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United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

(Mark One)

[X] Annual report pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934 for the fiscal year ended September 27, 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)

I.R.S. Employer Identification No.: 95-0615250

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. There is no public market for the Company’s voting and non-voting common equity.

The number of shares outstanding of each of the registrant’s classes of common stock, as of December 10, 2003 were as follows:

Documents Incorporated By Reference: Portions of the proxy statement for the 2004 annual meeting, which will be filed within 120 days of the end of the fiscal year, are incorporated by reference in Part III.

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Part I

Item 1.    BUSINESS

General

Unified Western Grocers, Inc. (“Unified” or the “Company”) is a grocery wholesaler serving supermarket operators in California, Oregon, Washington, Idaho, Nevada, Arizona, Hawaii, Colorado, Utah and various foreign countries in the South Pacific and elsewhere. The Company sells a wide variety of products to its customers, including dry grocery, frozen food, deli, meat, dairy, egg, produce, bakery, gourmet, specialty foods and general merchandise products. Unified also provides support services to its patrons, including member financing and insurance. Specific products and services available to patrons vary depending on location. The Company’s marketing platform is built on offering its customers better value than is available elsewhere by combining competitive pricing with superior selection, quality, timely delivery, service and convenience.

In September 1999, Unified completed a merger (the “Merger”) with United Grocers, Inc. (“United”), a grocery cooperative headquartered in Milwaukie, Oregon. In connection with the Merger, the Company changed its name from Certified Grocers of California, Ltd. (“Certified”) to Unified. Effective September 27, 1999 the Company also changed its fiscal year end from the Saturday nearest August 31 to the Saturday nearest September 30. The Merger provided Unified members with various benefits, including economies of scale and certain synergies through the elimination of duplicate facilities and functions, including legal, accounting and management information systems and services. The increased purchasing volume and economies of scale resulting from the Merger allowed for more favorable pricing on certain products, as well as increased availability of products and services not previously offered by the separate companies.

A California corporation organized in 1922 and incorporated in 1925, Unified does business primarily with those customers that qualify and have been accepted as “member-patrons.” The Company’s member-patrons are primarily independent grocers. To realize the benefits of membership in the cooperative, member-patrons are required to meet specific member capitalization requirements. Member capitalization requirements, as defined pursuant to the Company’s Bylaws, include a combination of capital stock ownership, required cash deposits and patronage dividend certificates. The Company operates as a cooperative for income tax purposes except with respect to business conducted with non-patrons and business conducted by its subsidiaries. Unified establishes for its member-patrons minimum purchase requirements, which may be modified at the discretion of the Company’s Board of Directors (the “Board”). A patron that does not meet member-patron purchase requirements may conduct business with Unified either as an “associate-patron” or as a customer on a non-patronage basis. Associate-patrons have reduced minimum purchase requirements, are required to establish cash deposits, and do not own shares of the capital stock of Unified. The earnings of the Company’s subsidiaries and non-patronage business of the cooperative are retained by the Company, while the earnings of the parent company attributable to patronage business conducted with its members are generally distributed to its patrons in the form of patronage dividends.

During the period from August 29, 1999 to September 28, 2002, the Company produced and distributed to its members patronage earnings of approximately $47.1 million from its three patronage earnings divisions. However, the Company’s non-patronage businesses generated losses that resulted in an accumulated deficit of approximately $21.9 million at September 28, 2002. The losses were primarily attributable to the Company’s retail grocery business, as well as other unprofitable subsidiaries and the one-time transition costs associated with the Merger. During this period, the Company pursued several initiatives to return its retail and other subsidiary businesses to profitability, including the closure and sale of under-performing retail locations and certain unprofitable businesses. Although substantial improvements were made in the Company’s retail operations, the Company concluded that future improvements would require continued capital investments and that such investments would not be without risk. Consequently, on September 25, 2002, the Board approved a plan to exit retail and other unprofitable subsidiary operations. Concurrent with this decision, the Board also approved a plan to effect a quasi-reorganization as of September 28, 2002. A quasi-reorganization is an accounting procedure that eliminates an accumulated deficit in retained earnings and permits a company to proceed on much the same basis as if it had been legally reorganized. A quasi-reorganization involves adjusting a company’s assets and liabilities to their fair values. Any remaining deficit in retained earnings is then eliminated by a transfer of amounts from paid-in capital and capital stock, if necessary, giving a company a “fresh start” and a zero balance in retained earnings. To reflect these actions, the Company wrote down certain current and non-current assets of its retail business, including goodwill, to

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net realizable value. In addition, the Company accrued certain exit related costs including estimated operating losses, severance, lease reserves and other necessary costs expected to be incurred over the disposal period. The effect of these two actions resulted in a net accumulated deficit that was eliminated by a transfer of amounts from paid-in capital, Class A and Class B Shares (see Notes 2 and 3 to the consolidated financial statements).

Wholesale Distribution Business

The Company’s wholesale distribution business represented approximately 99% of consolidated net sales from continuing operations for the fiscal years ended September 27, 2003 and September 28, 2002. The wholesale business includes a broad range of branded and private label products in nearly all food categories including dry grocery, frozen food, deli, meat, dairy, egg, produce, bakery, gourmet, specialty foods and general merchandise products.

The wholesale distribution segment includes the results of operations from the sale of food and general merchandise products to both member and non-member independent and chain supermarket operators. The Company’s patronage earnings are based on the combined results of the Company’s three patronage earnings divisions: the Southern California and Pacific Northwest Dairy Divisions and the Cooperative Division. The Company also does business on a non-patronage basis in the wholesale distribution segment through its specialty food company and international sales division and with non-member customers of the cooperative.

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

Unified sells a full line of branded food and nonfood items supplied by manufacturers in addition to merchandise under its own private labels, including the Springfield, Special Value, La Corona, Golden Creme, Western Family, Foremost, Cottage Hearth and Better Buy trade names. The Company operates its own bakery and fluid milk bottling manufacturing facilities in Southern California. Unified is not dependent upon any single source of supply in any of its businesses, except for the Company’s Southern California Dairy Division. Most of the raw milk used in production at the Los Angeles fluid milk bottling facility is purchased from a dairy cooperative that provides such products at prices established by the State of California. Management believes that alternative suppliers are available for substantially all of the Company’s products and that the loss of any one supplier would not have a material adverse effect on the Company’s business.

During the normal course of business, Unified enters into supply agreements with certain members and customers. These agreements require that the member or customer purchase specified amounts of their merchandise requirements from Unified and obligates the Company to supply such merchandise pursuant to agreed-upon terms and conditions relating to such matters as pricing and delivery. The supply agreements vary in terms and length.

Retail Business

In fiscal 1993, the Company initially acquired a 10% equity interest in SavMax Foods, Inc. (“SavMax”) a member-patron then operating seven retail stores. The Company subsequently purchased the remaining common and preferred shares of SavMax in December 1998. While seeking a qualified buyer for the stores, the Company implemented various initiatives to improve the financial performance of each store with emphasis placed on pricing, selection, service and overall store appearance. However, the stores faced deteriorating conditions in the local economies and increasing competitive pressures. The Company’s Ad Hoc Committee-Retail, which consisted of Board members experienced in operating retail supermarkets, provided guidance and advice on improving retail performance. The Company made improvements to the SavMax chain including the re-merchandising of all stores, the remodel of two store locations and the sale of one under-performing store location. At September 28, 2002, the Company continued to operate six of the original seven SavMax store locations.

As a means to facilitate its members’ ability to acquire store locations, the Company entered into an agreement in May 1999 to purchase certain assets related to 32 stores divested in connection with Albertsons, Inc.’s merger with American Stores, Inc. The acquisition was completed in October 1999. As part

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of this transaction, the Company sold or otherwise permitted the direct transfer of 26 of these stores to the Company’s members coincident to the closing of the transaction. The transaction resulted in an additional annualized supply volume of approximately $52.0 million relating to the increased purchases by the new member stores. Pursuant to its obligations under this transaction, the Company operated the remaining 6 stores (the “Divestiture Stores”) for a period of time. All of the Divestiture Stores were sold, subleased or closed as of the fiscal year ended September 28, 2002.

The Company acquired four stores as part of the Merger in September 1999. Due to poor operating performance, the Company subsequently closed three of the stores in fiscal 2002. The Company also acquired three stores in Northern California in June 2001 but closed and sold one of the stores in fiscal 2002.

At September 28, 2002, the Company’s retail business consisted of twelve stores, nine of which were operating. As a result of continued operating losses generated by its retail operations, the Company in fiscal 2002 initiated detailed studies and evaluations of its retail operations to identify and remedy certain under performing aspects of the retail business. These studies and evaluations were conducted by the Company and supervised by the Company’s Ad Hoc Committee-Retail. On September 25, 2002, the Board approved the Company’s plan to exit its unprofitable retail business. In connection with the plan and pursuant to Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB Opinion No. 30”), the results of operations of the retail business were reported as discontinued operations in the accompanying consolidated financial statements. The plan of disposition included the closure of three retail stores prior to September 28, 2002 with the remaining nine stores planned for sale or closure in fiscal 2003.

In connection with the Company’s exit plan, the Company recorded a loss on the sale and/or disposal of its discontinued retail business for the year ended September 28, 2002 which included the write-down of goodwill of $21.1 million, expected losses to be incurred during the disposal period of $4.5 million, write-down of assets to fair value of $10.5 million, lease reserves and settlements of $3.7 million, severance and termination benefits of $0.8 million and contract termination and other costs of $0.7 million. These costs were partially offset by estimated proceeds of $5.9 million, net of tax. The reserves established at September 28, 2002 represented estimates of the additional costs the Company expected to incur to complete its exit and disposal activities in fiscal 2003. Certain of the reserves established, such as lease reserves and settlements, will be resolved in future years.

During the year ended September 27, 2003, the Company closed seven of the remaining nine stores and obtained binding commitments for the sale and transfer of the leasehold rights for the remaining two stores to member-patrons, which stores were either sold or transferred subsequent to year-end. Sales proceeds realized on the sale of the leasehold rights, store inventories and certain store fixtures were approximately $1.2 million, net of tax which was less than the anticipated estimated proceeds of $5.9 million, net of tax. Also, the Company operated certain stores longer than originally projected in fiscal 2003, and thus the net realizability of certain of the retail business’s remaining assets and liabilities, primarily its estimated lease reserves and settlement costs, were adjusted. The adjustments, which total $5.9 million net of tax, were charged as a reduction to Class A and Class B Shares during the year ended September 27, 2003.

Other Support Businesses

The Company’s other support businesses collectively accounted for approximately 1% of the Company’s consolidated net sales for the fiscal years ended September 27, 2003 and September 28, 2002. In fiscal 2003, the Company’s other support businesses consisted of member financing and insurance. Certain other support businesses originally acquired as part of the Merger were either sold to unrelated third parties or shut down during fiscal 2003 pursuant to the September 25, 2002 Board approved plan to exit all unprofitable subsidiary operations.

Competition

The grocery industry, including the wholesale food distribution business, is highly competitive, and is characterized by relatively high volume and low profit margins. The shifting of market share among competitors is typical of the wholesale food business as competitors attempt to increase sales in various markets. Accordingly, the Company must be able to respond rapidly to fluctuating market prices, provide a

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wide range of perishable and nonperishable products, ensure prompt and efficient deliveries, and provide support services that are required by modern supermarket operations.

The Company competes with a number of local and regional grocery wholesalers and with a number of other businesses that market their products directly to retailers, including companies having greater assets and sales volume than the Company. In addition, the Company’s members also compete at the retail distribution level with several large chain store organizations that have fully integrated wholesale and retail operations.

In helping its customers remain competitive, the Company places emphasis on providing a high quality and diverse line of products, competitive service fees and timely and reliable deliveries. The Company also believes that providing a wide range of support services needed by its retail store customers is an important factor in ensuring its customers’ success.

On October 11, 2003, members of the United Food and Commercial Workers (“UFCW”) union in Southern California went on strike against Safeway, Inc. At the time of the strike, Safeway, Inc.’s bargaining partners, Kroger Co. and Albertsons, Inc., agreed to lock out workers until a contract settlement was reached. Some of the Company’s employees and a small number of the Company’s member-patrons’ employees are members of the UFCW, none of whom are on strike. Accordingly, the Company and its member-patrons have not been adversely affected by the strike.

Customers

Unified is a cooperative organization that conducts business primarily with its members and associate-patrons. Unified also conducts business with non-member customers on a non-patronage basis. The Company’s member and non-member customers are primarily retail grocery store operators ranging in size from single store operators to multiple store chains. The Company’s largest customer, a non-member, and ten largest member and non-member customers accounted for approximately 9% and 34%; 7% and 30%; and 7% and 30% of net sales from continuing operations for the fiscal years ended September 27, 2003, September 28, 2002 and September 29, 2001, respectively. In addition, the Company’s ten largest member and non-member credit customers accounted for approximately 35% and 22% of total accounts receivable at September 27, 2003 and September 28, 2002, respectively.

Capital Stock

Class A Shares.    Class A Shares may be held only by member-patrons of Unified. In order to qualify for and retain member-patron status, a person or other entity (1) must patronize Unified in amounts and in a manner that is established by the Board; (2) must have approved financial standing; (3) must make application in such form as is prescribed by Unified; and (4) is accepted as a member only after approval by the Board. Each holder of Class A Shares is entitled to one vote per share on all matters to be voted upon by the shareholders, and may cumulate votes in connection with the election of 80% of the authorized number of directors.

In fiscal 2002, Unified required that each of its member-patrons acquire and hold 100 Class A Shares. The price for these shares is the book value per share of the Company’s outstanding shares at the close of the fiscal year end prior to purchase. In November 2002, as part of its equity enhancement plan, the Board amended the Bylaws to increase the required holdings of Class A Shares by a member-patron to 150 shares at the end of fiscal 2003, 200 shares at the end of fiscal 2004, 250 shares at the end of fiscal 2005, 300 shares at the end of fiscal 2006, and 350 shares at the end of fiscal 2007.

Class B Shares.    Each holder of Class A Shares must also own a number of Class B Shares in an amount established by the Board. Unified currently requires each member-patron to acquire, over time, Class B Shares having combined issuance values in an amount equal to the member-patron’s required subordinated cash deposit. The price for these shares is the book value per share of the Company’s outstanding shares at the close of the fiscal year end prior to purchase. The holders of Class B Shares currently have the right to elect 20% of the authorized number of directors. Except as provided above or by California law, the holders of Class B Shares do not have any other voting rights.

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Class B Shares are generally issued to member-patrons as part of the Cooperative Division patronage dividends paid to the member-patron over a period of five consecutive fiscal years, beginning with the first full fiscal year following admission as a member-patron. The Class B issuance formula generally provides that the member-patron will hold Class B Shares having issuance values equal to 20% of the member-patron’s Class B Share requirement after the first full year of patronage dividend, 40% of the Class B Share requirement after the second patronage dividend, and so on until the member-patron reaches 100% of its Class B Share requirement.

If following the issuance of Class B Shares as part of the patronage dividend distribution for any given fiscal year, the member-patron does not hold Class B Shares having combined issuance values equal to the amount of Class B Shares required to be held by the member-patron, then additional Class B Shares must be purchased by the member-patron in a quantity sufficient to achieve the required amount. The issuance of additional Class B Shares will be paid for by charging the member-patron’s cash deposit account in an amount equal to the issuance value of the additional Class B Shares or by direct purchase.

Member-patrons that were former United members who did not receive sufficient Class B Shares in the Merger to meet the minimum Class B Share ownership deposit requirements were provided with the following alternatives subsequent to the Merger: (i) provide a cash deposit for the deficiency; (ii) purchase additional Class B Shares to cover the deficiency; or (iii) assign at least 80% of the Cooperative Division patronage dividends the shareholder will receive in the future to Unified to purchase Class B Shares for the account of the shareholder until the deficiency is eliminated. During that period, Unified requires the member to purchase at least the percentage of total product purchased during the most recent 12 month period prior to the Merger under a supply agreement with Unified.

Class C Shares.    Class C Shares are held by members of the Board. Each Director purchases one Class C Share for ten dollars. Class C Shares are non-voting Director Qualifying Shares and share in liquidation at a value of ten dollars per share.

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

Redemption of Capital Stock

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

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

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

The Company’s redemption policy currently provides that subject to the limitations described below, (i) Class A Shares and Class B Shares held by a shareholder that is no longer a qualified or active member-patron may be redeemed at the book value per share of the Company at the close of the last fiscal year end prior to termination of member status, (ii) with respect to terminations prior to September 30, 2000, the repurchase price would be the Company’s book value per share at the fiscal year end prior to the effective date of the Merger, (iii) Class B Shares of terminated members would not be redeemed until after September 28, 2002 and (iv) after September 28, 2002 Unified may repurchase excess Class B Shares tendered for redemption at the book value per share at the close of the last fiscal year end prior to the date the shares are tendered for repurchase.

Pursuant to the Merger, Unified agreed to repurchase excess Class B Shares held by former shareholders of United that were received in the Merger and tendered for redemption prior to January 28, 2001 at the book value as of April 2, 1999 of the shares of the Company’s common stock for which the excess Class B Shares were exchanged in the Merger. The Company purchased such shares by issuing notes referred to as “redemption subordinated notes,” which are payable in twenty equal quarterly principal installments and bear interest at 6% per year. In fiscal 2003, the Company paid $2.8 million on the notes.

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

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

As a California corporation, the Company is subject to the provisions of the California General Corporation Law including Section 500, which limits the ability of the Company to make distributions, including distributions to repurchase its own shares and make any payments on notes issued to repurchase Unified shares. Section 500 permits such repurchase and note payments only when retained earnings calculated in accordance with generally accepted accounting principles equal or exceed the amount of any proposed distribution or an alternative asset/liability ratio test is met. At September 27, 2003, the Company had retained earnings of $5.3 million.

Patronage Dividends

Unified distributes patronage dividends based upon its patronage earnings during the fiscal year. The Board approves the payment of dividends and the form of such payment for the Company’s three patronage earnings divisions: the Southern California and the Pacific Northwest Dairy Divisions and the Cooperative Division.

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The following table illustrates the patronage dividend earnings of Unified during the past three fiscal years.

Net patronage earnings are based on the combined results of the Southern California and Pacific Northwest Dairy Divisions and the Cooperative Division. In the event of a loss in one division, the Board will make an equitable decision with respect to the treatment of the loss.

Due to logistic and geographic constraints, patrons located in Southern California purchase dairy products from the Southern California Dairy Division while patrons located in the Pacific Northwest purchase dairy products from the Pacific Northwest Dairy Division. As a result, patrons of Unified located outside of Southern California and the Pacific Northwest typically do not participate in the Company’s dairy division program.

The Company’s Bylaws provide that patronage dividends may be distributed in cash or in any other form that constitutes a written notice of allocation under Section 1388 of the Internal Revenue Code. Section 1388 defines the term “written notice of allocation” to mean any capital stock, revolving fund certificate, retain certificate, certificate of indebtedness, letter of advice, or other written notice, that discloses to the recipient the stated dollar amount allocated to the recipient by Unified and the portion thereof, if any, which constitutes a patronage dividend. Written notices of allocation may be in the form of qualified written notices of allocation or non-qualified written notices of allocation. To constitute a qualified written notice of allocation, a patronage dividend must be paid at least 20% in cash and the balance in a form which constitutes a written notice of allocation and which the recipient has agreed to take into income for tax purposes in the year of receipt. If at least 20% of the patronage dividend is not paid in cash, the entire distribution, whether in the form of stock, subordinated patronage dividend certificates or other debt instrument, constitutes a non-qualified written notice of allocation.

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

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

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

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

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

Minimum Purchase Requirements

Unified requires that each member-patron meet the minimum purchase requirements established by the Board, which may be modified from time to time. Currently, Unified’s minimum purchase requirement for member-patrons is $5,000 per week. Exceptions to the minimum purchase requirements may be granted by the Board. Entities not meeting these minimum purchase requirements may be allowed to purchase products on a non-patronage basis.

Patron Deposits

Unified generally requires that its patrons maintain a subordinated cash deposit pursuant to a formula based on average weekly purchases from the Company or the amount of the patron’s average individual purchases if purchases are not made on a regular basis. Required deposit amounts are determined at least twice a year, at the end of the Company’s second and fourth fiscal quarters, based on a review of the patron’s purchases from the Cooperative Division during the preceding four quarters. Periodically, member-patrons with deposit deficiencies will be allowed to build the minimum cash deposit requirement over time. Member-patrons meeting certain qualifications may elect to maintain a reduced required deposit. Unified pays no interest on required cash deposit amounts. However, interest is paid at the prime rate for cash deposits in excess of the patron’s required deposit amount.

Member-patrons can satisfy the minimum deposit requirement through a combination of a cash deposit and the ownership of Class B Shares. The deposit value of a Class B Share is based upon its book value at the last fiscal year-end prior to the initial issuance of the Class B Shares. Former United shareholders were permitted a deposit value of $253.95 per share for the value of shares received in the Merger. Former United shareholders that did not have sufficient Class B Shares immediately following the Merger to meet the minimum deposit requirements were provided the following three alternatives: (i) provide a cash deposit for the deficiency; (ii) purchase additional Class B Shares to cover the deficiency; or (iii) assign at least 80% of the Cooperative Division patronage dividends the shareholder will receive in the future to Unified to purchase Class B Shares for the account of the shareholder until the deficiency is eliminated. During that period, Unified requires the member to purchase at least the percentage of total product that was purchased from United during the most recent 12 month period prior to the Merger under a supply agreement with Unified.

The member-patron deposit fund deficiency was approximately $7.0 million and $8.7 million at September 27, 2003 and September 28, 2002, respectively. The deposit fund deficiencies consisted of approximately $4.0 million and $5.7 million at September 27, 2003 and September 28, 2002, respectively, of member-patrons that were approved to build deposit fund requirements over time, and approximately $3.0 million in both years of former United members that elected to assign at least 80% of the Cooperative Division patronage dividends to fulfill deposit fund requirements.

Associate-patrons may only satisfy the minimum deposit requirement by a cash deposit. At September 27, 2003, the Company had 38 associate-patrons with cash deposits totaling $1.3 million.

In addition, member-patrons that participate in the Company’s price reservation program are required to maintain a non-interest-bearing deposit based upon the value of the inventory subject to the program. Under the Company’s price reservation program, patrons are permitted to place advance orders at reserved prices for certain dry grocery, frozen food, deli and general merchandise products. For the patron to receive the benefit of the price reservation program, an actual order must be placed. The price charged to the patron is the price in effect at the time of the reservation.

The required cash deposits of member-patrons are contractually subordinated and subject to the prior payment in full of certain senior indebtedness of the Company. As a condition of becoming a member-patron, each member-patron is required to execute a subordination agreement providing for the subordination of the member-patron’s required cash deposits. Generally, the subordination is such that no payment can be made

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by the Company with respect to the required cash deposits in the event of an uncured default by the Company with respect to senior indebtedness, or in the event of dissolution, liquidation, insolvency or other similar proceedings, until all senior indebtedness has been paid in full.

Upon request, the Company will return to patrons the amount of the cash deposit that is in excess of the required deposit amount provided that the patron is not in default of any other of its obligations to Unified. If membership status is terminated, patrons are entitled to have their deposits returned, less amounts owed to Unified. In all cases, a return of that portion of the patron’s cash deposits that consists of required deposits will be governed by the applicable subordination provisions.

Subordination Agreement, Pledge of Shares and Guarantees

Unified requires each patron, whether a member-patron or an associate-patron, to execute a subordination agreement that provides for the subordination in certain circumstances of the patron’s right to repayment of their cash deposit in full until all indebtedness to the Company is satisfied. The Company also requires each shareholder to pledge, as collateral, Class A, B and E Shares of the Company to secure their obligations to Unified. In general, individual shareholders of corporate members are generally required to guarantee the obligations of the corporate member except that former shareholders of United who were, at the date of the Merger, in compliance with their obligations to United and its subsidiaries are not required to provide individual guarantees in the absence of financing transactions.

Tax Matters

Unified is a California corporation operating primarily on a cooperative basis. The Company is subject to federal, state, franchise and other taxes applicable to corporations, such as sales, excise, real and personal property taxes. The Company files consolidated annual income tax returns with its subsidiaries.

As a corporation operating on a cooperative basis, the Company is subject to Subchapter T of the Internal Revenue Code and regulations promulgated under Subchapter T. Under Subchapter T rules, Unified generally must distribute patronage dividends to its patrons. In order to qualify as a patronage dividend, distributions are made on the basis of the relative value of the business done with or for patrons, under a pre-existing obligation to make such payment, and with reference to the net earnings from business done with or for the cooperative’s patrons. Patronage dividends are paid in cash or in any form that constitutes a written notice of allocation. A written notice of allocation is distributed to the patron and provides notice of the amount allocated to the patron by Unified and the portion thereof which constitutes a patronage dividend.

Under Subchapter T regulations, Unified may deduct for the fiscal year to which they relate the amount of patronage dividends paid in cash and qualified written notices of allocation or other property (except a nonqualified written notice of allocation) within 8½ months after the end of the fiscal year to which the patronage dividends relate. A written notice of allocation will be qualified if Unified pays at least 20% of the patronage dividend in cash, and the patron consents to take the stated dollar amount of the written notice into income in the year in which it is received. Members sign a consent form at the time of membership to satisfy the consent requirement. Patrons are required to consent to include in their gross income, in the year received, all cash as well as the stated dollar amount of all qualified written notices of allocation, including the patronage certificates and the book value of the Class B Shares distributed to them as part of the qualified written notices of allocation. Class B Shares distributed as part of the qualified written notices of allocation are also subject to state income and corporation franchise taxes in California and may be subject to these taxes in other states.

To the extent that Class B Shares are received by the patron as part of the qualified written notices of allocation under Subchapter T rules, the Internal Revenue Service (“IRS”) has held that if such Class B Shares are redeemed in full or in part or are otherwise disposed of, there will be included in the computation of the gross income of the patron, as ordinary income, in the year of redemption or other disposition, the excess of the amount realized on the redemption or other disposition over the amount previously included in the computation of gross income. However, since Class B Shares may be issued other than as a part of patronage dividends, it is possible that the IRS could take the position that the proceeds from a partial redemption of Class B Shares should be taxed as a dividend.

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Unified is subject to federal income tax and various state taxes on the net earnings of the business with or for patrons that are not distributed as qualified written notices of allocation and on the net earnings derived from non-patronage business. In fiscal 2002 as part of its equity enhancement plan, the Company issued nonqualified written notices of allocation in the form of Class B shares and Patronage Certificates. For fiscal 2003, the Board authorized the issuance of the new Class E Shares along with Class B Shares as nonqualified written notices of allocation. The patron does not include a nonqualified written notice of allocation, whether in Class B Shares, Class E Shares or Patronage Certificates, as income in the year of receipt and the Company is not entitled to an income tax deduction in the year of issuance. The patron will have ordinary taxable income and the Company will have an income tax deduction when the stock is redeemed or the subordinated patronage dividend certificate is paid in cash or property.

Patrons are urged to consult their tax advisors with respect to the applicability of U.S. federal income, state or local tax rules on the ownership and disposition of Class A, B and E Shares and the receipt of patronage certificates with respect to their own tax status.

Employees

Unified employs approximately 3,000 employees, of whom approximately 2,000 are represented by collective bargaining agents, the largest being the International Brotherhood of Teamsters. Collective bargaining agreements affecting the Company’s employees have various expiration dates ranging through 2005. The Company believes its labor relations to be good.

The Company’s exit from its retail business in fiscal 2003 reduced its workforce by approximately 600 employees, 400 of whom were represented by unions. Additionally, the Company implemented a workforce reduction in fiscal 2002 that eliminated approximately 340 positions consisting of regular and temporary employees and contractors impacting nearly all divisions, departments and facilities.

Energy Matters

Unified’s operations are dependent upon the continued availability of electric power, diesel fuel and gasoline. The Company’s trucking operations are extensive and diesel fuel storage capacity represents approximately two weeks average usage. As a result, either a shortage or a significant increase in the cost of electricity, diesel fuel or gasoline could disrupt distribution activities and adversely affect the Company’s sales and earnings.

Availability of SEC Filings

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

Item 2.    PROPERTIES

The Company’s corporate offices, warehouses and manufacturing facilities that it operates as of September 27, 2003 are summarized as follows:

These properties are located in California, Oregon and Arizona.

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Item 3.    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, the predecessor name of Unified, based on alleged insider relationship, fraudulent transfer claims against Certified and Grocers Specialty Company, fraud claims against Certified, Grocers Specialty Company and other unnamed parties, and contract and tort claims against KPMG. In its prayer for relief, the plaintiff seeks judgment against the defendants for $13.5 million, plus interest, punitive damages of $10.0 million and other unspecified damages. In September 2003, the court dismissed the fraudulent transfer and fraud claims against Certified and Grocers Specialty Company. The Trustee also filed a complaint in the Hawaii Circuit Court, First Circuit, entitled Mark J.C. Yee, Trustee for the Bankruptcy Estate of Hawaiian Grocery Stores, Ltd., vs. Unified Western Grocers, Inc., Certified Grocers of California, Ltd., Grocers Specialty Company, RHL, Inc., Alfred A. Plamann, Charles Pilliter, Daniel T. Bane, Robert M. Ling, David A. Woodward, Richard H. Loeffler, Fletcher Robbe, Goodsill Anderson Quinn and Stifel, and Does 1-10 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 (Grocers Specialty Company) and the controlling shareholder’s parent corporation (Certified), and breach of fiduciary duties by defendants Goodsill, Loeffler, RHL, Inc., and Robbe. Current and former officers of the Company were officers or directors of HGS during certain periods and a subsidiary of the Company was a shareholder of HGS during certain periods. The complaint seeks compensatory damages of approximately $13.5 million, plus interest, punitive damages of $10.0 million and other unspecified damages. All of the above referenced matters are now pending in the Federal District Court for the District of Hawaii. In March 2003, the Trustee amended its complaint to add Bruce Barber and Sheppard Mullin Richter & Hampton LLP, as defendants. The Company is vigorously defending this litigation.

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

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

None.

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Part II

Item 5.    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

There is no public market for the Company’s Class A, Class B, Class C or Class E Shares. As of December 10, 2003, the Company’s Class A Shares (102,125 outstanding) were held of record by 752 shareholders, Class B Shares (501,517 outstanding) were held of record by 714 shareholders, Class C Shares were held of record, one share each, by the 16 directors of Unified, and the Company’s Class E Shares (36,924 outstanding) were held of record by 416 shareholders. The Company does not pay cash dividends on its stock and has no plans to do so in the future.

Item 6.    SELECTED FINANCIAL DATA

The selected financial information below has been compiled from the audited consolidated financial statements of Unified for the fiscal years ended September 27, 2003, September 28, 2002, September 29, 2001, September 30, 2000, the transition period ended October 2, 1999 and the fiscal year ended August 28, 1999. The historical selected financial information has been recast to reflect the Company’s exit from its retail operations. These operations are classified as discontinued operations. The information below is only a summary and should be read in conjunction with the Company’s historical consolidated financial statements and related notes to the consolidated financial statements contained elsewhere in this document.

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Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements, specifically Note 16, Segment Information, included elsewhere in this document.

In the 2002 Period, the Company’s retail segment incurred a loss of $5.1 million, net of tax, compared to a loss of $11.9 million, net of tax, in fiscal 2001. While the operating performance of the Company’s retail segment had improved in the 2002 Period compared to the prior year, the Company concluded that future improvements would require continued capital investment and that such investments would not be without risk. As a result, the Board approved, on September 25, 2002, management’s plan to exit its retail operations. The Company has reclassified certain accounts in the consolidated financial statements to reflect its exit from the retail business. Accordingly, certain accounts such as revenues, costs and expenses, assets and liabilities and cash flows relating to the Company’s retail operations were segregated and the net operating results, net liabilities and net cash flows of the retail operations were reported as “Discontinued Operations” in the accompanying consolidated financial statements.

The Company has now completed its exit from the retail business. During the year, the Company closed seven of its remaining nine stores and obtained binding commitments for the sale and transfer of the

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leasehold rights for the remaining two stores to member-patrons, which stores were either sold or transferred subsequent to year-end. (See Note 2 to the consolidated financial statements).

Concurrent with its decision to exit retail and other unprofitable subsidiary activities, the Board also approved a plan to effect a quasi-reorganization as of September 28, 2002. A quasi-reorganization is an accounting procedure that eliminates an accumulated deficit in retained earnings and permits a company to proceed on much the same basis as if it had been legally reorganized. A quasi-reorganization involves adjusting a company’s assets and liabilities to their fair values. Any remaining deficit in retained earnings is then eliminated by a transfer of amounts from paid-in capital and capital stock, if necessary, giving a company a “fresh start” and a zero balance in retained earnings. To reflect these actions, the Company wrote down certain current and non-current assets of its retail business, including goodwill, to net realizable value. In addition, the Company established reserves for certain exit related costs including estimated operating losses, severance, lease reserves and other necessary costs expected to be incurred over the disposal period. The effect of these two actions resulted in a net accumulated deficit that was eliminated by a transfer of amounts from paid-in capital, Class A and Class B Shares (see Notes 2 and 3 to the consolidated financial statements).

The following discussion also addresses the impact of the quasi-reorganization on the Company’s financial condition and results of operations.

Results of Operations

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

Post Quasi-Reorganization

Fiscal Year Ended September 27, 2003 (“2003 Period”) Compared to Fiscal Year Ended September 28, 2002 (“2002 Period”)

Overview of the 2003 Period.    The Company’s consolidated operating income from continuing operations improved by $1.8 million to $45.8 million in the 2003 Period compared to $44.0 million in the 2002 Period. The Company experienced improvements in both its Wholesale Distribution and All Other business segments.

The Wholesale Distribution segment realized an overall net improvement in operating income of $0.4 million to $42.1 million in the 2003 Period compared to $41.8 million in the 2002 Period due to higher net sales and improved margins that were partially offset by increased costs in distribution, selling and administrative expenses. The margin improvement is primarily attributable to the Company’s modified pricing program that was implemented in July 2002, which charges member-patrons based on a cents per case service fee rather than a percent of sales methodology. The Company realized an improvement in the dollars collected on its products shipped, and also experienced a reduction in low case value products sold that were previously

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charged below required contribution levels. The Company’s distribution, selling and administrative expenses experienced a net increase in total expenses during the year from higher costs for certain expenses such as employee health and welfare costs, California workers’ compensation insurance, property insurance and a general cost of living increase in other expenses. The Company implemented a number of expense reduction initiatives to mitigate the increase in operating expenses. System improvements and other workflow process modifications have facilitated a reduction in labor force over the last two years of 18% in the non-union workforce and 11% in the union workforce. The Company’s combined-facility productivity has increased by 13% during the same two-year period (additional 5% in the 2003 Period in addition to an 8% improvement in the 2002 Period) as a result of productivity initiatives that were implemented.

Operating income also improved in the Company’s All Other business segment, increasing by $1.4 million to $3.7 million in the 2003 Period compared to $2.3 million in the 2002 Period. The improvement is primarily due to increased earnings from the Company’s finance subsidiary and the closure of certain unprofitable subsidiaries.

The following table summarizes the performance of each business segment for the 2003 and 2002 Periods.

Net sales.    Consolidated net sales from continuing operations increased $26.3 million to $2.8 billion in the 2003 Period compared to the 2002 Period.

The Company also experienced a reduction in sales due to a transitional non-member chain customer that began sourcing its specialty grocery products from another supplier resulting in reduced sales of approximately $9.2 million compared to the 2002 Period.

Offsetting these reductions was a decrease of $42.4 million in inter-segment eliminations resulting from the Company’s exit from its retail operations.

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Cost of sales.    Consolidated cost of sales from continuing operations were $2.5 billion for both the 2003 and 2002 Periods and comprised 89.9% and 90.0% of consolidated net sales for the 2003 and 2002 Periods, respectively.

Distribution, selling and administrative.    Consolidated distribution, selling and administrative expenses from continuing operations were $239.8 million and $234.4 million and comprised 8.5% and 8.4% of net sales for the 2003 and 2002 Periods, respectively.

The Company implemented a work force reduction in December 2001 resulting in the reduction of 198 positions. Union labor and benefit costs were also reduced as operating efficiencies resulted in fewer positions needed to distribute products. The workforce reduction reduced 2003 Period costs by $1.3 million compared to the prior year. Wage and benefit cost reductions from the workforce reduction were partially offset by a $3.3 million increase in annual wage adjustments averaging 2.5%. Additionally, the Company experienced cost reductions in its non-wage expenses by approximately $8.8 million compared to the 2002 Period. These reductions were due to management’s initiatives to lower facility costs by renegotiating rental rates at two of the Company’s facilities, lower utilization of third party storage, lower utility usage, and lower fleet equipment costs.

Offsetting these cost reductions, the Company experienced increases in expenses of $15.6 million due mainly to higher insurance premiums, medical and pension costs, legal and accounting fees and diesel fuel.

The adjustment to fair value of the Company’s land and buildings and pension liabilities pursuant to the quasi-reorganization on September 28, 2002 resulted in higher depreciation expense of $1.4 million, partially offset by the amortization of a pension credit of $1.0 million.

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Interest.    Interest expense was $20.6 million and $23.2 million and comprised 0.7% and 0.8% of consolidated net sales for the 2003 and 2002 Periods, respectively. Interest expense on the Company’s primary debt instruments declined $2.0 million over the 2002 Period. The Company’s effective borrowing rate for both the 2003 and 2002 Periods was 6.1%. Weighted average borrowings declined by $32.2 million in the 2003 Period.

The reduction in interest expense on the Company’s primary debt instruments was partially offset by a $0.8 million increase in interest expense related to capital leases, secondary debt instruments and the adjustment to fair value of certain long-term fixed notes pursuant to the Company’s quasi-reorganization on September 28, 2002.

Patronage dividends.    Patronage dividends for the 2003 Period were $16.6 million, compared to $16.7 million in the 2002 Period. Patronage dividends for the 2003 Period consisted of the patronage earnings from the Company’s three patronage pools: the Southern California and Pacific Northwest Dairy Divisions and the Cooperative Division. For the 2003 Period, the Company had patronage earnings of $10.0 million in the Southern California Dairy Division, $0.3 million in the Pacific Northwest Dairy Division and $6.3 million in the Cooperative Division.

Income taxes.    Income tax expense from continuing operations was $3.4 million for the 2003 Period compared to $2.2 million for the 2002 Period. The Company’s effective income tax rate from continuing operations was 39% for the 2003 Period compared to 52% for the 2002 Period. The lower effective income tax rate in the 2003 Period reflects a decrease in permanent differences between book and taxable income.

Discontinued operations.    Exit activities from the Company’s retail operations during the 2003 Period were charged against the disposal reserves established at September 28, 2002. During the 2003 Period, the Company closed seven of its remaining nine stores and obtained binding commitments for the sale and transfer of the leasehold rights for the remaining two stores to member-patrons, which stores were either sold or transferred subsequent to year-end.

Pre Quasi-Reorganization

Fiscal Year Ended September 28, 2002 (“2002 Period”) Compared to Fiscal Year Ended September 29, 2001 (“2001 Period”)

Overview of the 2002 Period.    The Company’s consolidated operating income from continuing operations improved by $3.6 million to $44.0 million in the 2002 Period compared to $40.4 million in the 2001 Period reflecting improvements in operating income for both the Wholesale Distribution and All Other business segments of the Company’s operations.

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Higher net sales in the Company’s Wholesale Distribution segment coupled with decreases in distribution, selling and administrative expenses was partially offset by increases in cost of sales, resulting in operating income increasing by $2.2 million to $41.8 million in the 2002 Period compared to $39.5 million in the 2001 Period. The Company also achieved improved operating income in the Company’s All Other business segment due primarily to improved performance by the Company’s insurance subsidiary, as well as other initiatives undertaken by the Company as detailed below.

Net sales.    Consolidated net sales from continuing operations for both the 2002 and 2001 Periods were comparable at approximately $2.8 billion.

The sales growth noted above was partially offset by a $54.8 million decline in the California region and a $22.0 million decline in the Pacific Northwest region due to lower same store volume and the closure of member stores. The Company’s sales were also reduced by the closure and sale of five Company-owned stores in the 2002 Period and three in the 2001 Period that lowered retail distribution volume by approximately $15.3 million. In addition, general merchandise sales volume in California declined $6.2 million due to the loss of a non-member customer.

Additionally inter-segment eliminations were reduced by $5.9 million due to the closure and lower same store sales by the Company’s discontinued retail subsidiary.

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Cost of Sales.    Consolidated cost of sales was $2.5 billion, comprising 90.0% of net sales for both the 2002 and 2001 Periods. 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 trend toward value pricing in response to economic and business conditions.

Distribution, selling and administrative.    Consolidated distribution, selling and administrative expenses decreased approximately $1.3 million to $234.4 million in the 2002 Period compared to $235.7 million in the 2001 Period and comprised 8.4% and 8.5% of consolidated net sales for the 2002 and 2001 Periods, respectively.

Offsetting these cost reductions, the Company realized increased expenses of $7.2 million due mainly to higher medical benefits costs, union pension expenses and insurance premiums. Additionally, the Company’s non-union pension expense for the 2002 Period was $2.3 million higher than the 2001 Period resulting from increases in pension liability and decreases in investment returns of plan assets due to deteriorating conditions in the equity markets.

Interest.    Interest expense was $23.2 million (0.8% of net sales) in the 2002 Period and $27.0 million (1.0% of net sales) in the 2001 Period. The Company’s effective borrowing rates for the 2002 and 2001 Periods were 6.36% and 7.79%, respectively. The decrease in interest expense was due to lower effective borrowing rates, as well as reduced borrowing levels. Weighted average borrowings declined $9.0 million in the 2002 Period.

Patronage dividends.    Patronage dividends for the 2002 Period were $16.7 million, an increase of $1.8 million from $14.9 million in the 2001 Period. Patronage earnings for the 2002 Period consisted of the patronage earnings from the Company’s three patronage pools: the Southern California and Pacific Northwest Dairy Divisions and the Cooperative Division. For the 2002 Period, the Company had patronage earnings of $10.4 million in the Southern California Dairy Division, $0.3 million in the Pacific Northwest Dairy Division and $6.0 million in the Cooperative Division.

Income Taxes.    Income tax expense from continuing operations was $2.2 million for the 2002 Period compared to a net tax benefit of $0.3 million for the 2001 Period.

Discontinued operations.    On September 25, 2002, the Company’s Board 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 planned for sale or closure in fiscal 2003. As a result, the Company has reclassified certain accounts in the consolidated financial statements to reflect its exit

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from the retail business. Accordingly, certain accounts such as revenues, costs and expenses, assets and liabilities and cash flows relating to the Company’s retail operations were segregated and the net operating results, net liabilities and net cash flows of the retail operations were reported as “Discontinued Operations” in the accompanying consolidated financial statements.

Revenues from discontinued operations were $125.3 million for the 2002 Period compared to $159.3 million for the 2001 Period. The reduction in revenues reflects the closure of five stores during the 2002 Period, as well as reduced same store sales. Loss from discontinued operations was $5.1 million, net of income tax benefits of $5.0 million, for the 2002 Period compared to a loss of $11.9 million, net of income tax benefits of $2.2 million, for the 2001 Period.

In connection with the Company’s exit plan, the Company recorded a loss on the sale and/or disposal of its discontinued retail business for the year ended September 28, 2002 which included the write-down of goodwill of $21.1 million, expected losses to be incurred during the disposal period of $4.5 million, write-down of assets to fair value of $10.5 million, lease reserves and settlements of $3.7 million, severance and termination benefits of $0.8 million and contract termination and other costs of $0.7 million. These costs were partially offset by estimated proceeds of $5.9 million, net of tax. The reserves established at September 28, 2002 represented estimates of the additional costs the Company expected to incur to complete its exit and disposal activities in fiscal 2003. Certain of the reserves established, such as lease reserves and settlements, will be resolved in future years.

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 operations. The Company believes that cash flow from operations and available credit lines will be sufficient to meet operating needs and capital spending requirements through the 2004 Period. Overall, net cash generated from continuing operations increased to $18.1 million for the 2003 Period compared to $5.3 million for the 2002 Period. The increase in net cash from continuing operations for the 2003 Period consisted of cash provided from operating activities of $88.5 million offset by amounts used in investing activities of $10.3 million and financing activities of $60.1 million. Cash utilized by discontinued operations was $11.4 million, $7.7 million and $7.8 million for the 2003, 2002 and 2001 Periods, respectively (See Note 2 to the consolidated financial statements). Working capital was $109.4 million and $144.0 million and the current ratio was 1.4 and 1.5 at September 27, 2003 and September 28, 2002, respectively.

Operating Activities:    Net cash provided by operating activities increased by $64.6 million to $88.5 million for the 2003 Period compared to $23.9 million for the 2002 Period. The improvement in operating cash was attributable to a $4.5 million improvement in pre-tax earnings in fiscal 2003, as well as management initiatives to more efficiently utilize its working capital. These initiatives consisted of efforts to accelerate the collection of accounts and notes receivable and reduce overall inventory levels. These initiatives contributed $19.1 million, while increased levels of accounts payable and accrued liabilities contributed $39.2 million in operating cash compared to the 2002 Period.

Investing Activities:    Net cash used in investing activities decreased by $0.6 million to $10.3 million for the 2003 Period compared to $10.9 million in the 2002 Period. The decrease in investing activities was due mainly to increases in long-term notes receivable of $12.8 million for loans made by the Company’s financing subsidiary to member retailers and increased investments of $1.2 million by the Company’s insurance subsidiary, consisting of the purchase and sale of securities to replace maturing investments in its portfolio. These increases were partially offset by reductions in capital expenditures of $1.2 million and other assets of $13.4 million.

Financing Activities:    Net cash used in financing activities was approximately $60.1 million for the 2003 Period compared to $7.7 million for the 2002 Period. The increased financing activities was the result of improved cash flow from operations that was used primarily to pay down the Company’s revolving debt during the 2003 Period.

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Contractual Obligations

At September 27, 2003, the Company was contingently liable with respect to 19 lease guarantees for certain member-patrons with commitments expiring through 2017. The Company believes the locations underlying these leases are marketable and, accordingly, will be able to recover a substantial portion of the guaranteed amounts in the event the Company is required to satisfy its obligations under the guarantees. In addition to the lease guarantees, the Company also guarantees certain third-party loans issued to member-patrons and stand-by letters of credit to certain vendors. The Company’s potential obligation for these guarantees is summarized in the table below.

Outstanding Debt and Other Financing Arrangements

The Company issued Patronage Certificates in fiscal years 1993, 1994 and 1995. In the 2003 period, the Company paid at maturity the Patronage Certificates issued in 1995 in the amount of approximately $1.9 million. The Patronage Certificates were included in patrons’ excess deposits and declared patronage dividends in the consolidated balance sheets at September 28, 2002. In the 2002 Period, the Company paid at maturity the Patronage Certificates issued in 1994 in the amount of approximately $2.3 million.

The Company issued $3.3 million of Patronage Certificates as a portion of its patronage dividends for fiscal 2002. The Company offset approximately $128,000 of these certificates against a portion of amounts owed to the Company by the holders in fiscal 2003. These Patronage Certificates are included in subordinated patronage dividend certificates in the consolidated balance sheets.

At September 27, 2003, the Company had a $200.0 million secured revolving credit facility (“Former Revolving Credit Agreement”) with a group of banks for which Cooperative Central Raiffeisen-Boerenleen Bank B.A., “Rabobank Nederland,” New York Branch, served as Administrative Agent. The Company had $118.0 million and $156.0 million outstanding under the Former Revolving Credit Agreement at September 27, 2003 and September 28, 2002, respectively.

On December 5, 2003, the Company refinanced the Former Revolving Credit Agreement with a $210.0 million secured revolving credit facility (“New Revolving Credit Agreement”) with a group of banks for which Harris Trust and Savings Bank is serving as Administrative Agent. At the Company’s request, the amount of the New Revolving Credit Agreement may be increased to $225.0 million subject to the agreement of new or existing lenders to provide such additional financing. The New Revolving Credit Agreement expires on December 5, 2007 and bears interest at either LIBOR plus an applicable margin (1.00% to 2.00%) or the lender’s base rate plus an applicable margin (0.00% to 0.75%). In each case, the applicable margin is based on the ratio of funded debt to operating cash flow. The New Revolving Credit Agreement permits advances of up to 85% of eligible accounts receivable and 65% of eligible inventories. The New Revolving Credit Agreement is secured by the Company’s, and certain of its subsidiaries’, accounts receivable and inventories.

In addition, the Company had a total of $104.3 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 September 27, 2003 and September 28, 2002, respectively. Subsequent to fiscal year ended September 27, 2003, the lender of these notes reduced the interest rate 25 basis points as a result of the Company achieving improved performance in fiscal 2003.

The Former and New Revolving Credit Agreements and the Senior Note Agreement as amended, each contain customary representations, warranties, covenants and default provisions for these types of financing. Obligations under these credit agreements are senior to the rights of members with respect to deposits,

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patronage dividend certificates and subordinated notes. Both the New Revolving Credit Agreement and the Senior Note Agreement limit the incurrence of additional funded debt and the incurrence of liens except permitted liens. Examples of default conditions include the failure to pay an installment of principal or interest under the agreements, the making of false representations and warranties, and non-compliance with one or more financial covenants (minimum tangible net worth, fixed charge coverage ratio and funded debt to earnings before interest, income taxes, depreciation, amortization and patronage dividends, “EBITDAP”). The New Revolving Credit Agreement and the Senior Note Agreement both limit distributions to shareholders (including the repurchase of shares) to designated permitted redemptions, and prohibit all distributions and payments on Patronage Dividend Certificates when an event of default has occurred and is continuing. In the event the Company is not in compliance with the financial covenants of the New Revolving Credit Agreement and the Senior Note Agreement, the continued availability of loan funds or the terms upon which such loans would be available could be adversely impacted, and the impact to the Company could be material.

Unified entered into a five-year interest rate collar agreement in February 1999 in relation to approximately $50.0 million of borrowings on its variable rate Former Revolving Credit Agreement. The collar agreement was put in place without incurring a fee and expires in February 2004. 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 Former Revolving Credit Agreement was 1.70% and 1.86% at September 27, 2003 and September 28, 2002, respectively.

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 whose primary function is to provide financing to the Company’s member-patrons who meet certain credit requirements. Funding for loans is derived from the cash reserves of GCC, as well as the $10.0 million credit facility. The credit agreement, as amended and restated, matures on October 31, 2004. Amounts advanced under the credit agreement bear interest at prime (4.00% and 4.75% at September 27, 2003 and September 28, 2002, respectively) or Eurodollar (1.16% and 1.81% at September 27, 2003 and September 28, 2002, respectively) plus 2.50%. The unused portion of the credit line is subject to a commitment fee of 0.125%. The applicable rate is determined at the Company’s discretion. GCC had $0 and $4.5 million outstanding at September 27, 2003 and September 28, 2002, respectively.

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. In January 1999, GCC entered into another loan purchase agreement with another bank. This additional loan purchase agreement had no maximum limitation on the loan purchases and was terminated on December 31, 2002. These loan purchase agreements do not qualify for sale treatment pursuant to 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. The aggregate amount of secured borrowings with the banks was $1.5 million and $11.5 million at September 27, 2003 and September 28, 2002, respectively. The pledged collateral included in current notes receivable were $0.7 million and $6.6 million and non-current amounts were $0.8 million and $4.9 million at September 27, 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 2004 to 2007.

The Company’s capital stock subordinated residual notes are notes to former United members who tendered their member stock to United prior to the date of the Merger. The redeemed shares represent shares issued to former United members from patronage dividends that were converted to five-year notes and are paid quarterly with interest.

The Company’s capital investment notes are serialized, have a minimum interest rate of 5% and mature ten years from the date of issuance. The notes are subordinated and have maturity dates through 2007. The notes originated with United and were assumed as part of the Merger. The Board at its discretion may change the interest rate above the minimum rate.

Pursuant to the Merger, Unified agreed to repurchase excess Class B Shares held by former shareholders of United that were received in the Merger and tendered for redemption prior to January 28, 2001 at the book

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value as of April 2, 1999 of the shares of the Company’s common stock for which the excess Class B Shares were exchanged in the Merger. The Company purchased such shares by issuing notes referred to as “redemption subordinated notes,” which are payable in twenty equal quarterly principal installments and bear interest at 6% per year. In fiscal 2003, the Company paid $2.8 million on the notes.

The Company has also guaranteed certain loans made directly to members by third-party lenders. At September 27, 2003 the maximum principal amount of these guarantees was $0.6 million. Member loans, provided by the Company and third parties, are generally secured with collateral, which usually consists of personal and real property owned by member-patrons and personal guarantees of member-patrons.

Patrons are generally required to maintain subordinated cash deposits with Unified and member-patrons are required to purchase Class B Shares over time in substitution for this cash deposit requirement. In the Merger, former United members were provided the opportunity to build the minimum subordinated deposit requirement over time, provided they agreed to assign at least 80% of the Cooperative Division patronage dividends they receive in the future to Unified to purchase Class B Shares until the deficiency is eliminated. During that period, Unified requires the member to purchase at least the percentage of total product purchased during the most recent 12 month period prior to the Merger under a supply agreement with Unified.

Upon termination of patron status, the withdrawing patron is entitled to recover deposits in excess of its obligations to Unified if permitted by the applicable subordination provisions, and any shares held by such withdrawing member-patron are subject to repurchase as described under “Redemption of Capital Stock.”

Additional Discussion And Analysis

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

Competitive Industry.    The wholesale food distribution and retail grocery industries are highly competitive and characterized by relatively high volume and low profit margins. The shifting of market share among competitors is typical of the wholesale food business as competitors attempt to increase sales in various markets. A significant portion of the Company’s sales are made at prices based on the cost of products it sells plus a markup. As a result, the Company’s profit levels may be negatively impacted if it is forced to respond to competitive pressure by reducing prices.

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

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

Economy.    The Company is affected by certain economic factors that are beyond its control including inflation and deflation. The degree to which the acquisition cost of products purchased by the Company for resale to customers is stable or deflating could have an adverse effect on the Company’s business and results of operations. The Company operates in a highly competitive marketplace and passing on cost

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increases to customers is difficult. The Company has experienced certain higher operating expenses, including but not limited to energy, fuel and employee wage, benefits and workers’ compensation insurance. 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 prior periods.

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

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

Goodwill impairment.    The Company’s operating results are highly dependent upon either maintaining or growing its distribution volume to members. The Company’s top ten member and non-member customers constitute approximately 34% of total sales at September 27, 2003. A significant loss in membership or volume could adversely affect the Company’s operating results. The Merger with United resulted in the recording of goodwill representing the intangible assets of the acquired business. The book value of the goodwill was approximately $25.9 million at September 27, 2003. Although the sales volume and member base of the combined entity continue to remain strong, significant reductions in the distribution volume in the future could potentially impair the carrying amount of goodwill necessitating a write-down of this asset. Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the Company elected to test its goodwill for impairment the third quarter of each fiscal year. Accordingly, the Company tested its goodwill and noted no impairment for the fiscal quarter ended June 28, 2003.

As a result of continuing operating losses generated by the Company’s retail business and the conclusion that future improvements would require ongoing capital investment that would be at risk, the Company’s Board 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 and for Long-Lived Assets to Be Disposed Of” (“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.

Litigation.    During the normal course of carrying out its business, the Company may become involved in litigation. In the event that management determines that the probability of an adverse judgment in a pending litigation is likely and that the exposure can be reasonably estimated, appropriate reserves are recorded at that time pursuant to SFAS No. 5 “Accounting for Contingencies”. Although the Company believes its reserves to be adequate, the final outcome of any litigation could adversely affect operating results if the actual settlement amount exceeds established reserves and insurance coverage.

Environmental.    The Company owns and operates various facilities for the manufacture, warehousing and distribution of products to its members. Accordingly, the Company is subject to increasingly stringent federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous materials. In

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particular, under applicable environmental laws, the Company may be responsible for remediation of environmental conditions and may be subject to associated liabilities (including liabilities resulting from lawsuits brought by private litigants) relating to its facilities and the land on which the Company facilities are situated, regardless of whether the Company leases or owns the facilities or land in question and regardless of whether such environmental conditions were created by it or by a prior owner or tenant. The Company believes it is in full compliance with all such laws and regulations and has established reserves for known and anticipated costs of remediation.

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

Insurance Reserves.    The Company’s insurance subsidiaries are regulated by the State of California and are subject to the rules and regulations promulgated by the appropriate regulatory agencies. In addition, the Company is self insured for workers compensation up to $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. Although the Company believes its reserves to be adequate, significant and adverse changes in the experience of claims settlement and other underlying assumptions could negatively impact operating results.

Debt 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 current covenants exist for the remaining term of the current revolving loan agreement, which matures September 29, 2004. Subsequent to fiscal year ended September 27, 2003, the Company refinanced its Former Revolving Credit Agreement with the New Revolving Credit Agreement that expires on December 5, 2007. The New Revolving Credit Agreement also requires compliance with certain financial covenants, including minimum tangible net worth, fixed charge coverage ratio and total funded debt to EBITDAP. The Company relies on internal cash and the revolving loan agreement to fund its daily operating activities. Consequently, the inability to access these sources of cash could adversely affect the Company’s operations.

Cash Flow.    The Company relies primarily upon cash flow from its operations, patron deposits and shareholdings to fund its operating activities. In the event that these sources of cash are not sufficient to meet the Company’s requirements, additional sources of cash are expected to be obtained from the Company’s credit facilities. Both the Former and New Revolving Credit Agreement permit advances of up to 85% of eligible accounts receivable and up to 65% of eligible inventory up to a maximum of $200 million for the Former Revolving Credit Agreement and $210 million for the New Revolving Credit Agreement. At the Company’s request, the amount of New Revolving Credit Agreement may be increased to $225 million subject to the agreement of new or existing lenders to provide such additional financing. As a result, if access to operating cash or to the New Revolving Credit Agreement becomes restricted, the Company may be compelled to seek alternate sources of cash.

Benefit Plans.    The Company’s employees participate in Company sponsored defined pension and postretirement benefit plans. Officers of the Company also participate in a Company sponsored Executive Salary Protection Plan (“ESPP II”), which provides additional post-termination retirement income based on each participant’s final salary and years of service as an officer of the Company. The Company accounts for

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these benefit plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 106 “Postretirement Benefit Plans” and SFAS No. 112 “Postemployment Benefit Plans” which require the Company to make actuarial assumptions that are used to calculate the carrying value of the related assets and liabilities and the amount of expenses to be recorded in the Company’s consolidated financial statements. Assumptions include the expected return on plan assets, discount rates, projected life expectancies of plan participants and anticipated salary increases. While we believe the underlying assumptions are appropriate, the carrying value of the related assets and liabilities and the amount of expenses recorded in the consolidated financial statements could differ if other assumptions are used.

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

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

Critical Accounting Policies

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

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

Insurance Reserves.    The Company’s insurance subsidiaries require management to make estimates of future disbursements to be paid to 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 totaled approximately $45.4 million as of September 27, 2003 and $39.3 million as of September 28, 2002.

Allowance for Uncollectible Accounts and Notes Receivable.    The preparation of the Company’s consolidated financial statements requires management to make estimates of the collectability of its accounts and notes receivable. Management regularly analyzes its accounts and notes receivable for changes in the credit-worthiness of customers, economic trends and other variables that may affect the adequacy of recorded reserves for potential bad debt. In determining the appropriate level of reserves to establish, the Company utilizes several techniques including specific account identification, percentage of aged receivables and historical collection and write-off trends. In addition, the Company considers in its reserve calculations collateral such as redemption notes, 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

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accounts for trade and short-term notes receivable was approximately $1.5 million and $0.3 million for long-term notes receivable at September 27, 2003. Pursuant to quasi-reorganization accounting rules, the Company’s accounts and notes receivable were adjusted to fair value. As a result, the related allowance for doubtful accounts were eliminated and offset against the trade and notes receivable accounts at September 28, 2002. The adjustment to fair value represents gross accounts and notes receivables that were netted against allowances for uncollectible accounts of $12.7 million at September 28, 2002.

Lease Loss Reserves.    The Company has historically subleased store sites to independent retailers who meet certain credit requirements, at rates that are at least as high as the rent paid by the Company. The Company also leases sites for its discontinued retail business. Under the terms of the original lease agreements, the Company remains primarily liable for any financial commitments a retailer may no longer be able to satisfy, including those stores that are part of the Company’s discontinued retail business. Should a retailer be unable to perform under the term of the sublease, the Company would record a charge to earnings for the cost of the remaining term of the lease, less any expected sublease income, at net present value. The Company is also contingently liable for certain subleased facilities. Variables affecting the level of lease reserves recorded include the remaining lease term, vacancy rates of leased property, the state of the economy, property taxes, common area maintenance costs and the time required to sublease the property. The Company’s lease reserves for all leased locations were approximately $20.1 million and $20.0 million as of September 27, 2003 and September 28, 2002, respectively.

Goodwill.    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 then discounted to net 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. Pursuant to SFAS No. 142, the Company elected to test its goodwill for impairment the third quarter of each fiscal year. Accordingly, the Company tested its goodwill and noted no impairment for the fiscal quarter ended June 28, 2003.

Discontinued Operations.    The decision to exit its unprofitable retail business on September 25, 2002 resulted in an impairment of the underlying assets and an accrual of exit-related costs and liabilities in accordance with APB Opinion No. 30. Pursuant to APB Opinion No. 30, the Company recognized the asset impairment and established reserves for certain exit-related costs such as estimated operating losses expected to be incurred over the disposal period, lease reserves and settlements, severance and contract termination costs.

During the year, the Company closed seven of its remaining nine stores and obtained binding commitments for the sale and transfer of the leasehold rights for the remaining two stores to member-patrons, which stores were either sold or transferred subsequent to year-end. Sales proceeds realized on the sale of the leasehold rights, store inventories and certain store fixtures were approximately $1.2 million, net of tax which was less than the anticipated estimated proceeds of $5.9 million, net of tax. Also, the Company operated certain stores longer than originally projected in fiscal 2003, and thus the net realizability of certain of the retail business’s remaining assets and liabilities, primarily its estimated lease reserves and settlement costs, were adjusted. The adjustments, which total $5.9 million net of tax, were charged as a reduction to Class A and Class B Shares during the year ended September 27, 2003.

Quasi-reorganization.    On September 25, 2002, the Company’s Board approved a plan to effect a quasi-reorganization as of September 28, 2002. A quasi-reorganization is an accounting procedure that eliminates an accumulated deficit in retained earnings and permits a company to proceed on much the same basis as if it had been legally reorganized. A quasi-reorganization involves adjusting a company’s assets and liabilities to their fair values. Any remaining deficit in retained earnings is then eliminated by a transfer of amounts from paid-in capital and capital stock, if necessary, giving a company a “fresh start” and a zero balance in retained earnings. The fair value adjustments pursuant to quasi-reorganization accounting rules did not result in a net write-up of assets.

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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. The Company had approximately $14.2 million and $9.4 million in net deferred tax assets that were reduced by a tax valuation allowance of approximately $2.0 and $6.4 million at September 27, 2003 and September 28, 2002, respectively. Management evaluated the available positive and negative evidence in determining the realizability of the net deferred tax assets at September 27, 2003 and concluded it is more likely than not that the Company will realize a portion of its net deferred tax assets. In reaching this conclusion, significant weight was given to the Company’s exit from the retail business and other unprofitable subsidiary operations and the continued quarterly and fiscal 2003 profitability of its continuing operations. Accordingly, the valuation allowance was reduced by $4.4 million and pursuant to quasi-reorganization accounting rules, the reduction in the valuation allowance was recorded as an increase to Class A and Class B Shares.

Benefit Plans.    The Company accounts for its benefit plans in accordance with SFAS No. 87, SFAS No. 106 and SFAS No. 112, which require the Company to make actuarial assumptions that are used to calculate the carrying value of the related assets and liabilities and the amount of expenses to be recorded in the Company’s consolidated financial statements. 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.

Accounting Pronouncements Adopted in Conjunction With the Quasi-Reorganization

As a result of the Company’s implementation of a quasi-reorganization as of September 28, 2002 (See Note 3 to the consolidated financial statements), the Company was required to early adopt all accounting standards with effective dates within one year of the quasi-reorganization date including 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”). The following describes the accounting pronouncements the Company early adopted.

SFAS No. 142.    SFAS No. 142 addresses the financial accounting and reporting for goodwill and other intangible assets. The statement 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. Adoption of SFAS No. 142 did not have an impact on the Company’s consolidated financial statements.

SFAS No. 143.    SFAS No. 143 addresses the accounting for obligations associated with the retirement of long-lived assets. Adoption of SFAS No. 143 did not have an impact on the Company’s consolidated financial statements.

SFAS No. 144.    SFAS No. 144 addresses financial accounting and reporting for the impairment and disposal of long-lived assets. This statement supersedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (“SFAS No. 121”) on the same topic and the accounting and certain reporting provisions of APB Opinion No. 30 for the disposal of a segment of a business (as defined in that Opinion). This Statement also amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. Adoption of SFAS No. 144 did not have an impact on the Company’s consolidated financial statements.

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SFAS No. 145.    SFAS No. 145 generally requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. Extraordinary treatment is required for certain extinguishments as provided in APB Opinion No. 30. The adoption of SFAS No. 145 did not have an impact on the Company’s consolidated financial statements.

SFAS No. 146.    SFAS No. 146 addresses exit and disposal activities including one-time involuntary employee termination benefits, contract termination costs and costs to consolidate facilities or relocate employees. Existing accounting guidelines (principally Emerging Issue Task Force Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity”) require companies to recognize a liability when management commits itself or announces plans to exit or dispose of an activity. SFAS No. 146 prohibits companies from recognizing an exit or disposal liability until the liability has been incurred, generally the “communication date” for one-time termination benefits and the contract termination or “cease use date” for contract costs, and requires these liabilities to be measured at fair value. The adoption of SFAS No. 146 did not have an impact on the Company’s consolidated financial statements.

Recently Issued Pronouncements

In April 2003, the Financial Accounting Standards Board (“FASB”) FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The adoption did not have an impact on the Company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. Many of these instruments previously were classified as equity or temporary equity and as such, SFAS No. 150 represents a significant change in the practice in the accounting for a number of mandatorily redeemable equity instruments. SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of non-public entities. For non-public entities that are Securities and Exchange Commission (“SEC”) registrants, the implementation of the provisions of the statement with regard to mandatorily redeemable financial instruments is effective for the first fiscal period beginning after December 15, 2003. The FASB submitted FASB Staff Position 150-c (“FSP 150-c”) for public comment by October 31, 2003. Among other matters, FSP 150-c sought to provide guidance on the implementation date of SFAS No. 150. FSP 150-c identified three entity types and the effective implementation date for each. The three entity types identified were public entities, non-public entities and non-public entities that are SEC registrants. The Company is identified as a non-public entity that is an SEC registrant. The Company, along with a number of other cooperatives in the industry, provided comment to the FASB regarding FSP 150-c and its potential impact on cooperatives, and requested the FASB permit a delay of the implementation of SFAS No. 150 for at least one year to permit cooperatives to determine the impact of certain accounting issues identified during the evaluation of implementing SFAS No. 150. In consideration of the comments received, the FASB indefinitely delayed the implementation of SFAS No. 150 for non-public entities, but did not permit a delay in the implementation of SFAS No. 150 for non-public entities that are SEC registrants. Accordingly, the Company will implement the provisions of this statement regarding mandatorily redeemable financial instruments effective with its second quarter in fiscal 2004. The Company is currently assessing the impact of this pronouncement on its consolidated financial statements.

Effective December 30, 2002, the Company adopted Financial Accounting Standards Board Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation significantly changes the previous practice in the accounting for, and disclosure of, guarantees. Guarantees meeting the characteristics described in the

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interpretation are required to be initially recorded at fair value, which is different from general current practice of recognizing a liability only when loss is probable and reasonably estimable, as prescribed in SFAS No. 5, “Accounting for Contingencies.” The interpretation also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor’s having to make payments under the guarantee is remote. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this interpretation did not have an impact on the Company’s consolidated financial statements.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51.” This interpretation addresses consolidation by business enterprises of entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Variable interest entities are required to be consolidated by their primary beneficiaries if they do not effectively disperse risks among the parties involved. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the entity’s expected losses or receives a majority of its expected residual returns. The consolidation requirements of this interpretation apply immediately to variable interest entities created after January 31, 2003 and apply to existing entities in the first fiscal year or interim period ending after December 15, 2003. Certain new disclosure requirements apply to all financial statements issued after January 31, 2003. The Company had no variable interest entities at adoption on February 1, 2003 or during the fiscal year ended September 27, 2003. As a result, the adoption of this interpretation did not have an impact on the Company’s consolidated financial statements.

Forward-Looking Information

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to expectations concerning matters that (a) are not historical facts, (b) predict or forecast future events or results, or (c) embody assumptions that may prove to have been inaccurate. Also, when we use words such as “believes,” “expects,” “anticipates” or similar expressions, we are making forward-looking statements. Although Unified 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 potential environmental claims; exposure to the uncertainties of litigation for product liability or other claims and other contingent liabilities; the inability of the Company to maintain its operating performance and equity base in order to meet financial covenants applicable to future periods; Unified’s assessment of the probability and materiality of losses associated with litigation and other contingent liabilities; Unified’s expectations regarding the adequacy of capital and liquidity; 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” and “Critical Accounting Policies” 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. Unified assumes no obligation to update or correct the forward-looking statements in this report to reflect subsequent events or actual results.

Item 7a.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Unified has only limited involvement with derivative financial instruments that are used to manage well-defined interest rate risks. In February 1999, the Company entered into a five-year interest rate collar agreement 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 and expires in February 2004. The hedge agreement is structured such that Unified pays a variable rate of interest between 6% (cap rate) and 4.94% (floor rate) based on a notional amount of $50.0 million. The weighted average interest rate, prior to lender’s margin, on borrowings on the revolving credit facility was 1.70% at September 27, 2003. The

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Company recorded an unrealized loss of $2.4 million in other comprehensive earnings (loss) reflecting the fair value of the collar agreement at September 28, 2002 just prior to the quasi-reorganization. The adoption of the quasi-reorganization resulted in the elimination of other comprehensive earnings (loss) as part of the fair value adjustment process resulting in the realization of the previously unrealized loss of $2.4 million thereby becoming the new cost basis of the collar agreement. The change in the fair market value of the collar agreement during the fiscal year ended September 27, 2003 was not significant.

Unified is subject to interest rate changes on its notes payable under the Company’s credit agreements that may affect the fair value of the notes payable, as well as cash flow and earnings. Based on the notes payable outstanding at September 27, 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 $1.2 million. Conversely, a 100 basis point decrease in the applicable interest rates would increase annual cash flow and pretax earnings by $1.2 million.

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

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Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Independent Auditors’ Report

The Board of Directors

Unified Western Grocers, Inc.

We have audited the accompanying consolidated balance sheets of Unified Western Grocers, Inc. and subsidiaries (the “Company”) as of September 27, 2003 and September 28, 2002 and the related consolidated statements of earnings (loss) and comprehensive earnings (loss), shareholders’ equity and cash flows for each of the three years in the period ended September 27, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(d). These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 27, 2003 and September 28, 2002 and the results of its operations and its cash flows for each of the three years in the period ended September 27, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 3 to the consolidated financial statements, the Company effected a quasi-reorganization in September 2002. In conjunction with the accounting for the quasi-reorganization, the Company adjusted the recorded value of specific assets and liabilities to fair value. In addition, as required by quasi-reorganization accounting, the Company early adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” SFAS No. 143, “Accounting for Asset Retirement Obligations,” SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” and SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

DELOITTE & TOUCHE LLP

Los Angeles, California

December 8, 2003

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Unified Western Grocers, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands)

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)

(dollars in thousands)

The accompanying notes are an integral part of these statements.

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Unified Western Grocers, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(dollars in thousands)