ITEM 1. BUSINESS

Name of the Registrant

Nutritional Sourcing Corporation was founded in 1993 under the name Pueblo Xtra International, Inc. and was known as Pueblo Xtra International, Inc. until July 22, 2002. Effective that date its name was changed to Nutritional Sourcing Corporation ("NSC").

General

NSC is a Delaware holding company that owns all of the membership units of Pueblo International, LLC, a Delaware limited liability company. Prior to October 28, 2004, NSC also owned all of the common stock of Pueblo Entertainment, Inc. ("Pueblo Entertainment"), also a Delaware company. On October 28, 2004, Pueblo Entertainment, Inc. was merged into Pueblo International, LLC. Pueblo Entertainment was organized on January 28, 2001 to own and operate the in-home movie and game entertainment store assets in Puerto Rico. Prior to that date those assets were owned and operated by Pueblo International, Inc. Pueblo International, Inc. was converted to a Delaware limited liability company on November 4, 2001 and its name was changed to Pueblo International, LLC. Throughout this report, unless the context otherwise requires, "Company" refers to NSC together with its subsidiaries. Further, throughout this report Pueblo International, LLC, together with its subsidiaries, is referred to as Pueblo. Also on October 28, 2004, FLBN Corporation, a wholly owned subsidiary of Pueblo, was converted to a Delaware limited liability company and its name was changed to FLBN, LLC ("FLBN"). FLBN is the subsidiary that operates the Company's supermarkets and in-home movie and game entertainment stores in the U.S. Virgin Islands.

Pueblo, which was founded in 1955 with the opening of the first mainland- style supermarkets in Puerto Rico, is one of the leading supermarket chains in the Commonwealth of Puerto Rico and the Territory of the U.S. Virgin Islands. In addition, the Company through its ownership of Pueblo is the leading operator of in-home movie and game entertainment outlets in Puerto Rico and the U.S. Virgin Islands through its franchise rights with Blockbuster Inc. ("BI"). As of October 30, 2004, the Company operated 41 supermarkets in Puerto Rico and 5 supermarkets in the U.S. Virgin Islands. As of October 30, 2004, the Company also operated 39 in-home movie and game entertainment stores in Puerto Rico and 2 in-home movie and game entertainment stores in the U.S. Virgin Islands.

On November 2, 2001, NSC and its subsidiaries changed their fiscal year end from the Saturday closest to January 31 to the Saturday closest to October 31. Consequently, one of the previous comparable periods being reported in this Annual Report on Form 10-K is the forty weeks ended November 3, 2001.

On July 28, 1993, NSC acquired all of the outstanding shares of common stock of Pueblo for an aggregate purchase price of $283.6 million plus transaction costs (hereinafter referred to as the "Acquisition"). Pursuant to the Acquisition, Pueblo became a wholly-owned subsidiary of NSC. The Acquisition was accounted for under the purchase method effective July 31, 1993 as discussed in the Goodwill and Trade Names section of NOTE 1 to the notes to the Company's consolidated financial statements included in Item 15 of this Form 10-K.

In August 2002, NSC defaulted in the payment of interest on its outstanding notes, and consented to the entry of an order for relief under Chapter 11 of the Bankruptcy code the next month. NSC consummated a plan of reorganization and emerged from bankruptcy in June 2003.

Business of the Company

Puerto Rico and U.S. Virgin Islands Supermarket Industry Overview

The grocery retailing business is extremely competitive. Competition is based primarily on price, quality of goods and service, convenience and product mix. The number and type of competitors, and the degree of competition experienced by individual stores, vary by location.

The top four chains (including Pueblo) in the retail grocery industry in Puerto Rico account for approximately 75% of total industry sales, with the remainder divided among smaller chains and numerous independent operations. Total supermarket chain sales in calendar year 2003 were approximately $2.3 billion, a significant portion of which was attributable to the more densely populated greater San Juan metropolitan area, where the larger chains are concentrated. The grocery industry in less populated parts of the island is characterized by smaller family-run operations with limited selection and less competitive prices. No major U.S. supermarket chains have established operations in the Puerto Rico grocery market, although a number of national general merchandise chains have significant Puerto Rican operations. Wal-Mart purchased one of the top four chains, Supermercados Amigo, effective December 5, 2002. Amigo divested 6 of its stores to another party and Wal-Mart is operating the remaining chain of 30 stores as Amigo stores. Wal- Mart also operates Sam's Clubs, Wal-Mart Supercenters and Wal-Mart stores on the island of Puerto Rico. National warehouse clubs and mass merchandisers, which have entered the Puerto Rico and U.S. Virgin Islands markets since 1990 offering various bulk grocery and general merchandise items, have increased pricing pressures on grocery retailers including the Company.

In Puerto Rico, the Company operates its supermarkets under the name Pueblo with emphasis on service, variety and high quality products at competitive prices. In Puerto Rico, the Company estimates that it has a grocery retailing market share of approximately 20%. During the 52 weeks ended October 30, 2004 ("Fiscal 2004"), the Company's stores in Puerto Rico averaged approximately 41,256 gross square feet and generated an average of approximately $423 of sales per selling square foot.

During the 52 weeks ended October 30, 2004, the five supermarkets in the U.S. Virgin Islands averaged 35,773 gross square feet and generated an average of approximately $439 of sales per selling square foot. The Company estimates its U.S. Virgin Islands grocery retailing market share at approximately 31%.

Supermarket Purchasing and Distribution

The Company's buying staff purchases products from distributors, as well as directly from producers or manufacturers. The Company generally controls shipping from the point of purchase in an effort to reduce costs and control delivery times. During the 52 weeks ended October 30, 2004, the Company purchased approximately 51% of its total dollar volume of product purchases directly from manufacturers. The Company is seeking to increase this percentage to reduce costs and to obtain improved payment terms.

The Company owns a full-line distribution center in greater San Juan with approximately 300,000 square feet which is the only facility of its type on the island with refrigerated, freezer and dry grocery capacity. The distribution center is equipped with a computerized tracking system which is integrated with the Company's purchasing, inventory management and shipping systems. This system enables the Company to make rapid procurement decisions, optimize inventory levels and increase labor productivity. During the fiscal year ended October 30, 2004, this facility provided approximately 52% of the goods (measured by purchase cost) supplied to the Company's supermarkets. This involved processing 20.5 million cases through the facility during that period.

Supermarket Marketing and Merchandising

General

The Company's merchandising strategies integrate one-stop shopping convenience, premium quality products, attractive pricing, a customer loyalty program and effective advertising and promotion. The Company reinforces its strategies with friendly and efficient customer service and a variety of other services such as banks, restaurants, and private postal facilities, effective promotional programs including in-store promotional activities, and both brandname and high quality private label product offerings.

Product Offerings

Over the past several years management has increased the number of items offered and analyzed the preferences of its customers. The Company offered approximately 55,000 stock keeping units ("SKUs") for sale as of October 30, 2004. The Company continues to analyze the preferences of its customers and adjusts its levels of SKUs to meet those needs. Management believes the Company's supermarkets offer the greatest product variety within their market areas, as its competitors generally lack the sales volume, store size and procurement efficiencies to stock and merchandise the wide variety of products and services offered by the Company. The Company's management believes the convenience and quality of its specialty department products contribute to customer satisfaction.

The following table sets forth the mix of products sold (as measured in sales dollars) in the Company's supermarkets for the fiscal periods indicated:

                                                    Fiscal Year Ended
                                      -------------------------------------------
                                       October 30,    November 1,      November 2,
Product Category                          2004           2003             2002
                                      -----------     -----------     -----------
Grocery   . . . . . . . . . . .  .        43.4%           43.9%           43.3%
Health/Beauty Care/General Merchandise     8.1             8.1             8.1
Dairy   . . . . . . . . . . . . . .       18.5            18.6            18.6
Meat/Seafood  . . . . . . . . . . .       14.9            15.1            16.0
Produce . . . . . . . . . . . . . .        9.8             9.2             9.2
Deli/Bakery . . . . . . . . . . . .        5.3             5.1             4.8
                                         ------          ------          ------
     Total  . . . . . . . . . . . .      100.0%          100.0%          100.0%
                                         ======          ======          ======

Pricing

As one of the largest grocery store chain operators in its markets, the Company is able to take advantage of volume purchase discounts and shipping efficiencies to offer competitive pricing at its supermarkets. The Company utilizes advertising circulars and run-of-press advertisements to emphasize special offers. During the 52 weeks ended October 30, 2004 the supermarkets reduced the number of times circulars are inserted in local newspapers from 33 to 10. The times the circulars are inserted are during the Christmas selling season and for certain popular holidays. Circulars are printed every two weeks during the remainder of the year but are distributed at the supermarkets rather than inserted in local newspapers. However, run-of-press advertisements in newspapers are used during the periods when the circulars are not inserted.

The circulars, whether inserted or distributed at the supermarkets, and run-of-press advertisements emphasize special offers to holders of the PuebloCard. The card is the cornerstone of the supermarket loyal customer program. The card has two pricing facets. One facet involves special prices that are made available to all customers that have the PuebloCard. The facet other involves additional discounts to customers that have attained, during the calendar year, certain levels of points which are accumulated as a result of making purchases at the supermarkets. Each dollar of purchase equals one point. The first point threshold allows the customer to receive a discount for the remainder of the calendar year of up to 12 percent in the department of the customer's choice. The second, higher point threshold allows the customer to choose a second, but different department to receive a discount of up to 12 percent for the remainder of the calendar year.

Private Label

The Company's private label program includes grocery, dairy, frozen foods, bakery and deli products in its supermarkets. As of October 30, 2004, the Company offered for sale approximately 217 SKUs of Pueblo brand items. The Company also utilizes Food Club brand and Value Time brand private label products through the Company's membership with Topco Associates, Inc. As of October 30, 2004 the Company offered for sale 502 SKUs of Food Club and Value Time products.

Product offerings among Pueblo, Food Club and Value Time private label products and national brands are chosen on the basis of quality, cost, gross margin and sales volume in order to offer what management believes is the best selection and value to its customers.

The Company's private label program consists of the products discussed above as well as products prepared in its bakery and deli departments and a variety of national brand labels sold exclusively at its supermarkets. During the fourth quarter of the fiscal year ended October 30, 2004, private label sales were approximately 11.2% of total supermarket sales.

Supermarket Category Management

The Company's category management system is designed to combine traditional product variety and pricing functions under the leadership of centralized category managers who are responsible for the supermarket product offerings to consumers. The category managers are supported by the supermarket procurement and replenishment staffs. The Company's management believes such a system improves sales, optimizes inventory levels, reduces purchase costs and thereby enhances gross profit and operating profit margins.

Supermarket Advertising and Promotion

In addition to utilizing newspaper and in-store advertising in Puerto Rico and the U.S. Virgin Islands, the Company uses direct mail to advertise the features of its customer loyalty program. At various times during the year this is supplemented by radio and television spots.

Pueblo is the only supermarket operator in its markets that has a Customer loyalty program that provides special economic benefits to consumers that have chosen to participate in the program. Since its inception in March 2001, these benefits have included special discounts on selected items. In April 2004, the Company enhanced the program to offer additional savings to participants. The additional savings are based on the points earned by the participants as discussed above under pricing. There were approximately 1.1 million loyalty cards issued by Pueblo as of October 30, 2004.

In-home Movie and Game Entertainment Operations

The Company has operated franchised in-home movie and game entertainment locations in Puerto Rico since 1989 and in the U.S. Virgin Islands since 1993, and operated 41 in-home movie and game entertainment locations in Puerto Rico and the U.S. Virgin Islands as of October 30, 2004. Of the 39 in-home movie and game entertainment stores located in Puerto Rico, 16 are adjacent to the Company's supermarkets and 23 are freestanding stores. Of the 2 in-home movie and game entertainment stores located in the U.S. Virgin Islands, 1 is free- standing and 1 is located adjacent to the Company's store. The Company's free-standing in-home movie and game entertainment stores average approximately 5,399 gross square feet, while the Company's in-home movie and game entertainment outlets that are in the same building as its supermarkets average approximately 3,900 gross square feet. The Company is able to take advantage of cross-marketing opportunities with its supermarket operations, including promotional in-home movie and game entertainment and merchandising offers.

The Company's In-home Movie and Game Entertainment Operations are currently the largest (in terms of number of stores and total revenue) in-home movie and game entertainment chain operating in Puerto Rico and the U.S. Virgin Islands. The Company believes its locations and name recognition give it an advantage over its competitors. In the last several years Video Avenue has opened 18 stores in Puerto Rico in competition with the Company. Each of the Company's free-standing in-home movie and game entertainment locations carries an average of approximately 10,000 tapes/discs dedicated to video rental whereas its in-home movie and game entertainment locations that are in the same building as its supermarkets average approximately 7,000 tapes/discs. Each location also offers for sale a selection of recorded and blank video tapes and discs, music compact discs, video games, prepaid phone cards, accessories, and snack food products. For promotions of its In-home Movie and Game Entertainment Division operations, the Company utilizes print, television, radio, billboards and in-store signage. The Company's franchisor also provides supplies and some licensed product and support services to the Company. These include, among other things, marketing programs and computer software.

The Company's successful development of its in-home movie and game entertainment franchise has been the result of its ability to leverage its knowledge of Puerto Rico and existing market and retailing expertise. The Company's knowledge of real estate and its existing portfolio of desirable supermarket locations has enabled it to obtain attractive, high traffic locations for its In-home Movie and Game Entertainment Operations. The Company continues to evaluate expansion opportunities in Puerto Rico.

Each in-home movie and game entertainment location is subject to a franchise agreement with the Company's franchisor that provides the right for such location to conduct in-home movie and game entertainment operations for a 20-year period from the initial date of operation of the location. The franchise agreement provides, in addition to other things, that the franchisor has the right to approve each location, approve the promotional activities of the division, approve products sold in each location as well as the cash register check-out hardware and software to be used at each location, and the communications systems to be used at each location. The agreement also specifies the franchise fees, as a percentage of sales, to be paid to the franchisor and provides for direction from the franchisor as to the monies spent on advertising, also as a percentage of sales.

Although the Company's In-home Movie and Game Entertainment Operations constitute the largest in-home movie and game entertainment chain in Puerto Rico and the U.S. Virgin Islands, the Company competes with 18 Video Avenue stores, 14 Cinema Video stores, numerous local independent video retailers, and mass merchandisers in the category of retail sales of movies and game videos. In addition, the Company's in-home movie and game entertainment stores compete against cable, television, satellite broadcasting, movie theaters, the Internet, and other forms of entertainment.

Management Information Systems

The Company believes high levels of automation and technology are essential to its operations and has invested considerable resources in computer hardware, systems applications and networking capabilities. These systems integrate all major aspects of the Company's business, including the monitoring of store sales, inventory control, merchandise planning, labor utilization, distribution and financial reporting.

All of the Company's stores are equipped with point of sale (POS) terminals with full price look-up capabilities that capture sales at the time of transaction down to the SKU level through the use of bar-code scanners. These scanners facilitate customer checkout and provide, by store, valuable information to assist our buyers in the reordering process and provide other valuable information used by category managers. Similar scanning technology is used by each store to electronically record goods received and orders generated.

The Company's management information systems at its In-home Movie and Game Entertainment Operations are systems that are licensed to the Company by its franchisor.

Employees

As of October 30, 2004, the Company had approximately 4,212 employees (full and part-time), of whom approximately 3,342 were employed at the supermarket level, 447 at the administrative and financial services offices and distribution center and 423 by the In-home Movie and Game Entertainment Division. Approximately 68% of the Company's hourly supermarket employees were employed on a part-time basis and approximately 2,879 store employees were represented by a nonaffiliated collective bargaining organization under a four year contract expiring in July 2006. The Company considers its relations with its employees to be good.

Trademarks, Tradenames and Service Marks

The Company owns certain trademarks, tradenames and service marks used in its business, which are registered with the U.S. Patent and Trademark Office, and the appropriate governmental authorities in Florida, Puerto Rico, the U.S. Virgin Islands, and selected foreign jurisdictions. The Company believes that its trademarks, tradenames, and service marks, including, but not limited to, Pueblo, PuebloXtra, and Xtra, are valuable assets due to the fact that brand name recognition and logos are important considerations in the Company's consumer markets. As a franchisee, the Company has exclusive rights to use the franchisor's trademark in its specified franchise territories.

Environmental Regulation

Compliance by the Company with federal, commonwealth, territory and local environmental protection laws has not had, and is not expected to have, a material effect on capital expenditures, earnings or the competitive position of the Company.

Risk Factors

Forward Looking Statements

Statements, other than statements of historical information, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K may constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include, among others, statements concerning expectations of adequate liquidity and anticipated capital expenditures. These statements are based on Company management's expectations and are subject to various risks and uncertainties. Actual results could differ materially from those anticipated due to a number of factors, including but not limited to the Company's substantial indebtedness and high degree of leverage (including limitations on the Company's ability to obtain additional financing and trade credit, to apply operating cash flow for purposes in addition to debt service, to respond to price competition in economic downturns and to dispose of assets pledged to secure such indebtedness or to freely use proceeds of any such dispositions), the Company's limited geographic markets and competitive conditions in the markets in which the Company operates and buying patterns of consumers.

Supermarket Industry

The retail grocery industry is extremely competitive and is characterized by high inventory turnover and narrow profit margins. The Company's results of operations are therefore sensitive to, and may be materially adversely impacted by, among other things, competitive pricing, promotional pressures and additional store openings by competitors. The Company competes with national, regional and local supermarkets, warehouse club stores, supercenters, drug stores, convenience stores, discount merchandisers and other local retailers in the market areas it serves. Competition with these outlets is based on price, store location, advertising and promotion, product mix, quality and service. Some of these competitors have greater financial resources, and may have lower merchandise acquisition costs and lower operating expenses than the Company, and the Company may be unable to compete successfully in the future.

In-home Movie and Game Entertainment Operations

The Company's in-home movie and game entertainment franchise faces significant competition and risks associated with technological obsolescence, and the Company may be unable to compete effectively. The in-home movie and game entertainment industry is highly competitive. The Company competes with local, regional and national video retail stores, and with mass merchants, club stores, specialty retailers, supermarkets, pharmacies, convenience stores, bookstores, mail order operations, online stores and other retailers, as well as with noncommercial sources, such as libraries. This industry is also challenged by illegal and non-official competitors that copy and distribute illegal VHS tapes and DVD's, also known as piracy activity. As a result of direct competition with others, pricing strategies for in-home movies and games is a significant competitive factor in the Company's in-home movie and game entertainment business. The Company's in-home movie and game entertainment business also competes with other forms of entertainment, including cinema, television, sporting events and family entertainment centers. If the Company does not compete effectively with competitors in the in-home movie and game entertainment industry or with providers of other forms of entertainment, its revenues and/or its profit margin could decline and its business, financial condition, liquidity and results of operations could be adversely affected.

Further, the division's operations are dependent on the studios that develop and distribute the product. Changes in video formats or distribution practices (for example from VHS tapes to DVD's)are disruptive to the division's operations as these changes may cause significant changes in its product acquisition costs, quantities it is required to purchase, the timing of the period a title may be rented before it is brought to market for sale (which impacts the length of time of high rental volume for a title - better known in the industry as the "rental window") and its per rental revenue depending on the distribution and pricing practices of the studios.

The division is also dependent on the movie and game production industry for the development of new product and re-launches of older titles as it has no production or duplication facilities of its own. The Company is also dependent on its franchisor for technological advances and permission to expand the items offered for sale.

Geographic Considerations; Regulation

The Company is concentrated in the densely populated greater San Juan metropolitan area of Puerto Rico and in the U.S. Virgin Islands. As a result, the Company is vulnerable to economic downturns in those regions, as well as natural and other catastrophic events, such as hurricanes and earthquakes, that may impact those regions. These events may adversely affect the Company's sales which may lead to lower earnings, or even losses, and may also adversely affect its future growth and expansion and ability to acquire windstorm insurance coverage. Further, since the Company is concentrated on three islands, opportunities for future store expansion may be limited, which may adversely affect its business and results of operations. Additionally, the Company is subject to governmental regulations (such as import taxes) that impose obligations and restrictions and may increase its costs.

The Company is Highly Leveraged

The Company emerged from bankruptcy in June, 2003 and has a substantial amount of indebtedness and debt service obligations, which could adversely affect its financial and operational flexibility and increase its vulnerability to adverse conditions. The Company could incur substantial additional indebtedness in the future, including indebtedness that would be secured by its assets. Additionally, the Company's revolving and term loan debt is subject to variable interest rates. If the Company increases its indebtedness or if there is a substantial increase in interest rates, the related risks that it now faces could intensify. For example, the Company's current level of indebtedness and/or an increase in indebtedness and interest rates could:

- require the Company to dedicate an increased portion of its cash flow to payments on its indebtedness;
- limit the Company's ability to borrow additional funds;
- increase the Company's vulnerability to general adverse economic and industry conditions;
- limit the Company's ability to fund future working capital, capital expenditures and other general corporate requirements;
- limit the Company's flexibility in planning for, or reacting to, changes in its business and the industry in which it operates or taking advantage of potential business opportunities;
- limit the Company's ability to execute its business strategy successfully; and
- place the Company at a potential competitive disadvantage in its industry.

The Company's ability to satisfy its indebtedness will depend on its financial and operating performance, which may fluctuate significantly from quarter to quarter and is subject to economic, industry and market conditions and to risks related to its business and other factors beyond its control. The Company cannot provide assurance that its business will generate sufficient cash flow from operations or that future borrowings will be available to it in amounts sufficient to enable it to pay its indebtedness or to fund its other liquidity needs.

Further, as NSC is a holding company, indebtedness at the NSC level is effectively subordinated to indebtedness and other obligations at the operating subsidiary level. See Item 7 MANAGEMENTS'DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and NOTE 5 - DEBT to the consolidated financial statements included in item 15 of this Form 10-K.