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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2003

 

Commission File No. 1-13453

 

TODHUNTER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE

 

59-1284057

(State or other jurisdiction of
incorporation or organization)

 

IRS Employer Identification No.

 

 

 

222 Lakeview Avenue, Suite 1500, West Palm Beach, FL

 

33401

(Address of principal executive offices)

 

(Zip Code)

 

 

 

Registrant’s telephone number, including area code:  (561) 655-8977

 

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, and (2) has been subject to such filing requirements for the past 90 days.

 

Yes    ý        No    o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes    o        No    ý

 

The number of shares outstanding of registrant’s Common Stock, $.01 par value per share, as of August 12, 2003 was 5,576,234.

 

 



 

TODHUNTER INTERNATIONAL, INC.

 

INDEX

 

PART I

FINANCIAL INFORMATION

 

 

Item 1

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets -
June 30, 2003, unaudited and September 30, 2002

 

 

 

 

 

Consolidated Statements of Income -
Nine and Three Months Ended June 30, 2003 and 2002, unaudited

 

 

 

 

 

Consolidated Statements of Cash Flows -
Nine and Three Months Ended June 30, 2003 and 2002, unaudited

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

Item 4

Controls and Procedures

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings *

 

 

 

 

Item 2

Changes in Securities and Use of Proceeds *

 

 

 

 

Item 3

Defaults Upon Senior Securities *

 

 

 

 

Item 4

Submission of Matters to a Vote of Security Holders *

 

 

 

 

Item 5

Other Information *

 

 

 

 

Item 6

Exhibits and Reports on Form 8-K

 

 

 

Signatures

 


* Item is omitted because answer is negative or item is inapplicable.

 



 

PART I - FINANCIAL INFORMATION

 

Item 1.           Financial Statements

 

TODHUNTER INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,
2003

 

September 30,
2002

 

 

 

(Unaudited)

 

*

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

14,205,007

 

$

13,946,736

 

Short-term investments

 

3,402,636

 

3,397,033

 

Trade receivables

 

13,801,588

 

13,505,737

 

Other receivables

 

2,617,059

 

2,696,743

 

Inventories

 

32,442,963

 

27,854,925

 

Notes receivable, current maturities

 

246,767

 

118,165

 

Deferred income taxes

 

2,205,750

 

1,992,000

 

Other current assets

 

2,488,589

 

3,078,437

 

Total current assets

 

71,410,359

 

66,589,776

 

 

 

 

 

 

 

LONG-TERM INVESTMENTS AND NOTES RECEIVABLE

 

 

 

 

 

Investments in and advances to equity investees

 

1,886,416

 

1,584,628

 

Notes receivable from affiliates, less current maturities

 

4,121,204

 

3,774,773

 

Notes receivable, less current maturities

 

523,608

 

584,687

 

 

 

6,531,228

 

5,944,088

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT

 

91,632,043

 

89,775,329

 

Less accumulated depreciation

 

50,824,798

 

47,590,112

 

 

 

40,807,245

 

42,185,217

 

 

 

 

 

 

 

GOODWILL

 

20,524,404

 

20,524,404

 

AMORTIZED INTANGIBLE ASSETS

 

1,785,030

 

2,040,181

 

OTHER ASSETS

 

29,250

 

598,838

 

 

 

$

141,087,516

 

$

137,882,504

 

 


*From audited financial statements.

See Notes to Consolidated Financial Statements.

 

1



 

TODHUNTER INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,
2003

 

September 30,
2002

 

 

 

(Unaudited)

 

*

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Current maturities of long-term debt

 

$

4,000,000

 

$

4,000,000

 

Accounts payable

 

7,949,135

 

4,051,379

 

Accrued expenses

 

3,041,682

 

3,223,293

 

Total current liabilities

 

14,990,817

 

11,274,672

 

 

 

 

 

 

 

LONG-TERM DEBT, less current maturities

 

49,900,206

 

53,017,009

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

5,033,250

 

4,710,000

 

 

 

 

 

 

 

OTHER LIABILITIES

 

2,233,337

 

1,811,459

 

 

 

72,157,610

 

70,813,140

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock, par value $.01 per share;
authorized 2,500,000 shares; no shares issued

 

 

 

Common stock, par value $.01 per share;
authorized 10,000,000 shares; issued 5,673,434 shares June 30, 2003, and 5,669,434 shares September 30, 2002

 

56,734

 

56,694

 

Additional paid-in capital

 

18,696,909

 

18,664,449

 

Retained earnings

 

50,914,043

 

49,086,001

 

 

 

69,667,686

 

67,807,144

 

Less cost of 99,200 shares of treasury stock

 

(737,780

)

(737,780

)

 

 

68,929,906

 

67,069,364

 

 

 

$

141,087,516

 

$

137,882,504

 

 


*From audited financial statements.

See Notes to Consolidated Financial Statements.

 

2



 

TODHUNTER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Nine Months Ended June 30,

 

Three Months Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

88,646,677

 

$

97,693,371

 

$

30,924,864

 

$

34,377,199

 

Less excise taxes

 

22,769,722

 

24,948,483

 

7,837,133

 

8,443,889

 

Net sales

 

65,876,955

 

72,744,888

 

23,087,731

 

25,933,310

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

44,423,842

 

49,402,731

 

15,022,995

 

17,289,143

 

Gross profit

 

21,453,113

 

23,342,157

 

8,064,736

 

8,644,167

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

17,392,479

 

15,592,695

 

6,305,257

 

5,778,418

 

Operating income

 

4,060,634

 

7,749,462

 

1,759,479

 

2,865,749

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

570,479

 

480,619

 

227,759

 

107,986

 

Interest expense

 

(2,583,583

)

(2,070,276

)

(985,150

)

(649,550

)

Equity in income (loss) of equity investee

 

325,970

 

136,035

 

76,565

 

(21,378

)

Other, net

 

(1,363,999

)

327,212

 

94,622

 

81,406

 

 

 

(3,051,133

)

(1,126,410

)

(586,204

)

(481,536

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

1,009,501

 

6,623,052

 

1,173,275

 

2,384,213

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

Current

 

(928,041

)

1,441,017

 

(883,657

)

444,267

 

Deferred

 

109,500

 

211,500

 

164,500

 

185,000

 

 

 

(818,541

)

1,652,517

 

(719,157

)

629,267

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

1,828,042

 

$

4,970,535

 

$

1,892,432

 

$

1,754,946

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

0.90

 

$

0.34

 

$

0.32

 

Diluted

 

$

0.32

 

$

0.88

 

$

0.34

 

$

0.31

 

 

 

 

 

 

 

 

 

 

 

Common shares and equivalents outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

5,572,608

 

5,518,675

 

5,574,322

 

5,528,558

 

Diluted

 

5,639,825

 

5,631,189

 

5,647,923

 

5,661,247

 

 

See Notes to Consolidated Financial Statements.

 

3



 

TODHUNTER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended June 30,

 

 

 

2003

 

2002

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

1,828,042

 

$

4,970,535

 

Adjustments to reconcile net income to net cash provided
by operating activities:

 

 

 

 

 

Depreciation

 

4,015,637

 

3,902,721

 

Amortization

 

30,150

 

67,650

 

(Gain) loss on sale of property and equipment

 

65,583

 

(30,373

)

Equity in income of equity investees

 

(325,970

)

(136,035

)

Deferred income taxes

 

109,500

 

211,500

 

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in:

 

 

 

 

 

Receivables

 

(216,167

)

(81,183

)

Inventories

 

(4,588,038

)

(709,611

)

Other current assets

 

589,848

 

(787,925

)

Increase (decrease) in:

 

 

 

 

 

Accounts payable

 

3,897,756

 

(348,117

)

Accrued expenses

 

(181,611

)

(314,764

)

Other liabilities

 

421,878

 

25,413

 

Net cash provided by operating activities

 

5,646,608

 

6,769,811

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Proceeds from sale of property and equipment

 

60,152

 

58,598

 

Principal payments received on notes receivable

 

92,046

 

68,045

 

Purchase of property and equipment

 

(2,763,400

)

(4,815,666

)

Disbursements for notes receivable

 

(506,000

)

(286,797

)

Purchase of short-term investments

 

(103,603

)

(2,918,664

)

Redemption of short-term investments

 

98,000

 

 

Investments in subsidiaries

 

24,182

 

 

Increase in other assets

 

794,589

 

190,600

 

Net cash used in investing activities

 

$

(2,304,034

)

$

(7,703,884

)

 

4



 

 

 

Nine Months Ended June 30,

 

 

 

2003

 

2002

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net borrowings on line of credit

 

$

50,000

 

$

1,900,000

 

Issuance of common stock

 

32,500

 

213,000

 

Disbursements for loan costs

 

 

(889,833

)

Principal payments on long-term borrowings

 

(3,166,803

)

(3,124,247

)

Net cash used in financing activities

 

(3,084,303

)

(1,901,080

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

258,271

 

(2,835,153

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Beginning

 

13,946,736

 

5,624,029

 

Ending

 

$

14,205,007

 

$

2,788,876

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

Cash payments (receipts) for:

 

 

 

 

 

Interest

 

$

2,580,428

 

$

2,059,474

 

Income taxes

 

$

(595,939

)

$

1,271,488

 

 

See Notes to Consolidated Financial Statements.

 

5



 

TODHUNTER INTERNATIONAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.          Basis of Presentation

 

The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, all adjustments, consisting only of normal recurring adjustments, except for the retirement of the Executive Officers (see Note 7), necessary for a fair presentation of the financial information for the periods indicated have been included.  For further information regarding the Company’s accounting policies, refer to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2002.

 

Aggregate amortization expenses were $30,150 and $10,050 for the nine and three months ended June 30, 2003, respectively, and $67,650 and $22,550 for the nine and three months ended June 30, 2002, respectively.

 

The Company applies Accounting Principles Board Opinion Number 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations in accounting for options granted, which requires compensation expense for the Company’s options to be recognized only if the market price of the underlying stock exceeds the exercise price on the date of grant.  Accordingly, the Company has not recognized compensation expense for its options granted after 1994.  Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, issued in October 1995, requires pro forma disclosures for option grants made after December 31, 1994, when accounting for stock-based compensation plans in accordance with APB 25.

 

If the Company elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per common share would have been reduced to the pro forma amounts show below:

 

 

 

Nine Months Ended
June 30,

 

Three Months Ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

1,828,042

 

$

4,970,535

 

$

1,892,432

 

$

1,754,946

 

Deduct:  Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

126,103

 

126,103

 

42,034

 

42,034

 

Net income, pro forma

 

$

1,701,939

 

$

4,844,432

 

$

1,850,398

 

$

1,712,912

 

Earnings per common share, as reported

 

 

 

 

 

 

 

 

 

Basic

 

0.33

 

0.90

 

0.34

 

0.32

 

Diluted

 

0.32

 

0.88

 

0.34

 

0.31

 

Earnings per common share, pro forma

 

 

 

 

 

 

 

 

 

Basic

 

0.30

 

0.87

 

0.33

 

0.30

 

Diluted

 

0.30

 

0.86

 

0.32

 

0.30

 

 

6



 

Note 2.          Inventories

 

The major components of inventories are:

 

 

 

June 30, 2003

 

September 30, 2002

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Finished goods

 

$

17,241,342

 

$

16,470,057

 

Work in process

 

3,138,158

 

1,513,786

 

Raw materials and supplies

 

12,063,463

 

9,871,082

 

 

 

 

 

 

 

 

 

$

32,442,963

 

$

27,854,925

 

 

Note 3.          Financing Arrangements

 

Long-term debt consists of the following as of June 30, 2003:

 

Term loans under a credit agreement (i) (ii), interest payable monthly based on either the Eurodollar or prime rate at the Company’s option, plus an applicable margin as defined in the agreement.  The interest rate at June 30, 2003 was 5.32%.  Future minimum quarterly principal installments of $1,000,000 through September 30, 2006 with any remaining balance due September 30, 2006.

 

$

33,000,000

 

 

 

 

 

Revolving loans under a credit agreement (i), interest payable quarterly based on either the Eurodollar or prime rate at the Company’s option, plus an applicable margin as defined in the agreement.  The blended interest rate at June 30, 2003 was 5.1%.  The revolving lines of credit terminate in October 2004.

 

20,550,000

 

 

 

 

 

Other

 

350,206

 

 

 

53,900,206

 

Less current maturities

 

4,000,000

 

 

 

$

49,900,206

 

 


(i)             In October 2001, the Company entered into a $70 million credit agreement, which consists of a $40 million term loan and a $30 million revolving loan facility.  The credit agreement is collateralized principally by all assets located in the United States of America.  The Company is restricted from paying dividends to stockholders.  Also, the Company is required to maintain unencumbered cash or marketable securities of $4 million at the end of each fiscal quarter and to maintain certain financial covenants.

 

(ii)          In addition to quarterly principal payments, the Company may be required to make additional principal payments based on results of the Company’s domestic operating profits, as defined in the agreement.

 

7



 

As of December 31, 2002 and March 31, 2003, the Company was not in compliance with the Funded Debt to EBITDA (earnings before interest, taxes, depreciation and amortization) financial covenant under its credit agreement.  In addition, as of March 31, 2003 the Company was not in compliance with its Interest Coverage and Fixed Charge Coverage financial covenants.  On February 18, 2003, the Company received a waiver for the December 31, 2002 covenant violation.  On May 14, 2003, the Company received a waiver of the March 31, 2003 covenant violations and amended the credit agreement prospectively to reset the levels of certain financial covenants to reflect the Company’s current business plan and forecasts.  The Company paid a fee of $136,250 for the December waiver and $160,000 for the March waiver and amendment.  The Company’s interest rate under the term-loan and revolving credit agreement was increased 50 basis points effective January 1, 2003 and an additional 50 basis points effective May 14, 2003.

 

Note 4.          Earnings Per Common Share

 

Basic earnings per common share are calculated by dividing net income by the average common shares outstanding.  On a diluted basis, shares outstanding are adjusted to assume the exercise of stock options.

 

 

 

Nine Months Ended
June 30,

 

Three Months Ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,828,042

 

$

4,970,535

 

$

1,892,432

 

$

1,754,946

 

Determination of shares:

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

5,572,608

 

5,518,675

 

5,574,322

 

5,528,558

 

Shares issuable on exercise of stock options, net of shares assumed to be purchased out of proceeds

 

67,217

 

112,514

 

73,601

 

132,689

 

Average common shares outstanding for diluted earnings per share computation

 

5,639,825

 

5,631,189

 

5,647,923

 

5,661,247

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

0.90

 

$

0.34

 

$

0.32

 

Diluted

 

$

0.32

 

$

0.88

 

$

0.34

 

$

0.31

 

 

The Company’s Virgin Islands subsidiary, through the Economic Development Commission of the Government of the Virgin Islands of the United States, has received a 90% exemption from income taxes on operating income.  This exemption is effective through September 2020.  The per share effect of this exemption on earnings (on a diluted basis) was to increase earnings per share by $0.15 and $0.06 for the nine and three months ended June 30, 2003, respectively, and $0.12 and $0.04 for the nine and three months ended June 30, 2002, respectively.

 

8



 

Note 5.          Segment and Geographical Information

 

The Company operates primarily in the beverage alcohol industry in the United States.  The Company reports its operating results in four segments:

 

Bulk Alcohol Products (citrus brandy, citrus spirits, rum, cane spirits, fortified citrus wine, purchased distilled products and byproducts)

Premium Branded Spirits (primarily Cruzan Estate Rums and Cruzan Flavored Rums)

Bottling Operations (contract bottling services and proprietary and private label products)

Vinegar and Cooking Wine (bulk vinegar, bulk cooking wine, vinegar stock and proprietary and private label case goods)

 

The accounting policies of the reportable segments are the same as those referred to in Note 1 to the consolidated financial statements.  The Company evaluates the performance of its operating segments based on income before income taxes, equity in income or loss of equity investees, interest income and interest expense. Material intersegment sales and transfers have been eliminated.

 

9



 

Summarized financial information concerning the Company’s reportable segments is shown in the following table.

 

Net sales, operating income (loss), depreciation and amortization and capital expenditures for the Company’s reportable segments for the nine and three months ended June 30, 2003 and 2002, and identifiable assets as of June 30, 2003 and 2002, were as follows:

 

 

 

Nine Months Ended
June 30,

 

Three Months Ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(in thousands)

 

(in thousands)

 

Net Sales

 

 

 

 

 

 

 

 

 

Bulk Alcohol Products

 

$

26,276

 

$

26,911

 

$

8,749

 

$

9,219

 

Premium Branded Spirits

 

13,521

 

15,134

 

4,796

 

6,702

 

Bottling Operations

 

10,953

 

14,923

 

4,542

 

4,718

 

Vinegar and Cooking Wine

 

15,127

 

15,777

 

5,001

 

5,294

 

 

 

$

65,877

 

$

72,745

 

$

23,088

 

$

25,933

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

Bulk Alcohol Products

 

$

8,673

 

$

8,235

 

$

2,900

 

$

2,835

 

Premium Branded Spirits

 

(1,290

)

(230

)

(544

)

312

 

Bottling Operations

 

(1,450

)

973

 

287

 

(35

)

Vinegar and Cooking Wine

 

2,947

 

3,306

 

895

 

1,203

 

Corporate Operations and Other

 

(4,819

)

(4,535

)

(1,778

)

(1,450

)

 

 

$

4,061

 

$

7,749

 

$

1,760

 

$

2,865

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

 

 

 

 

 

 

 

Bulk Alcohol Products

 

$

2,424

 

$

2,226

 

$

815

 

$

765

 

Premium Branded Spirits

 

72

 

104

 

22

 

33

 

Bottling Operations

 

1,099

 

1,193

 

401

 

381

 

Vinegar and Cooking Wine

 

362

 

352

 

120

 

118

 

Corporate Operations and Other

 

89

 

95

 

30

 

31

 

 

 

$

4,046

 

$

3,970

 

$

1,388

 

$

1,328

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

 

 

 

 

 

 

 

 

Bulk Alcohol Products

 

$

1,370

 

$

3,757

 

$

298

 

$

1,066

 

Premium Branded Spirits

 

71

 

63

 

55

 

4

 

Bottling Operations

 

1,178

 

687

 

171

 

344

 

Vinegar and Cooking Wine

 

68

 

193

 

34

 

115

 

Corporate Operations and Other

 

76

 

116

 

65

 

 

 

 

$

2,763

 

$

4,816

 

$

623

 

$

1,529

 

 

 

 

 

 

 

 

 

 

 

Identifiable Assets

 

 

 

 

 

 

 

 

 

Bulk Alcohol Products

 

$

76,132

 

$

71,355

 

 

 

 

 

Premium Branded Spirits

 

7,673

 

8,153

 

 

 

 

 

Bottling Operations

 

25,150

 

25,447

 

 

 

 

 

Vinegar and Cooking Wine

 

19,753

 

20,167

 

 

 

 

 

Corporate Operations and Other

 

12,380

 

12,047

 

 

 

 

 

 

 

$

141,088

 

$

137,169

 

 

 

 

 

 

10



 

Sales and operating income for the nine and three months ended June 30, 2003 and 2002 and identifiable assets as of June 30, 2003 and 2002, classified by geographic area, were as follows:

 

 

 

United States

 

U. S. Virgin Islands and
the Bahamas

 

Consolidated

 

 

 

(in thousands)

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2003:

 

 

 

 

 

 

 

Net sales

 

$

57,561

 

$

8,316

 

$

65,877

 

Operating income

 

1,603

 

2,458

 

4,061

 

Identifiable assets

 

96,023

 

45,065

 

141,088

 

 

 

 

 

 

 

 

 

June 30, 2002:

 

 

 

 

 

 

 

Net sales

 

64,991

 

7,754

 

72,745

 

Operating income

 

5,752

 

1,997

 

7,749

 

Identifiable assets

 

95,563

 

41,606

 

137,169

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2003:

 

 

 

 

 

 

 

Net sales

 

20,078

 

3,010

 

23,088

 

Operating income

 

615

 

1,145

 

1,760

 

 

 

 

 

 

 

 

 

June 30, 2002:

 

 

 

 

 

 

 

Net sales

 

22,947

 

2,986

 

25,933

 

Operating income

 

2,042

 

823

 

2,865

 

 

Included in net sales for the United States are export sales, primarily to Europe, Canada and the Caribbean, totaling approximately $6,203,000 and $2,506,000 for the nine and three months ended June 30, 2003, respectively, and $7,948,000 and $2,837,000 for the nine and three months ended June 30, 2002, respectively.

 

Note 6.          Comprehensive income

 

Comprehensive income is the total of net income and other changes in equity. Total comprehensive income for the nine and three months ended June 30, 2003 and 2002 was as follows:

 

 

 

Nine Months Ended
June 30,

 

Three Months Ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(in thousands)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,828

 

$

4,970

 

$

1,892

 

$

1,755

 

Other comprehensive income, interest rate cap adjustment

 

 

63

 

 

 

 

 

$

1,828

 

$

5,033

 

$

1,892

 

$

1,755

 

 

11



 

Note 7.          Retirement of Executive Officers

 

On November 26, 2002, the Company announced the retirement and resignation of A. Kenneth Pincourt, Jr., its Founder, Chairman and Chief Executive Officer.  The Company has entered into a retirement agreement with Mr. Pincourt, setting forth the terms of his retirement and resignation.  The retirement agreement replaces Mr. Pincourt’s previous employment agreement. Under the retirement agreement, the Company elected to accelerate retirement benefits under its deferred compensation program and to continue to pay compensation and provide related benefits through July 15, 2004, the remaining term of Mr. Pincourt’s previous employment contract.

 

Accelerated benefits under the deferred program amounted to $1,040,987, of which $549,220 had been accrued as of September 30, 2002. Mr. Pincourt’s deferred compensation was paid to him on December 13, 2002.  Also under the retirement agreement, Mr. Pincourt will continue to receive monthly payments of $41,004 through July 15, 2004, one bonus payment of $150,491 payable on or before October 31, 2003, and a second bonus payment of $119,138 payable on or before August 31, 2004.  Among other benefits, Mr. Pincourt is also able to participate in any health insurance plan, employee benefit plan or other arrangement made available by the Company or its subsidiaries to its executives and key management employees, through July 15, 2004.  The Company recorded a charge for the retirement of Mr. Pincourt during the first quarter of fiscal 2003.  The effect of this charge was included in other expense in the Company’s consolidated statement of income and amounted to $1,503,925 before income taxes.

 

The following table summarizes the charge made during the first quarter for Mr. Pincourt’s retirement:

 

Deferred compensation

 

$

1,040,987

 

Compensation and related benefits

 

1,012,158

 

Total

 

2,053,145

 

 

 

 

 

Less deferred compensation accrued as of September 30, 2002

 

(549,220

)

Charged to expense

 

$

1,503,925

 

 

On May 22, 2003, the Company announced the retirement of Troy Edwards, its Chief Financial Officer, Secretary, Treasurer and Controller.  The Company recorded a charge for the retirement of Mr. Edwards of $207,683 during the third quarter of fiscal 2003.  The effect of this charge was included in other expense in the Company’s consolidated statement of income.

 

Note 8.  Income Taxes

 

As of June 30, 2003, the Company had a tax loss from U.S. operations of $2.5 million, and the Company currently estimates that its tax loss from U.S. operations through September 30, 2003 will be $3.0 million.  The net operating loss will be carried back to prior tax years resulting in a refund of approximately $0.9 million.  As of June 30, 2003, the estimated refund has been recorded as an income tax benefit in the Company’s consolidated statement of income and as a receivable included in other current assets on the Company’s consolidated balance sheet.

 

12



 

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

 

Forward-Looking Statements

 

Management’s Discussion and Analysis contains “Forward-Looking Statements,” as defined in section 27a of the Securities Act of 1933, as amended, and Section 21e of the Securities Exchange Act of 1934, as amended.  Forward-Looking Statements are statements other than historical information or statements of current condition and relate to future events or the future financial performance of the Company.  Some Forward-Looking Statements may be identified by use of such terms as “believes,” “anticipates,” “intends” or “expects.”  Such Forward-Looking Statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such Forward-Looking Statements.  The following is a list of factors, among others, that could cause actual results to differ materially from those contemplated by the Forward-Looking Statements:  business conditions in certain market segments and industries and the general economy; competitive factors, including increased competition and price pressures; availability of third-party component products at reasonable prices; increased excise taxes; foreign currency exposure; changes in product mix between and among product lines; lower than expected customer orders and quarterly seasonal fluctuations of those orders; and product shipment interruptions.  The Company undertakes no obligation to update or revise any Forward-Looking Statements, whether as a result of new information, future events or otherwise.

 

Introduction

 

The following discussion and analysis summarizes the significant factors affecting (i) consolidated results of operations of the Company for the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002, (ii) consolidated results of operations of the Company for the three months ended June 30, 2003 compared to the three months ended June 30, 2002, and (iii) financial liquidity and capital resources.  This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and notes thereto included herein.  Certain amounts presented in this Item 2 have been rounded to the nearest thousand or hundred thousand, as applicable, but the percentages calculated are based on actual amounts without rounding.

 

The Company operates primarily in the beverage alcohol industry in the United States.  The Company is a leading producer and supplier of brandy, rum, wine and spirits to other beverage alcohol manufacturers; produces, imports and markets premium branded spirits; bottles beverage alcohol and other beverages on a contract basis and under its own labels; and produces vinegar and cooking wine.  The Company reports its operating results in four segments:  Bulk Alcohol Products (citrus brandy, citrus spirits, rum, cane spirits, fortified citrus wine, purchased distilled products and byproducts); Premium Branded Spirits (primarily Cruzan Estate Rums and Cruzan Flavored Rums); Bottling Operations (contract bottling services and proprietary and private label products); and Vinegar and Cooking Wine (bulk vinegar, bulk cooking wine, vinegar stock and proprietary and private label case goods).

 

Information regarding the net sales, operating income and total assets of each of the Company’s business segments and information regarding geographic areas is set forth in Note 5 to the consolidated financial statements.

 

The Company’s net sales and gross margins (gross profit as a percentage of net sales) vary depending on the mix of business among the Company’s products.  Historically, gross margins have been highest in bulk alcohol products and premium branded spirits and lower in bottling operations and vinegar and cooking wine operations.

 

The Company has a limited number of customers, and these customers often purchase bulk alcohol products in significant quantities or place significant orders for contract bottling services, distilled spirits, vinegar and cooking wine.  Accordingly, the size and timing of purchase orders and product shipments can cause operating results to fluctuate significantly from quarter to quarter.  Additionally, some Company products generate higher profit margins than others, and changes in the Company’s product mix can cause gross margins to fluctuate.  Certain aspects of the Company’s business are seasonal, with increased demand for the Company’s contract bottling services from April to October and increased production of the Company’s bulk alcohol products from November to June, corresponding to

 

13



 

the Florida citrus harvest.  As a result of these factors, the Company’s operating results may vary significantly from quarter to quarter.

 

Net sales represent the Company’s gross sales less excise taxes. Excise taxes are generally payable on products bottled by the Company.  In addition, excise taxes are payable on sales of industrial alcohol to certain customers.  Accordingly, excise taxes vary from period to period depending upon the Company’s product and customer mix.

 

Results of Operations

 

The following table sets forth statement of income items as a percentage of net sales.

 

 

 

Nine Months Ended
June 30,

 

Three Months Ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of goods sold

 

67.4

 

67.9

 

65.1

 

66.7

 

Gross margin

 

32.6

 

32.1

 

34.9

 

33.3

 

Selling, general and administrative expenses

 

26.4

 

21.4

 

27.3

 

22.3

 

Operating income

 

6.2

 

10.7

 

7.6

 

11.0

 

Interest expense

 

(3.9

)

(2.8

)

(4.3

)

(2.5

)

Other income (expense), net

 

(0.7

)

1.2

 

1.8

 

0.7

 

Income before income taxes

 

1.6

 

9.1

 

5.1

 

9.2

 

Income tax (expense) benefit

 

1.2

 

(2.3

)

3.1

 

(2.4

)

Net income

 

2.8

%

6.8

%

8.2

%

6.8

%

 

The following table provides information on net sales of certain Company products.

 

 

 

Nine Months Ended
June 30,

 

Three Months Ended
June 30,

 

 

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

 

 

(in thousands)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bulk Alcohol Products

 

$

26,276

 

$

26,911

 

(2.4

)

$

8,749

 

$

9,219

 

(5.1

)

Premium Branded Spirits

 

13,521

 

15,134

 

(10.7

)

4,796

 

6,702

 

(28.5

)

Bottling Operations

 

10,953

 

14,923

 

(26.6

)

4,542

 

4,718

 

(3.7

)

Vinegar and Cooking Wine

 

15,127

 

15,777

 

(4.1

)

5,001

 

5,294

 

(5.5

)

 

 

$

65,877

 

$

72,745

 

(9.4

)

$

23,088

 

$

25,933

 

(11.0

)

 

14



 

The following table provides unit sales volume data for certain Company products.

 

 

 

Nine Months Ended
June 30,

 

 

 

Three Months Ended
June 30,

 

 

 

 

 

2003

 

2002

 

% Change

 

2003

 

2002

 

% Change

 

 

 

(in thousands)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bulk alcohol products:

 

 

 

 

 

 

 

 

 

 

 

 

 

Distilled products, in proof gallons

 

 

 

 

 

 

 

 

 

 

 

 

 

Citrus Brandy

 

1,131

 

928

 

21.8

 

260

 

268

 

(3.0

)

Citrus Spirits

 

238

 

430

 

(44.6

)

55

 

156

 

(64.5

)

Rum

 

3,323

 

3,238

 

2.6

 

1,176

 

1,265

 

(7.0

)

Cane Spirits

 

389

 

485

 

(19.8

)

144

 

146

 

(0.9

)

Fortified citrus wine, in gallons

 

7,559

 

7,613

 

(0.7

)

2,531

 

2,506

 

1.0

 

Premium branded spirits, in cases

 

360

 

414

 

(12.9

)

133

 

233

 

(42.6

)

Bottling operations, in cases

 

2,876

 

4,540

 

(36.7

)

1,435

 

1,360

 

5.5

 

Vinegar

 

 

 

 

 

 

 

 

 

 

 

 

 

Bulk, in 100 grain gallons

 

4,290

 

4,112

 

4.3

 

1,588

 

1,294

 

22.7

 

Cases

 

396

 

518

 

(23.7

)

125

 

160

 

(22.0

)

Drums, in 100 grain gallons

 

1,162

 

1,302

 

(10.8

)

389

 

527

 

(26.3

)

Cooking Wine

 

 

 

 

 

 

 

 

 

 

 

 

 

Bulk, in gallons

 

3,226

 

3,350

 

(3.7

)

1,048

 

1,273

 

(17.7

)

Cases

 

476

 

519

 

(8.3

)

126

 

141

 

(11.3

)

 

Nine months ended June 30, 2003 compared to nine months ended June 30, 2002.  Unless otherwise noted, references to 2003 represent the nine-month period ended June 30, 2003 and references to 2002 represent the nine-month period ended June 30, 2002.  In 2002, net sales and cost of goods sold of premium branded spirits included excise taxes of approximately $2.0 million, representing excise taxes included in cases sold from warehouses located outside of the Company’s Florida bonded warehouse facilities. Beginning October 1, 2002, the Company no longer includes excise taxes in net sales and cost of goods sold of premium branded spirits case sales from locations outside of the Company’s Florida bonded warehouse facilities.  Net sales and cost of sales in 2002 have been reclassified to conform to the 2003 presentation.

 

Net Sales. Net sales were $65.9 million in 2003, a decrease of 9.4% from net sales of $72.7 million in 2002.

 

Net sales of bulk alcohol products were $26.3 million in 2003, a decrease of 2.4% from net sales of $26.9 million in 2002.  The decrease resulted primarily from decreased shipments of citrus spirits, cane spirits and fortified citrus wine.  Due to a decrease in orders from certain customers, management believes that its fortified wine volume in fiscal 2003 may decline by approximately 5% from fiscal 2002.  In 2002, the Company had sales of citrus and cane spirits to new customers that had difficulty sourcing bulk alcohol from their regular suppliers.  These sales are not expected to reoccur in 2003.

 

Net sales of premium branded spirits were $13.5 million in 2003, a decrease of 10.7% from net sales of $15.1 million in 2002.  In 2002, net sales of premium branded spirits included $1.9 million of bulk tequila sales, and $1.2 million of new Cruzan ready-to-drink products. Bulk tequila sales represent the liquidation of inventory that was held to produce Porfidio tequila. During the third quarter of 2002, the Company introduced a new line of Cruzan products in the new ready-to-drink category and sold approximately 101,000 cases of this new product through June 30, 2002.  Due to increased competition and management’s expectation of limited growth potential within the ready-to-drink product category, the Company made a strategic decision to exit this category and concentrate on the growing segment of its premium branded spirits business, Cruzan Rums and Cruzan Flavored Rums.  Excluding bulk tequila and new Cruzan ready-to-drink product sales, net sales of premium branded spirits were $13.5 million in 2003, an increase of 12.4% from net sales of $12.0 million in 2002.  Sales of the Company’s Cruzan Estate Rums

 

15



 

and Cruzan Flavored Rums, collectively, increased 9.6% and Cruzan Flavored Rums alone increased 11.2% in 2003 compared to 2002.

 

Net sales of the Company’s bottling operations were $11.0 million in 2003, a decrease of 26.6% from net sales of $14.9 million in 2002.  The unit volume of the Company’s bottling operations decreased 36.7% in 2003 as a result of the decision of a large bottling customer to shift production from the Company to its own bottling facilities.  During fiscal 2002, this customer represented approximately 48% of the Company’s unit volume in bottling operations.  Management believes that this loss in volume will be partially offset by increased business with new and existing customers and that total bottling operations volume may decline by approximately 33% in fiscal 2003.  During the third quarter of fiscal 2003, management implemented a plan to consolidate the Company’s bottling operations to increase efficiencies and reduce overhead in the future.  Management expects to realize cost savings from this plan beginning in the first quarter of fiscal 2004, with these cost savings increasing in the second, third and fourth quarters of fiscal 2004.

 

Net sales of vinegar and cooking wine were $15.1 million in 2003, a decrease of 4.1% from net sales of $15.8 million in 2002.  Management believes that the decrease in net sales is due to increased competition and the timing of customer orders.

 

Gross Profit. Gross profit was $21.5 million in 2003, a decrease of 8.1% from gross profit of $23.3 million in 2002.  Gross margin increased to 32.6% in 2003 from 32.1% in 2002.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $17.4 million in 2003, an increase of 11.5% from $15.6 million in 2002.  The increase was primarily attributable to increased administrative, marketing and advertising expenses related to the Company’s premium branded spirits business.  The Company has increased its administrative, marketing and advertising expenses in its premium branded spirits business as it continues to place emphasis on this growing business segment.

 

Operating Income.  The following table sets forth the operating income (loss) by reportable segment of the Company for 2003 and 2002.

 

 

 

Nine Months Ended
June 30,

 

 

 

 

 

2003

 

2002

 

% Change

 

 

 

(In thousands)

 

 

 

Bulk Alcohol Products

 

$

8,673

 

$

8,235

 

5.3

 

Premium Branded Spirits

 

(1,290

)

(230

)

 

Bottling Operations

 

(1,450

)

973

 

 

Vinegar and Cooking Wine

 

2,947

 

3,306

 

(10.8

)

Corporate Operations and Other

 

(4,819

)

(4,535

)

 

 

 

$

4,061

 

$

7,749

 

(47.6

)

 

As a result of the above factors, operating income was $4.1 million in 2003, a decrease of 47.6% from operating income of $7.7 million in 2002.

 

The Company’s premium branded spirits segment experienced operating losses of $1.3 million in 2003 and $0.2 million in 2002.  The operating losses reflected the Company’s continuing efforts to increase market share by reinvesting segment gross profits in selling and marketing expenses.  Included in the operating loss of premium branded spirits in 2002 was profit of $0.5 million related to bulk tequila sales.  Excluding bulk tequila sales, operating loss of premium branded spirits would have been $0.7 million in 2002.

 

The Company’s bottling operations segment reported an operating loss of $1.5 million in 2003 compared to operating income of $1.0 million in 2002. The operating loss reflected the decision of a large bottling customer to shift production from the Company to its own bottling facilities.  This customer represented approximately 48% of the Company’s annual bottling operations unit volume for fiscal year 2002.  Management believes that this loss in volume will be partially offset by increased business with new and existing customers and that total bottling operations volume may decline by approximately 33% in fiscal 2003.  During the third quarter of fiscal 2003, management implemented a plan to consolidate the Company’s bottling operations to increase efficiencies and reduce overhead in the future.  Management expects to realize cost savings from this plan beginning in the first quarter of fiscal 2004, with these cost savings increasing in the second, third and fourth quarters of fiscal 2004.

 

16



 

Interest Expense. Interest expense was $2.6 million in 2003 and $2.1 million in 2002.  The increase in interest expense was due to higher interest rates during 2003 as compared to 2002 and the payment of $296,250 in waiver fees during 2003 as described in Note 3 to the consolidated financial statements.  The Company’s interest rate under the term-loan and revolving credit agreement was increased 50 basis points effective January 1, 2003 and an additional 50 basis points effective May 14, 2003.

 

Other Expense.  On November 26, 2002, the Company announced the retirement and resignation of A. Kenneth Pincourt, Jr., its Founder, Chairman and Chief Executive Officer.  The Company has entered into a retirement agreement with Mr. Pincourt, setting forth the terms of his retirement and resignation.  The retirement agreement replaces Mr. Pincourt’s previous employment agreement. Under the retirement agreement, the Company elected to accelerate retirement benefits under its deferred compensation program and to continue to pay compensation and provide related benefits through July 15, 2004, the remaining term of Mr. Pincourt’s previous employment contract.

 

Accelerated benefits under the deferred program amounted to $1,040,987, of which $549,220 had been accrued as of September 30, 2002. Mr. Pincourt’s deferred compensation was paid to him on December 13, 2002.  Also under the retirement agreement, Mr. Pincourt will continue to receive monthly payments of $41,004 through July 15, 2004, one bonus payment of $150,491 payable on or before October 31, 2003, and a second bonus payment of $119,138 payable on or before August 31, 2004.  Among other benefits, Mr. Pincourt is also able to participate in any health insurance plan, employee benefit plan or other arrangement made available by the Company or its subsidiaries to its executives and key management employees, through July 15, 2004.  The Company recorded a charge for the retirement of Mr. Pincourt during the first quarter of fiscal 2003.  The effect of this charge was included in other expense in the Company’s consolidated statement of income and amounted to $1,503,925 before income taxes.

 

The following table summarizes the charge made during the first quarter for Mr. Pincourt’s retirement:

 

Deferred compensation

 

$

1,040,987

 

Compensation and related benefits

 

1,012,158

 

Total

 

2,053,145

 

 

 

 

 

Less deferred compensation accrued as of September 30, 2002

 

(549,220

)

Charged to expense

 

$

1,503,925

 

 

On May 22, 2003, the Company announced the retirement of Troy Edwards, its Chief Financial Officer, Secretary, Treasurer and Controller.  The Company recorded a charge for the retirement of Mr. Edwards of $207,683 during the third quarter of fiscal 2003.  The effect of this charge was included in other expense in the Company’s consolidated statement of income.

 

Income Tax Expense. The Company’s effective income tax rate was 24.9% in 2002.  The low tax rate was attributable to a 90% exemption of the Company’s Virgin Islands subsidiary from U.S. Virgin Islands income taxes.  The exemption is effective through September 2020.  In addition, the Company benefited from the extraterritorial income exclusion in 2003 and 2002.  During 2003, the Company incurred operating losses from its U.S. operations and recorded an income tax benefit of $0.9 million.

 

Three months ended June 30, 2003 compared to three months ended June 30, 2002.  Unless otherwise noted, references to 2003 represent the three-month period ended June 30, 2003 and references to 2002 represent the three-month period ended June 30, 2002.  In 2002, net sales and cost of goods sold of premium branded spirits included excise taxes of approximately $0.9 million, representing excise taxes included in cases sold from warehouses located outside of the Company’s Florida bonded warehouse facilities. Beginning October 1, 2002, the Company no longer includes excise taxes in net sales and cost of goods sold of premium branded spirits case sales from locations outside of the Company’s Florida bonded warehouse facilities.  Net sales and cost of sales in 2002 have been reclassified to conform to the 2003 presentation.

 

17



 

Net Sales. Net sales were $23.1 million in 2003, a decrease of 11.0% from net sales of $25.9 million in 2002.

 

Net sales of bulk alcohol products were $8.7 million in 2003, a decrease of 5.1% from net sales of $9.2 million in 2002.  Management believes that the decrease in bulk alcohol shipments is primarily due to the timing of customer orders.  However, in 2002, the Company had sales of citrus and cane spirits to new customers that had difficulty sourcing bulk alcohol from their regular suppliers.  These sales are not expected to reoccur in 2003.

 

Net sales of premium branded spirits were $4.8 million in 2003, a decrease of 28.5% from net sales of $6.7 million in 2002.  In 2002, net sales of premium branded spirits included $0.7 million in sales of Antiqueno Aguardiente compared to $0.2 million in sales of Antiqueno Aguardiente in 2003, and $1.2 million of new Cruzan ready-to-drink products.  During the third quarter of 2002, the Company entered into a settlement agreement with the producer of Antiqueno Aguardiente and was reappointed exclusive U.S. importer of Antiqueno Aguardiente for a four-year period.  The Company resumed sales of Antiqueno Aguardiente in June 2002 after not having received a product shipment since June 2001, and therefore, the replenishment of inventories by customers resulted in a one time increase in these sales.  During the third quarter of 2002, the Company introduced a new line of Cruzan products in the new ready-to-drink category and sold approximately 101,000 cases of this new product through June 30, 2002.  Due to increased competition and management’s expectation of limited growth potential within the ready-to-drink product category, the Company made a strategic decision to exit this category and concentrate on the growing segment of its premium branded spirits business, Cruzan Rums and Cruzan Flavored Rums.  Excluding pipeline sales of Antiqueno Aguardiente and new Cruzan ready-to-drink product sales, net sales of premium branded spirits were $4.8 million in 2003, a decrease of 4.4% from net sales of $5.0 million in 2002.  Sales of the Company’s Cruzan Estate Rums and Cruzan Flavored Rums, collectively, decreased 10.9% and Cruzan Flavored Rums alone decreased 12.2% in 2003 compared to 2002.  During the quarter ended June 30, 2003, Bacardi, Ltd., the world’s largest rum supplier, entered the flavored rum category with the introduction of four flavored rum products.  There were also product introductions in the flavored rum category by at least three other rum producers.  This increase in competition in the flavored rum category, along with price decreases by the Company’s major competitors in the rum segment, affected the Company’s retail shelf space allocation and product sales.  However, distributor's sales of Cruzan Rum products to retailers continue to be strong.  Therefore, management believes that the effect of these new product introductions and price promotions will be short-term and that over the long-term the Company’s Cruzan Rum brands will return to strong growth in this growing product segment.

 

Net sales of the Company’s bottling operations were $4.5 million in 2003, a decrease of 3.7% from net sales of $4.7 million in 2002.  The unit volume of the Company’s bottling operations increased 5.5% in 2003 as a result of increased business with new and existing customers.  However, the average price per case of product sold decreased.  During the third quarter of fiscal 2003, management implemented a plan to consolidate the Company’s bottling operations to increase efficiencies and reduce overhead in the future.  Management expects to realize cost savings from this plan beginning in the first quarter of fiscal 2004, with these cost savings increasing in the second, third and fourth quarters of fiscal 2004.

 

Net sales of vinegar and cooking wine were $5.0 million in 2003, a decrease of 5.5% from net sales of $5.3 million in 2002.  Management believes that the decrease in net sales is due to increased competition and the timing of customer orders.

 

Gross Profit. Gross profit was $8.1 million in 2003, a decrease of 6.7% from gross profit of $8.6 million in 2002.  Gross margin increased to 34.9% in 2003 from 33.3% in 2002.  The increase in gross margin was primarily attributable to a favorable change in product mix.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $6.3 million in 2003, an increase of 9.1% from $5.8 million in 2002.  The increase was primarily attributable to increased administrative, marketing and advertising expenses related to the Company’s premium branded spirits business.  The Company has increased its administrative, marketing and advertising expenses in its premium branded spirits business as it continues to place emphasis on this growing business segment.

 

Operating Income.  The following table sets forth the operating income (loss) by reportable segment of the Company for 2003 and 2002.

 

18



 

 

 

Three Months Ended
June 30,

 

 

 

 

 

2003

 

2002

 

% Change

 

 

 

(In thousands)

 

 

 

Bulk Alcohol Products

 

$

2,900

 

$

2,835

 

2.3

 

Premium Branded Spirits

 

(544

)

312

 

 

Bottling Operations

 

287

 

(35

)

 

Vinegar and Cooking Wine

 

895

 

1,203

 

(25.6

)

Corporate Operations and Other

 

(1,778

)

(1,450

)

 

 

 

$

1,760

 

$

2,865

 

(38.6

)

 

As a result of the above factors, operating income was $1.8 million in 2003, a decrease of 38.6% from operating income of $2.9 million in 2002.

 

The Company’s bottling operations segment reported operating income of $0.3 million in 2003 compared to breaking even in 2002. The operating loss reflected the decision of a large bottling customer to shift production from the Company to its own bottling facilities.  This customer represented approximately 48% of the Company’s annual bottling operations unit volume for fiscal year 2002.  Management believes that this loss in volume will be partially offset by increased business with new and existing customers and that total bottling operations volume may decline by approximately 33% in fiscal 2003.  During the third quarter of fiscal 2003, management implemented a plan to consolidate the Company’s bottling operations to increase efficiencies and reduce overhead in the future.  Management expects to realize cost savings from this plan beginning in the first quarter of fiscal 2004, with these cost savings increasing in the second, third and fourth quarters of fiscal 2004.

 

Interest Expense. Interest expense was $1.0 million in 2003 and $0.6 million in 2002.  The increase in interest expense was due to higher interest rates during 2003 as compared to 2002 and the payment of a $160,000 waiver fee during 2003 as described in Note 3 to the consolidated financial statements.  The Company’s interest rate under the term-loan and revolving credit agreement was increased 50 basis points effective January 1, 2003 and an additional 50 basis points effective May 14, 2003.

 

Income Tax Expense. The Company’s effective income tax rate was 26.3% in 2002.  The low tax rate was attributable to a 90% exemption of the Company’s Virgin Islands subsidiary from U.S. Virgin Islands income taxes.  The exemption is effective through September 2020.  In addition, the Company benefited from the extraterritorial income exclusion in 2003 and 2002.  During 2003, the Company incurred operating losses from its U.S. operations and recorded an income tax benefit of $0.9 million.

 

Financial Liquidity and Capital Resources

 

General

 

The Company’s principal use of cash in its operating activities is for purchasing raw materials to be used in its manufacturing operations, purchasing imported products for its premium branded spirits business and carrying inventories and receivables.  The Company’s source of liquidity has historically been cash flow from operations and its line of credit.  Some of the Company’s manufacturing operations are seasonal and the Company’s borrowings on its line of credit vary during the year.  For example, the Company uses citrus molasses as its primary raw material in the production of citrus brandy and spirits at its two Florida distilleries.  The Company buys citrus molasses, a by-product of citrus juice production, from local manufacturers of citrus juice and concentrate during the citrus harvest, which generally runs from November to June.  The Company generally begins purchasing citrus molasses in November and manufactures and builds inventory of citrus brandy and spirits.  The Company manufactures and builds inventory while raw materials are available due to the short life of the citrus molasses it purchases.  Another seasonal business of the Company is its contract bottling services.  Demand for contract bottling services is highest during the months from April through October.  Management believes that cash provided by its operating and

 

19



 

financing activities will provide adequate resources to satisfy its working capital, liquidity and anticipated capital expenditure requirements for both its short-term and long-term capital needs.

 

Operating Activities

 

Net cash provided by operating activities in 2003 was $5.6 million, which resulted from $5.7 million in net income adjusted for noncash items, and $0.1 million representing the net increase in operating assets and liabilities.

 

The Company currently has approximately $2.1 million of ready-to-drink finished goods inventory and related raw materials and supplies, the sales of which have not yet met expectations.  The Company continues to sell this inventory in the ordinary course and during July entered into a barter agreement with a large media trading company for the trade of a portion of this inventory in exchange for media advertising and other trade credits.  The Company believes that the value of the media advertising and other trade credits received is at least equal to the book value of the inventory exchanged.

 

Investing and Financing Activities

 

Net cash used in investing activities in 2003 was $2.3 million, which resulted primarily from $2.7 million of capital expenditures.

 

Net cash used in financing activities in 2003 was $3.1 million, which resulted primarily from payments of $3.2 million of long-term debt.

 

The Company’s revolving credit facility provides for maximum borrowings of $30 million.  Borrowings under this facility were $20.6 million at June 30, 2003 (see Note 3 to the consolidated financial statements).

 

The Company’s bank debt was $53.6 million as of June 30, 2003, and its ratio of total debt to equity was 1.04 to 1.

 

As of December 31, 2002 and March 31, 2003, the Company was not in compliance with the Funded Debt to EBITDA (earnings before interest, taxes, depreciation and amortization) financial covenant under its credit agreement.  In addition, as of March 31, 2003 the Company was not in compliance with its Interest Coverage and Fixed Charge Coverage financial covenants.  On February 18, 2003, the Company received a waiver for the December 31, 2002 covenant violation.  On May 14, 2003, the Company received a waiver of the March 31, 2003 covenant violations and amended the credit agreement prospectively to reset the levels of certain financial covenants to reflect the Company’s current business plan and forecasts.  The Company paid a fee of $136,250 for the December waiver and $160,000 for the March waiver and amendment.  The Company’s interest rate under the term-loan and revolving credit agreement was increased 50 basis points effective January 1, 2003 and an additional 50 basis points effective May 14, 2003.

 

The Company’s share of the undistributed earnings of the Bahamian and Virgin Islands subsidiaries was approximately $7.5 million and $27.9 million, respectively, as of September 30, 2002.  See Note 10 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2002 for additional information on income taxes related to these subsidiaries.

 

Based on current plans and business conditions, management expects that its cash, cash equivalents, and short-term investments, together with any amounts generated from operations and available borrowings, will be sufficient to meet the Company’s cash requirements for at least the next 12 months.

 

Effects of Inflation and Changing Prices

 

The Company’s results of operations and financial condition have not been significantly affected by inflation and changing prices.  The Company has been able, subject to normal competitive conditions, to pass along rising costs through increased selling prices.

 

20



 

Critical Accounting Policies

 

The Company’s significant accounting policies are more fully described in Note 1 to the Company’s consolidated financial statements located in Item 8 of its Annual Report on Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosures of contingent assets and liabilities. Actual results could differ from those estimates under different assumptions or conditions. The Company believes that the following critical accounting policy is subject to estimates and judgments used in the preparation of its consolidated financial statements:

 

The Company has goodwill and intangible assets associated with business acquisitions. The Company reviews these assets for impairment annually and whenever an event occurs or circumstances change that would more likely than not reduce the fair value of these assets below their carrying value.  If the fair value of these assets is less than their carrying value, then an impairment loss would be recognized equal to the excess of the carrying value over the fair value of the asset.

 

Item 3.           Quantitative and Qualitative Disclosures About Market Risk

 

The information required under this Item 3 is incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended September 30, 2002.

 

Item 4.           Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, management, including the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act, as amended).  Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic SEC reports.  It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

Changes in Internal Controls

 

In addition, management, including the Company’s Chief Executive Officer and Chief Financial Officer, reviewed the Company’s internal controls, and there have been no significant changes in the internal controls during the Company’s most recently completed fiscal quarter that could significantly affect those controls subsequent to the date of their last evaluation.

 

PART II.  OTHER INFORMATION

 

Item 6.  Exhibits and Reports on Form 8-K

 

3.1

Amended and Restated Certificate of Incorporation of Todhunter International, Inc.  (1)

3.2

Amended and Restated By-Laws of Todhunter International, Inc.  (5)

4.1

Form of Todhunter International, Inc. Common Stock Certificate (1)

10.6

Todhunter International, Inc. 1992 Stock Option Plan, as amended (3)

10.8

Lease, dated March 24, 1988, as amended, between Todhunter International, Inc. and Esperanté Limited Partnership (1)

10.8(a)

Amendment to Lease, dated January 1, 1997, between Todhunter International, Inc. and Florida Acquisition Fund Esperanté, Ltd. (4)

 

21



 

10.18

Executive Employment Agreement dated as of July 15, 1999, between Thomas A. Valdes and Todhunter International, Inc. (5)

10.19

Executive Employment Agreement dated as of July 15, 1999, between Jay S. Maltby and Todhunter International, Inc. (5)

10.21

Executive Employment Agreement dated as of July 15, 1999, between D. Chris Mitchell and Todhunter International, Inc. (5)

10.22

Amended and Restated Credit Agreement dated as of October 19, 2001, by and among Todhunter International, Inc., and each of the Financial Institutions Initially a Signatory thereto, and SouthTrust Bank (6)

10.22(a)

Waiver of Defaults Under Credit Agreement, dated February 18, 2003, by and among Todhunter International, Inc., SouthTrust Bank, acting as lender and Agent, Wachovia Bank, N.A., National City Bank and SunTrust Bank (8)

10.22(b)

Modification of Credit Agreement, dated May 14, 2003, by and among Todhunter International, Inc., SouthTrust Bank, acting as lender and Agent, Wachovia Bank, N.A., National City Bank and SunTrust Bank (10)

10.23

Agreement and General Release of All Claims between Todhunter International, Inc. and A. Kenneth Pincourt, Jr., dated as of November 26, 2002 (7)

11.1

Statement of Computation of Per Share Earnings (9)

20.1

Earnings press release for the three-month and nine-month periods ended June 30, 2003 (10)

21.1

Subsidiaries of Todhunter International, Inc. (2)

31.1

Certification of Jay S. Maltby, Chairman, Chief Executive Officer and President, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (10)

31.2

Certification of Ezra Shashoua, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (10)

32.1

Certification of Jay S. Maltby, Chairman, Chief Executive Officer and President, pursuant to 18 U.S.C. Section 1350 (10)

32.2

Certification of Ezra Shashoua, Executive Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 (10)

 


(1)

 

Incorporated herein by reference to the Company’s Registration Statement on Form S-1 (File No.  33-50848).

 

 

 

(2)

 

Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended September 30, 1995.

 

 

 

(3)

 

Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended September 30, 1997.

 

 

 

(4)

 

Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended September 30, 1998.

 

 

 

(5)

 

Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended September 30, 1999.

 

 

 

(6)

 

Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended September 30, 2001.

 

 

 

(7)

 

Incorporated herein by reference to the Company’s Report on Form 8-K for November 26, 2002.

 

 

 

(8)

 

Incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.

 

 

 

(9)

 

Filed herewith and incorporated herein by reference to Note 4 of notes to consolidated financial statements, included in Item 1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.

 

 

 

(10)

 

Filed herewith.

 

22



 

(b)

 

Reports on Form 8-K

 

 

 

 

 

During the third quarter of fiscal 2003, the Company filed the following current report on Form 8-K:

 

(1)

 

Form 8-K dated May 15, 2003. This Form 8-K reported information under Item 9 (Regulation FD Disclosure).

 

 

 

(2)

 

Form 8-K dated May 22, 2003. This Form 8-K reported information under Item 5 (Other Events and required FD Disclosure).

 

 

 

 

23



 

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.

 

Date: August 14, 2003

/s/  Jay S. Maltby

 

Jay S. Maltby

 

Chairman, Chief Executive Officer and President

 

 

 

 

Date: August 14, 2003

/s/  Ezra Shashoua

 

Ezra Shashoua

 

Executive Vice President and Chief Financial Officer

 

24