**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended December 31, 2003**

 

**Commission File No. 1-13453**

 

| **TODHUNTER INTERNATIONAL, INC.**                                                   |
|-------------------------------------------------------------------------------------|
| (Exact  name of registrant as specified in its charter)                             |
|                                                                                |   |   |
| **DELAWARE**                                                                        |   | **59-1284057** |
| (State  or other jurisdiction of  incorporation or organization)                    |   | IRS  Employer Identification No. |
|                                                                                |   |   |
| **222 Lakeview Avenue, Suite 1500, West Palm Beach, FL**                            |   | **33401** |
| (Address  of principal executive offices)                                           |   | (Zip  Code) |
|                                                                                |
| Registrant’s  telephone number, including area code:   **(561) 655-8977** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes     ý                                                 No     o

 

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

 

Yes     o                                                 No     ý

 

The number of sharesoutstanding of registrant’s Common Stock, $.01 par value per share, as ofFebruary 12, 2004 was 5,617,534.

 

 

----

 

TODHUNTERINTERNATIONAL, INC.

 

INDEX

 
| PART I  | FINANCIAL INFORMATION |                                                                                                    |
|---------|-----------------------|---------------------------------------------------------------------------------------------------------|
|    |                  |                                                                                                    |
|    | Item 1                | Financial Statements                                                                                    |   |
|    |                  |                                                                                                    |   |
|    |                  | Consolidated Balance  Sheets -  December 31, 2003 and September 30, 2003                      |   |
|    |                  |                                                                                                    |   |
|    |                  | Consolidated  Statements of Income -  Three Months Ended December 31, 2003 and 2002, unaudited     |   |
|    |
|    |                  |                                                                                                    |   |
|    |                  | Consolidated  Statements of Cash Flows -  Three Months Ended December 31, 2003 and 2002, unaudited |   |
|    |
|    |                  |                                                                                                    |   |
|    |                  | Notes to  Consolidated Financial Statements                                                             |   |
|    |                  |                                                                                                    |   |
|    | Item  2               | Management’s  Discussion and Analysis of Financial Condition  and Results of Operations            |   |
|    |                  |                                                                                                    |   |
|    | Item  3               | Quantitative  and Qualitative Disclosures About Market Risk                                             |   |
|    |                  |                                                                                                    |   |
|    | Item 4                | Controls and Procedures                                                                                 |   |
|    |                  |                                                                                                    |   |
| PART II | OTHER INFORMATION     |                                                                                                    |
|    |                  |                                                                                                    |   |
|    | Item 1                | Legal Proceedings                                                                                       |   |
|    |                  |                                                                                                    |   |
|    | Item 2                | Changes in Securities and  Use of Proceeds                                                              |   |
|    |                  |                                                                                                    |   |
|    | Item 3                | Defaults Upon Senior  Securities                                                                        |   |
|    |                  |                                                                                                    |   |
|    | Item 4                | Submission of Matters to a  Vote of Security Holders                                                    |   |
|    |                  |                                                                                                    |   |
|    | Item 5                | Other Information                                                                                       |   |
|    |                  |                                                                                                    |   |
|    | Item 6                | Exhibits and  Reports on Form 8-K                                                                       |   |
|    |                  |                                                                                                    |   |
|    | Signatures            |                                                                                                    |

 

----

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1.****          ****Financial Statements**

 

TODHUNTER INTERNATIONAL, INC.CONSOLIDATED BALANCE SHEETS

 
|                                                       |   | **December 31,  2003** |        | **September 30,  2003** |   |
|------------------------------------------------------------|--------|-----------------------------|-------------|------------------------------|--------|
|                                                       |   | **(Unaudited)**             |        | *****                        |   |
| ASSETS                                                     |   |                        |        |                         |   |
|                                                       |   |                        |        |                         |   |
| CURRENT  ASSETS                                            |   |                        |        |                         |   |
| Cash  and cash equivalents                                 |   | $                           | 19,303,457  |                         | $      | 14,918,605 |   |
| Short-term  investments                                    |   | 1,414,173                   |        | 1,819,016                    |   |
| Trade  receivables                                         |   | 13,210,287                  |        | 15,867,079                   |   |
| Other  receivables                                         |   | 2,101,461                   |        | 2,879,334                    |   |
| Inventories                                                |   | 28,556,598                  |        | 28,664,895                   |   |
| Notes  receivable, current maturities                      |   | 650,505                     |        | 647,782                      |   |
| Deferred  income taxes                                     |   | 2,025,250                   |        | 2,224,000                    |   |
| Other  current assets                                      |   | 4,509,518                   |        | 3,895,977                    |   |
| Total  current assets                                      |   | 71,771,249                  |        | 70,916,688                   |   |
|                                                       |   |                        |        |                         |   |
| LONG-TERM  INVESTMENTS AND NOTES RECEIVABLE                |   |                        |        |                         |   |
| Investments  in and advances to equity investees           |   | 2,093,743                   |        | 1,879,623                    |   |
| Notes  receivable from affiliates, less current maturities |   | 3,704,386                   |        | 3,714,346                    |   |
| Notes  receivable, less current maturities                 |   | 483,007                     |        | 506,422                      |   |
|                                                       |   | 6,281,136                   |        | 6,100,391                    |   |
|                                                       |   |                        |        |                         |   |
| PROPERTY  AND EQUIPMENT                                    |   | 92,825,166                  |        | 92,182,294                   |   |
| Less  accumulated depreciation                             |   | 53,293,994                  |        | 52,125,682                   |   |
|                                                       |   | 39,531,172                  |        | 40,056,612                   |   |
|                                                       |   |                        |        |                         |   |
| GOODWILL                                                   |   | 20,524,404                  |        | 20,524,404                   |   |
| AMORTIZED  INTANGIBLE ASSETS                               |   | 824,797                     |        | 834,850                      |   |
| OTHER  ASSETS                                              |   | 791,131                     |        | 866,128                      |   |
|                                                       |   | $                           | 139,723,889 |                         | $      | 139,299,073 |   |

 

----

*Fromaudited financial statements.

See Notes to ConsolidatedFinancial Statements.

 

----

 

TODHUNTER INTERNATIONAL, INC.CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                                                  |   | **December 31,  2003** |        | **September 30,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|------------------------------|--------|
|                                                                                                                                                                  |   | **(Unaudited)**             |        | *****                        |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                            |   |                        |        |                         |   |
|                                                                                                                                                                  |   |                        |        |                         |   |
| CURRENT  LIABILITIES                                                                                                                                                  |   |                        |        |                         |   |
| Current  maturities of long-term debt                                                                                                                                 |   | $                           | 22,300,000  |                         | $      | 4,000,000 |   |
| Accounts  payable                                                                                                                                                     |   | 9,168,453                   |        | 6,288,431                    |   |
| Accrued  expenses                                                                                                                                                     |   | 2,462,961                   |        | 3,837,745                    |   |
| Total  current liabilities                                                                                                                                            |   | 33,931,414                  |        | 14,126,176                   |   |
|                                                                                                                                                                  |   |                        |        |                         |   |
| LONG-TERM  DEBT, less current maturities                                                                                                                              |   | 27,288,750                  |        | 47,315,617                   |   |
|                                                                                                                                                                  |   |                        |        |                         |   |
| DEFERRED  INCOME TAXES                                                                                                                                                |   | 5,240,000                   |        | 5,243,000                    |   |
|                                                                                                                                                                  |   |                        |        |                         |   |
| OTHER  LIABILITIES                                                                                                                                                    |   | 1,676,847                   |        | 2,002,761                    |   |
|                                                                                                                                                                  |   | 68,137,011                  |        | 68,687,554                   |   |
|                                                                                                                                                                  |   |                        |        |                         |   |
| STOCKHOLDERS’  EQUITY                                                                                                                                            |   |                        |        |                         |   |
| Preferred  stock, par value $.01 per share; authorized 2,500,000 shares; no shares  issued                                                                            |   | —                      |        | —                       |   |
| Common  stock, par value $.01 per share; authorized 10,000,000 shares; issued  5,703,934 shares December 31, 2003, and 5,686,434 shares  September 30, 2003 |   | 57,039                      |        | 56,864                       |   |
| Additional  paid-in capital                                                                                                                                           |   | 18,927,304                  |        | 18,803,404                   |   |
| Retained  earnings                                                                                                                                                    |   | 53,340,315                  |        | 52,489,031                   |   |
|                                                                                                                                                                  |   | 72,324,658                  |        | 71,349,299                   |   |
| Less  cost of 99,200 shares of treasury stock                                                                                                                         |   | (737,780                    | )           | (737,780                     | )      |
|                                                                                                                                                                  |   | 71,586,878                  |        | 70,611,519                   |   |
|                                                                                                                                                                  |   | $                           | 139,723,889 |                         | $      | 139,299,073 |   |

 

----

*From audited financialstatements.

See Notes to ConsolidatedFinancial Statements.

 

2

----

 

TODHUNTERINTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OFINCOME

(Unaudited)

 
|                                          |   | **Three Months Ended  December 31** |       |
|-----------------------------------------------|--------|------------------------------------------|------------|
|                                          |   | **2003**                                 |       | **2002** |   |
|                                          |   |                                     |       |   |   |
| Sales                                         |   | $                                        | 27,687,682 |   | $ | 28,337,184 |   |
| Less  excise taxes                            |   | 5,246,030                                |       | 7,372,705 |   |
| Net  sales                                    |   | 22,441,652                               |       | 20,964,479 |   |
|                                          |   |                                     |       |   |   |
| Cost  of goods sold                           |   | 15,308,176                               |       | 15,380,241 |   |
| Gross  profit                                 |   | 7,133,476                                |       | 5,584,238 |   |
|                                          |   |                                     |       |   |   |
| Selling,  general and administrative expenses |   | 6,248,054                                |       | 5,508,973 |   |
| Operating  income                             |   | 885,422                                  |       | 75,265 |   |
|                                          |   |                                     |       |   |   |
| Other  income (expense):                      |   |                                     |       |   |   |
| Interest  income                              |   | 172,559                                  |       | 132,661 |   |
| Interest  expense                             |   | (696,983                                 | )          | (724,903 | ) |
| Equity  in income of equity investee          |   | 214,120                                  |       | 93,288 |   |
| Other,  net                                   |   | 228,571                                  |       | (1,397,030 | ) |
|                                          |   | (81,733                                  | )          | (1,895,984 | ) |
|                                          |   |                                     |       |   |   |
| Income  (loss) before income taxes            |   | 803,689                                  |       | (1,820,719 | ) |
|                                          |   |                                     |       |   |   |
| Income  tax expense (benefit):                |   |                                     |       |   |   |
| Current                                       |   | (243,345                                 | )          | (267,263 | ) |
| Deferred                                      |   | 195,750                                  |       | (61,000 | ) |
|                                          |   | (47,595                                  | )          | (328,263 | ) |
|                                          |   |                                     |       |   |   |
| Net  income (loss)                            |   | $                                        | 851,284    |   | $ | (1,492,456 | ) |
|                                          |   |                                     |       |   |   |
| Earnings  (loss) per common share:            |   |                                     |       |   |   |
| Basic                                         |   | $                                        | 0.15       |   | $ | (0.27 | ) |
| Diluted                                       |   | $                                        | 0.15       |   | $ | (0.27 | ) |
|                                          |   |                                     |       |   |   |
| Common  shares and equivalents outstanding:   |   |                                     |       |   |   |
| Basic                                         |   | 5,596,174                                |       | 5,571,125 |   |
| Diluted                                       |   | 5,679,016                                |       | 5,571,125 |   |

 

See Notes to Consolidated FinancialStatements.

 

3

----

 

TODHUNTERINTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OFCASH FLOWS

(Unaudited)

 
|                                                                                      |   | **Three Months Ended  December 31,** |       |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                                      |   | **2003**                                  |       | **2002** |   |
|                                                                                      |   |                                      |       |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                                     |   |                                      |       |   |   |
| Net  income (loss)                                                                        |   | $                                         | 851,284    |   | $ | (1,492,456 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |   |                                      |       |   |   |
| Depreciation                                                                              |   | 1,366,443                                 |       | 1,273,222 |   |
| Amortization                                                                              |   | 10,050                                    |       | 10,050 |   |
| Gain  on sale of property and equipment                                                   |   | (181,772                                  | )          | (15,636 | ) |
| Equity  in income of equity investees                                                     |   | (214,120                                  | )          | (93,288 | ) |
| Deferred  income taxes                                                                    |   | 195,750                                   |       | (61,000 | ) |
| Changes  in assets and liabilities:                                                       |   |                                      |       |   |   |
| (Increase)  decrease in:                                                                  |   |                                      |       |   |   |
| Receivables                                                                               |   | 3,434,665                                 |       | 3,452,868 |   |
| Inventories                                                                               |   | 108,297                                   |       | 806,288 |   |
| Other  current assets                                                                     |   | (613,541                                  | )          | 101,372 |   |
| Increase  (decrease) in:                                                                  |   |                                      |       |   |   |
| Accounts  payable                                                                         |   | 2,880,022                                 |       | 616,052 |   |
| Accrued  expenses                                                                         |   | (1,374,784                                | )          | (1,130,835 | ) |
| Other  liabilities                                                                        |   | (325,914                                  | )          | 437,396 |   |
| Net  cash provided by operating activities                                                |   | 6,136,380                                 |       | 3,904,033 |   |
|                                                                                      |   |                                      |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                                     |   |                                      |       |   |   |
| Proceeds  from sale of property and equipment                                             |   | 413,500                                   |       | 19,280 |   |
| Principal  payments received on notes receivable                                          |   | 30,652                                    |       | 19,181 |   |
| Purchase  of property and equipment                                                       |   | (1,072,731                                | )          | (1,427,035 | ) |
| Redemption  of short-term investments                                                     |   | 404,843                                   |       | 98,000 |   |
| Investments  in subsidiaries                                                              |   | —                                    |       | (274,001 | ) |
| (Increase)  decrease in other assets                                                      |   | 75,000                                    |       | (46,815 | ) |
| Net  cash used in investing activities                                                    |   | $                                         | (148,736   | ) | $ | (1,611,390 | ) |
|                                                                                      |   |                                      |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                                     |   |                                      |       |   |   |
| Net  payments on line of credit                                                           |   | $                                         | (700,000   | ) | $ | (1,300,000 | ) |
| Issuance  of common stock                                                                 |   | 124,075                                   |       | 16,250 |   |
| Principal  payments on long-term borrowings                                               |   | (1,026,867                                | )          | (1,055,876 | ) |
| Net  cash used in financing activities                                                    |   | (1,602,792                                | )          | (2,339,626 | ) |
|                                                                                      |   |                                      |       |   |   |
| Net  increase (decrease) in cash and cash equivalents                                     |   | 4,384,852                                 |       | (46,983 | ) |
|                                                                                      |   |                                      |       |   |   |
| Cash  and cash equivalents:                                                               |   |                                      |       |   |   |
| Beginning                                                                                 |   | 14,918,605                                |       | 13,946,736 |   |
| Ending                                                                                    |   | $                                         | 19,303,457 |   | $ | 13,899,753 |   |
|                                                                                      |   |                                      |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                                        |   |                                      |       |   |   |
| Cash  payments for:                                                                       |   |                                      |       |   |   |
| Interest                                                                                  |   | $                                         | 687,320    |   | $ | 721,748 |   |
| Income  taxes                                                                             |   | $                                         | 9,814      |   | $ | 10,810 |   |

 

See Notes toConsolidated Financial Statements.

 

4

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TODHUNTER INTERNATIONAL, INC.

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited)

 

Note 1.          Basis of Presentation

 

Theconsolidated financial statements included herein have been prepared by theCompany, without audit, pursuant to the rules and regulations of the Securitiesand Exchange Commission.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rulesand regulations.  In the opinion ofmanagement, all adjustments, consisting only of normal recurring adjustments,except for the retirement of the Executive Officer (see Note 6), necessary fora fair presentation of the financial information for the periods indicated havebeen included.  For further informationregarding the Company’s accounting policies, refer to the consolidatedfinancial statements and related notes included in the Company’s Annual Reporton Form 10-K for the year ended September 30, 2003.

 

Aggregateamortization expenses were $10,050 for the three months ended December 31,2003 and 2002.

 

TheCompany applies Accounting Principles Board Opinion Number 25, *Accounting for Stock Issued to Employees*(“APB 25”) and related interpretations in accounting for options granted, whichrequires compensation expense for the Company’s options to be recognized onlyif the market price of the underlying stock exceeds the exercise price on thedate of grant.  Accordingly, the Companyhas not recognized compensation expense for its options granted after1994.  Statement of Financial AccountingStandards (“SFAS”) No. 123, *Accounting forStock-Based Compensation*, issued in October 1995, requires proforma disclosures for option grants made after December 31, 1994, whenaccounting for stock-based compensation plans in accordance with APB 25.

 

If theCompany elected to recognize compensation cost based on the fair value of theoptions granted at grant date as prescribed by SFAS No. 123, net income (loss) and earnings (loss) per common share would have beenreduced to the pro forma amounts show below:

 
|                                                                                                                                                |   | **Three Months Ended December 31,** |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                                                                                                |   | **2003**                                 |    | **2002** |   |
|                                                                                                                                                |   |                                     |    |   |   |
| Net  income (loss), as reported                                                                                                                     |   | $                                        | 851,284 |   | $ | (1,492,456 | ) |
| Deduct:  Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | 42,034                                   |    | 42,034 |   |
| Net  income (loss), pro forma                                                                                                                       |   | $                                        | 809,250 |   | $ | (1,534,490 | ) |
| Earnings  (loss) per common share, as reported                                                                                                      |   |                                     |    |   |   |
| Basic                                                                                                                                               |   | 0.15                                     |    | (0.27 | ) |
| Diluted                                                                                                                                             |   | 0.15                                     |    | (0.27 | ) |
| Earnings  (loss) per common share, pro forma                                                                                                        |   |                                     |    |   |   |
| Basic                                                                                                                                               |   | 0.14                                     |    | (0.28 | ) |
| Diluted                                                                                                                                             |   | 0.14                                     |    | (0.28 | ) |

 

5

----

 

Note 2.          Inventories

 

The major components ofinventories are:

 
|                        |   | **December 31, 2003** |       | **September 30, 2003** |   |
|-----------------------------|--------|----------------------------|------------|-----------------------------|--------|
|                        |   | **(Unaudited)**            |       |                        |   |
|                        |   |                       |       |                        |   |
| Finished  goods             |   | $                          | 16,749,660 |                        | $      | 15,588,106 |   |
| Work  in process            |   | 2,364,642                  |       | 3,380,434                   |   |
| Raw  materials and supplies |   | 9,442,296                  |       | 9,696,355                   |   |
|                        |   |                       |       |                        |   |
|                        |   | $                          | 28,556,598 |                        | $      | 28,664,895 |   |

 

Note 3.          Financing Arrangements

 

Long-term debt consists ofthe following as of December 31, 2003:

 
| Term loans under a credit  agreement (i) (ii), interest payable monthly based on either the  Eurodollar or prime rate at the Company’s option, plus an applicable margin  as defined in the agreement.  The  interest rate at December 31, 2003 was 4.92%.  Future minimum quarterly principal installments of $1,000,000 through  September 30, 2006 with any remaining balance due September 30,  2006. |   | $          | 31,000,000 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |       |       |
| Revolving loans under a credit agreement (i),  interest payable quarterly based on either the Eurodollar or prime rate at  the Company’s option, plus an applicable margin as defined in the  agreement.  The blended interest rate  at December 31, 2003 was 4.96%.   The revolving lines of credit terminate in October 2004.                                                                                |   | 18,300,000 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |       |       |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 288,750    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 49,588,750 |       |
| Less current maturities                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 22,300,000 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $          | 27,288,750 |   |

 

----

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

 

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

 

6

----

 

Note 4.          Earnings Per Common Share

 

Basic earnings per commonshare are calculated by dividing net income (loss) by the average common sharesoutstanding.  On a diluted basis, sharesoutstanding are adjusted to assume the exercise of stock options.

 
|                                                                                                  |   | **Three Months Ended  December 31,** |    |
|-------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                                                                  |   | **2003**                                  |    | **2002** |   |
|                                                                                                  |   |                                      |    |   |   |
| Net income (loss)                                                                                     |   | $                                         | 851,284 |   | $ | (1,492,456 | ) |
| Determination of shares:                                                                              |   |                                      |    |   |   |
| Weighted average number of common shares outstanding                                                  |   | 5,596,174                                 |    | 5,571,125 |   |
| Shares  issuable on exercise of stock options, net of shares assumed to be purchased  out of proceeds |   | 82,842                                    |    | — | * |
| Average  common shares outstanding for diluted earnings per share computation                         |   | 5,679,016                                 |    | 5,571,125 |   |
|                                                                                                  |   |                                      |    |   |   |
| Earnings (loss) per common share:                                                                     |   |                                      |    |   |   |
| Basic                                                                                                 |   | $                                         | 0.15    |   | $ | (0.27 | ) |
| Diluted                                                                                               |   | $                                         | 0.15    |   | $ | (0.27 | ) |

 

----

*                 The effect of stock options have notbeen included for the three months ended December 31, 2002, as theireffect would have been anti-dilutive.

 

The Company’s Virgin Islandssubsidiary, through the Economic Development Commission of the Government ofthe Virgin Islands of the United States, has received a 90% exemption fromincome taxes on operating income.  Thisexemption is effective through September 2020.  The per share effect of this exemption on earnings (on a dilutedbasis) was to increase earnings per share by $0.07 and $0.03 for the threemonths ended December 31, 2003 and 2002, respectively.

 

7

----

 

Note 5.          Segment and Geographical Information

 

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

 

Bulk Alcohol Products (rum, citrusbrandy, citrus spirits, cane spirits, fortified citrus wine, purchaseddistilled products and byproducts)

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

Bottling Operations (contractbottling services and proprietary and private label products)

Vinegar and Cooking Wine (bulkvinegar, bulk cooking wine, vinegar stock and proprietary and private labelcase goods)

 

Corporate Operations includes expenses related to theCompany’s executive offices that are not allocated to its reportablesegments.  These expenses includepayroll and related expenses, professional fees, consulting fees, rent for theCompany’s executive offices, insurance expense, directors’ fees and utilities.

 

Theaccounting policies of the reportable segments are the same as those referredto in Note 1 to the consolidated financial statements located in Item 8 of theCompany’s Annual Report on Form 10-K for the year ended September 30,2003.  The Company evaluates theperformance of its operating segments based on income before income taxes,equity in income or loss of equity investees, interest income and interestexpense. Material intersegment sales and transfers have been eliminated.

 

8

----

 

Summarizedfinancial information concerning the Company’s reportable segments is shown inthe following table.

 

Netsales, operating income (loss), depreciation and amortization and capitalexpenditures for the Company’s reportable segments for the three months endedDecember 31, 2003 and 2002, and identifiable assets as ofDecember 31, 2003 and 2002, were as follows:

 
|                              |   | **Three Months Ended  December 31,** |    |
|-----------------------------------|--------|-------------------------------------------|---------|
|                              |   | **2003**                                  |    | **2002** |   |
|                              |   | **(in thousands)**                        |    |
| **Net Sales**                     |   |                                      |    |   |   |
| Bulk Alcohol Products             |   | $                                         | 8,588   |   | $ | 8,695 |   |
| Premium Branded Spirits           |   | 5,842                                     |    | 4,204 |   |
| Bottling Operations               |   | 2,675                                     |    | 2,829 |   |
| Vinegar and Cooking Wine          |   | 5,337                                     |    | 5,236 |   |
|                              |   | $                                         | 22,442  |   | $ | 20,964 |   |
|                              |   |                                      |    |   |   |
| **Operating Income  (Loss)**      |   |                                      |    |   |   |
| Bulk Alcohol Products             |   | $                                         | 2,737   |   | $ | 2,097 |   |
| Premium Branded Spirits           |   | (696                                      | )       | (413 | ) |
| Bottling Operations               |   | (980                                      | )       | (1,282 | ) |
| Vinegar and Cooking Wine          |   | 866                                       |    | 1,172 |   |
| Corporate Operations              |   | (1,042                                    | )       | (1,499 | ) |
|                              |   | $                                         | 885     |   | $ | 75 |   |
| **Depreciation and Amortization** |   |                                      |    |   |   |
| Bulk Alcohol Products             |   | $                                         | 806     |   | $ | 809 |   |
| Premium Branded Spirits           |   | 25                                        |    | 25 |   |
| Bottling Operations               |   | 402                                       |    | 298 |   |
| Vinegar and Cooking Wine          |   | 118                                       |    | 122 |   |
| Corporate Operations              |   | 25                                        |    | 29 |   |
|                              |   | $                                         | 1,376   |   | $ | 1,283 |   |
|                              |   |                                      |    |   |   |
| **Capital  Expenditures**         |   |                                      |    |   |   |
| Bulk Alcohol Products             |   | $                                         | 612     |   | $ | 758 |   |
| Premium Branded Spirits           |   | 132                                       |    | 16 |   |
| Bottling Operations               |   | 313                                       |    | 631 |   |
| Vinegar and Cooking Wine          |   | 15                                        |    | 11 |   |
| Corporate Operations              |   | 1                                         |    | 11 |   |
|                              |   | $                                         | 1,073   |   | $ | 1,427 |   |
|                              |   |                                      |    |   |   |
| **Identifiable  Assets**          |   |                                      |    |   |   |
| Bulk Alcohol Products             |   | $                                         | 75,407  |   | $ | 70,711 |   |
| Premium Branded Spirits           |   | 8,804                                     |    | 6,535 |   |
| Bottling Operations               |   | 23,224                                    |    | 23,403 |   |
| Vinegar and Cooking Wine          |   | 19,423                                    |    | 19,841 |   |
| Corporate Operations              |   | 12,866                                    |    | 13,508 |   |
|                              |   | $                                         | 139,724 |   | $ | 133,998 |   |

 

9

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Sales and operating income (loss) for the three months endedDecember 31, 2003 and 2002 and identifiable assets as of December 31,2003 and 2002, classified by geographic area, were as follows:

 
| **Three Months  Ended**  |   | **United States** |   | **U. S. Virgin****Islands and  the Bahamas** |   | **Consolidated** |   |
|--------------------------|--------|-------------------|--------|----------------------------------------------|--------|------------------|--------|
|                     |   |              |   | **(in thousands)**                           |   |             |   |
|                     |   |              |   |                                         |   |             |   |
| December 31,  2003: |   |              |   |                                         |   |             |   |
| Net  sales               |   | $                 | 19,618 |                                         | $      | 2,824            |   | $ | 22,442 |   |
| Operating  income        |   | 110               |   | 775                                          |   | 885              |   |
| Identifiable  assets     |   | 93,094            |   | 46,630                                       |   | 139,724          |   |
|                     |   |              |   |                                         |   |             |   |
| December 31,  2002: |   |              |   |                                         |   |             |   |
| Net sales                |   | 18,660            |   | 2,304                                        |   | 20,964           |   |
| Operating income (loss)  |   | (363              | )      | 438                                          |   | 75               |   |
| Identifiable assets      |   | 91,132            |   | 42,866                                       |   | 133,998          |   |
|                          |        |                   |        |                                              |        |                  |        |  |  |  |

 

Includedin net sales for the United States are export sales, primarily to Europe,Canada and the Caribbean, totaling approximately $2,472,000 and $1,918,000 forthe three months ended December 31, 2003 and 2002, respectively.

 

10

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Note 6.  Retirement ofExecutive Officer

 

OnNovember 26, 2002, the Company announced the retirement and resignation ofA. Kenneth Pincourt, Jr., its Founder, Chairman and Chief ExecutiveOfficer.  The Company entered into aretirement agreement with Mr. Pincourt, setting forth the terms of hisretirement and resignation.  Theretirement agreement replaced Mr. Pincourt’s previous employment agreement.Under the retirement agreement, the Company elected to accelerate retirementbenefits under its deferred compensation program and to continue to paycompensation and provide related benefits through July 15, 2004, theremaining term of Mr. Pincourt’s previous employment contract.

 

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

 

Thefollowing table summarizes the charge made during the first quarter of fiscal2003 for Mr. Pincourt’s retirement:

 
| Deferred compensation                                             |   | $         | 1,040,987 |   |
|-------------------------------------------------------------------|--------|-----------|-----------|--------|
| Compensation  and related benefits                                |   | 1,012,158 |      |
| Total                                                             |   | 2,053,145 |      |
|                                                              |   |      |      |
| Less  deferred compensation accrued as of September 30, 2002 |   | (549,220  | )         |
| Charged to  expense                                               |   | $         | 1,503,925 |   |

 

Note 7.  Income Taxes

 

The Company incurred losses for income tax purposes from itsU.S. operations of $1.3 million and $2.0 million in 2003 and 2002,respectively.  The Company has recordedan income tax benefit in the Company’s consolidated statement of income and asa receivable included in other current assets on the Company’s consolidated balancesheet.

 

11

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

 

**Forward-Looking Statements**

 

Management’s Discussion and Analysiscontains “Forward-Looking Statements,” as defined in section 27a of theSecurities Act of 1933, as amended, and Section 21e of the SecuritiesExchange Act of 1934, as amended. Forward-Looking Statements are statements other than historicalinformation or statements of current condition and relate to future events orthe future financial performance of the Company.  Some Forward-Looking Statements may be identified by use of suchterms as “believes,” “anticipates,” “intends” or “expects.”  Such Forward-Looking Statements involveknown and unknown risks, uncertainties and other factors that may cause theactual results, performance or achievements of the Company to be materiallydifferent from any future results, performance or achievements expressed orimplied by such Forward-Looking Statements. The following is a list of factors, among others, that could causeactual results to differ materially from those contemplated by theForward-Looking Statements:  businessconditions in certain market segments and industries and the general economy;competitive factors, including increased competition and price pressures;availability of third-party component products at reasonable prices; increasedexcise taxes; foreign currency exposure; changes in product mix between andamong product lines; lower than expected customer orders and quarterly seasonalfluctuations of those orders; and product shipment interruptions.  The Company undertakes no obligation toupdate or revise any Forward-Looking Statements, whether as a result of newinformation, future events or otherwise.

 

**Introduction**

 

The following discussion and analysissummarizes the significant factors affecting (i) consolidated results ofoperations of the Company for the three months ended December 31, 2003compared to the three months ended December 31, 2002,  and (ii) financial liquidity and capitalresources.  This discussion and analysisshould be read in conjunction with the Company’s consolidated financialstatements and notes thereto included herein. Certain amounts presented in this Item 2 have been rounded to thenearest thousand or hundred thousand, as applicable, but the percentagescalculated are based on actual amounts without rounding.

 

The Company operates primarily in thebeverage alcohol industry in the United States.  The Company is a leading producer and supplier of rum, brandy,wine and spirits to other beverage alcohol manufacturers; produces, imports andmarkets premium branded spirits; bottles beverage alcohol and other beverageson a contract basis and under its own labels; and produces vinegar and cookingwine.  The Company reports its operatingresults in four segments:  Bulk AlcoholProducts (rum, citrus brandy, citrus spirits, cane spirits, fortified citruswine, 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); andVinegar and Cooking Wine (bulk vinegar, bulk cooking wine, vinegar stock andproprietary and private label case goods).

 

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

 

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

 

The Company’s customers oftenpurchase bulk alcohol products in significant quantities or place significantorders for contract bottling services, distilled spirits, vinegar and cookingwine.  Accordingly, the size and timingof purchase orders and product shipments can cause operating results tofluctuate significantly from quarter to quarter.  Additionally, some Company products generate higher profitmargins than others, and changes in the Company’s product mix can cause grossmargins to fluctuate.  Certain aspectsof the Company’s business are seasonal, with increased demand for the Company’scontract bottling services from April to October and increasedproduction of the Company’s bulk alcohol products from November to June,corresponding to

 

12

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

 

Net sales represent the Company’sgross sales less excise taxes. Excise taxes are generally payable on sales ofcertain of the Company’s bulk alcohol products and on all alcohol productsbottled by the Company.  However, thereare no excise taxes paid on sales made to customers that have tax permits.  Accordingly, excise taxes may varysignificantly from period to period depending upon the Company’s product andcustomer mix.

 

**Results ofOperations**

 

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

 
|                                          |   | **Three Months Ended****December 31****,** |   |
|-----------------------------------------------|--------|-------------------------------------------------|--------|
|                                          |   | **2003**                                        |   | **2002** |   |
| Net sales                                     |   | 100.0                                           | %      | 100.0 | % |
| Cost  of goods sold                           |   | 68.2                                            |   | 73.4 |   |
| Gross  margin                                 |   | 31.8                                            |   | 26.6 |   |
| Selling,  general and administrative expenses |   | 27.8                                            |   | 26.2 |   |
| Operating  income                             |   | 4.0                                             |   | 0.4 |   |
| Interest  expense                             |   | (3.1                                            | )      | (3.5 | ) |
| Other  income (expense), net                  |   | 2.7                                             |   | (5.6 | ) |
| Income  (loss) before income taxes            |   | 3.6                                             |   | (8.7 | ) |
| Income  tax benefit                           |   | 0.2                                             |   | 1.6 |   |
| Net  income (loss)                            |   | 3.8                                             | %      | (7.1% | ) |

 

The following table providesinformation on net sales of certain Company products.

 
|                      |   | **Three Months Ended  December 31,** |   |     |   |
|---------------------------|--------|-------------------------------------------|--------|----------|--------|
|                      |   | **2003**                                  |   | **2002** |   | **% Change** |   |
|                      |   | **(in thousands)**                        |   |     |   |
|                      |   |                                      |   |     |   |   |   |
| Bulk Alcohol Products     |   | $                                         | 8,588  |     | $      | 8,695 |   | (1.2 | ) |
| Premium  Branded Spirits  |   | 5,842                                     |   | 4,204    |   | 38.9 |   |
| Bottling  Operations      |   | 2,675                                     |   | 2,829    |   | (5.4 | ) |
| Vinegar  and Cooking Wine |   | 5,337                                     |   | 5,236    |   | 1.9 |   |
|                      |   | $                                         | 22,442 |     | $      | 20,964 |   | 7.0 |   |

 

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The following table provides unitsales volume data for certain Company products.

 
|                                 |   | **Three Months Ended  December 31,** |   |     |   |
|--------------------------------------|--------|-------------------------------------------|--------|----------|--------|
|                                 |   | **2003**                                  |   | **2002** |   | **% Change** |   |
|                                 |   | **(in thousands)**                        |   |     |   |
|                                 |   |                                      |   |     |   |   |   |
| Bulk alcohol products:               |   |                                      |   |     |   |   |   |
| Distilled products, in proof gallons |   |                                      |   |     |   |   |   |
| Citrus Brandy                        |   | 417                                       |   | 457      |   | (8.6 | ) |
| Citrus Spirits                       |   | —                                    |   | 116      |   | (100.0 | ) |
| Rum                                  |   | 1,116                                     |   | 948      |   | 17.7 |   |
| Cane Spirits                         |   | 90                                        |   | 125      |   | (28.3 | ) |
| Fortified wine, in gallons           |   | 2,754                                     |   | 2,543    |   | 8.3 |   |
| Premium branded spirits, in cases    |   | 201                                       |   | 109      |   | 84.5 |   |
| Bottling operations, in cases        |   | 660                                       |   | 543      |   | 21.5 |   |
| Vinegar                              |   |                                      |   |     |   |   |   |
| Bulk, in 100 grain gallons           |   | 1,364                                     |   | 1,239    |   | 10.1 |   |
| Cases                                |   | 117                                       |   | 154      |   | (24.3 | ) |
| Drums, in 100 grain gallons          |   | 246                                       |   | 385      |   | (36.3 | ) |
| Cooking Wine                         |   |                                      |   |     |   |   |   |
| Bulk, in gallons                     |   | 899                                       |   | 1,153    |   | (22.1 | ) |
| Cases                                |   | 215                                       |   | 184      |   | 17.1 |   |

 

**Three months endedDecember 31, 2003 compared to three months ended December 31, 2002**. Unless otherwise noted, references to 2003 represent the three-monthperiod ended December 31, 2003 and references to 2002 represent thethree-month period ended December 31, 2002.

 

*Net Sales.*Net sales were $22.4 million in2003, an increase of 7.0% from net sales of $21.0 million in 2002.

 

Net sales ofbulk alcohol products were $8.6 million in 2003, a decrease of 1.2% from netsales of $8.7 million in 2002.  Thedecrease resulted primarily from decreased shipments of citrus brandy, citrusspirits and cane spirits offset by increased shipments of rum and fortifiedcitrus wine.  The decrease in citrusbrandy, citrus spirits and cane spirits was due in part to the timing ofcustomer orders.  In addition, in 2002,the Company had sales of citrus and cane spirits to new customers that haddifficulty sourcing bulk alcohol from their regular suppliers.  These sales did not reoccur in 2003.

 

Netsales of premium branded spirits were $5.8 million in 2003, an increase of38.9% from net sales of $4.2 million in 2002. During the third quarter of fiscal 2002, the Company had introduced anew line of Cruzan products in the ready-to-drink category and soldapproximately 134,000 cases of this product through September 30,2002.  During fiscal 2003, due toincreased competition and management’s expectation of limited growth potentialwithin the ready-to-drink product category, the Company made a strategicdecision to exit this category and concentrate on the growing segment of itspremium branded spirits business, Cruzan Estate Rums and Cruzan FlavoredRums.  In connection with management’sdecision to exit the ready-to-drink product category, during the fourth quarterof fiscal 2003, the Company entered into an agreement with a corporate tradingcompany to receive trade credits upon installment deliveries of the Company’sremaining inventory of ready-to-drink products.  In 2003, net sales of premium branded spirits included $0.6million of Cruzan ready-to-drink products sold to this trading company.  These sales represented the final sales ofinventories of such products.  ExcludingCruzan ready-to-drink product sales, net sales of premium branded spirits were$5.2 million in 2003, an increase of 23.7% from net sales of $4.2 million in2002, as the premium branded spirits segment continued its double digit growth.

 

14

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Sales ofthe Company’s Cruzan Estate Rums and Cruzan Flavored Rums increased 1.8% in2003 compared to 2002.  This growth ratefor Cruzan Estate Rums and Cruzan Flavored Rums is a decline from previousperiods.  Sales of Cruzan Estate Rumsand Cruzan Flavored Rums increased from $2.2 million in fiscal 1996 to $17.0million in fiscal 2003.  During thistime, the Cruzan brand has been recognized as one of the fastest growing brandsin the spirits industry by certain beverage industry publications and theCruzan Rums have won numerous tasting awards from several prestigious beverageindustry organizations.  Beginning infiscal year 2003, several of the Company’s competitors began to introduce theirown lines of flavored rum products into the marketplace, which has negativelyimpacted the level of sales growth of Cruzan Flavored Rums. The Company is alsoaware of other competitors that plan to introduce their own lines of flavoredrum products into the marketplace in the near future. Some of the Company’scompetitors in the rum and flavored rum categories have significantly greaterfinancial and other resources than the Company, which could adversely effectthe Company’s sales growth of Cruzan Rums and Cruzan Flavored Rums. As aresponse to such increased competition, and in order to provide further impetusto the growth of Cruzan Flavored Rums, management plans to significantlyincrease its marketing budget during fiscal 2004.  Management believes that by increasing its marketing budget andmaintaining its focus on the Cruzan brand, sales of Cruzan Estate Rums andCruzan Flavored Rums will once again return to double digit growth for fiscal2004.

 

Netsales of the Company’s bottling operations were $2.7 million in 2003, adecrease of 5.4% from net sales of $2.8 million in 2002.  While the unit volume of the Company’sbottling operations increased 21.5% in 2003 as a result of business with newcontract bottling customers, average unit prices declined as a result of achange in customer mix.  During 2003,the Company lost a large private label bottling customer.  Net sales to this customer wereapproximately $1.6 million and 124,277 cases for the year endedSeptember 30, 2003, or approximately 11.0% of bottling operations netsales and 3.3% of bottling operations volume. Net sales to this customer during 2002 were approximately $0.7 millionand 57,666 cases.  Also during 2003,excise taxes decreased $2.2 million compared to 2002.  The decrease in sales to this private label bottling customerduring 2003 accounted for approximately $1.6 million of the $2.2 milliondecrease in excise taxes. Management believes that the loss of this low marginbusiness will not have a material effect on the Company’s consolidated resultsof operations or financial position. During the third quarter of fiscal 2003, management began to implement aplan to consolidate the Company’s bottling operations to increase efficienciesand reduce overhead in the future. Management expects to realize cost savings from this plan beginning inthe third quarter of fiscal 2004.

 

Netsales of vinegar and cooking wine were $5.3 million in 2003, an increase of1.9% from net sales of $5.2 million in 2002.

 

*Gross Profit.* Gross profit was $7.1 million in2003, an increase of 27.7% from gross profit of $5.6 million in 2002.  During 2003, bulk alcohol gross profitincreased as a result of increased shipments of rum and fortified wine; premiumbranded spirits gross profit increased with sales; bottling operations grossprofit increased due to new business with contract bottling customers; andvinegar and cooking wine gross profit decreased due to higher materialcost.  Gross margin increased to 31.8%in 2003 from 26.6% in 2002 as a result of changes in product mix.

 

*Selling, General and AdministrativeExpenses. *Selling, general and administrativeexpenses were $6.2 million in 2003, an increase of 13.4% from $5.5 million in2002.  The increase was primarilyattributable to increased administrative, marketing and advertising expenses inthe Company’s premium branded spirits business as the Company continues toplace emphasis on this growing business segment.

 

15

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

 
|                      |   | **Three Months Ended  December 31,** |   |     |   |
|---------------------------|--------|-------------------------------------------|--------|----------|--------|
|                      |   | **2003**                                  |   | **2002** |   | **%  Change** |   |
|                      |   | **(In thousands)**                        |   |     |   |
| Bulk  Alcohol Products    |   | $                                         | 2,737  |     | $      | 2,097 |   | 30.5 |   |
| Premium  Branded Spirits  |   | (696                                      | )      | (413     | )      | — |   |
| Bottling  Operations      |   | (980                                      | )      | (1,282   | )      | — |   |
| Vinegar  and Cooking Wine |   | 866                                       |   | 1,172    |   | (26.1 | ) |
| Corporate  Operations     |   | (1,042                                    | )      | (1,499   | )      | — |   |
|                      |   | $                                         | 885    |     | $      | 75 |   | 1,076.4 |   |

 

Asa result of the above factors, operating income was $0.9 million in 2003, anincrease of 1,076.4% from operating income of $0.1 million in 2002.

 

The Company’s premium branded spiritssegment experienced operating losses of $0.7 million in 2003 and $0.4 millionin 2002.  The operating losses reflectedthe Company’s continuing efforts to increase market share by reinvestingsegment gross profits in selling and marketing expenses.

 

The Company’s bottling operationssegment reported an operating loss of $1.0 million in 2003 compared to anoperating loss of $1.3 million in 2002. During the third quarter of fiscal2003, management began to implement a plan to consolidate the Company’sbottling operations to increase efficiencies and reduce overhead.  Management expects this business to returnto profitability during the fourth quarter of fiscal 2004.

 

*Interest Expense.*Interest expense was $0.7 million in2003 and 2002.  The Company’s borrowingrates were higher in 2003 compared to 2002. However, higher rates were offset by lower average borrowings during2003, resulting in slightly lower interest expense.

 

*Other Expense*. On November 26, 2002, the Company announced the retirement andresignation of A. Kenneth Pincourt, Jr., its Founder, Chairman and ChiefExecutive Officer.  The Company hasentered into a retirement agreement with Mr. Pincourt, setting forth the termsof his retirement and resignation.  Theretirement agreement replaces Mr. Pincourt’s previous employment agreement.Under the retirement agreement, the Company elected to accelerate retirementbenefits under its deferred compensation program and to continue to paycompensation and provide related benefits through July 15, 2004, theremaining term of Mr. Pincourt’s previous employment contract.

 

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

 

16

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

 
| Deferred compensation                                             |   | $         | 1,040,987 |   |
|-------------------------------------------------------------------|--------|-----------|-----------|--------|
| Compensation  and related benefits                                |   | 1,012,158 |      |
| Total                                                             |   | 2,053,145 |      |
|                                                              |   |      |      |
| Less  deferred compensation accrued as of September 30, 2002 |   | (549,220  | )         |
| Charged to  expense                                               |   | $         | 1,503,925 |   |

 

*Income Tax Expense.*During 2003 and 2002, the Companyincurred operating losses from its U.S. operations and recorded an income taxbenefit of $0.2 million and $0.3 million, respectively.  The Company’s Virgin Islands subsidiary hasa 90% exemption from U.S. Virgin Islands income taxes.  The exemption is effective throughSeptember 2020.  In addition, theCompany benefited from the extraterritorial income exclusion in 2003 and 2002.

 

**Financial Liquidity and Capital Resources**

 

**General**

 

The Company’s principal use of cashin its operating activities is for purchasing raw materials to be used in itsmanufacturing operations and purchasing imported products for its premiumbranded spirits business.  The Company’ssource of liquidity has historically been cash flow from operations and fromborrowings on its line of credit.  Someof the Company’s manufacturing operations are seasonal and the Company’sborrowings on its line of credit vary during the year.  For example, the Company uses citrus molassesas its primary raw material in the production of citrus brandy and spirits atits two Florida distilleries.  TheCompany buys citrus molasses, a by-product of citrus juice production, fromlocal manufacturers of citrus juice and concentrate during the citrus harvest,which generally runs from November to June.  The Company begins purchasing citrus molasses in November and,due to the short life of the citrus molasses it purchases, manufactures andbuilds inventory of citrus brandy and spirits through June.  Another seasonal business of the Company isits contract bottling services.  Demandfor contract bottling services is highest during the months fromApril through October.  Managementbelieves that cash provided by its operating and financing activities willprovide adequate resources to satisfy its working capital, liquidity andanticipated capital expenditure requirements for both its short-term andlong-term capital needs.

 

**Operating Activities**

 

Net cash provided by operatingactivities in 2003 was $6.1 million, which resulted from $2.0 million in netincome adjusted for noncash items, and $4.1 million representing the netdecrease in operating assets and liabilities.

 

**Investing andFinancing Activities**

 

Net cash used in investing activitiesin 2003 was $0.1 million, which resulted primarily from $1.1 million of capitalexpenditures, offset by proceeds from the sale of property and equipment,collections on notes receivable and redemptions of short-term investments.

 

Net cash used in financing activitiesin 2003 was $1.6 million, which resulted primarily from payments of $1.0million of long-term debt and $0.7 million in payments on the Company’s line ofcredit.

 

The Company’s revolving creditfacility, which expires in October 2004, provides for maximum borrowingsof $30 million.  Borrowings under thisfacility were $18.3 million at December 31, 2003.  The Company intends to extend or refinancethis facility prior to its scheduled expiration (see Note 3 to the consolidatedfinancial statements).

 

17

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The Company’s bank debt was $49.3million as of December 31, 2003, and its ratio of total debt to equity was0.95 to 1.

 

The Company has not paid dividends tostockholders since becoming a public company in 1992.  The Company intends to continue to retain earnings for use in itsbusiness and, therefore, does not anticipate declaring or paying cash dividendsin this fiscal year.  Also, the paymentof cash dividends is restricted by the Company’s credit agreement.  In addition to quarterly term loan principalpayments required by the credit agreement, the Company may be required to makeadditional principal payments based on the results of the Company’s domesticoperating profits, as defined in the credit agreement.

 

The Company’s share of theundistributed earnings of the Bahamian and Virgin Islands subsidiaries wasapproximately $7.3 million and $31.6 million, respectively, as ofSeptember 30, 2003.  See Note 10 tothe Company’s consolidated financial statements included in the Company’sAnnual Report on Form 10-K for the year ended September 30, 2003 foradditional information on income taxes related to these subsidiaries.

 

Based on current plans and businessconditions, management expects that its cash, cash equivalents, and short-terminvestments, together with any amounts generated from operations and availableborrowings, will be sufficient to meet the Company’s cash requirements for atleast the next 12 months.

 

**Effects of Inflation and Changing Prices**

 

The Company’s results of operationsand financial condition have not been significantly affected by inflation andchanging prices.  The Company has beenable, subject to normal competitive conditions, to pass along rising coststhrough increased selling prices.

 

**Critical Accounting Policies**

 

The Company’s significant accountingpolicies are more fully described in Note 1 to the Company’s consolidatedfinancial statements located in Item 8 of its Annual Report on Form 10-K forthe year ended September 30, 2003. The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues, and expenses, and therelated disclosures of contingent assets and liabilities. Actual results coulddiffer from those estimates under different assumptions or conditions. TheCompany believes that the following critical accounting policy is subject toestimates and judgments used in the preparation of its consolidated financialstatements:

 

The Company has goodwill andintangible assets associated with business acquisitions. The Company reviewsthese assets for impairment annually and whenever an event occurs orcircumstances change that would more likely than not reduce the fair value ofthese 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 carryingvalue over the fair value of the asset.

 

**Off-Balance Sheet Arrangements**

 

The Company has no off-balance sheetarrangements that have or are reasonably likely to have a current or futureeffect on the Company’s financial condition, changes in financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources that are material to investors.  See Recent Accounting Pronouncements, below.

 

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**Recent Accounting Pronouncements**

 

As of March 31, 2003, theCompany adopted Financial Accounting Standards Board Interpretation No. 45(“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others.  FIN 45 requires a guarantor to recognize atthe inception of a guarantee, a liability for the fair value or market value,of the obligation undertaken in issuing the guarantee and must disclose the informationin its interim and annual financial statements.  The provisions related to recognizing a liability at inceptionfor the fair value of the guarantor’s obligation does not apply to guaranteesissued between entities under common control and therefore is not applicable tothe Company.  Management believes thatthis standard does not have a material effect on the Company’s consolidatedfinancial position or results of operations.

 

In January 2003, the FinancialAccounting Standards Board issued FIN 46, Consolidation of Variable InterestEntities.  FIN 46 clarifies theapplication of Accounting Research Bulletin 51, Consolidated FinancialStatements, for certain entities that do not have sufficient equity at risk forthe entity to finance its activities without additional subordinated financialsupport from other parties or in which equity investors do not have thecharacteristics of a controlling financial interest (“variable interestentities”).  Variable interest entitieswithin the scope of FIN 46 will be required to be consolidated by their primarybeneficiary.  The primary beneficiary ofa variable interest entity is determined to be the party that absorbs amajority of the entity’s expected losses, receives a majority of its expectedreturns, or both.  FIN 46 appliedimmediately to variable interest entities created after January 31, 2003,and to variable interest entities in which the Company obtains an interestafter that date.  FIN 46 was effectiveJuly 1, 2003 to variable interest entities in which the Company holds avariable interest that it acquired before February 1, 2003.  Management believes this standard does nothave a material effect on the Company’s consolidated financial position orresults of operations.

 

**Item 3.****          ****Quantitative and QualitativeDisclosures About Market Risk**

 

The information required under thisItem 3 is incorporated herein by reference to the Company’s Annual Report onForm 10-K for the year ended September 30, 2003.

 

**Item 4.****          ****Controls and Procedures**

 

**Evaluation of Disclosure Controls andProcedures**

 

The Company maintains disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”) that are designed toensure that information required to be disclosed in the Company’s reports underthe Exchange Act are recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that the informationis accumulated and communicated to the Company’s management, including theCompany’s Chief Executive Officer and Chief Financial Officer, as appropriate,to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognized that any disclosure controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired objectives, and management wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible disclosure controls and procedures. The Company’s management, with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer, has evaluated the effectivenessof the design and operation of the Company’s disclosure controls and proceduresas of the end of the period covered by this report.  Based upon that evaluation and subject to the foregoing, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe design and operation of the Company’s disclosure controls and proceduresprovided reasonable assurance that the disclosure controls and procedures areeffective to accomplish their objectives.

 

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**Changes in Internal Control Over FinancialReporting**

 

In addition, management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, reviewed theCompany’s internal control over financial reporting (as defined in Rule13a-15(f) under the Exchange Act), and there have been no significant changesin the Company’s internal control or in other factors that could significantlyaffect the Company’s internal control over financial reporting during theperiod covered by this report.

 

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**PART II.  OTHERINFORMATION**

 

**Item 5.  Other Information**

 
| (a) | Our  Board of Directors has adopted a code of ethics that applies to our Chief  Executive Officer and our Chief Financial Officer, Controller and persons  performing similar functions, and is included as Exhibit 14.1 to this Form  10-Q. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Item 6.  Exhibits andReports on Form 8-K**

 
| 3.1      |   | Amended and Restated Certificate of Incorporation of  Todhunter International, Inc.  (1)                                                                                                                                      |
|----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2      |   | Amended  and Restated By-Laws of Todhunter International, Inc.  (5)                                                                                                                                                           |
| 4.1      |   | Form  of Todhunter International, Inc. Common Stock Certificate (1)                                                                                                                                                                |
| 10.6     |   | Todhunter International, Inc. 1992 Stock Option Plan, as  amended  (3)                                                                                                                                                        |
| 10.8     |   | Lease, dated March 24, 1988, as amended, between  Todhunter International, Inc. and Esperanté Limited Partnership  (1)                                                                                              |
| 10.8(a)  |   | Amendment to Lease, dated January 1, 1997, between  Todhunter International, Inc. and Florida Acquisition Fund Esperanté, Ltd.  (4)                                                                                      |
| 10.22    |   | Amended  and Restated Credit Agreement dated as of October 19, 2001, by and among  Todhunter International, Inc., and each of the Financial Institutions Initially  a Signatory thereto, and SouthTrust Bank (6)              |
| 10.22(a) |   | Waiver  of Defaults Under Credit Agreement, dated February 18, 2003, by and  among Todhunter International, Inc., SouthTrust Bank, acting as lender and  Agent, Wachovia Bank, N.A., National City Bank and SunTrust Bank (8) |
| 10.22(b) |   | Modification  of Credit Agreement, dated May 14, 2003, by and among Todhunter  International, Inc., SouthTrust Bank, acting as lender and Agent, Wachovia  Bank, N.A., National City Bank and SunTrust Bank (9)                    |
| 10.23    |   | Agreement  and General Release of All Claims between Todhunter International, Inc. and  A. Kenneth Pincourt, Jr., dated as of November 26, 2002 (7) +                                                                         |
| 10.24    |   | Amended  and Restated Executive Employment Agreement dated as of June 17, 2003,  between Thomas A. Valdes and Todhunter International, Inc. (10) +                                                                            |
| 10.25    |   | Amended  and Restated Executive Employment Agreement dated as of June 17, 2003,  between Jay S. Maltby and Todhunter International, Inc. (10) +                                                                               |
| 10.26    |   | Amended  and Restated Executive Employment Agreement dated as of June 17, 2003,  between D. Chris Mitchell and Todhunter International, Inc. (10) +                                                                           |
| 10.27    |   | Executive  Employment Agreement dated as of June 17, 2003, between Ousik Yu and  Todhunter International, Inc. (10) +                                                                                                         |
| 10.28    |   | Executive  Employment Agreement dated as of June 17, 2003, between Ezra Shashoua  and Todhunter International, Inc. (10) +                                                                                                    |
| 10.29    |   | Form  of Indemnification Agreement dated as of June 17, 2003, signed by all  directors and executive officers of Todhunter International, Inc. (10) +                                                                         |
| 11.1     |   | Statement  of Computation of Per Share Earnings (11)                                                                                                                                                                               |
| 14.1     |   | Code  of Ethics for the Chief Executive Officer and the Senior Financial Officers  (12)                                                                                                                                            |
| 20.1     |   | Earnings  press release for the three-month period ended December 31, 2003 (12)                                                                                                                                               |
| 21.1     |   | Subsidiaries  of Todhunter International, Inc. (2)                                                                                                                                                                                 |
| 31.1     |   | Certification of Jay S. Maltby, Chairman, Chief Executive  Officer and President, pursuant to Rule 13a-14(a) of the Securities Exchange  Act of 1934 (12)                                                                          |
| 31.2     |   | Certification of Ezra Shashoua, Executive Vice President  and Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934 (12)                                                                     |
| 32.1     |   | Certification of Jay S. Maltby, Chairman, Chief Executive  Officer and President, pursuant to 18 U.S.C. Section 1350 (12)                                                                                                     |
| 32.2     |   | Certification of Ezra Shashoua, Executive Vice President  and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 (12)                                                                                                |

 

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+                                         Indicatesmanagement contracts or compensatory plans or arrangements required to be filedas an exhibit.

 

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| (1)     |                                                                        | Incorporated herein by  reference to the Company’s Registration Statement on Form S-1 (File  No. 33-50848).                                                                                                           |
|---------|-----------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                        |                                                                                                                                                                                                                                 |
| (2)     |                                                                        | Incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the year ended  September 30, 1995.                                                                                                 |
|    |                                                                        |                                                                                                                                                                                                                                 |
| (3)     |                                                                        | Incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the year ended  September 30, 1997.                                                                                                      |
|    |                                                                        |                                                                                                                                                                                                                                 |
| (4)     |                                                                        | Incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the year ended  September 30, 1998.                                                                                                      |
|    |                                                                        |                                                                                                                                                                                                                                 |
| (5)     |                                                                        | Incorporated herein by  reference to the Company’s Current Report on Form 8-K for November 17,  1999.                                                                                                                      |
|    |                                                                        |                                                                                                                                                                                                                                 |
| (6)     |                                                                        | Incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the year ended  September 30, 1999.                                                                                                      |
|    |                                                                        |                                                                                                                                                                                                                                 |
| (7)     |                                                                        | Incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the year ended  September 30, 2001.                                                                                                      |
|    |                                                                        |                                                                                                                                                                                                                                 |
| (8)     |                                                                        | Incorporated herein by  reference to the Company’s Current Report on Form 8-K for November 26,  2002.                                                                                                                      |
|    |                                                                        |                                                                                                                                                                                                                                 |
| (9)     |                                                                        | Incorporated herein by  reference to the Company’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 2003.                                                                                                     |
|    |                                                                        |                                                                                                                                                                                                                                 |
| (10)    |                                                                        | Incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the year ended  September 30, 2003.                                                                                                      |
|    |                                                                        |                                                                                                                                                                                                                                 |
| (11)    |                                                                        | Filed herewith and  incorporated herein by reference to Note 4 of notes to consolidated financial  statements, included in Item 1 of the Company’s Quarterly Report on Form 10-Q  for the quarter ended December 31, 2003. |
|    |                                                                        |                                                                                                                                                                                                                                 |
| (12)    |                                                                        | Filed herewith.                                                                                                                                                                                                                      |
|    |                                                                        |                                                                                                                                                                                                                                 |
| **(b)** | **Reports on Form 8-K**                                                     |
|    |
|    | No  reports on Form 8-K were filed during the first quarter of fiscal 2004. |
|         |                                                                             |                                                                                                                                                                                                                                      |  |

 

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**Signatures**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| Date:  February 12, 2004 | /s/  Jay S. Maltby                                    |   |
|-------------------------------|-------------------------------------------------------|--------|
|                          | Jay S.  Maltby                                        |
|                          | Chairman,  Chief Executive Officer and President      |
|                          |                                                  |
|                          |                                                  |
| Date:  February 12, 2004 | /s/  Ezra Shashoua                                    |   |
|                          | Ezra  Shashoua                                        |
|                          | Executive  Vice President and Chief Financial Officer |

 

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