**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM10-Q**

 

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

 

**For the quarterly period ended March 31, 2005**

** **

**CommissionFile No. 1-13453**

 

**CRUZANINTERNATIONAL, 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  telephone number, including area code: **(561) 655-8977** |

 

**TODHUNTERINTERNATIONAL, INC.**

(Formername, if changed since last report)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

 

Yes   o           No   ý

 

Thenumber of shares outstanding of registrant’s Common Stock, $.01 par value pershare, as of May 10, 2005 was 6,338,519.

 

 

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CRUZANINTERNATIONAL, INC.

 

INDEX

 
| PART  I | FINANCIAL  INFORMATION |                                                                                                       |
|---------|------------------------|------------------------------------------------------------------------------------------------------------|
|    |                   |                                                                                                       |   |
|    | Item  1                | Financial  Statements                                                                                      |   |
|    |                   |                                                                                                       |   |
|    |                   | Consolidated Balance Sheets  -  March 31, 2005 and September 30, 2004                                      |   |
|    |                   |                                                                                                       |   |
|    |                   | Consolidated  Statements of Income -  Six Months and Three Months Ended March 31, 2005 and 2004, unaudited |   |
|    |                   |                                                                                                       |   |
|    |                   | Consolidated  Statements of Cash Flows -  Six Months Ended March 31, 2005 and 2004, 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                | Unregistered  Sales of Equity 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                                                                                                   |   |
|    |                   |                                                                                                       |   |
|    | Signatures             |                                                                                                       |

 

----

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

 

----

 

CRUZANINTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                 | ** ** | **March 31,**   | ** **  | **September 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------|-------------|-------------------|------------|
| ** **                                                 | ** ** | **2005**        | ** **  | **2004**          | ** ** |
| ** **                                                 | ** ** | **(Unaudited)** | ** **  | *****             | ** ** |
| ASSETS                                                     |       |            |        |              |       |
|                                                       |       |            |        |              |       |
| CURRENT  ASSETS                                            |       |            |        |              |       |
| Cash and  cash equivalents                                 |       | $               | 4,261,618   |              | $          | 3,617,582 |   |
| Short-term  investments                                    |       | 217,293         |        | 216,246           |       |
| Trade  receivables                                         |       | 17,162,268      |        | 17,970,125        |       |
| Other  receivables                                         |       | 1,481,365       |        | 2,448,611         |       |
| Inventories                                                |       | 32,660,181      |        | 29,162,496        |       |
| Notes  receivable, current maturities                      |       | 3,539,807       |        | 3,559,409         |       |
| Deferred  income taxes                                     |       | 1,303,500       |        | 981,000           |       |
| Other  current assets                                      |       | 3,145,402       |        | 3,195,781         |       |
| Total  current assets                                      |       | 63,771,434      |        | 61,151,250        |       |
|                                                       |       |            |        |              |       |
| LONG-TERM  INVESTMENTS AND RECEIVABLES                     |       |            |        |              |       |
| Investments  in and advances to equity investees           |       | 2,544,438       |        | 2,232,285         |       |
| Notes receivable  from affiliates, less current maturities |       | 375,000         |        | 375,000           |       |
| Notes  receivable, less current maturities                 |       | 360,646         |        | 411,060           |       |
|                                                       |       | 3,280,084       |        | 3,018,345         |       |
|                                                       |       |            |        |              |       |
| PROPERTY AND  EQUIPMENT                                    |       | 98,244,767      |        | 96,666,655        |       |
| Less  accumulated depreciation                             |       | 59,140,010      |        | 56,716,805        |       |
|                                                       |       | 39,104,757      |        | 39,949,850        |       |
|                                                       |       |            |        |              |       |
| GOODWILL                                                   |       | 20,524,404      |        | 20,524,404        |       |
| TRADEMARKS                                                 |       | 857,081         |        | 893,648           |       |
| DEFERRED  LOAN COSTS                                       |       | 507,809         |        | 634,910           |       |
| DEFERRED  INCOME TAXES                                     |       | 405,500         |        | —            |       |
| OTHER ASSETS                                               |       | 2,018,252       |        | 1,660,219         |       |
|                                                       |       | $               | 130,469,321 |              | $          | 127,832,626 |   |

 

----

*Fromaudited financial statements.

SeeNotes to Consolidated Financial Statements.

 

1

----

 

CRUZANINTERNATIONAL, INC.

CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                                                            | ** ** | **March 31,**   | ** **  | **September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|-------------|-------------------|------------|
| ** **                                                                                                                            | ** ** | **2005**        | ** **  | **2004**          | ** ** |
| ** **                                                                                                                            | ** ** | **(Unaudited)** | ** **  | *****             | ** ** |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                            |       |            |        |              |       |
|                                                                                                                                  |       |            |        |              |       |
| CURRENT  LIABILITIES                                                                                                                  |       |            |        |              |       |
| Current  maturities of long-term debt                                                                                                 |       | $               | 34,500,000  |              | $          | 4,000,000 |   |
| Accounts  payable                                                                                                                     |       | 12,160,954      |        | 11,868,947        |       |
| Accrued  expenses                                                                                                                     |       | 2,601,494       |        | 4,726,253         |       |
| Total  current liabilities                                                                                                            |       | 49,262,448      |        | 20,595,200        |       |
|                                                                                                                                  |       |            |        |              |       |
| LONG-TERM  DEBT, less current maturities                                                                                              |       | 93,312          |        | 25,674,240        |       |
|                                                                                                                                  |       |            |        |              |       |
| DEFERRED  INCOME TAXES                                                                                                                |       | —          |        | 648,000           |       |
|                                                                                                                                  |       |            |        |              |       |
| OTHER  LIABILITIES                                                                                                                    |       | 1,211,317       |        | 1,091,248         |       |
|                                                                                                                                  |       | 50,567,077      |        | 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 March 31, 2005 and September 30, 2004 |       | 64,377          |        | 64,377            |       |
| Additional  paid-in capital                                                                                                           |       | 28,916,707      |        | 28,916,707        |       |
| Retained  earnings                                                                                                                    |       | 51,658,940      |        | 51,580,634        |       |
|                                                                                                                                  |       | 80,640,024      |        | 80,561,718        |       |
| Less cost of  99,200 shares of treasury stock                                                                                         |       | (737,780        | )           | (737,780          | )          |
|                                                                                                                                  |       | 79,902,244      |        | 79,823,938        |       |
|                                                                                                                                  |       | $               | 130,469,321 |              | $          | 127,832,626 |   |

 

----

*Fromaudited financial statements.

SeeNotes to Consolidated Financial Statements.

 

2

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CRUZANINTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OFINCOME

(Unaudited)

 
| ** **                                    | ** ** | **Six Months Ended  March 31,** | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **2005**                        | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                            |       |                              |       |   |   |   |   |
| Sales                                         |       | $                               | 61,984,756 |                              | $          | 56,417,025 |   | $ | 31,803,513 |   | $ | 28,729,343 |   |
| Less excise  taxes                            |       | 12,280,929                      |       | 11,935,530                        |       | 6,291,879 |   | 6,689,500 |   |
| Net sales                                     |       | 49,703,827                      |       | 44,481,495                        |       | 25,511,634 |   | 22,039,843 |   |
|                                          |       |                            |       |                              |       |   |   |   |   |
| Cost of  goods sold                           |       | 32,773,210                      |       | 28,575,502                        |       | 16,656,009 |   | 13,710,479 |   |
| Gross profit                                  |       | 16,930,617                      |       | 15,905,993                        |       | 8,855,625 |   | 8,329,364 |   |
|                                          |       |                            |       |                              |       |   |   |   |   |
| Selling,  general and administrative expenses |       | 17,158,891                      |       | 13,630,445                        |       | 8,852,881 |   | 6,939,238 |   |
| Operating  income (loss)                      |       | (228,274                        | )          | 2,275,548                         |       | 2,744 |   | 1,390,126 |   |
|                                          |       |                            |       |                              |       |   |   |   |   |
| Other income  (expense):                      |       |                            |       |                              |       |   |   |   |   |
| Interest  income                              |       | 186,571                         |       | 360,231                           |       | 88,552 |   | 187,672 |   |
| Interest  expense                             |       | (1,364,341                      | )          | (1,406,418                        | )          | (771,673 | ) | (709,435 | ) |
| Equity in  income of equity investee          |       | 162,153                         |       | 349,623                           |       | 129,862 |   | 135,503 |   |
| Other, net                                    |       | 65,865                          |       | 293,571                           |       | (13,242 | ) | 65,000 |   |
|                                          |       | (949,752                        | )          | (402,993                          | )          | (566,501 | ) | (321,260 | ) |
|                                          |       |                            |       |                              |       |   |   |   |   |
| Income (loss)  before income taxes            |       | (1,178,026                      | )          | 1,872,555                         |       | (563,757 | ) | 1,068,866 |   |
|                                          |       |                            |       |                              |       |   |   |   |   |
| Income tax  expense (benefit):                |       |                            |       |                              |       |   |   |   |   |
| Current                                       |       | 119,668                         |       | (700,759                          | )          | 60,527 |   | (457,414 | ) |
| Deferred                                      |       | (1,376,000                      | )          | 603,500                           |       | (553,500 | ) | 407,750 |   |
|                                          |       | (1,256,332                      | )          | (97,259                           | )          | (492,973 | ) | (49,664 | ) |
|                                          |       |                            |       |                              |       |   |   |   |   |
| Net income  (loss)                            |       | $                               | 78,306     |                              | $          | 1,969,814 |   | $ | (70,784 | ) | $ | 1,118,530 |   |
|                                          |       |                            |       |                              |       |   |   |   |   |
| Earnings  (loss) per common share:            |       |                            |       |                              |       |   |   |   |   |
| Basic                                         |       | $                               | 0.01       |                              | $          | 0.35 |   | $ | (0.01 | ) | $ | 0.20 |   |
| Diluted                                       |       | $                               | 0.01       |                              | $          | 0.35 |   | $ | (0.01 | ) | $ | 0.20 |   |
|                                          |       |                            |       |                              |       |   |   |   |   |
| Common  shares and equivalents outstanding:   |       |                            |       |                              |       |   |   |   |   |
| Basic                                         |       | 6,338,519                       |       | 5,598,122                         |       | 6,338,519 |   | 5,617,591 |   |
| Diluted                                       |       | 6,465,182                       |       | 5,696,128                         |       | 6,338,519 |   | 5,722,369 |   |

 

SeeNotes to Consolidated Financial Statements.

 

3

----

 

CRUZANINTERNATIONAL, INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                                    | ** ** | **Six Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                       | ** ** | **2004** | ** ** |
|                                                                                          |       |                           |       |   |   |
| CASH FLOWS  FROM OPERATING ACTIVITIES                                                         |       |                           |       |   |   |
| Net income                                                                                    |       | $                              | 78,306     |   | $ | 1,969,814 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |                           |       |   |   |
| Depreciation                                                                                  |       | 2,447,457                      |       | 2,702,323 |   |
| Amortization  of trademarks and other assets                                                  |       | 41,491                         |       | 20,100 |   |
| Amortization  of deferred loan costs                                                          |       | 236,101                        |       | — |   |
| Gain on sale  of property and equipment                                                       |       | —                         |       | (197,271 | ) |
| Equity in  income of equity investees                                                         |       | (162,153                       | )          | (349,623 | ) |
| Deferred  income taxes                                                                        |       | (1,376,000                     | )          | 603,500 |   |
| Changes in  assets and liabilities:                                                           |       |                           |       |   |   |
| (Increase)  decrease in:                                                                      |       |                           |       |   |   |
| Receivables                                                                                   |       | 1,775,103                      |       | 279,718 |   |
| Inventories                                                                                   |       | (3,497,685                     | )          | (3,784,567 | ) |
| Other  current assets                                                                         |       | 50,379                         |       | 334,955 |   |
| Increase  (decrease) in:                                                                      |       |                           |       |   |   |
| Accounts  payable                                                                             |       | 292,007                        |       | 3,398,791 |   |
| Accrued  expenses                                                                             |       | (2,124,759                     | )          | (1,894,185 | ) |
| Other  liabilities                                                                            |       | 120,069                        |       | (1,100,415 | ) |
| Net cash  provided by (used in) operating activities                                          |       | (2,119,684                     | )          | 1,983,140 |   |
|                                                                                          |       |                           |       |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                                         |       |                           |       |   |   |
| Proceeds  from sale of property and equipment                                                 |       | 9,142                          |       | 429,815 |   |
| Principal  payments received on notes receivable                                              |       | 70,016                         |       | 61,836 |   |
| Purchase of  property and equipment                                                           |       | (1,611,506                     | )          | (2,586,566 | ) |
| (Purchase)  redemption of short-term investments                                              |       | (1,047                         | )          | 998,843 |   |
| Advance to  equity investee                                                                   |       | (150,000                       | )          | — |   |
| (Increase)  decrease in other assets                                                          |       | (362,957                       | )          | 120,751 |   |
| Net cash  used in investing activities                                                        |       | $                              | (2,046,352 | ) | $ | (975,321 | ) |

 

4

----

 
| ** **                                            | ** ** | **Six Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **2005**                       | ** ** | **2004** | ** ** |
|                                                  |       |                           |       |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES                 |       |                           |       |   |   |
| Net  borrowings (payments) on line of credit          |       | $                              | 7,000,000  |   | $ | (13,000,000 | ) |
| Issuance of  common stock                             |       | —                         |       | 295,675 |   |
| Disbursements  for loan costs                         |       | (109,000                       | )          | — |   |
| Principal  payments on long-term borrowings           |       | (2,080,928                     | )          | (2,105,227 | ) |
| Net cash  provided by (used in) financing activities  |       | 4,810,072                      |       | (14,809,552 | ) |
|                                                  |       |                           |       |   |   |
| Net increase  (decrease) in cash and cash equivalents |       | 644,036                        |       | (13,801,733 | ) |
|                                                  |       |                           |       |   |   |
| Cash and  cash equivalents:                           |       |                           |       |   |   |
| Beginning                                             |       | 3,617,582                      |       | 14,918,605 |   |
| Ending                                                |       | $                              | 4,261,618  |   | $ | 1,116,872 |   |
|                                                  |       |                           |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION    |       |                           |       |   |   |
| Cash  payments (refunds) for:                         |       |                           |       |   |   |
| Interest                                              |       | $                              | 1,015,295  |   | $ | 1,415,835 |   |
| Income taxes                                          |       | $                              | 99,120     |   | $ | (1,418,352 | ) |

 

See Notes to Consolidated Financial Statements.

 

5

----

 

CRUZAN INTERNATIONAL, INC.

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note1.   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.

 

The Company applies Accounting Principles BoardOpinion Number 25, *Accounting for StockIssued to Employees* (“APB 25”) and related interpretations inaccounting for options granted, which requires compensation expense for theCompany’s options to be recognized only if the market price of the underlyingstock exceeds the exercise price on the date of grant.  Accordingly, the Company has not recognizedcompensation expense for its options granted after 1994.  Statement of Financial Accounting Standards (“SFAS”)No. 123, *Accounting for Stock-BasedCompensation*, issued in October 1995, requires pro forma disclosuresfor option grants made after December 31, 1994, when accounting for stock-basedcompensation plans in accordance with APB 25. As of January 1, 2003, the Company adopted SFAS 148, *Accounting for Stock-Based Compensation-Transitionand Disclosure*, an amendment of SFAS 123. The standard amends SFAS123 to provide alternative methods of transition for voluntary changes to thefair value based method of accounting for stock-based employee compensation.Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 torequire pro-forma disclosures when the intrinsic value method continues to beused.  The Company has elected tocontinue accounting for stock-based compensation using the intrinsic method inaccordance with APB 25, and has adopted the new disclosure requirementsspecified 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(loss) and earnings (loss) per common share would have been reduced to the proforma amounts show below:

 
| ** **                                     | ** ** | **Periods Ended March 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **Six Months**              | ** ** | **Three Months** | ** ** |
| ** **                                     | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                        |       |   |   |   |   |   |   |
| Net income  (loss), as reported                |       | $                           | 78,306     |   | $ | 1,969,814 |   | $ | (70,784 | ) | $ | 1,118,530 |   |
| Compensation  costs, net of taxes              |       | —                      |       | 42,034 |   | — |   | — |   |
| Net income  (loss), pro forma                  |       | 78,306                      |       | 1,927,780 |   | (70,784 | ) | 1,118,530 |   |
| Earnings  (loss) per common share, as reported |       |                        |       |   |   |   |   |   |   |
| Basic                                          |       | 0.01                        |       | 0.35 |   | (0.01 | ) | 0.20 |   |
| Diluted                                        |       | 0.01                        |       | 0.35 |   | (0.01 | ) | 0.20 |   |
| Earnings  (loss) per common share, pro forma   |       |                        |       |   |   |   |   |   |   |
| Basic                                          |       | 0.01                        |       | 0.34 |   | (0.01 | ) | 0.20 |   |
| Diluted                                        |       | 0.01                        |       | 0.33 |   | (0.01 | ) | 0.20 |   |
|                                                |            |                             |            |  |  |  |  |  |  |  |  |  |  |

 

6

----

 

Note 2.   Inventories

 

Themajor components of inventories are:

 
| ** **                  | ** ** | **March 31, 2005** | ** ** | **September 30, 2004** | ** ** |
|-----------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                  | ** ** | **(Unaudited)**    | ** ** | ** **             | ** ** |
|                        |       |               |       |                   |       |
| Finished  goods             |       | $                  | 17,196,118 |                   | $          | 15,155,035 |   |
| Work in  process            |       | 2,192,727          |       | 2,668,698              |       |
| Raw  materials and supplies |       | 13,271,336         |       | 11,338,763             |       |
|                        |       |               |       |                   |       |
|                        |       | $                  | 32,660,181 |                   | $          | 29,162,496 |   |

 

Note3.   Financing Arrangements

 

Long-termdebt consists of the following as of March 31, 2005:

 
| 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 March 31, 2005 was  6.27%. Future minimum quarterly principal installments of $1,000,000 through  December 31, 2005 with any remaining balance due January 31, 2006. |   | $          | 26,000,000 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |       |       |
| 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  March 31, 2005 was 5.8%. The revolving lines of credit terminate on January  31, 2006.                                                                    |   | 8,500,000  |       |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   |       |       |
| Other                                                                                                                                                                                                                                                                                                                                                                                                 |   | 93,312     |       |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   | 34,593,312 |       |
| Less current  maturities                                                                                                                                                                                                                                                                                                                                                                              |   | 34,500,000 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                  |   | $          | 93,312     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |        |            |            |        |  |

 

(i)            InOctober 2001, the Company entered into a $70 million credit agreement,consisting of a $40 million term loan and a $30 million revolving loanfacility.  In March 2004, the revolvingloan facility was reduced to $15 million. In June 2004, the credit agreement was modified to extend the maturitydate of the revolving loan facility to September 2006.

 

In December2004, the Company received a waiver of its financial covenants compliancerequirement for the quarters ended September 30, 2004 and December 31,2004.  The financial covenant requirementswere also amended prospectively in accordance with the Company’s business planfor fiscal 2005.  The covenant amendmentrequired the Company to agree to a .25% increase in the interest rate, providedthat the Funded Debt to EBITDA ratio is between 2.50 and 3.25.  In the event that the Company’s Funded Debtto EBITDA ratio is between 3.26 and 4.00, the interest rate will increase by..25%.  The maturity of the creditagreement 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 the creditagreement.

 

7

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Note4.   Earnings (Loss) Per Common Share

 

Basicearnings (loss) per common share are calculated by dividing net income (loss)by the average common shares outstanding. On a diluted basis, shares outstanding are adjusted to assume theexercise of stock options.  

 
| ** **                                                                                            | ** ** | **Periods Ended March 31** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
|                                                                                                  |       | **Six Months**             |       | **Three Months** |   |
| ** **                                                                                            | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                  |       |                       |       |   |   |   |   |   |   |
| Net income  (loss)                                                                                    |       | $                          | 78,306     |   | $ | 1,969,814 |   | $ | (70,784 | ) | $ | 1,118,530 |   |
| Determination  of shares:                                                                             |       |                       |       |   |   |   |   |   |   |
| Weighted  average number of common shares outstanding                                                 |       | 6,338,519                  |       | 5,598,122 |   | 6,338,519 |   | 5,617,591 |   |
| Shares  issuable on exercise of stock options, net of shares assumed to be purchased  out of proceeds |       | 126,663                    |       | 98,006 |   |   | * | 104,778 |   |
| Average  common shares outstanding for diluted earnings per share computation                         |       | 6,465,182                  |       | 5,696,128 |   | 6,338,519 |   | 5,722,369 |   |
|                                                                                                  |       |                       |       |   |   |   |   |   |   |
| Earnings  (loss) per common share:                                                                    |       |                       |       |   |   |   |   |   |   |
| Basic                                                                                                 |       | $                          | 0.01       |   | $ | 0.35 |   | $ | (0.01 | ) | $ | 0.20 |   |
| Diluted                                                                                               |       | $                          | 0.01       |   | $ | 0.35 |   | $ | (0.01 | ) | $ | 0.20 |   |

 

----

*The effect of stock options has not been included for thethree months ended March 31, 2005, as their effect would have beenanti-dilutive.

 

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 increase earningsper share by $0.11 and $0.05 for the six and three months ended March 31, 2005,respectively, and $0.13 and $0.06 for the six and three months ended March 31,2004, respectively.

 

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, 

 

8

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equityin income or loss of equity investees, interest income and interest expense.Material intersegment sales and transfers have been eliminated.

 

Netsales and operating income (loss) for the Company’s reportable segments for thesix and three months ended March 31, 2005 and 2004, were as follows:

 
| ** **                   | ** ** | **Periods Ended March 31,** | ** ** |
|------------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **Six Months**              | ** ** | **Three Months** | ** ** |
| ** **                   | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(in thousands)**          | ** ** | **(in thousands)** | ** ** |
| **Net  Sales**               |       |                        |       |   |   |   |   |   |   |
| Bulk Alcohol  Products       |       | $                           | 19,602     |   | $ | 17,126 |   | $ | 9,659 |   | $ | 8,538 |   |
| Premium  Branded Spirits     |       | 13,915                      |       | 11,524 |   | 8,098 |   | 5,683 |   |
| Bottling  Operations         |       | 5,253                       |       | 5,547 |   | 2,345 |   | 2,872 |   |
| Vinegar and  Cooking Wine    |       | 10,934                      |       | 10,284 |   | 5,410 |   | 4,947 |   |
|                         |       | $                           | 49,704     |   | $ | 44,481 |   | $ | 25,512 |   | $ | 22,040 |   |
|                         |       |                        |       |   |   |   |   |   |   |
| **Operating  Income (Loss)** |       |                        |       |   |   |   |   |   |   |
| Bulk Alcohol  Products       |       | $                           | 6,282      |   | $ | 6,191 |   | $ | 2,711 |   | $ | 3,454 |   |
| Premium  Branded Spirits     |       | (3,343                      | )          | (1,887 | ) | (1,359 | ) | (1,191 | ) |
| Bottling  Operations         |       | (2,201                      | )          | (1,722 | ) | (1,025 | ) | (743 | ) |
| Vinegar and  Cooking Wine    |       | 1,383                       |       | 1,624 |   | 814 |   | 758 |   |
| Corporate  Operations        |       | (2,349                      | )          | (1,930 | ) | (1,138 | ) | (888 | ) |
|                         |       | $                           | (228       | ) | $ | 2,276 |   | $ | 3 |   | $ | 1,390 |   |

 

Note 6. Supplemental Executive Retirement Plan

 

During the second quarter of fiscal 2004, theCompany’s Compensation and Stock Option Committee approved a supplementalexecutive retirement plan for certain key executives of the Company.  The plan is an unfunded plan within themeaning of SFAS No. 132 *EmployersDisclosures About Pensions and Other Post Retirement Benefits*.  The net periodic benefit cost for the six andthree months ended March 31, 2005 and 2004, was as follows:

 
| ** **                 | ** ** | **Periods Ended March 31,** | ** ** |
|----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **Six Months**              | ** ** | **Three Months** | ** ** |
| ** **                 | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost               |       | $                           | 133,403    |   | $ | 22,014 |   | $ | 67,363 |   | $ | 22,014 |   |
| Interest  cost             |       | 9,405                       |       | 1,321 |   | 5,442 |   | 1,321 |   |
| Net periodic  benefit cost |       | $                           | 142,808    |   | $ | 23,335 |   | $ | 72,805 |   | $ | 23,335 |   |

 

Note 7.  Income Taxes

 

The Company incurred losses for income tax purposes from itsU.S. operations of $3.0 million through each of the second quarter of 2005 and2004.  The Company has recorded an incometax benefit in the Company’s consolidated statement of income and an asset onthe 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 $926,152 and $482,999 from cost of goods sold to selling,general and administrative expenses for the six and three months ended March31, 2004, respectively.

 

9

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Note9.  Name Change

 

On May 2,2005, the Company announced that it has changed its name from TodhunterInternational, Inc. to Cruzan International, Inc.  The new name, approved by the Company’sshareholders on March 15, 2005, reflects the Company’s evolving strategic focuson its Cruzan Rum brand, which has continued to experience tremendous growthsince its repositioning in the marketplace in the late 1990s.  In conjunction with its new corporateidentity, on May 3, 2005, the Company’s common stock began trading on the American Stock Exchange under the new symbol, “RUM.”

 

Note 10. Stock Options

 

On February24, 2005, the Company’s Compensation Committee granted options to purchase549,000 shares of the Company’s common stock to officers and other keyemployees of the Company.

 

10

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**Item 2.    Management’sDiscussion and Analysis of 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 Securities ExchangeAct of 1934, as amended.  Forward-LookingStatements are statements other than historical information or statements ofcurrent condition and relate to future events or the future financialperformance of the Company.  SomeForward-Looking Statements may be identified by use of such terms as “believes,”“anticipates,” “intends” or “expects.” Such Forward-Looking Statements involve known and unknown risks,uncertainties and other factors that may cause the actual results, performanceor achievements of the Company to be materially different from any futureresults, performance or achievements expressed or implied by suchForward-Looking Statements.  Forinformation concerning these factors and related matters, see “Risks that MayAffect Future Results” in Item 7, and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of the Company’s Annual Reporton Form 10-K for the fiscal year ended September 30, 2004.  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 six months ended March 31, 2005 compared tothe six months ended March 31, 2004, (ii) consolidated results of operations ofthe Company for the three months ended March 31, 2005 compared to the threemonths ended March 31, 2004, and (iii) 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.

 

Market share and industry data and rankingsdisclosed in this report have been obtained from industry and governmentpublications, as indicated; the Company has not independently verified thisinformation, although management believes such data and rankings to bereasonably 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 is approximately80%.  Management believes that theCompany is the largest supplier of fortified citrus wine in the United Statesand is not aware of any other domestic suppliers of fortified citrus wine.  Management is aware of only one other UnitedStates manufacturer of citrus brandy and citrus spirits and believes that theCompany’s market share for these products is approximately 85%.

 

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.

 

11

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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 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).

 

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 the Company’sbusiness are seasonal, with increased demand for the Company’s contractbottling services from April to October and increased production of the Company’sbulk alcohol products from November to June, corresponding to the Floridacitrus harvest.  As a result of thesefactors, the Company’s operating results may vary significantly from quarter toquarter.

 

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.

 

12

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##### **Resultsof Operations**

##### ** **

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.

 

**Table 1 – Statement of Income as a Percent ofNet Sales**

** **
| ** **                                    | ** ** | **Periods Ended March 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **Six Months**              | ** ** | **Three Months** | ** ** |
| ** **                                    | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                     |       | 100.0                       | %          | 100.0 | % | 100.0 | % | 100.0 | % |
| Cost of  goods sold                           |       | 65.9                        |       | 64.2 |   | 65.3 |   | 62.2 |   |
| Gross margin                                  |       | 34.1                        |       | 35.8 |   | 34.7 |   | 37.8 |   |
| Selling,  general and administrative expenses |       | 34.5                        |       | 30.7 |   | 34.7 |   | 31.5 |   |
| Operating  income (loss)                      |       | (0.4                        | )          | 5.1 |   | 0.0 |   | 6.3 |   |
| Interest  expense                             |       | (2.7                        | )          | (3.2 | ) | (3.0 | ) | (3.2 | ) |
| Other  income, net                            |       | 0.8                         |       | 2.3 |   | 0.8 |   | 1.8 |   |
| Income (loss)  before income taxes            |       | (2.3                        | )          | 4.2 |   | (2.2 | ) | 4.9 |   |
| Income tax  benefit                           |       | 2.5                         |       | 0.2 |   | 1.9 |   | 0.2 |   |
| Net income  (loss)                            |       | 0.2                         | %          | 4.4 | % | (0.3 | )% | 5.1 | % |

** **

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

** **
| ** **                   | ** ** | **Periods Ended March 31,** | ** ** |
|------------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **Six Months**              | ** ** | **Three Months** | ** ** |
| ** **                   | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net  Sales**               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bulk alcohol  products       |       | $                           | 19,602     |   | $ | 17,126 |   | $ | 9,659 |   | $ | 8,538 |   |
| Premium  branded spirits     |       | 13,915                      |       | 11,524 |   | 8,098 |   | 5,683 |   |
| Bottling  operations         |       | 5,253                       |       | 5,547 |   | 2,345 |   | 2,872 |   |
| Vinegar and  cooking wine    |       | 10,934                      |       | 10,284 |   | 5,410 |   | 4,947 |   |
|                         |       | 49,704                      |       | 44,481 |   | 25,512 |   | 22,040 |   |
|                         |       |                        |       |   |   |   |   |   |   |
| **Gross  Profit (Loss)**     | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bulk alcohol  products       |       | 8,445                       |       | 9,069 |   | 3,772 |   | 4,757 |   |
| Premium  branded spirits     |       | 6,636                       |       | 5,073 |   | 3,996 |   | 2,702 |   |
| Bottling  operations         |       | (828                        | )          | (613 | ) | (347 | ) | (240 | ) |
| Vinegar and  cooking wine    |       | 2,678                       |       | 2,377 |   | 1,435 |   | 1,110 |   |
|                         |       | 16,931                      |       | 15,906 |   | 8,856 |   | 8,329 |   |
|                         |       |                        |       |   |   |   |   |   |   |
| **Operating  Income (Loss)** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bulk alcohol  products       |       | 6,282                       |       | 6,191 |   | 2,711 |   | 3,454 |   |
| Premium  branded spirits     |       | (3,343                      | )          | (1,887 | ) | (1,359 | ) | (1,191 | ) |
| Bottling  operations         |       | (2,201                      | )          | (1,722 | ) | (1,025 | ) | (743 | ) |
| Vinegar and  cooking wine    |       | 1,383                       |       | 1,624 |   | 814 |   | 758 |   |
| Corporate  operations        |       | (2,349                      | )          | (1,930 | ) | (1,138 | ) | (888 | ) |
|                         |       | $                           | (228       | ) | $ | 2,276 |   | $ | 3 |   | $ | 1,390 |   |

 

13

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

 

**Table 3 – Unit Sales Volume Data**

 
| ** **                            | ** ** | **Periods Ended March 31,** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **Six Months**              | ** ** | **Three Months** | ** ** |
| ** **                            | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Bulk alcohol  products:               |       |                        |       |   |   |   |   |   |   |
| Distilled  products, in proof gallons |       |                        |       |   |   |   |   |   |   |
| Citrus  Brandy                        |       | 723                         |       | 638 |   | 359 |   | 220 |   |
| Citrus  Spirits                       |       | 308                         |       | 55 |   | 114 |   | 55 |   |
| Rum                                   |       | 2,394                       |       | 2,224 |   | 979 |   | 1,108 |   |
| Cane Spirits                          |       | 182                         |       | 217 |   | 71 |   | 127 |   |
| Fortified  wine, in gallons           |       | 6,100                       |       | 5,323 |   | 3,221 |   | 2,570 |   |
| Premium  branded spirits, in cases    |       | 342                         |       | 342 |   | 202 |   | 141 |   |
| Bottling  operations, in cases        |       | 1,178                       |       | 1,412 |   | 598 |   | 752 |   |
| Vinegar                               |       |                        |       |   |   |   |   |   |   |
| Bulk, in 100  grain gallons           |       | 2,419                       |       | 2,619 |   | 1,169 |   | 1,254 |   |
| Cases                                 |       | 352                         |       | 217 |   | 188 |   | 100 |   |
| Drums, in  100 grain gallons          |       | 568                         |       | 650 |   | 310 |   | 405 |   |
| Cooking Wine                          |       |                        |       |   |   |   |   |   |   |
| Bulk, in  gallons                     |       | 1,370                       |       | 1,426 |   | 768 |   | 528 |   |
| Cases                                 |       | 366                         |       | 366 |   | 154 |   | 151 |   |

** **

**Six months ended March 31, 2005 compared to six months endedMarch 31, 2004**.  Unless otherwise noted, references to 2005represent the six-month period ended March 31, 2005 and references to 2004represent the six-month period ended March 31, 2004.

 

*Net Sales.*Net sales were $49.7 million in 2005, an increase of 11.7% from netsales of $44.5 million in 2004.

 

Net sales of bulk alcohol products were $19.6 million in 2005, anincrease of 14.5% from net sales of $17.1 million in 2004.  The increase in net sales resulted primarilyfrom increased shipments of citrus brandy, citrus spirits, rum and fortifiedwine, offset by decreased shipments of cane spirits.  The increase in shipments of citrus brandy,citrus spirits, rum and fortified wine was due in part to the timing ofcustomer orders.  The Company’s customersoften 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.  In 2005, unit sales of citrus brandyincreased 13.4% compared to 2004, and the average selling price of citrusbrandy decreased 3.2%.  Also in 2005,unit sales of the Company’s fortified wine products increased 14.6% compared to2004, although the average selling price for the Company’s fortified winedecreased 3.5%.  The average sellingprices for fortified wine products decreased due to management lowering pricesas a result of increased competition from other producers.

 

Net sales of premium branded spirits were $13.9 million in 2005, anincrease of 20.8% from net sales of $11.5 million in 2004.  In 2004, net sales of premium branded spiritsincluded $0.7 million of Cruzan ready-to-drink products and other products whichwere discontinued.  Excluding these discontinuedproduct sales, net sales of premium branded spirits were $13.9 million in 2005,an increase of 28.6% from net sales of $10.8 million in 2004, as the premiumbranded spirits segment continued its double digit growth.

 

Sales of the Company’s Cruzan Estate Rums and Cruzan Flavored Rumsincreased 30.5% in 2005 compared to 2004. Sales of Cruzan Estate Rums and Cruzan Flavored Rums have increased from$2.2 million in 

 

14

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fiscal1996 to $21.0 million in fiscal 2004. During this time, the Cruzan brand has been recognized as one of thefastest growing brands in the spirits industry by Impact Databank and AdamsLiquor Handbook, two leading beverage industry publications.  In addition, the Cruzan Rums have wonnumerous tasting awards from several prestigious beverage industryorganizations, including The American Tasting Institute, The Beverage TastingInstitute and the San Francisco World Spirits Competition.  Since January 2003, several of the Company’s competitorshave introduced their own lines of flavored rum products into the marketplace,which, in certain prior fiscal quarters, has negatively impacted the level ofsales growth of Cruzan Flavored Rums. Some of the Company’s competitors in the rum and flavored rum categorieshave significantly greater financial and other resources than the Company,which could adversely affect the Company’s sales growth of Cruzan Estate Rumsand Cruzan Flavored Rums. As a response to such increased competition, and in orderto provide further impetus to the growth of Cruzan Flavored Rums, managementsignificantly increased its marketing budget for fiscal 2004 in an effort tosupport the continued growth of the Company’s Cruzan brand, causing an increasein the operating loss for this business segment in fiscal 2004.  Management has continued to increaseexpenditures in fiscal 2005 to improve brand growth.

 

Net sales of the Company’s bottling operations were $5.3 million in2005, a decrease of 5.3% from net sales of $5.5 million in 2004.  While the unit volume of the Company’sbottling operations decreased 16.5% in 2005, average unit prices increased13.5% as a result of price increases to certain customers and a change inproduct mix.  Sales in the Company’sbottling operations have declined in the last three fiscal years as a result ofa contraction in the ready-to-drink product category, for which the Company wasa large 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 continues to place an emphasis onthe 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.  In January 2005, theoperation of this bottling line was reduced to one shift.  At the present time, the Company has nottaken an impairment charge relating to its bottling operations as the carryingvalue of its bottling assets is less than fair value.

 

Net sales of vinegar and cooking wine were $10.9 million in 2005, anincrease of 6.3% from net sales of $10.3 million in 2004.   In 2005, total unit sales of vinegar andcooking wine decreased 3.9% compared to 2004, although the average sellingprice per unit increased 10.6%.  Theaverage selling prices of vinegar and cooking wine increased due to acombination of decreased sales of lower priced white distilled vinegar and anincrease in sales of higher priced bulk apple vinegar and vinegar case goods.

 

*Gross Profit.* Gross profit was $16.9 million in 2005, anincrease of 6.4% from gross profit of $15.9 million in 2004.  During 2005, bulk alcohol gross profitdecreased as a result of increased citrus molasses and juice concentrate rawmaterial costs as well as price concessions to fortified wine customers;premium branded spirits gross profit increased with sales; bottling operationsgross (loss) was comparable to 2004; and vinegar and cooking wine gross profitincreased due to an improved product mix. Gross margin decreased to 34.1% in 2005 from 35.8% in 2004 as a resultof the factors discussed above.  In thefirst quarter of fiscal 2005, the Company changed the classification of certainexpenses from cost of goods sold to selling, general and administrative as aresult of a review and improvement in its financial reporting practices.  The Company has restated its prior yearstatement of income to reflect the new classification.  This resulted in the reclassification of$926,152 from cost of goods sold to selling, general and administrativeexpenses for the six months ended March 31, 2004.

 

*Selling, General and Administrative Expenses. *Selling, general and administrative expenses were $17.2 million in2005, an increase of 25.9% from $13.6 million in 2004.  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.  Duringfiscal 2004, the Company increased its selling, general and administrative expensesin its premium branded spirits segment in an effort to support the continuedgrowth of the Company’s Cruzan brand. Management has continued to increase expenditures in fiscal 2005 toimprove brand growth.  Also during 2005,the Company’s corporate overhead has increased as a result of increased legaland professional fees incurred for compliance with Section 404 of theSarbanes-Oxley Act 

 

15

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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 (Loss).*  Table2 sets forth the operating income (loss) by reportable segment of the Companyfor 2005 and 2004.  The Company’soperating (loss) was $0.2 million in 2005, as compared to operating income of$2.3 million in 2004.  The Company’spremium branded spirits segment had operating losses of $3.3 million in 2005and $1.9 million in 2004.  As a result ofthe factors described under “Net Sales” above, the Company’s bottlingoperations segment reported an operating loss of $2.2 million in 2005 and $1.7million in 2004.

 

*Interest Expense.*Interest expense was $1.4 million in 2005 and2004.  The Company’s borrowing rates werehigher in 2005 compared to 2004. However, higher rates were offset by lower average borrowings during2005, resulting in slightly lower interest expense.

 

*Income Tax Expense.*During 2005and 2004, the Company incurred operating losses from its U.S. operations andrecorded an income tax benefit of $1.3 million and $0.1 million,respectively.  The Company’s VirginIslands subsidiary has a 90% exemption from U.S. Virgin Islands incometaxes.  The exemption is effectivethrough September 2020.  In addition, theCompany benefited from the extraterritorial income exclusion in 2005 and 2004

 

**Three months ended March 31, 2005 comparedto three months ended March 31, 2004**.  Unlessotherwise noted, references to 2005 represent the three-month period endedMarch 31, 2005 and references to 2004 represent the three-month period endedMarch 31, 2004.

 

*Net Sales.*Net sales were $25.5 million in2005, an increase of 15.8% from net sales of $22.0 million in 2004.

 

Net sales of bulk alcohol productswere $9.7 million in 2005, an increase of 13.1% from net sales of $8.5 millionin 2004.  The increase in net salesresulted primarily from increased shipments of citrus brandy, citrus spiritsand fortified wine, offset by decreased shipments of cane spirits and rum.  The increase in shipments of citrus brandy,citrus spirits and fortified wine was due to the timing of customerorders.  The Company’s customers oftenpurchase bulk alcohol products in significant quantities, and accordingly, thesize and timing of purchase orders and product shipments can cause operatingresults to fluctuate significantly from quarter to quarter.  In 2005, unit sales of the Company’sfortified wine products increased 25.3% compared to 2004, although the averageselling price for the Company’s fortified wine decreased 4.4%.  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 $8.1 million in 2005, an increase of 42.5% from net sales of $5.7 millionin 2004.

 

Sales of the Company’s Cruzan EstateRums and Cruzan Flavored Rums increased 34.7% in 2005 compared to 2004.  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 an increase in the operating loss for this businesssegment in fiscal 2004.  Management hascontinued to increase expenditures in fiscal 2005 to improve brand growth.

 

Netsales of the Company’s bottling operations were $2.3 million in 2005, a decreaseof 18.3% from net sales of $2.9 million in 2004.  While the unit volume of the Company’sbottling operations decreased 20.4% in 2005, 

 

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averageunit prices increased as a result of price increases to certain customers and achange in product mix.  Sales in theCompany’s bottling operations have declined in the last three fiscal years as aresult of a contraction in the ready-to-drink product category, for which theCompany was a major contract bottler. Responding to this decline, in July 2004 the Company completed thepartial consolidation of its bottling operations.  However, bottling operations volume did noteven meet the Company’s reduced expectations for fiscal 2004, which resulted ina loss in this segment for fiscal 2004. The Company continues to place an emphasis on the sales effort in thissegment, seeking other contract bottling opportunities.  The Company has explored other alternativesin its two bottling facilities, including further consolidation, a partial saleand shedding 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.  In January 2005, the operation of thisbottling line was reduced to one shift. At the present time, the Company has not taken an impairment chargerelating to its bottling operations as the carrying value of its bottling assetsis less than fair value.

 

Net sales of vinegar and cooking winewere $5.4 million in 2005, an increase of 9.3% from net sales of $4.9 millionin 2004.   In 2005, total unit sales ofvinegar and cooking wine increased 6.2% compared to 2004, and the averageselling price per unit increased 2.9%. The average selling prices of vinegar and cooking wine increased due toa combination of decreased sales of lower priced white distilled vinegar andincreased sales of higher priced apple and wine vinegar.

 

*Gross Profit.* Gross profit was $8.9 million in2005, an increase of 6.3% from gross profit of $8.3 million in 2004.  During 2005, bulk alcohol gross profitdecreased as a result of decreased shipments of rum and price concessions tofortified wine customers; premium branded spirits gross profit increased due toincreased sales; bottling operations gross (loss) was comparable to 2004; andvinegar and cooking wine gross profit increased due to improved productmix.  Gross margin decreased to 34.7% in2005 from 37.8% in 2004 as a result of changes in product mix and increasedmolasses, juice concentrate and grain alcohol raw material costs.  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 $482,999 from cost of goods sold to selling, generaland administrative expenses for the three months ended March 31, 2004.

 

*Selling, General and AdministrativeExpenses. *Selling, general and administrativeexpenses were $8.9 million in 2005, an increase of 27.6% from $6.9 million in2004.  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.  During fiscal 2005, the Company has increasedits selling, general and administrative expenses in its premium branded spiritssegment in an effort to support the continued growth of the Company’s Cruzanbrand.  Management has continued toincrease expenditures in fiscal 2005 to improve brand growth.  Also during 2005, 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 which will continue in fiscal 2005.

 

*Operating Income (Loss).* Table 2 sets forth the operating income (loss) by reportable segment ofthe Company for 2005 and 2004.  TheCompany’s operating income was $2,744 in 2005, as compared to operating incomeof $1.4 million in 2004.  The Company’spremium branded spirits segment had operating losses of $1.4 million in 2005and $1.2 million in 2004.  As a result ofthe factors described under “Net Sales” above, the Company’s bottlingoperations segment reported an operating loss of $1.0 million in 2005.

 

*Interest Expense.*Interest expense was $0.8 million in2005 and $0.7 million in 2004.  TheCompany’s borrowing rates were higher in 2005 compared to 2004.

 

*Income Tax Expense.*During 2005 and 2004, the Companyincurred operating losses from its U.S. operations and recorded an income taxbenefit of $0.5 million and $0.1 million, respectively.  The Company’s Virgin Islands subsidiary has a90% exemption from U.S. Virgin Islands income taxes.  The exemption is effective through September2020.  In addition, the Company benefitedfrom the extraterritorial income exclusion in 2005 and 2004.

 

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**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 premiumbranded spirits business.  The Company’ssource of liquidity has historically been cash flow from operations and itsline of credit.  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 anddecreases after the citrus harvest ends when the Company supplies its customerswith citrus 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 other businesses.Management expects to continue to increase the Company’s inventory of barrelaged 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.  In January 2005, the operation of thisbottling line was reduced to one shift.

 

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 has continuedto increase expenditures in fiscal 2005 to improve brand growth.  To the extent that the increased expendituresdo not result in increased sales of the Cruzan brand, the Company’s short-termliquidity 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 capital expenditurerequirements for both its short-term and long-term capital needs.

 

**Operating Activities**

 

Net cash used in operating activitiesin 2005 was $2.1 million, which resulted from $1.3 million in net incomeadjusted for noncash items, less $3.4 million representing the net increase inoperating assets and liabilities.

 

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**Investing andFinancing Activities**

 

Net cash used in investing activitiesin 2005 was $2.0 million, which resulted primarily from $1.6 million of capitalexpenditures and $0.2 million of advances to equity investees.

 

Net cash provided by financingactivities in 2005 was $4.8 million, which resulted primarily from payments of$2.1 million of long-term debt offset by borrowings of $7.0 million on theCompany’s line of credit.

 

In October2001, the Company entered into a $70 million credit agreement, consisting of a$40 million term loan and a $30 million revolving loan facility.  In March 2004, the revolving loan facilitywas reduced to $15 million.  In June2004, the credit agreement was modified to extend the maturity date of therevolving loan facility to September 2006.

 

In December 2004, the Companyreceived a waiver of its financial covenants compliance requirement for thequarters ended September 30, 2004 and December 31, 2004.  The financial covenant requirements were alsoamended prospectively in accordance with the Company’s business plan for fiscal2005.  The covenant amendment requiredthe Company to agree to a .25% increase in the interest rate, provided that theFunded Debt to EBITDA ratio is between 2.50 and 3.25.  In the event that the Company’s Funded Debtto EBITDA ratio is between 3.26 and 4.00, the interest rate will increase by..25%.  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 $34.5 million as of March 31, 2005, and its ratio of total debt toequity was 0.63 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.  See Note 10 to the Company’s consolidatedfinancial statements included in the Company’s Annual Report on Form 10-K forthe year ended September 30, 2004 for additional information on income taxesrelated 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, 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.

 

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**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.    Quantitativeand Qualitative Disclosures About Market Risk**

 

The information required under thisItem 3 is incorporated herein by reference to the Company’s Annual Report onForm10-K for the year ended September 30, 2004. As of March 31, 2005, there have been no material changes to theinformation provided therein.

 

**Item 4.    Controlsand 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, the Company’sChief Executive Officer and Chief Financial Officer concluded that the designand operation of the Company’s disclosure controls and procedures providedreasonable assurance that the disclosure controls and procedures are effectiveto accomplish their objectives.

 

**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 changes in theCompany’s internal controls during the second quarter of fiscal 2005 that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

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**PART II.  OTHERINFORMATION**

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

The annual meeting of stockholders ofthe Company was held on March 15, 2005, in West Palm Beach, Florida, for thefollowing purposes:

 

(i)             to approve an amendment to theCompany’s Amended and Restated Certificate of Incorporation to change thecompany’s corporate name from Todhunter International, Inc. to CruzanInternational, Inc.; and

 

(ii)          to elect two Class I directors tohold office for a term of three years.

 

Proxies for the meeting weresolicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, asamended, and there was no solicitation in opposition to management’ssolicitations.

 

Election of Directors

 

All of management’s nominees forelection as directors as listed in the proxy statement were elected.  The results of the election were as follows:

 
| **Name**          | ** ** | **Class** | ** ** | **For**   | ** ** | **Withheld** | ** ** | **Abstentions and  Broker Non-Votes** | ** ** |
|-------------------|------------|-----------|------------|-----------|------------|--------------|------------|---------------------------------------|------------|
| Donald L.  Kasun  |       | I         |       | 5,827,883 |       | 10,500       |       | 0                                     |       |
| Thomas A.  Valdes |       | I         |       | 5,728,474 |       | 109,909      |       | 0                                     |       |

 

Following the annual meeting, MichaelE. Carballo, Joseph R. Cook and Leonard G. Rogers continue to serve as Class IIdirectors with terms expiring at the 2006 annual meeting, and Jay S. Maltby,Edward F. McDonnell and D. Chris Mitchell continue to serve as Class IIIdirectors with terms expiring at the 2007 Annual Meeting.

 

Approval of Certificate of Amendmentto the Company’s Amended and Restated Certificate of Incorporation

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** |
|-----------|------------|-------------|------------|-------------|
| 5,834,117 |       | 3,900       |       | 366         |

** **

**Item 6.  Exhibits**

** **
| 11.1 |   | Statement  of Computation of Per Share Earnings (1)                                                                                                           |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 20.1 |   | Earnings  press release for the second quarter and six months ended March 31, 2005 (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 March 31, 2005.

 

(2)                                  Filedherewith.

 

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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:  May 13, 2005 | /s/  Jay S. Maltby                                    |
|---------------------|-------------------------------------------------------|
|                | Jay S.  Maltby                                        |
|                | Chairman,  Chief Executive Officer and President      |
|                |                                                  |
|                |                                                  |
|                |                                                  |
| Date:  May 13, 2005 | /s/  Ezra Shashoua                                    |
|                | Ezra  Shashoua                                        |
|                | Executive  Vice President and Chief Financial Officer |

 

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