**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

For the quarterly periodended **December 31, 2004**

 

**Commission File No. 1-13453**

 

**TODHUNTERINTERNATIONAL, INC.**

(Exactname 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 telephonenumber, 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 the preceding12 months, and (2) has been subject to such filing requirements for the past 90days.

 

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 10, 2005 was 6,338,519.

 

 

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TODHUNTERINTERNATIONAL, INC.

 

INDEX

 
| PART I  |   | FINANCIAL INFORMATION |                                                                                               |
|---------|--------|-----------------------|----------------------------------------------------------------------------------------------------|
|    |   |                  |                                                                                               |
|    |   | Item 1                | Financial Statements                                                                               |   |
|    |   |                  |                                                                                               |   |
|    |   |                  | Consolidated Balance  Sheets -  December 31, 2004 and September 30, 2004                           |   |
|    |   |                  |                                                                                               |   |
|    |   |                  | Consolidated  Statements of Income -  Three Months Ended December 31, 2004 and 2003, unaudited     |   |
|    |   |                  |                                                                                               |   |
|    |   |                  | Consolidated  Statements of Cash Flows -  Three Months Ended December 31, 2004 and 2003, unaudited |   |
|    |   |                  |                                                                                               |   |
|    |   |                  | Notes to  Consolidated Financial Statements                                                        |   |
|    |   |                  |                                                                                               |   |
|    |   | Item  2               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations        |   |
|    |   |                  |                                                                                               |   |
|    |   | Item  3               | Quantitative  and Qualitative Disclosures About Market Risk                                        |   |
|    |   |                  |                                                                                               |   |
|    |   | Item 4                | Controls and Procedures                                                                            |   |
|    |   |                  |                                                                                               |   |
| PART II |   | OTHER INFORMATION     |                                                                                               |
|    |   |                  |                                                                                               |
|    |   | Item 1                | Legal Proceedings *                                                                                |   |
|    |   |                  |                                                                                               |   |
|    |   | Item 2                | Changes in Securities and  Use of Proceeds *                                                       |   |
|    |   |                  |                                                                                               |   |
|    |   | Item 3                | Defaults Upon Senior  Securities *                                                                 |   |
|    |   |                  |                                                                                               |   |
|    |   | Item 4                | Submission of Matters to a  Vote of Security Holders *                                             |   |
|    |   |                  |                                                                                               |   |
|    |   | Item 5                | Other Information *                                                                                |   |
|    |   |                  |                                                                                               |   |
|    |   | Item 6                | Exhibits and  Reports on Form 8-K                                                                  |   |
|    |   |                  |                                                                                               |   |
|    |   | Signatures            |                                                                                               |

 

----

* Item is omitted becauseanswer is negative or item is inapplicable.

 

----

 

**PART I -FINANCIAL INFORMATION**

 

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

 

TODHUNTER INTERNATIONAL, INC.CONSOLIDATED BALANCE SHEETS

 
| ** **                                                 | ** ** | **December 31,  2004** | ** **  | **September 30,  2004** | ** ** |
|------------------------------------------------------------|------------|------------------------|-------------|-------------------------|------------|
| ** **                                                 | ** ** | **(Unaudited)**        | ** **  | *****                   | ** ** |
| ASSETS                                                     |       |                   |        |                    |       |
|                                                       |       |                   |        |                    |       |
| CURRENT ASSETS                                             |       |                   |        |                    |       |
| Cash and cash equivalents                                  |       | $                      | 3,157,955   |                    | $          | 3,617,582 |   |
| Short-term investments                                     |       | 217,293                |        | 216,246                 |       |
| Trade receivables                                          |       | 15,715,216             |        | 17,970,125              |       |
| Other receivables                                          |       | 2,866,468              |        | 2,448,611               |       |
| Inventories                                                |       | 30,428,606             |        | 29,162,496              |       |
| Notes receivable, current maturities                       |       | 3,548,326              |        | 3,559,409               |       |
| Deferred income taxes                                      |       | 1,127,250              |        | 981,000                 |       |
| Other current assets                                       |       | 3,098,368              |        | 3,195,781               |       |
| Total current assets                                       |       | 60,159,732             |        | 61,151,250              |       |
|                                                       |       |                   |        |                    |       |
| LONG-TERM INVESTMENTS AND NOTES RECEIVABLE                 |       |                   |        |                    |       |
| Investments in and advances to equity  investees           |       | 2,514,576              |        | 2,232,285               |       |
| Notes receivable from affiliates, less  current maturities |       | 375,000                |        | 375,000                 |       |
| Notes receivable, less current maturities                  |       | 386,064                |        | 411,060                 |       |
|                                                       |       | 3,275,640              |        | 3,018,345               |       |
|                                                       |       |                   |        |                    |       |
| PROPERTY AND EQUIPMENT                                     |       | 97,283,125             |        | 96,666,655              |       |
| Less accumulated depreciation                              |       | 57,912,852             |        | 56,716,805              |       |
|                                                       |       | 39,370,273             |        | 39,949,850              |       |
|                                                       |       |                   |        |                    |       |
| GOODWILL                                                   |       | 20,524,404             |        | 20,524,404              |       |
| TRADEMARKS                                                 |       | 883,597                |        | 893,648                 |       |
| DEFERRED LOAN COSTS                                        |       | 659,449                |        | 634,910                 |       |
| DEFERRED INCOME TAXES                                      |       | 28,000                 |        | —                  |       |
| OTHER ASSETS                                               |       | 1,646,681              |        | 1,660,219               |       |
|                                                       |       | $                      | 126,547,776 |                    | $          | 127,832,626 |   |

 

----

*Fromaudited financial statements.

See Notes to ConsolidatedFinancial Statements.

 

----

 
| ** **                                             | ** ** | **December 31,  2004** | ** **  | **September 30,  2004** | ** ** |
|--------------------------------------------------------|------------|------------------------|-------------|-------------------------|------------|
| ** **                                             | ** ** | **(Unaudited)**        | ** **  | *****                   | ** ** |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY             |       |                   |        |                    |       |
|                                                   |       |                   |        |                    |       |
| CURRENT LIABILITIES                                    |       |                   |        |                    |       |
| Current maturities of long-term debt                   |       | $                      | 4,000,000   |                    | $          | 4,000,000 |   |
| Accounts payable                                       |       | 10,331,908             |        | 11,868,947              |       |
| Accrued expenses                                       |       | 2,252,294              |        | 4,726,253               |       |
| Total current liabilities                              |       | 16,584,202             |        | 20,595,200              |       |
|                                                   |       |                   |        |                    |       |
| LONG-TERM DEBT, less current maturities                |       | 28,726,619             |        | 25,674,240              |       |
|                                                   |       |                   |        |                    |       |
| DEFERRED INCOME TAXES                                  |       | —                 |        | 648,000                 |       |
|                                                   |       |                   |        |                    |       |
| OTHER LIABILITIES                                      |       | 1,263,927              |        | 1,091,248               |       |
|                                                   |       | 46,574,748             |        | 48,008,688              |       |
|                                                   |       |                   |        |                    |       |
| STOCKHOLDERS’ EQUITY                              |       |                   |        |                    |       |
| Preferred stock, par value $.01 per share;             |       |                   |        |                    |       |
| authorized 2,500,000 shares;                           |       |                   |        |                    |       |
| no shares issued                                       |       |                   |        |                    |       |
| Common stock, par value $.01 per share;                |       |                   |        |                    |       |
| authorized 10,000,000 shares; issued  6,437,719 shares |       |                   |        |                    |       |
| December 31, 2004 and September 30, 2004               |       | 64,377                 |        | 64,377                  |       |
| Additional paid-in capital                             |       | 28,916,707             |        | 28,916,707              |       |
| Retained earnings                                      |       | 51,729,724             |        | 51,580,634              |       |
|                                                   |       | 80,710,808             |        | 80,561,718              |       |
| Less cost of 99,200 shares of treasury  stock          |       | (737,780               | )           | (737,780                | )          |
|                                                   |       | 79,973,028             |        | 79,823,938              |       |
|                                                   |       | $                      | 126,547,776 |                    | $          | 127,832,626 |   |

 

----

*From audited financial statements.

See Notes to ConsolidatedFinancial Statements.

 

2

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TODHUNTERINTERNATIONAL, INC.

CONSOLIDATEDSTATEMENTS OF INCOME

(Unaudited)

 
| ** **                                   | ** ** | **Three Months Ended December 31,** | ** ** |
|----------------------------------------------|------------|-------------------------------------|------------|
| ** **                                   | ** ** | **2004**                            | ** ** | **2003** | ** ** |
|                                         |       |                                |       |   |   |
| Sales                                        |       | $                                   | 30,181,243 |   | $ | 27,687,682 |   |
| Less excise taxes                            |       | 5,989,050                           |       | 5,246,030 |   |
| Net sales                                    |       | 24,192,193                          |       | 22,441,652 |   |
|                                         |       |                                |       |   |   |
| Cost of goods sold                           |       | 16,117,201                          |       | 14,865,023 |   |
| Gross profit                                 |       | 8,074,992                           |       | 7,576,629 |   |
|                                         |       |                                |       |   |   |
| Selling, general and administrative expenses |       | 8,306,010                           |       | 6,691,207 |   |
| Operating income (loss)                      |       | (231,018                            | )          | 885,422 |   |
|                                         |       |                                |       |   |   |
| Other income (expense):                      |       |                                |       |   |   |
| Interest income                              |       | 98,019                              |       | 172,559 |   |
| Interest expense                             |       | (592,668                            | )          | (696,983 | ) |
| Equity in income of equity investee          |       | 32,291                              |       | 214,120 |   |
| Other, net                                   |       | 79,107                              |       | 228,571 |   |
|                                         |       | (383,251                            | )          | (81,733 | ) |
|                                         |       |                                |       |   |   |
| Income (loss) before income taxes            |       | (614,269                            | )          | 803,689 |   |
|                                         |       |                                |       |   |   |
| Income tax expense (benefit):                |       |                                |       |   |   |
| Current                                      |       | 59,141                              |       | (243,345 | ) |
| Deferred                                     |       | (822,500                            | )          | 195,750 |   |
|                                         |       | (763,359                            | )          | (47,595 | ) |
|                                         |       |                                |       |   |   |
| Net income                                   |       | $                                   | 149,090    |   | $ | 851,284 |   |
|                                         |       |                                |       |   |   |
| Earnings per common share:                   |       |                                |       |   |   |
| Basic                                        |       | $                                   | 0.02       |   | $ | 0.15 |   |
| Diluted                                      |       | $                                   | 0.02       |   | $ | 0.15 |   |
|                                         |       |                                |       |   |   |
| Common shares and equivalents outstanding:   |       |                                |       |   |   |
| Basic                                        |       | 6,338,519                           |       | 5,596,174 |   |
| Diluted                                      |       | 6,458,198                           |       | 5,679,016 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

3

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TODHUNTERINTERNATIONAL, INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                                   | ** ** | **Three Months Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
|                                                                                         |       | **2004**                            | ** ** | **2003** |   |
|                                                                                         |       | ** **                          | ** ** | ** ** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                         |       |                                |       |   |   |
| Net income                                                                                   |       | $                                   | 149,090    |   | $ | 851,284 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                                |       |   |   |
| Depreciation                                                                                 |       | 1,220,500                           |       | 1,366,443 |   |
| Amortization of trademarks                                                                   |       | 10,050                              |       | 10,050 |   |
| Amortization of deferred loan costs                                                          |       | 84,463                              |       | 75,000 |   |
| Gain on sale of property and equipment                                                       |       | —                              |       | (181,772 | ) |
| Equity in income of equity investees                                                         |       | (32,291                             | )          | (214,120 | ) |
| Deferred income taxes                                                                        |       | (822,500                            | )          | 195,750 |   |
| Changes in assets and liabilities:                                                           |       |                                |       |   |   |
| (Increase) decrease in:                                                                      |       |                                |       |   |   |
| Receivables                                                                                  |       | 1,837,052                           |       | 3,434,665 |   |
| Inventories                                                                                  |       | (1,266,110                          | )          | 108,297 |   |
| Other current assets                                                                         |       | 97,414                              |       | (613,541 | ) |
| Increase (decrease) in:                                                                      |       |                                |       |   |   |
| Accounts payable                                                                             |       | (1,537,039                          | )          | 2,880,022 |   |
| Accrued expenses                                                                             |       | (2,473,959                          | )          | (1,374,784 | ) |
| Other liabilities                                                                            |       | 172,679                             |       | (325,914 | ) |
| Net cash provided by (used in) operating  activities                                         |       | (2,560,651                          | )          | 6,211,380 |   |
|                                                                                         |       |                                |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                         |       |                                |       |   |   |
| Proceeds from sale of property and  equipment                                                |       | 8,941                               |       | 413,500 |   |
| Principal payments received on notes  receivable                                             |       | 36,079                              |       | 30,652 |   |
| Purchase of property and equipment                                                           |       | (649,864                            | )          | (1,072,731 | ) |
| Increase in short-term investments                                                           |       | (1,047                              | )          | — |   |
| Redemption of short-term investments                                                         |       | —                              |       | 404,843 |   |
| Advance to equity investee                                                                   |       | (250,000                            | )          | — |   |
| Decrease in other assets                                                                     |       | 13,536                              |       | — |   |
| Net cash used in investing activities                                                        |       | $                                   | (842,355   | ) | $ | (223,736 | ) |

 

4

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| ** **                                            | ** ** | **Three Months Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                            | ** ** | **2004**                            | ** ** | **2003** | ** ** |
|                                                  |       |                                |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                  |       |                                |       |   |   |
| Net borrowings (payments) on line of credit           |       | $                                   | 4,100,000  |   | $ | (700,000 | ) |
| Issuance of common stock                              |       | —                              |       | 124,075 |   |
| Disbursements for loan costs                          |       | (109,000                            | )          | — |   |
| Principal payments on long-term borrowings            |       | (1,047,621                          | )          | (1,026,867 | ) |
| Net cash provided by (used in) financing  activities  |       | 2,943,379                           |       | (1,602,792 | ) |
|                                                  |       |                                |       |   |   |
| Net increase (decrease) in cash and cash  equivalents |       | (459,627                            | )          | 4,384,852 |   |
|                                                  |       |                                |       |   |   |
| Cash and cash equivalents:                            |       |                                |       |   |   |
| Beginning                                             |       | 3,617,582                           |       | 14,918,605 |   |
| Ending                                                |       | $                                   | 3,157,955  |   | $ | 19,303,457 |   |
|                                                  |       |                                |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION    |       |                                |       |   |   |
| Cash payments for:                                    |       |                                |       |   |   |
| Interest                                              |       | $                                   | 423,949    |   | $ | 687,320 |   |
| Income taxes                                          |       | $                                   | 27,710     |   | $ | 9,814 |   |

 

See Notes toConsolidated Financial Statements.

 

5

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TODHUNTER INTERNATIONAL, INC.

 

NOTESTO CONSOLIDATED FINANCIAL 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 adjustmentsnecessary for a fair presentation of the financial information for the periodsindicated, have been included.  Forfurther information regarding the Company’s accounting policies, refer to theconsolidated financial statements and related notes included in the Company’sAnnual Report on Form 10-K for the year ended September 30, 2004.

 

TheCompany applies Accounting Principles Board Opinion Number 25, *Accounting for Stock Issued to Employees* (“APB25”) 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 pro formadisclosures for option grants made after December 31, 1994, when accounting forstock-based compensation plans in accordance with APB 25.  As of January 1, 2003, the Company adoptedSFAS 148, *Accounting for Stock-BasedCompensation-Transition and Disclosure*, an amendment of SFAS 123.The standard amends SFAS 123 to provide alternative methods of transition forvoluntary changes to the fair value based method of accounting for stock-basedemployee compensation. Additionally, SFAS 148 amends the disclosurerequirements of SFAS 123 to require pro-forma disclosures when the intrinsicvalue method continues to be used.  TheCompany has elected to continue accounting for stock-based compensation usingthe intrinsic method in accordance with APB 25, and has adopted the newdisclosure requirements specified under SFAS 148.

 

If theCompany had elected to recognize compensation cost based on the fair value ofthe options granted at grant date as prescribed by SFAS No. 123, net income andearnings per common share would have been reduced to the pro forma amounts showbelow:

 
| ** **                             | ** ** | **Three Months Ended December 31,** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **2004**                            | ** ** | **2003** | ** ** |
|                                   |       |                                |       |   |   |
| Net income, as reported                |       | $                                   | 149,090    |   | $ | 851,284 |   |
| Compensation costs, net of taxes       |       | —                              |       | 42,034 |   |
| Net income, pro forma                  |       | $                                   | 149,090    |   | $ | 809,250 |   |
| Earnings per common share, as reported |       |                                |       |   |   |
| Basic                                  |       | 0.02                                |       | 0.15 |   |
| Diluted                                |       | 0.02                                |       | 0.15 |   |
| Earnings per common share, pro forma   |       |                                |       |   |   |
| Basic                                  |       | 0.02                                |       | 0.14 |   |
| Diluted                                |       | 0.02                                |       | 0.14 |   |

 

6

----

 

Note 2.   Inventories

 

The major components ofinventories are:

 
| ** **                 | ** ** | **December 31, 2004** | ** ** | **September 30, 2004** | ** ** |
|----------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                 | ** ** | **(Unaudited)**       | ** ** | ** **             | ** ** |
|                       |       |                  |       |                   |       |
| Finished goods             |       | $                     | 15,161,606 |                   | $          | 15,155,035 |   |
| Work in process            |       | 2,334,419             |       | 2,668,698              |       |
| Raw materials and supplies |       | 12,932,581            |       | 11,338,763             |       |
|                       |       |                  |       |                   |       |
|                       |       | $                     | 30,428,606 |                   | $          | 29,162,496 |   |

 

Note 3.   Financing Arrangements

 

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

 
| Term loans under a credit agreement (i)  (ii), interest payable monthly based on either the Eurodollar or prime rate  at the Company’s option, plus an applicable margin as defined in the  agreement. The interest rate at December 31, 2004 was 5.78%. Future minimum  quarterly principal installments of $1,000,000 through December 31, 2005 with  any remaining balance due January 31, 2006. |   | $          | 27,000,000 |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                     |   |       |       |
| Revolving loans under a credit agreement  (i), interest payable quarterly based on either the Eurodollar or prime rate  at the Company’s option, plus an applicable margin as defined in the  agreement. The blended interest rate at December 31, 2004 was 5.44%. The  revolving lines of credit terminate on January 31, 2006.                                                                    |   | 5,600,000  |       |
|                                                                                                                                                                                                                                                                                                                                                                                                     |   |       |       |
| Other                                                                                                                                                                                                                                                                                                                                                                                                    |   | 126,619    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                     |   | 32,726,619 |       |
| Less current maturities                                                                                                                                                                                                                                                                                                                                                                                  |   | 4,000,000  |       |
|                                                                                                                                                                                                                                                                                                                                                                                                     |   | $          | 28,726,619 |   |

 

----

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

 

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

 

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

 

7

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Note 4.   Earnings Per Common Share

 

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

 
| ** **                                                                                           | ** ** | **Three Months Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                           | ** ** | **2004**                            | ** ** | **2003** | ** ** |
|                                                                                                 |       |                                |       |   |   |
| Net income                                                                                           |       | $                                   | 149,090    |   | $ | 851,284 |   |
| Determination of shares:                                                                             |       |                                |       |   |   |
| Weighted average number of common shares  outstanding                                                |       | 6,338,519                           |       | 5,596,174 |   |
| Shares issuable on exercise of stock  options, net of shares assumed to be purchased out of proceeds |       | 119,679                             |       | 82,842 |   |
| Average common shares outstanding for diluted  earnings per share computation                        |       | 6,458,198                           |       | 5,679,016 |   |
|                                                                                                 |       |                                |       |   |   |
| Earnings per common share:                                                                           |       |                                |       |   |   |
| Basic                                                                                                |       | $                                   | 0.02       |   | $ | 0.15 |   |
| Diluted                                                                                              |       | $                                   | 0.02       |   | $ | 0.15 |   |

 

The Company’s Virgin Islands subsidiary, through the EconomicDevelopment Commission of the Government of the Virgin Islands of the UnitedStates, has received a 90% exemption from income taxes on operatingincome.  This exemption is effectivethrough September 2020.  The per shareeffect of this exemption on earnings (on a diluted basis) was to increaseearnings per share by $0.06 and $0.07 for the three months ended December 31,2004 and 2003, respectively.

 

8

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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)

 

The Company’s executive offices are located in West PalmBeach, Florida and certain of the expenses of the Company’s executive officesare classified as Corporate Operations and are not allocated to the operatingsegments described above.  These expensesinclude salaries and related expenses, legal and professional fees, rent foroffice space, utilities and insurance.

 

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 30,2004.  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.

 

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

 
| ** **                   | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| ** **                   | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                   | ** ** | **(in thousands)**                   | ** ** |
| **Net  Sales**               |       |                                 |       |   |   |
| Bulk Alcohol Products        |       | $                                    | 9,943      |   | $ | 8,588 |   |
| Premium Branded Spirits      |       | 5,817                                |       | 5,842 |   |
| Bottling Operations          |       | 2,908                                |       | 2,675 |   |
| Vinegar and Cooking Wine     |       | 5,524                                |       | 5,337 |   |
|                         |       | $                                    | 24,192     |   | $ | 22,442 |   |
|                         |       |                                 |       |   |   |
| **Operating  Income (Loss)** |       |                                 |       |   |   |
| Bulk Alcohol Products        |       | $                                    | 3,571      |   | $ | 2,737 |   |
| Premium Branded Spirits      |       | (1,984                               | )          | (696 | ) |
| Bottling Operations          |       | (1,176                               | )          | (980 | ) |
| Vinegar and Cooking Wine     |       | 569                                  |       | 866 |   |
| Corporate Operations         |       | (1,211                               | )          | (1,042 | ) |
|                         |       | $                                    | (231       | ) | $ | 885 |   |

 

9

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Note 6.  Supplemental Executive Retirement Plan

 

During thesecond quarter of fiscal 2004, the Company’s Compensation and Stock OptionCommittee approved a supplemental executive retirement plan for certain keyexecutives of the Company.  The plan isan unfunded plan within the meaning of Financial Accounting Standard 132.  The net periodic benefit cost for the threemonths ended December 31, 2004 and 2003, was as follows:

 
| ** **                | ** ** | **Three Months Ended December 31,** | ** ** |
|---------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| Service cost              |       | $                                   | 66,041     |   | $ | — |   |
| Interest cost             |       | 3,963                               |       | — |   |
|                      |       |                                |       |   |   |
| Net periodic benefit cost |       | $                                   | 70,004     |   | $ | — |   |

 

Note 7.  Income Taxes

 

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

 

Note 8. Reclassification of Cost of Goods Sold

 

In the first quarter of fiscal 2005, the Company changed theclassification of certain expenses from cost of goods sold to selling, generaland administrative as a result of a review and improvement in its financialreporting practices.  The Company hasrestated its prior year statement of income to reflect the newclassification.  This resulted in thereclassification of $443,153 from cost of goods sold to selling, general andadministrative expenses for the three months ended December 31, 2003.

 

10

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**Item 2.****   ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Forward-Looking Statements**

 

Management’s Discussion andAnalysis contains “Forward-Looking Statements,” as defined in section 27a ofthe Securities 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 theCompany.  Some Forward-Looking Statementsmay be identified by use of such terms as “believes,” “anticipates,” “intends”or “expects.”  Such Forward-LookingStatements involve known and unknown risks, uncertainties and other factorsthat may cause the actual results, performance or achievements of the Companyto be materially different from any future results, performance or achievementsexpressed or implied by such Forward-Looking Statements.  For information concerning these factors andrelated matters, see “Risks that May Affect Future Results” in Item 7,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of the Company’s Annual Report on Form 10-K for the fiscal yearended September 30, 2004.  The Companyundertakes no obligation to update or revise any Forward-Looking Statements,whether as a result of new information, future events or otherwise.

 

**Introduction**

 

The following discussion and analysissummarizes the significant factors affecting (i) consolidated results ofoperations of the Company for the three months ended December 31, 2004 comparedto the three months ended December 31, 2003, and (ii) financial liquidity and capital resources.  This discussion and analysis should be readin conjunction with the Company’s consolidated financial statements and notesthereto included herein.  Certain amountspresented in this Item 2 have been rounded to the nearest thousand or hundredthousand, as applicable, but the percentages calculated are based on actualamounts without rounding.

 

Market share and industry data andrankings disclosed in this report have been obtained from industry andgovernment publications, as indicated; the Company has not independentlyverified this information, although management believes such data and rankingsto be reasonably accurate.

 

Management believes that the Companyis the largest supplier of bulk rum in the United States based on reports ofU.S. Imports for Consumption prepared by the Department of Census and that theCompany’s market share of bulk rum products in the United States isapproximately 80%.  Management believesthat the Company is the largest supplier of fortified citrus wine in the UnitedStates and is not aware of any other domestic suppliers of fortified citruswine.  Management is aware of only oneother United States manufacturer of citrus brandy and citrus spirits andbelieves that the Company’s market share for these products is approximately85%.

 

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

 

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

 

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

 

The Company’s executive offices arelocated in West Palm Beach, Florida and certain of the expenses of the Company’sexecutive offices are not allocated to the operating segments describedabove.  The expenses of the Company’scorporate operations include salaries and related expenses, legal andprofessional fees, rent for office space, utilities and insurance.

 

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

 

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 premium branded spirits, contract bottling services,  vinegar and cooking wine.  Accordingly, the size and timing of purchaseorders and product shipments can cause operating results to fluctuatesignificantly from quarter to quarter. Additionally, some Company products generate higher profit margins thanothers, and changes in the Company’s product mix can cause gross margins tofluctuate.  Certain aspects of theCompany’s business are seasonal, with increased demand for the Company’scontract bottling services from April to October and increased production ofthe Company’s bulk alcohol products from November to June, corresponding to theFlorida citrus harvest.  As a result ofthese factors, the Company’s operating results may vary significantly fromquarter 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.

 

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**Results ofOperations**

 

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

 

**Table1 – Statement of Income as a Percent of Net Sales**

 
| ** **                                    | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|
|                                          |       | **2004**                             | ** ** | **2003** |   |
| Net sales                                     |       | 100.0                                | %          | 100.0 | % |
| Cost of goods sold                            |       | 66.6                                 |       | 66.2 |   |
| Gross margin                                  |       | 33.4                                 |       | 33.8 |   |
| Selling, general and administrative  expenses |       | 34.4                                 |       | 29.8 |   |
| Operating income (loss)                       |       | (1.0                                 | )          | 4.0 |   |
| Interest expense                              |       | (2.4                                 | )          | (3.1 | ) |
| Other income (expense), net                   |       | 0.9                                  |       | 2.7 |   |
| Income (loss) before income taxes             |       | (2.5                                 | )          | 3.6 |   |
| Income tax benefit                            |       | 3.1                                  |       | 0.2 |   |
| Net income                                    |       | 0.6                                  | %          | 3.8 | % |

 

**Table2 – Net Sales, Gross Profit (Loss) and Operating Income (Loss) by OperatingSegment**

 
| ** **                   | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| ** **                   | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| **Net  Sales**               |       |                                 |       |   |   |
| Bulk alcohol products        | ** ** | $                                    | 9,943      |   | $ | 8,588 |   |
| Premium branded spirits      |       | 5,817                                |       | 5,842 |   |
| Bottling operations          |       | 2,908                                |       | 2,675 |   |
| Vinegar and cooking wine     |       | 5,524                                |       | 5,337 |   |
| ** **                   |       | $                                    | 24,192     |   | $ | 22,442 |   |
|                         |       |                                 |       |   |   |
| **Gross  Profit (Loss)**     |       |                                 |       |   |   |
| Bulk alcohol products        |       | 4,673                                |       | 4,312 |   |
| Premium branded spirits      |       | 2,641                                |       | 2,371 |   |
| Bottling operations          |       | (481                                 | )          | (373 | ) |
| Vinegar and cooking wine     |       | 1,242                                |       | 1,267 |   |
| ** **                   |       | $                                    | 8,075      |   | $ | 7,577 |   |
|                         |       |                                 |       |   |   |
| **Operating  Income (Loss)** |       |                                 |       |   |   |
| Bulk alcohol products        |       | 3,571                                |       | 2,737 |   |
| Premium branded spirits      |       | (1,984                               | )          | (696 | ) |
| Bottling operations          |       | (1,176                               | )          | (980 | ) |
| Vinegar and cooking wine     |       | 569                                  |       | 866 |   |
| Corporate operations         |       | (1,211                               | )          | (1,042 | ) |
| ** **                   |       | $                                    | (231       | ) | $ | 885 |   |

 

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Table 3 below provides unit salesvolume data for certain Company products.

 

**Table3 – Unit Sales Volume Data**

 
| ** **                           | ** ** | **Three Months Ended  December 31,** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|--------------|------------|
| ** **                           | ** ** | **2004**                             | ** ** | **2003**     | ** ** | ** ** |
| ** **                           | ** ** | **(in thousands)**                   | ** ** | ** **   | ** ** |
|                                 |       |                                 |       |         |       |   |   |
| Bulk alcohol products:               |       |                                 |       |         |       |   |   |
| Distilled products, in proof gallons |       |                                 |       |         |       |   |   |
| Citrus Brandy                        |       | 364                                  |       | 417          |       | (12.7 | ) |
| Citrus Spirits                       |       | 195                                  |       | —       |       | — |   |
| Rum                                  |       | 1,415                                |       | 1,116        |       | 26.8 |   |
| Cane Spirits                         |       | 111                                  |       | 90           |       | 23.1 |   |
| Fortified wine, in gallons           |       | 2,880                                |       | 2,754        |       | 4.6 |   |
| Premium branded spirits, in cases    |       | 140                                  |       | 201          |       | (30.3 | ) |
| Bottling operations, in cases        |       | 580                                  |       | 660          |       | (12.2 | ) |
| Vinegar                              |       |                                 |       |         |       |   |   |
| Bulk, in 100 grain gallons           |       | 1,249                                |       | 1,364        |       | (8.4 | ) |
| Cases                                |       | 164                                  |       | 117          |       | 41.1 |   |
| Drums, in 100 grain gallons          |       | 257                                  |       | 246          |       | 4.8 |   |
| Cooking Wine                         |       |                                 |       |         |       |   |   |
| Bulk, in gallons                     |       | 603                                  |       | 899          |       | (33.0 | ) |
| Cases                                |       | 211                                  |       | 215          |       | (1.7 | ) |

** **

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

 

*Net Sales.*Net sales were $24.2 million in 2004, an increase of7.8% from net sales of $22.4 million in 2003.

 

Net sales of bulk alcohol productswere $9.9 million in 2004, an increase of 15.8% from net sales of $8.6 millionin 2003.  The increase in net salesresulted primarily from increased shipments of citrus spirits, cane spirits,rum and fortified wine, offset by decreased shipments of citrus brandy.  The increase in shipments of citrus spirits,cane spirits, rum and fortified wine was due in part to the timing of customerorders.  Also, in the case of canespirits, shipments have increased as a result of a decrease in the marketsurplus of grape spirits.  The Company’scustomers often purchase bulk alcohol products in significant quantities, andaccordingly, the size and timing of purchase orders and product shipments cancause operating results to fluctuate significantly from quarter to quarter.  Management believes that the Company’s salesof citrus brandy may have declined due to both the timing of customer ordersand to competition from other producers. In 2004, unit sales of citrus brandy decreased 12.7% compared to 2003,and the average selling price of citrus brandy decreased 6.7%.  Also in 2004, unit sales of the Company’sfortified wine products increased 4.6% compared to 2003, although the averageselling price for the Company’s fortified wine decreased 2.5%.  The average selling prices for these bulkalcohol products decreased due to management lowering prices as a result ofincreased competition from other producers.

 

Net sales of premium branded spiritswere $5.8 million in 2004, a decrease of 0.4% from net sales of $5.8 million in2003.  In 2003, net sales of premiumbranded spirits included $0.9 million of Cruzan ready-to-drink products andother products which were discontinued. Excluding these discontinued product sales, net sales of premium brandedspirits were $5.8 million in 2004, an increase of 19.2% from net sales of $4.9million in 2003, as the premium branded spirits segment continued its doubledigit growth.

 

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Sales of the Company’s Cruzan EstateRums and Cruzan Flavored Rums increased 25.4% in 2004 compared to 2003.  Sales of Cruzan Estate Rums and CruzanFlavored Rums have increased from $2.2 million in fiscal 1996 to $21.0 millionin fiscal 2004.  During this time, theCruzan brand has been recognized as one of the fastest growing brands in thespirits industry by Impact Databank and Adams Liquor Handbook, two leadingbeverage industry publications.  Inaddition, the Cruzan Rums have won numerous tasting awards from severalprestigious beverage industry organizations, including The American TastingInstitute, The Beverage Tasting Institute and the San Francisco World SpiritsCompetition.  Since January 2003, severalof the Company’s competitors have introduced their own lines of flavored rumproducts into the marketplace, which, in certain fiscal quarters, hasnegatively impacted the level of sales growth of Cruzan Flavored Rums.  Some of the Company’s competitors in the rumand flavored rum categories have significantly greater financial and otherresources than the Company, which could adversely affect the Company’s salesgrowth of Cruzan Estate Rums and Cruzan Flavored Rums. As a response to suchincreased competition, and in order to provide further impetus to the growth ofCruzan Flavored Rums, management significantly increased its marketing budgetfor fiscal 2004 in an effort to support the continued growth of the Company’sCruzan brand, causing a current increase in the operating loss for thisbusiness segment.  Management intends tocontinue its increased expenditures in fiscal 2005 to improve brand growth.

 

Netsales of the Company’s bottling operations were $2.9 million in 2004, anincrease of 8.7% from net sales of $2.7 million in 2003.  While the unit volume of the Company’sbottling operations decreased 12.2% in 2004, average unit prices increased as aresult of price increases to certain customers and a change in productmix.  Sales in the Company’s bottlingoperations have declined in the last three fiscal years as a result of acontraction in the ready-to-drink product category, for which the Company is amajor contract bottler.  Responding tothis decline, in July 2004 the Company completed the partial consolidation ofits bottling operations.  However,bottling operations volume did not even meet the Company’s reduced expectationsfor fiscal 2004, which resulted in a loss in this segment for fiscal 2004.  The Company has been placing a renewedemphasis on the sales effort in this segment, seeking other contract bottlingopportunities.  The Company has exploredother alternatives in its two bottling facilities, including furtherconsolidation, a partial sale and shedding less profitable product lines.  In December 2004, management decided todiscontinue production of all products in the Lake Alfred bottling plant withthe exception of one profitable bottling line that bottles vinegar, cookingwine and juices.  At the present time,the Company has not taken an impairment charge relating to its bottlingoperations as the carrying value of its bottling assets is less than fairvalue.

 

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

 

*Gross Profit.* Gross profit was $8.1 million in2004, an increase of 6.6% from gross profit of $7.6 million in 2003.  During 2004, bulk alcohol gross profitincreased as a result of increased shipments of rum and fortified wine; premiumbranded spirits gross profit increased due to an improved product mix; bottlingoperations gross (loss) was comparable to 2003; and vinegar and cooking winegross profit decreased due to higher material cost.  Gross margin decreased to 33.4% in 2004 from33.8% in 2003 as a result of changes in product mix.  In the first quarter of fiscal 2005, theCompany changed the classification of certain expenses from cost of goods soldto selling, general and administrative as a result of a review and improvementin its financial reporting practices. The Company has restated its prior year statement of income to reflectthe new classification.  This resulted inthe reclassification of $443,153 from cost of goods sold to selling, generaland administrative expenses for the three months ended December 31, 2003.

 

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*Selling, General and Administrative Expenses. *Selling, general and administrative expenses were $8.3million in 2004, an increase of 24.1% from $6.7 million in 2003.  The increase was primarily attributable toincreased administrative, marketing and advertising expenses in the Company’spremium branded spirits business as the Company continues to place emphasis onthis growing business segment. During fiscal 2004, the Company increased itsselling, general and administrative expenses in its premium branded spiritssegment in an effort to support the continued growth of the Company’s Cruzanbrand.  Management intends to continueits increased expenditures in fiscal 2005 to improve brand growth.  Also during 2004, the Company’s corporateoverhead has increased as a result of increased legal and professional feesincurred for compliance with Section 404 of the Sarbanes-Oxley Act of2002.  These costs relate to increasedcompliance activities and the Company’s ongoing documentation, testing andimprovement of its internal control systems and will continue in fiscal 2005.

 

*Operating Income.*  Table 2 setsforth the operating income (loss) by reportable segment of the Company for 2004and 2003.  The Company’s operating losswas $0.2 million in 2004, as compared to operating income of $0.9 million in2003.  The Company’s premium brandedspirits segment experienced operating losses of $2.0 million in 2004 and $0.7million in 2003.  The operating lossesreflected the Company’s continuing efforts to increase market share byreinvesting segment gross profits in selling and marketing expenses.  As a result of the factors described under “NetSales” above, the Company’s bottling operations segment reported an operatingloss of $1.2 million in 2004 and $1.0 million in 2003.

 

*Interest Expense.*Interest expense was $0.6 million in 2004 and $0.7million in 2003.  The Company’s borrowingrates were higher in 2004 compared to 2003. However, higher rates were offset by lower average borrowings during2004, resulting in slightly lower interest expense.

 

*Income Tax Expense.*During 2004 and 2003, the Company incurred operatinglosses from its U.S. operations and recorded an income tax benefit of $0.8million and $0.1 million, respectively. The Company’s Virgin Islands subsidiary has a 90% exemption from U.S.Virgin Islands income taxes.  Theexemption is effective through September 2020. In addition, the Company benefited from the extraterritorial incomeexclusion in 2004 and 2003.

 

**Financial Liquidity and Capital Resources**

 

**General**

 

The Company’s principal use of cashin its operating activities is for labor, overhead and raw materials used inits manufacturing operations and purchasing imported products for its premium brandedspirits business.  The Company’s sourceof liquidity has historically been cash flow from operations and its line ofcredit.  Some of the Company’smanufacturing operations are seasonal and the Company’s borrowings on its lineof credit vary during the year.

 

The Florida citrus harvest isgenerally performed during the months from November through June.  The majority of the Florida citrus harvest isprocessed as fresh fruit juice or juice concentrate.  A byproduct of citrus juice production iscitrus molasses which the Company uses as a raw material at its two Floridadistilleries to produce citrus brandy and spirits.  Due to the seasonal availability and short “shelf-life”of the citrus molasses raw material, the Company produces its estimated annualcustomer requirements during a seven-month period, and therefore, carries ahigher than normal level of inventory in relation to sales during thisseven-month period.  Generally, theCompany’s inventory level increases during this seven-month period and decreasesafter the citrus harvest ends when the Company supplies its customers withcitrus brandy and spirits from inventory from July through October.

 

There are no federal regulations thatrequire minimum aging to be designated rum. However, due to the Company’s highquality standards, the Company ages its Cruzan Estate Rums for two to fiveyears and certain of the Company’s super premium rums are aged up to twelveyears. Due to the Company’s own aging requirements, production of Cruzan EstateRums is scheduled to meet demand two to three years in the future.  Accordingly, inventories are larger inrelation to sales and total assets than would be normal for most otherbusinesses.

 

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

 

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

 

During fiscal 2004, managementincreased selling, general and administrative expenses in its premium brandedspirits segment in an effort to support the continued growth of the Company’sCruzan brand.  Management intends tocontinue its increased expenditures in fiscal 2005 to improve brandgrowth.  To the extent that the increasedexpenditures do not result in increased sales of the Cruzan brand, the Company’sshort-term liquidity may be adversely affected. However, management actively monitors sales and expenditures on anongoing basis, and retains the ability to adjust its level of expenditures inresponse to market conditions and in order to maintain sufficient liquidity.

 

Management believes that cashprovided by its operating and financing activities will provide adequateresources to satisfy its working capital, liquidity and anticipated capitalexpenditure requirements for both its short-term and long-term capital needs.

 

**Operating Activities**

 

Net cash used in operating activitiesin 2004 was $2.6 million, which resulted from $0.6 million in net incomeadjusted for noncash items, less $3.2 million representing the net increase inoperating assets and liabilities.

 

**Investing andFinancing Activities**

 

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

 

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

 

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

 

In December 2004, the Companyreceived a waiver of its financial covenants compliance requirement for thequarter ended September 30, 2004.  Thefinancial covenant requirements were also amended prospectively in accordancewith the Company’s business plan for fiscal 2005.  The Company agreed to a .25% increase fromits current interest rates so long as the Funded Debt to EBITDA ratio isbetween 2.50 and 3.25.  In addition, ifthe Company’s Funded Debt to EBITDA ratio is between 3.26 and 4.00, theinterest rate would be .25% higher than the rate for the 2.50 to 3.25level.  The maturity of the creditagreement was modified to January 31, 2006. The Company is currently reviewing proposals relating to the refinancingof its long-term debt.

 

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

 

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

 

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See Note 10 to the Company’s consolidated financialstatements included in the Company’s Annual Report on Form 10-K for the yearended September 30, 2004 for additional information on income taxes related tothese 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, 2004.  Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues, and expenses, and the related disclosures of contingentassets and liabilities. Actual results could differ from those estimates underdifferent assumptions or conditions. The Company believes that the followingcritical accounting policy is subject to estimates and judgments used in thepreparation of its consolidated financial statements:

 

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.

 

**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, 2004.

 

**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

 

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Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of the design and operation of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport.  Based upon that evaluation andsubject to the foregoing, the Company’s Chief Executive Officer and ChiefFinancial Officer concluded that the design and operation of the Company’sdisclosure controls and procedures provided reasonable assurance that thedisclosure controls and procedures are effective to accomplish theirobjectives.

 

**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 controls or in other factors during the fourthquarter of Fiscal 2004 that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PART II.  OTHERINFORMATION**

 

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

** **

| 10.22(e) |   | Modification  of Credit Agreement and Waiver, dated December 20, 2004, by and among  Todhunter International, Inc., SouthTrust Bank, acting as lender and Agent,  and Wachovia Bank, N.A. (2) |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                          |
| 11.1     |   | Statement  of Computation of Per Share Earnings (1)                                                                                                                                           |
|     |   |                                                                                                                                                                                          |
| 20.1     |   | Earnings  press release for the three month period ended December 31, 2004 (2)                                                                                                                |
|     |   |                                                                                                                                                                                          |
| 31.1     |   | Certification of Jay S. Maltby, Chairman, Chief Executive  Officer and President, pursuant to Rule 13a-14(a) of the Securities Exchange  Act of 1934 (2)                                      |
|     |   |                                                                                                                                                                                          |
| 31.2     |   | Certification of Ezra Shashoua, Executive Vice President  and Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934 (2)                                 |
|     |   |                                                                                                                                                                                          |
| 32.1     |   | Certification of Jay S. Maltby, Chairman, Chief Executive  Officer and President, pursuant to 18 U.S.C. Section 1350 (2)                                                                      |
|     |   |                                                                                                                                                                                          |
| 32.2     |   | Certification of Ezra Shashoua, Executive Vice President  and Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350 (2)                                                                |

 

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(1)                                  Filed herewith and incorporatedherein 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 thequarter ended December 31, 2004.

 

(2)                                  Filedherewith.

 

**(b)****  ****Reports on Form 8-K**

 

Noreports on Form 8-K were filed during the first quarter of fiscal 2005.

 

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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 10, 2005 |   |   |   | /s/ Jay S. Maltby                                     |   |
|-------------------------|--------|--------|--------|-------------------------------------------------------|--------|
|                    |   |   |   | Jay S. Maltby                                         |
|                    |   |   |   | Chairman, Chief Executive Officer  and President      |
|                    |   |   |   |                                                  |
|                    |   |   |   |                                                  |
| Date: February 10, 2005 |   |   |   | /s/ Ezra Shashoua                                     |   |
|                    |   |   |   | Ezra Shashoua                                         |
|                    |   |   |   | Executive Vice President and Chief  Financial Officer |

 

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