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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

for the quarterly period ended July 2, 2004.

Commission File Number: 333-74589

NATIONAL WINE & SPIRITS, INC.

(Exact name of registrant as specified in its charter)

(317) 636-6092

(Registrant’s telephone number, including area code)

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

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

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 July 2, 2004 was 5,330,521, of which 104,520 were voting stock.

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NATIONAL WINE & SPIRITS, INC.

Quarterly Report

For the period ended July 2, 2004

INDEX

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Part I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

NATIONAL WINE & SPIRITS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes

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NATIONAL WINE & SPIRITS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

See accompanying notes.

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NATIONAL WINE & SPIRITS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

See accompanying notes.

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National Wine & Spirits, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Business and Summary of Significant Accounting Policies

Nature of Business and Principles of Consolidation

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 8. 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 period ended July 2, 2004 are not necessarily indicative of the results that may be expected for the year ending March 31, 2005.

There were no amounts included in comprehensive income (loss) for the three-month period ended July 2, 2004 other than net income (loss).

The balance sheet at March 31, 2004 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.

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National Wine & Spirits, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Use of Estimates and Assumptions

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.

Fiscal Year

The Company’s fiscal year begins on April 1 and ends on March 31 of the year stated. The Company reports results using a fiscal quarter method whereby each quarter is reported as of the last Friday of the thirteen week period. The results for the quarter ended July 2, 2004 include thirteen weeks and two days. The results for the quarter ended June 27, 2003 include twelve weeks and four days.

Recent Accounting Pronouncements

None applicable to the Company.

Reclassifications

Certain amounts from prior year’s financial statement have been reclassified to conform to the current period presentation.

2. Inventory

Inventory is comprised of the following:

3. Supplemental Cash Flow Information

Cash paid for interest during the three-month period ended July 2, 2004 and June 27, 2003 was $431,000 and $519,000, respectively.

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National Wine & Spirits, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

4. Debt

Long-term debt is comprised of the following:

The bond indenture restricts the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends, engage in mergers or consolidations, make capital expenditures and otherwise restricts corporate activities.

On or after January 15, 2004, the Company may redeem some or all of the senior notes at any time at stated redemption prices plus accrued interest and liquidated damages.

In addition, the agreement places restrictions on the Company and its subsidiaries regarding additional indebtedness, dividends, mergers or consolidations and capital expenditures. Further, the Company must maintain certain interest coverage and funded debt coverage ratios, with which the Company was in compliance at July 2, 2004.

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National Wine & Spirits, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

On June 30, 2004, the Company amended its $40 million revolving credit facility. The amendment permits the Company to repurchase up to $10.0 million of its senior notes subject to certain availability levels.

5. Commitments

During the three month period ended July 2, 2004, the Company agreed to pay a supplier approximately $950,000 in settlement of purchase commitments. No additional payments are expected to be paid or losses incurred in conjunction with this commitment. As this amount is not expected to be recovered through the profit of future sales, the Company recorded a charge to cost of products sold for the three-month period ended July 2, 2004.

6. Intangible Assets

Intangible assets consist of the following:

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National Wine & Spirits, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

7. Employee Benefit Plans

The Company funds a noncontributory defined benefit pension plan covering substantially all of its warehousemen and drivers. Eligible employees can participate after one year of service and the attainment of age 21 with entry on January 1 and July 1. Benefits are based on length of eligible service, form of payment, and vest after 5 years of employment. The Company makes quarterly contributions to the plan based on amounts permitted by law as well as voluntary contributions to maintain or increase the funded percentage of the plan. The Company uses a December 31 measurement date. Components of Net Periodic Benefit Cost for the three months ended July 2, 2004 and June 27, 2003 are as follows:

During the three months ended July 2, 2004, $301,000 has been contributed to the company sponsored defined benefit pension plan. The Company presently anticipates contributing an additional $621,000 to fund the plan during the fiscal year for a total of $922,000.

8. Segment Reporting

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 to the financial statements.

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National Wine & Spirits, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

9. Litigation

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.

The Company received notification on July 21, 2004 of an award in favor of the Company, in connection with a certain lawsuit, subject to rights of appeal by both parties. The settlement is for approximately $2.3 million and is to be received by the Company within thirty days of the notification.

10. Management Fees

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 committed to fund eighty percent (80%) of operating losses and receive eighty percent (80%) of operating profits. NWS funds twenty percent (20%) of any such losses and receives 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 $3,731,000 and $2,529,000 as a reduction of operating expenses during the three months ended July 2, 2004 and June 27, 2003, respectively.

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

You should read the following discussion in conjunction with “Selected Consolidated Financial Data” and NWS’ historical consolidated financial statements and the accompanying notes included elsewhere in this Form 10-Q. Unless otherwise indicated, all references to years are to NWS’ fiscal year ended March 31.

Disclosure Regarding Forward-Looking Statements

This Form 10-Q, including, but not limited to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections, 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.

Overview

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 United States 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.

The Company evaluates its operations and liquidity upon two reportable segments, which are business units that engage in product sales and all other activities. Product sales operations are conducted in Indiana, Illinois, Michigan, and from the USB distribution business. The majority of other activities relate to distribution fee operations in Michigan.

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 and the following two paragraphs and the reconciliation below. EBITDA, as used herein, is defined as net income or loss 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.

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

EBITDA is a non-GAAP financial measure within the meaning of Regulation G. EBITDA is presented because it is a widely accepted financial indicator used by investors and analysts to analyze and compare companies on the basis of debt service capability. Management uses EBITDA 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 or loss 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.

The most comparable GAAP measure for EBITDA is net income or loss. Following is a reconciliation between net income or loss and EBITDA for the three months ended July 2, 2004 and June 27, 2003:

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

Executive Summary

The Company’s net income and EBITDA showed increases from the prior year’s quarter due to volume growth in the wine, spirits and distribution fees categories. Expense reductions in the product sales segment, along with the increased revenue, resulted in a $1.1 million increase in operating income for the quarter ended July 2, 2004 as compared to the prior year’s quarter. Net income was $0.1 million for the three months ended July 2, 2004 as compared to a net loss of $0.04 million during the same quarter last year. EBITDA of $5.5 million for the quarter ended July 2, 2004 was $1.4 million above the prior year’s quarter. The Company had $30.8 million available under its $40.0 million revolving credit facility at July 2, 2004.

Total revenue increased by $0.6 million primarily due to the increased brand representation in the distribution fees segment. The product sales segment experienced a decline in revenue for the quarter ended July 2, 2004 as compared to the prior year’s quarter, due to product introductions that occurred in the prior year’s quarter that were not entirely offset by increased sales of existing brands during the current year.

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

Results of Operations

The following table includes information regarding total cases shipped by NWS during the three months ended July 2, 2004 and June 27, 2003:

USB’s results are included in the other category for the current and prior years.

Three Months Ended July 2, 2004 Compared With Three Months Ended June 27, 2003

Revenue

Total revenue increased $0.6 million to $144.7 million as a result of increased fee revenue and stable product sales. Product sales case volume in the spirits and wine categories increased 1.2% and 8.3%, respectively for the three months ended July 2, 2004 as compared to the prior year’s quarter. Other case volume declined from the prior year’s quarter primarily due to reduced sales volume of Seagram Smooth, a product introduced by the Company’s USB division in last year’s quarter. Increases in the spirits and wine categories in the product sales segment offset the revenue shortfall for Other products as compared to the prior year’s quarter. The addition of the Schieffelin, Future, and expansion of the Diageo and Allied Domecq brands in the fee operations segment were primarily responsible for the $1.2 million, or 18.8%, increase in fee revenue from the prior year’s quarter.

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

Gross Profit

Gross profit decreased $1.7 million to $33.2 million due to decreased product sales volume, primarily the result of the comparison to the prior year’s quarter which included the Seagram Smooth product introduction by the Company’s USB division. Gross profit percentage on product sales of 18.9% was below the prior year’s comparable period of 20.9% primarily due to competitive conditions in the Company’s Illinois market and the settlement of a purchase commitment of $1.0 million in the product sales segment. Incremental gross margin from the fee operations segment of $1.2 million was primarily due to the addition of the Schieffelin and Future brands, as well as increased volume of the Diageo and Allied Domecq brands.

Operating Expenses

Total operating expenses declined by $2.8 million, or 8.4% primarily due to the product sales segment, which included reductions in the sales and administrative areas, along with increased management fees, as compared to the prior year’s quarter. Operating expenses for the product sales segment decreased $4.1 million, or 15.0% for the quarter ended July 2, 2004 as compared to the prior year’s quarter. Reduced brand promotional costs, increased management fees, and savings from reduced professional and health care costs were primarily responsible for the reduction in product sales operating expenses during the quarter ended July 2, 2004 as compared to the prior year’s quarter. Operating expenses in the Company’s fee operations increased by approximately $1.3 million due to greater sales expense and increased case volume over the quarter ended July 2, 2004 as compared to the prior year’s quarter.

Warehouse and delivery expenses in the product sales segment remained stable despite the increased case volume, decreasing by $0.1 million during the quarter ended July 2, 2004 as compared to the prior year’s quarter. Warehouse and delivery expenses for the Company’s fee operations increased by approximately $0.3 million, primarily from increased labor expense, equipment repair and supplies that resulted from the increased case volume.

Selling expenses for the product sales segment decreased $2.0 million from the prior year’s quarter, primarily due to reductions in brand promotion costs as compared to the prior year’s quarter, which included product introductions. Sales salaries and associated travel expenses for the fee operations increased by approximately $0.9 million due to the addition of the Schieffelin brands and expansion of the Fortune and Diageo brokerage operations.

Administrative expenses for the product sales segment decreased by $0.8 million for the quarter ended July 2, 2004 as compared to the prior year’s quarter. The decrease was primarily the result of expense reductions for office wages and taxes of $0.3 million, health costs of $0.4 million, and professional fees of $0.3 million. Administrative expenses for the fee operations increased by $0.2 million, primarily due to increased support services that resulted from the increased case volume during the current year’s quarter as compared the prior year’s comparable period.

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

Management fees from Glazer, as part of the management services agreement, were $3.7 million for the three months ended July 2, 2004, as compared to $2.5 million for the prior year’s quarter. These increased from the prior year’s quarter due to the modification of the agreement that occurred during December 2003.

Income From Operations

Operating income for the product sales segment increased by $1.3 million for the quarter ended July 2, 2004 to $2.5 million, versus the prior year’s comparable quarter. Stable revenue with reduced operating expenses more than offset the shortfall in gross profit during the quarter ended July 2, 2004 as compared to the prior year’s quarter. Operating income for the fee operations segment decreased $0.2 million for the three months ended July 2, 2004, compared to $0.4 million for the prior year’s quarter.

Interest Expense

Interest expense increased $0.7 million to $2.4 million for the quarter ended July 2, 2004 as compared to the prior year’s quarter. Gains from the repurchase of $9.6 million of the Company’s senior notes during the quarter ended June 27, 2003 reduced interest expense by approximately $0.7 million, while no debt repurchases occurred during the current year’s quarter.

Other Income or Expense

The reduction in other income for the quarter ended July 2, 2004 was primarily due to the Company’s share of income from Commonwealth Wine & Spirits, LLC, which decreased by $0.3 million for the three months ended July 2, 2004 as compared to the prior year’s quarter.

Net Income or Loss

Net income was $0.1 million for the three months ended July 2, 2004, which increased by $0.1 million from the prior year’s quarter. Improvement in the net income from the product sales segment of $0.3 million was primarily the reason for the increase in net income for the three months ended July 2, 2004 as compared to the prior year’s comparable period.

EBITDA

For financial analysis purposes only, the Company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) for the quarter ended July 2, 2004 was $5.5 million as compared to $4.1 million for the prior year’s comparable quarter. Please see the discussion and reconciliation regarding EBITDA as a non-GAAP financial measure set forth in “Management’s

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

Discussion and Analysis of Financial Condition and Results of Operations – Overview”. EBITDA should not be construed as an alternative to operating income or loss, or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity.

Liquidity and Capital Resources

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

The Company amended its $40 million revolving credit facility as of June 30, 2004. The amendment permits the Company to repurchase up to $10.0 million of its senior notes subject to certain availability levels.

At July 2, 2004, the Company had $5.5 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 $30.8 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 revolver rate of interest was 5.00% at July 2, 2004. The Company did not have any advances priced at a LIBOR based rate at July 2, 2004. The Company must maintain certain interest coverage and funded debt coverage ratios, with which the Company was in compliance at July 2, 2004. 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 2005.

The Company used $4.7 million in net cash from operating activities for the quarter ended July 2, 2004, as compared to cash provided of $9.1 million for the prior year’s comparable quarter. This increased use of operating cash flow was primarily the result of a reduction in working capital of $15.4 million from the Company’s Illinois business during the prior year’s comparable period which did not occur during the current year. Cash used by working capital for the three months ended July 2, 2004 was $8.0 million, primarily due to funding of accounts receivable of $11.5 million for the product sales segment. The Company was able to reduce inventories in the product sales segment which provided $1.6 million of working capital cash flow for the three months ended July 2, 2004. Cash provided by net income (loss) and adjustments for depreciation and amortization were $3.1 million for the quarter ended July 2, 2004, as compared to $2.3 million for the prior year’s comparable quarter.

Net cash used by investing activities was $0.1 million for the quarter ended July 2, 2004, as compared to cash used of $0.2 million for the prior year’s comparable period. The decreased

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

use of cash, as compared to the prior year’s quarterly period, was primarily due to reduced spending for capital expenditures. The Company intends to continue the reduced level of capital expenditures during fiscal 2005 at maintenance levels between $2.0 million and $2.5 million.

Net cash provided by financing activities was $6.1 million for the quarter ended July 2, 2004, an increase of $20.0 million from the prior year’s comparable quarter. The Company purchased $9.6 million of its senior notes and paid down its line of credit by $2.0 million during the quarter ended June 27, 2003, while no senior notes were repurchased and advances on the line of credit increased by $2.5 million during the quarter ended July 2, 2004. There were no distributions to stockholders during the quarter ended July 2, 2004, while distributions were provided to stockholders for estimated income tax payments of $2.6 million during the quarter ended June 27, 2003. Stockholder distributions other than for tax liabilities are limited by the revolving credit facility and indenture. The Company anticipates that fiscal 2005 stockholder distributions will be for income tax estimates of the shareholders and distributions for other purposes will be limited by the credit facility and indenture.

Total assets of $195.6 million at July 2, 2004 increased by $8.5 million from March 31, 2004. The increase in assets was primarily due to the product sales segment with increased accounts receivable of $10.3 million and lowered inventories of $1.6 million. Total debt of $88.9 million at July 2, 2004 as compared to March 31, 2004 increased by $2.5 million due to the advances on the revolving credit facility. Equity increased to $12.7 million at July 2, 2004 as compared to March 31, 2004 due to net income of $0.1 million.

The Company expects to maintain adequate cash balances, collateral, and revolving credit facility availability to satisfy the Company’s anticipated working capital and debt service requirements during fiscal 2005.

Other

As a matter of policy, the Company plans to review and evaluate all professional services firms every three to four years. This review will include but is not limited to legal, audit and information systems services.

Inflation

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.

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

Environmental Matters

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.

Critical Accounting Policies

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 assumptions and projections, require management’s subjective judgments. The time periods for

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

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.

Inventory Valuation. The carrying amount of inventories is reduced by an allowance that reflects management’s estimate of inventory at net realizable value. Management reviews inventory turnover, sales activity, individual product spoilage, and historical destruction data to calculate an allowance for obsolescence.

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 good sold when the related product is sold.

Many of the vendor allowance programs are not part of written contracts and collectibility of amounts owed to NWS under such agreements cannot be assured. Management reviews vendor accounts receivable balances for collectibility and records an allowance for management’s best estimate of uncollectible accounts.

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 fiscal 2004, the Company reduced its expected long-term rate of return on plan assets to 7.5% from 8.5% during the prior fiscal year. The assumed long-term rate of return on assets reflects the weighted average rate of earnings expected on the classes of funds invested, or to be invested to provide for the plan benefits. An analysis of the composition of the plan’s investments and investment policy compared against the investment’s expected returns results in 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

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

past asset gains (losses) can affect future pension income (cost). Over the long term, the Company’s pension plan assets have earned in excess of 9.3%. However, the plan assets have lost an average of 2.0% per year during the last two years. Should this trend continue, the Company will again 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, 2004, the Company determined this rate to be 6.0%, a decrease of 50 basis points from the rate used at March 31, 2003. 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 Company’s accumulated pension obligation exceeded the fair value of the related plan assets primarily due to the difference in the actual return on assets compared to the expected return on assets and the reduction in the discount rate assumption. As a result, in fiscal 2004 the Company recorded an increase to accrued pension liability and a non-cash charge to equity of approximately $0.1 million. This charge may be reversed in future periods if asset returns improve or interest rates rise. For the year quarter ended July 2, 2004, the Company recognized consolidated pretax pension cost of $0.2 million, equal to the $0.2 million in the quarter ended June 27, 2003. The Company currently expects that the consolidated pension cost for fiscal 2005 will not be materially different from fiscal 2004. The Company’s required minimum amount of fiscal 2005 contributions are approximately $0.9 million. However, the Company may elect to increase the minimum level of contributions in fiscal 2005 based on a number of factors, including performance of pension investments, changes in interest rates, and the funded percentage of the plan.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

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 July 2, 2004:

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.

Item 4. Controls and Procedures

As of July 2, 2004, 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 July 2, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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.

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

The shareholders of National Wine & Spirits, Inc. voted unanimously, via written consent, to add John J. Baker, David W. Goodrich and Stephen E. LaCrosse to the Board of Directors effective May 1, 2004.

Item 5. Other Events

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.

Item 6. Exhibits and Reports on Form 8-K

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SIGNATURES

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

Dated as of August 12, 2004

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