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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 December 31, 2004

 

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 February 10, 2005 was 6,338,519.

 

 



 

TODHUNTER INTERNATIONAL, INC.

 

INDEX

 

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets -
December 31, 2004 and September 30, 2004

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income -
Three Months Ended December 31, 2004 and 2003, unaudited

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows -
Three Months Ended December 31, 2004 and 2003, 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

 

 

 

December 31,
2004

 

September 30,
2004

 

 

 

(Unaudited)

 

*

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

3,157,955

 

$

3,617,582

 

Short-term investments

 

217,293

 

216,246

 

Trade receivables

 

15,715,216

 

17,970,125

 

Other receivables

 

2,866,468

 

2,448,611

 

Inventories

 

30,428,606

 

29,162,496

 

Notes receivable, current maturities

 

3,548,326

 

3,559,409

 

Deferred income taxes

 

1,127,250

 

981,000

 

Other current assets

 

3,098,368

 

3,195,781

 

Total current assets

 

60,159,732

 

61,151,250

 

 

 

 

 

 

 

LONG-TERM INVESTMENTS AND NOTES RECEIVABLE

 

 

 

 

 

Investments in and advances to equity investees

 

2,514,576

 

2,232,285

 

Notes receivable from affiliates, less current maturities

 

375,000

 

375,000

 

Notes receivable, less current maturities

 

386,064

 

411,060

 

 

 

3,275,640

 

3,018,345

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT

 

97,283,125

 

96,666,655

 

Less accumulated depreciation

 

57,912,852

 

56,716,805

 

 

 

39,370,273

 

39,949,850

 

 

 

 

 

 

 

GOODWILL

 

20,524,404

 

20,524,404

 

TRADEMARKS

 

883,597

 

893,648

 

DEFERRED LOAN COSTS

 

659,449

 

634,910

 

DEFERRED INCOME TAXES

 

28,000

 

 

OTHER ASSETS

 

1,646,681

 

1,660,219

 

 

 

$

126,547,776

 

$

127,832,626

 

 


*From audited financial statements.

See Notes to Consolidated Financial Statements.

 



 

 

 

December 31,
2004

 

September 30,
2004

 

 

 

(Unaudited)

 

*

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Current maturities of long-term debt

 

$

4,000,000

 

$

4,000,000

 

Accounts payable

 

10,331,908

 

11,868,947

 

Accrued expenses

 

2,252,294

 

4,726,253

 

Total current liabilities

 

16,584,202

 

20,595,200

 

 

 

 

 

 

 

LONG-TERM DEBT, less current maturities

 

28,726,619

 

25,674,240

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

 

648,000

 

 

 

 

 

 

 

OTHER LIABILITIES

 

1,263,927

 

1,091,248

 

 

 

46,574,748

 

48,008,688

 

 

 

 

 

 

 

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 6,437,719 shares

 

 

 

 

 

December 31, 2004 and September 30, 2004

 

64,377

 

64,377

 

Additional paid-in capital

 

28,916,707

 

28,916,707

 

Retained earnings

 

51,729,724

 

51,580,634

 

 

 

80,710,808

 

80,561,718

 

Less cost of 99,200 shares of treasury stock

 

(737,780

)

(737,780

)

 

 

79,973,028

 

79,823,938

 

 

 

$

126,547,776

 

$

127,832,626

 

 


*From audited financial statements.

See Notes to Consolidated Financial Statements.

 

2



 

TODHUNTER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Sales

 

$

30,181,243

 

$

27,687,682

 

Less excise taxes

 

5,989,050

 

5,246,030

 

Net sales

 

24,192,193

 

22,441,652

 

 

 

 

 

 

 

Cost of goods sold

 

16,117,201

 

14,865,023

 

Gross profit

 

8,074,992

 

7,576,629

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

8,306,010

 

6,691,207

 

Operating income (loss)

 

(231,018

)

885,422

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

98,019

 

172,559

 

Interest expense

 

(592,668

)

(696,983

)

Equity in income of equity investee

 

32,291

 

214,120

 

Other, net

 

79,107

 

228,571

 

 

 

(383,251

)

(81,733

)

 

 

 

 

 

 

Income (loss) before income taxes

 

(614,269

)

803,689

 

 

 

 

 

 

 

Income tax expense (benefit):

 

 

 

 

 

Current

 

59,141

 

(243,345

)

Deferred

 

(822,500

)

195,750

 

 

 

(763,359

)

(47,595

)

 

 

 

 

 

 

Net income

 

$

149,090

 

$

851,284

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic

 

$

0.02

 

$

0.15

 

Diluted

 

$

0.02

 

$

0.15

 

 

 

 

 

 

 

Common shares and equivalents outstanding:

 

 

 

 

 

Basic

 

6,338,519

 

5,596,174

 

Diluted

 

6,458,198

 

5,679,016

 

 

See Notes to Consolidated Financial Statements.

 

3



 

TODHUNTER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

149,090

 

$

851,284

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation

 

1,220,500

 

1,366,443

 

Amortization of trademarks

 

10,050

 

10,050

 

Amortization of deferred loan costs

 

84,463

 

75,000

 

Gain on sale of property and equipment

 

 

(181,772

)

Equity in income of equity investees

 

(32,291

)

(214,120

)

Deferred income taxes

 

(822,500

)

195,750

 

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in:

 

 

 

 

 

Receivables

 

1,837,052

 

3,434,665

 

Inventories

 

(1,266,110

)

108,297

 

Other current assets

 

97,414

 

(613,541

)

Increase (decrease) in:

 

 

 

 

 

Accounts payable

 

(1,537,039

)

2,880,022

 

Accrued expenses

 

(2,473,959

)

(1,374,784

)

Other liabilities

 

172,679

 

(325,914

)

Net cash provided by (used in) operating activities

 

(2,560,651

)

6,211,380

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Proceeds from sale of property and equipment

 

8,941

 

413,500

 

Principal payments received on notes receivable

 

36,079

 

30,652

 

Purchase of property and equipment

 

(649,864

)

(1,072,731

)

Increase in short-term investments

 

(1,047

)

 

Redemption of short-term investments

 

 

404,843

 

Advance to equity investee

 

(250,000

)

 

Decrease in other assets

 

13,536

 

 

Net cash used in investing activities

 

$

(842,355

)

$

(223,736

)

 

4



 

 

 

Three Months Ended December 31,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net borrowings (payments) on line of credit

 

$

4,100,000

 

$

(700,000

)

Issuance of common stock

 

 

124,075

 

Disbursements for loan costs

 

(109,000

)

 

Principal payments on long-term borrowings

 

(1,047,621

)

(1,026,867

)

Net cash provided by (used in) financing activities

 

2,943,379

 

(1,602,792

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(459,627

)

4,384,852

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Beginning

 

3,617,582

 

14,918,605

 

Ending

 

$

3,157,955

 

$

19,303,457

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

Cash payments for:

 

 

 

 

 

Interest

 

$

423,949

 

$

687,320

 

Income taxes

 

$

27,710

 

$

9,814

 

 

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 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, 2004.

 

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.  As of January 1, 2003, the Company adopted SFAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS 123. The standard amends SFAS 123 to provide alternative methods of transition for voluntary changes to the fair value based method of accounting for stock-based employee compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require pro-forma disclosures when the intrinsic value method continues to be used.  The Company has elected to continue accounting for stock-based compensation using the intrinsic method in accordance with APB 25, and has adopted the new disclosure requirements specified under SFAS 148.

 

If the Company had 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:

 

 

 

Three Months Ended December 31,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Net income, as reported

 

$

149,090

 

$

851,284

 

Compensation costs, net of taxes

 

 

42,034

 

Net income, pro forma

 

$

149,090

 

$

809,250

 

Earnings per common share, as reported

 

 

 

 

 

Basic

 

0.02

 

0.15

 

Diluted

 

0.02

 

0.15

 

Earnings per common share, pro forma

 

 

 

 

 

Basic

 

0.02

 

0.14

 

Diluted

 

0.02

 

0.14

 

 

6



 

Note 2.   Inventories

 

The major components of inventories are:

 

 

 

December 31, 2004

 

September 30, 2004

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Finished goods

 

$

15,161,606

 

$

15,155,035

 

Work in process

 

2,334,419

 

2,668,698

 

Raw materials and supplies

 

12,932,581

 

11,338,763

 

 

 

 

 

 

 

 

 

$

30,428,606

 

$

29,162,496

 

 

Note 3.   Financing Arrangements

 

Long-term debt consists of the following as of December 31, 2004:

 

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 December 31, 2004 was 5.78%. Future minimum quarterly principal installments of $1,000,000 through December 31, 2005 with any remaining balance due January 31, 2006.

 

$

27,000,000

 

 

 

 

 

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 December 31, 2004 was 5.44%. The revolving lines of credit terminate on January 31, 2006.

 

5,600,000

 

 

 

 

 

Other

 

126,619

 

 

 

32,726,619

 

Less current maturities

 

4,000,000

 

 

 

$

28,726,619

 

 


(i)                                     In October 2001, the Company entered into a $70 million credit agreement, consisting of a $40 million term loan and a $30 million revolving loan facility.  During March 2004, the credit agreement was amended to reduce the revolving loan facility to $15 million.  In June 2004, the credit agreement was modified to extend the maturity date of the revolving loans to be the same as the term loans, September 2006.

 

In December 2004, the Company received a waiver of its financial covenants compliance requirement for the quarters ended September 30, 2004 and December 31, 2004.  The financial covenant requirements were also amended prospectively in accordance with the Company’s business plan for fiscal 2005.  The Company agreed to a .25% increase from its current interest rates so long as the Funded Debt to EBITDA ratio is between 2.50 and 3.25.  In addition, if the Company’s Funded Debt to EBITDA ratio is between 3.26 and 4.00, the interest rate would be .25% higher than the rate for the 2.50 to 3.25 level.  The maturity of the credit agreement was modified to January 31, 2006.

 

(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



 

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. 

 

 

 

Three Months Ended December 31,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Net income

 

$

149,090

 

$

851,284

 

Determination of shares:

 

 

 

 

 

Weighted average number of common shares outstanding

 

6,338,519

 

5,596,174

 

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

 

119,679

 

82,842

 

Average common shares outstanding for diluted earnings per share computation

 

6,458,198

 

5,679,016

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic

 

$

0.02

 

$

0.15

 

Diluted

 

$

0.02

 

$

0.15

 

 

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 $0.06 and $0.07 for the three months ended December 31, 2004 and 2003, 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 (rum, citrus brandy, citrus spirits, 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 Company’s executive offices are located in West Palm Beach, Florida and certain of the expenses of the Company’s executive offices are classified as Corporate Operations and are not allocated to the operating segments described above.  These expenses include salaries and related expenses, legal and professional fees, rent for office space, utilities and insurance.

 

The accounting policies of the reportable segments are the same as those referred to in Note 1 to the consolidated financial statements located in Item 8 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2004.  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.

 

Net sales and operating income (loss) for the Company’s reportable segments for the three months ended December 31, 2004 and 2003, were as follows:

 

 

 

Three Months Ended
December 31,

 

 

 

2004

 

2003

 

 

 

(in thousands)

 

Net Sales

 

 

 

 

 

Bulk Alcohol Products

 

$

9,943

 

$

8,588

 

Premium Branded Spirits

 

5,817

 

5,842

 

Bottling Operations

 

2,908

 

2,675

 

Vinegar and Cooking Wine

 

5,524

 

5,337

 

 

 

$

24,192

 

$

22,442

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

Bulk Alcohol Products

 

$

3,571

 

$

2,737

 

Premium Branded Spirits

 

(1,984

)

(696

)

Bottling Operations

 

(1,176

)

(980

)

Vinegar and Cooking Wine

 

569

 

866

 

Corporate Operations

 

(1,211

)

(1,042

)

 

 

$

(231

)

$

885

 

 

9



 

 

Note 6.  Supplemental Executive Retirement Plan

 

During the second quarter of fiscal 2004, the Company’s Compensation and Stock Option Committee approved a supplemental executive retirement plan for certain key executives of the Company.  The plan is an unfunded plan within the meaning of Financial Accounting Standard 132.  The net periodic benefit cost for the three months ended December 31, 2004 and 2003, was as follows:

 

 

 

Three Months Ended December 31,

 

 

 

2004

 

2003

 

Service cost

 

$

66,041

 

$

 

Interest cost

 

3,963

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

70,004

 

$

 

 

Note 7.  Income Taxes

 

The Company incurred losses for income tax purposes from its U.S. operations of $2.0 million and $1.3 million in the first quarter of 2004 and 2003, respectively.  The Company has recorded an income tax benefit in the Company’s consolidated statement of income and an asset on the Company’s consolidated balance sheet.

 

Note 8.  Reclassification of Cost of Goods Sold

 

In the first quarter of fiscal 2005, the Company changed the classification of certain expenses from cost of goods sold to selling, general and administrative as a result of a review and improvement in its financial reporting practices.  The Company has restated its prior year statement of income to reflect the new classification.  This resulted in the reclassification of $443,153 from cost of goods sold to selling, general and administrative expenses for the three months ended December 31, 2003.

 

10



 

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.  For information concerning these factors and related matters, see “Risks that May Affect Future Results” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004.  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 three months ended December 31, 2004 compared to the three months ended December 31, 2003,  and (ii) 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.

 

Market share and industry data and rankings disclosed in this report have been obtained from industry and government publications, as indicated; the Company has not independently verified this information, although management believes such data and rankings to be reasonably accurate.

 

Management believes that the Company is the largest supplier of bulk rum in the United States based on reports of U.S. Imports for Consumption prepared by the Department of Census and that the Company’s market share of bulk rum products in the United States is approximately 80%.  Management believes that the Company is the largest supplier of fortified citrus wine in the United States and is not aware of any other domestic suppliers of fortified citrus wine.  Management is aware of only one other United States manufacturer of citrus brandy and citrus spirits and believes that the Company’s market share for these products is approximately 85%.

 

The Company’s primary spirits brand is Cruzan Rum, which is the fourth-largest premium rum brand in the United States according to statistics published by Impact Databank and Adams Liquor Handbook, two leading spirits industry publications.

 

The Company’s higher margin cooking wine products are sold throughout the United States and Canada.  Although published data is not available, management is not aware of any competitors of the Company’s size and believes that the Company is the largest supplier of cooking wine in the United States.

 

11



 

The Company operates primarily in the beverage alcohol industry in the United States.  The Company is a leading producer and supplier of rum, brandy, 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 (rum, citrus brandy, citrus spirits, 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).

 

The Company’s executive offices are located in West Palm Beach, Florida and certain of the expenses of the Company’s executive offices are not allocated to the operating segments described above.  The expenses of the Company’s corporate operations include salaries and related expenses, legal and professional fees, rent for office space, utilities and insurance.

 

Information regarding the net sales and operating income (loss) of each of the Company’s business segments is set forth in Note 5 to the consolidated financial statements and in Table 2 included in this Item 2.

 

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’s customers often purchase bulk alcohol products in significant quantities or place significant orders for premium branded spirits, contract bottling services,  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 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 sales of certain of the Company’s bulk alcohol products and on all alcohol products bottled by the Company.  However, there are no excise taxes paid on sales made to customers that have tax permits.  Accordingly, excise taxes may vary significantly from period to period depending upon the Company’s product and customer mix.

 

12



 

Results of Operations

 

Tables 1 and 2 below set forth statement of income items as a percentage of net sales and information on net sales, gross profit (loss) and operating income (loss) by operating segment.

 

Table 1 – Statement of Income as a Percent of Net Sales

 

 

 

Three Months Ended
December 31,

 

 

 

2004

 

2003

 

Net sales

 

100.0

%

100.0

%

Cost of goods sold

 

66.6

 

66.2

 

Gross margin

 

33.4

 

33.8

 

Selling, general and administrative expenses

 

34.4

 

29.8

 

Operating income (loss)

 

(1.0

)

4.0

 

Interest expense

 

(2.4

)

(3.1

)

Other income (expense), net

 

0.9

 

2.7

 

Income (loss) before income taxes

 

(2.5

)

3.6

 

Income tax benefit

 

3.1

 

0.2

 

Net income

 

0.6

%

3.8

%

 

Table 2 – Net Sales, Gross Profit (Loss) and Operating Income (Loss) by Operating Segment

 

 

 

Three Months Ended
December 31,

 

 

 

2004

 

2003

 

Net Sales

 

 

 

 

 

Bulk alcohol products

 

$

9,943

 

$

8,588

 

Premium branded spirits

 

5,817

 

5,842

 

Bottling operations

 

2,908

 

2,675

 

Vinegar and cooking wine

 

5,524

 

5,337

 

 

 

$

24,192

 

$

22,442

 

 

 

 

 

 

 

Gross Profit (Loss)

 

 

 

 

 

Bulk alcohol products

 

4,673

 

4,312

 

Premium branded spirits

 

2,641

 

2,371

 

Bottling operations

 

(481

)

(373

)

Vinegar and cooking wine

 

1,242

 

1,267

 

 

 

$

8,075

 

$

7,577

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

Bulk alcohol products

 

3,571

 

2,737

 

Premium branded spirits

 

(1,984

)

(696

)

Bottling operations

 

(1,176

)

(980

)

Vinegar and cooking wine

 

569

 

866

 

Corporate operations

 

(1,211

)

(1,042

)

 

 

$

(231

)

$

885

 

 

13



 

Table 3 below provides unit sales volume data for certain Company products.

 

Table 3 – Unit Sales Volume Data

 

 

 

Three Months Ended
December 31,

 

% Change

 

 

 

2004

 

2003

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Bulk alcohol products:

 

 

 

 

 

 

 

Distilled products, in proof gallons

 

 

 

 

 

 

 

Citrus Brandy

 

364

 

417

 

(12.7

)

Citrus Spirits

 

195

 

 

 

Rum

 

1,415

 

1,116

 

26.8

 

Cane Spirits

 

111

 

90

 

23.1

 

Fortified wine, in gallons

 

2,880

 

2,754

 

4.6

 

Premium branded spirits, in cases

 

140

 

201

 

(30.3

)

Bottling operations, in cases

 

580

 

660

 

(12.2

)

Vinegar

 

 

 

 

 

 

 

Bulk, in 100 grain gallons

 

1,249

 

1,364

 

(8.4

)

Cases

 

164

 

117

 

41.1

 

Drums, in 100 grain gallons

 

257

 

246

 

4.8

 

Cooking Wine

 

 

 

 

 

 

 

Bulk, in gallons

 

603

 

899

 

(33.0

)

Cases

 

211

 

215

 

(1.7

)

 

Three months ended December 31, 2004 compared to three months ended December 31, 2003.  Unless otherwise noted, references to 2004 represent the three-month period ended December 31, 2004 and references to 2003 represent the three-month period ended December 31, 2003.

 

Net Sales. Net sales were $24.2 million in 2004, an increase of 7.8% from net sales of $22.4 million in 2003.

 

Net sales of bulk alcohol products were $9.9 million in 2004, an increase of 15.8% from net sales of $8.6 million in 2003.  The increase in net sales resulted primarily from increased shipments of citrus spirits, cane spirits, rum and fortified wine, offset by decreased shipments of citrus brandy.  The increase in shipments of citrus spirits, cane spirits, rum and fortified wine was due in part to the timing of customer orders.  Also, in the case of cane spirits, shipments have increased as a result of a decrease in the market surplus of grape spirits.  The Company’s customers often purchase bulk alcohol products in significant quantities, and accordingly, the size and timing of purchase orders and product shipments can cause operating results to fluctuate significantly from quarter to quarter.  Management believes that the Company’s sales of citrus brandy may have declined due to both the timing of customer orders and to competition from other producers.  In 2004, unit sales of citrus brandy decreased 12.7% compared to 2003, and the average selling price of citrus brandy decreased 6.7%.  Also in 2004, unit sales of the Company’s fortified wine products increased 4.6% compared to 2003, although the average selling price for the Company’s fortified wine decreased 2.5%.  The average selling prices for these bulk alcohol products decreased due to management lowering prices as a result of increased competition from other producers.

 

Net sales of premium branded spirits were $5.8 million in 2004, a decrease of 0.4% from net sales of $5.8 million in 2003.  In 2003, net sales of premium branded spirits included $0.9 million of Cruzan ready-to-drink products and other products which were discontinued.  Excluding these discontinued product sales, net sales of premium branded spirits were $5.8 million in 2004, an increase of 19.2% from net sales of $4.9 million in 2003, as the premium branded spirits segment continued its double digit growth.

 

14



 

Sales of the Company’s Cruzan Estate Rums and Cruzan Flavored Rums increased 25.4% in 2004 compared to 2003.  Sales of Cruzan Estate Rums and Cruzan Flavored Rums have increased from $2.2 million in fiscal 1996 to $21.0 million in fiscal 2004.  During this time, the Cruzan brand has been recognized as one of the fastest growing brands in the spirits industry by Impact Databank and Adams Liquor Handbook, two leading beverage industry publications.  In addition, the Cruzan Rums have won numerous tasting awards from several prestigious beverage industry organizations, including The American Tasting Institute, The Beverage Tasting Institute and the San Francisco World Spirits Competition.  Since January 2003, several of the Company’s competitors have introduced their own lines of flavored rum products into the marketplace, which, in certain fiscal quarters, has negatively impacted the level of sales growth of Cruzan Flavored Rums.  Some of the Company’s competitors in the rum and flavored rum categories have significantly greater financial and other resources than the Company, which could adversely affect the Company’s sales growth of Cruzan Estate Rums and Cruzan Flavored Rums. As a response to such increased competition, and in order to provide further impetus to the growth of Cruzan Flavored Rums, management significantly increased its marketing budget for fiscal 2004 in an effort to support the continued growth of the Company’s Cruzan brand, causing a current increase in the operating loss for this business segment.  Management intends to continue its increased expenditures in fiscal 2005 to improve brand growth.

 

Net sales of the Company’s bottling operations were $2.9 million in 2004, an increase of 8.7% from net sales of $2.7 million in 2003.  While the unit volume of the Company’s bottling operations decreased 12.2% in 2004, average unit prices increased as a result of price increases to certain customers and a change in product mix.  Sales in the Company’s bottling operations have declined in the last three fiscal years as a result of a contraction in the ready-to-drink product category, for which the Company is a major contract bottler.  Responding to this decline, in July 2004 the Company completed the partial consolidation of its bottling operations.  However, bottling operations volume did not even meet the Company’s reduced expectations for fiscal 2004, which resulted in a loss in this segment for fiscal 2004.  The Company has been placing a renewed emphasis on the sales effort in this segment, seeking other contract bottling opportunities.  The Company has explored other alternatives in its two bottling facilities, including further consolidation, a partial sale and shedding less profitable product lines.  In December 2004, management decided to discontinue production of all products in the Lake Alfred bottling plant with the exception of one profitable bottling line that bottles vinegar, cooking wine and juices.  At the present time, the Company has not taken an impairment charge relating to its bottling operations as the carrying value of its bottling assets is less than fair value.

 

Net sales of vinegar and cooking wine were $5.5 million in 2004, an increase of 3.5% from net sales of $5.3 million in 2003  In 2004, total unit sales of vinegar and cooking wine decreased 12.5% compared to 2003, although the average selling price per unit increased 18.3%.  The average selling prices of vinegar and cooking wine increased due to a combination of decreased sales of lower priced white distilled vinegar and bulk cooking wine and an increase in sales of higher priced vinegar case goods and drums.

 

Gross Profit. Gross profit was $8.1 million in 2004, an increase of 6.6% from gross profit of $7.6 million in 2003.  During 2004, bulk alcohol gross profit increased as a result of increased shipments of rum and fortified wine; premium branded spirits gross profit increased due to an improved product mix; bottling operations gross (loss) was comparable to 2003; and vinegar and cooking wine gross profit decreased due to higher material cost.  Gross margin decreased to 33.4% in 2004 from 33.8% in 2003 as a result of changes in product mix.  In the first quarter of fiscal 2005, the Company changed the classification of certain expenses from cost of goods sold to selling, general and administrative as a result of a review and improvement in its financial reporting practices.  The Company has restated its prior year statement of income to reflect the new classification.  This resulted in the reclassification of $443,153 from cost of goods sold to selling, general and administrative expenses for the three months ended December 31, 2003.

 

15



 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $8.3 million in 2004, an increase of 24.1% from $6.7 million in 2003.  The increase was primarily attributable to increased administrative, marketing and advertising expenses in the Company’s premium branded spirits business as the Company continues to place emphasis on this growing business segment. During fiscal 2004, the Company increased its selling, general and administrative expenses in its premium branded spirits segment in an effort to support the continued growth of the Company’s Cruzan brand.  Management intends to continue its increased expenditures in fiscal 2005 to improve brand growth.  Also during 2004, the Company’s corporate overhead has increased as a result of increased legal and professional fees incurred for compliance with Section 404 of the Sarbanes-Oxley Act of 2002.  These costs relate to increased compliance activities and the Company’s ongoing documentation, testing and improvement of its internal control systems and will continue in fiscal 2005.

 

Operating Income.  Table 2 sets forth the operating income (loss) by reportable segment of the Company for 2004 and 2003.  The Company’s operating loss was $0.2 million in 2004, as compared to operating income of $0.9 million in 2003.  The Company’s premium branded spirits segment experienced operating losses of $2.0 million in 2004 and $0.7 million in 2003.  The operating losses reflected the Company’s continuing efforts to increase market share by reinvesting segment gross profits in selling and marketing expenses.  As a result of the factors described under “Net Sales” above, the Company’s bottling operations segment reported an operating loss of $1.2 million in 2004 and $1.0 million in 2003.

 

Interest Expense. Interest expense was $0.6 million in 2004 and $0.7 million in 2003.  The Company’s borrowing rates were higher in 2004 compared to 2003.  However, higher rates were offset by lower average borrowings during 2004, resulting in slightly lower interest expense.

 

Income Tax Expense. During 2004 and 2003, the Company incurred operating losses from its U.S. operations and recorded an income tax benefit of $0.8 million and $0.1 million, respectively.  The Company’s Virgin Islands subsidiary has a 90% exemption 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 2004 and 2003.

 

Financial Liquidity and Capital Resources

 

General

 

The Company’s principal use of cash in its operating activities is for labor, overhead and raw materials used in its manufacturing operations and purchasing imported products for its premium branded spirits business.  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.

 

The Florida citrus harvest is generally performed during the months from November through June.  The majority of the Florida citrus harvest is processed as fresh fruit juice or juice concentrate.  A byproduct of citrus juice production is citrus molasses which the Company uses as a raw material at its two Florida distilleries to produce citrus brandy and spirits.  Due to the seasonal availability and short “shelf-life” of the citrus molasses raw material, the Company produces its estimated annual customer requirements during a seven-month period, and therefore, carries a higher than normal level of inventory in relation to sales during this seven-month period.  Generally, the Company’s inventory level increases during this seven-month period and decreases after the citrus harvest ends when the Company supplies its customers with citrus brandy and spirits from inventory from July through October.

 

There are no federal regulations that require minimum aging to be designated rum. However, due to the Company’s high quality standards, the Company ages its Cruzan Estate Rums for two to five years and certain of the Company’s super premium rums are aged up to twelve years. Due to the Company’s own aging requirements, production of Cruzan Estate Rums is scheduled to meet demand two to three years in the future.  Accordingly, inventories are larger in relation to sales and total assets than would be normal for most other businesses.

 

16



 

Management expects to continue to increase the Company’s inventory of barrel aged rums to meet projected increased sales in the future.

 

The Company’s contract bottling services business is seasonal.  Demand for contract bottling services is highest from April through October.  During these months the Company’s requirements increase for ingredients, glass bottles, caps, labels, packaging materials and labor.  During fiscal 2004, the Company incurred losses from its bottling operations of $3.9 million.  Management has explored alternatives for its two bottling facilities, including further consolidation, a partial sale and shedding less profitable product lines.  In December 2004, management decided to discontinue production of all products in the Lake Alfred bottling plant with the exception of one profitable bottling line that bottles vinegar, cooking wine and juices.

 

During fiscal 2004, management increased selling, general and administrative expenses in its premium branded spirits segment in an effort to support the continued growth of the Company’s Cruzan brand.  Management intends to continue its increased expenditures in fiscal 2005 to improve brand growth.  To the extent that the increased expenditures do not result in increased sales of the Cruzan brand, the Company’s short-term liquidity may be adversely affected.  However, management actively monitors sales and expenditures on an ongoing basis, and retains the ability to adjust its level of expenditures in response to market conditions and in order to maintain sufficient liquidity.

 

Management believes that cash provided by its operating and 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 used in operating activities in 2004 was $2.6 million, which resulted from $0.6 million in net income adjusted for noncash items, less $3.2 million representing the net increase in operating assets and liabilities.

 

Investing and Financing Activities

 

Net cash used in investing activities in 2004 was $0.8 million, which resulted primarily from $0.7 million of capital expenditures and $0.3 million of advances to equity investees.

 

Net cash provided by financing activities in 2004 was $2.9 million, which resulted primarily from payments of $1.0 million of long-term debt offset by borrowings of $4.1 million on the Company’s line of credit.

 

In October 2001, the Company entered into a $70 million credit agreement, consisting of a $40 million term loan and a $30 million revolving loan facility.  During March 2004, the credit agreement was amended to reduce the revolving loan facility to $15 million.  In June 2004, the credit agreement was modified to extend the maturity date of the revolving loans to be the same as the term loans, September 2006.

 

In December 2004, the Company received a waiver of its financial covenants compliance requirement for the quarter ended September 30, 2004.  The financial covenant requirements were also amended prospectively in accordance with the Company’s business plan for fiscal 2005.  The Company agreed to a .25% increase from its current interest rates so long as the Funded Debt to EBITDA ratio is between 2.50 and 3.25.  In addition, if the Company’s Funded Debt to EBITDA ratio is between 3.26 and 4.00, the interest rate would be .25% higher than the rate for the 2.50 to 3.25 level.  The maturity of the credit agreement was modified to January 31, 2006.  The Company is currently reviewing proposals relating to the refinancing of its long-term debt.

 

The Company’s total outstanding bank debt was $32.6 million as of December 31, 2004, and its ratio of total debt to equity was 0.58 to 1.

 

The Company’s share of the undistributed earnings of the Bahamian and Virgin Islands subsidiaries was approximately $43.7 million as of September 30, 2004.  No provision has been made for taxes which would result from the remittance of such undistributed earnings, as the Company intends to reinvest these earnings indefinitely.

 

17



 

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, 2004 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.

 

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 for the year ended September 30, 2004.  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.

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

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, 2004.

 

Item 4.    Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives, and management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.  The Company’s management, with the participation of the Company’s

 

18



 

Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives.

 

Changes in Internal Control Over Financial Reporting

 

In addition, management, including the Company’s Chief Executive Officer and Chief Financial Officer, reviewed the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act), and there have been no significant changes in the Company’s internal controls or in other factors during the fourth quarter of Fiscal 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

19



 

PART II.  OTHER INFORMATION

 

Item 6.  Exhibits and Reports on Form 8-K

 

10.22(e)

 

Modification of Credit Agreement and Waiver, dated December 20, 2004, by and among Todhunter International, Inc., SouthTrust Bank, acting as lender and Agent, and Wachovia Bank, N.A. (2)

 

 

 

11.1

 

Statement of Computation of Per Share Earnings (1)

 

 

 

20.1

 

Earnings press release for the three month period ended December 31, 2004 (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 (2)

 

 

 

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 (2)

 

 

 

32.1

 

Certification of Jay S. Maltby, Chairman, Chief Executive Officer and President, pursuant to 18 U.S.C. Section 1350 (2)

 

 

 

32.2

 

Certification of Ezra Shashoua, Executive Vice President and Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350 (2)

 


(1)                                  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 December 31, 2004.

 

(2)                                  Filed herewith.

 

(b)   Reports on Form 8-K

 

No reports on Form 8-K were filed during the first quarter of fiscal 2005.

 

20



 

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: February 10, 2005

 

 

 

/s/ Jay S. Maltby

 

 

 

 

 

Jay S. Maltby

 

 

 

 

Chairman, Chief Executive Officer and President

 

 

 

 

 

 

 

 

 

 

Date: February 10, 2005

 

 

 

/s/ Ezra Shashoua

 

 

 

 

 

Ezra Shashoua

 

 

 

 

Executive Vice President and Chief Financial Officer

 

21