SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2004 |
|
Commission File Number 1-13453 |
TODHUNTER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE |
591284057 |
(State of Incorporation) |
(IRS
Employer |
222 Lakeview Avenue, Suite 1500, West Palm Beach, FL |
33401 |
(Address of principal executive office) |
(Zip Code) |
Registrants telephone number, including area code: (561) 655-8977
Securities Registered Pursuant to Section 12(b) of the Act: Common Stock, $.01 Par Value
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of Title 17, Code of Federal Regulations) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No ý
Aggregate market value of the voting stock held by non-affiliates of the registrant as of December 3, 2004 (computed by reference to the last reported sale price of the registrants Common Stock on the American Stock Exchange on such date): $23,760,862.
The number of shares outstanding of the registrants Common Stock, $.01 par value per share, as of December 3, 2004, was 6,338,519.
There were no shares of Preferred Stock outstanding as of December 3, 2004.
Documents Incorporated by Reference: Part III - Portions of the registrants definitive proxy statement to be filed within 120 days of the end of the registrants fiscal year in conjunction with the registrants 2005 annual stockholders meeting.
Introductory Note
This Annual Report on Form 10-K for the fiscal year ended September 30, 2004 (the Form 10-K) contains forward-looking statements, as defined in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). 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. Such risks, uncertainties, and other factors that may cause such a difference include, without limitation, those noted under Risks That May Affect Future Results beginning on page 21. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Todhunter International, Inc. (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 operates four production facilities in the United States and one in St. Croix, United States Virgin Islands, and purchases certain products for resale. The Company is a Delaware corporation organized in 1970 as a successor to a business founded in the Bahamas in 1964.
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. All references in this report to Fiscal 2004, Fiscal 2003 and Fiscal 2002 refer to the Companys fiscal years ended September 30 of such year.
Dominant Supplier of Bulk Alcohol Products
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 Companys 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 Companys market share for these products is approximately 85%.
Control By Angostura Limited
Angostura Limited (Angostura), a Trinidad-based distiller, has reported that, as of June 17, 2004, it beneficially owned 4,294,583 shares, representing 68%, of the Companys outstanding Common Stock, $.01 par value per share (the Common Stock).
2004 Developments
During Fiscal 2004, the Company continued its strategy of growing its premium branded spirits segment and capitalizing on its position in the flavored rum category by expanding its sales force and significantly increasing its marketing budget, partly in response to increased competition from new product entries by the Companys major rum spirits competitors, primarily Bacardi, Diageo, Allied Domecq and Pernod Ricard. Fiscal 2004 was a milestone for the Company in that it was the first time that the Company executed a print media campaign directed towards consumers. Fiscal 2004 was also the first year that the Company sponsored a celebrity entertainer, Kenny Chesney, to increase the brand awareness of Cruzan Rum. Kenny Chesney was the Country Music Awards and American Music Awards Entertainer of the Year in 2004 and is the reigning Academy of Country Music top male vocalist of the year. The Company signed a sponsorship contract with Kenny Chesney for an additional three years. Management believes that the Companys brand promotion strategies have been effective in increasing the sales growth of the Cruzan Rum brand by 24% during Fiscal 2004.
In July 2004, the Company completed the partial consolidation of its bottling operations to reduce overhead. However, bottling operations volume has not met even the Companys reduced expectations for 2004, which has caused a continuing loss in this segment. 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 production line bottling vinegar, cooking wine and juices.
In August and September 2004, the eyes of three major hurricanes struck within approximately thirty miles of all of the Companys facilities in Central Florida. Physical damage to the Companys facilities of less than $100,000 occurred as a result of these hurricanes. However, while difficult to quantify, disruptions to business caused by these hurricanes, including several days of plant shut-downs, prolonged loss of power, product shipment interruptions and increased labor costs, contributed to lost sales in the premium branded spirits segment, as well as to the additional costs in the bottling and vinegar and cooking wine segments.
In Fiscal 2004 the Company had a loss before income taxes of $4.6 million compared to income of $2.4 million in Fiscal 2003. After income taxes the Companys net loss was $0.9 million in Fiscal 2004 compared to net income of $3.4 million in Fiscal 2003. This loss was primarily due to the increased marketing expenditures in our premium branded spirits segment, continuing losses in the Companys bottling operations and, to a lesser extent, the hurricane disruptions the Company experienced in its fourth quarter.
During June 2004, the Company and Angostura completed a transaction whereby Angostura agreed to invest $10 million in the Company in exchange for 714,285 shares of common stock, which equates to an equity issue price of $14.00 per share. The transaction was approved by the Board of Directors after having been determined to be fair to the public stockholders of the Company by a Special Committee of Independent Directors of the Company. In addition, Angostura reimbursed one-half of the Companys expenses in connection with this transaction. As a result of this transaction, Angosturas ownership of the Companys stock increased from 64% to 68%. The Subscription Agreement for this transaction also provided that the Company use its best efforts to complete a rights offering pursuant to a registration statement to be filed with the Securities and Exchange
1
Commission. The rights offering is intended to allow each stockholder of the Company, other than Angostura and its affiliates, to purchase such holders approximate pro rata amount of the number of shares of the common stock of the Company that will permit the public stockholders in the aggregate to maintain the percentage stock ownership the public stockholders owned prior to the stock purchase by Angostura. It is expected that the number of shares available to be sold pursuant to the rights offering will be approximately 408,000 and the per share purchase price of the rights offering will be the lesser of $14.00 or the closing price on the American Stock Exchange two days prior to the effective date of the registration statement. The Company filed a preliminary registration statement on August 30, 2004. After filing the registration statement, the Company determined that it would be in the best interests of the Company and its stockholders to complete the rights offering after the Company files this Annual Report on Form 10-K for the fiscal year ended September 30, 2004. The Company intends to complete the rights offering during the second quarter of fiscal 2005.
The Company operates primarily in the beverage alcohol industry in the United States. The Company reports its results in four operating segments and has unallocated corporate overhead:
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)
Information regarding the net sales, operating income (loss) and total assets of each of the Companys business segments and information regarding geographic areas is set forth in Note 13 to the Companys consolidated financial statements.
Bulk Alcohol Products. The Company produces and sells rum, citrus brandy, citrus spirits, cane spirits and fortified citrus wine in the United States and internationally. The Company also purchases distilled products for resale, including grain alcohol, which is denatured and packaged and sold as industrial alcohol to hospitals, universities, fragrance producers and other manufacturers. The Company is the largest supplier of bulk rum, citrus brandy and fortified citrus wine in the United States. The Company sells its bulk alcohol products to over 40 producers of beverage alcohol in the United States and exports bulk alcohol products to approximately 20 foreign countries. The Companys distilling operations produce a byproduct, which is sold as animal feed.
Citrus brandy and spirits are distilled from citrus juice byproducts purchased from manufacturers of citrus juice concentrate. The Companys citrus brandy is used primarily as an ingredient in flavored brandies. Citrus spirits are used primarily as a fortifying ingredient to increase the alcohol content of the Companys citrus wine and the wine of other manufacturers. The Companys citrus wine is fermented from citrus juice and fortified with citrus spirits to increase its alcohol content to approximately 20% by volume. Known as fortified citrus wine, this product is used primarily as an ingredient in cordials, whiskies and other beverage alcohol. Rum and cane spirits are distilled from sugar cane molasses and are sold to other bottlers of rum, producers of beverage alcohol, food companies and flavor manufacturers. Rum is also used in the Companys premium branded spirits and bottling operations.
Management believes that the Companys proximity to raw materials and its use of citrus byproducts in the production of bulk alcohol provide it with cost advantages over competitors products. Because end products are taxed on a blended rate based upon the ingredients used rather than on the resulting alcohol content of the end product, beverage alcohol producers can lower excise taxes on their products by substituting fortified citrus wine for distilled spirits alternatives. This cost savings arises because fortified citrus wine is currently subject to federal excise taxes of $1.57 per gallon, whereas distilled spirits are taxed at $13.50 per proof gallon (one proof gallon is approximately equivalent in alcohol content to two and one-half gallons of fortified citrus wine). The ability of beverage alcohol producers to substitute fortified citrus wine for distilled spirits varies by end product in accordance with government regulations. For example, fortified citrus wine may contribute up to 49% of the alcohol content of cordials and liqueurs, and up to approximately 10% of the alcohol content of Canadian whiskey. In addition, small quantities of fortified citrus wine may be used in blended whiskey, rum, brandy and other types of beverage alcohol.
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The Florida citrus harvest is generally 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 in its distilling operations 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 Companys inventory levels increase during this seven month period and when the citrus harvest ends the Company supplies its customers with citrus brandy and spirits from inventory from July through October.
Premium Branded Spirits. The Company manufactures, imports, exports, and markets a variety of premium branded spirits. The Companys premium branded spirits include Cruzan Estate Rums, Cruzan Flavored Rums, Hine Cognac, Conch Republic Rum, Ron Carlos Rum and Antioqueno Aquardiente. The Companys 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 Companys strategy is to market high quality products that satisfy the preferences of consumers of legal drinking age and to support those products with international, national, and regional marketing programs. These programs are intended to extend consumer brand recognition and brand loyalty.
In the United States, the Company sells branded spirits either through wholesale distributors or directly to state governments in those states that control alcohol sales. Typically, the Company does not have contracts with its distributors although some states have statutes that limit the Companys ability to terminate distributor relationships. Outside the United States, the Company typically distributes its products by selecting the best local distributor for its brands in each specific market. The Companys principal export markets for Cruzan Rum are Canada, Central America, the Caribbean, Scandinavia, the Baltic States, Italy, France, the Philippines, Israel, New Zealand and the Global Duty Free Markets (40 countries). The Company has a distribution agreement with V&S Vin and Sprit AB (V&S) that provides for joint marketing and for the distribution by V&S of Cruzan products in the international spirits market where the Company has not already established a distributor relationship.
The principal raw materials used in manufacturing and packaging Cruzan Rum are cane molasses, glass bottles, cartons, and oak barrels, which are used for storage and aging. Currently, none of these raw materials is in short supply, and there are adequate sources from which they may be obtained. See discussion under Raw Materials for additional disclosures related to sourcing cane molasses and glass bottles.
The alcohol industry is highly competitive and there are many brands sold in the consumer market. Trade information indicates that the Company is one of the smaller branded spirit suppliers in the United States in terms of revenues, although Cruzan Rum has been recognized as one of the fastest growing brands in the United States and Global Duty Free Markets by Impact Magazine and Adams, two leading industry publications.
The Alcohol and Tobacco Tax and Trade Bureau of the United States Treasury Department regulates the wine and spirits industry with respect to production, blending, bottling, sales, advertising and transportation of alcohol products. Also, each state regulates advertising, promotion, transportation, sale, and distribution of such products.
There are no federal regulations that require minimum aging to be designated rum. However, due to the Companys high quality standards, the Company ages its Cruzan Estate Rums for two to five years and certain of the Companys super premium rums are aged up to twelve years. Due to the Companys 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. Management expects to continue to increase the Companys inventory of barrel aged rums to meet increased sales in the future.
Bottling Operations. The Companys bottling operations include contract bottling services and the production, bottling and marketing of distilled spirits under its own proprietary labels and under the private labels of retailers. The Companys primary bottling operations are located in Florida and primarily serve customers in the Southeastern United States. The Company also produces and sells proprietary label products in the United States Virgin Islands.
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Contract bottling products include distilled spirits, coolers, prepared cocktails and fruit juices. The Company has two large contract bottling customers which accounted for 83% of the bottling operations case volume and 49% of bottling operations net sales for the year ended September 30, 2004. One of these contracts is for three years, expiring December 2006, and the other contract is on a year-to-year basis. Each contract provides for advance notification of annual production requirements, although there are no minimum volume requirements.
The Companys proprietary and private label products include rum, gin, vodka, tequila, cordials and various whiskies. The Companys proprietary label products are marketed in the popular-price category of the distilled spirits market. The Company has one large private label customer which accounted for approximately 4% of bottling operations case volume and 11% of bottling operations net sales for the year ended September 30, 2004. Net sales from this customer are based on short-term arrangements that may terminate at any time. Although the Company does not have long-term contracts with its private label customers, management believes that its relations with its customers are good.
The Company sells its proprietary and private label spirits to distributors located primarily in the Southeastern United States. The Company does not have contracts with distributors for its proprietary products.
Vinegar and Cooking Wine. To complement its distilling, winery and bottling operations, the Company produces vinegar, vinegar stock, and cooking wine. The Company sells vinegar and cooking wine to over 700 condiment manufacturers, food service distributors and major retailers in the United States and Canada. The Companys sales to retailers are made under the Companys proprietary labels and retailers private labels.
The Company has three large vinegar and cooking wine customers which accounted for 32% of the net sales of vinegar and cooking wine for the year ended September 30, 2004. Although the Company does not have long-term supply contracts with its vinegar and cooking wine customers, management believes that its relations with its customers are good and that the Companys products are competitively priced.
Corporate Operations. The Companys executive offices are located in West Palm Beach, Florida and certain of the expenses of the Companys executive offices 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.
No single customer was responsible for more than 10% of the Companys consolidated net sales during fiscal 2004. The Company has five major customers in its bulk alcohol products segment, three major customers in its bottling operations segment, and three major customers in its vinegar and cooking wine segment, the loss of one or more of these major customers in any of these segments could have a material adverse effect on that segment.
The Companys principal domestic production facilities are located in Lake Alfred and Auburndale, Florida, both near Orlando and central to Floridas citrus growing region. The two plants have similar distilling, bottling and winery operations, allowing the Company to shift production from one plant to the other. The Lake Alfred plant also has a vinegar production facility. Both plants are near major highways and are serviced by a railroad, providing good transportation access. The Company has a cold storage, warehousing and plastic bottle manufacturing facility in Winter Haven, Florida. The Company also operates a winery and vinegar production facility in Louisville, Kentucky. The Companys rum production facilities are located in St. Croix, United States Virgin Islands.
Distilling. The Company begins its distilling process with citrus or cane molasses, which is fermented for approximately two to four days. Once fermented, the product has an average alcohol content of 9% by volume, which is increased to approximately 95% through distillation. The alcohol is further purified through rectifying columns which remove impurities. The finished product is stored in stainless steel tanks, except for rum, which is
4
generally stored in wooden barrels for aging purposes. The Lake Alfred, Auburndale and Virgin Islands facilities can produce, on a combined basis, up to 23 million gallons of distilled products per year.
Winery. Wine is produced by the fermentation of citrus or grape juice. After fermentation, the wine is fortified by the addition of distilled citrus spirits to raise its alcohol content to approximately 20% by volume. Fortified citrus wine is sold to producers of beverage alcohol. The wineries are physically segregated from the distilling operations and have their own sets of fermenting and storage tanks. The Lake Alfred, Auburndale and Louisville facilities can produce, on a combined basis, up to 30 million gallons of wine per year.
Bottling. The Lake Alfred and Auburndale plants both have automated, high-speed bottling lines capable of filling up to 600 12-ounce containers per minute. The Lake Alfred plant has two lines that are used primarily to bottle vinegar, cooking wine and juices, two lines that are used to bottle proprietary and private label products and one line to bottle premium branded spirits. In December 2004, management decided to discontinue production of all products in the Lake Alfred bottling plant with the exception of one profitable production line bottling vinegar, cooking wine and juices. The Auburndale plant has two lines that are dedicated to bottling coolers and prepared cocktails and three lines that bottle proprietary and private label products and premium branded spirits. The Companys warehouse storage areas can accommodate up to 1,000,000 cases. The Companys plant in the Virgin Islands has one line capable of bottling up to 250,000 cases per year. The Company distills and ages its own rum, but generally produces its other proprietary and private label products from alcohol purchased from third parties. Depending on the particular formula for a product, the Company adds flavoring and/or sugar, reduces the products proof and then filters and bottles the finished product. The Companys bottling capacity is approximately 10 million cases per year.
Vinegar and Cooking Wine. Vinegar is produced by converting alcohol into acetic acid. Several varieties of vinegar, including white distilled, red wine, white wine, corn, rice wine, malt, balsamic and apple cider, are produced at the Lake Alfred and Louisville facilities, which have a combined capacity of 10 million grain gallons per year. Cooking wine is produced by the controlled fermentation of red or white grape juice into wine and is then denatured with salt or other ingredients. Because of this denaturing process, these products are not subject to federal excise taxes. Several varieties of cooking wine, including red, white, sherry, golden, marsala and chablis, are produced at the Lake Alfred, Auburndale and Louisville facilities.
Quality Control. Each of the Companys facilities is equipped with a quality control laboratory. The Company employs several chemists who continually test to ensure the quality of raw materials and end products.
Raw Materials. The cost of raw materials fluctuates depending upon a number of factors, including crop conditions, weather, governmental programs and purchases by foreign governments.
The principal raw materials used in the Companys distilling operations are citrus molasses, a byproduct of citrus juice production, and cane molasses, a byproduct of sugar production. Citrus molasses, which is used in the production of citrus brandy and citrus spirits, accounted for approximately 65% of the raw materials used in the Companys distilling operations in Fiscal 2004. Cane molasses, which is used in the production of rum and cane spirits, accounted for the remaining 35%. Citrus juice concentrate is the primary raw material used in the Companys winery operations. The Company purchases such raw materials from a variety of suppliers. The Company purchases distilled products, used in its bulk alcohol products and bottling operations businesses, from several suppliers. Glass bottles and other materials, such as caps, labels and cardboard cartons, are used in bottling and packaging and, with the exception of glass bottles, are available from numerous suppliers. Alcohol and grape juice concentrate are the primary raw materials used in the Companys vinegar and cooking wine operations. As more fully described below, during Fiscal 2004, two suppliers each accounted for more than 10% of all of the Companys raw material purchases.
The Company purchases the majority of its glass bottle requirements from one supplier. Glass bottle costs are one of the largest components of the Companys cost of goods sold. The glass bottle industry is highly concentrated with only a small number of producers. The inability of the Companys glass bottle supplier to satisfy the Companys requirements could adversely affect the Companys operations.
The Company uses cane molasses as a raw material for the production of rum at its facilities in St. Croix, United States Virgin Islands. The Company purchases its cane molasses raw material requirements through a single broker that specializes in the South American and Caribbean molasses markets. This arrangement is beneficial to the Company in securing a higher quality molasses at lower prices than the Company could obtain by going directly to the individual molasses suppliers. Based on an analysis of the world-wide cane molasses market provided to the
5
Company by the Companys molasses broker, management believes that there are adequate supplies of cane molasses available to meet the Companys cane molasses raw material requirements.
The size and timing of purchase orders and product shipments can cause operating results to fluctuate significantly from quarter to quarter, particularly since some customers purchase bulk alcohol products in significant quantities or place significant orders for contract bottling services, distilled spirits, vinegar and cooking wine. Additionally, some Company products generate higher profit margins than others, and changes in the Companys product mix will therefore cause gross margins to fluctuate. Certain aspects of the Companys business are also seasonal, with increased demand for the Companys contract bottling services from April to October and increased production of the Companys bulk alcohol products from November to June, corresponding to the Florida citrus harvest. As a result of these factors, the Companys operating results may vary significantly from quarter to quarter.
Bulk alcohol products are sold primarily in large quantities through Company-employed salespeople. The Companys marketing strategy emphasizes the cost advantages of these products over other ingredients available to end producers. Bulk alcohol products are sold primarily to other bottlers, distillers and end producers located in the United States and exports bulk alcohol products to approximately 20 foreign countries.
The Company manufactures, imports, exports and markets a variety of premium branded spirits to wholesalers in the United States and internationally. The Companys marketing and promotional programs for its premium brands are directed at consumers, retailers and wholesalers and include consumer and trade print advertising, event sponsorship, product sampling, in-store displays, price promotions, point-of-sale materials and public relations.
The Company sells proprietary and private label spirits to wholesalers for distribution primarily in the Southeastern United States. The Companys marketing strategy for these products places primary emphasis upon the Companys cost advantages, directed at wholesalers and retailers, rather than consumers. Wholesalers market these products to retailers who then market them directly to consumers. Although competition for retail shelf space in the beverage alcohol industry is significant, wholesalers of such products, and not the Company, generally must address such competition. Sales of the Companys premium branded spirits and proprietary and private label products are generally made FOB (free on board) at the Companys facilities and, accordingly, the purchasers of such products are responsible for the risk of loss and transportation costs. In addition to its own sales force, the Company works through various brokers to develop and service its sales to wholesalers and retailers.
The Companys marketing strategy with respect to its contract bottling services emphasizes the cost advantages and quality of the Companys services. Arrangements with bottling customers are typically negotiated by the Companys executive officers.
Vinegar and cooking wine are sold primarily in large quantities to manufacturers, distributors and retailers through the Companys own sales force. These products are also sold through wholesalers and directly to retailers under the Companys proprietary labels and the private labels of retailers.
Trademarks and Distribution Agreements
Trademarks are an important aspect of the Companys business. The Company sells its products under a number of trademarks, which the Company owns or uses under license. The Companys important trademarks include Cruzan Rum, Cruzan Estate Rum, Cruzan Flavored Rum, Ron Carlos Rum, Conch Republic Rum and Edmundo Cooking Wine. Throughout its segments, the Company also has various licenses and distribution agreements for the sale, or the production and sale, of its products and products of third parties. These licenses and distribution agreements have varying terms and durations. Agreements include, among others, import, marketing and distribution agreements (Imported Spirits Distribution Agreements) with Antioqueno Aguardiente, expiring in May 2006, and Hine Cognac, which is a year to year renewable arrangement for services to be performed by the Company. The Company also has distribution agreements with several third parties to distribute Cruzan Rum in foreign countries, including V&S Vin and Sprit AB (V&S) for V&S to distribute Cruzan products in the international spirits market.
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All of the Companys Imported Spirits Distribution Agreements may be terminated if the Company fails to meet certain performance criteria. The Company believes it is currently in compliance with all material terms of its Imported Spirits Distribution Agreements. Although there can be no assurance that the Companys material Imported Spirits Distribution Agreements will be renewed, given the Companys long-term relationships with its suppliers, the Company expects that such agreements will be renewed prior to their expiration and does not believe that these agreements will be terminated.
The areas of the beverage alcohol industry in which the Company does business are highly competitive with respect to price, service and product quality, and there are several companies with substantially greater financial and other resources than the Company.
The Companys citrus-based bulk alcohol products compete primarily with producers of grape-based products. While the Company is aware of only one other domestic producer of citrus brandy and spirits, there are several producers of grape-based distilled products. The Companys fortified wine business is subject to price competition from various producers in North America.
The Companys premium branded spirits and proprietary and private label products compete on a regional and national basis against other distilled spirits products, including premium labels, mid-price and popular-price products. The premium branded spirits and proprietary label products produced by the Company compete with those of companies for whom the Company performs contract bottling services and to whom the Company sells its bulk alcohol products. The Company believes that its relationships with its customers are good, and it has not experienced any adverse effects, such as termination or non-renewal of ongoing contracts, as a result of competition. In addition, the Company does not expect to experience any material adverse effects from such competition in the foreseeable future.
Contract bottling operations compete against other bottlers located throughout the Southeastern United States.
In the United States, the vinegar industry is dominated by two large manufacturers with approximately 20 vinegar plants and there are about a dozen smaller manufacturers with an aggregate of approximately 24 vinegar plants. Since vinegar is a low margin commodity, the sale of vinegar is limited to within a small radius of a particular manufacturing plant due to the cost of shipping to the customer. Therefore, with the exception of certain higher margin specialty vinegars which are sold throughout the United States, the majority of the Companys vinegar products are only competitive within a limited radius of the Companys manufacturing facility, generally 200 to 500 miles. The Companys 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 Companys size and believes that the Company is the largest supplier of cooking wine in the United States.
The Alcohol and Tobacco Tax and Trade Bureau of the United States Treasury Department regulates the wine and spirits industry with respect to production, blending, bottling, sales, advertising and transportation of alcohol products. Also, each state regulates advertising, promotion, transportation, sale and distribution of alcohol products.
Pursuant to federal and state environmental requirements, the Company is required to obtain permits and licenses to operate certain facilities, and to treat and remove effluents discharged from its distilling, winery and bottling operations. Management believes it is presently in material compliance with all applicable federal and state regulations.
Beverage alcohol produced and bottled by the Company is subject to federal excise taxes. As of September 30, 2004, excise taxes were being imposed at flat rates of $13.50 per proof gallon for distilled spirits and $1.57 per gallon for fortified wine.
The Companys fortified wine products, as an ingredient of beverage alcohol, have a cost advantage under the component method of taxation, which taxes wine at a lower rate than distilled spirits. Changes in, or the elimination of, the component method of taxation, as it relates to wine, could have a material adverse effect on the Companys results of operations.
As of September 30, 2004, the Company had approximately 415 full-time employees. Additional workers are generally employed at the Companys bottling facilities during the summer months, when the bulk of contract
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bottling takes place. None of the Companys employees is a member of any labor union, nor are there any collective bargaining agreements between the Company and its employees, with the exception of 35 of the Companys 55 United States Virgin Islands employees. Management believes that its relations with its employees are good.
The Company has facilities in Florida and Kentucky for the production of bulk alcohol products, premium branded spirits, contract bottling services, vinegar and cooking wine. The Company sells its products and services primarily to customers in the United States but also exports certain products to foreign countries, primarily in Europe, Canada, Central America and the Caribbean. The Companys rum production facilities are located in St. Croix, United States Virgin Islands. Bulk rum produced in the Virgin Islands is sold primarily to other bottlers of rum, producers of beverage alcohol, food companies and flavor manufacturers located in the United States, but is also sold to foreign countries in the Caribbean, South America and Europe. See Note 13 to the Companys consolidated financial statements for additional information about the Companys foreign and domestic operations and export sales.
The Company owns all of its principal production facilities, including all related land, buildings, and equipment. The Lake Alfred facility consists of four principal buildings with approximately 250,000 total square feet on 32 acres. The Auburndale facility consists of three principal buildings with approximately 250,000 total square feet on 16 acres. The Louisville facility consists of three principal buildings with approximately 60,000 total square feet on 27.5 acres. The Winter Haven facility consists of five principal buildings with approximately 260,000 total square feet on 30 acres. The Virgin Islands facility consists of 11 principal buildings with approximately 140,000 total square feet on 33 acres. The Company leases approximately 10,000 square feet of office space in West Palm Beach, Florida for its executive offices and 2,600 square feet of office space in Jupiter, Florida for its marketing operations. Management believes that all of its facilities, both owned and leased, are adequate and suitable for operations in the foreseeable future. However, management may undertake the expansion of certain facilities from time to time in the ordinary course of business.
The Company and its subsidiaries are subject to litigation from time to time in the ordinary course of business. None of these routine legal proceedings are material.
No matters were submitted to security holders during the fourth quarter of Fiscal 2004.
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The Companys Common Stock trades on the American Stock Exchange under the symbol THT. Table 1 below sets forth the high and low closing quotations of the Companys Common Stock for each quarter during the past two fiscal years.
Table 1 High and Low Quotations of the Companys Common Stock
Period |
|
High |
|
Low |
|
||
Fiscal 2003 |
|
|
|
|
|
||
First quarter |
|
$ |
11.25 |
|
$ |
9.75 |
|
Second quarter |
|
10.20 |
|
7.45 |
|
||
Third quarter |
|
10.48 |
|
9.25 |
|
||
Fourth quarter |
|
11.35 |
|
9.80 |
|
||
Fiscal 2004 |
|
|
|
|
|
||
First quarter |
|
11.55 |
|
9.95 |
|
||
Second quarter |
|
12.15 |
|
10.50 |
|
||
Third quarter |
|
14.50 |
|
11.92 |
|
||
Fourth quarter |
|
14.05 |
|
12.10 |
|
||
The number of stockholders of record as of December 3, 2004 was 28. In addition, based upon a list of non-objecting beneficial owners, there were at least 475 beneficial owners as of January 2004.
No dividends were paid to stockholders during Fiscal 2003 and Fiscal 2004. The Company intends to continue to retain earnings for use in its business and, therefore, does not anticipate declaring or paying cash dividends in the foreseeable future. The payment of cash dividends is also limited by the Companys credit agreement. Also, see Financial Liquidity and Capital Resources, included in Item 7.
9
The selected financial data in Table 2 below are derived from the Companys audited consolidated financial statements. These data are qualified by reference to, and should be read in conjunction with, the consolidated financial statements and related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
Table 2 Selected Financial Data
|
|
Year ended September 30, |
|
|||||||||||||
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
|
(In thousands, except per share data) |
|
|||||||||||||
Statements of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
$ |
96,416 |
|
$ |
90,444 |
|
$ |
96,839 |
|
$ |
97,253 |
|
$ |
92,987 |
|
Cost of goods sold |
|
68,684 |
|
61,174 |
|
65,700 |
|
65,170 |
|
64,117 |
|
|||||
Gross profit |
|
27,732 |
|
29,270 |
|
31,139 |
|
32,083 |
|
28,870 |
|
|||||
Selling, general and administrative expenses |
|
31,311 |
|
23,205 |
|
22,539 |
|
20,534 |
|
17,772 |
|
|||||
Operating income (loss) |
|
(3,579 |
) |
6,065 |
|
8,600 |
|
11,549 |
|
11,098 |
|
|||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest income |
|
371 |
|
709 |
|
754 |
|
864 |
|
901 |
|
|||||
Interest expense |
|
(2,226 |
) |
(3,377 |
) |
(3,073 |
) |
(4,893 |
) |
(5,115 |
) |
|||||
Other, net |
|
834 |
|
(950 |
) |
288 |
|
244 |
|
(178 |
) |
|||||
Income (loss) before income taxes and extraordinary item |
|
(4,600 |
) |
2,447 |
|
6,569 |
|
7,764 |
|
6,706 |
|
|||||
Income tax expense (benefit) |
|
(3,692 |
) |
(956 |
) |
1,122 |
|
1,561 |
|
1,649 |
|
|||||
Income (loss) before extraordinary item |
|
(908 |
) |
3,403 |
|
5,447 |
|
6,203 |
|
5,057 |
|
|||||
Extraordinary item, net of income tax benefit |
|
|
|
|
|
|
|
|
|
(1,169 |
) |
|||||
Net income (loss) |
|
$ |
(908 |
) |
$ |
3,403 |
|
$ |
5,447 |
|
$ |
6,203 |
|
$ |
3,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|||||
Basic |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income (loss) before extraordinary item |
|
$ |
(0.16 |
) |
$ |
0.61 |
|
$ |
0.99 |
|
$ |
1.12 |
|
$ |
0.92 |
|
Extraordinary item |
|
|
|
|
|
|
|
|
|
(0.21 |
) |
|||||
Net income (loss) |
|
$ |
(0.16 |
) |
$ |
0.61 |
|
$ |
0.99 |
|
$ |
1.12 |
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income (loss) before extraordinary item |
|
$ |
(0.16 |
) |
$ |
0.60 |
|
$ |
0.97 |
|
$ |
1.12 |
|
$ |
0.91 |
|
Extraordinary item |
|
|
|
|
|
|
|
|
|
(0.21 |
) |
|||||
Net income (loss) |
|
$ |
(0.16 |
) |
$ |
0.60 |
|
$ |
0.97 |
|
$ |
1.12 |
|
$ |
0.70 |
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|||||
Basic |
|
5,801 |
|
5,574 |
|
5,527 |
|
5,514 |
|
5,514 |
|
|||||
Diluted |
|
5,801 |
|
5,644 |
|
5,624 |
|
5,527 |
|
5,550 |
|
|||||
Balance Sheet Data (at period end): |
|
|
|
|
|
|
|
|
|
|
|
|||||
Working capital |
|
$ |
40,556 |
|
$ |
56,791 |
|
$ |
55,315 |
|
$ |
51,889 |
|
$ |
40,372 |
|
Total assets |
|
127,833 |
|
139,299 |
|
137,883 |
|
133,588 |
|
126,548 |
|
|||||
Shortterm debt |
|
4,000 |
|
4,000 |
|
4,000 |
|
4,000 |
|
8,000 |
|
|||||
Longterm debt |
|
25,674 |
|
47,316 |
|
53,017 |
|
55,685 |
|
51,334 |
|
|||||
Stockholders equity |
|
79,824 |
|
70,612 |
|
67,069 |
|
61,221 |
|
54,841 |
|
10
Managements discussion and analysis of financial condition and results of operations contains forward-looking statements. See Introductory Note on page 1.
The following discussion and analysis summarizes the significant factors affecting (i) consolidated results of operations of the Company for Fiscal 2004 compared to Fiscal 2003, and Fiscal 2003 compared to Fiscal 2002, and (ii) financial liquidity and capital resources for Fiscal 2004. This discussion and analysis should be read in conjunction with the Companys consolidated financial statements and notes thereto included herein. Certain amounts presented in this Item 7 have been rounded to the nearest thousand and hundred thousand, as applicable, but the percentages are based on actual amounts without rounding.
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); and Vinegar and Cooking Wine (bulk vinegar, bulk cooking wine, vinegar stock and proprietary and private label case goods).
Information regarding net sales, operating income (loss) and total assets of each of the Companys business segments and information regarding geographic areas is set forth in Note 13 to the Companys consolidated financial statements located in Item 8 of this Annual Report on Form 10-K.
Tables 3 and 4 below set forth statement of operation items as a percentage of net sales and information on net sales, gross profit (loss) and operating income (loss) by operating segment.
Table 3 Statement of Operations as a Percent of Net Sales
|
|
Year Ended September 30, |
|
||||
|
|
2004 |
|
2003 |
|
2002 |
|
Net sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
Cost of goods sold |
|
71.2 |
|
67.6 |
|
67.8 |
|
Gross margin |
|
28.8 |
|
32.4 |
|
32.2 |
|
Selling, general and administrative expenses |
|
32.5 |
|
25.7 |
|
23.3 |
|
Operating income (loss) |
|
(3.7 |
) |
6.7 |
|
8.9 |
|
Other expense, net |
|
(1.1 |
) |
(4.0 |
) |
(2.1 |
) |
Income (loss) before income taxes |
|
(4.8 |
) |
2.7 |
|
6.8 |
|
Income tax (expense) benefit |
|
3.9 |
|
1.1 |
|
(1.2 |
) |
Net income (loss) |
|
(0.9 |
)% |
3.8 |
% |
5.6 |
% |
11
Table 4 Net Sales, Gross Profit (Loss) and Operating Income (Loss) by Operating Segment
|
|
Year Ended September 30, |
|
|||||||
|
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
(In thousands) |
|
|||||||
Net Sales |
|
|
|
|
|
|
|
|||
Bulk alcohol products |
|
$ |
37,249 |
|
$ |
35,203 |
|
$ |
35,447 |
|
Premium branded spirits |
|
26,846 |
|
20,808 |
|
21,778 |
|
|||
Bottling operations |
|
11,911 |
|
14,278 |
|
18,661 |
|
|||
Vinegar and cooking wine |
|
20,410 |
|
20,155 |
|
20,953 |
|
|||
|
|
$ |
96,416 |
|
$ |
90,444 |
|
$ |
96,839 |
|
|
|
|
|
|
|
|
|
|||
Gross Profit (Loss) |
|
|
|
|
|
|
|
|||
Bulk alcohol products |
|
13,562 |
|
15,103 |
|
14,528 |
|
|||
Premium branded spirits |
|
12,038 |
|
9,723 |
|
9,597 |
|
|||
Bottling operations |
|
(2,236 |
) |
(913 |
) |
1,312 |
|
|||
Vinegar and cooking wine |
|
4,368 |
|
5,357 |
|
5,702 |
|
|||
|
|
$ |
27,732 |
|
$ |
29,270 |
|
$ |
31,139 |
|
|
|
|
|
|
|
|
|
|||
Operating Income (Loss) |
|
|
|
|
|
|
|
|||
Bulk alcohol products |
|
9,021 |
|
11,432 |
|
10,539 |
|
|||
Premium branded spirits |
|
(7,569 |
) |
(2,271 |
) |
(331 |
) |
|||
Bottling operations |
|
(3,904 |
) |
(1,901 |
) |
129 |
|
|||
Vinegar and cooking wine |
|
3,041 |
|
4,190 |
|
4,602 |
|
|||
Corporate operations |
|
(4,168 |
) |
(5,385 |
) |
(6,339 |
) |
|||
|
|
$ |
(3,579 |
) |
$ |
6,065 |
|
$ |
8,600 |
|
Table 5 below provides unit sales volume data for certain Company products.
Table 5 Unit Sales Volume Data
|
|
Year Ended September 30, |
|
% Change |
|
||||||
|
|
2004 |
|
2003 |
|
2002 |
|
04/03 |
|
03/02 |
|
|
|
(In thousands) |
|
||||||||
Bulk alcohol products: |
|
|
|
|
|
|
|
|
|
|
|
Distilled products, in proof gallons |
|
|
|
|
|
|
|
|
|
|
|
Citrus brandy |
|
1,265 |
|
1,363 |
|
1,170 |
|
(7.2 |
) |
16.5 |
|
Citrus spirits |
|
233 |
|
306 |
|
504 |
|
(23.8 |
) |
(39.4 |
) |
Rum |
|
4,885 |
|
4,702 |
|
4,413 |
|
3.9 |
|
6.6 |
|
Cane spirits |
|
473 |
|
485 |
|
605 |
|
(2.4 |
) |
(19.8 |
) |
Fortified wine, in gallons |
|
12,070 |
|
10,280 |
|
10,072 |
|
17.4 |
|
2.1 |
|
Premium branded spirits, in cases |
|
708 |
|
599 |
|
587 |
|
18.2 |
|
2.0 |
|
Bottling operations, in cases |
|
3,257 |
|
3,750 |
|
5,571 |
|
(13.2 |
) |
(32.7 |
) |
Vinegar |
|
|
|
|
|
|
|
|
|
|
|
Bulk, in 100 grain gallons |
|
5,099 |
|
5,836 |
|
5,453 |
|
(12.6 |
) |
7.0 |
|
Cases |
|
499 |
|
527 |
|
667 |
|
(5.3 |
) |
(20.9 |
) |
Drums, in 100 grain gallons |
|
1,654 |
|
1,452 |
|
1,733 |
|
13.9 |
|
(16.2 |
) |
Cooking Wine |
|
|
|
|
|
|
|
|
|
|
|
Bulk, in gallons |
|
2,620 |
|
4,212 |
|
3,113 |
|
(37.8 |
) |
35.3 |
|
Cases |
|
634 |
|
615 |
|
648 |
|
3.1 |
|
(5.0 |
) |
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.
12
The Companys net sales and gross margins (gross profit as a percentage of net sales) vary depending on the mix of business among the Companys 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. Within its bottling operations, sales and gross margins have varied substantially based upon the mix of business from the Companys Type A and Type B bottling customers. Type A bottling customers pay the Company to purchase their raw materials and these costs are passed through to the customer. Type B bottling customers supply their own raw materials and are only charged for bottling charges. Although gross profit per case for the Companys Type A and Type B bottling customers is approximately equal, given the same case volume, net sales and cost of goods sold with respect to products bottled for Type A bottling customers are higher, and gross margins are lower, than for Type B bottling customers. As a result, significant fluctuations in volume of Type A bottling customers can distort the Companys gross margin.
The size and timing of purchase orders and product shipments can cause operating results to fluctuate significantly from quarter to quarter, particularly since some customers purchase bulk alcohol products in significant quantities or place significant orders for contract bottling services, distilled spirits, vinegar and cooking wine. Additionally, some Company products generate higher profit margins than others, and changes in the Companys product mix will therefore cause gross margins to fluctuate. Certain aspects of the Companys business are also seasonal, with increased demand for the Companys contract bottling services from April to October and increased production of the Companys bulk alcohol products from November to June, corresponding to the Florida citrus-harvest. As a result of these factors, the Companys operating results may vary significantly from quarter to quarter.
Net sales represent the Companys gross sales less excise taxes. Excise taxes are generally payable on sales of certain of the Companys 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 Companys product and customer mix.
13
Net Sales. Net sales were $96.4 million in 2004, an increase of 6.6% from net sales of $90.4 million in 2003.
Net sales of bulk alcohol products were $37.2 million in 2004, an increase of 5.8% from net sales of $35.2 million in 2003. The increase resulted primarily from increased shipments of rum and fortified wine offset by decreased shipments of citrus brandy, citrus spirits and cane spirits. The decrease in citrus brandy, citrus spirits and cane spirits was due in part to the timing of customer orders. In addition, in 2003, the Company had sales of citrus and cane spirits to new customers that had difficulty sourcing bulk alcohol from their regular suppliers. These sales did not reoccur in 2004. Management believes that the Companys sales of citrus brandy and spirits have declined due to a market surplus of grape spirits which some of the Companys customers may be using as an alternative ingredient in their product formulations. However, management believes that this decline in business is temporary and that the Companys sales of citrus brandy and spirits will increase in the future as the market surplus of grape spirits declines. In 2004, unit sales of citrus brandy and spirits decreased 7.2% and 23.8%, respectively, compared to 2003, and the average selling price of citrus brandy decreased 5.7%. Also in 2004, unit sales of the Companys fortified wine products increased 17.4% compared to 2003, although the average selling price for the Companys fortified wine decreased 3.4%. The average selling prices for these bulk alcohol products decreased due to management lowering prices as a result of increased competition from grape spirits distillers and foreign wine producers.
Net sales of premium branded spirits were $26.8 million in 2004, an increase of 29.0% from net sales of $20.8 million in 2003. Sales of the Companys Cruzan Estate Rums and Cruzan Flavored Rums increased 24.1% in 2004 compared to 2003. Sales of Cruzan Estate Rums and Cruzan Flavored Rums 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 certain beverage industry publications and the Cruzan Rums have won numerous tasting awards from several prestigious beverage industry organizations. Since January 2003, several of the Companys 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 Companys competitors in the rum and flavored rum categories have significantly greater financial and other resources than the Company, which could adversely affect the Companys 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 Companys Cruzan brand, causing a current increase in the operating loss for this business segment. Management intends to continue its increased expenditures in 2005 to improve brand growth.
In August and September 2004, the eyes of three major hurricanes struck within approximately thirty miles of all of the Companys facilities in Central Florida. Physical damage to the Companys facilities of less than $100,000 occurred as a result of these hurricanes. However, while difficult to quantify, disruptions to business caused by these hurricanes, including several days of plant shut-downs, prolonged loss of power, product shipment interruptions and increased labor costs, contributed to lost sales in the premium branded spirits segment, as well as to the additional costs in the bottling and vinegar and cooking wine segments as discussed below. The Company and its insurance advisor determined that the losses incurred during these hurricanes, including physical damage and business interruption, did not meet the deductible levels of the Companys casualty insurance policies due mainly to the fact that each hurricane had a separate deductible requirement and the Companys disruptions were incurred over the course of all of the hurricanes, as well as the relatively minor physical damage incurred.
Net sales of the Companys bottling operations were $11.9 million in 2004, a decrease of 16.6% from net sales of $14.3 million in 2003. During the first quarter of fiscal 2004, the Company lost a large private label bottling customer. Net sales to this private label bottling customer were approximately $2.5 million and 193,719 cases for the year ended September 30, 2003, or approximately 17.6% of bottling operations net sales and 5.2% of bottling operations volume. Also during 2004, excise taxes decreased $4.8 million compared to 2003, primarily due to the decrease in sales to this private label bottling customer. Sales in the Companys bottling operations also continued to decline 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 to reduce overhead. However, bottling operations volume has not met even the Companys reduced expectations for 2004, which has caused a continuing loss in this segment. 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
14
products in the Lake Alfred bottling plant with the exception of one profitable production line bottling 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 managements estimate of fair value.
Net sales of vinegar and cooking wine were $20.4 million in 2004, an increase of 1.3% from net sales of $20.2 million in 2003. In 2004, total unit sales of vinegar and cooking wine decreased 16.9% compared to 2003, although the average selling price per unit increased 21.9%. 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 a slight increase in sales of higher priced cooking wine case goods.
Gross Profit. Gross profit was $27.7 million in 2004, a decrease of 5.3% from gross profit of $29.3 million in 2003. During 2004, bulk alcohol gross profit decreased as a result of higher raw material and energy costs; premium branded spirits gross profit increased with sales; bottling operations gross profit decreased with sales and increased costs as a result of hurricane disruptions; and vinegar and cooking wine gross profit decreased due to higher raw material cost and increased production costs as a result of hurricane disruptions. Gross margin was 28.8% in 2004 and 32.4% in 2003.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $31.3 million in 2004, an increase of 34.9% from $23.2 million in 2003. The increase was primarily attributable to increased administrative, marketing and advertising expenses in the Companys premium branded spirits business as the Company continues to place emphasis on this growing business segment. During 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 Companys Cruzan brand. Management intends to continue its increased expenditures in 2005 to improve brand growth. Also during 2004, the Companys Compensation and Stock Option Committee approved a new Supplemental Executive Retirement Plan for certain key executives of the Company. See Note 15 to the Companys consolidated financial statements. This new plan replaces a deferred compensation plan, which resulted in the cancellation of a $0.7 million liability which was credited to expense.
Operating Income (Loss). The following table sets forth the operating income (loss) by reportable segment of the Company for 2004 and 2003.
|
|
Year Ended |
|
||||
|
|
2004 |
|
2003 |
|
||
|
|
(In thousands) |
|
||||
Bulk alcohol products |
|
$ |
9,021 |
|
$ |
11,432 |
|
Premium branded spirits |
|
(7,569 |
) |
(2,271 |
) |
||
Bottling operations |
|
(3,904 |
) |
(1,901 |
) |
||
Vinegar and cooking wine |
|
3,041 |
|
4,190 |
|
||
Corporate operations |
|
(4,168 |
) |
(5,385 |
) |
||
|
|
$ |
(3,579 |
) |
$ |
6,065 |
|
As a result of the above factors, operating loss was $3.6 million in 2004, as compared to operating income of $6.1 million in 2003.
The Companys premium branded spirits segment experienced operating losses of $7.6 million in 2004 and $2.3 million in 2003. The operating losses reflected the Companys 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 Companys bottling operations segment reported an operating loss of $3.9 million in 2004 and $1.9 million in 2003.
Interest Expense. Interest expense was $2.2 million in 2004 and $3.4 million in 2003. The Companys borrowing rates and average borrowings were lower in 2004 compared to 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 had entered into a retirement agreement with Mr. Pincourt, setting forth the terms of his retirement and resignation. The retirement agreement replaced Mr. Pincourts previous employment agreement. Under the retirement agreement, the Company elected to accelerate retirement benefits under its deferred compensation program and to continue to pay
15
compensation and provide related benefits through July 15, 2004, the remaining term of Mr. Pincourts 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. Pincourts deferred compensation was paid to him on December 13, 2002. Also under the retirement agreement, Mr. Pincourt continued to receive monthly payments of $41,004 through July 15, 2004, one bonus payment of $150,491, which was paid in October 2003, and a second bonus payment of $119,138, which was paid in August 2004. Among other benefits, Mr. Pincourt was 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 2003 and there were no charges with respect to this in 2004. The effect of this charge was included in other expense in the Companys consolidated statement of operations and amounted to $1,503,925 before income taxes.
The following table summarizes the charge made during 2003 for Mr. Pincourts 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 Companys consolidated statement of operations.
Income Tax Expense. During 2004 and 2003, the Company incurred operating losses from its U.S. operations and recorded an income tax benefit of $3.7 million and $1.0 million, respectively. The Companys 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.
Net Sales. Net sales were $90.4 million in 2003 and $96.8 million in 2002.
Net sales of bulk alcohol products were $35.2 million in 2003, a decrease of 0.7% from net sales of $35.4 million in 2002. In 2003, unit sales of citrus brandy and rum increased 16.5% and 6.6%, respectively, compared to 2002, although the average selling price of citrus brandy and rum decreased 2.6% and 1.7%, respectively. The average selling price for citrus brandy decreased due to management lowering prices as a result of increased competition and the average selling price for rum decreased as a result of selling more of the Companys lower priced rum. Management believes that the Companys citrus brandy may continue to experience pricing pressure due to competition from other producers.
Net sales of premium branded spirits were $20.8 million in 2003, a decrease of 4.5% from net sales of $21.8 million in 2002. In 2002, net sales of premium branded spirits included $1.9 million of bulk tequila sales and $1.5 million of new Cruzan ready-to-drink products. Bulk tequila sales represented 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 ready-to-drink category, sales of which are included in the Companys premium branded spirits segment. The Company sold approximately 134,000 cases of this new product, representing net sales of $1.5 million through September 30, 2002. During 2003, due to increased competition and managements 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 Estate Rums and Cruzan Flavored Rums. In connection with managements decision to exit the ready-to-drink product category, during the fourth quarter of 2003, the Company entered into an agreement with a corporate trading company to receive trade credits upon installment deliveries of the Companys remaining inventory of ready-to-drink products. During the fourth quarter of 2003, sales of the Companys ready-to-drink products were $1.0 million. Excluding bulk tequila and Cruzan ready-to-drink product sales, net sales of premium branded spirits were $19.8 million in 2003, an increase of 8.4% from net sales of $18.3 million in 2002. Sales of the Companys Cruzan Estate Rums and Cruzan Flavored Rums increased 13.5% in 2003 compared to 2002.
16
Net sales of the Companys bottling operations were $14.3 million in 2003, a decrease of 23.5% from net sales of $18.7 million in 2002. The unit volume of the Companys bottling operations decreased 32.7% 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 Companys unit volume in bottling operations. During the third quarter of Fiscal 2003, management implemented a plan to consolidate the Companys bottling operations to increase efficiencies and reduce overhead.
Net sales of vinegar and cooking wine were $20.2 million in 2003, a decrease of 3.8% from net sales of $21.0 million in 2002. In 2003, total unit sales of vinegar and cooking wine increased 8.9% compared to 2002, although the average selling price per unit decreased 11.6%. The average selling price of vinegar and cooking wine decreased due to a combination of increased sales of lower priced white distilled vinegar and bulk cooking wine and decreased sales of higher priced vinegar and cooking wine case goods.
Gross Profit. Gross profit was $29.3 million in 2003, a decrease of 6.0% from gross profit of $31.1 million in 2002. Gross margin increased to 32.4% in 2003 from 32.2% in 2002. In 2002, gross profit included approximately $0.5 million related to the liquidation sale of bulk tequila, and $0.2 million related to the sale of ready-to-drink products.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $23.2 million in 2003, an increase of 3.0% from $22.5 million in 2002.
Operating Income. The following table sets forth the operating income (loss) by operating segment of the Company for 2003 and 2002 and the percent change for the periods.
|
|
Year Ended September 30, |
|
||||
|
|
2003 |
|
2002 |
|
||
|
|
(in thousands) |
|
||||
Bulk alcohol products |
|
$ |
11,432 |
|
$ |
10,539 |
|
Premium branded spirits |
|
(2,271 |
) |
(331 |
) |
||
Bottling operations |
|
(1,901 |
) |
129 |
|
||
Vinegar and cooking wine |
|
4,190 |
|
4,602 |
|
||
Corporate operations |
|
(5,385 |
) |
(6,339 |
) |
||
|
|
$ |
6,065 |
|
$ |
8,600 |
|
As a result of the above factors, operating income was $6.1 million in 2003, as compared to operating income of $8.6 million in 2002.
The Companys premium branded spirits segment experienced operating losses of $2.3 million in 2003 and $0.3 million in 2002. The operating losses reflected the Companys continuing efforts to increase market share by reinvesting segment gross profits in selling and marketing expenses.
The Companys bottling operations segment reported an operating loss of $1.9 million in 2003 compared to operating income of $0.1 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 Companys annual bottling operations unit volume for fiscal year 2002. During the third quarter of Fiscal 2003, management implemented a plan to consolidate the Companys bottling operations to increase efficiencies and reduce overhead.
Interest Expense. Interest expense was $3.4 million in 2003 and $3.1 million in 2002. The net increase in interest expense was a result of higher interest rates during 2003 as compared to 2002, the payment of $296,250 in amendment fees during 2003, partially offset by lower average borrowings. The Companys 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 entered into a retirement agreement with Mr. Pincourt, setting forth the terms of his retirement and resignation. The retirement agreement replaces Mr. Pincourts 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. Pincourts previous employment contract.
17
Accelerated benefits under the deferred program amounted to $1,040,987, of which $549,220 had been accrued as of September 30, 2002. Mr. Pincourts deferred compensation was paid to him on December 13, 2002. Also under the retirement agreement, Mr. Pincourt continued to receive monthly payments of $41,004 through July 15, 2004, one bonus payment of $150,491 which was paid in October 2003, and a second bonus payment of $119,138 which was paid in August 2004. Among other benefits, Mr. Pincourt was 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 Companys consolidated statement of operations and amounted to $1,503,925 before income taxes.
The following table summarizes the charge made during the first quarter of Fiscal 2003 for Mr. Pincourts 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 Companys consolidated statement of operations.
Income Tax Expense. The Companys effective income tax rate was 17.1% in 2002. The low tax rate was attributable to a 90% exemption of the Companys 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 $1.3 million.
The Companys principal use of cash in its operating activities is for purchasing raw materials to be used in its manufacturing operations and purchasing imported products for its premium branded spirits business. The Companys source of liquidity has historically been cash flow from operations and its line of credit. Some of the Companys manufacturing operations are seasonal and the Companys borrowings on its line of credit vary during the year.
The Florida citrus harvest is generally 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 Companys 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 Companys high quality standards, the Company ages its Cruzan Estate Rums for two to five years and certain of the Companys super premium rums are aged up to twelve years. Due to the Companys 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. Management expects to continue to increase the Companys inventory of barrel aged rums to meet projected increased sales in the future.
Another seasonal business of the Company is its contract bottling services. Demand for contract bottling services is highest from April through October. During these months the Companys requirements increase for ingredients, glass bottles, caps, labels, packaging materials and labor. During 2004, the Company incurred losses from its bottling operations of $3.9 million. Management has explored alternatives for its two bottling facilities, including further
18
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 production line bottling vinegar, cooking wine and juices.
During 2004, management increased selling, general and administrative expenses in its premium branded spirits segment in an effort to support the continued growth of the Companys Cruzan brand. Management intends to continue its increased expenditures in 2005 to improve brand growth. To the extent that the increased expenditures do not result in increased sales of the Cruzan brand, the Companys 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.
Net cash provided by operating activities in 2004 was $3.5 million, which resulted from $0.6 million in net income adjusted for noncash items, and a $2.9 million net change in operating assets and liabilities. In 2004, the Company spent $0.9 million on sprinkler systems and safety equipment in its distilling and bottling operations to satisfy insurance requirements, which reduced the Companys insurance premiums.
Net cash used in investing activities in 2004 was $3.2 million, including capital expenditures of $5.3 million partially offset by a redemption of short-term investments of $1.6 million. In 2004, the Company spent $1.0 million on sprinkler systems and safety equipment in its distilling and bottling operations to satisfy insurance requirements which reduced the Companys insurance premiums.
Net cash used in financing activities in 2004 was $11.6 million, which resulted primarily from a $17.5 million net decrease in borrowings under the revolving credit facility, $4.1 million of payments on long-term debt off-set by $10.1 million from the issuance of common stock.
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. See Note 9 to the Companys consolidated financial statements for additional information related to the Companys long-term debt.
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 Companys business plan for the following fiscal year. 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 Companys 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, and the Company paid an amendment fee of $107,500.
The Companys bank debt was $29.5 million as of September 30, 2004, and its ratio of total debt to equity was 0.60 to 1.
The Companys share of the undistributed earnings of its 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. See Note 10 to the Companys consolidated financial statements for additional information on income taxes related to these subsidiaries.
Based on current plans and business conditions, management expects that its cash and cash equivalents, together with any amounts generated from operations and available borrowings, will be sufficient to meet the Companys cash requirements for at least the next 12 months.
19
The Companys significant accounting policies are more fully described in Note 1 to the Companys consolidated financial statements located in Item 8 of this 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.
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Companys financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations and Commitments
The following table reflects scheduled maturities of contractual obligations including principal maturities on long-term debt and future minimum payments on operating leases with terms of one year or more. Purchase obligations include an event sponsorship contract and a contract to purchase spirits.
|
|
Payments Due By Period |
|
|||||||||||||
|
|
Total |
|
Within |
|
2-3 Years |
|
4-5 Years |
|
After |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-term debt |
|
$ |
29,674,240 |
|
$ |
4,000,000 |
|
$ |
25,674,240 |
|
$ |
|
|
$ |
|
|
Operating leases |
|
912,239 |
|
416,699 |
|
495,540 |
|
|
|
|
|
|||||
Unconditional purchase obligations |
|
5,771,745 |
|
1,758,500 |
|
4,013,245 |
|
|
|
|
|
|||||
Total contractual cash obligations |
|
$ |
36,358,224 |
|
$ |
6,175,199 |
|
$ |
30,183,025 |
|
$ |
|
|
$ |
|
|
During November 2002, the Company announced the retirement of A. Kenneth Pincourt, Jr., its Founder, Chairman and Chief Executive Officer. The Company entered into an agreement with Mr. Pincourt, setting forth the terms of his retirement. Under this agreement, the Company elected to accelerate retirement benefits and continue to pay compensation and provide related benefits through July 15, 2004. The Company recorded a charge for these items during the first quarter of its 2003 fiscal year.
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 Companys consolidated statement of operations.
The effect of these charges, net of income tax benefits, was approximately $1.1 million or $.19 per common share in Fiscal 2003.
20
The Companys 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.
In addition to the risks and uncertainties of ordinary business operations, important factors that could cause the Companys actual results to differ materially from those contained in or implied by any forward-looking statements contained in this Annual Report on Form 10-K include:
The Company faces competition that may reduce its market share and margins.
The Company is in a highly competitive industry and the dollar amount and unit volume of its sales could be negatively affected by the Companys inability to maintain or increase prices, changes in geographic or product mix, a general decline in beverage alcohol consumption or the decision of wholesale customers, retailers or consumers to purchase competitors products instead of the Companys products. Since March 2003, no less than four of the Companys largest competitors Bacardi, Diageo, Allied Domecq and Pernot Ricard have introduced competitive flavored rum product offerings. Each of these competitors has greater financial resources than the Company. Wholesaler, retailer and consumer purchasing decisions are influenced by, among other things, the perceived absolute or relative overall value of the Companys products, including their quality or pricing, compared to competitive products. Unit volume and dollar sales could also be affected by pricing, purchasing, financing, operational, advertising or promotional decisions made by wholesalers, state and provincial agencies, and retailers, which could affect their supply of, or consumer demand for, the Companys products. The Company could also experience higher than expected selling, general and administrative expenses if management finds it necessary to increase the number of personnel or advertising or promotional expenditures to maintain the Companys competitive position or for other reasons. Increased competition and unanticipated actions by competitors or customers could lead to downward pressure on prices and/or a decline inthe Companys market share, which would adversely affect the Companys results and hinder its growth potential.
The Companys bottling operations have declined, and may continue to decline in the short-term.
Net sales of the Companys bottling operations for Fiscal 2004 decreased by 16.6% from Fiscal 2003. During the first quarter of fiscal 2004, the Company lost a large private label-bottling customer that accounted for approximately 17.6% of its bottling operations net sales and 5.2% of its bottling operations volume. Sales in the Companys bottling operations also continued to decline 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 to reduce overhead. However, bottling operations volume has not met even managements reduced expectations for Fiscal 2004, which has caused a continuing loss in this segment. 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 production line bottling vinegar, cooking wine and juices. Management cannot assure that its efforts will be successful, or that this segment will experience operating profits in the future.
The Companys premium branded spirits segment has experienced, and may continue to experience, operating losses as the Company reinvests its gross profit from that and other segments in the Companys selling, general and administrative expense for the premium branded spirits segment.
Net sales of the Companys premium branded spirits segment, which includes Cruzan Estate Rums and Cruzan Flavored Rums, for Fiscal 2004 increased by 29% compared to Fiscal 2003. However, during Fiscal 2004, the Companys premium branded spirits segment experienced operating losses of $7.6 million, up from operating losses of $2.3 million in Fiscal 2003. These operating losses reflect managements continuing efforts to increase market share by reinvesting this and other segments gross profits in selling and marketing expenses for the premium branded spirits segment. During 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 Companys
21
Cruzan brand. Management intends to continue its increased expenditures in 2005 to improve brand growth. The Company cannot assure that its increased selling and marketing efforts will be successful, or that this segment will experience operating profits in the future.
The seasonality of the Companys business and the timing of orders could cause operating results to fluctuate.
The size and timing of purchase orders and product shipments can cause the Companys operating results to fluctuate significantly from quarter to quarter, particularly since some customers purchase bulk alcohol products in significant quantities or place significant orders for contract bottling services, vinegar and cooking wine. Additionally, some of the Companys products generate higher profit margins than others, and changes in the Companys product mix will therefore cause gross margins to fluctuate. Certain aspects of the Companys business are also seasonal, with increased demand for the Companys contract bottling services from April to October and increased production of some of the Companys bulk alcohol products from November to June, corresponding to the Florida citrus-harvest. As a result of these factors, the Companys operating results may be erratic, varying significantly from quarter to quarter.
The Companys dependence on distribution channels may limit its ability to sell its products.
The Company sells its popular price and premium branded spirits principally to wholesalers for resale to retail outlets, including package liquor stores and restaurants. The replacement or poor performance of the Companys major wholesalers or the Companys inability to collect accounts receivable from its major wholesalers could materially and adversely affect the Companys results of operations and financial condition. Distribution channels for alcoholic beverages have been characterized in recent years by rapid change, including consolidations of certain wholesalers. Wholesalers and retailers of the Companys products offer products which compete directly with the Companys products for retail shelf space and consumer purchases. Accordingly, there is a risk that these wholesalers or retailers may give higher priority to competitors products. The Company cannot assure that its wholesalers and retailers will continue to purchase the Companys products or provide the Companys products with adequate levels of promotional support.
The Company must maintain a relatively large inventory of its products to support customer delivery requirements, and if this inventory becomes obsolete and the Company is required to write down its inventory, the Companys operating results would be adversely affected.
The Company must maintain a relatively large inventory to meet customer delivery requirements for the Companys products, including those in its bulk alcohol, premium branded spirits, bottling operations, and vinegar and cooking wine segments. Inventory may become obsolete as the Company and its customers introduce new products, cease to produce old products, or modify the design of a products packaging. The Company maintains a provision for inventory obsolescence to cover potential write-downs in inventory for obsolescence, but the Company cannot assure that this provision is adequate, and inventory obsolescence could harm the Companys operating results.
The Company may be unable to comply with its lenders financial covenants, and therefore the Companys debt repayment may be accelerated unexpectedly.
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 Companys business plan for the following fiscal year. 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 Companys 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, and the Company paid an amendment fee of $107,500. See Note 9 to the Companys consolidated financial statements for additional information related to the Companys long-term debt.
22
The Company cannot assure that it will be able to continue to comply with the financial covenants. In addition, if the Company is unable to comply with the financial covenants, it cannot assure that its lenders will grant a waiver of a covenant violation. In the event that the Company is not in compliance with a financial covenant its lenders have the ability to call the Companys debts, which would have a severe adverse impact upon the Companys operations and its ability to continue as a going concern.
An increase in excise taxes or government regulations could have a material adverse effect on the Companys business.
In the United States and other countries in which the Company operates, the Company is subject to the imposition of excise and other taxes on beverage alcohol products in varying amounts which have been subject to change. Significant increases in excise or other taxes on beverage alcohol products could materially and adversely affect the Companys financial condition or results of operations. Many states have considered proposals to increase, and some of these states have increased, state alcohol excise taxes. In addition, the beverage alcohol industry is subject to extensive regulation by federal, state, local and foreign governmental agencies concerning such matters as licensing, trade and pricing practices, permitted and required labeling, advertising and relations with wholesalers and retailers. Certain federal and state regulations also require warning labels and signage. New or revised regulations or increased licensing fees, requirements or taxes could also have a material adverse effect on the Companys financial condition or results of operations.
A decline in the consumption of products the Company sells could adversely affect the Companys sales revenues or margin.
There have been periods in the past in which there were substantial declines in the overall per capita consumption of beverage alcohol products in the United States and other markets in which the Company operates. A limited or general decline in consumption in one or more ofthe Companys product categories could occur in the future due to a variety of factors, including:
a decline in the popularity of flavored spirits;
demographic and social trends, changes in travel, vacation or leisure activity, patterns and a downturn in economic conditions;
increased concern about the health consequences of consuming beverage alcohol products and about drinking and driving;
increased activity of anti-alcohol consumer groups;
increased federal, state or foreign excise or other taxes on beverage alcohol products; and
Any decline in the consumption of products the Company sells could have a significant adverse effect on its sales revenue or margin.
A small number of customers account for a high percentage of the Companys net sales and if the Company loses a few customers or is unable to attract new customers, net sales could decline.
The Companys bulk alcohol, contract bottling services and proprietary and private label products are sold to a relatively small number of customers and the Company has large customers for vinegar and cooking wine. The loss of a few of these customers could have a material adverse effect on the Companys liquidity and results of operations. For example, the Companys net sales for its bottling operations decreased 16.6% between Fiscal 2003 and Fiscal 2004, and 23.5% between Fiscal 2002 and Fiscal 2003 largely because of the loss of two large customers. The Company cannot assure that it will not lose other customers.
The Company expects that sales of certain products to a small number of customers will continue to account for a high percentage of the Companys net sales for the foreseeable future. For example, for the Fiscal years ended September 30, 2004, 2003 and 2002, the Companys top 10 customers accounted for approximately 43%, 58% and 31%, respectively, of the Companys total net sales. The Companys future success depends on its
23
ability to retain the Companys current customers, and to attract new customers. The loss of one or several customers, whether through termination of agreements, acquisitions or bankruptcy, could significantly reduce the Companys net sales.
Changes in the regulatory environment for the operation of the Companys business or those of its customers could pose risks and increased expenses.
The Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the Securities and Exchange Commission have required changes in corporate governance practices of public companies. In addition to final rules and rule proposals already made by the Securities and Exchange Commission, the American Stock Exchange has adopted revisions to its requirements for listed companies. The Company continues to review all of its accounting policies and practices, legal disclosure and corporate governance policies under the new legislation, including those related to the Companys relationships with its independent auditors, enhanced financial disclosures, internal controls, board and board committee practices, corporate responsibility and loan practices, and intend fully to continue to comply with such laws. Management expects these new rules and regulations to make it more difficult for the Company to attract and retain qualified executive officers and qualified members of its Board of Directors, particularly to serve on the various committees of the Board, including and in particular, the audit committee. In addition, compliance with new rules imposed by the Securities and Exchange Commission and the American Stock Exchange will likely cause the Company to incur increased expenses, including legal and accounting expenses.
If the Company does not successfully address the risks inherent in selling to international customers,the Companys net sales and financial results could decline.
The Company derived 8% of its net sales from international sales in Fiscal 2004 and 6% in Fiscal 2003. Management plans to expand net sales and to grow the Companys international operations. The Company has limited experience in international sales and may not be able to compete or operate effectively in international markets. The Company faces certain risks inherent in conducting business internationally, including:
fluctuations in currency exchange rates and imposition of currency exchange controls;
language and translation issues;
difficulties in collecting accounts receivable and longer collection periods;
changes in regulatory requirements;
political and economic instability; and
potential adverse tax consequences.
Any of these factors could harm the Companys international sales and, consequently, its business and operating results. Specifically, failure to successfully manage international growth could result in higher operating costs than anticipated or could delay or preclude altogether the Companys ability to generate net sales in key international markets.
The Company has a material amount of goodwill and adverse results in operations could result in a write-down of goodwill, which would further adversely affect the Companys results of operations.
As of September 30, 2004, goodwill represented approximately $20.5 million, or 16% of the Companys total assets. Goodwill is the amount by which the costs of an acquisition account for using the purchase method exceeds the fair value of the net assets acquired. The Company adopted Statement of Financial Accounting Standard No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets, in its entirety, on October 1, 2001. Under SFAS No. 142, goodwill is no longer amortized, but instead is subject to a periodic impairment evaluation based on the fair value of the reporting unit. Reductions in the Companys net income caused by a write-down of goodwill could materially and adversely affect the Companys results of operations.
24
Adverse public opinion about alcohol may harm the Companys business.
In recent years there has been substantial publicity regarding the possible health benefits of moderate alcohol consumption. The results of a number of studies suggest that moderate consumption of beverage alcohol could result in decreased mortality, lower risk of cardiovascular disease, and other health benefits. Alternatively, anti-alcohol groups have, in the past, successfully advocated more stringent labeling requirements and other regulations designed to discourage consumption of beverage alcohol. More restrictive regulations, negative publicity regarding alcohol consumption, publication of studies that indicate a significant health risk from moderate consumption of alcohol or changes in consumer perceptions of the relative healthfulness or safety of beverage alcohol generally could adversely affect the sale and consumption of alcohol and the demand for beverage alcohol and could have a material adverse effect on the Companys business, financial condition, and results of operations.
|
|
Market Risk Analysis |
|
||||||||||||||||||||||
|
|
September 30, 2004 |
|
||||||||||||||||||||||
|
|
Expected Maturity Date |
|
||||||||||||||||||||||
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
Thereafter |
|
Total |
|
Fair Value |
|
||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Notes receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fixed rate |
|
$ |
3,563,408 |
|
$ |
226,807 |
|
$ |
234,218 |
|
$ |
243,397 |
|
$ |
75,533 |
|
$ |
2,106 |
|
$ |
4,345,469 |
|
$ |
4,364,971 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Rate |
|
5.78 |
% |
5.18 |
% |
8.13 |
% |
8.14 |
% |
8.21 |
% |
10.25 |
% |
7.61 |
% |
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Variable rate |
|
$ |
4,000,000 |
|
$ |
25,674,240 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
29,674,240 |
|
$ |
29,674,240 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Rate |
|
5.61 |
% |
5.39 |
% |
|
|
|
|
|
|
|
|
5.43 |
% |
|
|
The Company carries certain variable rate debt and thus is exposed to the impact of interest rate changes. The table above summarizes the Companys market risk associated with debt obligations as of September 30, 2004.
In the event of an adverse change in interest rates, management would consider taking certain actions, such as an interest rate hedge or swap, to further mitigate the Companys exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such actions. The Company had no derivative financial instruments as of September 30, 2004.
See Note 9 to the Companys consolidated financial statements for additional information related to Companys financing arrangements.
The consolidated financial statements and financial statement schedules of the Company and its subsidiaries, and the report of independent auditors, are listed at Item 15.
None.
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 Companys reports under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that the information is accumulated and communicated to the Companys management, including the Companys Chief Executive Officer and Chief
25
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 Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Companys 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 Companys Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the Companys disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives.
In addition, management, including the Companys Chief Executive Officer and Chief Financial Officer, reviewed the Companys 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 Companys 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 Companys internal control over financial reporting.
Item 9B. Other Information
None.
26
The Company has adopted a Code of Ethics applicable to its Chief Executive Officer, Chief Financial Officer, Controller and other employees performing similar functions. In addition, the Company has adopted a Code of Business Conduct and Ethics applicable to all directors, officers and employees. Both Codes are available on the Companys website at http://www.todhunter.com. The Company also intends to post any amendments to, or waivers from, either Code on the Companys website.
The other information required by Item 10 is incorporated by reference from the Companys definitive proxy statement for its 2005 annual stockholders meeting.
The information required by Item 11 is incorporated by reference from the Companys definitive proxy statement for its 2005 annual stockholders meeting.
The following table summarizes information about the Companys equity compensation plans as of September 30, 2004. All outstanding awards relate to the Companys Common Stock. For additional information about the Companys equity compensation plans, see Note 12 to the Companys consolidated financial statements.
Plan Category |
|
Number of securities to |
|
Weightedaverage |
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plans Approved by Security Holders (1) |
|
312,500 |
|
$ |
8.13 |
|
|
|
Equity Compensation Plans Approved by Security Holders (2) |
|
|
|
|
|
853,000 |
|
|
Equity Compensation Plans Not Approved by Security Holders |
|
60,000 |
|
$ |
9.06 |
|
|
|
Total |
|
372,500 |
|
$ |
8.28 |
|
853,000 |
|
(1) All of the shares reported in this row reflect stock options granted under the Companys 1992 Employee Stock Option Plan, as amended.
(2) All of the shares reported in this row reflect stock options granted under the Companys 2004 Employee Stock Option Plan.
The other information required by Item 12 is incorporated by reference from the Companys definitive proxy statement for its 2005 annual stockholders meeting.
27
The information required by Item 13 is incorporated by reference from the Companys definitive proxy statement for its 2005 annual stockholders meeting.
The information required by Item 14 is incorporated by reference from the Companys definitive proxy statement for its 2005 annual stockholders meeting.
28
(a) Financial Statements and Schedules
See Index to Financial Statements and Financial Statement Schedules.
(b) Exhibits
See Index to Exhibits.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of West Palm Beach, State of Florida, on the 15th day of December, 2004.
|
TODHUNTER INTERNATIONAL, INC. |
||
|
|
||
|
By: |
/s/ Jay S. Maltby |
|
|
|
Jay S. Maltby, Chairman of the Board, |
|
|
|
Chief Executive Officer and President |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Jay S. Maltby |
Chairman of the Board, Chief |
December 15, 2004 |
Jay S. Maltby |
(Principal Executive Officer) |
|
|
|
|
/s/ Ezra Shashoua |
Executive Vice President and Chief |
December 15, 2004 |
Ezra Shashoua |
(Principal Financial |
|
|
|
|
/s/ Michael E. Carballo |
Director |
December 15, 2004 |
Michael E. Carballo |
|
|
|
|
|
/s/ Joseph R. Cook |
Director |
December 15, 2004 |
Joseph R. Cook |
|
|
|
|
|
/s/ Donald L. Kasun |
Director |
December 15, 2004 |
Donald L. Kasun |
|
|
|
|
|
/s/ Edward F. McDonnell |
Director |
December 15, 2004 |
Edward F. McDonnell |
|
|
|
|
|
/s/ D. Chris Mitchell |
Director |
December 15, 2004 |
D. Chris Mitchell |
|
|
|
|
|
/s/ Leonard G. Rogers |
Director |
December 15, 2004 |
Leonard G. Rogers |
|
|
|
|
|
/s/ Thomas A. Valdes |
Director |
December 15, 2004 |
Thomas A. Valdes |
|
|
30
TODHUNTER INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
All other schedules have been omitted as not required, not applicable, not deemed material or because the information is included in the notes to the Companys consolidated financial statements.
31
Independent Auditors Report
To the Board of Directors and Stockholders
Todhunter International, Inc.
West Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of Todhunter International, Inc. and subsidiaries as of September 30, 2004 and 2003, and the related consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended September 30, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Todhunter International, Inc. and subsidiaries as of September 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2004 in conformity with accounting principles generally accepted in the United States of America.
|
/s/ McGladrey & Pullen, LLP |
|
|
West Palm Beach, Florida |
|
November 24, 2004, except for the |
|
last paragraph in (i) of Note 9 as |
|
to which the date is December 20, 2004. |
|
McGladrey & Pullen, LLP is a member firm of RSM International,
an affiliation of separate and independent legal entities.
32
Todhunter International, Inc. and Subsidiaries
September 30, 2004 and 2003
Assets |
|
2004 |
|
2003 |
|
||
Current Assets |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
3,617,582 |
|
$ |
14,918,605 |
|
Short-term investments |
|
216,246 |
|
1,819,016 |
|
||
Trade receivables |
|
17,970,125 |
|
15,867,079 |
|
||
Other receivables |
|
2,448,611 |
|
2,879,334 |
|
||
Inventories |
|
29,162,496 |
|
28,664,895 |
|
||
Notes receivable, current maturities |
|
3,559,409 |
|
647,782 |
|
||
Deferred income taxes |
|
981,000 |
|
2,224,000 |
|
||
Other current assets |
|
3,195,781 |
|
3,895,977 |
|
||
Total current assets |
|
61,151,250 |
|
70,916,688 |
|
||
|
|
|
|
|
|
||
Investments in and Advances to Equity Investees |
|
2,232,285 |
|
1,879,623 |
|
||
|
|
|
|
|
|
||
Notes Receivable, less current maturities |
|
411,060 |
|
506,422 |
|
||
|
|
|
|
|
|
||
Notes Receivable From Affiliates, less current maturities |
|
375,000 |
|
3,714,346 |
|
||
|
|
|
|
|
|
||
Property and Equipment, less accumulated depreciation 2004 $56,716,805; 2003 $52,125,682 |
|
39,949,850 |
|
40,056,612 |
|
||
|
|
|
|
|
|
||
Goodwill |
|
20,524,404 |
|
20,524,404 |
|
||
|
|
|
|
|
|
||
Trademarks |
|
893,648 |
|
834,850 |
|
||
|
|
|
|
|
|
||
Deferred Loan Costs |
|
634,910 |
|
866,128 |
|
||
|
|
|
|
|
|
||
Other Assets |
|
1,660,219 |
|
|
|
||
|
|
|
|
|
|
||
|
|
$ |
127,832,626 |
|
$ |
139,299,073 |
|
See Notes to Consolidated Financial Statements.
33
Liabilities and Stockholders Equity |
|
2004 |
|
2003 |
|
||
Current Liabilities |
|
|
|
|
|
||
Current maturities of long-term debt |
|
$ |
4,000,000 |
|
$ |
4,000,000 |
|
Accounts payable |
|
11,868,947 |
|
6,288,431 |
|
||
Accrued expenses |
|
4,726,253 |
|
3,837,745 |
|
||
|
|
|
|
|
|
||
Total current liabilities |
|
20,595,200 |
|
14,126,176 |
|
||
|
|
|
|
|
|
||
Long-Term Debt, less current maturities |
|
25,674,240 |
|
47,315,617 |
|
||
|
|
|
|
|
|
||
Deferred Income Taxes |
|
648,000 |
|
5,243,000 |
|
||
|
|
|
|
|
|
||
Other Liabilities |
|
1,091,248 |
|
2,002,761 |
|
||
|
|
48,008,688 |
|
68,687,554 |
|
||
Commitments |
|
|
|
|
|
||
|
|
|
|
|
|
||
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 2004 6,437,719 and 2003 5,686,434 shares |
|
64,377 |
|
56,864 |
|
||
Additional paid-in capital |
|
28,916,707 |
|
18,803,404 |
|
||
Retained earnings |
|
51,580,634 |
|
52,489,031 |
|
||
|
|
80,561,718 |
|
71,349,299 |
|
||
Less cost of 99,200 shares of treasury stock |
|
(737,780 |
) |
(737,780 |
) |
||
|
|
79,823,938 |
|
70,611,519 |
|
||
|
|
|
|
|
|
||
|
|
$ |
127,832,626 |
|
$ |
139,299,073 |
|
34
Todhunter International, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended September 30, 2004, 2003 and 2002
|
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Sales |
|
$ |
121,983,473 |
|
$ |
120,819,993 |
|
$ |
128,967,429 |
|
Less excise taxes |
|
25,567,774 |
|
30,375,700 |
|
32,128,016 |
|
|||
Net sales |
|
96,415,699 |
|
90,444,293 |
|
96,839,413 |
|
|||
Cost of goods sold |
|
68,683,722 |
|
61,174,613 |
|
65,700,655 |
|
|||
Gross profit |
|
27,731,977 |
|
29,269,680 |
|
31,138,758 |
|
|||
Selling, general and administrative expenses |
|
31,311,358 |
|
23,204,978 |
|
22,538,523 |
|
|||
Operating income (loss) |
|
(3,579,381 |
) |
6,064,702 |
|
8,600,235 |
|
|||
Other income (expense): |
|
|
|
|
|
|
|
|||
Interest income |
|
371,183 |
|
709,429 |
|
754,312 |
|
|||
Interest expense |
|
(2,226,011 |
) |
(3,376,539 |
) |
(3,072,820 |
) |
|||
Equity in income (losses) of equity investees |
|
352,662 |
|
323,177 |
|
(144,474 |
) |
|||
Other, net |
|
481,063 |
|
(1,273,941 |
) |
431,676 |
|
|||
|
|
(1,021,103 |
) |
(3,617,874 |
) |
(2,031,306 |
) |
|||
|
|
|
|
|
|
|
|
|||
Income (loss) before income taxes |
|
(4,600,484 |
) |
2,446,828 |
|
6,568,929 |
|
|||
Income tax expense (benefit): |
|
|
|
|
|
|
|
|||
Current |
|
(340,087 |
) |
(1,257,202 |
) |
734,198 |
|
|||
Deferred |
|
(3,352,000 |
) |
301,000 |
|
388,000 |
|
|||
|
|
(3,692,087 |
) |
(956,202 |
) |
1,122,198 |
|
|||
Net income (loss) |
|
$ |
(908,397 |
) |
$ |
3,403,030 |
|
$ |
5,446,731 |
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|||
Basic |
|
$ |
(0.16 |
) |
$ |
0.61 |
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|||
Diluted |
|
$ |
(0.16 |
) |
$ |
0.60 |
|
$ |
0.97 |
|
Common shares and equivalents outstanding: |
|
|
|
|
|
|
|
|||
Basic |
|
5,800,931 |
|
5,574,456 |
|
5,526,781 |
|
|||
|
|
|
|
|
|
|
|
|||
Diluted |
|
5,800,931 |
|
5,644,432 |
|
5,624,164 |
|
See Notes to Consolidated Financial Statements.
35
Todhunter International, Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity
Years Ended September 30, 2004, 2003 and 2002
|
|
Common Stock |
|
Additional |
|
||||
|
|
Shares |
|
Amount |
|
|
|||
|
|
|
|
|
|
|
|
||
Balance, October 1, 2001 |
|
5,612,934 |
|
$ |
56,129 |
|
$ |
18,326,014 |
|
Issuance of common stock |
|
56,500 |
|
565 |
|
338,435 |
|
||
Net income |
|
|
|
|
|
|
|
||
Net unrealized income on interest rate cap |
|
|
|
|
|
|
|
||
Balance, September 30, 2002 |
|
5,669,434 |
|
56,694 |
|
18,664,449 |
|
||
Issuance of common stock |
|
17,000 |
|
170 |
|
138,955 |
|
||
Net income |
|
|
|
|
|
|
|
||
Balance, September 30, 2003 |
|
5,686,434 |
|
56,864 |
|
18,803,404 |
|
||
Issuance of common stock |
|
751,285 |
|
7,513 |
|
10,113,303 |
|
||
Net loss |
|
|
|
|
|
|
|
||
Balance, September 30, 2004 |
|
6,437,719 |
|
$ |
64,377 |
|
$ |
28,916,707 |
|
See Notes to Consolidated Financial Statements.
36
|
|
Retained |
|
Accumulated |
|
|
|
Total |
|
Total |
|
|||||||
|
Shares |
|
Amount |
|
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance, October 1, 2001 |
|
$ |
43,639,270 |
|
$ |
(63,000 |
) |
99,200 |
|
$ |
(737,780 |
) |
$ |
61,220,633 |
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
339,000 |
|
|
|
|||||
Net income |
|
5,446,731 |
|
|
|
|
|
|
|
5,446,731 |
|
$ |
5,446,731 |
|
||||
Net unrealized income on interest rate cap |
|
|
|
63,000 |
|
|
|
|
|
63,000 |
|
63,000 |
|
|||||
Balance, September 30, 2002 |
|
49,086,001 |
|
|
|
99,200 |
|
(737,780 |
) |
67,069,364 |
|
$ |
5,509,731 |
|
||||
Issuance of common stock |
|
|
|
|
|
|
|
|
|
139,125 |
|
|
|
|||||
Net income |
|
3,403,030 |
|
|
|
|
|
|
|
3,403,030 |
|
3,403,030 |
|
|||||
Balance, September 30, 2003 |
|
52,489,031 |
|
|
|
99,200 |
|
(737,780 |
) |
70,611,519 |
|
$ |
3,403,030 |
|
||||
Issuance of common stock |
|
|
|
|
|
|
|
|
|
10,120,816 |
|
|
|
|||||
Net loss |
|
(908,397 |
) |
|
|
|
|
|
|
(908,397 |
) |
(908,397 |
) |
|||||
Balance, September 30, 2004 |
|
$ |
51,580,634 |
|
$ |
|
|
99,200 |
|
$ |
(737,780 |
) |
$ |
79,823,938 |
|
$ |
(908,397 |
) |
37
Todhunter International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended September 30, 2004, 2003 and 2002
|
|
2004 |
|
2003 |
|
2002 |
|
|||
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|||
Net income (loss) |
|
$ |
(908,397 |
) |
$ |
3,403,030 |
|
$ |
5,446,731 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|||
Depreciation |
|
5,106,463 |
|
5,385,736 |
|
5,252,962 |
|
|||
Amortization of trademarks |
|
40,200 |
|
40,200 |
|
40,200 |
|
|||
Deferred loan costs included in interest |
|
308,904 |
|
299,004 |
|
315,000 |
|
|||
Gain on sale of investments |
|
|
|
(71,574 |
) |
|
|
|||
Gain on sale of property and equipment |
|
(281,541 |
) |
(155,848 |
) |
(30,370 |
) |
|||
Equity in (income) losses of equity investees |
|
(352,662 |
) |
(323,177 |
) |
144,474 |
|
|||
Deferred income taxes |
|
(3,352,000 |
) |
301,000 |
|
388,000 |
|
|||
Changes in assets and liabilities |
|
|
|
|
|
|
|
|||
(Increase) decrease in: |
|
|
|
|
|
|
|
|||
Receivables |
|
(1,672,323 |
) |
(2,543,933 |
) |
1,575,569 |
|
|||
Inventories |
|
(497,601 |
) |
(809,970 |
) |
(371,596 |
) |
|||
Other assets |
|
(476,613 |
) |
(817,540 |
) |
(767,099 |
) |
|||
Increase (decrease) in: |
|
|
|
|
|
|
|
|||
Accounts payable |
|
5,580,516 |
|
2,237,052 |
|
(1,117,863 |
) |
|||
Accrued expenses |
|
888,508 |
|
614,452 |
|
897,589 |
|
|||
Other liabilities |
|
(911,513 |
) |
191,302 |
|
497,423 |
|
|||
Net cash provided by operating activities |
|
3,471,941 |
|
7,749,734 |
|
12,271,020 |
|
|||
|
|
|
|
|
|
|
|
|||
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|||
Proceeds from sale of property and equipment |
|
567,192 |
|
82,370 |
|
61,088 |
|
|||
Principal payments received on notes receivable |
|
523,081 |
|
119,075 |
|
106,853 |
|
|||
Purchase of property and equipment |
|
(5,285,352 |
) |
(3,385,470 |
) |
(6,000,633 |
) |
|||
Disbursement for notes receivable |
|
|
|
(10,000 |
) |
(250,000 |
) |
|||
Purchase of short-term investments |
|
|
|
(1,380,553 |
) |
(3,397,033 |
) |
|||
Redemption of short-term investments |
|
1,602,770 |
|
3,721,547 |
|
8,533,851 |
|
|||
Advance to equity investees |
|
|
|
(270,000 |
) |
|
|
|||
Other assets |
|
(582,408 |
) |
(92,567 |
) |
215,934 |
|
|||
Net cash used in investing activities |
|
(3,174,717 |
) |
(1,215,598 |
) |
(729,940 |
) |
|||
|
|
|
|
|
|
|
|
|||
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|||
Net borrowings (payments) under line of credit arrangements |
|
$ |
(17,500,000 |
) |
$ |
(1,500,000 |
) |
$ |
1,500,000 |
|
Proceeds from issuance of common stock |
|
10,120,816 |
|
139,125 |
|
339,000 |
|
|||
Disbursements for loan costs |
|
(77,686 |
) |
|
|
(889,833 |
) |
|||
Principal payments on long-term borrowings |
|
(4,141,377 |
) |
(4,201,392 |
) |
(4,167,540 |
) |
|||
Net cash used in financing activities |
|
(11,598,247 |
) |
(5,562,267 |
) |
(3,218,373 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net increase (decrease) in cash and cash equivalents |
|
(11,301,023 |
) |
971,869 |
|
8,322,707 |
|
|||
|
|
|
|
|
|
|
|
|||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|||
Beginning |
|
14,918,605 |
|
13,946,736 |
|
5,624,029 |
|
|||
Ending |
|
$ |
3,617,582 |
|
$ |
14,918,605 |
|
$ |
13,946,736 |
|
|
|
|
|
|
|
|
|
|||
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|||
Cash payments (refunds) for: |
|
|
|
|
|
|
|
|||
Interest |
|
$ |
1,946,229 |
|
$ |
3,390,213 |
|
$ |
2,728,397 |
|
|
|
|
|
|
|
|
|
|||
Income taxes |
|
$ |
(1,320,708 |