4.1 million in cash used to reduce existing short-term and long-term debt, in addition to $1.4 million in cash used to redeem Member shareholdings. This was partially
offset by non-recurring payments for deferred financing fees of $2.6 million which occurred in the 2004 Period. Cash used by financing activities is expected to be funded by the Companys improved operating cash flow, lower working capital and
the positive impact of the Equity Enhancement Plan to meet operating and capital spending requirements.



Equity Enhancement Plan



In fiscal 2002, the Company implemented the first part of an equity enhancement plan designed to build equity in the Company for future investment in the business and other infrastructure improvements. In fiscal 2002, a portion
of the patronage dividend was retained in the form of patronage dividend certificates that mature in 5 years. 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. Class E Shares were issued as part of the patronage dividends issued in fiscal years 2004 and
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 cash received from the increased Class A Share requirement is expected to continue the improvement in Member capital in future years.



Bank Credit Facility



The Company refinanced its $200.0 million revolving credit agreement in fiscal 2004 with a new $225.0 million revolving credit agreement. The new
expanded facility, combined with borrowing levels under the new facility of $83.0 million at January 1, 2005, increases the availability of capital accessible by the Company.



Discontinued Operations



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 for discontinued operations was approximately $0.1 million and $2.4 million in the 2005 Period and 2004 Period, respectively.



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Off-Balance Sheet Arrangements



As of the date of this report, with the exception of the transaction disclosed in Note 4 of Notes to Consolidated Condensed Financial Statements, the Company does not participate
in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.



CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS



At
January 1, 2005, the Company was contingently liable with respect to 14 lease guarantees for certain Members 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 Members and standby letters of credit to certain vendors. Accordingly, with respect to the third-party loan guarantees, the Company would be required to pay these obligations in the event of default by the Member. The Company would only be
obligated under the standby letters of credit to the extent of any amount utilized by the vendor.



During fiscal 2004, the Company entered into a lease guarantee with one of its Members. The guarantee has a ten-year term, and as of January 1, 2005 and October 2, 2004, the maximum potential amount of future payments that the Company could
be required to make as a result of the Members non-payment of rent is approximately $3.0 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 January 1, 2005 and October
2, 2004, represents the premium receivable from the Member 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.



The Companys contractual obligations and commercial commitments at January 1, 2005 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                                                  |  | $                      | 97,437  |                 | $ | 6,011     |  | $         | 13,508 |                  | $ | 77,918  |  | $ |      
|Revolving lines of credit                                             |  |                        | 83,000  |                 |   |          |  |           |       |                  |   | 83,000  |  |   |      
|Operating lease obligations                                           |  |                        | 142,214 |                 |   | 24,647    |  |           | 51,219 |                  |   | 20,778  |  |   | 45,570
|Capital lease obligations                                             |  |                        | 435     |                 |   | 214       |  |           | 221    |                  |   |        |  |   |      
|Other long-term obligations                                           |  |                        | 12,876  |                 |   | 2,840     |  |           | 10,036 |                  |   |        |  |   |      
|Secured borrowings to banks, including standby repurchase obligations |  |                        | 669     |                 |   | 351       |  |           | 318    |                  |   |        |  |   |      
|Projected interest on contractual obligations                         |  |                        | 30,200  |                 |   | 8,363     |  |           | 14,505 |                  |   | 7,332   |  |   |      
|                                                                     
|Total contractual cash obligations                                    |  | $                      | 366,831 |                 | $ | 42,426    |  | $         | 89,807 |                  | $ | 189,028 |  | $ | 45,570
|                                                                     



|                             |  |                        |        |                 |   |           |  |           |        |                   |   |       |  |   |      
|---------------------------- |  | ---------------------- | ------ | --------------- | - | --------- |  | --------- | ------ | ----------------- | - | ----- |  | - | -----
|(dollars in thousands)       |  |                        |        |                 |   |           |  |           |        |                  
|                             |  | Payments due by period
|Other Commercial Commitments |  | Total                  |        | Less than1 year |   | 1-3 years |  | 4-5 years |        | More than 5 years
|Standby letters of credit    |  | $                      | 8,173  |                 | $ | 8,173     |  | $         |       |                   | $ |      |  | $ |     
|Lease and loan guarantees    |  |                        | 25,013 |                 |   | 4,871     |  |           | 13,558 |                   |   | 3,002 |  |   | 3,582
|                            
|Total commercial commitments |  | $                      | 33,186 |                 | $ | 13,044    |  | $         | 13,558 |                   | $ | 3,002 |  | $ | 3,582
|                            



The projected interest component on the
Companys contractual obligations was estimated based on the prevailing or contractual interest rates for the respective obligations over the period of the agreements.



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OUTSTANDING DEBT AND OTHER FINANCING ARRANGEMENTS



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



|                                                                                                                                                                                                                                         |  |                |         |                |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | -------------- | - | -------
|(dollars in thousands)                                                                                                                                                                                                                   |  |                |         |               
|                                                                                                                                                                                                                                         |  | January 1,2005 |         | October 2,2004
|Senior secured notes expiring April 1, 2008, (interest rate of 7.72% at January 1, 2005 and October 2, 2004); approximately $865 principal and interest
payable monthly through April 1, 2008, remaining $36.0 million due April 1, 2008 |  | $              | 56,503  |                | $ | 57,409 
|                                                                                                                                                                                                                                         |  |               
|Senior secured notes expiring October 1, 2009, payable monthly, interest only (interest rate of 8.71% at January 1, 2005 and October 2,
2004)                                                                                            |  |                | 40,934  |                |   | 40,984 
|                                                                                                                                                                                                                                         |  |               
|Notes to banks under secured revolving credit agreement expiring December 5, 2007, interest rate at the lenders base rate plus 0. 50% or
adjusted LIBOR (2.23% plus 1.50% at January 1, 2005 and 1.34% plus 1.50% at October 2, 2004)   |  |                | 83,000  |                |   | 88,000 
|                                                                                                                                                                                                                                         |  |               
|Secured borrowings to banks, collateralized by member loans receivable, repayment based on terms of underlying collateral                                                                                                                |  |                | 669     |                |   | 765    
|                                                                                                                                                                                                                                         |  |               
|Redemption subordinated notes, payable in twenty quarterly installments plus interest at 6.0%                                                                                                                                            |  |                | 481     |                |   | 751    
|                                                                                                                                                                                                                                         |  |               
|Capital investment notes (subordinated), interest at 5.0%, maturity dates through 2007                                                                                                                                                   |  |                | 12,395  |                |   | 12,616 
|                                                                                                                                                                                                                                         |  |               
|Obligations under capital leases                                                                                                                                                                                                         |  |                | 435     |                |   | 808    
|                                                                                                                                                                                                                                        
|Total notes payable                                                                                                                                                                                                                      |  |                | 194,417 |                |   | 201,333
|Less portion due within one year                                                                                                                                                                                                         |  |                | 9,416   |                |   | 9,639  
|                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                         |  | $              | 185,001 |                | $ | 191,694
|                                                                                                                                                                                                                                        



The Company had a total of $97.4 million and
$98.4 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 January 1, 2005 and October 2, 2004,
respectively. During fiscal 2004, the interest rate on these notes was reduced 25 basis points as a result of the Company achieving improved performance in fiscal 2003.



In addition, the Company has a $225.0 million secured revolving credit facility (Revolving Credit Agreement) with a group of banks for
which Harris Trust and Savings Bank is serving as Administrative Agent. The 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 Revolving Credit Agreement permits advances of up to 85% of eligible accounts receivable and 65% of eligible
inventories. The Revolving Credit Agreement is collateralized by the accounts receivable and inventories of the Company and certain subsidiaries. The Company had $83.0 million and $88.0 million outstanding under the Revolving Credit Agreement at
January 1, 2005 and October 2, 2004, respectively.



The 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 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 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
the event the Company is not in compliance with the financial



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covenants of the Revolving Credit Agreement and the Senior Note Agreement, the continued availability of loan funds or the terms upon which such loans would be
available could be negatively impacted, and the impact to the Company could be material. As of January 1, 2005, the Company was in compliance with all applicable covenants of its Revolving Credit Agreement and Senior Note Agreement.



A $10.0 million credit agreement with a third party bank 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 Members 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, which was amended and restated in fiscal 2004, matures on June 9, 2007. Amounts advanced under the credit agreement bear interest at prime (5.25% and 4.75%) or
Eurodollar (2.56% and 2.01%) plus 2.25% at January 1, 2005 and October 2, 2004, respectively. 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
no borrowings outstanding at January 1, 2005 or October 2, 2004.



Member loan receivables
are periodically sold by GCC to the third party bank through a loan purchase agreement. This loan purchase agreement, which was amended and restated in fiscal 2004, matures on June 9, 2007. Total loan purchases under the agreement are limited to a
total aggregate principal amount outstanding of $70.0 million. The loan purchase agreement does not qualify for sale treatment pursuant to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities and, accordingly, the Company accounts for the transfer of these financial assets as a secured borrowing with a pledge of collateral. The aggregate amount of secured borrowings with the third party bank was $0.7 million and
$0.8 million at January 1, 2005 and October 2, 2004, respectively. The pledged collateral included in current notes receivable was $0.4 million and $0.4 million and non-current amounts were $0.3 million and $0.4 million at January 1, 2005 and
October 2, 2004, respectively. The notes receivable generally bear interest at rates averaging prime plus 2.00%, are paid monthly and have maturity dates ranging from 2005 to 2007.



On September 27, 1999, the Company merged with United Grocers, Inc. (United), a grocery cooperative headquartered in Milwaukie, Oregon
(the Merger). Pursuant to the Merger, Unified agreed to repurchase excess Class B Shares held by former shareholders of United that were received in the Merger and tendered for redemption prior to January 28, 2001. The price paid for the
excess Class B Shares was the book value as of April 2, 1999 of the shares of the Companys common stock for which the excess Class B Shares were exchanged in the Merger. The Company purchased such shares by issuing notes referred to as
redemption subordinated notes, which are payable in twenty equal quarterly principal installments and bear interest at 6% per year. During the thirteen weeks ended January 1, 2005, the Company paid $0.3 million on the notes.



The Companys capital investment notes are serialized, have a minimum interest rate of 5% and
mature ten years from the date of issuance. The notes are subordinated and have maturity dates through 2007. The notes originated with United and were assumed as part of the Merger. The Board at its discretion may change the interest rate above the
minimum rate. The Company, while not obligated to do so, considers requests for redemption of these notes prior to maturity.



The Company has also guaranteed certain loans made directly to Members by third-party lenders. At January 1, 2005 the maximum principal amount of these guarantees was $0.1 million.
Member loans, provided by the Company and third parties, are generally secured with collateral, which usually consists of personal and real property owned by Members and personal guarantees of Members.



PATRON DEPOSITS AND PATRONAGE DIVIDENDS



Members are required to meet specific Member capitalization requirements, which include capital stock
ownership and may include required cash deposits. In addition, each Member must meet minimum purchase requirements that may be modified at the discretion of the Companys Board of Directors (the Board). Unified currently requires
each Member to hold Class B Shares having an issuance value equal to approximately twice the amount of certain of the Members average weekly purchases, except for meat and produce that are subject to a one week requirement (the Class B
Share requirement). If purchases are not made weekly, the average weekly purchases are based on the number of weeks actually purchased. The Class B Share requirement is determined twice a year, at the end of the Companys second and
fourth fiscal quarters, based on the Members purchases from the Cooperative Division during the preceding four quarters.



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In October 2004, the Board approved certain modifications to the Class B Share requirement, effective as of March 31, 2005.
The purpose of the new plan is to encourage Member growth by offering a reduced requirement if certain qualifications are met and to provide a cap on the investment requirement at certain volume levels. The Standard Class B Investment requirement
(SBI) is twice the amount of certain average weekly purchases, except for meat and produce, which are one times average weekly purchases. Members may apply for a Reduced Class B Investment (RBI), which requires Members to pay
for their purchases electronically on the current due date and demonstrate credit worthiness. The RBI is based on a sliding scale such that additional purchase volume marginally reduces the requirement as a percentage of purchase volume. Members who
do not apply for the RBI would remain on the SBI. These modifications are scheduled to be effective with the second quarter fiscal 2005 recalculation of the Class B Share requirement.



In accordance with the Companys Bylaws, Members must satisfy their Class B Share requirement entirely through the holding of Class B Shares by
the end of the sixth year of membership. New Members may satisfy their Class B Share requirement over the five consecutive fiscal years commencing with the first year after admission as a Member at the rate of 20% per year if a subordinated cash
deposit (Required Deposit) is maintained. Periodically, Members with deposit deficiencies will be allowed to build the minimum cash deposit requirement over time, typically a 26-week period that is billed to the Member. Members may also
maintain deposits with Unified in excess of such required amounts. Unified pays no interest on Required Deposits. However, interest is paid at the prime rate for cash deposits in excess of the Members Required Deposit. All such deposits of a
Member are maintained in the Members deposit account.



Former United members who
did not have sufficient amounts in their deposit accounts immediately following the Merger were provided with alternatives to eliminate the deficiency over time. The requirement for a Member to maintain the subordinated deposit account may be
eliminated if the Member holds sufficient Class B Shares to satisfy the Class B Share requirement. This is accomplished by acquiring and holding Class B Shares with initial issuance values equal in the aggregate to the dollar value of the Class B
Share requirement. The initial issuance value of Class B Shares is equal to the purchase price for the shares, which fluctuates.



Members are required to execute subordination agreements providing for the pledging of their Required Deposit accounts to Unified and the subordination of the Members right
to repayment of their Required Deposit to the prior payment in full of senior indebtedness of Unified.



Upon request, the Company will return to Members the amount of the cash deposit that is in excess of the Required Deposit amount (Excess Deposits) provided that the Member is not in default of any of its obligations
to Unified. Members may have cash in their deposit accounts that exceed the required amounts if the Members purchases during the period when the Required Deposit amount is determined to have declined from the previous measuring period or the
Members have received cash patronage dividends, which are deposited into the Members deposit accounts. If membership status is terminated, Members are entitled to have their cash deposits returned, less amounts owed to Unified. Any shares held
by such withdrawing Member are subject to repurchase as described under Redemption of Capital Stock. In all cases, a return of that portion of the Members cash deposits that consists of Required Deposits will be governed by the
applicable subordination provisions and will be returned only to the extent permitted by the subordination provisions. In addition, a withdrawing Member is entitled to recover Required Deposits in excess of its obligations to Unified if permitted by
the applicable subordination provisions.



Unifieds obligation to repay
Members Required Deposit accounts on termination of Member status (once the Members obligations to Unified have been satisfied) is reported as a long-term liability on Unifieds consolidated condensed balance sheets. Excess Deposits
are not subordinated to Unifieds other obligations and are reported as short-term liabilities on Unifieds consolidated condensed balance sheets. At January 1, 2005 and October 2, 2004, Unified had $16.7 and $12.8 million, respectively,
in Patrons required deposits and $18.4 and $12.9 million, respectively, in Patrons excess deposits and estimated patronage dividends (of which $11.6 and $10.1 million, respectively, represented excess cash
deposits as previously defined).



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 Members. For fiscal 2002, patronage dividends for the Cooperative Division were paid in Class B Shares and patronage dividend
certificates (Patronage



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Certificates). Patronage Certificates have a term of five years and an interest rate approximating the five-year treasury rate as such rate exists at fiscal year
end, and such rate is to be adjusted annually thereafter to approximate the same benchmark interest rate on each anniversary of the fiscal year end.



In fiscal 2003, the Company issued $3.3 million of Patronage Certificates as a portion of its patronage dividends for fiscal 2002. These Patronage Certificates are included in
subordinated patronage dividend certificates in the accompanying consolidated 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 2004 and 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.



For fiscal 2004 and 2003, patronage dividends in the Cooperative Division were paid to Members in the
form of:



| | · |  | Class B Shares to the extent of any deficiency in the Member meeting its Class B Share requirement; and
| | - |  | -------------------------------------------------------------------------------------------------------



| | · |  | Class E Shares for the balance of the patronage dividend due to the Member.
| | - |  | ---------------------------------------------------------------------------



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,
and any Class B Shares in excess of the Class B Share requirement (Excess Class B Shares) held by a current Member, whether or not the shares have been tendered for repurchase. The repurchase of Class A Shares, Class B Shares or Class E
Shares is solely at the discretion of the Board. 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. After ten years, the holder may request that Unified, at the sole discretion of the Board, repurchase Class E Shares, even if the membership of the holder has not terminated. The shares, when redeemed, will be redeemed at stated value.



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.



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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 October 22, 2004, the Company repurchased 71 shares of the Companys Class B Shares that had
been tendered and were pending redemption. The Company paid approximately $0.01 million to redeem the shares. On December 15, 2004, the Board authorized the repurchase on December 30, 2004 of 3,100 shares of the Companys Class A Shares and
24,174 shares of the Companys Class B Shares that had been tendered and were pending redemption. The Company paid approximately $0.5 million and $4.3 million, respectively, to redeem the shares.



On December 20, 2004, the Company retired 7,799 of its Class B Shares (with an approximate value of
$1.2 million) formerly owned by SavMax Foods, Inc. (SavMax), a wholly-owned subsidiary of the Company, whose operations were discontinued effective September 28, 2002. The authority for such retirement was broadly provided on September
25, 2002, when the Board approved the Companys exit of its retail operations. The retirement of SavMaxs ownership of the Class B Shares of the Company is one of the final steps necessary to complete dissolution of this subsidiary.



PENSION AND POSTRETIREMENT BENEFIT PLANS



The Companys employees participate in a cash balance pension plan (Benefit Plan)
sponsored by the Company. The Benefit Plan is a noncontributory defined benefit pension plan covering substantially all employees of the Company who are not subject to a collective bargaining agreement. Under the Benefit Plan, participants are
credited with an annual accrual based on years of service with the Company. The Benefit 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 Benefit 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 Benefit 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. Depending on when the officer became a participant in the ESPP II, final salary is defined as the
highest compensation of the last three years preceding employment separation or the average of the highest five years of compensation out of the last ten years preceding employment separation. Funds are held in a rabbi trust for the ESPP II
consisting primarily of life insurance policies reported at cash surrender value. In accordance with EITF No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust, the assets and
liabilities of a rabbi trust must be accounted for as if they are assets and liabilities of the Company. The assets held in the rabbi trust are not available for general corporate purposes.



The Company accounts for its Benefit Plan and ESPP II 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 condensed 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 8.50%. 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 0.50% (from 8.50% to 8.00%) would have increased its projected pension expense for fiscal 2005 by approximately $0.3 million.



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The discount rate that was utilized for determining the Companys fiscal 2004 pension obligation and projected fiscal 2005 net
periodic benefit cost was selected to reflect the rates of return currently available on high quality fixed income securities whose cash flows (via coupons and maturities) match the timing and amount of future benefit payments of the plan. Bond
information was provided by a recognized rating agency for all high quality bonds receiving one of the two highest ratings. As a result of this modeling process, the discount rate was increased from 6.00% at June 30, 2003 to 6.25% at June 30, 2004.



Assuming a long-term rate of return on plan assets of 8.50%, a discount rate of 6.25%
and certain other assumptions, the Company estimates that its combined pension expense for the Benefit Plan and ESPP II for fiscal 2005 will be approximately $5.7 million. 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 increase the
Companys projected fiscal 2005 pension expense for the Benefit Plan and ESPP II by approximately $0.1 million.



The Companys net periodic benefit cost for its combined pension and other postretirement benefits was approximately $2.7 million for the thirteen-week period ended January 1,
2005 compared to $2.6 million for the thirteen-week period ended December 27, 2003.



During fiscal 2004, the Company contributed $4.2 million to the Benefit Plan and ESPP II for the 2003 plan year. At this time, the Company expects to make contributions of $4.7 million in fiscal 2005 for the 2004 plan year, which will be
due by September 15, 2005. Due to changes prescribed by the Pension Funding Equity Act of 2004, which changed the interest rate used to calculate the funded current liability percentage (FCLP) as of January 1, 2003, the Company is not
required to make quarterly contributions to the Benefit Plan for the 2004 plan year. For the 2005 plan year, however, due to a FCLP rate below 100% at January 1, 2004, the Company is required to make contributions on a prescribed quarterly basis.
Therefore, commencing April 15, 2005, the Company expects to make contributions of $918,000 per quarter for the 2005 plan year. Subsequent to April 15, 2005, additional contributions will be due July 15, 2005, October 15, 2005 and January 15, 2006.
The Company made no contributions to the plans during the thirteen weeks ended January 1, 2005.



At January 1, 2005, the fair value of the benefit plan assets increased to $72.5 million from $66.1 million at October 2, 2004.



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.



Assuming a discount rate of 6.25% and certain other assumptions, the Company estimates that postretirement expense for fiscal 2005 will be approximately $5.2 million. Future postretirement expense will be affected by discount
rates and other variables such as expected rate of compensation increases and projected health care trend rates.



RISK FACTORS



The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that the Company currently deems immaterial also may impair the Companys
business operations. If any of the following risks occur, the Companys business, prospects, financial condition, operating results and cash flows could be adversely affected in amounts that could be material.



Unifieds management deals with many risks and uncertainties in the normal course of business.
Readers 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 an adverse effect on the Companys business, results of operations and financial
position.



The markets in which we operate are highly
competitive.    The wholesale food distribution and retail grocery industries are highly competitive and characterized by high volume and low profit margins. The shifting of market share among competitors is typical of
the wholesale food business as competitors attempt to increase sales in



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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 customers 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 supermarket operators, including some
independent operators, many of who are the Companys customers. The market share of such alternative format stores is expected to grow in the future.



Increased industry competitive pressure is causing some of the Companys Members that can qualify to purchase directly from suppliers to increase their level of direct
purchases from suppliers and expand their self-distribution activities. The Companys operating results could be adversely affected if a significant reduction in distribution volume occurred in the future.



Continued consolidation in the industry, consolidation 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 11, 2003, members of the United Food and Commercial Workers union (UFCW) in
Southern California went on strike against one of the areas large grocery retail chains. At the time of the strike, the retailers other two bargaining partners agreed to lock out workers until a contract settlement was reached. As a
result of the strike, which was settled on February 26, 2004, the Company experienced higher sales during the first and second quarters of fiscal 2004 as some consumers began patronizing independent retailers rather than the larger grocery retail
chains targeted by the strike. Following the resolution of the strike, the Company experienced a reduction in sales from the strike volume levels as consumers returned to their prior shopping patterns. The Company experienced a mixed result
following the strike, as some retailers were able to retain new patrons gained during the strike, while other retailers volume returned to more normalized levels. Due to the many factors involved, an exact measurement of benefit from the
additional volume and sales retained following the strike cannot be precisely determined.



We are vulnerable to changes in general economic conditions.    The Company is affected by certain economic factors that are beyond its control including inflation. An inflationary economic period could
impact the Companys operating expenses in a variety of areas, including, but not limited to, employee wages, benefits and workers compensation insurance, as well as energy and fuel costs. A significant portion of the Companys debt
is at floating interest rates and an inflationary economic cycle typically results in higher interest costs. The Company operates in a highly competitive marketplace and passing on such cost increases to customers could be difficult.



Changes in the economic environment could adversely affect Unifieds 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 inflationary 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 for 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.



The Company holds investments in the
common and preferred stock of certain Members. These investments are held at cost or the equity method and are periodically evaluated for impairment. As a result, changes in the economic environment that adversely affect the business of these
Members could result in the write-down of these investments.



We will continue to
be subject to risk of loss of member volume.    We will continue to be subject to the risks associated with consolidation within the grocery industry. When independent retailers are acquired by large chains with
self-distribution capacity, are driven from business by larger grocery chains, or become large enough to



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develop their own self-distribution system, we will lose distribution volume. Members may also select other wholesale providers. Reduced volume is normally injurious
to profitable operations since fixed costs must be spread over a lower sales volume.



Litigation could lead to unexpected losses.    During the normal course of carrying out its 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 the exposure can be reasonably estimated, appropriate reserves are recorded at that time pursuant to Statement of Financial Accounting Standards (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.



We are subject to environmental laws and
regulations.    The Company owns and operates various facilities for the manufacture, warehousing and distribution of products to its customers. 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 compliance with all such laws
and regulations and has established reserves for known and anticipated costs of remediation.



We are exposed to potential product liability claims.    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.



Our
insurance reserves may be inadequate if unexpected losses occur.    The Companys insurance subsidiaries are regulated by the State of California and are subject to the rules and regulations promulgated by the
appropriate regulatory agencies. In addition, the Company is self insured for workers compensation up to $300,000 per incident and maintains appropriate reserves to cover anticipated payments. Insurance reserves are recorded based on estimates made
by management and validated by third party actuaries to ensure such estimates are within acceptable ranges. Actuarial estimates are based on detailed analyses of health care cost trends, mortality rates, claims history, demographics, industry trends
and federal and state law. As a result, the amount of reserve and related expense is significantly affected by the outcome of these studies. Although the Company believes its reserves to be adequate, significant and adverse changes in the experience
of claims settlement and other underlying assumptions could negatively impact operating results.



We may not have adequate resources to fund our operations.    The Company relies primarily upon cash flow from its operations and Member investments 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 to fund its daily operating activities. Our Revolving Credit Agreement,
which expires on December 5, 2007, requires compliance with certain financial covenants, including minimum tangible net worth, fixed charge coverage ratio and total funded debt to earnings before interest, taxes, depreciation, amortization and
patronage dividends (EBITDAP). While the Company is currently in compliance with all required covenants and expects to remain in compliance, this does not guarantee the Company will remain in compliance in future periods.



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The Companys 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 January 1, 2005, the Company believes it has sufficient cash flow from operations and availability under the Revolving Credit Agreement to meet operating needs and capital spending
requirements through fiscal 2005. However, if access to operating cash or to the 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. Consequently, the inability to access alternate sources of cash on terms similar to its existing agreement could adversely affect the Companys operations.



The value of our benefit plan assets and liabilities is based on estimates and assumptions, which
may prove inaccurate.    The Companys employees participate in Company sponsored defined pension and postretirement benefit plans. Officers of the Company also participate in a Company sponsored ESPP II, which
provides additional 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, which
require the Company to make actuarial assumptions that are used to calculate the carrying value of the related assets, where applicable, 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 and anticipated salary increases. While we believe 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.



A system failure or breach of system or network security could delay or interrupt services to our customers or subject us to significant
liability.    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 disruptions to the business that could have a material adverse effect on the Companys results of
operations.



We risk losses due to natural disasters and similar
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. In addition, 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 Members.



Our business is vulnerable to disruption by terrorist
activities.    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 Members and could also have an adverse effect on the Companys
operations and financial results.



Our success depends on our retention of our
executive officers, senior management and our ability to hire and retain additional key personnel.    The Companys success depends on the skills, experience and performance of its executive officers, senior
management and other key personnel. The loss of service of one or more of its executive officers, senior management or other key employees could have a material adverse effect on the Companys business, prospects, financial condition, operation
results and cash flows. The Companys future success also depends on its continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for these personnel is intense, and there can be no
assurance that the Company can retain our key employees or that it can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future.



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The successful operation of our business depends upon the supply and marketing relationships from other
companies.    The Company depends upon third parties for supply of products and raw materials. Any disruption in the services provided by any of these suppliers, or any failure by them to handle current or higher volumes
of activity, could have a material adverse effect on the Companys business, prospects, financial condition, operating results and cash flows.



The Company participates in various marketing and promotional programs to increase sales volume and reduce merchandise costs. Failure to continue these relationships on terms that
are acceptable to Unified, or to obtain adequate marketing relationships could have a material adverse effect on the Companys business, prospects, financial condition, operating results and cash flows.



Increased energy, diesel fuel and gasoline costs could reduce our
profitability.    The Companys operations require and are dependent upon the continued availability of substantial amounts of electricity, diesel fuel and gasoline to manufacture, store and transport products. The
Companys trucking operations are extensive and diesel fuel storage capacity represents approximately two weeks average usage. The prices of electricity, diesel fuel and gasoline fluctuate significantly over time. Given the competitive nature
of the grocery industry, the Company may not be able to pass on increased costs of production, storage and transportation to the customers. As a result, either a shortage or significant increase in the cost of electricity, diesel fuel or gasoline
could disrupt distribution activities and negatively impact our business and results of operations.



Strike or work stoppage by our union employees could disrupt our business.    Approximately 62% of Unifieds employees are covered by collective bargaining agreements, some of which are
due to expire in fiscal 2005. The inability to negotiate acceptable contracts with the unions could result in a strike or work stoppage and increased operating costs resulting from higher wages or benefits paid to union members or replacement
workers. Such outcome could have a material negative impact on the Companys operations and financial results.



If we fail to maintain an effective system of internal controls, we may not be able to detect fraud or report our financial results accurately, which could harm our business
and we could be subject to regulatory scrutiny.    Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), Unified will be required, beginning in its fiscal year 2005, to perform an evaluation
of the Companys internal controls over financial reporting and have the Companys independent registered public accounting firm test and evaluate the design and operating effectiveness of such internal controls and publicly attest to such
evaluation. The Company has prepared an internal plan of action for compliance with the requirements of Section 404, which includes a timeline and scheduled activities, although as of the date of this filing the Company has not yet completed its
effectiveness evaluation. Although the Company believes its internal controls are operating effectively, the Company cannot guarantee that it will not have any material weaknesses as reported by the Companys independent registered public
accounting firm. Compliance with the requirements of Section 404 is expected to be expensive and time-consuming. If the Company fails to complete this evaluation in a timely manner, or if the Companys independent registered public accounting
firm cannot timely attest to the Companys evaluation, the Company could be subject to regulatory scrutiny and a loss of public confidence in our internal controls. In addition, any failure to implement required new or improved controls, or
difficulties encountered in their implementation, could harm the Companys operating results or cause the Company to fail to meet its reporting obligations.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The preparation of the Companys consolidated condensed 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 condensed financial statements, the disclosure of contingent assets and
liabilities as of the date of the consolidated condensed financial statements and reported amounts of revenues and expenses during the year. The Company believes its estimates and assumptions are reasonable; however, future results could differ from
those estimates under different assumptions or conditions.



The Company believes the
following discussion addresses its most critical accounting policies, which are those that are most important to the portrayal of the Companys financial condition and results and requires managements most difficult, subjective and
complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Companys critical accounting policies and important accounting practices are described below.



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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. Certain of 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. Changes in state regulations may 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 projected workers compensation payouts totaled approximately $58.7 million as of January 1, 2005 and $57.1 million as of October 2, 2004.



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. The Companys trade and
short-term notes receivable, net was approximately $145.4 million and $140.8 million (including approximately $12.8 million and $5.2 million of short-term notes receivable) at January 1, 2005 and October 2, 2004, respectively. The Companys
long-term notes receivable, net was approximately $14.7 million and $14.3 million at January 1, 2005 and October 2, 2004, respectively. 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 a major customer 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 $2.5 million and $2.1 million at January 1, 2005 and October 2, 2004, respectively, and $0.9 million and $0.8 million for long-term notes receivable at January 1, 2005 and October 2, 2004, respectively. As a result
of the quasi-reorganization on September 28, 2002, the Companys accounts and notes receivable were adjusted to fair value.



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 terms 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. Favorable changes in economic conditions, leading to shorter vacancy
periods or higher than expected sublease rental commitments, could result in a reduction of the required reserves. The Companys lease reserves for all leased locations were approximately $12.8 million and $14.3 million as of January 1, 2005
and October 2, 2004, 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. 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.



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Goodwill and Intangible Assets.    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 37% of total sales at January 1, 2005. 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 $24.7 million at
January 1, 2005. Although the sales volume and customer base of the combined entity remains 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 and intangible assets for impairment
pursuant to SFAS No. 142, Goodwill and Other Intangible Assets, which provides that goodwill and other intangible assets with indefinite lives are not 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, impairment is indicated; and (2)
if impairment is indicated in the first step, it is measured by comparing the implied fair value of goodwill and intangible assets 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 in the
third quarter of each fiscal year. Accordingly, the Company tested its goodwill and noted no impairment for the fiscal quarter ended June 26, 2004. In addition to the annual impairment test required under SFAS No. 142, during fiscal 2005 and 2004,
the Company assessed whether events or circumstances occurred that potentially indicate that the carrying amount of these assets may not be recoverable. The Company concluded that there were no such events or changes in circumstances during 2005 and
2004 and determined that the fair value of the Companys reporting units was in excess of its carrying value as of January 1, 2005 and October 2, 2004. Consequently, no impairment charges were recorded in the first quarter of fiscal 2005 and
fiscal year 2004.



Long-lived Assets.    In accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, the Company assesses the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value may not be
recoverable. Recoverability is measured by comparing the carrying amount of an asset to expected future net cash flows generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized to the extent of the difference. SFAS No. 144 requires companies to separately report discontinued operations, including components of an entity that either have been disposed of (by sale, abandonment or in a distribution to owners) or
classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.



Factors that the Company considers important which could individually or in combination trigger an impairment review include the following:



| | · |  | Significant underperformance relative to expected historical or projected future operating results;
| | - |  | ---------------------------------------------------------------------------------------------------



| | · |  | Significant changes in the manner of the Companys use of the acquired assets or the strategy for our overall business; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| | · |  | Significant changes in our business strategies and/or negative industry or economic trend.
| | - |  | ------------------------------------------------------------------------------------------



If the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the above
indicators of impairment, the Company will measure any impairment based on a projected discounted cash flow method using a discount rate commensurate with the Companys estimated cost of capital.



On a quarterly basis, the Company assesses whether events or changes in circumstances occur that
potentially indicate the carrying value of long-lived assets may not be recoverable. The Company concluded that there were no such events or changes in circumstances during the first quarter of fiscal 2005 and fiscal year 2004.



Quasi-reorganization.    On September 25, 2002, the Companys
Board approved a plan to effect a quasi-reorganization as of 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 involves adjusting a companys assets and liabilities to their fair



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values. 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 fair value adjustments pursuant to quasi-reorganization accounting rules did not result in a net write-up of assets.



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 $8.8 million and $10.5 million in net deferred tax assets that are net of tax valuation allowances of $2.0 million at January 1, 2005 and October 2, 2004, respectively. Of the net deferred tax assets, $11.9
million and $11.9 million are classified as current assets in deferred income taxes and $3.1 million and $1.4 million are included in long-term liabilities, other in the accompanying consolidated balance sheets as of January 1, 2005 and October 2,
2004, 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 January 1, 2005 and concluded it is more likely than not that the
Company will not realize a portion of its net deferred tax assets. 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 ESPP II plan, 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 condensed 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 condensed
financial statements could differ if other assumptions are used.



The Company contributes
to collectively bargained, multi-employer defined benefit pension plans in accordance with the provisions of negotiated labor contracts. The amount of the Companys contribution is, in part, dependent upon the performance of the multi-employer
plans assets whose administration is not subject to control by the Company. Poor investment performance by the multi-employer plans could result in increased contributions required of all participating employers, including the Company, and
such amounts may be material.



Inventories.    Inventories are primarily comprised of merchandise purchased for resale and are stated at the lower of FIFO (first-in, first-out) cost or market. The Company provides for estimated inventory
losses between physical inventory counts based upon historical inventory losses as a percentage of sales. The provision is adjusted periodically to reflect updated trends of actual physical inventory count results.



Vendor Funds.    The Company receives funds from many of the vendors
whose products the Company buys for resale to its Members. These vendor funds are provided to increase the sell-through of the related products. The Company receives funds for a variety of merchandising activities: placement of vendors
products in the Members advertising; placement of vendors products in prominent locations in the Members stores; introduction of new products into the Companys distribution system and Members stores; exclusivity rights
in certain categories that have slower-turning products; and to compensate for temporary price reductions offered to customers on products held for sale at Members stores.



Vendor funds are reflected as a reduction of inventory costs or as an offset to cost incurred on behalf of the vendor for which the Company is being
reimbursed in accordance with Emerging Issues Task Force (EITF) Issue No. 02-16, Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor (EITF No. 02-16).



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Amounts due from vendors upon achievement of certain milestones, such as minimum purchase volumes, are accrued prior to the achievement of the milestone if the Company
believes it is probable the milestone will be achieved, and the amounts to be received are reasonably estimable.



Certain discounts and allowances negotiated by the Company on behalf of its members were required to be reclassified upon adoption of EITF Issue No. 03-10, Application of
Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers (EITF No. 03-10). Accordingly, for the quarter ended January 1, 2005, $23.2 million of such discounts and allowances were classified as a
reduction in cost of sales, and for the quarter ended December 27, 2003, $24.2 million of such consideration was reclassified as a reduction in cost of sales with a corresponding reduction in net sales. In addition, for the quarter ended January 1,
2005, $0.2 million was classified as a reduction in distribution, selling and administrative expenses, and for the quarter ended December 27, 2003, $0.1 million was reclassified as a reduction in distribution, selling and administrative expenses
with a corresponding increase in cost of sales. Comparable amounts for years prior to fiscal 2003 were not reclassified, as reclassification is not permitted under the transition guidance. The application of EITF 03-10 had no effect on earnings.



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.



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



Refer to Note 10 to Notes to Consolidated Condensed Financial Statements in Part I,
Item 1 of this quarterly report on Form 10-Q for managements discussion of recently issued accounting pronouncements and their expected impact, if any, on the Companys consolidated condensed financial statements.



ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The following discussion of the market risks the Company faces contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual
results could differ materially from those discussed in the forward-looking statements.



Unified 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 January 1, 2005 and the current market condition, a one percent increase in the applicable interest rates would decrease the Companys annual cash flow
and pretax earnings by approximately $0.8 million. Conversely, a one percent decrease in the applicable interest rates would increase annual cash flow and pretax earnings by $0.8 million.



With the adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the Companys investments in
convertible bonds were reclassified from available for sale securities to trading securities. As a result of changing the classification of the convertible bonds, the Company is subject to market risk associated with fluctuations in interest rates
and the market value of the embedded conversion feature.



The Company is exposed to
credit risk on accounts receivable through the ordinary course of business and the Company performs ongoing credit evaluations. Concentration of credit risk with respect to accounts receivables are limited due to the nature of our customer base
(i.e., primarily Members). The Company currently believes its allowance for doubtful accounts is sufficient to cover customer credit risks.



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ITEM 4.    CONTROLS AND PROCEDURES



Disclosure controls and procedures.Disclosure controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act,
such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls are also designed to reasonably assure that such
information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. 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.



At the end of the period covered by this report, Unifieds management, with the participation of
our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered in this report.



Changes in internal controls over financial reporting.Management,
with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated any changes in the Companys internal control over financial reporting that occurred during the most recent fiscal quarter. Based on
that evaluation, management, the Chief Executive Officer and the Chief Financial Officer of the Company have concluded that no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934) occurred during the thirteen weeks of our fiscal quarter ended January 1, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



The Company is a non-accelerated filer and is 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. The Company is currently in the documentation phase of its Section 404 compliance and will be required to comply with these
disclosure requirements for 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 (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 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. In the third quarter of 2004, the court permitted Value Recovery Group, L.P., as Assignee of



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the Federal Deposit Insurance Corporation, Receiver of Southern Pacific Bank (VRG) to join the action as a plaintiff. VRG asserts it was a creditor of HGS
at the time of HGS bankruptcy filing. In June 2004, Yee and VRG filed an amended complaint, continuing to assert claims similar to those described above. In their prayer for relief, the plaintiffs seek damages in an undetermined amount,
rescission of certain transactions, restitution to plaintiffs in an unstated amount and punitive and other damages in an unstated amount. 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.



ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



COMPANY PURCHASES OF EQUITY SECURITIES



|                                     |  |                                 |  |                             |       
|------------------------------------ |  | ------------------------------- |  | --------------------------- | ------
|Period                               |  | Total Number ofShares Purchased |  | Average PricePaid Per Share
|October 3, 2004  October 30, 2004   |  | 71 Class B Shares               |  | $                           | 188.27
|October 31, 2004  November 27, 2004 |  |                                |  |                             |      
|November 28, 2004  January 1, 2005  |  | 3,100 Class A Shares            |  | $                           | 163.00
|November 28, 2004  January 1, 2005  |  | 24,174 Class B Shares           |  | $                           | 177.38
|                                    
|Total                                |  | 27,345 Shares                   |  | $                           | 175.78
|                                    



Refer to Redemption of Capital Stock
in Part I, Item 1 of this quarterly report on Form 10-Q for discussion of the Companys share redemptions.



ITEM 3.    DEFAULTS UPON SENIOR SECURITIES



None.



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



None.



ITEM 5.    OTHER INFORMATION



None.



ITEM 6.    EXHIBITS



(a) Exhibits

|     |  |                                                                                                                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|3.1  |  | Amended and Restated Articles of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter
ended March 29, 2003, File No. 000-10815).
|     | 
|3.2  |  | Bylaws of the Registrant, as amended (incorporated by reference to Exhibit 3.2 to the Registrants Annual Report on Form 10-K for the fiscal year ended September 27, 2003, filed on December 16,
2003, File No. 000-10815).              
|     | 
|31.1 |  | Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                          
|     | 
|31.2 |  | Chief Financial 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.                                                                                                                                          



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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: February 10, 2005



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