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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 October 2, 2004 or

¨ Transition report pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934 for the transition period from              to             

Commission file number 0-10815

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 15, 2004, were as follows:

Documents Incorporated By Reference: Portions of the proxy statement for the 2005 annual meeting, which will be filed within 120 days of the end of the fiscal year, are incorporated by reference into Part III of this Form 10-K.

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Part I

Item 1.    BUSINESS

General

Unified Western Grocers, Inc. (“Unified” or the “Company”) is a retailer-owned, grocery wholesale cooperative serving supermarket operators located primarily in the western United States and the South Pacific. The Company’s customers range in size from single store operators to multiple store chains. The Company sells a wide variety of products typically found in supermarkets. The Company reports all product sales in its Wholesale Distribution business or segment. The Company’s customers include its owners (“member-patrons” or “Members”) and non-owners (“non-members”). Unified also provides support services to its customers, including insurance and financing. Insurance activities are reported in its Insurance business or segment while finance activities are grouped with the Company’s All Other business activities. The availability of specific products and services may vary by geographic region.

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.

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

The earnings from the Company’s subsidiaries and from business conducted on a non-patronage basis (collectively “non-patronage business”) are retained by the Company. The earnings from business conducted on a patronage basis are distributed to Members in the form of patronage dividends.

Wholesale Distribution Business

The Company’s wholesale distribution business represented approximately 99% of consolidated net sales from continuing operations for the fiscal years ended October 2, 2004 (“2004 Period”), September 27, 2003 (“2003 Period”) and September 28, 2002 (“2002 Period”). The wholesale distribution 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 Members and non-members. The segment includes earnings from the Company’s patronage divisions, non-patronage division and non-patronage subsidiaries.

Patronage Divisions:    The Company conducts business with both Members and non-members within the patronage divisions. Earnings resulting from activities with Members are distributed in the form of patronage dividends, while earnings resulting from activities with non-members are retained by the Company. The Company’s patronage earnings are based on the combined results of the Company’s three patronage earnings divisions: the Southern California Dairy Division, the Pacific Northwest Dairy Division and the Cooperative Division.

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Non-Patronage Division and Non-Patronage Subsidiaries:    The Company also does business on a non-patronage basis in the wholesale distribution segment through its non-patronage division, specialty food subsidiary and international sales subsidiary. These businesses sell products to both Members and non-members. Earnings from non-patronage business activities are retained by the Company.

Facilities and Transportation:    The Company operates over 3.5 million square feet of warehouse and manufacturing space throughout its marketing area.

The Company operates a fleet of tractors and trailers that it uses to distribute products to its customers. Customers have the choice of two delivery options. Customers may either elect to have the Company deliver orders to their stores or warehouse locations or may choose to pick-up their orders from the Company’s distribution centers. Approximately 58% of the Company’s sales are distributed by its own fleet.

National Brands:    Unified supplies more than 70,000 national brand items, which represented approximately 87% of the Company’s net sales in the 2004 Period. The Company believes that national brands are attractive to chain accounts and other customers seeking consistent product quality throughout their operations. Unified’s national brand strategy has promoted closer relationships with many national suppliers, which provide important sales and marketing support to the Company.

Private Brands:    Unified’s private brands enable the Company to offer its customers an exclusive and expanding line of product alternatives to comparable national brands across a wide range of prices. Private brands typically carry higher margins than comparable national brand products, while at the same time helping to promote customer loyalty. Unified’s two-tier private brand strategy emphasizes certain brands as a direct alternative to national brand items and other brands as an alternative to lower cost regional labels. Unified sells a full line of food and nonfood items under various private brands. Sales of Unified’s private brands represented approximately 13% of the Company’s net sales in the 2004 Period. Unified currently offers over 3,900 private brand products, including dry grocery, frozen, delicatessen, general merchandise, ice cream, fluid milk and bakery. These products are sold under the following private labels: Western Family, Springfield, Special Value, Golden Creme and Cottage Hearth trade names. The Company operates its own bakery and milk bottling manufacturing facilities in Los Angeles, California. Western Family products are acquired from Western Family Holding Company, of which the Company holds a partial ownership interest. All other private brands are manufactured by third parties with whom the Company contracts.

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Supply Agreements:    During the normal course of business, Unified enters into supply agreements with certain Members and non-member customers. These agreements require that the Member or non-member 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.

Insurance Business

The Company’s insurance business includes the results of operations for the Company’s three insurance subsidiaries (Grocers and Merchants Insurance Service, Inc., Springfield Insurance Company and Springfield Insurance Company, Ltd.). These subsidiaries provide insurance and insurance-related services, including workers’ compensation and liability insurance policies, to both the Company and its Members primarily located in California. The Company’s insurance business accounts for approximately 1% of the Company’s consolidated net sales for the fiscal years ended October 2, 2004, September 27, 2003 and September 28, 2002.

Other Support Businesses

The Company’s other support businesses collectively accounted for less than 1% of the Company’s consolidated net sales for the fiscal years ended October 4, 2004, September 27, 2003 and September 28, 2002. In fiscal 2004, 2003 and 2002, the Company’s other support businesses consisted primarily of a financing entity.

Quasi-reorganization

During the period from August 29, 1999 to September 28, 2002, the Company distributed to its Members patronage earnings of approximately $47.1 million from its three patronage earnings divisions (see “Patronage Dividends” below). 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 (“retail”), as well as other unprofitable subsidiaries, and the one-time transition costs associated with the Merger. On September 25, 2002, the Board approved a plan to exit retail and other unprofitable subsidiary operations (see “Discontinued Operations” below). Subsequent to 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 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 of Notes to Consolidated Financial Statements).

Discontinued Operations

As a result of continued operating losses generated by its retail operations, the Board approved the Company’s plan to exit its retail business on September 25, 2002. 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. At September 28, 2002, the Company’s retail business consisted of twelve stores, nine of which were operating. All stores were closed or sold in accordance with the plan of disposition.

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

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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.

During the year ended September 27, 2003, the Company closed seven of the nine operating stores and obtained binding commitments for the sale and transfer of the leasehold rights for the remaining two stores to Members. 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, thus the net realizability of certain of the retail business’ remaining assets and liabilities, primarily its estimated lease reserves and settlement costs, were adjusted. The adjustments, which totaled $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. Additional adjustments were recorded in fiscal 2004 for lease reserves resulting from the sale and transfer of the remaining two retail locations and other contract and settlement costs relating to the final disposition of the retail business. The adjustments, which totaled $1.2 million net of tax, were charged as a reduction to Class A and Class B Shares.

Competition

The grocery industry, including the wholesale food distribution business, is highly competitive, and is characterized by high volume and low profit margins. As a result of heightened competition, the grocery industry has trended towards vertical integration, alternative format grocery stores (including warehouse club stores and supercenters) and mergers and acquisitions among competing organizations. The drivers of mergers or acquisitions include the need to consolidate to increase efficiency, sales and resource sharing. All of these drivers are central to enabling an organization to achieve its strategic and financial objectives easier than it could on its own. Unified competes in the wholesale grocery industry with regional and national food wholesalers such as Associated Grocers of Seattle, C&S Wholesale, and Supervalu Inc., as well as other local cooperative wholesalers that provide a broad range of products and services to their customers. Unified also competes with many local and regional meat, grocery product, specialty, and general food wholesalers. Unified’s customers compete directly with vertically integrated regional and national chains. The growth or loss in market share of our customers will also impact the Company’s sales and earnings. For more information about the competition Unified faces, please refer to the section entitled “Risk Factors” contained in Item 7, “Management Discussion and Analysis of Financial Conditions and Results of Operations.”

Technology has played a significant role in the shift of market share and the overall composition of the grocery industry as companies continue to use technology to gain efficiencies and reduce costs. As chain supermarkets increase in size and alternative format grocery stores gain market share, independent grocers are further challenged to compete. Unified’s customers benefit from the Company’s substantial investment in supply-chain technology, including improvements in the Company’s vendor management activities through new item introductions, promotions management and payment support activities. Improvements in the Company’s distribution systems have helped lower costs and improved order accuracy. The Company’s Member-focused efforts include “speed-to-shelf” for new items and enhanced retail promotion planning.

In helping its Members and non-member customers remain competitive, the Company places emphasis on providing a high quality and diverse line of products, competitive pricing and timely and reliable deliveries. The Company also provides a wide range of other services, such as financing and insurance to further support the Member’s business. Certain successful members have been able to maintain or grow market share by focusing on niche markets.

Customers

Unified conducts business primarily with its Members on a patronage basis. Earnings from business conducted with Members through its patronage divisions are distributed in the form of patronage dividends, while the Company retains earnings from non-patronage business conducted with Members. Unified also conducts business with non-member customers on a non-patronage basis. Earnings from business activities transacted with non-members are retained by the Company. The Company’s Member and non-member customers are retail grocery store operators ranging in size from single store operators to multiple store chains. The Company’s largest

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customer, a non-member customer, and the ten largest Member and non-member customers accounted for approximately 9% and 36%; 9% and 34%; and 7% and 30% of net sales from continuing operations for the fiscal years ended October 2, 2004, September 27, 2003 and September 28, 2002, respectively. In addition, the Company’s ten largest Members and non-member credit customers accounted for approximately 36%, 35% and 22% of total accounts receivable at October 2, 2004, September 27, 2003 and September 28, 2002, respectively.

Capital Shares

There is no established public trading market for Unified’s shares. The Company’s equity capitalization is obtained solely from its member-patrons in accordance with the Company’s share purchase requirements as established in the Bylaws.

Class A Shares.    Class A Shares may be held only by Members of Unified. A Member (1) must purchase products from Unified in amounts and in a manner that is established by the Board; (2) must meet certain financial performance criteria; (3) must make application in such form as is prescribed by Unified; and (4) must be accepted as a Member 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.

Prior to December 2002, Unified’s Bylaws required that each Member 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 December 2002, the Company adopted an equity enhancement plan. As part of this plan, the Board increased the required holdings of Class A Shares by a Member 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 to hold Class B Shares having an issuance value equal to approximately twice the amount of certain of the Member’s average weekly purchases, except for certain product categories that are subject to reduced requirements (the “Class B Share requirement”). The Class B Share requirement is determined twice a year, at the end of the Company’s second and fourth fiscal quarters, based on the Member’s purchases from the Cooperative Division during the preceding four quarters. At the end of the fourth quarter of fiscal 2004, the requirement was based on Members’ purchases over the preceding two quarters only, so as to exclude any excess purchase volume that may have occurred as a result of a labor dispute in Southern California involving the three major national retail chain stores.

Members meeting certain qualifications may elect to maintain a reduced Class B Share requirement. For purposes of this requirement, each Class B Share held by a Member has an issuance value equal to the book value per share of the Company’s outstanding shares at the close of the fiscal year end prior to the issuance of such Class B Shares. 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.

In accordance with the Company’s Bylaws, Members must satisfy their Class B Share requirement entirely through the holding of Class B Shares by the end of the sixth year of membership. Thus, Class B Shares required to be held by a new Member may be acquired over the five consecutive fiscal years commencing with the first year after admission as a Member at the rate of 20% per year if a subordinated cash deposit is provided for the full amount of the requirement.

Class B Shares are generally issued to Members as a portion of the Cooperative Division patronage dividends paid. If following the issuance of Class B Shares as part of the patronage dividend distribution for any given fiscal year after the first year as a Member, the Member does not hold the required amount of Class B Shares, then additional Class B Shares must be purchased by the Member in a quantity sufficient to achieve the requirement. The additional Class B Shares are paid for by charging the Member’s cash deposit account in an amount equal to the issuance value of the additional Class B Shares or by direct purchase by the Member.

In October 2004, the Board amended the Class B Share requirement. The purpose of the new plan is to encourage Member growth by offering a reduced requirement if certain qualifications are met and to provide a cap on the

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investment requirement at certain volume levels. The standard Class B investment requirement (“Standard Requirement”) is twice the amount of certain average weekly purchases, except for meat and produce, which are one times average weekly purchases. Members may apply for a reduced Class B investment requirement (“Reduced Requirement”), which requires Members to pay for their purchases electronically on the current due date and demonstrate credit worthiness. The Reduced Requirement is based on a sliding scale such that additional purchase volume lowers the requirement. Members who do not apply for the Reduced Requirement would remain on the Standard Requirement. These changes are scheduled to be effective with the second quarter fiscal 2005 recalculation of the Class B Share requirement. In conjunction with adopting modifications to the Class B Share requirement, the Board granted a temporary discontinuance for the fiscal year ending October 2, 2004 only, of the requirement to purchase Class B Shares, such that if the issuance of Class B Shares from the patronage dividend distribution did not satisfy the amount of Class B Shares required to be held, the Member’s cash deposit account would be charged. This temporary discontinuance does not apply to those Members who are in the process of acquiring their Class B Shares over the five consecutive fiscal years commencing with the first year following admission as a Member.

Members that were former United members who did not meet the minimum Class B Share ownership requirements at the time of the Merger must (i) purchase additional Class B Shares to cover the deficiency; or (ii) assign at least 80% of the Cooperative Division patronage dividends the shareholder receives 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 amount of total product purchased during the most recent 12 month period prior to the Merger under a supply agreement with Unified.

Class C Shares.    Members of the Board hold Class C Shares. Each director purchases one Class C Share for its stated value of 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 part of its fiscal 2003 equity enhancement plan, a new class of equity, denominated “Class E Shares”, was created. Class E Shares were issued as a portion of the patronage dividends issued for the Cooperative Division in fiscal 2004 and fiscal 2003, and may be issued as a portion of the patronage dividends issued for the Cooperative Division in future periods, as determined annually at the discretion of the Board. The Class E Shares have a stated value of $100 per share, and are non-voting and non-dividend bearing equity securities. Class E Shares are transferable only with the consent of the Company. Pursuant to the Company’s redemption policy, Class E Shares cannot be repurchased for ten years from their date of issuance unless approved by the Board or upon sale or liquidation of the Company. The shares, when redeemed, will be redeemed at stated value.

Redemption of Capital Stock

The Articles of Incorporation and Bylaws currently provide that Unified has the right to repurchase any Class A Shares, Class B Shares or Class E Shares held by a former Member, and any Class B Shares in excess of the Class B Share requirement (“Excess Class B Shares”) held by a current Member, whether or not the shares have been tendered for repurchase. The repurchase of Class A Shares, Class B Shares or Class E Shares is solely at the discretion of the Board. Pursuant to the Company’s redemption policy, Class E Shares cannot be repurchased for ten years from their date of issuance unless approved by the Board or upon sale or liquidation of the Company. After ten years, the holder may request that Unified, at the sole discretion of the Board, repurchase Class E Shares, even if the membership of the holder has not terminated. The shares, when redeemed, will be redeemed at stated value.

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

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California General Corporation Law

The Company is subject to the restrictions imposed by the California General Corporation Law (the “CGCL”). Section 501 of the CGCL prohibits any distribution that would be likely to result in a corporation being unable to meet its liabilities as they mature. In addition, Section 500 of the CGCL prohibits any distribution to shareholders for the purchase or redemption of shares unless (a) the amount of retained earnings immediately prior thereto equals or exceeds the amount of the proposed distribution or (b) an alternative asset-liability ratio test is met. Historically, the Company maintained sufficient retained earnings to accomplish its share repurchase program. However, during fiscal years 2000, 2001 and 2002, the Company’s retained earnings had been depleted such that they were inadequate to permit repurchase of the Company’s shares. This was remedied with the Company’s exit from its retail business, quasi-reorganization and subsequent profitable operations. However, there can be no assurance that the Company will be able in the future to redeem all shares tendered under the restrictions of the CGCL.

Recent Redemption Activity

On December 10, 2003, the Board authorized the repurchase on December 22, 2003 of 19,825 shares of the Company’s Class A Shares that had been tendered and were pending redemption. The Company paid approximately $3.4 million to redeem the shares. On February 17, 2004, the Board authorized the repurchase on February 20, 2004 of 1,600 shares of the Company’s Class A Shares and 194 of the Company’s Class B Shares that had been tendered and were pending redemption. The Company paid approximately $0.3 million to redeem the shares. On April 21, 2004, the Board authorized the repurchase on May 3, 2004 of 1,700 Class A Shares that had been tendered and were pending redemption. The Company paid $0.3 million to redeem those shares. On August 25, 2004, the Board authorized the repurchase on September 8, 2004 of 1,750 Class A Shares that had been tendered and were pending redemption. The Company paid $0.3 million to redeem those shares.

On December 15, 2004, the Board authorized the repurchase of 3,100 Class A Shares with an approximate redemption value of $0.5 million and 24,173 Class B Shares with an approximate redemption value of $4.3 million (see Note 21 to Notes to Consolidated Financial Statements).

Articles of Incorporation and Bylaws

The Board has the right to amend the Company’s redemption policy at any time, including, but not limited to, changing the order in which repurchases will be made or suspending or further limiting the number of shares repurchased, except as otherwise may be expressly provided in the Articles of Incorporation. A copy of the Bylaws, which contains the Company’s redemption policy, was filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2003, and is incorporated herein by reference.

Redemption policy

The Board has the discretion to modify the redemption policy from time to time. All redemptions occur solely at the discretion of the Board. The Company’s redemption policy currently provides that, subject to the following limitations, (i) Class A Shares and Class B Shares held by a shareholder that is no longer a qualified or active Member 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 is 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 2004 and 2003, the Company paid $1.1 million and $2.8 million, respectively, on the notes.

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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:

If the amount redeemed in any fiscal year is less than all shares eligible for redemption, then the shares redeemed will be determined on a pro rata basis.

Credit or Other Agreements

The Company is party to credit agreements under which redemptions of Class A, Class B and Class E Shares are prohibited during the period of breach or default under the credit agreements.

Patronage Dividends

Unified distributes patronage dividends to its Members based upon its patronage earnings during a fiscal year. Non-member customers are not entitled to receive patronage dividends. The Board approves the payment of dividends and the form of such payment for the Company’s three patronage earnings divisions: the Southern California Dairy Division, the Pacific Northwest Dairy Division and the Cooperative Division.

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

The Company tracks the volume of qualifying patronage purchases from the Company in the respective divisions on an individual member basis. The dividends are distributed in proportion to the qualified patronage sales during the year. Total patronage earnings are based on the combined results of the Southern California Dairy Division, the Pacific Northwest Dairy Division 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, Members of Unified located outside of Southern California and the Pacific Northwest typically do not participate in the patronage earnings of the Company’s dairy divisions.

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

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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 amount of the distribution not paid in cash, 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, pursuant to the equity enhancement plan, Cooperative Division patronage dividends were paid to Members for fiscal 2002 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 were paid to member-patrons in the form of:

For fiscal 2004, patronage dividends in the Cooperative Division will be paid to member-patrons in the same manner as fiscal 2003.

Patronage dividends generated by the dairy divisions are paid in cash.

Minimum Purchase Requirements

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

Member Equity Investments

Unified generally requires that its Members own Class B Shares pursuant to a formula based on average weekly purchases from the Company or the amount of the Member’s average purchases if purchases are not made on a regular basis. New Members may satisfy their Class B Share requirement over the five consecutive fiscal years commencing with the first year after admission as a Member at the rate of 20% per year if a subordinated cash deposit (“Required Deposit”) is maintained. Periodically, Members with deposit deficiencies will be allowed to build the minimum cash deposit requirement over time. Unified pays no interest on required cash deposit amounts. However, interest is paid at the prime rate for cash deposits in excess of the Member’s required deposit amount.

The value of a Class B Share for purpose of satisfying the Class B Share requirement is based upon the book value at the last fiscal year end prior to the initial issuance of each Class B Share. Former United shareholders were permitted a value of $253.95 per share for the value of shares received in the Merger. Former United shareholders who did not have sufficient Class B Shares immediately following the Merger to meet the minimum deposit

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requirements were provided with alternatives to eliminate the deficiency over time. The three alternatives were: (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 receives in the future to Unified to purchase Class B Shares until the deficiency is eliminated.

The Member deposit fund deficiency was approximately $6.3 million, $7.0 million and $8.7 million at October 2, 2004, September 27, 2003 and September 28, 2002, respectively. The deposit fund deficiencies consisted of approximately $3.6 million, $4.0 million and $5.7 million at October 2, 2004, September 27, 2003 and September 28, 2002, respectively, of Members that were approved to build deposit fund requirements over time, and approximately $2.7 million in fiscal 2004 and $3.0 million in both fiscal years 2003 and 2002, respectively, of former United members that elected to assign at least 80% of the Cooperative Division patronage dividends to fulfill deposit fund requirements.

Prior to fiscal 2004, Members participating in the Company’s price reservation program were also required to maintain a non-interest-bearing deposit based upon the value of the inventory subject to the program. During fiscal 2004, the price reservation deposit requirement was discontinued; however, the price reservation program remains in effect.

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, each Member is required to execute a subordination agreement providing for the subordination of the Member’s required cash deposits. Generally, the subordination is such that no payment can be made 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.

Unified requires each Member to execute a subordination agreement that provides for the subordination in certain circumstances of the Member’s right to repayment of their required cash deposit in full until all indebtedness to the Company is satisfied. If membership status is terminated, upon request, the Company will return to Members the amount of the cash deposit that is in excess of the required deposit amount, less any amounts owed to Unified, provided that the Member is not in default of any other of its obligations to Unified. In all cases, a return of that portion of the Member’s cash deposits that consists of required deposits will be governed by the applicable subordination provisions and will be returned only to the extent permitted by the subordination provisions.

Pledge of Shares, Patronage Certificates and Guarantees

The Company requires each shareholder to pledge, as collateral, all Class A, B and E Shares of the Company, as well as all Patronage Certificates, held by them to secure their obligations to Unified. Individual shareholders of corporate Members are 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 thereunder. Under Subchapter T, Unified generally must distribute patronage dividends to its Members. 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 Members, 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 Members. 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 Member and provides notice of the amount allocated to the Member by Unified and the portion thereof which constitutes a patronage dividend.

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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 8 ¹/2 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 Member 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. Members 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 Member 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 Member, 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.

Unified is subject to federal income tax and various state taxes on the net earnings of the business with or for Members 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, and in fiscal 2003 and fiscal 2004, the Company issued nonqualified written notices of allocation in the form of Class B Shares and Class E Shares. The Member 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 Member 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.

Members 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.

Suppliers and Raw Materials Sources

The products Unified sells to its customers and the raw materials the Company uses in its manufacturing operations are purchased from a number of sources. In general, the Company is not dependent upon any single source of supply in any of its businesses. Management believes that alternative supplies 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. Management also believes the products and raw materials generally are available in sufficient supply to adequately meet customer demand.

Seasonality and Backlog

The Company’s wholesale business segment is not subject to significant seasonal fluctuations in demand. The Company experiences no material backlog in sales orders or the provisioning of customer orders.

Government Regulation

Unified owns and operates various facilities for the manufacture, warehousing and distribution of products to its Members and non-member customers. Accordingly, the Company is subject to increasingly stringent federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and

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hazardous wastes and (ii) impose liability for the costs of cleaning up, and certain damages resulting from sites of past spills, disposals or other releases of hazardous materials. In particular, under applicable environmental laws, Unified 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’s facilities are situated, regardless of whether Unified 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. Unified believes it is in compliance with all such laws and regulations and has established reserves for known and anticipated costs of remediation.

Employees

Unified employs approximately 2,900 employees, of whom approximately 1,800 are represented by labor unions under 23 collective bargaining agreements. The International Brotherhood of Teamsters represents a significant majority of employees covered by labor contracts. Collective bargaining agreements affecting the Company’s employees have various expiration dates ranging through 2008. 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 initiative in fiscal 2002 that eliminated approximately 340 positions consisting of regular and temporary employees and contractors impacting nearly all divisions, departments and facilities.

Availability of SEC Filings

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

Item 2.    PROPERTIES

The Company’s corporate offices, warehouses and manufacturing facilities as of October 2, 2004 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., Grocers Specialty Company, and KPMG, was filed December 14, 2001. In this case, the Trustee for the bankruptcy estate, who is the plaintiff in the matter, has asserted preference claims against Certified Grocers of California, Ltd. (“Certified”), the predecessor name of Unified, based on alleged insider relationship, fraudulent transfer claims against Certified and Grocers Specialty Company, fraud claims against Certified, Grocers Specialty Company and other unnamed parties, and contract and tort claims against KPMG. In September 2003, the court dismissed the fraudulent transfer and fraud claims against Certified and Grocers Specialty Company. The Trustee also filed a complaint in the Hawaii Circuit Court, First Circuit, entitled Mark J.C. Yee (“Yee”), Trustee for the Bankruptcy Estate of Hawaiian Grocery Stores, Ltd., vs. Unified Western Grocers, Inc., Certified Grocers of California, Ltd., Grocers Specialty Company, RHL, Inc., Alfred A. Plamann, Charles Pilliter, Daniel T. Bane, Robert M. Ling, David A. Woodward, Richard H. Loeffler, Fletcher Robbe, Goodsill Anderson Quinn and Stifel, and Does 1-10 on May 17, 2002. In March 2003, the Trustee amended its complaint to add Bruce Barber and Sheppard Mullin Richter & Hampton LLP, as defendants. This action, which generally arises out of the same transactions that are the subject of the Federal District Court proceeding referenced above, asserts breach of fiduciary duties by the officers and directors of Hawaiian Grocery Stores, Ltd. (“HGS”), the controlling shareholder of HGS (Grocers Specialty Company) and the controlling shareholder’s parent corporation (Certified), and breach of fiduciary duties by defendants Goodsill, Loeffler, RHL, Inc., and Robbe. Current and former officers of the Company were officers or directors of HGS during certain periods and a subsidiary of the Company was a shareholder of HGS during certain periods. In the third quarter of 2004, the court permitted Value Recovery Group, L.P., as Assignee of the Federal Deposit Insurance Corporation, Receiver of Southern Pacific Bank (“VRG”) to join the action as a plaintiff. VRG asserts it was a creditor of HGS at the time of HGS’ bankruptcy filing. In June 2004, Yee and VRG filed an amended complaint, continuing to assert claims similar to those described above. In their prayer for relief, the plaintiffs seek damages in an undetermined amount, rescission of certain transactions, restitution to plaintiffs in an unstated amount and punitive and other damages in an unstated amount. All of the above referenced matters are now pending in the Federal District Court for the District of Hawaii. The Company is vigorously defending this litigation.

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

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

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.

Additional Item.    EXECUTIVE OFFICERS OF THE REGISTRANT

Please refer to the information under “Part III, Item 10. Directors and Executive Officers of the Registrant” for information regarding the executive officers of the Registrant.

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Part II

Item 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There is no established public trading market for the Company’s Class A, Class B, Class C or Class E Shares. As of December 15, 2004, the Company’s Class A Shares (111,700 shares outstanding) were held of record by 564 shareholders, Class B Shares (524,403 shares outstanding) were held of record by 784 shareholders, Class C Shares were held of record, one share each, by the 16 directors of Unified, and the Company’s Class E Shares (92,827 shares outstanding) were held of record by 573 shareholders. The Company does not pay cash dividends on its stock and has no plans to do so in the future.

Company Purchases of Equity Securities

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 October 2, 2004, September 27, 2003, September 28, 2002, September 29, 2001 and September 30, 2000. 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 following selected consolidated financial data should be read in conjunction with the Company’s consolidated financial statements and the notes thereto and the information contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Historical results are not necessarily indicative of future results.

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

Forward-Looking Information

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to expectations concerning matters that (a) are not historical facts, (b) predict or forecast future events or results, or (c) embody assumptions that may prove to have been inaccurate. These forward-looking statements involve risks, uncertainties and assumptions. When the Company uses words such as “believes,” “expects,” “anticipates” or similar expressions, the Company is making forward-looking statements. Although Unified believes that the expectations reflected in such forward-looking statements are reasonable, the Company cannot give readers any assurance that such expectations will prove correct. The actual results may differ materially from those anticipated in the forward-looking statements as a result of numerous factors, many of which are beyond the Company’s control. Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, the factors discussed in the sections entitled “Risk Factors” and “Critical Accounting Policies and Estimates” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements attributable to Unified are expressly qualified in their entirety by the factors that may cause actual results to differ materially from anticipated results. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date hereof. The Company undertakes no duty or obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this document as well as in other documents the Company files from time to time with the Securities and Exchange Commission.

COMPANY OVERVIEW

Unified Western Grocers, Inc. (“Unified,” “the Company,” “our,” or “we”), a California corporation organized in 1922 and incorporated in 1925, is a retailer-owned, grocery wholesale cooperative serving supermarket operators primarily located in the western United States and in the South Pacific. The Company sells a wide variety of grocery-related and general merchandise products to its customers. The Company also provides financing and insurance services to its customers. The Company does business primarily with Members on a patronage basis. Retailers may do business with the Company as non-member customers on a non-patronage basis.

The Company operates its business in two reportable business segments: (1) Wholesale Distribution and (2) Insurance. All remaining business activities are grouped into “All Other” (see Note 17 of Notes to Consolidated Financial Statements.)

Sales Activities

The Company experienced overall sales growth of 11.3% for the fiscal year ended October 2, 2004 (the “2004 Period”). The 2004 Period included 53 weeks while the fiscal year ended September 27, 2003 included 52 weeks. Sales growth was achieved through a combination of one-time events, including a strike and lockout in Southern California impacting the three major national grocery chains, that will not be repeated in the fiscal year ended October 1, 2005 (the “2005 Period”) as well as continuing sales growth. The Company’s continuing sales growth was approximately 4.6%, and was driven primarily by new store openings by existing customers and the addition of new customers.

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

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During the 2004 Period, the Company has added new Members to the cooperative as indicated in the following table:

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

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

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

Economic Factors

Certain business costs such as workers’ compensation, medical, benefits and fuel have risen significantly in recent periods. Additionally, wage increases occur as a result of negotiated labor contracts and the impact of inflationary cost of living adjustments. These cost increases have resulted in economic pressure on the Company’s underlying cost structure. To offset these cost increases, the Company actively develops initiatives aimed at improving business processes and managing costs to achieve reductions. The implementation of these initiatives has resulted in significant improvements throughout the Company, most notably in the Company’s distribution system, which has led to improved warehouse and transportation efficiencies. Labor efficiencies, such as the number of cases moved in the warehouse per hour of work, have increased 5%, 4% and 8% in the 2004, 2003 and 2002 Periods, respectively, due to system and process improvements. Additionally, the growth in sales for the 2004 Period also provided the Company with benefits of scale.

Technology

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

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Discontinued Operations and Quasi-reorganization

In the fiscal year ended September 28, 2002 (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 significant continued capital investment. 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 fiscal year ended September 27, 2003 (the “2003 Period”), the Company closed seven of its remaining nine operating stores and obtained binding commitments for the sale and transfer of the leasehold rights for the remaining two stores to Members, which stores were either sold or transferred in the first quarter of the 2004 Period (see Note 2 of Notes to Consolidated Financial Statements).

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

Results of Operations

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with “Item 6—Selected Consolidated Financial Data” and the consolidated financial statements and notes to the consolidated financial statements, specifically Note 17 to Notes to Consolidated Financial Statements, Segment Information, included elsewhere in this report. Certain statements in the following discussion are not historical in nature and should be considered to be forward-looking statements that are inherently uncertain.

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

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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 October 2, 2004 (“2004 Period”) Compared to Fiscal Year Ended September 27, 2003 (“2003 Period”)

Overview of the 2004 Period.    The results of operations for the 2004 Period includes 53 weeks while the 2003 Period included 52 weeks. The Company’s consolidated operating income from continuing operations improved by $4.2 million, or 9.2%, to $50.0 million in the 2004 Period compared to $45.8 million in the 2003 Period. The operating income for the Company’s Wholesale Distribution segment improved over the 2003 Period, but was offset in part by a decline in the Insurance segment and the other combined business activities not separately reportable as a segment (collectively referred to as “All Other” business).

On October 11, 2003, members of the United Food and Commercial Workers union (“UFCW”) in Southern California went on strike against one of the area’s large grocery retail chains. At the time of the strike, the retailer’s other two bargaining partners agreed to lock out workers until a contract settlement was reached. As a result of the strike, which was settled on February 26, 2004, the Company experienced higher sales and costs during the quarters ended December 27, 2003 and March 27, 2004 as some consumers began patronizing independent retailers rather than the larger grocery retail chains targeted by the strike. During the strike, efforts to support the additional volume resulted in higher cost of goods and additional logistics costs. However, the additional costs did not outweigh the benefits of the additional volume and contributed to the higher operating income for the 2004 Period. Following the resolution of the strike, the Company experienced a reduction in sales and costs from the strike volume levels as consumers returned to their prior shopping patterns. Due to the many factors involved, an exact measurement of benefit from the additional volume and sales retained following the strike cannot be precisely determined.

As discussed in Note 1 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data”, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers” (“EITF No. 03-10”) beginning with its second quarter of fiscal 2004, which requires manufacturers’ sales incentives offered directly to consumers that do not meet certain criteria to be reflected as a reduction of revenue in the financial statements of a reseller. Accordingly, for the 2004 Period, $86.6 million of such consideration was classified as a reduction in cost of sales, and for the 2003 Period, $87.6 million of such consideration was reclassified as a reduction in cost of sales with a corresponding reduction in net sales. In addition, for the 2004 Period, $0.6 million was classified as a reduction in distribution, selling and administrative expenses, and for the 2003 Period, $0.7 million was reclassified as a reduction in distribution, selling and administrative expenses with a corresponding increase in cost of sales. Comparable amounts for years presented prior to fiscal 2003 were not reclassified, as reclassification is not permitted under the transition guidance. The application of EITF No. 03-10 had no effect on net earnings.

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The Company operates primarily within three marketing areas made up of its Southern California, Northern California and Pacific Northwest regions. Each region experienced sales growth through a combination of new stores added by existing customers, growth in perimeter store products, and new membership.

The 2004 Period included an additional week of operations that also contributed to an increase in sales over the 2003 Period.

As a result of the UFCW strike in Southern California, the Company experienced a temporary sales increase during the 2004 Period as consumers began patronizing the Company’s independent grocery retailers rather than the larger grocery retail chains targeted by the strike. Subsequent to the strike, the Company retained some volume while most of the temporary sales increase returned to normal levels as consumers returned to their prior shopping patterns. The Northern California and Pacific Northwest regions experienced sales volume increases even though they were not impacted by the strike.

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

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

Net sales.    Consolidated net sales from continuing operations increased $308.5 million, or 11.4%, to $3.0 billion in the 2004 Period compared to the 2003 Period.

In addition, increased sales to grocers competing with the three major grocery retailers on strike in Southern California were estimated to be approximately $130.0 million higher compared to the 2003 Period. However, an exact measurement of the impact of the strike on sales cannot be precisely determined due to the many variables involved.

The Company also experienced a reduction in sales due to the transition of a non-member chain customer that began sourcing its specialty grocery products from another supplier resulting in reduced sales of approximately $8.9 million compared to the 2003 Period.

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The Company’s exit from its retail operations resulted in a decrease of $17.8 million in inter-segment eliminations for the 2004 Period as compared to the 2003 Period.

Cost of sales.    Consolidated cost of sales from continuing operations was $2.7 billion for the 2004 Period and $2.4 billion for the 2003 Period, an increase of 11.9%, and comprised 90.1% and 89.6% of consolidated net sales for the 2004 and 2003 Periods, respectively.

Distribution, selling and administrative expenses.    Consolidated distribution, selling and administrative expenses from continuing operations were $252.0 million and $239.1 million, an increase of 5.4%, and comprised 8.3% and 8.7% of net sales for the 2004 and 2003 Periods, respectively.

The favorable factors contributing to the reduction in cost as a percent of sales are as follows:

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While the Company believes its reserves for lease losses and allowance for doubtful accounts are sufficient to cover the estimated risk, adverse changes in estimates can have a material impact on the Company’s financial results.

The unfavorable factors are as follows:

The remaining decrease of 0.1% in cost as a percent of net sales was made up of other less significant expense changes.

The Company’s finance subsidiary expenses increased $0.3 million compared to the 2003 Period primarily due to loan collection activities. The finance subsidiary has experienced significant favorable collection performance during both the 2004 and 2003 Periods on loans previously reserved and a general improvement in the quality of the underlying loan portfolio. As a result of collections received on previously reserved loans, the reserve for uncollectible loans was reduced $1.6 million and $1.8 million in the 2004 and 2003 Periods, respectively. The Company believes its loan reserves are sufficient to cover the credit risk in the loan portfolio but does not anticipate this favorable reduction in loan reserves to continue in future periods.

In addition, All Other includes $0.4 million of expense activities related to brokerage commissions and leases on closed retail store sites that have been sold to a variable interest entity as discussed in Note 4 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data”. The need for additional reserves is dependent upon the variable interest entity’s ability to develop the sites and subsequently sell or sublease them to outside parties.

Partially offsetting the cost increases was a reduction of $0.3 million in expenses related to the closure of unprofitable subsidiaries. The remaining decrease of $0.2 million was made up of other less significant expense changes.

Interest.    Interest expense was $17.3 million and $20.6 million, a reduction of $3.3 million, or 16.0%, and comprised 0.5% and 0.8% of consolidated net sales for the 2004 and 2003 Periods, respectively. Interest expense on the Company’s primary debt instruments declined $3.1 million over the 2003 Period. The interest expense reduction was comprised of two major components—a decrease in weighted average borrowings and interest rate reductions.

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The Company’s borrowings on its revolving credit agreement are subject to market rate fluctuations. A 0.25% change in the market rate of interest over the prior period would have resulted in a $0.3 million increase or decrease in corresponding interest expense.

Changes in secondary debt instruments resulted in a $0.2 million decrease in expense in the 2004 Period as compared to the 2003 Period.

Patronage dividends.    Patronage dividends for the 2004 Period were $20.7 million, compared to $16.6 million in the 2003 Period, an increase of 24.9%. Patronage dividends for the 2004 Period consisted of the patronage earnings from the Company’s three patronage earnings divisions: the Southern California Dairy Division, the Pacific Northwest Dairy Division and the Cooperative Division. For the 2004 and 2003 Periods, respectively, the Company had patronage earnings of $10.1 million and $10.0 million in the Southern California Dairy Division, $0.3 million and $0.3 million in the Pacific Northwest Dairy Division and $10.3 million and $6.3 million in the Cooperative Division.

Income taxes.    Income tax expense was $4.6 million for the 2004 Period compared to $3.4 million for the 2003 Period, an increase of $1.2 million, or 36%. The Company’s effective income tax rate was 38.2% for the 2004 Period compared to 38.9% for the 2003 Period. The lower effective income tax rate in the 2004 Period reflects a decrease in permanent differences between book and taxable income.

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, or 4.1%, 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 segment and All Other business activities. The Company’s Insurance segment experienced a decline in operating income over the 2002 Period. As discussed in Note 1 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data”, the Company adopted EITF No. 03-10 beginning with its second quarter of fiscal 2004, which requires manufacturers’ sales incentives offered directly to consumers that do not meet certain criteria to be reflected as a reduction of revenue in the financial statements of a reseller. Pursuant to the transition guidance contained in EITF No. 03-10, the Company has reclassified its net sales, cost of sales and distribution, selling and administrative expenses for the year ended September 27, 2003 to reflect the impact of EITF No. 03-10. Comparable amounts for all prior years presented were not reclassified, as reclassification is not permitted under the transition guidance. Accordingly, $87.6 million of such consideration for the year ended September 27, 2003 has been classified as a reduction in cost of sales with a corresponding reduction in net sales. Therefore, net sales for the 2003 Period are not comparable to the 2002 Period to the extent of the impact of EITF No. 03-10. In addition, $0.7 million has been classified as a reduction in distribution, selling and administrative expenses with a corresponding increase in cost of sales as of September 27, 2003. The application of EITF No. 03-10 had no effect on net earnings.

The Wholesale Distribution segment realized an overall net improvement in operating income of $0.3 million to $42.1 million in the 2003 Period compared to $41.8 million in the 2002 Period due to 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

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member-patrons based on a cent 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 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 in the Company’s Insurance segment declined $2.1 million to an operating loss of ($0.3) million in the 2003 Period compared to operating income of $1.8 million in the 2002 Period. The decline in operating income is primarily attributable to increased cost of sales of $4.1 million in the 2003 Period due to premium increases on policies written and an increase in insurance reserve provisions to comply with statutory reserve requirements. The increased cost of sales was partially offset by a $2.5 million increase in net sales due primarily to increased rates on policy renewals. The remaining $0.5 million decline in operating income is due to other less significant increases in selling and administrative expenses.

Operating income also improved in the Company’s All Other business activities, increasing by $3.6 million to $4.0 million in the 2003 Period compared to $0.4 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.

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Net sales.    Consolidated net sales from continuing operations decreased $61.3 million, or 2.2%, to $2.7 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.

The $103.7 million reduction in gross sales was offset by a decrease of $42.4 million in inter-segment eliminations resulting from the Company’s exit from its retail operations. As a result of the above, net wholesale distribution sales decreased by $61.3 million.

Cost of sales.    Consolidated cost of sales from continuing operations decreased $67.9 million, or 2.7%, to $2.4 billion in the 2003 Period compared to the 2002 Period and comprised 89.6% and 90.0% of consolidated net sales for the 2003 and 2002 Periods, respectively.

Distribution, selling and administrative expenses.    Consolidated distribution, selling and administrative expenses from continuing operations were $239.1 million and $234.4 million, an increase of 2.0%, and comprised 8.7% and 8.4% of net sales for the 2003 and 2002 Periods, respectively.

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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 $14.9 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.

Interest.    Interest expense was $20.6 million and $23.2 million, a reduction of $2.6 million, or 11.2%, and comprised 0.8% of consolidated net sales for the 2003 and 2002 Periods. Interest expense on the Company’s primary debt instruments declined $2.0 million over the 2002 Period. The Company’s average borrowing rate for both the 2003 and 2002 Periods was 6.2%. Weighted average borrowings declined by $32.2 million in the 2003 Period.

The reduction in interest expense on the Company’s primary debt instruments due to lower borrowings was $2.0 million. Changes in secondary debt instruments resulted in a $0.6 million decrease in expense for the 2003 Period compared to the 2002 Period.

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 earnings divisions: the Southern California Dairy Division, the Pacific Northwest Dairy Division and the Cooperative Division. For the 2003 and 2002 Periods, respectively, the Company had patronage earnings of $10.0 million and $10.4 million in the Southern California Dairy Division, $0.3 million and $0.3 million in the Pacific Northwest Dairy Division and $6.3 million and $6.0 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 shortly after year end.

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Liquidity and Capital Resources

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

Cash Flow

The positive impact of working capital initiatives implemented in the 2003 Period continued throughout the 2004 Period. As a result, net cash consisting of cash and cash equivalents increased by $6.9 million to $23.6 million for the 2004 Period compared to $16.7 million for the 2003 Period.

The following table summarizes the impact of operating, investing and financing activities from continuing operations, and cash utilized for discontinued operations, on the Company’s cash flows for the 2004 and 2003 Periods:

Net cash generated from continuing operations and investing and financing activities decreased by $6.0 million to $12.1 million for the 2004 Period compared to $18.1 million for the 2003 Period. The decrease in net cash for the 2004 Period consisted of cash provided from operating activities of $62.7 million offset by amounts used in investing activities of $15.3 million and financing activities of $35.3 million. Cash used by discontinued operations was $5.2 million and $11.4 million for the 2004 and 2003 Periods, respectively (see Note 2 of Notes to Consolidated Financial Statements in Item 8). Working capital was $98.4 million and $108.7 million and the current ratio was 1.4 at October 2, 2004 and September 27, 2003.

Operating Activities:    Net cash provided by operating activities decreased by $26.4 million to $62.7 million for the 2004 Period compared to $89.1 million for the 2003 Period. The decline in cash provided by operating activities compared to the 2003 Period was attributable to the impact of working capital management initiatives implemented in the 2003 Period that continued to further benefit the 2004 Period, but at a reduced amount as the Company approached desired levels. The Company continues to make improvements in reducing its inventory and accounts receivable levels; however, future working capital reductions are not expected to be as pronounced as was experienced in the 2004 and 2003 Periods. During the 2004 Period, the Company experienced positive cash flows as a result of a decrease in accounts receivable and inventories of $12.9 million and a net increase in accounts payable, accrued liabilities and other long-term liabilities of $14.1 million.

Investing Activities:    Net cash used in investing activities increased by $5.0 million to $15.3 million for the 2004 Period compared to $10.3 million utilized in the 2003 Period. The increase in investing activities was due mainly to increases in capital expenditures of $5.2 million and increases in other assets of $5.1 million primarily for increases in insurance deposit requirements, as well as increases in net investments of $2.6 million by the Company’s insurance subsidiaries, consisting of the purchase and sale of securities to replace maturing investments in its portfolio and to finance increased reserve requirements. Additionally, cash provided by long-term notes receivable increased by $7.8 million, reflecting a reduction in new loans to Members and principal payments received on existing loans with Members by the Company’s financing subsidiary. Spending on investing activities is expected to be funded by existing cash balances, cash generated from operations or additional borrowings.

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Financing Activities:    Net cash utilized by financing activities was approximately $35.3 million for the 2004 Period compared to $60.7 million for the 2003 Period. The decrease in cash used by financing activities reflects the Company’s improved operating cash flow, lower working capital and the positive impact of the Equity Enhancement Plan to meet operating and capital spending requirements.

Equity Enhancement Plan

In fiscal 2002, the Company implemented the first part of an equity enhancement plan designed to build equity in the Company for future investment in the business and other infrastructure improvements. In fiscal 2002, a portion of the patronage dividend was retained in the form of patronage dividend certificates which mature in 5 years. In November 2002, the Company amended its Bylaws, increasing the required holdings of Class A Shares from 100 shares in fiscal 2002 to 350 shares by the end of fiscal 2007. In addition, in fiscal 2003, the Company introduced a new class of capital stock, denominated “Class E Shares.” Class E Shares were issued as part of the patronage dividends issued in fiscal years 2004 and 2003 for the Cooperative Division and may be issued in future years at the discretion of the Board. Accordingly, improvement in Member capital is expected to continue in future years as more cash is retained by the Company rather than paid as a component of the patronage dividend for the Cooperative Division. In addition, the cash received from the increased Class A Share requirement is expected to continue the improvement in Member capital in future years.

Bank Credit Facility

The Company refinanced its $200.0 million revolving credit agreement on December 5, 2003 with a new $225.0 million revolving credit agreement. The new expanded facility, combined with borrowing levels under the new facility of $88.0 million at October 2, 2004, increases the availability of capital accessible by the Company.

Discontinued Operations

The Company’s exit from its retail business in fiscal 2003 further benefited the Company’s cash position by allowing it to preserve working capital that would otherwise have been used to fund the unprofitable retail operations. Net cash used for discontinued operations was approximately $5.2 million, $11.4 million and $7.7 million in fiscal 2004, fiscal 2003 and fiscal 2002, respectively.

Pension and Postretirement Benefit Plans

The Company’s employees participate in a cash balance pension plan (the “Benefit Plan”) sponsored by the Company. Under the Benefit Plan, participants are credited with an annual accrual based on years of service with the Company. The Company makes contributions to the Benefit Plan in amounts that are at least sufficient to meet the minimum funding requirements of applicable laws and regulations, but no more than amounts deductible for federal income tax purposes. The Company also has an Executive Salary Protection Plan (“ESPP II”) that provides supplemental post-termination retirement income based on each participant’s final salary and years of service as an officer of the Company. During fiscal 2004, the Company contributed $4.2 million to the foregoing plans for the 2003 plan year. At this time, the Company expects to make contributions of $4.7 million in fiscal 2005 for the 2004 plan year. Contributions for the 2004 plan year will be due by September 15, 2005. In addition, the Company expects to make quarterly estimated contributions totaling $1.8 million in fiscal 2005 for the 2005 plan year.

Assuming a long-term rate of return on plan assets of 8.50%, a discount rate of 6.25% and certain other assumptions, the Company estimates that its combined pension expense for the Benefit Plan and ESPP II for fiscal 2005 will be approximately $5.7 million. Future pension expense will be affected by future investment performance, discount rates and other variables such as expected rate of compensation increases and mortality rates relating to plan participants. Decreasing both the discount rate and projected salary increase assumptions by 0.5% would increase the Company’s projected fiscal 2005 pension expense for the Benefit Plan and ESPP II by approximately $0.1 million.

The Company sponsors postretirement benefit plans that cover both nonunion and union employees. Retired nonunion employees currently are eligible for a plan providing medical benefits and a certain group of retired nonunion employees currently participate in a plan providing life insurance benefits for which active nonunion employees are no longer eligible.

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Assuming a discount rate of 6.25% and certain other assumptions, the Company estimates that postretirement expense for fiscal 2005 will be approximately $5.1 million. Future postretirement expense will be affected by discount rates and other variables such as expected rate of compensation increases and projected health care trend rates.

Off-Balance Sheet Arrangements

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

Contractual Obligations and Commercial Commitments

At October 2, 2004, the Company was contingently liable with respect to 15 lease guarantees for certain Members with commitments expiring through 2017. The Company believes the locations underlying these leases are marketable and, accordingly, that it will be able to recover a substantial portion of the guaranteed amounts in the event the Company is required to satisfy its obligations under the guarantees. In addition to the lease guarantees, the Company also guarantees certain third-party loans issued to Members and standby letters of credit to certain vendors. Accordingly, with respect to the third-party loan guarantees, the Company would be required to pay these obligations in the event of default by the Member. The Company would only be obligated under the standby letters of credit to the extent of any amount utilized by the vendor.

During fiscal 2004, the Company entered into a lease guarantee with one of its Members. The guarantee has a ten-year term, and as of October 2, 2004, the maximum potential amount of future payments that the Company could be required to make as a result of the Member’s non-payment of rent is approximately $3.0 million. Pursuant to Financial Accounting Standards Board Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” Unified has recorded a liability in connection with this guarantee arrangement. This liability, which amounts to approximately $0.1 million at October 2, 2004, represents the premium receivable from the Member as consideration for the guarantee, and is deemed to be the fair value of the lease guarantee. The Company does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under this guarantee arrangement.

The Company’s contractual obligations and commercial commitments at October 2, 2004 are summarized as follows:

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Obligations under the Company’s Benefit Plan and ESPP II are disclosed in Note 14 of Notes to Consolidated Financial Statements.

The projected interest component on the Company’s contractual obligations was estimated based on the prevailing or contractual interest rates for the respective obligations over the period of the agreements (see Note 9 of Notes to Consolidated Financial Statements).

Outstanding Debt and Other Financing Arrangements

In the 2003 period, the Company paid at maturity patronage dividend certificates (“Patronage Certificates”) issued in 1995 in the amount of approximately $1.9 million.

Additionally, in fiscal 2003, the Company issued $3.3 million of Patronage Certificates as a portion of its patronage dividends for fiscal 2002. The Company offset approximately $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.

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

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The Company had a total of $98.4 million and $104.3 million outstanding in senior secured notes to certain insurance companies and pension funds under a note purchase agreement dated September 29, 1999 (as amended, the “Senior Note Agreement”) at October 2, 2004 and September 27, 2003, respectively. During fiscal 2004, the interest rate on these notes was reduced 25 basis points as a result of the Company achieving improved performance in fiscal 2003.

In addition, at September 27, 2003, the Company had a $200.0 million secured revolving credit facility (“Former Revolving Credit Agreement”) with a group of banks for which Cooperative Central Raiffeisen-Boerenleen Bank B.A., “Rabobank Nederland,” New York Branch, served as Administrative Agent. In December 2003, the Company refinanced the Former Revolving Credit Agreement with a $225.0 million secured revolving credit facility (“New Revolving Credit Agreement”) with a group of banks for which Harris Trust and Savings Bank is serving as Administrative Agent. The New Revolving Credit Agreement expires on December 5, 2007 and bears interest at either LIBOR plus an applicable margin (1.00% to 2.00%), or the lender’s base rate plus an applicable margin (0.00% to 0.75%). In each case, the applicable margin is based on the ratio of funded debt to operating cash flow. The New Revolving Credit Agreement permits advances of up to 85% of eligible accounts receivable and 65% of eligible inventories. The New Revolving Credit Agreement is collateralized by the accounts receivable and inventories of the Company and certain subsidiaries. The Company had $88.0 million outstanding under the New Revolving Credit Agreement and $118.0 million outstanding under the Former Revolving Credit Agreement at October 2, 2004 and September 27, 2003, respectively.

The New Revolving Credit Agreement and the Senior Note Agreement, as amended, each contain customary representations, warranties, financial covenants and default provisions for these types of financing. Obligations under these credit agreements are senior to the rights of members with respect to required deposits, patronage dividend certificates and subordinated notes. Both the New Revolving Credit Agreement and the Senior Note Agreement limit the incurrence of additional funded debt and the incurrence of liens except permitted liens. Examples of default conditions include the failure to pay an installment of principal or interest under the agreements, the making of false representations and warranties, and non-compliance with one or more financial covenants (minimum tangible net worth, fixed charge coverage ratio and funded debt to earnings before interest, income taxes, depreciation, amortization and patronage dividends, “EBITDAP”). The New Revolving Credit Agreement and the Senior Note Agreement both limit distributions to shareholders (including the repurchase of shares) to designated permitted redemptions, and prohibit all distributions and payments on Patronage 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 negatively impacted, and the impact to the Company could be material. As of October 2, 2004, the Company was in compliance with all applicable covenants of its Revolving Credit Agreement.

In February 1999, the Company entered into a five-year interest rate collar agreement to partially offset interest rate fluctuations associated with its variable interest rate borrowings on its Former Revolving Credit Agreement. The collar agreement expired in February 2004.

A $10.0 million credit agreement with a third party bank is collateralized by Grocers Capital Company’s (“GCC”) Member loan receivables. GCC is a wholly owned subsidiary of the Company whose primary function is to provide financing to Members who meet certain credit requirements. Funding for loans is derived from the cash reserves of GCC, as well as the $10.0 million credit facility. The credit agreement, which was amended and restated in fiscal 2004, matures on June 9, 2007. Amounts advanced under the credit agreement bear interest at prime (4.75% and 4.00%) or Eurodollar (2.01% and 1.16%) plus 2.25% and 2.50% at October 2, 2004 and September 27, 2003, respectively. The unused portion of the credit line is subject to a commitment fee of 0.125%. The applicable rate is determined at the Company’s discretion. GCC had no borrowings outstanding at October 2, 2004 or September 27, 2003.

Member loan receivables are periodically sold by GCC to the third party bank through a loan purchase agreement. This loan purchase agreement, which was amended and restated in fiscal 2004, matures on June 9, 2007. Total loan purchases under the agreement are limited to a total aggregate principal amount outstanding of $70.0 million. The loan purchase agreement does not qualify for sale treatment pursuant to SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” and, accordingly, the Company accounts for the transfer of these financial assets as a secured borrowing with a pledge of collateral. The

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aggregate amount of secured borrowings with the third party bank was $0.8 million and $1.5 million at October 2, 2004 and September 27, 2003, respectively. The pledged collateral included in current notes receivable was $0.4 million and $0.7 million and non-current amounts were $0.4 million and $0.8 million at October 2, 2004 and September 27, 2003, respectively. The notes receivable generally bear interest at rates averaging prime plus 2.00%, are paid monthly and have maturity dates ranging from 2004 to 2007.

The Company’s capital stock subordinated residual notes were 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 paid off the remaining principal balance of these notes in the 2004 Period.

Pursuant to the Merger, Unified agreed to repurchase excess Class B Shares held by former shareholders of United that were received in the Merger and tendered for redemption prior to January 28, 2001. The price paid for the excess Class B Shares was the book value as of April 2, 1999 of the shares of the Company’s common stock for which the excess Class B Shares were exchanged in the Merger. The Company purchased such shares by issuing notes referred to as “redemption subordinated notes,” which are payable in twenty equal quarterly principal installments and bear interest at 6% per year. In fiscal 2004, the Company paid $1.1 million on the notes.

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

The Company has also guaranteed certain loans made directly to Members by third-party lenders. At October 2, 2004 the maximum principal amount of these guarantees was $0.4 million. Member loans, provided by the Company and third parties, are generally secured with collateral, which usually consists of personal and real property owned by Members and personal guarantees of Members.

Unified currently requires each Member to hold a combination of Class B Shares and cash having a combined value equal to approximately twice the amount of certain of the Member’s average weekly purchases, except for certain product categories that are subject to reduced requirements (the “Class B Share requirement”). New Members must satisfy their Class B Share requirement entirely through the holding of Class B Shares by the end of the sixth year of membership. Thus, Class B Shares required to be held by a new Member may be acquired over the five consecutive fiscal years commencing with the first year after admission as a Member at the rate of 20% per year if a subordinated cash deposit is maintained. 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 Member is entitled to recover cash deposits in excess of its obligations to Unified if permitted by the applicable subordination provisions, and any shares held by such withdrawing Member are subject to repurchase as described under “Redemption of Capital Stock.”

Risk Factors

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

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

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

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

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

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

On October 11, 2003, members of the United Food and Commercial Workers union (“UFCW”) in Southern California went on strike against one of the area’s large grocery retail chains. At the time of the strike, the retailer’s other two bargaining partners agreed to lock out workers until a contract settlement was reached. As a result of the strike, which was settled on February 26, 2004, the Company experienced higher sales during the quarters ended December 27, 2003 and March 27, 2004 as some consumers began patronizing independent retailers rather than the larger grocery retail chains targeted by the strike. Following the resolution of the strike, the Company experienced a reduction in sales from the strike volume levels as consumers returned to their prior shopping patterns. The Company experienced a mixed result following the strike, as some retailers were able to retain new patrons gained during the strike, while other retailers’ volume returned to more normalized levels. Due to the many factors involved, an exact measurement of benefit from the additional volume and sales retained following the strike cannot be precisely determined.

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

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

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

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We will continue to be subject to risk of loss of member volume.    We will continue to be subject to the risks associated with consolidation within the grocery industry. When independent retailers are acquired by large chains with self-distribution capacity, are driven from business by larger grocery chains, or become large enough to develop their own self-distribution system, we will lose distribution volume. Members may also select other wholesale providers. Reduced volume is normally injurious to profitable operations since fixed costs must be spread over a lower sales volume.

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

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

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

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

We may not have adequate resources to fund our operations.    The Company relies primarily upon cash flow from its operations and Member investments to fund its operating activities. In the event that these sources of cash are not sufficient to meet the Company’s requirements, additional sources of cash are expected to be obtained from the Company’s credit facilities to fund its daily operating activities. In December 2003, the Company refinanced its

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former Revolving Credit Agreement with a 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 earnings before interest, taxes, depreciation, amortization and patronage dividends (“EBITDAP”). While the Company is currently in compliance with all required covenants and expects to remain in compliance, this does not guarantee the Company will remain in compliance in future periods. The Company’s New Revolving Credit Agreement permits advances of up to 85% of eligible accounts receivable and up to 65% of eligible inventory up to a maximum of $225 million. As of October 2, 2004, the Company believes it has sufficient cash flow from operations and availability under the New Revolving Credit Agreement to meet operating needs and capital spending requirements through fiscal 2005. However, if access to operating cash or to the New Revolving Credit Agreement becomes restricted, the Company may be compelled to seek alternate sources of cash. The Company cannot assure that alternate sources will provide cash on terms favorable to the Company. Consequently, the inability to access alternate sources of cash on terms similar to its existing agreement could adversely affect the Company’s operations.

The value of our benefit plan assets is based on estimates and assumptions, which may prove inaccurate.    The Company’s employees participate in Company sponsored defined pension and postretirement benefit plans. Officers of the Company also participate in a Company sponsored ESPP II, which provides additional post-termination retirement income based on each participant’s final salary and years of service as an officer of the Company. The Company accounts for these benefit plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” and SFAS No. 112 “Employers’ Accounting for Postemployment Benefits”, which require the Company to make actuarial assumptions that are used to calculate the carrying value of the related assets, where applicable, and liabilities and the amount of expenses to be recorded in the Company’s consolidated financial statements. Assumptions include the expected return on plan assets, discount rates, projected life expectancies of plan participants and anticipated salary increases. While we believe the underlying assumptions are appropriate, the carrying value of the related assets and liabilities and the amount of expenses recorded in the consolidated financial statements could differ if other assumptions are used.

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

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

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

Our success depends on our retention of our executive officers, senior management and our ability to hire and retain additional key personnel.    The Company’s success depends on the skills, experience and performance of its executive officers, senior management and other key personnel. The loss of service of one or more of its

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

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

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

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

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

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

Critical Accounting Policies and Estimates

The preparation of the Company’s consolidated 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

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amounts of revenues and expenses during the year. The Company believes its estimates and assumptions are reasonable; however, future results could differ from those estimates under different assumptions or conditions.

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

Insurance Reserves.    The Company’s insurance subsidiaries provide various types of insurance products to its Members including workers’ compensation, general liability, auto, directors and officers and others. Certain of the Company’s insurance subsidiaries are regulated by the State of California and are subject to the rules and regulations promulgated by the appropriate state regulatory agencies. There are many factors that contribute to the variability in estimating insurance loss reserves and related costs. Changes in state regulations may have a direct impact on workers’ compensation cost and reserve requirements. In fiscal 2004, mandatory contributions to the California Workers’ Compensation Fund for California based companies was reduced to somewhat mitigate the impact of the rising workers’ compensation cost to these businesses. The cost of insurance and the sufficiency of loss reserves are also impacted by actuarial estimates based on a detailed analysis of health care cost trends, mortality rates, claims history, demographics and industry trends. As a result, the amount of the loss reserve and the related expense is significantly affected by these variables, as well as the periodic changes in state and federal law. The Company regularly assesses the sufficiency of its loss reserves, which represent potential future claims and settlements to policyholders. Insurance reserves are recorded based on estimates and assumptions made by management using data available at the valuation date and are validated by third party actuaries to ensure such estimates are within acceptable ranges. In addition, the Company’s Wholesale Distribution segment is self insured for workers’ compensation of up to $300,000 per incident. Insurance reserves maintained by the Company’s insurance subsidiaries and the Company’s reserve for projected workers’ compensation payouts totaled approximately $57.1 million as of October 2, 2004 and $45.4 million as of September 27, 2003.

Allowance for Uncollectible Accounts and Notes Receivable.    The preparation of the Company’s consolidated financial statements requires management to make estimates of the collectibility of its accounts and notes receivable. Management regularly analyzes its accounts and notes receivable for changes in the credit-worthiness of customers, economic trends and other variables that may affect the adequacy of recorded reserves for potential bad debt. In determining the appropriate level of reserves to establish, the Company utilizes several techniques including specific account identification, percentage of aged receivables and historical collection and write-off trends. In addition, the Company considers in its reserve calculations collateral such as redemption notes, Member shareholdings, cash deposits and personal guarantees. A bankruptcy or financial loss associated with a major customer could have a material adverse effect on the Company’s sales and operating results. The Company’s allowance for doubtful accounts for trade and short-term notes receivable was approximately $2.1 million and $1.5 million at October 2, 2004 and September 27, 2003, respectively, and $0.8 million and $0.3 million for long-term notes receivable at October 2, 2004 and September 27, 2003, respectively. As a result of the quasi-reorganization on September 28, 2002, the Company’s accounts and notes receivable were adjusted to fair value.

Lease Loss Reserves.    The Company has historically subleased store sites to independent retailers who meet certain credit requirements, at rates that are at least as high as the rent paid by the Company. The Company also leases sites for its discontinued retail business. Under the terms of the original lease agreements, the Company remains primarily liable for any financial commitments a retailer may no longer be able to satisfy, including those stores that are part of the Company’s discontinued retail business. Should a retailer be unable to perform under the terms of the sublease, the Company would record a charge to earnings for the cost of the remaining term of the lease, less any expected sublease income, at net present value. The Company is also contingently liable for certain subleased facilities. Variables affecting the level of lease reserves recorded include the remaining lease term, vacancy rates of leased property, the state of the economy, property taxes, common area maintenance costs and the time required to sublease the property. Favorable changes in economic conditions, leading to shorter vacancy periods or higher than expected sublease rental commitments, could result in a reduction of the required reserves. The Company’s lease reserves for all leased locations were approximately $14.3 million and $20.1 million as of October 2, 2004 and September 27, 2003, respectively.

Goodwill and Intangible Assets.    The Company’s operating results are highly dependent upon either maintaining or growing its distribution volume to its customers. The Company’s top ten Member and non-member customers

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constituted approximately 36% of total sales at October 2, 2004. A significant loss in membership or volume could adversely affect the Company’s operating results. The Merger with United resulted in the recording of goodwill representing the intangible assets of the acquired business. The book value of the goodwill was approximately $25.0 million at October 2, 2004. Although the sales volume and customer base of the combined entity remains strong, significant reductions in the distribution volume in the future could potentially impair the carrying amount of goodwill necessitating a write-down of this asset.

The Company evaluates its goodwill and intangible assets for impairment pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” which provides that goodwill and other intangible assets with indefinite lives are not amortized but tested for impairment annually, or more frequently if circumstances indicate potential impairment. The impairment test is comprised of two steps: (1) a reporting unit’s fair value is compared to its carrying value; if the fair value is less than its carrying value, impairment is indicated; and (2) if impairment is indicated in the first step, it is measured by comparing the implied fair value of goodwill and intangible assets to its carrying value at the reporting unit level. In determining fair value, the Company uses the discounted cash flow method, which assumes a certain growth rate projected over a period of time in the future and then discounted to net present value using the Company’s estimated cost of capital. The Company evaluates its goodwill for impairment in the third quarter of each fiscal year. Accordingly, the Company tested its goodwill and noted no impairment for the fiscal quarter ended June 26, 2004. In addition to the annual impairment test required under SFAS No. 142, during fiscal 2004 and 2003, the Company assessed whether events or circumstances occurred that potentially indicate that the carrying amount of these assets may not be recoverable. The Company concluded that there were no such events or changes in circumstances during 2004 and 2003 and determined that the fair value of the Company’s reporting units was in excess of its carrying value as of October 2, 2004 and September 27, 2003. Consequently, no impairment charges were recorded in fiscal 2004 and 2003.

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

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

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

On a quarterly basis, the Company assesses whether events or changes in circumstances occur that potentially indicate the carrying value of long-lived assets may not be recoverable. The Company concluded that there were no such events or changes in circumstances during fiscal 2004 and 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” (“SFAS No. 109”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax asset will not be realized. In accordance with SFAS No. 109 and post quasi-reorganization accounting, valuation allowance reductions are accounted for as an adjustment to additional paid-in capital, while increases to the valuation allowance are accounted for as an adjustment to the income tax provision. The Company had approximately $10.5 million and $14.2 million in net deferred tax assets that are net of tax valuation allowances of $2.0 million at October 2, 2004 and September 27, 2003, respectively. Of the net deferred tax assets, $11.9 million and $10.1 million are classified as current assets in deferred income taxes and ($1.4) million and $4.1 million are included in long-term liabilities, other and other assets in the accompanying consolidated balance sheets as of October 2, 2004 and September 27, 2003, respectively. Management evaluated the available positive and negative evidence in assessing the Company’s ability to realize the benefits of the net deferred tax assets at October 2, 2004 and concluded it is more likely than not that the Company will not realize a portion of its net deferred tax assets. The remaining balance of the net deferred tax assets should be realized through future operating results and the reversal of taxable temporary differences.

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

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

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

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

Vendor funds are reflected as a reduction of inventory costs or as an offset to cost incurred on behalf of the vendor for which the Company is being reimbursed in accordance with Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor” (“EITF No. 02-16”). Amounts due from vendors upon achievement of certain milestones, such as minimum purchase volumes, are accrued prior to the achievement of the milestone if the Company believes it is probable the milestone will be achieved, and the amounts to be received are reasonably estimable.

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Certain discounts and allowances negotiated by the Company on behalf of its members were required to be reclassified upon adoption of EITF Issue No. 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers” (“EITF No. 03-10”). Accordingly, for the year ended October 2, 2004, $86.6 million of such discounts and allowances were classified as a reduction in cost of sales, and for the year ended September 27, 2003, $87.6 million of such consideration was reclassified as a reduction in cost of sales with a corresponding reduction in net sales. In addition, for the year ended October 2, 2004, $0.6 million was classified as a reduction in distribution, selling and administrative expenses, and for the year ended September 27, 2003, $0.7 million was reclassified as a reduction in distribution, selling and administrative expenses with a corresponding increase in cost of sales. Comparable amounts for years presented prior to fiscal 2003 were not reclassified, as reclassification is not permitted under the transition guidance. The application of EITF 03-10 had no effect on earnings.

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 of Notes to 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 adoption of these statements did not have an impact on the Company’s consolidated financial statements.

Recently Issued Pronouncements

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

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51, Consolidated Financial Statements.” This interpretation addresses consolidation by business enterprises of entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Variable interest entities are required to be consolidated by their primary beneficiaries if they do not effectively disperse risks among the parties involved. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the entity’s expected losses or receives a majority of its expected residual returns. In December 2003, the FASB amended FIN 46, now referred to as FIN 46 Revised (“FIN 46R”). The requirements of FIN 46R are effective no later than the end of the first reporting period that ends after March 15, 2004. Additionally, certain new disclosure requirements apply to all financial statements issued after December 31, 2003. During the quarter ended December 27, 2003, the Company became involved with a variable interest entity. The Company consolidated the variable interest entity and has included the disclosure requirements of FIN 46R in Note 4 of Notes to Consolidated Financial Statements.

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In December 2003, the FASB issued revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (the “Statement”), which replaces existing SFAS No. 132 of the same title. All disclosure requirements required in the existing SFAS No. 132 have been retained in the revised version. The Statement requires additional disclosures regarding types of plan assets held, investment strategies, measurement dates, plan obligations, cash flows and components of net periodic benefit cost (expense). The Statement also calls for certain information to be disclosed in financial statements for interim periods. The Company adopted this Statement in the quarter ended June 26, 2004. The disclosures required by this Statement are included in Note 14 of Notes to Consolidated Financial Statements.

In May 2004, the FASB issued FASB Staff Position No. FAS 106-2 (“FSP 106-2”), “Accounting and Disclosure Requirements Regarding the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Act”), which supersedes FSP 106-1 under the same name. The Act introduced a prescription drug benefit under Medicare Part D and a federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. If the Company’s prescription drug benefit were to be determined actuarially equivalent to Medicare Part D, the subsidy under the Act would initially be accounted for as an actuarial experience gain that would reduce its accumulated projected benefit obligation (“APBO”) pursuant to SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The subsidy would reduce the service cost component of postretirement benefit expense on a go-forward basis. If a plan is subsequently amended to provide actuarially equivalent benefits that were previously deemed not to be equivalent, the direct effect on the APBO of the change and the direct effect on the APBO of the subsidy, to which the employer would then be entitled, should be combined. If such combined effect reduces the APBO, it should be accounted for as an actuarial experience gain; if the combined impact increases the APBO, it should be accounted for as prior service cost and recognized over the remaining years of service to the full eligibility dates of those plan participants active at the date of the plan amendment. Since the Company has determined that its drug benefit is not actuarially equivalent, no special disclosures are required. Accordingly, neither the amount of postretirement benefit expense nor the ABPO reflect the effect of the Act. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. Adoption of this revised accounting interpretation did not have a material impact on the Company’s consolidated financial statements.

In November 2002, the EITF released Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF No. 02-16”). EITF No. 02-16 provides guidance on how a reseller should characterize the cash consideration received from a vendor and when and how the cash consideration should be recorded in its income statements. EITF No. 02-16 requires that cash consideration received from the vendor be accounted for as a reduction of inventory cost at the time of receipt and as a credit to cost of sales when the inventory is sold unless certain criteria are met. If the cash consideration received from the vendor is considered a direct, specific and incremental reimbursement of costs incurred by the reseller to sell the vendor’s products, the cash consideration is treated as a reduction of such selling costs. The adoption of EITF No. 02-16 did not have a material impact on the Company’s consolidated financial statements.

In November 2003, the EITF reached a consensus on EITF Issue No. 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers” (“EITF No. 03-10”). EITF No. 03-10 addresses the accounting for manufacturers’ sales incentives offered directly to consumers, including manufacturer coupons. According to EITF No. 03-10, manufacturers’ sales incentives offered directly to consumers that do not meet certain criteria should be reflected as a reduction of revenue in the financial statements of a reseller. The consensus applies to new arrangements, including modifications to existing arrangements, entered into in fiscal periods beginning after November 25, 2003. Accordingly, for the year ended October 2, 2004, $86.6 million of such consideration was classified as a reduction in cost of sales, and for the year ended September 27, 2003, $87.6 million of such consideration was reclassified as a reduction in cost of sales with a corresponding reduction in net sales. In addition, for the year ended October 2, 2004, $0.6 million was classified as a reduction in distribution, selling and administrative expenses, and for the year ended September 27, 2003, $0.7 million was reclassified as a reduction in distribution, selling and administrative expenses with a corresponding increase in cost of sales. Comparable amounts for years presented prior to fiscal 2003 were not reclassified, as reclassification is not permitted under the transition guidance. The application of the EITF had no effect on net earnings.

On March 31, 2004, the FASB ratified the consensus reached by the Task Force on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF No. 03-1”).

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EITF No. 03-1 provides guidance for determining whether certain investment securities are impaired, and requires certain additional disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The recognition provisions of this standard have been deferred. The Company has included the disclosures required by EITF No. 03-1 in Note 6 of Notes to Consolidated Financial Statements.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Unified is subject to interest rate changes on its notes payable under the Company’s credit agreements that may affect the fair value of the notes payable, as well as cash flow and earnings. Based on the notes payable outstanding at October 2, 2004 and the current market condition, a one percent increase in the applicable interest rates would decrease the Company’s annual cash flow and pretax earnings by approximately $0.9 million. Conversely, a one percent decrease in the applicable interest rates would increase annual cash flow and pretax earnings by $0.9 million.

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

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

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Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Shareholders and 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 October 2, 2004 and September 27, 2003 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 October 2, 2004. Our audits also included the financial statement schedule listed on page 106. 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 standards of the Public Company Accounting Oversight Board (United States). 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 October 2, 2004 and September 27, 2003 and the results of its operations and its cash flows for each of the three years in the period ended October 2, 2004 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.”

/S/    DELOITTE & TOUCHE LLP

Los Angeles, California

December 7, 2004 (December 15, 2004 as to Note 21)

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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)