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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)

|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 29, 2003 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



UNIFIED WESTERN GROCERS, INC.

(Exact name of registrant as specified in its charter)



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



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 Act.)  Yes ̈No  x



The number of shares outstanding of each of the registrants classes of common stock, as of March 29, 2003, were as follows:



Class A:    71,425
shares            Class B:    478,909 shares            Class C: 16 shares



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##### Table of Contents

TABLE OF CONTENTS



|Item                       |  |                                                                                       |  | Page
|-------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                           |  | PART I                                                                                |  |     
|                          
|Item 1.                    |  | Financial Statements (Unaudited)                                                      |  | 1   
|                          
|Item 2.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11  
|                          
|Item 3.                    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 23  
|                          
|Item 4.                    |  | Controls and Procedures                                                               |  | 24  
|                          
|                           |  | PART II                                                                               |  |     
|                          
|Item 1.                    |  | Legal Proceedings                                                                     |  | 25  
|                          
|Item 2.                    |  | Changes in Securities and Use of Proceeds                                             |  | 25  
|                          
|Item 3.                    |  | Defaults Upon Senior Securities                                                       |  | 25  
|                          
|Item 4.                    |  | Submission of Matters to a Vote of Security Holders                                   |  | 25  
|                          
|Item 5.                    |  | Other Information                                                                     |  | 26  
|                          
|Item 6.                    |  | Exhibits and Reports on Form 8-K                                                      |  | 26  
|                          
|Signatures                 |  | 27                                                                                   
|                          
|Section 302 Certifications |  | 28                                                                                   



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PART I.    FINANCIAL INFORMATION



|Item 1. |  | Financial Statements
|------- |  | --------------------

Unified Western Grocers, Inc. and Subsidiaries



Consolidated Balance SheetsUnaudited

(dollars in thousands)



|                                                                                                                                       |  | March 29, 2003 |         | September 28, 2002
|-------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ------------------
|Assets                                                                                                                                 |  |                |         |                   
|Current Assets:                                                                                                                        |  |                |         |                   
|Cash and cash equivalents                                                                                                              |  | $              | 20,963  |                   
|Accounts and notes receivable, net of allowances of $0.9 million at March 29,
2003                                                     |  |                | 153,482 |                   
|Inventories                                                                                                                            |  |                | 172,667 |                   
|Prepaid expenses                                                                                                                       |  |                | 6,066   |                   
|Deferred taxes                                                                                                                         |  |                | 11,649  |                   
|                                                                                                                                       |  |                |         |                   
|Total current assets                                                                                                                   |  |                | 364,827 |                   
|Properties, net                                                                                                                        |  |                | 191,633 |                   
|Investments                                                                                                                            |  |                | 48,094  |                   
|Notes receivable, net of allowances of $0.5 million at March 29, 2003                                                                  |  |                | 28,846  |                   
|Goodwill                                                                                                                               |  |                | 29,671  |                   
|Other assets, net                                                                                                                      |  |                | 51,278  |                   
|                                                                                                                                       |  |                |         |                   
|Total Assets                                                                                                                           |  | $              | 714,349 |                   
|                                                                                                                                       |  |                |         |                   
|Liabilities and Shareholders Equity                                                                                                   |  |                |         |                   
|Current Liabilities:                                                                                                                   |  |                |         |                   
|Accounts payable                                                                                                                       |  | $              | 123,293 |                   
|Accrued liabilities                                                                                                                    |  |                | 92,855  |                   
|Current portion of notes payable                                                                                                       |  |                | 14,118  |                   
|Patrons excess deposits and declared patronage dividends                                                                              |  |                | 14,032  |                   
|Net current liabilities of discontinued operations                                                                                     |  |                | 39      |                   
|                                                                                                                                       |  |                |         |                   
|Total current liabilities                                                                                                              |  |                | 244,337 |                   
|Notes payable, due after one year                                                                                                      |  |                | 255,105 |                   
|Long-term liabilities, other                                                                                                           |  |                | 104,616 |                   
|Net liabilities of discontinued operations                                                                                             |  |                | 40      |                   
|Patrons deposits and certificates:                                                                                                    |  |                |         |                   
|Patrons required deposits                                                                                                             |  |                | 17,030  |                   
|Subordinated patronage dividend certificates                                                                                           |  |                | 3,338   |                   
|                                                                                                                                      
|Commitments and contingencies                                                                                                          |  |                |         |                   
|                                                                                                                                      
|Shareholders equity:                                                                                                                  |  |                |         |                   
|Class A Shares: 500,000 shares authorized, 71,425 and 71,125 shares outstanding at
March 29, 2003 and September 28, 2002, respectively |  |                | 10,815  |                   
|Class B Shares: 2,000,000 shares authorized, 478,909 shares outstanding at March 29,
2003 and September 28, 2002                       |  |                | 76,261  |                   
|Retained earnings after elimination of accumulated deficit of $26,976 effective
September 28, 2002                                     |  |                | 2,315   |                   
|Accumulated other comprehensive income                                                                                                 |  |                | 492     |                   
|                                                                                                                                       |  |                |         |                   
|Total shareholders equity                                                                                                             |  |                | 89,883  |                   
|                                                                                                                                       |  |                |         |                   
|Total Liabilities and Shareholders Equity                                                                                             |  | $              | 714,349 |                   
|                                                                                                                                       |  |                |         |                   

The accompanying notes are an integral part of these statements.



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Unified Western Grocers, Inc. and Subsidiaries



Consolidated Statements of Earnings (Loss) and
Comprehensive Earnings (Loss)Unaudited

(dollars in thousands)



|                                                                                                                                                                                                       |  | Thirteen Weeks Ended |         |   | Twenty Six Weeks Ended |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------- | ------- | - | ---------------------- | -
|                                                                                                                                                                                                       |  | March 29, 2003       |         |   | March 30, 2002         |  
|Net sales                                                                                                                                                                                              |  | $                    | 654,181 |   |                        | $
|Cost of sales                                                                                                                                                                                          |  |                      | 584,812 |   |                        |  
|Distribution, selling and administrative expenses                                                                                                                                                      |  |                      | 58,843  |   |                        |  
|                                                                                                                                                                                                       |  |                      |         |   |                        |  
|Operating income                                                                                                                                                                                       |  |                      | 10,526  |   |                        |  
|Interest expense                                                                                                                                                                                       |  |                      | (5,941  | ) |                        |  
|                                                                                                                                                                                                       |  |                      |         |   |                        |  
|Earnings from continuing operations before estimated patronage dividends and income
taxes                                                                                                              |  |                      | 4,585   |   |                        |  
|Estimated patronage dividends                                                                                                                                                                          |  |                      | (2,808  | ) |                        |  
|                                                                                                                                                                                                       |  |                      |         |   |                        |  
|Earnings from continuing operations before income taxes                                                                                                                                                |  |                      | 1,777   |   |                        |  
|Income taxes                                                                                                                                                                                           |  |                      | (760    | ) |                        |  
|                                                                                                                                                                                                       |  |                      |         |   |                        |  
|Earnings from continuing operations                                                                                                                                                                    |  |                      | 1,017   |   |                        |  
|Loss from discontinued operations, net of income tax benefits of $0.2 million and $0.8
million for the thirteen weeks ended March 30, 2002 and the twenty-six weeks ended March 30, 2002, respectively |  |                      |        |   |                        |  
|                                                                                                                                                                                                       |  |                      |         |   |                        |  
|Net earnings (loss)                                                                                                                                                                                    |  |                      | 1,017   |   |                        |  
|Other comprehensive earnings (loss), net of income taxes:                                                                                                                                              |  |                      |         |   |                        |  
|Unrealized gain on valuation of interest rate collar                                                                                                                                                   |  |                      | 340     |   |                        |  
|Unrealized holding loss on investments                                                                                                                                                                 |  |                      | (73     | ) |                        |  
|                                                                                                                                                                                                       |  |                      |         |   |                        |  
|Comprehensive earnings (loss)                                                                                                                                                                          |  | $                    | 1,284   |   |                        | $
|                                                                                                                                                                                                       |  |                      |         |   |                        |  





The accompanying notes are an integral part of these statements.



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Unified Western Grocers, Inc. and Subsidiaries



Consolidated Statements of Cash FlowsUnaudited

(dollars in thousands)



|                                                                                    |  | Twenty Six Weeks Ended |        
|----------------------------------------------------------------------------------- |  | ---------------------- | -------
|                                                                                    |  | March 29, 2003         |        
|Cash flows from operating activities:                                               |  |                        |        
|Net earnings (loss)                                                                 |  | $                      | 2,315  
|Less: Loss from discontinued operations                                             |  |                        |       
|                                                                                    |  |                        |        
|Earnings from continuing operations                                                 |  |                        | 2,315  
|Adjustments to reconcile net earnings to net cash provided by operating
activities: |  |                        |        
|Depreciation and amortization                                                       |  |                        | 12,738 
|Provision for doubtful accounts                                                     |  |                        | 1,602  
|Deferred taxes                                                                      |  |                        | 1,617  
|Gain on sale of properties                                                          |  |                        | (275   
|Purchases of trading securities                                                     |  |                        | (1,553 
|Proceeds from maturities or sales of trading securities                             |  |                        | 4,492  
|(Increase) decrease in assets:                                                      |  |                        |        
|Accounts and notes receivable, net                                                  |  |                        | 30,693 
|Inventories                                                                         |  |                        | 29,523 
|Prepaid expenses                                                                    |  |                        | 458    
|Pension plan assets                                                                 |  |                        |       
|Increase (decrease) in liabilities:                                                 |  |                        |        
|Accounts payable                                                                    |  |                        | (23,049
|Accrued liabilities                                                                 |  |                        | 1,057  
|Long-term liabilities, other                                                        |  |                        | 1,326  
|                                                                                    |  |                        |        
|Net cash provided by operating activities                                           |  |                        | 60,944 
|                                                                                    |  |                        |        
|Cash flows from investing activities:                                               |  |                        |        
|Purchase of properties                                                              |  |                        | (1,883 
|Purchases of securities and other investments                                       |  |                        | (5,346 
|Proceeds from maturities or sales of securities and other investments               |  |                        | 8,336  
|Increase in notes receivable                                                        |  |                        | (9,378 
|Proceeds from sales of properties                                                   |  |                        | 280    
|Increase in other assets                                                            |  |                        | (2,440 
|                                                                                    |  |                        |        
|Net cash utilized by investing activities                                           |  |                        | (10,431
|                                                                                    |  |                        |        
|Cash flows from financing activities:                                               |  |                        |        
|Additions to long-term notes payable                                                |  |                        | 1,000  
|Reduction of long-term notes payable                                                |  |                        | (27,000
|Reduction of short-term notes payable                                               |  |                        | (5,864 
|Payment of deferred financing fees                                                  |  |                        | (445   
|Patrons excess deposits and declared patronage dividends                           |  |                        | (1,572 
|Redemption of patronage dividend certificates                                       |  |                        | (1,868 
|Increase in members required deposits                                              |  |                        | 3,292  
|Issuance of shares to members                                                       |  |                        | 79     
|                                                                                    |  |                        |        
|Net cash (utilized) provided by financing activities                                |  |                        | (32,378
|                                                                                    |  |                        |        
|Net increase in cash and cash equivalents from continuing operations                |  |                        | 18,135 
|Net cash utilized by discontinued operations                                        |  |                        | (7,129 
|Cash and cash equivalents at beginning of period                                    |  |                        | 9,957  
|                                                                                    |  |                        |        
|Cash and cash equivalents at end of period                                          |  | $                      | 20,963 
|                                                                                    |  |                        |        
|Supplemental disclosure of cash flow information:                                   |  |                        |        
|Cash paid during the period for:                                                    |  |                        |        
|Interest                                                                            |  | $                      | 11,497 
|Income taxes                                                                        |  | $                      | 18     
|Supplemental disclosure of non-cash item:                                           |  |                        |        
|Issuance of subordinated redemption notes to repurchase Class B Shares from
members |  | $                      |       



Noncash Transactions



Capital lease obligations of $4,367 were
incurred when the Company entered into leases for warehouse and computer equipment during the twenty six week period ended March 29, 2003.



The accompanying notes are an integral part of these statements.



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Unified Western Grocers, Inc. and Subsidiaries



Notes To Consolidated Financial Statements



1.    Basis of Presentation



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



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



Certain amounts in the prior years financial statements have been reclassified to conform to the current years presentation.



2.    Discontinued Operations



On September 25, 2002, the Companys
Board of Directors approved a plan to exit the Companys retail operations. The plan of disposition included the closure of three retail stores prior to September 28, 2002 with the remaining nine stores being sold or closed in fiscal 2003. As a
result, the Company has reclassified its consolidated financial statements to reflect the exit of its retail operations and to segregate the revenues, costs and expenses, assets and liabilities and cash flows of this business. The net operating
results, net liabilities and net cash flows of the retail operations have been reported as discontinued operations in the accompanying financial statements. As of March 29, 2003, nine stores were closed and the Company continued to
operate three stores pending their closure or sale.



Revenues from discontinued operations were $12.0 million and $33.4 million for the thirteen and twenty six week periods ended March 29, 2003, respectively compared to $32.9 million and $70.0 million for the thirteen and twenty six
week periods ended March 30, 2002, respectively. Net losses from discontinued operations were approximately $3.1 million and $6.2 million for the thirteen and twenty six week periods ended March 29, 2003, respectively, compared to $1.1 million and
$4.0 million for the thirteen and twenty six week periods ended March 30, 2002, respectively.



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Unified Western Grocers, Inc. and Subsidiaries



Notes To Consolidated Financial StatementsContinued





Certain of
the liabilities established in connection with the discontinued operations such as, lease reserves and settlements and contract terminations may be resolved in future years. As of March 29, 2003, the provisions established for these matters are
considered adequate. The amount of such estimated reserves and current period charges against the reserves are presented below.



|                   |  | Operating Losses       |        |   | Lease Termination Costs |   |        | Employee Termination and Other Closing Costs |  |   | Total  |  
|------------------ |  | ---------------------- | ------ | - | ----------------------- | - | ------ | -------------------------------------------- |  | - | ------ | -
|                   |  | (dollars in thousands) |       
|September 28, 2002 |  | $                      | (6,889 | ) |                         | $ | (5,668 | )                                            |  | $ | (2,897 | )
|Charges to reserve |  |                        | 2,446  |   |                         |   | 3,348  |                                              |  |   | 377    |  
|                   |  |                        |        |   |                         |   |        |                                              |  |   |        |  
|March 29, 2003     |  | $                      | (4,443 | ) |                         | $ | (2,320 | )                                            |  | $ | (2,520 | )
|                   |  |                        |        |   |                         |   |        |                                              |  |   |        |  



3.    Quasi-Reorganization



Concurrent with the decision to dispose of its retail operations as discussed in Note 2, the Companys Board of Directors 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 deficit in retained earnings and involves adjusting the Companys assets and liabilities to their fair values. Any
remaining deficit in retained earnings is then eliminated by a transfer from additional paid-in capital and capital stock, if necessary, giving the Company a fresh start with a zero balance in retained earnings. The quasi-reorganization
process resulted in the restatement of assets and liabilities of the Company 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 quasi-reorganization adjustments did not result in a net write-up of net assets.



A summary of the consolidated accumulated deficit and the effects of the quasi-reorganization on the accumulated deficit follows:



|                                                                                                              |  | (dollars in thousands) |        
|------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -------
|Accumulated deficit at September 28, 2002 prior to disposal of retail operations and
quasi-reorganization     |  | $                      | (21,868
|Retail disposal costs charged to earnings, net of taxes:                                                      |  |                        |        
|Write down of retail assets to fair value                                                                     |  |                        | (10,515
|Goodwill write off                                                                                            |  |                        | (21,142
|Other exit costs, including loss on discontinued operations                                                   |  |                        | (3,787 
|                                                                                                              |  |                        |        
|Total retail disposal costs charged to earnings                                                               |  |                        | (35,444
|Accumulated deficit in retained earnings before quasi-reorganization
adjustments                              |  |                        | (57,312
|Fair value adjustments, net of taxes:                                                                         |  |                        |        
|Property                                                                                                      |  |                        | 54,325 
|Pension and post retirement benefits                                                                          |  |                        | (16,493
|Elimination of accumulated other comprehensive income                                                         |  |                        | (7,858 
|Other fair value adjustments                                                                                  |  |                        | 362    
|                                                                                                              |  |                        |        
|Total fair value adjustments                                                                                  |  |                        | 30,336 
|Accumulated deficit at September 28, 2002                                                                     |  |                        | (26,976
|Transfer from additional paid in capital                                                                      |  |                        | 18,095 
|Transfer from Class A Shares                                                                                  |  |                        | 1,148  
|Transfer from Class B Shares                                                                                  |  |                        | 7,733  
|                                                                                                              |  |                        |        
|Retained earnings balance at September 28, 2002, after disposal of retail operations and
quasi-reorganization |  | $                      |       
|                                                                                                              |  |                        |        



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Unified Western Grocers, Inc. and Subsidiaries



Notes To Consolidated Financial StatementsContinued





4.    Acquisitions



On September 27, 1999, the Company merged with United Grocers, Inc. (United), 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 are presented below.



|                              |  | (dollars in thousands) |       
|----------------------------- |  | ---------------------- | ------
|Balance at September 28, 2002 |  | $                      | (3,362
|Charges to the reserve        |  |                        | 183   
|Adjustments to the reserve    |  |                        | 478   
|                              |  |                        |       
|Balance at March 29, 2003     |  | $                      | (2,701
|                              |  |                        |       



During
the fiscal quarter ended March 29, 2003, the Company determined it had excess reserves related to a certain facility resulting from unanticipated sublease income. As a result, the Company reversed the excess reserve and reduced goodwill.



5.    Segment Information



Unified is a grocery wholesaler serving
supermarket operators in California, Oregon, Washington, western Idaho, Nevada, Arizona, Hawaii, Colorado, Utah and various foreign countries in the South Pacific and elsewhere. Unified sells a wide variety of products to its customers, including
dry grocery, frozen food, deli, meat, dairy, egg, produce, bakery, gourmet, specialty foods and general merchandise products. Unified also provides support services to its patrons, including finance, merchandising services, insurance and
transportation. Products and services available to patrons may differ depending upon location.



Based on the information monitored by the Companys chief operating decision makers to manage the business, the Company has identified one reportable segment:



| |  |  | Wholesale distribution includes the results of operations from the sale of food and general merchandise items to independent supermarket operators, both members and
non-members.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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Unified Western Grocers, Inc. and Subsidiaries



Notes To Consolidated Financial StatementsContinued





The
Company had a reportable retail segment through the third quarter of fiscal 2002. The Companys Board of Directors approved a plan to exit its retail operation on September 25, 2002 and accordingly this segment is shown as a discontinued
operation (See Note 2). As a result, the segment data included below has been restated to exclude amounts related to the retail segment. Information about the Companys operations by operating segment is as follows:



|                                                       |  | Thirteen Weeks Ended   |         |   | Twenty Six Weeks Ended |  
|------------------------------------------------------ |  | ---------------------- | ------- | - | ---------------------- | -
|                                                       |  | March 29, 2003         |         |   | March 30, 2002         |  
|                                                       |  | (dollars in thousands) |        
|Net sales:                                             |  |                        |         |   |                        |  
|Wholesale distribution                                 |  | $                      | 652,732 |   |                        | $
|All other                                              |  |                        | 10,344  |   |                        |  
|Intersegment elimination                               |  |                        | (8,895  | ) |                        |  
|                                                       |  |                        |         |   |                        |  
|Total net sales                                        |  | $                      | 654,181 |   |                        | $
|                                                       |  |                        |         |   |                        |  
|Operating income:                                      |  |                        |         |   |                        |  
|Wholesale distribution                                 |  | $                      | 9,829   |   |                        | $
|All other                                              |  |                        | 697     |   |                        |  
|                                                       |  |                        |         |   |                        |  
|Total operating income                                 |  | $                      | 10,526  |   |                        | $
|                                                       |  |                        |         |   |                        |  
|Interest expense                                       |  |                        | (5,941  | ) |                        |  
|Estimated patronage dividends                          |  |                        | (2,808  | ) |                        |  
|Income taxes                                           |  |                        | (760    | ) |                        |  
|                                                       |  |                        |         |   |                        |  
|Earnings from continuing operations                    |  | $                      | 1,017   |   |                        | $
|                                                       |  |                        |         |   |                        |  
|Loss from discontinued operations, net of income taxes |  |                        |        |   |                        |  
|                                                       |  |                        |         |   |                        |  
|Net earnings (loss)                                    |  | $                      | 1,017   |   |                        | $
|                                                       |  |                        |         |   |                        |  
|Depreciation and amortization:                         |  |                        |         |   |                        |  
|Wholesale distribution                                 |  | $                      | 6,348   |   |                        | $
|Discontinued operations                                |  |                        |        |   |                        |  
|All other                                              |  |                        | 92      |   |                        |  
|                                                       |  |                        |         |   |                        |  
|Total depreciation and amortization                    |  | $                      | 6,440   |   |                        | $
|                                                       |  |                        |         |   |                        |  
|Capital expenditures:                                  |  |                        |         |   |                        |  
|Wholesale distribution                                 |  | $                      | 1,538   |   |                        | $
|Discontinued operations                                |  |                        |        |   |                        |  
|All other                                              |  |                        | 32      |   |                        |  
|                                                       |  |                        |         |   |                        |  
|Total capital expenditures                             |  | $                      | 1,570   |   |                        | $
|                                                       |  |                        |         |   |                        |  
|Identifiable assets:                                   |  |                        |         |   |                        |  
|Wholesale distribution                                 |  | $                      | 607,647 |   |                        | $
|Discontinued operations                                |  |                        |        |   |                        |  
|All other                                              |  |                        | 106,702 |   |                        |  
|                                                       |  |                        |         |   |                        |  
|Total identifiable assets                              |  | $                      | 714,349 |   |                        | $
|                                                       |  |                        |         |   |                        |  



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Unified Western Grocers, Inc. and Subsidiaries



Notes To Consolidated Financial StatementsContinued





6.    Contingencies



During the 2002 period, 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 of Unified, based on alleged insider relationship,
fraudulent transfer claims against Certified and Grocers Specialty Company, fraud claims against Certified, Grocers Specialty Company and other unnamed parties, and contract and tort claims against KPMG. In its prayer for relief, the plaintiff seeks
judgment against the defendants for $13.5 million, plus interest, punitive damages of $10 million and other unspecified damages. The Trustee also filed a complaint in the Hawaii Circuit Court, First Circuit, entitled Mark J.C. Yee, Trustee for
the Bankruptcy Estate of Hawaiian Grocery Stores, Ltd., vs. Unified Western Grocers, Inc., Certified Grocers of California, Ltd., Grocers Specialty Company, RHL, Inc., Alfred A. Plamann, Charles Pilliter, Daniel T. Bane, Robert M. Ling, David A.
Woodward, Richard H. Loeffler, Fletcher Robbe, Goodsill Anderson Quinn and Stifel, and Does 1-10 on May 17, 2002.This action, which generally arises out of the same transactions that are the subject of the Federal District Court proceeding
referenced above, asserts breach of fiduciary duties by the officers and directors of Hawaiian Grocery Stores, Ltd. (HGS), the controlling shareholder of HGS (Grocery Specialty Company) and the controlling shareholders parent
corporation (Certified), and breach of fiduciary duties by defendants Goodsill, Loeffler, RHL, Inc., and Robbe. Current and former officers of the Company were officers or directors of HGS during certain periods and a subsidiary of the Company was a
shareholder of HGS during certain periods. The complaint seeks compensatory damages of approximately $13.5 million, plus interest, punitive damages of $10.0 million and other unspecified damages. All of the above referenced matters are now pending
in the Federal District Court for the District of Hawaii. In March 2003, the Trustee amended the complaints in the above-referenced matters to add Bruce Barber and Sheppard Mullin Richter & Hampton LLP, as defendants. These proceedings are in
their very early stages and the Company intends to vigorously defend 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, we expect that the outcome of these matters will not result in a material adverse effect on our business, financial condition or results of operations.



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Unified Western Grocers, Inc. and Subsidiaries



Notes To Consolidated Financial StatementsContinued





7.    Contractual Obligations



At March 29, 2003, the Company was contingently liable with respect to 18 lease guarantees for certain member-patrons. The commitments have expiration dates through 2017. The Company believes the locations underlying these
leases are marketable and, accordingly, would 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 certain circumstances, Unified also guarantees
third-party loans issued to its member-patrons and provides stand-by letters of credit to certain vendors. The Companys guarantee of certain loans, leases and stand by letters of credit are summarized in the table below.



|                  |  |                        |        |                  |   |                            |  |      
|----------------- |  | ---------------------- | ------ | ---------------- | - | -------------------------- |  | -----
|Remaining Terms   |  | Guaranteed Leases      |        | Guaranteed Loans |   | Stand-By Letters of Credit |  | Total
|                  |  | (dollars in thousands)
|1-3 years         |  | $                      | 14,759 |                  | $ | 689                        |  | $    
|3-5 years         |  |                        | 9,341  |                  |   | 219                        |  |      
|More than 5 years |  |                        | 25,019 |                  |   | 296                        |  |      
|                  |  |                        |        |                  |   |                            |  |      
|                  |  | $                      | 49,119 |                  | $ | 1,204                      |  | $    
|                  |  |                        |        |                  |   |                            |  |      



8.    New Accounting Pronouncements



As a result of the Companys implementation of a quasi-reorganization as of September 28, 2002 (See Note 3), the Company was required to early adopt all accounting standards with effective
dates within one year of the quasi-reorganization implementation including Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), SFAS No. 143,
Accounting for Asset Retirement Obligations (SFAS No. 143), SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), SFAS No. 145, Rescission of Financial
Accounting Standards Board (FASB) Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No. 145) and SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (SFAS No. 146).



SFAS No. 142 addresses the financial accounting and reporting for goodwill and other intangible assets. The statement provides that goodwill or other intangible assets with indefinite lives will no longer be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate potential impairment. The impairment test is comprised of two steps: (1) a reporting units fair value is compared to its carrying value; if the fair value is less
than its carrying value, goodwill impairment is indicated; and (2) if impairment is indicated in the first step, it is measured by comparing the implied fair value of goodwill to its carrying value at the reporting unit level. Adoption of SFAS No.
142 did not have an impact on the Companys consolidated financial statements.



The following table sets forth the reconciliation of net earnings as adjusted for the non-amortization provisions of SFAS No. 142:



|                                         |  | Thirteen Weeks Ended   |       |                | Twenty Six Weeks Ended |     
|---------------------------------------- |  | ---------------------- | ----- | -------------- | ---------------------- | ----
|                                         |  | March 29, 2003         |       | March 30, 2002 |                        |     
|                                         |  | (amounts in thousands) |      
|Reported net earnings (loss)             |  | $                      | 1,017 |                | $                      | (818
|Add: goodwill amortization, net of taxes |  |                        |      |                |                        | 221 
|                                         |  |                        |       |                |                        |     
|Adjusted net earnings (loss)             |  | $                      | 1,017 |                | $                      | (597
|                                         |  |                        |       |                |                        |     



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Unified Western Grocers, Inc. and Subsidiaries



Notes To Consolidated Financial StatementsContinued





The
adoption of the remaining pronouncements did not have a significant impact on the Companys consolidated financial statements.



In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), which elaborates on required disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and
clarifies the need for a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company previously adopted the disclosure requirements of FIN 45 for
the quarter ended December 28, 2002 (see Note 7). The Company adopted the initial recognition and measurement provisions of FIN 45 on January 1, 2003. The adoption had no effect on the Companys consolidated financial position, results of
operations or shareholders equity.



In
January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary.
The Company adopted the consolidation requirements of FIN 46 on February 1, 2003. The adoption had no effect on the Companys consolidated financial position, results of operations or shareholders equity.



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##### Table of Contents



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



Liquidity and
Capital Resources



Cash Flow



Unified relies primarily upon its cash flow from operations,
patron deposits, shareholdings and borrowings from the Companys credit facilities to fund its daily operations. The Company believes that both cash flow from its operations and available credit lines will be sufficient to meet operating needs
and capital spending requirements for the fiscal 2003 period. Overall, net cash from continuing operations increased by $18.1 million for the twenty six week period ending March 29, 2003 (the 2003 period) compared to an increase of
$2.8 million for the twenty six week period ending March 30, 2002 (the 2002 period). The increase in net cash from continuing operations for the 2003 period consisted of cash provided from operating activities of $60.9 million
offset by amounts utilized in investing activities of $10.4 million and financing activities of $32.4 million. Cash utilized by discontinued operations in the 2003 and 2002 periods related to the Companys retail operations (See Note 2).
Working capital was $120.5 million and $144.0 million and the current ratio was 1.5 at March 29, 2003 and September 28, 2002, respectively. Working capital varies primarily as a result of seasonal inventory requirements.



Operating Activities:Net
cash provided by operating activities increased by $47.8 million to $60.9 million for the 2003 period compared to $13.1 million provided for the 2002 period. The improvement in operating cash was primarily attributable to a $1.9 million improvement
in pre-tax earnings in fiscal 2003, as well as seasonal reductions in overall inventory levels of $9.6 million and improved collection of accounts receivable of $16.4 million. Operating cash also improved due to lower cash utilization for accounts
payable of $16.6 million.



Investing
Activities:    Net cash utilized by investing activities was approximately $10.4 million for the 2003 period compared to $19.6 million utilized in the 2002 period. The decrease in cash utilized of $9.2 million is due
primarily to reduced investing activities of $8.0 million resulting from the investment transactions of the Companys insurance subsidiaries that changed from long term to short term investments. This activity consists of securities purchased
to replace maturing investments in the portfolio. Capital expenditures for computer and warehouse equipment were $2.3 million and other assets were $7.5 million less in the 2003 period compared to the 2002 period. The reduction in cash utilized in
investing activities was partially offset by increases in long term notes receivable of $8.5 million for loans made by the Companys financing subsidiary to member retailers.



Financing Activities:    Net cash utilized by financing activities was
approximately $32.4 million for the 2003 period compared to $9.3 million provided for the 2002 period. The increase in cash utilization is due primarily to the reduction in short and long term debt.



Pension Plans



The Company maintains a qualified defined benefit pension
plan (the Qualified Plan), which covers substantially all non-union employees, as well as an unfunded executive pension plan.



As a result of general declines in the financial markets, the fair value of Qualified Plan assets decreased from $66.3 million at
September 29, 2001 to $52.2 million at September 28, 2002. The Qualified Plan was overfunded by $3.8 million at September 29, 2001 and was underfunded by $23.6 million at September 28, 2002 for accounting purposes but was in full compliance with
ERISA funding requirements. In connection with the quasi-reorganization (See Note 3), the Company was required to remeasure and record the Companys pension obligations at fair value as of September 28, 2002. The remeasurement increased the
Companys pension obligation by $19.7 million to $23.6 million. As part of the remeasurement, the Company recorded previously unrecognized actuarial losses and prior service costs. At March 29, 2003, the fair value of Qualified Plan assets was
$52.1 million.



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The
Companys pension expense is calculated based upon a number of actuarial assumptions, including an expected long-term rate of return on Qualified Plan assets of 9.0%. In developing the long-term rate of return assumption, the Company evaluated
historical asset class returns based on broad equity and bond indices. The Company anticipates that the Companys investment managers will continue to generate long-term returns of at least 9.0%. The expected long-term rate of return on
Qualified Plan assets assumes an asset allocation of approximately 60% equity and 40% fixed income financial instruments. The Company regularly reviews the asset allocation and periodically rebalances the investment mix to achieve certain investment
goals when considered appropriate. Despite the recent decline in the equity markets, the Company believes that 9.0% is a reasonable long-term rate of return on Qualified Plan assets. 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 our Qualified Plan assets by 0.5% (from 9.0% to 8.5%) would have increased our pension expense for fiscal 2002 by approximately $0.3
million.



The discount rate that was utilized for
determining future pension obligations is based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. As a result of the general decline in interest rates, the discount rate was reduced from
7.50% at June 29, 2001 to 6.75% at September 28, 2002. Due to the effect of the expected long-term rate of return on Qualified Plan assets of 9.0%, a discount rate of 6.75% and certain other assumptions, the Company estimates that pension expense
for fiscal 2003 will be approximately $3.4 million. Future pension expense will be affected by future investment performance, discount rates and other variables such as demographics relating to plan participants. Decreasing both the discount rate
and the salary increase assumptions by 0.5% would have increased our pension expense for fiscal 2002 by approximately $0.1 million.



Outstanding Debt and Other Financing Arrangements



At March 29, 2003, the Company had a $200 million secured revolving credit facility (Revolving Credit Agreement) with a group
of banks. The revolving credit agreement expires on October 1, 2004 and bears interest at either LIBOR plus an applicable margin (2.00% to 3.00%) based on the ratio of funded debt to operating cash flow or the lenders base rate plus 0.75%. The
revolving credit facility permits advances of up to 85% of eligible accounts receivable and 65% of eligible inventories. The Company had $129.0 million and $156.0 million outstanding at March 29, 2003 and September 28, 2002, respectively.



The Company also had a total of $106.9 million
and $109.4 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 March 29, 2003 and September
28, 2002, respectively.



In December 2002, the
Senior Note Agreement was amended to modify the tangible net worth and leverage ratio covenant set forth therein.



Unified entered into a five-year interest rate collar agreement in February 1999 in relation to approximately $50 million of borrowings on
its variable rate revolving credit facility. The collar agreement was put in place without incurring a fee. The collar agreement is structured such that Unified pays a variable rate of interest between 6% (cap rate) and 4.94% (floor rate) based on a
notional amount of $50.0 million. The weighted average interest rate, prior to lenders margin, on borrowings on the revolving credit facility was 1.53% at March 29, 2003 and 1.86% at September 28, 2002.



A $10.0 million credit agreement is collateralized by Grocers
Capital Companys (GCC) member loan receivables. GCC is a wholly owned subsidiary of Unified. The primary function of GCC is to provide loan financing to the Companys member-patrons. The funding for loans made by GCC is
provided by GCCs cash reserves as well as the $10.0 million credit agreement. The credit agreement as amended and restated has a maturity date of October 31, 2004. Amounts advanced under the credit agreement bear interest at prime (4.25%



12



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##### Table of Contents

at March 29, 2003) or Eurodollar (3.77% at March 29, 2003) plus 2.50%. The applicable rate is selected by the Company at its discretion. The
outstanding balance was $5.5 million and $4.5 million at March 29, 2003 and September 28, 2002, respectively. The unused portion of this credit line is subject to a commitment fee of 0.125%.



Member loan receivables are periodically sold by GCC to a bank
through a loan purchase agreement. This loan purchase agreement, as amended and restated, extends through October 31, 2004. Total loan purchases under the agreement are limited to a total aggregate principal amount outstanding of $70.0 million. GCC
entered into an additional loan purchase agreement with another bank in January 1999. This additional loan purchase agreement can be terminated upon thirty days prior written notice. There is no maximum limitation on the loan purchases pursuant to
the additional loan purchase agreement. These agreements do not qualify for sales treatment under SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125
and accordingly the Company accounts for the transfer of these financial assets as a secured borrowing with a pledge of collateral. At March 29, 2003 and September 28, 2002, the aggregate amount of secured borrowings with the banks was $2.2 million
and $11.5 million, respectively. The pledged collateral included in notes receivable, current in the accompanying consolidated condensed balance sheets amounted to $1.0 million and $6.6 million and the amounts included in notes receivable,
long-term amounted to $1.2 million and $4.9 million as of March 29, 2003 and September 28, 2002, respectively. The notes receivable generally bear interest at rates averaging prime plus 2%, are paid monthly and have maturity dates ranging from 2003
to 2009.



Patronage Dividends



Patrons are generally required to maintain a subordinated
cash deposit with Unified. Member-patrons may satisfy the minimum deposit requirement through a combination of a cash deposit and the ownership of Class B Shares. In the Merger, former United members were provided the opportunity to build the
minimum subordinated deposit over time, provided that they agreed to assign 80% of patronage dividends received for this purpose and maintain a supply agreement with Unified until the minimum deposit condition is satisfied. Upon termination of
patron status, the withdrawing patron is entitled to recover deposits in excess of its obligations to Unified if permitted by the applicable subordination provisions, and a member-patron also will be entitled to have its shares redeemed, subject to
applicable legal requirements, company policies and credit agreement limitations. With certain exceptions, Unifieds current redemption policy limits the Class B Shares that Unified is obligated to redeem in any fiscal year to 5% of the number
of Class B Shares deemed outstanding at the end of the preceding fiscal year.



Redemption of all capital stock is subject to limitations imposed by the Articles of Incorporation and Bylaws, credit agreements to which the Company is a party, and restrictions imposed by law on the
ability of a company to redeem its own shares. As a California corporation, the Company is subject to the provisions of the California General Corporation Law including Section 500 which limits the ability of the Company to make distributions,
including distributions to repurchase its own shares and any payments on notes issued to repurchase Unified shares. Section 500 permits such repurchase and note payments only when retained earnings calculated in accordance with generally accepted
accounting principles (GAAP) equal or exceed the amount of any proposed distribution or an alternative asset/liability ratio test is met. At March 29, 2003, the Company had retained earnings of $2.3 million. Accordingly, the Company is
now able to redeem shares subject to the limitation of Section 500 and policies established by the Board of Directors and subject to the Companys credit agreements.



Prior to the fiscal year ended September 28, 2002, Unified had typically distributed at least 20% of the
non-dairy patronage dividends in cash and 80% in Class B Shares to its member-patrons.



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In fiscal
2002, the Board of Directors adopted an equity enhancement plan. Pursuant to that plan, Cooperative Division patronage dividends to member-patrons for fiscal year 2002 are payable in the form of:



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



| |  |  | Patronage Certificates to the extent of the balance of such patronage dividends for member-patrons. Such Patronage Certificates will have a term of five years and an
interest rate approximating the five year treasury rate as such rate exists at the fiscal year end, such rate to be adjusted annually thereafter to approximate the same benchmark interest rate on each anniversary of the fiscal year end.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company authorized the
issuance of $3.3 million of Patronage Certificates as a portion of its patronage dividends for fiscal year 2002. These Patronage Certificates are included in subordinated patronage dividend certificates in the consolidated condensed balance sheets.



In December 2002, as an additional part of its
fiscal 2003 equity enhancement plan, the Board of Directors authorized submission to the shareholders of a proposal to create a new class of equity, to be denominated Class E Shares, by amendment to the Articles of Incorporation.
This proposal was approved by the shareholders in March 2003. The new Class E Shares may be issued as a portion of patronage dividends for the Cooperative Division in 2003 and in future periods, as determined annually at the discretion of the Board
of Directors. The Class E Shares have a stated or par value of $100 per share, are non-voting and are non-dividend bearing equity securities. Class E Shares are transferable only with the consent of the Company. Pursuant to the Companys
repurchase policy, Class E Shares cannot be repurchased for ten years from their date of issuance unless approved by the Board of Directors or upon sale or liquidation of the Company. The shares, when redeemed, will be redeemed at stated value.
Thereafter, at the election of a holder of Class E Shares, the shares will be repurchased by the Company subject to applicable restrictions imposed by law, credit agreements, and the Companys redemption policy. For fiscal 2003, patronage
dividends in the Cooperative Division will be payable to member-patrons in the form of:



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



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



Associate-Patrons would be paid patronage dividends in the form of cash or patronage dividend certificates or part in each in a manner to
be determined by the Board of Directors.



Dairy
patronage dividends have been paid in cash in the periods presented.



Tax Matters



Income taxes
are provided using the liability method prescribed by SFAS No. 109, Accounting for Income Taxes (SFAS No. 109). The Company had net deferred tax assets of $7.8 million and $9.4 million, of which $11.6 million is classified as
a current asset in deferred income taxes and $3.8 million and $2.2 million is included in long term liabilities on the accompanying consolidated condensed balance sheets as of March 29, 2003 and September 28, 2002, respectively.



A valuation allowance is provided to reduce the deferred tax
assets to a level which, more likely than not, will be realized. In accordance with SFAS No. 109 and the accounting for a quasi-reorganization, valuation allowances existing immediately after the quasi-reorganization, if reduced in future periods,
are required to be accounted for as an adjustment to additional paid-in capital. In contrast, increases to the valuation allowance in future periods will be accounted for as an adjustment to the tax provision. The remaining balance of the net
deferred tax assets should be realized through future operating results and the reversal of taxable temporary differences.



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##### Table of Contents



The
Companys effective income tax rate from continuing operations was 43% and 42% for the thirteen and twenty six week periods ended March 29, 2003 compared to 40% for the thirteen and twenty six week periods ended March 30, 2002. The Company does
not expect to pay any income taxes for the fiscal year ended 2003 due to its net operating loss carry-forwards.



The Internal Revenue Service (the IRS) completed its examination of the Companys consolidated federal income tax returns
for the fiscal periods between August 29, 1998 through September 30, 2000. The IRS has proposed adjustments to the federal income tax returns for the corresponding fiscal years that are not significant and will be offset by net operating loss
carry-backs.



Results of Operations



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



|                                                       |  | Thirteen Weeks Ended |   |  | Twenty Six Weeks Ended |  
|------------------------------------------------------ |  | -------------------- | - |  | ---------------------- | -
|                                                       |  | March 29, 2003       |   |  | March 30, 2002         |  
|Net sales                                              |  | 100.0                | % |  | 100.0                  | %
|Cost of sales                                          |  | 89.4                 |   |  | 90.0                   |  
|Distribution, selling and administrative expenses      |  | 9.0                  |   |  | 8.6                    |  
|                                                       |  |                      |   |  |                        |  
|Operating income                                       |  | 1.6                  |   |  | 1.4                    |  
|Interest expense                                       |  | (0.9                 | ) |  | (0.9                   | )
|Estimated patronage dividends                          |  | (0.4                 | ) |  | (0.4                   | )
|Income taxes                                           |  | (0.1                 | ) |  |                       |  
|                                                       |  |                      |   |  |                        |  
|Earnings from continuing operations                    |  | 0.2                  |   |  | 0.1                    |  
|Loss from discontinued operations, net of income taxes |  |                     |   |  | (0.2                   | )
|                                                       |  |                      |   |  |                        |  
|Net earnings (loss)                                    |  | 0.2                  |   |  | (0.1                   | )
|                                                       |  |                      |   |  |                        |  



The
Company has reclassified certain accounts in its consolidated financial statements to reflect the exit of its retail operations and to segregate the related revenues, costs and expenses, assets and liabilities and cash flows. The net operating
results, net liabilities and net cash flows of the retail operations have been reported as Discontinued Operations for both periods presented.



Thirteen Week Period Ended March 29, 2003 (2003 Period) Compared to the Thirteen Week Period Ended March 30, 2002 (2002
Period)



Net
sales.    Net sales from continuing operations were $654.2 million for the 2003 period and 679.7 million for the 2002 period, a decrease of $25.5 million.



| |  |  | Wholesale Distribution Segment:    Wholesale sales were $652.7 million for the 2003 period and $693.5 million for the 2002 period, a
decline of $40.8 million over the 2002 period.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On September 25, 2002, the Companys Board of Directors approved a plan to exit the Companys retail operations. During the 2003 period, the company closed
two retail locations, leaving three operating stores open pending their sale or closure. The Company also closed three retail locations during fiscal 2002 subsequent to the thirteen-week period ended March 30, 2002. The reduction in sales to
corporate retail locations and other inter-company activities was $15.2 million.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company modified its pricing program in July 2002 to charge its customers in its core product categories based on a cents per case service fee rather than a
percent of sales methodology. The sell plan change is intended to maintain the Companys dollar profit margin on products sold to customers as consumer purchasing patterns change in response to economic and business conditions. The pricing
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | program modification also factored in the cost to distribute products resulting in an increase in margin on lower value products. The change
created an expected decline in low margin product sales while improving the Companys overall profitability. The decline in low margin product sales was $13.5 million over the prior period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Due to the timing of Easter and Passover, seasonal sales did not take place in the current period although they were included in the prior period. The change in the
timing of seasonal sales resulted in an approximate $2.5 million reduction in sales over the prior period.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Two of the Companys non-member chain account customers began sourcing their specialty grocery and general merchandise products from other suppliers during the
current period. Sales to these two customers declined $2.3 million over the previous period.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Store closures net of new store openings and a general softness in the economy accounted for the remaining $7.3 million decline over the prior period.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All Other:    Net sales for the Companys other wholly owned subsidiaries for the 2003 period were $10.3 million compared to $10.4
million for the 2002 period.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



Cost of Sales.    Cost of sales was $584.8 million and $611.8 million or 89.4% and 90.0% of net sales for the 2003 and 2002 periods, respectively.



| |  |  | Wholesale Distribution Segment:Cost of sales was $579.2 million and $607.4 million or 88.5% and 89.4% of net wholesale sales for the
2003 and 2002 periods, respectively. The decrease in cost of sales as a percent of net sales was due to the modifications the Company made to its pricing program for its core product categories.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All Other:    Cost of sales was $5.6 million and $4.4 million for the 2003 and 2002 periods respectively. The higher cost of sales was due
to premium increases in policies written by the Companys insurance subsidiary that resulted in a $0.9 million increase in underwriting costs and an additional insurance reserve provision of $0.8 million to comply with statutory reserve
requirements. These increases were offset by a reduction of $0.5 million due to the closure of the Companys printing and transportation subsidiaries.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Distribution, Selling and Administrative.    Distribution, selling and
administrative expenses increased $0.3 million to $58.8 million (9.0% of net sales) in the 2003 period compared to $58.5 million (8.6% of net sales) in the 2002 period.



| |  |  | Wholesale Distribution Segment:    Expenses of $57.6 million for the 2003 period were $1.7 million higher than the 2002 period. Expenses
as a percent of net wholesale sales were 8.9% compared to 8.2% in the prior year. Several factors contributed to the overall cost change.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Wages and benefits, primarily in the union labor pool, declined $2.1 million over the prior period due to lower sales and operating efficiencies resulting in fewer
positions needed to distribute the sales volume. Wage and benefit cost reductions were partially offset by an approximate $1.1 million increase due to the yearly cost of living adjustment that averaged approximately 2.5%. The Company reduced costs
$0.9 million over the prior year from renegotiated rental rates at two of the Companys facilities, lower third party storage expense and lower fleet equipment costs.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Offsetting these cost reductions the Company realized an increase in expenses of $2.7 million due mainly to higher medical benefits, insurance premiums, diesel fuel
and the amortization of deferred costs associated with the implementation of new computer systems. Additionally, the Companys non-union pension expense for the 2003 period was $0.8 million higher than the 2002 period due to performance in the
equity markets.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The remaining increase of $0.1 million was made up of other less significant changes in other distribution, selling and administrative expenses.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All Other:    Distribution, selling and administrative expenses for the Companys other wholly owned subsidiaries for the 2003 period
were $1.2 million compared to $2.6 million for the 2002 period. The closure of the Companys printing and transportation subsidiaries contributed $0.8 million of the reduction compared to prior year. The Companys finance subsidiary
recovered $0.6 million on a loan previously written off.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest.    Interest expense was $5.9 million (0.9% of net sales) in the 2003 period as compared to $6.1 million (0.9% of net sales) in the 2002 period. The Companys effective borrowing
rates for its primary debt instruments for the 2003 and 2002 periods were 6.3% and 6.2%, respectively. Weighted average borrowings declined $34.5 million in the 2003 period. The reduction in interest expense from the decline in the average
borrowings was partially offset by increases in interest expense related to leases and secondary debt instruments.



Estimated Patronage Dividends.    Estimated patronage dividends for the 2003 period were $2.8 million for the
2003 and 2002 periods. Estimated patronage earnings for 2003 period consisted of the patronage earnings from the Companys three patronage pools: the Cooperative Division and the Southern California and Pacific Northwest Dairy Divisions. For
the 2003 period, the Company had patronage earnings of $0.2 million in the Cooperative Division, $2.5 million in the Southern California Dairy Division and $0.1 million in the Pacific Northwest Dairy Division. In the 2002 period, the Company had
patronage earnings of $0.1 million in the Cooperative Division, $2.6 million in the Southern California Dairy Division and $0.1 million in the Pacific Northwest Dairy Division.



Income Taxes.    Income tax expense from continuing operations was $0.8 million
for the 2003 period compared to $0.2 million for the 2002 period. The Companys effective income tax rate from continuing operations was 43.0% for the 2003 period compared to 40.0% for the 2002 period.



Discontinued Operations.    The
Companys retail operations incurred losses of $3.1 million for the 2003 period. The losses for the 2003 period consist of $2.2 million in operational losses, $0.6 million in lease termination costs and $0.3 million for severance and other
contract termination costs. These disposal costs were charged against disposal reserves established at September 28, 2002 as part of the Companys exit from its retail operations.



Twenty Six Week Period Ended March 29, 2003 (2003 Period) Compared to the Twenty Six Week Period Ended
March 30, 2002 (2002 Period)



Net Sales.    Net sales from continuing operations were $1.4 billion for the 2003 period, a decrease of $28.4 million over the 2002 period.



| |  |  | Wholesale Distribution Segment:    Wholesale sales were $1.4 billion, a decrease of $58.2 million over the 2002 period. On September 25,
2002, the Companys Board of Directors approved a plan to exit the Companys retail operations. During the 2003 period, the company closed six retail locations, leaving three operating stores open pending their sale or closure. The Company
also closed three retail locations during fiscal 2002 subsequent to the twenty-six week period ended March 30, 2002. The reduction in sales to corporate retail locations and other inter-company activities was $28.7 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company modified its pricing program in July 2002 to charge its customers in its core product categories based on a cents per case service fee rather than a
percent of sales methodology. The sell plan change is intended to maintain the Companys dollar profit margin on products sold to customers as consumer purchasing patterns change in response to economic and business conditions. The pricing
program modification also factored in the cost to distribute products resulting in an increase in margin on lower value products. The change created an expected decline in low margin product sales while the overall profitability increased. The
decline in low margin product sales was $9.0 million over the prior period.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Due to the timing of Easter and Passover, seasonal sales did not take place in the current period although they were included in the prior period. The change in the
timing of seasonal sales resulted in an approximate $2.5 million reduction in sales over the prior period.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Two of the Companys non-member chain account customers began sourcing their specialty grocery and general merchandise products from other suppliers during the
current period. Sales to these two customers declined $2.3 million over the previous period.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Store closures net of new store openings and a general softness in the economy accounted for the remaining $15.7 million decline over the prior period.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All Other:    Net sales increased $0.6 million to $21.7 million during the current period. Underwriting revenues increased $1.9 million in
the Companys insurance subsidiary primarily from increased rates on policy renewals. The Company closed its printing and transportation subsidiaries effective December 28, 2002. The closure resulted in a sales reduction of $1.0 million in the
current period compared to the previous period. A reduction in other activities over the prior period reduced sales $0.3 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cost of Sales.    Cost of sales was $1.2 billion, a decline of $31.5 million over the prior year. Cost of sales
as a percent of net sales was 89.5% compared to 89.9% in the prior year.



| |  |  | Wholesale Distribution Segment:    Cost of sales of $1.2 billion was $33.3 million lower than prior year. Cost of sales as a
percent of net wholesale sales was 89.8% compared to 90.3% in the prior year. The decrease in cost of sales as a percent of net sales was due to the modifications the Company made to its pricing program for its core product categories.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All Other:    Cost of sales was $9.9 million and $8.1 million for the 2003 and 2002 periods respectively. The higher cost of sales was due
to premium increases in policies written by the Companys insurance subsidiary that resulted in a $1.4 million increase in underwriting costs and an additional insurance reserve provision of $0.8 million to comply with statutory reserve
requirements. The closure of the Companys printing and transportation subsidiaries reduced costs by $0.4 million over the prior period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Distribution, Selling and Administrative.    Distribution, selling and administrative expenses were
$119.8 million for the 2003 and 2002 periods. Expenses as a percent of net sales were 8.8% and 8.6% for the 2003 and 2002 period, respectively.



| |  |  | Wholesale Distribution Segment:    Expenses of $116.2 million for the 2003 period were $1.6 million higher than the 2002 period. Expenses
as a percent of net wholesale sales were 8.7% and 8.4% for the 2003 and 2002 period, respectively. Several factors contributed to the overall cost change.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company implemented a work force reduction in December 2001 resulting in the reduction of 198 active positions. Union labor and benefit costs were also
reduced as operating efficiencies resulted in fewer positions being needed to distribute the sales volume and lower overall sales. These labor changes reduced costs $6.0 million over the prior year. Labor and benefit cost reductions were
partially offset by an approximate $2.2 million increase due to the yearly cost of living adjustment that averaged approximately 2.5%. The Company reduced costs $1.5 million over the prior year as a result of renegotiating rental rates at two of the
Companys facilities, lower third party storage expense and lower fleet equipment costs.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Offsetting the cost reduction the Company realized an increase in expenses of $5.7 million due mainly to higher medical benefits, insurance premiums, diesel fuel,
and the amortization of deferred costs associated with the implementation of new computer systems. Additionally, the Companys non-union pension expense for the 2003 period was $1.6 million higher due to performance in the equity markets.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The remaining decrease of $0.4 million was made up of other less significant changes in other distribution, selling and administrative expenses.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All Other:    Distribution, selling and administrative expenses for the Companys other wholly owned subsidiaries for the 2003 period
were $3.7 million compared to $5.1 million for the 2002 period. The closure of the Companys printing and transportation subsidiaries contributed $1.0 million of the reduction as compared to prior year. The Companys finance subsidiary
recovered $0.6 million on a loan previously written off.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest.    Interest expense was $11.9 million (0.9% of net sales) for both the 2003 and 2002 periods. The Companys effective borrowing rates for its primary debt instruments for the 2003
and 2002 periods were 6.3% and 6.2%, respectively. Weighted average borrowings declined $20.8 million in the 2003 period. The reduction in interest expense from the decline in the average borrowings was offset by an increase in interest expense
related to leases and secondary debt instruments.



Estimated Patronage Dividends.    Patronage dividends for the 2003 period were $6.8 million, an increase of $1.2 million from $5.6 million in 2002 period. Estimated patronage earnings for 2003 period
consisted of the patronage earnings from the Companys three patronage pools: the Cooperative Division and the Southern California and Pacific Northwest Dairy Divisions. For the 2003 period, the Company had patronage earnings of $1.4 million in
the Cooperative Division, $5.2 million in the Southern California Dairy Division and $0.2 million in the Pacific Northwest Dairy Division. In the 2002 period, the Company had patronage earnings of $0.2 million in the Cooperative Division, $5.3
million in the Southern California Dairy Division and $0.1 million in the Pacific Northwest Dairy Division.



Income Taxes.    Income tax expense from continuing operations was $1.6 million for the 2003 period compared to
a tax expense of $0.8 million for the 2002 period. The Companys effective income tax rate from continuing operations was 42.0% for the 2003 period compared to 40.0% for the 2002 period.



Discontinued Operations.    The
Companys retail operations incurred losses of $6.2 million for the 2003 period. The losses for the 2003 period consist of $2.6 million in operational losses, $3.3 million in lease termination costs and $0.3 million for severance and other
contract termination costs. These disposal costs were charged against disposal reserves established at September 28, 2002 as part of the Companys exit from its retail operations.



Additional Discussion and Analysis



As with all companies, Unifieds management deals with many risks and uncertainties in the course of
performing its responsibilities. The Additional Discussion and Analysis section provides additional information on such issues.



Goodwill Impairment.The Companys operating results are highly dependent upon maintaining and growing
its distribution volume to members. The Companys top ten customers constitute approximately 30% of total sales. A significant loss in customers or volume could adversely affect the Companys operating results. The Merger with United
created goodwill whose balance is approximately $26.0 million at March 29, 2003. To date, the sales activity and customer base of the combined entity remain strong. However, a significant loss in volume could potentially impair the carrying
amount of goodwill necessitating a write down in this asset. As a result of continuing operating losses generated by the Companys retail business and the determination that future improvements would require ongoing capital investment that
might be at risk, the Companys Board of Directors in September 2002 approved a resolution to exit the Companys retail operations. The plan of disposition included the closure of three retail stores prior to the Companys 2002 fiscal
year end and either the sale or closure of the Companys remaining nine stores in fiscal 2003. Accordingly, the decision to exit the retail business resulted in an impairment of the underlying assets including goodwill pursuant to SFAS No. 121,
Accounting for the Impairment of Long Lived Assets (SFAS No. 121). As a result, the Company wrote off goodwill related to its retail operations totaling $21.1 million, net of taxes, at September 28, 2002.



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The Company
early adopted SFAS No. 142, Goodwill and Other Intangible Assets in connection with the quasi-reorganization. As a result, the remaining goodwill balances are no longer amortized and will be tested for impairment at least annually
pursuant to the new rules outlined in SFAS No. 142 or more frequently if significant changes in the business occur that require a more frequent analysis. The adoption of SFAS No. 142 did not have an impact on the Companys consolidated
financial statements at September 28, 2002.



Economy.    The Company is affected by certain economic factors that are beyond the control of the Company, including inflation and deflation. The degree to which the acquisition cost of products purchased
by the Company for resale to customers is stable or deflating could have an adverse effect on the Companys business and results of operations. In July 2002, the Company modified its pricing program in its core product categories from a percent
of sales methodology to a cents per case service fee. This change will allow the Company to maintain a more consistent dollar profit margin during periods of product deflation. The Company operates in a highly competitive marketplace and passing on
cost increases to customers is difficult. The Company has experienced certain higher operating expenses, including but not limited to energy, fuel and employee wages and benefits. The Companys facilities are principally located in California
and the Pacific Northwest region, both of which have experienced significant increases in utility costs. In the first quarter of fiscal year 2002, the Company implemented a surcharge to its customers to offset the increased cost of energy. In
response to the increase in operating costs, the Company also implemented a comprehensive expense reduction initiative. As part of these initiatives, the Company eliminated approximately 340 non-retail positions consisting of regular and temporary
employees and contractors impacting nearly all divisions, departments and facilities. As a result of these efforts, the Company realized substantial non-retail related reduced personnel costs in fiscal 2002.



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



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



Environmental.    The Company owns and operates facilities for the manufacture, warehousing and distribution of products to its members. The facilities and operations are
subject to various laws and regulations concerning the protection of the environment and employee health and the Company believes it is in full compliance with all such laws and regulations. The Company has established reserves for known and
anticipated costs of remediation.



Product
Liability.    An inherent risk of the food distribution industry is the risk of exposure to product liability claims in the event people who purchase products from the Company become ill or incur some other form of injury.
The Company maintains stringent quality standards on products purchased or manufactured by the Company. The Company also rigorously tests its private brands products to ensure the Companys quality standards are met. In response to this
potential risk, the Company purchases liability insurance and also requires product manufacturers to maintain an appropriate level of liability insurance to protect against product liability claims that may occur. The Company believes that its
current liability insurance provides adequate coverage, but if losses exceed this coverage the Companys financial position and results of operations may be harmed.



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



Bank Covenants.    The
Companys revolving loan agreement with banks required improved performance in the first quarter of fiscal 2003 to continue financial covenant compliance. Such improvement was attained and no future changes in the existing covenants exist under
the life of the current revolving loan agreement with banks, which matures October 1, 2004. However, a failure to maintain the improved operating performance could have an adverse effect upon the continued compliance and resulting availability of
loan funds or the terms upon which loan funds would continue to be available, and the impact could be material.



Cash Flow.    The Company relies upon cash flow from its operations, patron deposits and shareholdings to fund
its operating activities. In the event that these sources of cash are not sufficient to meet the Companys requirements, additional sources of cash are expected to be obtained from the Companys credit facilities. The revolving credit
facility permits advances of up to 85% of eligible accounts receivable and up to 65% of eligible inventory to a maximum of $200 million. As a result, significant reductions in availability may require the Company to seek alternate sources of cash.



Pension Plans.    The
Companys employees participate in a defined benefit pension plan sponsored by the Company. The Company accounts for the plans in accordance with SFAS No. 87, Employers Accounting for Pensions which requires the Company to
make actuarial assumptions which are used to calculate the value of related assets, liabilities and expenses recorded in the Companys financial statements. While we believe the assumptions are appropriate, which include assumptions regarding
rates of return on plan assets, life expectancies, rates of increase in salary levels and discount rates, the value of pension related assets, liabilities and expenses recorded in the financial statements could differ if other assumptions are used.



Critical Accounting Policies



The Securities and Exchange Commission defines critical
accounting policies as those that require application of managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. The Companys critical accounting policies and important accounting practices are outlined and described below.



Insurance Reserves.    The Companys insurance subsidiaries require management to make estimates of claims
anticipated to be made in the future by policyholders and to establish appropriate reserves for those claims. In addition, the Company is self insured for workers compensation up to $100,000 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. Insurance reserves
maintained by the Companys insurance subsidiaries and the Companys reserve for workers compensation payouts were approximately $39.3 million as of March 29, 2003 and September 28, 2002.



Allowance for Uncollectible Accounts and Notes
Receivable.    The preparation of the Companys financial statements requires management to make estimates of the collectability of its accounts and notes receivable.



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Management specifically analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and
changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. In determining the appropriate level of reserves to be established, the Company utilizes several techniques including specific account
identification, percentage of aged receivables and historical cash collection trends. In addition, when establishing reserves, the Company takes into consideration collateral such as redemption notes, Class B Shares, cash deposits and personal
guarantees. A bankruptcy or financial loss associated with several major customers could have a material adverse effect on the Companys sales and operating results. The Companys allowance for doubtful accounts for trade and short term
notes receivable was approximately $0.9 million and $0.5 million for long term notes receivable at March 29, 2003. Pursuant to quasi-reorganization accounting, the Companys contra accounts including the allowance for doubtful accounts were
eliminated and offset against the trade and notes receivable accounts at September 28, 2002, thereby stating these accounts at their fair value. The fair value represents gross accounts and notes receivables reduced to fair value by an allowance for
uncollectible amounts and other fair value adjustments of $12.7 million at September 28, 2002.



Lease Loss Reserves.    The Company must estimate and record appropriate reserves for leased property for which the Company provides lease guarantees and sub-leases to its
member patrons. Variables affecting the level of reserves recorded include the remaining lease term, vacancy rates of leased property, the state of the economy, property taxes, common area maintenance costs and estimates of the amount of time to
sub-lease the property. In estimating the appropriate level of reserves to record, the Company estimates the amount of losses to be incurred over the remaining term of the lease and discounts these amounts to their net present value. The
Companys lease loss reserves were approximately $12.3 million and $14.3 million as of March 29, 2003 and September 28, 2002, respectively.



Intangibles and Long Lived Assets.    As a result of the Companys implementation of a
quasi-reorganization as of September 28, 2002, the Company was required to early adopt SFAS No. 142 which provides that goodwill and other intangible assets with indefinite lives will no longer be amortized, but shall be tested for impairment
annually, or more frequently if circumstances indicate potential impairment. The impairment test is comprised of two steps: (1) a reporting units fair value is compared to its carrying value; if the fair value is less than its carrying value,
goodwill impairment is indicated; and (2) if impairment is indicated in the first step, it is measured by comparing the implied fair value of goodwill to its carrying value at the reporting unit level. In determining fair value, the Company uses the
discounted cash flow method which assumes a certain growth rate projected over a period of time in the future and discounted to present value using the Companys estimated cost of capital. Adoption of SFAS No. 142 did not have an impact on the
Companys consolidated financial statements at September 28, 2002.



Discontinued Operations.    The decision to exit the unprofitable retail operations on September 25, 2002 resulted in an impairment of the underlying assets and an accrual of exitrelated
costs and liabilities in accordance with Accounting Principle Board (APB) Opinion No. 30. Pursuant to APB Opinion No. 30, the Company recognized the asset impairment and accrued exit related costs including expected losses anticipated
over the disposal period as of the measurement date, which was September 25, 2002.



Certain of the liabilities established in connection with the discontinued operations such as lease reserves and settlements (including proceeds to be received or paid in connection with lease buyouts)
and contract terminations will be resolved in future years. As of March 29, 2003, the provisions established for these matters are considered adequate.



Quasi-reorganization.    On September 25, 2002, the Companys Board of Directors approved a resolution 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 the Company to proceed on much the same basis as if it had been legally
reorganized. A quasi-reorganization involves adjusting the companys assets and liabilities to their fair values. Any remaining deficit in retained earnings is then eliminated by a transfer from



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paid in capital and capital stock, if necessary, giving the Company a fresh start with a zero balance in retained earnings. The
quasi-reorganization adjustments did not result in a net write up of net assets.



Tax Valuation Allowances.The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires that deferred tax
assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the net deferred tax asset will not be realized. At March 29, 2003 and September 28, 2002, the Company had approximately $7.8 million and $9.4 million, respectively, in net deferred
tax assets that were reduced by a tax valuation allowance of approximately $6.4 million.



Benefit Plans.    The Company accounts for its pension plans in accordance with SFAS No. 87, Employers Accounting for Pensions, which requires the Company
to make actuarial assumptions which are used to calculate the value of pension plan assets, liabilities and expenses recorded in the Companys financial statements. The assumptions are regularly evaluated by management in consultation with
outside actuaries who are relied upon as experts. In the event that the Company determines that changes are warranted in the assumptions used, such as the discount rate, expected long term rate of return on plan assets, or health care costs, future
pension and postretirement benefit expenses could increase or decrease.



Forward-Looking Information



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



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 statements, as soon as reasonably practicable after those reports are electronically filed with the Securities and Exchange Commission. These documents are also available
through the Securities and Exchange Commission website (www.sec.gov).



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|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk
|------- |  | ----------------------------------------------------------



Unified
has only limited involvement with derivative financial instruments. They are used to manage well-defined interest rate risks. Unified entered into a five-year interest rate collar agreement in February 1999 in relation to certain borrowings on its
variable rate revolving credit facility. The collar agreement was put in place without incurring a fee with respect to the collar transaction. The hedge agreement is structured such that Unified pays a variable rate of interest between 6% (cap rate)
and 4.94% (floor rate) based on a notional amount of $50 million. The weighted average interest rate, prior to lenders margin, on borrowings on the revolving credit facility was 1.53% at March 29, 2003. Prior to the quasi-reorganization,
the Company recorded an unrealized loss of $2.4 million in other comprehensive earnings reflecting the fair value of the collar agreement at September 28, 2002. The elimination of other comprehensive earnings (loss) as part of the fair value
adjustment process resulted in the unrealized loss of $2.4 million becoming the new cost basis of the collar agreement. The fair value of the collar agreement was an unrealized loss of $1.9 million and $2.4 million at March 29, 2003 and September
28, 2002, respectively. Accordingly, the Company recorded an unrealized gain of $0.3 million and $0.5 million for the thirteen and twenty six week periods ended March 29, 2003, respectively.



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 and cash flow and earnings. Based on the notes payable outstanding at March 29, 2003 and the current market condition, a 100 basis point increase
in the applicable interest rates would decrease the Companys annual cash flow and pretax earnings by approximately $1.4 million. Conversely, a 100 basis point decrease in the applicable interest rates would increase annual cash flow and pretax
earnings by $1.4 million.



With the adoption of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity, 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. During the thirteen and twenty six week periods ended March 29,
2003, the Company recorded gains due to the changes in the fair value of the convertible bonds totaling $48,000 and $0.4 million, respectively.



|Item 4. |  | Controls and Procedures
|------- |  | -----------------------



Within
the 90 days prior to the filing date of this report, the Chief Executive Officer and the Chief Financial Officer of the Company, with the participation of the Companys management, carried out an evaluation of the effectiveness of the
Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the date of the evaluation, the Companys
disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report.



There were no significant changes in the Companys
internal controls or in other factors that could significantly affect internal controls, known to the Chief Executive Officer or the Chief Financial Officer, subsequent to the date of the evaluation.



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PART II.    OTHER INFORMATION



|Item 1. |  | Legal Proceedings
|------- |  | -----------------



During
fiscal 2002, the Company became involved in litigation in the state of Hawaii stemming from the Companys 1996 sale of a subsidiary to a private investor, events subsequent to the sale, and the subsequent bankruptcy and liquidation of such
business. In re: Hawaiian Grocery Stores, Ltd; and Mark J.C. Yee vs. Unified Western Grocers, Inc., Certified Grocers of California, Ltd., and Grocers Specialty Company, and KPMG, was filed December 14, 2001. In this case, the Trustee for the
bankruptcy estate, who is the plaintiff in the matter, has asserted preference claims against Certified Grocers of California, Ltd. (Certified), the predecessor of Unified, based on alleged insider relationship, fraudulent transfer
claims against Certified and Grocers Specialty Company, fraud claims against Certified, Grocers Specialty Company and other unnamed parties, and contract and tort claims against KPMG. In its prayer for relief, the plaintiff seeks judgment against
the defendants for $13.5 million, plus interest, punitive damages of $10 million and other unspecified damages. The Trustee also filed a complaint in the Hawaii Circuit Court, First Circuit, entitled Mark J.C. Yee, Trustee for the Bankruptcy
Estate of Hawaiian Grocery Stores, Ltd., vs. Unified Western Grocers, Inc., Certified Grocers of California, Ltd., Grocers Specialty Company, RHL, Inc., Alfred A. Plamann, Charles Pilliter, Daniel T. Bane, Robert M. Ling, David A. Woodward, Richard
H. Loeffler, Fletcher Robbe, Goodsill Anderson Quinn and Stifel, and Does 1-10 on May 17, 2002. This action, which generally arises out of the same transactions that are the subject of the Federal District Court proceeding referenced above,
asserts breach of fiduciary duties by the officers and directors of Hawaiian Grocery Stores, Ltd. (HGS), the controlling shareholder of HGS (Grocery Specialty Company) and the controlling shareholders parent corporation
(Certified), and breach of fiduciary duties by defendants Goodsill, Loeffler, RHL, Inc., and Robbe. Current and former officers of the Company were officers or directors of HGS during certain periods and a subsidiary of the Company was a shareholder
of HGS during certain periods. The complaint seeks compensatory damages of approximately $13.5 million, plus interest, punitive damages of $10.0 million and other unspecified damages. All of the above referenced matters are now pending in the
Federal District Court for the District of Hawaii. In March 2003, the Trustee amended the complaints in the above-referenced matters to add Bruce Barber and Sheppard Mullin Richter & Hampton LLP, as defendants. These proceedings are in their
very early stages and the Company intends to vigorously defend 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, we expect that the outcome of these matters will not result in a material adverse effect on our business, financial condition or results of operations.



|Item 2. |  | Changes in Securities and Use of Proceeds
|------- |  | -----------------------------------------



None



|Item 3. |  | Defaults upon Senior Securities
|------- |  | -------------------------------



None



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



(a)  Date of Meeting:    March 11, 2003 (Annual Meeting)



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



Election of Directors



|Class A Directors          |  | Votes For |  | Withheld Authority
|-------------------------- |  | --------- |  | ------------------
|Louis A. Amen              |  | 43,800    |  | 9,400             
|David M. Bennett           |  | 44,700    |  | 8,500             
|John Berberian             |  | 44,500    |  | 8,700             
|Edmund Kevin Davis         |  | 45,100    |  | 8,100             
|Deiter Huckestein          |  | 44,500    |  | 8,700             
|Darioush Khaledi           |  | 44,100    |  | 9,100             
|John D. Lang               |  | 44,600    |  | 8,600             
|Jay T. McCormack           |  | 45,000    |  | 8,200             
|Peter J. ONeal            |  | 45,200    |  | 8,000             
|Michael A. Provenzano, Jr. |  | 44,400    |  | 8,800             
|Thomas S. Sayles           |  | 44,600    |  | 8,600             
|Kenneth Ray Tucker         |  | 45,400    |  | 7,800             
|Richard L. Wright          |  | 45,200    |  | 8,000             
|                          
|Class B Directors          |  | Votes For |  | Withheld Authority
|Douglas A. Nidiffer        |  | 335,828   |  | 38,303            
|Mimi R. Song               |  | 334,316   |  | 39,815            
|Robert E. Stiles           |  | 349,314   |  | 24,817            



Amendment to Articles of Incorporation to authorize the issuance of Class E Shares:



|Votes For |  | Votes Against |  | Votes Abstaining
|--------- |  | ------------- |  | ----------------
|37,800    |  | 12,900        |  | 2,800           



Item 5.    Other Information



None



Item 6.    Exhibits and Reports on Form 8-K



(a)  Exhibits:



|    
|----
|3.1 
|    
|3.2 
|    
|99.1



(b)  Reports on Form 8-K:



None



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##### Table of Contents

SIGNATURES



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



UNIFIED WESTERN GROCERS, INC. (Registrant)By

/s/    ALFRED A. PLAMANNAlfred A. Plamann On behalf of the Registrant and as President
and Chief Executive OfficerBy

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

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




Dated:    May 12, 2003



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##### Table of Contents

CHIEF EXECUTIVE OFFICER CERTIFICATION



I, Alfred A. Plamann, President and Chief Executive Officer of Unified Western Grocers, Inc., certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Unified Western Grocers, Inc. (the Registrant);
| | -- |  | -------------------------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Evaluated the effectiveness of the Registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The Registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrants auditors and the audit committee
of Registrants board of directors (or persons performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the Registrants ability to record, process, summarize
and report financial data and have identified for the Registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The Registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dated:    May 12, 2003



/s/    ALFRED A.
PLAMANNAlfred A. Plamann President and Chief Executive Officer (principal executive officer)




28



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##### Table of Contents

CHIEF FINANCIAL OFFICER CERTIFICATION



I, Richard J. Martin, Executive Vice President, Finance and
Administration and Chief Financial Officer of Unified Western Grocers, Inc., certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Unified Western Grocers, Inc., (the Registrant);
| | -- |  | --------------------------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Evaluated the effectiveness of the Registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The Registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrants auditors and the audit committee
of Registrants board of directors (or persons performing the equivalent functions):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the Registrants ability to record, process, summarize
and report financial data and have identified for the Registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The Registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dated:    May 12, 2003



/s/    RICHARD J.
MARTINRichard J. Martin Executive Vice President, Finance andAdministration and Chief Financial Officer (principal financial and accounting officer)




29