NATIONAL WINE & SPIRITS INC - 10-Q Quarterly Report

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

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

The number of shares of Common Stock, $.01 par value, of National Wine & Spirits, Inc. outstanding as of February 4, 2003 was 5,330,521, of which 104,520 were voting stock.

National Wine & Spirits, Inc. (“NWS” or the “Company”), an S-Corporation, is a holding company which operates primarily in the wine and liquor wholesale distribution business. Based in Indianapolis, National Wine & Spirits Corporation (“NWSC”) is a wholesale distributor of liquor and wines throughout Indiana and also operates a division for the distribution of cigars and accessories. Based in Chicago, NWS-Illinois, LLC (“NWS-LLC”) is a wholesale distributor of liquor, wines, and beer throughout Illinois. NWS Michigan, Inc. (“NWSM”) and National Wine & Spirits, LLC (“NWSM-LLC”) are distributors of liquor and non-alcoholic products throughout Michigan. NWSM distributes products as an Authorized Distribution Agent (“ADA”) for the State of Michigan and derives revenue from distribution fees. Accordingly, NWSM’s results represent the entire “All Other” segment as described in Note 7. Based in Connecticut, U.S. Beverage, LLC (“USB”) distributes and markets import and craft beer along with malt based products throughout the United States.

The consolidated financial statements include the accounts of NWS, NWSC, NWS-LLC, NWSM, NWSM-LLC, and USB, all of which NWS wholly owns or owns 100% of the voting stock. All significant intercompany accounts and transactions have been eliminated from the consolidated financial statements. Substantially all revenues result from the sale of liquor, beer and wine or distribution fees there from. NWS performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended December 2003 are not necessarily indicative of the results that may be expected for the year ending March 31, 2004.

There were no amounts included in comprehensive income (loss) for the nine-month period ended December 31, 2003 other than net income (loss).

The balance sheet at March 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46): Consolidation of Variable Interest Entities and during December 2003 issued Interpretation 46 (FIN 46R), Consolidation of Variable Interest Entities, and Interpretation of ARB 51. The term “variable interest” is defined in FIN 46 as “contractual, ownership or other pecuniary interest in an entity that change with changes in the entity’s net asset value.” Variable interests are investments or other interest that will absorb a portion of an entity’s expected losses if they occur or receive portions of the entity’s expected residual returns if they occur. FIN 46R defers the effective date of FIN 46 for certain entities and makes several other changes to FIN 46. The Company does not expect the recognition provisions of FIN 46 or FIN 46R to have a material impact on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150 (SFAS 150): Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company’s results of operations or financial position.

Certain amounts from prior year’s balance sheet have been reclassed to conform to the current year presentation. The balance sheet has been reclassified to include additional disclosure relating to distribution rights obligations.

During the nine months ended December 31, 2003, certain inventory quantities were reduced, which resulted in a partial liquidation of a LIFO inventory layer carried at a cost which prevailed in a prior year. For the nine months ended December 31, 2003, the effect of the liquidation of inventory was a decrease in the cost of products sold and a decrease in the net loss by $1,143,000.

Cash paid for interest during the nine-month period ended December 31, 2003 and December 31, 2002 was $5,401,000 and $5,902,000, respectively. As further discussed in note 9, non-cash additions of distributions rights of approximately $17,500,000, discounted to $15,587,000 were added to the Company’s intangibles and long-term obligation sections of the balance sheet.

The Company expects to enter into a firm purchase contract or to purchase certain inventory subsequent to December 31, 2003. The estimated loss resulting from the purchase of this inventory is approximately $1,100,000 and no amounts have been recorded as of December 31, 2003.

As a result of the declining demand and lower than expected sales performance for a product line in the Company’s product sales segment, management performed an impairment analysis of the related distribution rights that are not subject to amortization. Management determined that the related distribution rights were impaired and recorded a charge of $593,000 to amortization expense during the three month period ended December 31, 2003 to write the intangible asset down to fair value. Fair value was calculated based on the discounted future cash flows of the product line’s expected contribution margin.

The Company’s reportable segments are business units that engage in product sales and all other activities. The majority of the all other activities relate to distribution fee operations. The Company evaluates performance and allocates resources based on these segments. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1 in the financial statements included in form 10-K as of March 31, 2003.

The Company is a party to various lawsuits and claims arising in the normal course of business. While the ultimate resolution of lawsuits or claims against the Company cannot be predicted with certainty, management is vigorously defending all claims and does not expect that these matters will have a material adverse effect on the financial position or results of operations of the Company.

NWSC entered into a contract for distributing certain products during the nine months ended December 31, 2003, which will be on an exclusive basis beginning January 1, 2004. Required payments for this agreement, combined with incremental payments triggered from a previous distribution agreement total $17,500,000, of which $16,167,000 is unpaid as of December 31, 2003. Payments are required quarterly through July 2009 and June 2011, respectively. NWSC has imputed interest for this obligation at 4.0% and recorded a discount on the obligation, which reduced the related intangible asset by $1,913,000. These assets will be amortized over the life of their respective contracts.

NWS-LLC entered into a management services agreement with a nationwide wholesaler of wine and spirits during the year ended March 31, 2003 and, effective December 1, 2003, NWS modified certain terms of the agreement related to NWS’s operations in the State of Illinois. NWS formerly shared profits and losses of NWS-LLC equally with the other wholesaler. Under the new terms of the agreement, effective December 1, 2003, the other wholesaler has committed to fund eighty percent (80%) of operating losses and receive eighty percent (80%) of operating profits. NWS will fund twenty percent (20%) of any such losses and receive twenty percent (20%) of any such profits. Ownership of NWS-LLC or the NWS-LLC’s operating assets has not changed and neither party has the present right to buy or cause the sale of the other party’s interest. However, at any time after July 31, 2004, if certain conditions are met, the other wholesaler may purchase NWS-LLC’s assets for a purchase price based upon 80% of the then current net assets of NWS-LLC and a 20% equity interest in the successor Illinois organization, as defined in the agreement. As part of the agreement, NWS-LLC recorded approximately $2,441,000 and $7,634,000 as a reduction of operating expenses during the three months and nine months ended December 31, 2003, respectively.

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

This Form 10-Q, including, but not limited to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology, such as “may,” “intend,” “will,” “expect,” “anticipate,” “should,” “plans to,” “estimate” or “continue” or the negative thereof or other variations thereon or comparable terminology. In particular, any statement, express or implied, concerning future operating results or the ability to generate revenues, income or cash flow to service the Company’s debt are forward-looking statements. Although the Company believes that the expectations will prove to have been correct, all forward-looking statements are expressly qualified by such cautionary statements, and the Company undertakes no obligation to update such forward-looking statements.

National Wine & Spirits, Inc. (the “Company”) is one of the largest distributors of wine and spirits in the United States. Substantially all of the Company’s current operations are in Illinois, Indiana, Michigan, Kentucky, and from U.S. Beverage, L.L.C. (USB), the Company’s national import, craft and specialty beer marketing and distribution business. The Company’s reported revenues include net product sales in Illinois, Indiana, Michigan, and from USB, with distribution fees from the Michigan distribution operation.

EBITDA is used throughout this Item as a financial indicator. Each reference to EBITDA herein is qualified by reference to, and should be read in conjunction with this paragraph, the following two paragraphs and the reconciliation below. EBITDA, as used herein, is defined as net income plus interest expense, depreciation and amortization. EBITDA should not be construed as an alternative to income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity.

Furthermore, EBITDA is a non-GAAP financial measure within the meaning of Regulation G. EBITDA is a widely accepted financial indicator used by investors and analysts to analyze and compare companies on the basis of debt service capability. EBITDA is presented because management uses it to set targets and monitor and assess financial performance. EBITDA is not intended to represent cash flows for the periods presented, nor has it been presented as an alternative to net income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance and cash flow prepared in accordance with generally accepted accounting principles.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The most comparable GAAP measure for EBITDA is net income (loss). Net income declined from $5.6 million from the prior year’s comparable quarter to a net loss of $1.2 million for the three months ended December 31, 2003. Net income declined from $10.6 million during the prior year’s nine month period to a net loss of $3.5 million for the nine months ended December 31, 2003. Net losses at the Company’s Illinois and USB operations were primarily responsible for the drop in net income during the three and nine month periods ended December 31, 2003, as compared to the prior year’s comparable periods. Following is reconciliation between net income (loss) and EBITDA for the three months and nine months ended December 31, 2003 and 2002, respectively.

The EBITDA information reflected herein may not be comparable to similarly titled measures used by other companies.

For the three months ended December 31, 2003, the Company’s EBITDA was $4.8 million, as compared to $10.4 million for the prior year’s comparable quarter. Net loss was $1.2 million for the three months ended December 31, 2003, versus net income of $5.6 million for the prior year’s comparable quarter, primarily resulting from the decline in the Company’s Illinois sales volume and lower than expected sales from the Company’s USB division. The Company’s case volume and revenue from its Indiana and Michigan operations improved for the three months ended December 31, 2003, as compared to the prior year’s comparable quarter through organic growth and additional brands. During October 2003, Future Brands named the Company as its sole broker for the state of Michigan effective January 2004, a move which will strengthen ties with this important supplier.

The Company’s Illinois division experienced reduced sales volume, as compared to the prior year’s comparable quarter, resulting from the loss of certain distribution rights that occurred during the last fiscal quarter of the year ended March 31, 2003. The Company is pursuing additional volume and brand representation for its Illinois division, and the Company believes its Illinois operations present a viable and attractive alternative to suppliers in the Illinois market.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The Company and Glazer’s Wholesale Distributors (“Glazer”) modified the strategic partnership that has existed in the Illinois market since February 2003. While Glazer and the Company formerly shared profits and losses of the Illinois wine and spirits distribution business equally, under the new terms of the alliance, Glazer has committed to fund eighty percent (80%) of operating losses and receive eighty percent (80%) of operating profits effective as of December 1, 2003. The Company will fund twenty percent (20%) of any such losses and receive twenty percent (20%) of any such profits. Day-to day management of the Illinois business will now be the responsibility of Glazer, subject to certain rights and protective provisions in favor of the Company. Under the new terms of the alliance, ownership of the Illinois operation or the Company’s Illinois operating assets has not changed and neither party has the present right to buy or cause the sale of the other party’s interest in the alliance or the Company’s Illinois operating assets. However, at any time after July 31, 2004, if certain conditions are met, Glazer may purchase the Company’s Illinois assets for a purchase price based upon 80% of the then current net assets of the Company’s Illinois operating company and a 20% equity interest in the successor Illinois organization.

USB introduced Seagram Smooth, a malt based product that competes in the ready-to-drink market sector, during the quarter ended June 30, 2003. The Company’s expenses relating to this product introduction and other brand promotion activities have been substantial in relation to the sales volume, while selected advertising and brand support expenditures have been modified due to lower than expected sales volume.

For the nine months ended December 31, 2003, the Company’s EBITDA was $11.7 million, as compared to $25.5 million for the prior year’s comparable quarter. Net loss was $3.5 million for the nine months ended December 31, 2003, versus net income of $10.6 million for the prior year’s comparable period, primarily resulting from the decline in the Company’s Illinois sales volume. Although the Company’s USB sales volume increased significantly from the prior year’s period due to the new product introductions, the associated brand promotion costs have more than offset the gross margin contribution from the increased sales volume. The Company’s case volume and revenue from its Indiana and Michigan operations have improved for the nine months ended December 31, 2003, as compared to the prior year’s comparable period.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The following table includes information regarding total cases shipped by NWS during the three months and nine months ended December 31, 2003, compared with the comparable periods ended December 31, 2002:

Three Months Ended December 31, 2003, Compared with the Three Months Ended December 31, 2002.

Total product revenue decreased $59.3 million to $149.0 million for the three months ended December 31, 2003 versus $208.3 million for the prior year’s comparable quarter. The revenue decrease for the quarter ended December 31, 2003 as compared to the prior year’s comparable quarter was primarily due to the reduced sales volume in the Company’s Illinois business. Product sales in the Company’s Indiana and Michigan operations increased due to the addition of the Diageo (“DEO”) and Schieffelin & Somerset (“S&S”) brands. Fee revenue for the quarter ended December 31, 2003 increased 14.3% from the prior year’s comparable quarter due to the addition of S&S brands being represented in the Company’s Michigan business. Case sales for the Michigan distribution fee business increased 19.8% from the prior year’s comparable quarter. The Company commenced distribution and brokerage of the S&S brands during the quarter ended June 30, 2003, and will commence brokerage services for Fortune Brands starting January 1, 2004 which are expected to increase fee revenue for the remainder of the fiscal year, in comparison to the prior fiscal year periods.

Gross margin on product sales decreased $12.6 million for the three months ended December 31, 2003 versus the prior year’s comparable quarter. The sales volume decline in the

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Company’s Illinois business was primarily responsible for the drop in gross margin dollars during the three months ended December 31, 2003, as compared to the prior year’s comparable quarter. Gross profit percentage on product sales of 16.6% was below the prior year’s comparable quarter of 18.4% due to reduced margin percentages in the Company’s USB and Illinois division, and amortization of distribution rights in the Company’s Indiana division.

Total operating expenses decreased $5.3 million, or 14.3%, as compared to the prior year’s comparable period for the three months ended December 31, 2003, to $31.4 million. The reduction in operating expenses during the three months ended December 31, 2003, as compared to the prior year’s comparable period, were primarily the result of staffing adjustments, cost reduction initiatives, and management fees received from Glazer in the Company’s Illinois business. The Company’s USB division continued to reduce certain discretionary selling costs during the quarter ended December 31, 2003 as compared to the quarter ended December 31, 2002.

Warehouse and delivery expenses were reduced by $0.5 million during the three months ended December 31, 2003 as compared to the prior year’s comparable period due to reductions in personnel and operations in the Company’s Illinois business. Warehouse and delivery expenses for the Company’s other operations had only modest increases over the prior year’s comparable period.

Selling expenses decreased $2.2 million from the prior year’s comparable period, as a result of significant cost reductions in the Company’s Illinois business. The Company’s Illinois division has significantly reduced sales salaries and commissions due to the reduced sales volume. The Company’s USB division was able to reduce various sales related costs despite increased brand promotion expenditures as compared to the prior year’s comparable quarter. Selling expenses in the Company’s fee business increased during the three months ended December 31, 2003, as compared to the prior year’s comparable period, due to the addition of sales personnel and brand promotion expenditures.

Administrative expense decreased $2.6 million for the three months ended December 31, 2003 as compared to the prior year’s comparable period. The decrease was primarily the result of payments of approximately $2.4 million received from Glazer as part of a management services agreement with Glazer for the Company’s Illinois division. The Company recorded an impairment loss related to distribution rights of approximately $0.6 million during the three months ended December 31, 2003. Cost reductions for wages and related costs by the Company’s Illinois business offset increased costs for professional fees and only moderate increases in administrative expenses in the Company’s other operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating income declined $7.4 million for the three months ended December 31, 2003, to $0.8 million, versus $8.2 million for the prior year’s comparable quarter. The decline in revenue and margins from the Company’s Illinois division and the increased brand promotion costs in the Company’s USB division were primarily responsible for the decrease in operating income.

Interest expense declined $0.4 million to $2.5 million for the three months ended December 31, 2003 as compared to the prior year’s comparable period. The Company’s long-term debt at December 31, 2003 of $97.9 million was $17.1 million lower than the December 31, 2002 balance, resulting in reduced interest expense during the quarter ended December 31, 2003.

Other income increased by $0.2 million due to increased income from the Company’s equity in earnings from Commonwealth Wine & Spirits, LLC.

Net income declined from $5.6 million from the prior year’s comparable quarter to a net loss of $1.2 million for the three months ended December 31, 2003. Net losses at the Company’s Illinois and USB operations were primarily responsible for the drop in net income during the three months ended December 31, 2003, as compared to the prior year’s comparable quarter.

For financial analysis purposes only, the Company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) for the quarter ended December 31, 2003 was $4.8 million as compared to $10.4 million for the prior year’s comparable reporting period. Please see the discussion and reconciliation regarding EBITDA as a non-GAAP financial measure set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview”. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Nine Months Ended December 31, 2003, Compared with the Nine Months Ended December 31, 2002

Total product revenue decreased $146.8 million to $408.3 million for the nine months ended December 31, 2003 versus $555.1 million for the prior year’s comparable period. The revenue decrease for the nine months ended December 31, 2003 as compared to the prior year’s comparable period was primarily due to the reduced sales volume in the Company’s Illinois business. Product sales in all of the Company’s other operations were up due to growth of existing brands and the addition of the DEO and S&S brands. Fee revenue and case sales for the nine months ended December 31, 2003 increased 16.0% and 13.8%, respectively, from the prior year’s comparable period due to sales growth of existing brands and the addition of S&S brands being represented in the Company’s Michigan business. The Company commenced distribution and brokerage of the S&S brands during the quarter ended June 30, 2003 and will commence brokerage services for Fortune Brands starting January 1, 2004.

Gross margin on product sales decreased $34.2 million for the nine months ended December 31, 2003 versus the prior year’s comparable period. The sales volume decline in the Company’s Illinois business was primarily responsible for the drop in gross margin dollars during the nine months ended December 31, 2003, as compared to the prior year’s comparable period. Gross profit percentage on product sales of 18.4% was below the prior year’s comparable period of 19.7% primarily due to increased brand support in the Company’s USB division and amortization of distribution rights in the Company’s Indiana division.

Total operating expenses decreased $15.0 million, or 13.8% for the nine months ended December 31, 2003, as compared to the prior year’s comparable period, to $93.9 million. Staffing adjustments, cost reduction initiatives, and management fees received from Glazer in the Company’s Illinois business, whose operating expenses have been reduced by approximately 42% from the prior year, were primarily responsible for the reduction in operating expenses during the nine months ended December 31, 2003 as compared to the prior year’s comparable period. Operating expenses in the Company’s other operations increased moderately due to the increased sales and case volume over the nine months ended December 31, 2003, as compared to the prior year’s comparable period.

Warehouse and delivery expenses were reduced by $1.8 million during the nine months ended December 31, 2003 as compared to the prior year’s comparable period, due to reductions in personnel and operations in the Company’s Illinois business. Warehouse and delivery expenses for the Company’s fee operations had modest increases over the prior year’s comparable period due to the increased brands represented.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Selling expenses decreased $5.1 million from the prior year’s comparable period, as a result of significant cost reductions in the Company’s Illinois business. The Company’s Illinois division has significantly reduced sales salaries and commissions commensurate with the reduced sales volume. Sales expenses, such as commissions, salaries, and brand promotion have increased in other operations due to the addition of the DEO and S&S brands in certain markets and the new product introductions by the Company’s USB division.

Administrative expenses decreased $8.2 million for the nine months ended December 31, 2003 as compared to the prior year’s comparable period. The decrease was primarily the result of payments of approximately $7.6 million received from Glazer as part of a management services agreement with Glazer for the Company’s Illinois division. Cost reductions for wages and related costs by the Company’s Illinois business offset increased costs for professional fees and asset impairment charges in the Company’s other operations.

Operating income declined $16.3 million for the nine months ended December 31, 2003, to $2.3 million, versus $18.6 million for the prior year’s comparable period. The decline in revenue and margins from the Company’s Illinois division, and the increased brand promotion costs in the Company’s USB division, were primarily responsible for the decrease in operating income.

Interest expense declined $2.2 million to $6.3 million for the nine months ended December 31, 2003 as compared to the prior year’s comparable period. Gains from the discounted repurchases of the Company’s senior notes and reduced long term debt levels were primarily responsible for the decreased expense. The Company repurchased $9.6 million of its senior notes on the open market during the quarter ended June 30, 2003 at approximately 90% of face value and expensed associated unamortized debt issuance costs resulting in a $0.7 million gain. The Company’s long-term debt at December 31, 2003 of $97.9 million was $17.1 million lower than the December 31, 2002 balance, resulting in reduced interest expense during the nine months ended December 31, 2003.

Other income remained even compared to the prior year’s comparable period due to reduced rental income, lower interest income, which were offset by the losses from the investment in eSkye Solutions, Inc. that were incurred during the prior year’s comparable period but not during the current year’s period.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Net income declined from $10.6 million during the prior year’s nine month period to a net loss of $3.5 million for the nine months ended December 31, 2003. Net losses at the Company’s Illinois and USB operations were primarily responsible for the drop in net income during the nine months ended December 31, 2003, as compared to the prior year’s comparable period.

For financial analysis purposes only, the Company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) for the nine months ended December 31, 2003 was $11.7 million as compared to $25.5 million for the prior year’s comparable reporting period. Please see the discussion and reconciliation regarding EBITDA as a non-GAAP financial measure set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview”. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity.

The Company’s primary cash requirements have been to fund accounts receivable and inventories for the product markets in Illinois, Indiana, Michigan, and its U.S. Beverage operations. The Company has historically satisfied its cash requirements principally through cash flow from operations, trade terms, bank borrowings and existing cash balances.

At December 31, 2003, the Company had $13.2 million of outstanding advances on its $40.0 million revolving line of credit facility and also had $3.7 million in letters of credit outstanding, resulting in availability of $23.1 million. The line of credit borrowings are collateralized by and based upon eligible accounts receivable and inventories, as defined, and are guaranteed by the Company’s subsidiaries. Interest is payable monthly at the LIBOR rate or the higher of the prime lending rate or the federal funds rate, plus a margin percentage. The Company’s prime based and LIBOR based revolver rate of interest was 4.00% and 2.92%, respectively, at December 31, 2003. The Company had $6.2 million outstanding at the prime based pricing and $7.0 million outstanding at the LIBOR pricing as of December 31, 2003. The Company must maintain certain interest coverage and funded debt coverage ratios, with which the Company was in compliance at December 31, 2003. The Company anticipates that the collateral base for the revolving credit facility will provide adequate availability to fund operations and working capital needs during fiscal 2004.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The Company generated $6.4 million in net cash from operating activities for the nine months ended December 31, 2003, as compared to cash used of $2.7 million for the prior year’s comparable period. Cash provided by working capital for the nine months ended December 31, 2003 was $2.4 million versus cash used of $19.5 million for the prior year’s comparable period. This $21.9 million improvement was primarily due to the Illinois business’ net reductions in inventories, receivables, and payment of current liabilities. The Company’s net proceeds from the reduction of Illinois working capital was approximately $22.0 million for the nine months ended December 31, 2003. Inventory purchases and other working capital cash needs, due to the addition of the S&S brands, were the primary reason for cash used by working capital during the nine-month period ended December 31, 2003. Cash provided by net income (loss) and adjustments for depreciation and amortization were $5.4 million for the nine months ended December 31, 2003, as compared to $17.0 million for the prior year’s comparable period.

Net cash used by investing activities was $0.2 million for the nine months ended December 31, 2003, a decrease of $2.3 million from the comparable prior year’s period. The decreased use of cash, as compared to the prior year’s comparable period, was primarily due to reduced capital expenditures and intangible purchases of $2.8 million. The Company reduced its capital expenditures during the first nine months of fiscal 2004 due to the reduction in the Illinois business. The Company intends to continue the reduced level of capital expenditures during fiscal 2004 at maintenance levels between $2.0 million and $2.5 million.

Net cash used by financing activities increased by $3.5 million for the nine months ended December 31, 2003 as compared to the prior year’s comparable period. Purchases of the Company’s senior notes in the open market of $8.7 million and payment of $2.3 million for distribution rights increased cash used by financing activities for the nine months ended December 31, 2003 as compared to the prior year’s comparable period. Increased net proceeds from the revolving credit facility and decreased stockholder distributions during the nine months ended December 31, 2003, as compared to the prior year’s comparable period, funded the increased uses of cash for debt reduction and payment of the distribution rights. The Company purchased $9.6 million of its senior notes at approximately 90% of face, plus accrued interest, during the three months ended June 30, 2003. The Company may continue to selectively pursue repurchase opportunities in the open market during the remainder of fiscal 2004. The revolving credit facility allows up to $30 million of debt repurchases subsequent to March 31, 2003, if after giving effect to the purchase, there is $15 million of availability under the $40 million revolving credit facility. There were $13.2 million of outstanding advances on the revolving credit facility at December 31, 2003. The Company will utilize the positive cash flow from the downsizing of Illinois operations, existing cash, and its credit facility to fund operations and possible additional senior note repurchases during the remainder of fiscal 2004.

The Company’s distributions to stockholders decreased by $3.4 million for the nine months ended December 31, 2003, as compared to the prior year’s comparable period. Stockholder distributions during the nine months ended December 31, 2003 provided funds to

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

stockholders for estimated income tax payments of $2.6 million and $3.4 million related to certain stockholder obligations described below. The Company’s stockholder distributions have been reduced during fiscal 2004 due to reduced income tax estimates paid by the stockholders. Stockholder distributions other than for tax liabilities are limited by the revolving credit facility and indenture.

During 1998 Mr. LaCrosse transferred substantially all of his non-voting stock to a family trust for estate-planning purposes. As part of that transfer the Company has distributed $3.4 million to Mr. LaCrosse, the family trust, and Mrs. Johnston during the nine months ended December 31, 2003. These distributions were made within the terms and conditions contained in the Company’s indenture governing its senior notes (including the limitation on restricted payments) and the revolving credit facility. The family trust then remitted $2.8 million of these funds to Mr. LaCrosse in repayment of indebtedness for the non-voting stock that was purchased during 1998 and Mrs. Johnston retained $0.6 million. As of December 31, 2003 there is $2.5 million owed to Mr. LaCrosse by the family trust related to the 1998 transfer of non-voting stock.

Total assets of $207.5 million at December 31, 2003 increased $3.8 million from March 31, 2003. The increase in assets was primarily due to the addition of distribution rights, offset by the collection of vendor receivables and reduced capital expenditures. The increase in distribution rights assets was offset by a corresponding increase in distribution rights obligations representing the present value of amounts expected to be paid over the respective contract lives. Cash balances decreased $1.5 million during the nine months ended December 31, 2003 due to funding of open market senior note repurchases that reduced long-term debt. Total debt of $97.9 million at December 31, 2003 as compared to March 31, 2003 decreased slightly due to the Company’s repurchase of $9.6 million of its senior notes on the open market offset by advances of $9.2 million of the revolving credit facility. Equity decreased to $18.3 million at December 31, 2003 as compared to March 31, 2003 due to the stockholder distributions of $6.0 million and the net loss of $3.5 million.

The Company expects to maintain adequate cash balances and revolving credit facility availability to satisfy the Company’s anticipated working capital and debt service requirements during fiscal 2004.

Inflation has not had a significant impact on the Company’s operations but there can be no assurance that inflation will not have a negative effect on the Company’s financial condition, results of operations or debt service capabilities in the future.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The Company currently owns and leases a number of properties, and historically it has owned and/or leased others. Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions relating to the presence of certain hazardous substances on such properties. The liability imposed by such laws is often joint and several without regard for whether the property owner or operator knew of, or was responsible for, the presence of such hazardous substances. In addition, the presence of such hazardous substances, or the failure to properly remediate such substances, may adversely affect the property owner’s ability to borrow using the real estate as collateral and to transfer its interest in the real estate. Although the Company is not aware of the presence of hazardous substances requiring remediation, there can be no assurance that releases unknown to the Company have not occurred. Except for blending and bottling of a few of the Company’s private label brands, the Company does not manufacture any of the wine or spirit products it sells and believes that it has conducted its business in substantial compliance with applicable environmental laws and regulations. Compliance with environmental laws has not had a material effect upon NWS’ capital expenditures, earnings or competitive position.

The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses during the reporting periods.

The Company continually evaluates its accounting policies and estimates it uses to prepare the consolidated financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

The Company believes its critical accounting policies and estimates, as reviewed and discussed with the Audit Committee of the Board of Directors, include accounting for impairment of long-lived assets, accounts receivable valuation, inventory valuation, vendor allowances, and pensions.

Impairment of Long-lived Assets. The Company evaluates long-lived assets and intangibles subject to amortization whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review of recoverability, the Company estimates future cash flows expected to result from the use of the asset and its eventual disposition. The estimates of future cash flows, based on reasonable and supportable

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

assumptions and projections, require management’s subjective judgments. The time periods for estimating future cash flows is often lengthy, which increases the sensitivity to assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. The Company considers the probability of possible outcomes in determining the best estimate of future cash flows.

Receivables and Credit Policies. The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances and creates an allowance for doubtful accounts based on the credit worthiness of specific accounts and an estimate of other uncollectible accounts based on historical performance.

Vendor Allowances Received. The Company records vendor allowances and discounts in accordance with EITF 02-16: Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor. The Company receives allowances from vendors as a result of purchasing and promoting their products. Vendor allowances provided as a reimbursement of specific, incremental, and identifiable costs incurred to promote a vendor’s products are recorded as an expense reduction when the cost is incurred. All other vendor allowances, including vendor allowances received in excess of the Company’s cost to promote a vendor’s product, or vendor allowances directly related to purchase of a vendor’s product are initially deferred. The deferred amounts are then recorded as a reduction of cost of goods sold when the related product is sold.

Defined Benefit Pension Plan. The most significant element in determining the Company’s pension income (cost) in accordance with SFAS No. 87 is the expected return on plan assets. In 2003, the Company assumed that the expected long-term rate of return on plan assets would be 8.5%. The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years. This produces the expected return on plan assets that is included in pension income (cost). The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future pension income (cost). Over the long term, the Company’s pension plan assets have generated a return in excess of 9.5%. However, the plan assets have lost an average of 14.9% per year during the last two years. Should this trend continue, the Company would be required to reconsider its assumed expected rate of return on plan assets. If the Company were to lower this rate, future pension cost would increase.

At the end of each year, the Company determines the discount rate to be used to calculate the present value of plan liabilities. The discount rate is an estimate of the current interest rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company uses the preceding November’s Moody’s AA Corporate Bond Index rounded down to the nearest ¼ of a percentage point. At March 31, 2003, the Company determined this

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

rate to be 6.5%, a decrease of 50 basis points from the rate used at March 31, 2002. Changes in discount rates over the past three years have not materially affected pension income (cost), and the net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, have been deferred, in accordance with SFAS No. 87.

The significant declines in the financial markets over the past two years coupled with the decline in interest rates have caused the Company’s accumulated pension obligation to exceed the fair value of the related plan assets. As a result, for fiscal 2003 the Company recorded an increase to accrued pension liability and a non-cash charge to equity of approximately $1.1 million. This charge may be reversed in future periods if market conditions improve or interest rates rise.

For the year ended March 31, 2003, the Company recognized consolidated pension cost of $0.5 million, up from $0.3 million in 2002. The Company currently expects that the consolidated pension cost for 2004 will not be materially different from 2003. The Company’s required minimum amount of 2004 contributions will not exceed actual contributions made in 2003. However, the Company may elect to increase the level of contributions in 2004 over 2003 levels based on a number of factors, including performance of pension investments, changes in interest rates, and changes in workforce compensation.

In April 2002 the Financial Accounting Standards Board issued Statement No. 145: Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions as well as addresses the classifications of gains and losses on debt extinguishment. Accordingly, the Company classified its gains from repurchases of its long-term debt in interest expense on the Consolidated Statement of Operations.

The Company adopted the Emerging Issues Task Force Issue 02-16: Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor for arrangements either modified or created after December 31, 2002. This statement reached a consensus that cash consideration represents a reimbursement of costs incurred by the customer to sell the vendor’s products and should be characterized as a reduction of that cost when recognized in the customer’s income statement if the cash consideration represents a reimbursement of a specific, incremental, identifiable cost incurred by the customer in selling the vendor’s products or services. If the amount of cash consideration paid by the vendor exceeds the cost being reimbursed, that excess amount should be characterized in the customer’s statement of operations as a reduction of cost of sales when recognized in the customer’s statement of operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The Company has reviewed its accounting policies and methods and concluded that the recording of cash consideration received from vendors was in accordance with the statement.

The Company receives allowances from vendors as a result of purchasing and promoting their products. Vendor allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are recorded as an expense reduction when the cost is incurred. All other vendor allowances, including vendor allowances received in excess of the Company’s cost to promote a vendor’s product, or vendor allowances directly related to purchase of a vendor’s product are initially deferred. The deferred amounts are then recorded as a reduction of cost of goods sold when the related product is sold.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46): Consolidation of Variable Interest Entities and during December 2003 issued Interpretation 46 (FIN 46R): Consolidation of Variable Interest Entities, and Interpretation of ARB 51. The term “variable interest” is defined in FIN 46 as “contractual, ownership or other pecuniary interest in an entity that change with changes in the entity’s net asset value.” Variable interests are investments or other interest that will absorb a portion of an entity’s expected losses if they occur or receive portions of the entity’s expected residual returns if they occur. FIN 46R defers the effective date of FIN 46 for certain entities and makes several other changes to FIN 46. The Company does not expect the recognition provisions of FIN 46 or FIN 46R to have a material impact on the Company’s financial position or results of operations.

The Company uses long-term debt as a primary source of capital in its business. The following table presents the principal cash repayments and related weighted average interest rates by maturity date for the Company’s long-term fixed-rate debt and other types of long-term debt at December 31, 2003:

The Company is exposed to fluctuations in interest rate risk as a result of its variable rate debt. The Company’s objectives in managing its exposure to changes in interest rates are to limit the effect of interest rate changes on earnings and cash flows and to minimize the amount of borrowings under the Company’s revolving line of credit. This approach to managing interest rate risk does not consider the changes in the Company’s competitive environment indirectly related to changes in interest rates and management’s responses to these changes.

As of December 31, 2003, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, Chief Financial Officer, and the Company’s Corporate Controller, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Company’s Chief Executive Officer, Chief Financial Officer, and the Company’s Corporate Controller concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. No changes in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, National Wine & Spirits, Inc. is identifying in exhibit 99 to this quarterly report important factors that could cause the Company’s actual results to differ materially from those projected in forward-looking statements of the Company made by, or on behalf of, the Company.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 11, 2004.

NATIONAL WINE & SPIRITS, INC.

By: /s/ James E. LaCrosse

James E. LaCrosse,

Chairman, President,

Chief Executive Officer, and

Chief Financial Officer


Indiana		35-2064429
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

700 West Morris Street, P.O. Box 1602 Indianapolis, Indiana (Address of principal executive offices)		46206 (Zip Code)
		46206 (Zip Code)


		Page Number
PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets December 31, 2003 *(unaudited)* and March 31, 2003	2

	Condensed Consolidated Statements of Operations *(unaudited)* Three Months Ended December 31, 2003 and 2002; Nine Months Ended December 31, 2003 and 2002	3

	Condensed Consolidated Statements of Cash Flows *(unaudited)* Nine Months Ended December 31, 2003 and 2002	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	27

Item 5.	Other Events	28

Item 6.	Exhibits and Reports on Form 8-K	28

	Signature	29


	December 31, 2003			March 31, 2003
	(unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	4,290		$	5,820
Accounts receivable:
Trade, less allowance for doubtful accounts		34,939			31,888
Vendor, less allowance for doubtful accounts		6,042			11,369
Inventory		83,161			82,982
Prepaid expenses		4,291			4,301

Total current assets		132,723			136,360

Property and equipment, net		32,688			36,498
Other assets:
Intangible assets, net of amortization		29,298			18,328
Investment in Commonwealth Wine & Spirits, LLC		5,612			5,637
Cash surrender value of life insurance		4,190			3,815
Goodwill		1,246			1,246
Deferred pension costs		715			715
Deposits and other		601			596
Notes receivable		418			513

Total other assets		42,080			30,850

Total assets	$	207,491		$	203,708


Liabilities And Stockholders’ Equity
Current liabilities:
Accounts payable	$	40,952		$	39,550
Accrued payroll and payroll taxes		6,682			7,486
Excise taxes payable		4,514			4,503
Current portion of distribution rights obligations		4,061			1,697
Other accrued expenses		12,147			11,941

Total current liabilities		68,356			65,177

Deferred pension liability		3,005			3,005
Distribution rights obligations		19,972			9,369
Long-term debt		97,857			98,303

Total liabilities		189,190			175,854

Stockholders’ equity:
Voting common stock, $.01 par value. 200,000 shares authorized, 104,520 shares issued and outstanding		1			1
Nonvoting common stock, $.01 par value 20,000,000 shares authorized, 5,226,001 shares issued and outstanding shares		53			53
Additional paid-in capital		25,009			25,009
Accumulated earnings (deficit)		(4,472	)		5,081
Accumulated other comprehensive loss-unrecognized net pension loss		(2,290	)		(2,290	)

Total stockholders’ equity		18,301			27,854

Total liabilities and stockholders’ equity	$	207,491		$	203,708


	Three Months Ended						Nine Months Ended
	December 31, 2003			December 31, 2002			December 31, 2003			December 31, 2002
Net product sales	$	148,995		$	208,278		$	408,335		$	555,091
Distribution fees		7,535			6,594			20,935			18,049

Total revenue		156,530			214,872			429,270			573,140

Cost of products sold		124,239			169,955			333,049			445,616

Gross profit		32,291			44,917			96,221			127,524

Selling, general and administrative expenses:
Warehouse and delivery		9,769			10,241			28,190			29,949
Selling		12,114			14,299			38,560			43,676
Administrative		9,566			12,170			27,160			35,314

		31,449			36,710			93,910			108,939

Income from operations		842			8,207			2,311			18,585

Interest expense:
Related parties		(52	)		(50	)		(139	)		(151	)
Third parties		(2,411	)		(2,795	)		(6,887	)		(8,341	)
Gain from repurchase of long term debt		—			—			700			—

		(2,463	)		(2,845	)		(6,326	)		(8,492	)

Other income (expense):
Interest income		3			35			18			146
Rental and other income (expense)		(10	)		(31	)		33			140
Equity in income of Commonwealth Wine & Spirits, LLC		389			196			420			368
Equity in losses of eSkye Solutions, Inc.		—			—			—			(160	)

Total other income		382			200			471			494

Net income (loss)	$	(1,239	)	$	5,562		$	(3,544	)	$	10,587


	Nine Months Ended
	December 31, 2003			December 31, 2002
Operating activities:
Net income (loss)	$	(3,544	)	$	10,587
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of property and equipment		4,599			4,897
Amortization of intangible assets		4,368			1,562
Equity in losses of eSkye Solutions, Inc.		—			160
Equity in earnings of Commonwealth Wine & Spirits, LLC		(420	)		(368	)
Provision for bad debt expense		340			449
Gain on repurchase of long term debt		(700	)		—
Gain on sales of assets		(263	)		(35	)
Increase in cash surrender value of life insurance		(375	)		(389	)
Changes in operating assets and liabilities
Accounts receivable		2,083			(14,894	)
Inventories		(179	)		(3,894	)
Prepaid expenses		10			(510	)
Deposits and other		(3	)		(370	)
Accounts payable		1,402			(3,798	)
Accrued expenses and taxes		(916	)		3,946

Net cash and cash equivalents provided (used) by operating activities		6,402			(2,657	)

Investing activities:
Purchases of property and equipment		(844	)		(2,035	)
Purchases of intangible assets		(19	)		(1,600	)
Proceeds from sale of property and equipment		171			93
Distributions from Commonwealth Wine & Spirits, LLC		445			797
Collections on notes receivable		95			260

Net cash and cash equivalents used by investing activities		(152	)		(2,485	)

Financing activities:
Proceeds from line of credit borrowings		101,300			24,000
Principal payments on line of credit borrowings		(92,100	)		(21,500	)
Principal payments on long-term debt, including purchases of senior notes		(8,681	)		—
Proceeds of borrowings from stockholder		—			1
Payments of distribution rights obligations		(2,290	)		—
Receipts on notes receivable from stockholders and others		—			2,628
Distributions to stockholders		(6,009	)		(9,416	)

Net cash and cash equivalents used by financing activities		(7,780	)		(4,287	)

Net decrease in cash and cash equivalents		(1,530	)		(9,429	)
Cash and cash equivalents, beginning of period		5,820			11,735

Cash and cash equivalents, end of period	$	4,290		$	2,306

Intangible Assets

Not Subject to

Amortization

Carrying

Amount

Carrying

Amount

Distribution rights


	December 31, 2003		March 31, 2003
Inventory at FIFO	$	93,532,000	$	93,895,000
Less: LIFO reserve		10,371,000		10,913,000

	$	83,161,000	$	82,982,000


	December 31, 2003		March 31, 2003
Senior notes payable (A)	$	80,329,000	$	89,975,000
Bank revolving line of credit (B)		13,200,000		4,000,000
Notes payable to stockholders		4,328,000		4,328,000

		97,857,000		98,303,000
Less: current maturities		—		—

	$	97,857,000	$	98,303,000


		December 31, 2003				March 31, 2003
Intangible Assets Subject to Amortization	Weighted Average Life	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Distribution rights	7	$	31,262,000	$	5,047,000	$	15,676,000	$	1,683,000
Loan acquisition costs	10		4,188,000		1,976,000		4,716,000		1,890,000
Non-compete agreements	5		200,000		183,000		200,000		153,000

Total	7	$	35,650,000	$	7,206,000	$	20,592,000	$	3,726,000


	Three Months Ended					Nine Months Ended
	December 31, 2003			December 31, 2002		December 31, 2003			December 31, 2002
	(in thousands)					(in thousands)
Net Income (loss)	$	(1,239	)	$	5,562	$	(3,544	)	$	10,587
Interest expense		2,463			2,845		6,326			8,492
Depreciation		1,391			1,572		4,599			4,897
Amortization		2,157			439		4,368			1,562

EBITDA	$	4,772		$	10,418	$	11,749		$	25,538


	Three Months Ended December 31				Nine Months Ended December 31
	2003	2002	Percent Change		2003	2002	Percent Change
	(Cases in thousands)				(Cases in thousands)
Wine (product sales operations)	746	976	(23.6	)%	1,865	2,367	(21.2	)%
Spirits (product sales operations)	668	1,026	(34.9	)%	1,750	2,693	(35.0	)%
Spirits (distribution fee operations)	853	712	19.8	%	2,288	2,011	13.8	%

Total wine and spirits	2,267	2,714	(16.5	)%	5,903	7,071	(16.5	)%

Other (including USB sales)	1,333	1,882	(29.2	)%	7,561	6,911	9.4	%

Total	3,600	4,596	(21.7	)%	13,464	13,982	(3.7	)%


	2003		2004		2005		2006		2007		Thereafter			Total			Fair Value
Fixed	$	—	$	—	$	—	$	—	$	—	$	80,329,000		$	80,329,000		$	72,296,000
Avg. Rate		—		—		—		—		—		10.125	%		10.125	%
Variable	$	—	$	—	$	—	$	—	$	—	$	17,528,000		$	17,528,000		$	17,528,000
Avg. Rate		—		—		—		—		—		4.00	%		4.00	%