ITEM 1. BUSINESS
GENERAL OVERVIEW
Todhunter International, Inc. (the "Company") is a leading producer and supplier of brandy, rum, wine and spirits to other beverage alcohol manufacturers; produces, imports and markets premium branded spirits; bottles beverage alcohol and other beverages on a contract basis and under its own labels; and produces vinegar and cooking wine. The Company operates four production facilities in the United States and one in St. Croix, United States Virgin Islands, and purchases certain products for resale. The Company is a Delaware corporation organized in 1970 as a successor to a business founded in the Bahamas in 1964. All references in this report to "Fiscal 2001," "Fiscal 2000" and "Fiscal 1999" shall refer to the Company's fiscal years ended September 30 of such year.
OWNERSHIP BY ANGOSTURA LIMITED
Angostura Limited ("Angostura"), a Trinidad-based distiller, has reported that, as of March 19, 2001, it beneficially owned 2,984,313 shares, representing 54.1% of the Company's outstanding Common Stock, $.01 par value per share ( the "Common Stock").
ACQUISITION AND DIVESTITURE ACTIVITY
In November 1999, the Company acquired substantially all of the assets of Adams Wine Company, d/b/a Monarch Wine Company of Georgia ("Monarch"), Atlanta, Georgia, for $23.8 million in cash ( the "Monarch Acquisition"). Monarch specializes in the manufacture of wines, including custom blended wines and cooking wines for the food industry and base wines for producers of vinegar and beverage alcohol.
In September 2000, the Company sold all of its remaining operating assets in the Bahamas to British Fidelity Holdings Limited, an affiliate through common ownership, for a $3.5 million note due in August 2005 bearing interest at 6% (see Note 4 to the Company's consolidated financial statements). The Company recorded a loss of $78,838 on the transaction. Sales of the Bahamian operations were previously included in the "Corporate Operations and Other" segment.
BUSINESS SEGMENTS
The Company operates primarily in the beverage alcohol industry in the United States. The Company reports its operating results in five segments:
o Bulk Alcohol Products (citrus brandy, citrus spirits, rum, cane spirits, fortified citrus wine, purchased distilled products and byproducts) o Premium Branded Spirits (primarily rum and flavored rum) o Bottling Operations (contract bottling services and proprietary and private label products) o Vinegar and Cooking Wine (bulk vinegar, bulk cooking wine, vinegar stock and proprietary and private label case goods) o Corporate Operations and Other (primarily corporate-related items)
Information regarding the net sales, operating income (loss) and total assets of each of the Company's business segments and information regarding geographic areas is set forth in Note 12 to the Company's consolidated financial statements.
BULK ALCOHOL PRODUCTS. The Company produces and sells citrus brandy, citrus spirits, rum, cane spirits and fortified citrus wine in the United States. The Company also purchases distilled products for resale, including grain alcohol, which is denatured and packaged and sold as industrial alcohol to hospitals, universities, fragrance producers and other manufacturers. The Company is the largest supplier of citrus brandy, bulk rum and fortified citrus wine in the United States. The Company sells its bulk alcohol products to over 40 producers of beverage alcohol in the United States and exports products to approximately 10 foreign countries. The Company's distilling operations produce a byproduct, which is sold as animal feed.
Citrus brandy and spirits are distilled from citrus juice byproducts purchased from manufacturers of citrus juice concentrate. The Company's citrus brandy is used primarily as an ingredient in flavored brandies. Citrus spirits are used primarily as a fortifying ingredient to increase the alcohol content of the Company's citrus wine and the wine of other manufacturers. The Company's citrus wine is fermented from citrus juice and fortified with citrus spirits to increase its alcohol content to approximately 20% by volume. Known as fortified citrus wine, this product is used primarily as an ingredient in cordials, whiskies and other beverage alcohol. Rum and cane spirits are distilled from sugar cane molasses and are sold to other bottlers of rum, producers of beverage alcohol, food companies and flavor manufacturers. Rum is also used in the Company's premium branded spirits and bottling operations.
Management believes that the Company's proximity to raw materials and its use of citrus byproducts in the production of bulk alcohol provide it with cost advantages over competitors' products. Because end products are taxed on a blended rate based upon the ingredients used rather than on the resulting alcohol content of the end product, beverage alcohol producers can lower excise taxes on their products by substituting fortified citrus wine for distilled spirits alternatives. This cost savings arises because fortified citrus wine is currently subject to federal excise taxes of $1.57 per gallon, whereas distilled spirits are taxed at $13.50 per proof gallon (one proof gallon is approximately equivalent in alcohol content to two and one-half gallons of fortified citrus wine). The ability of beverage alcohol producers to substitute fortified citrus wine for distilled spirits varies by end product in accordance with government regulations. For example, fortified citrus wine may contribute up to 49% of the alcohol content of cordials and liqueurs, and up to approximately 10% of the alcohol content of Canadian whiskey. In addition, small quantities of fortified citrus wine may be used in blended whiskey, rum, brandy and other types of beverage alcohol.
PREMIUM BRANDED SPIRITS. The Company produces, bottles, imports, develops and markets a line of premium branded spirits in the United States and exports distilled spirits to countries in Europe, Central America and the Caribbean. Since 1996, the Company has established and strengthened relationships with wholesalers, expanded its distribution network, developed new products, obtained agency agreements and acquired management and marketing expertise. Management's strategy has been to focus on marketing and building premium brands with an initial emphasis on the rum category. The Company's principal premium brands include Cruzan Estate Rums and Cruzan Flavored Rums.
BOTTLING OPERATIONS. The Company's bottling operations include contract bottling services and the production, bottling and marketing of a complete line of distilled spirits under its own proprietary labels and under the private labels of major retailers. The Company's primary bottling operations are located in Florida and serve customers in the Southeastern United States. The Company also produces and sells proprietary label products in the United States Virgin Islands.
Contract bottling products include distilled spirits, coolers, prepared cocktails, fruit juices, carbonated and non-carbonated fruit flavored beverages and flavored sparkling water. The Company's proprietary and private label products include rum, gin, vodka, tequila, cordials and various whiskies. The Company's proprietary label products are marketed in the popular-price category of the distilled spirits market.
VINEGAR AND COOKING WINE. To complement its distilling, winery and bottling operations, the Company produces vinegar, vinegar stock, and cooking wine for sale to condiment manufacturers, food service distributors and major retailers in the United States and Canada . The Company's sales to retailers are made using the Company's proprietary labels and under the retailers' private labels.
CORPORATE OPERATIONS AND OTHER. Corporate Operations and Other includes corporate-related items and the results of the Company's Bahamian subsidiary through Fiscal 2000, when the Company sold all of the subsidiary's remaining operating assets.
DEPENDENCE ON MAJOR CUSTOMERS
The Company sells its bulk alcohol products to over 40 producers of beverage alcohol in the United States and exports to approximately 10 foreign countries. The Company's contract bottling services and proprietary and private label products are sold to a limited number of customers. The Company's vinegar and cooking wine are sold to over 700 condiment manufacturers, food service distributors and retailers. The Company has major customers in its bulk alcohol products and bottling operations businesses; the loss of one or more of these major customers could have a material adverse effect on the Company's liquidity and results of operations.
PRODUCTION
The Company's principal domestic production facilities are located in Lake Alfred and Auburndale, Florida, both near Orlando and central to Florida's citrus growing region. The two plants have similar distilling, bottling and winery operations, allowing the Company to shift production from one plant to the other. The Lake Alfred plant also has a vinegar production facility. Both plants are near major highways and are serviced by a railroad, providing good transportation access. The Company has a cold storage, warehousing and plastic bottle manufacturing facility in Winter Haven, Florida. The Company also operates a winery and vinegar production facility in Louisville, Kentucky. The Company's offshore rum production facilities are located in St. Croix, United States Virgin Islands.
DISTILLING. The Company begins its distilling process with citrus or cane molasses, which is fermented for approximately two to seven days. Once fermented, the product has an average alcohol content of 4% by volume, which is increased to approximately 95% through distillation. The alcohol is then processed through rectifying columns and further refined. The finished product is stored in stainless steel tanks, except for rum, which is generally stored in wooden barrels for aging purposes. The Lake Alfred, Auburndale and Virgin Islands facilities can produce, on a combined basis, up to 23 million gallons of distilled products per year.
WINERY. Wine is produced by the fermentation of citrus or grape juice. After fermentation, the wine is fortified by the addition of distilled citrus spirits to raise its alcohol content to approximately 20% by volume. Fortified citrus wine is sold to producers of beverage alcohol. The wineries are physically segregated from the distilling operations and have their own sets of fermenting and storage tanks. The Lake Alfred, Auburndale and Louisville facilities can produce, on a combined basis, up to 30 million gallons of wine per year.
BOTTLING. The Lake Alfred and Auburndale plants both have automated, high-speed bottling lines capable of filling up to 600 12-ounce containers per minute. The Lake Alfred plant has two lines that are used primarily to bottle vinegar and juices, two lines that are used to bottle proprietary and private label products and one line to bottle premium branded spirits. The Auburndale plant has two lines that are dedicated to bottling coolers and prepared cocktails and three lines that bottle proprietary and private label products, premium branded spirits and cooking
wine. The Company's warehouse storage areas can accommodate up to 1,000,000 cases. The Company's plant in the Virgin Islands has one line capable of bottling up to 250,000 cases per year. The Company distills and ages its own rum, but generally produces its other proprietary and private label products from alcohol purchased from third parties. Depending on the particular formula for a product, the Company adds flavoring and/or sugar, reduces the product's proof and then filters and bottles the finished product. The Company's bottling capacity is approximately 10 million cases per year.
VINEGAR AND COOKING WINE. Vinegar is produced by converting alcohol into acetic acid. Several varieties of vinegar, including white distilled, red wine, white wine, corn, rice wine, balsamic, tarragon and apple cider, are produced at the Lake Alfred and Louisville facilities, which have a combined capacity of 10 million grain gallons per year. Cooking wine is produced by the controlled fermentation of red or white grape juice into wine. Several varieties of cooking wine, including red, white, sherry, golden, marsala and chablis, are produced at the Lake Alfred, Auburndale and Louisville facilities.
QUALITY CONTROL. Each of the Company's facilities is equipped with a quality control laboratory. The Company employs several chemists who continually test to ensure the quality of raw materials and end products.
RAW MATERIALS. The principal raw materials used in the Company's distilling operations are citrus molasses, a byproduct of citrus juice production, and cane molasses, a byproduct of sugar production. Citrus molasses, which is used in the production of citrus brandy and citrus spirits, accounted for approximately 58% of the raw materials used in the Company's distilling operations in Fiscal 2001. Cane molasses, which is used in the production of rum and cane spirits, accounted for the remaining 42%. Citrus juice concentrate is the primary raw material used in the Company's winery operations. The Company purchases such raw materials from a variety of suppliers. The Company purchases distilled products, used in its bulk alcohol products and bottling operations businesses, from several suppliers. Glass bottles and other materials, such as caps, labels and cardboard cartons, are used in bottling and packaging and are available from numerous suppliers. Alcohol and grape juice concentrate are the primary raw materials used in the Company's vinegar and cooking wine operations. During Fiscal 2001, one supplier accounted for more than 10% of the Company's raw material purchases. The cost of raw materials fluctuates depending upon a number of factors, including crop conditions, weather, governmental programs and purchases by foreign governments.
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY
The size and timing of purchase orders and product shipments can cause operating results to fluctuate significantly from quarter to quarter, particularly since some customers purchase bulk alcohol products in significant quantities or place significant orders for contract bottling services, distilled spirits, vinegar and cooking wine. Additionally, some Company products generate higher profit margins than others, and changes in the Company's product mix will therefore cause gross margins to fluctuate. Certain aspects of the Company's business are also seasonal, with increased demand for the Company's contract bottling services from April to October and increased production of the Company's bulk alcohol products from November to June, corresponding to the Florida citrus harvest. As a result of these factors, the Company's operating results may vary significantly from quarter to quarter.
MARKETING AND DISTRIBUTION
Bulk alcohol products are sold primarily in large quantities through Company-employed salespeople. The Company's marketing strategy emphasizes the cost advantages of these products over other ingredients available to end producers. Bulk alcohol products are sold primarily to other bottlers, distillers and end producers located throughout the United States and Canada.
The Company sells proprietary and private label spirits to wholesalers for distribution primarily in the Southeastern United States. The Company's marketing strategy for these products places primary emphasis upon promotional programs emphasizing the Company's cost advantages, directed at wholesalers and retailers, rather than consumers. Wholesalers market these products to retailers, who then market them directly to consumers. Although competition for retail shelf space in the beverage alcohol industry is significant, wholesalers of such products, and not the Company, generally must address such competition, although the Company's promotional programs may affect the allocation of retail shelf space for its products. The Company produces, imports, markets and sells premium branded spirits to wholesalers in the United States. The Company's marketing and promotional programs
for its premium brands are directed at wholesalers, retailers and consumers. Sales of the Company's proprietary and private label and premium branded spirits are generally made FOB (free on board) at the Company's facilities and, accordingly, the purchasers of such products are responsible for the risk of loss and transportation costs. In addition to its own salesforce, the Company works through various brokers to develop and service its sales to wholesalers and retailers.
The Company's marketing strategy with respect to its contract bottling services emphasizes the cost advantages and quality of the Company's services. Arrangements with bottling customers are typically negotiated by the Company's executive officers.
Vinegar and cooking wine are sold primarily in large quantities to manufacturers, distributors and retailers through the Company's own salesforce. These products are also sold through wholesalers and directly to retailers under the Company's proprietary labels and under the private labels of retailers.
COMPETITION
The areas of the beverage alcohol industry in which the Company does business are highly competitive with respect to price, service and product quality, and there are several companies with substantially greater financial and other resources than the Company. The Company's citrus-based bulk alcohol products compete primarily with producers of grape-based products. While the Company is aware of only two other domestic producers of citrus brandy and spirits, there are several producers of grape-based distilled products. The Company's proprietary and private label products and premium branded spirits compete on a regional and national basis against other distilled spirits products, including premium labels, mid-price and popular-price products. The proprietary label and premium branded spirits produced by the Company compete with those of companies for whom the Company performs contract bottling services and to whom the Company sells its bulk alcohol products. The Company believes that its relationships with its customers are good, and it has not experienced any adverse effects, such as termination or non-renewal of ongoing contracts, as a result of competition. In addition, the Company does not expect to experience any material adverse effects from such competition in the foreseeable future. Contract bottling operations compete against other bottlers located throughout the Southeastern United States. The Company experiences similar competition in its vinegar and cooking wine operations. While Management believes that it has achieved a strong competitive position in the markets it serves, there can be no assurance that the Company will be able to maintain its competitive position in the future.
REGULATION AND TAXATION
Producing, importing and selling wine and spirits is subject to extensive regulation by certain federal and state agencies, and the Company is required to obtain various permits, bonds and licenses to comply with these regulations. Pursuant to federal and state environmental requirements, the Company is required to obtain permits and licenses to operate certain facilities, and to treat and remove effluents discharged from its distilling, winery and bottling operations. Management believes it is presently in material compliance with all applicable federal and state regulations. See Item 3, "Legal Proceedings," for further information.
Beverage alcohol produced and bottled by the Company is subject to substantial federal excise taxes. As of September 30, 2001, excise taxes were being imposed at flat rates of $13.50 per proof gallon for distilled spirits and $1.57 per gallon for fortified wine.
The Company's fortified wine products, as an ingredient of beverage alcohol, have a cost advantage under the component method of taxation, which taxes wine at a lower rate than distilled spirits. Changes in, or the elimination of, the component method of taxation, as it relates to wine, would have a material adverse effect on the Company's results of operations.
EMPLOYEES
As of September 30, 2001, the Company had approximately 425 full-time employees. Additional workers are generally employed at the Company's bottling facilities during the summer months, when the bulk of contract bottling takes place. None of the Company's employees is a member of any labor union nor are there any collective bargaining agreements between the Company and its employees, with the exception of the Company's Virgin Islands
employees. The Virgin Islands operation, consisting of approximately 55 employees, is fully unionized. Management believes that its relations with its employees are good.
INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has facilities in Florida and Kentucky for the production of its bulk alcohol products, premium branded spirits, contract bottling services, vinegar and cooking wine. The Company sells its products and services primarily to customers in the United States but also exports certain products to foreign countries, primarily in Europe, Canada, Central America and the Caribbean. The Company's rum production facilities are located in St. Croix, United States Virgin Islands. Rum produced in the Virgin Islands is sold primarily to other bottlers of rum, producers of beverage alcohol, food companies and flavor manufacturers located in the United States but is also sold to foreign countries in the Caribbean, South America and Europe. See Note 12 to the Company's consolidated financial statements for additional information about the Company's foreign and domestic operations and export sales.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns all of its principal production facilities, including all related land, buildings, and equipment. The Lake Alfred facility consists of four principal buildings with approximately 250,000 total square feet on 32 acres. The Auburndale facility consists of three principal buildings with approximately 250,000 total square feet on 16 acres. The Louisville facility consists of three principal buildings with approximately 60,000 total square feet on 27.5 acres. The Winter Haven facility consists of four principal buildings with approximately 200,000 total square feet on 30 acres. The Virgin Islands facility consists of seven principal buildings with approximately 200,000 total square feet on 33 acres. The Company leases approximately 10,000 square feet of office space in West Palm Beach, Florida for its executive offices. Management believes that all of its facilities, both owned and leased, are adequate and suitable for operations in the foreseeable future. However, management may undertake the expansion of certain facilities from time to time in the ordinary course of business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Bureau of Alcohol, Tobacco and Firearms of the United States Department of the Treasury (the "BATF") has advised the Company that it is conducting an investigation of shipments made by various U.S. alcohol producers to certain countries formerly included in the Soviet Union. In connection with this investigation, a federal grand jury in the District of New Jersey has issued subpeonas to several employees of the Company. To date, the Company has voluntarily complied with these subpeonas and cooperated with the investigation. The BATF has indicated that it believes that certain of the Company's shipments may not have conformed to the specifications previously approved by the BATF, and that this nonconformity may have violated U.S. law. However, the Company has not been advised that it has been designated a target of the investigation, and it believes that its business has been conducted in accordance with applicable law. The Company cannot predict whether or to what extent it may be subject to fines or other penalties if it is found to have violated any such laws, however, the Company does not expect any such fines or other penalties, if any, to have a material adverse effect on the Company's financial condition or results of operations.
The Company and its subsidiaries are subject to litigation from time to time in the ordinary course of business. None of these routine legal proceedings are material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders during the fourth quarter of Fiscal 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the American Stock Exchange under the symbol "THT." The following table sets forth the high and low closing quotations of the Company's Common Stock for each quarter during the past two fiscal years.
The number of stockholders of record as of December 7, 2001 was 46. In addition, based upon a list of non-objecting beneficial owners, there were at least 583 beneficial owners at January 19, 2001.
No dividends were paid to stockholders during Fiscal 2000 and Fiscal 2001. The Company intends to continue to retain earnings for use in its business and therefore does not anticipate declaring or paying cash dividends in the forseeable future. The payment of cash dividends would also require the consent of the Company's lender. Also, see "Financial Liquidity and Capital Resources," included in Item 7.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the Company's audited consolidated financial statements. These data are qualified by reference to, and should be read in conjunction with, the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management's discussion and analysis of financial condition and results of operations contains "forward-looking statements." See "Introductory Note" on page 1.
The following discussion and analysis summarizes the significant factors affecting (i) consolidated results of operations of the Company for Fiscal 2001 compared to Fiscal 2000, and Fiscal 2000 compared to Fiscal 1999, and (ii) financial liquidity and capital resources for Fiscal 2001. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto included herein. Certain amounts presented in this Item 7 have been rounded to the nearest thousand and hundred thousand, as applicable, but the percentages are based on actual amounts without rounding.
The Company operates primarily in the beverage alcohol industry in the United States. The Company reports its operating results in five segments: Bulk Alcohol Products (citrus brandy, citrus spirits, rum, cane spirits, fortified citrus wine, purchased distilled products and byproducts); Premium Branded Spirits (primarily rum and flavored rum); Bottling Operations (contract bottling services and proprietary and private label products); Vinegar and Cooking Wine (bulk vinegar, bulk cooking wine, vinegar stock and proprietary and private label case goods); and Corporate Operations and Other (primarily corporate related items).
Information regarding net sales, operating income (loss) and total assets of each of the Company's business segments and information regarding geographic areas is set forth in Note 12 to the Company's consolidated financial statements located in Item 8 of this Annual Report on Form 10-K.
The following tables set forth statement of income items as a percentage of net sales and information on net sales of certain Company products.
The following table provides unit sales volume data for certain Company products.
The Company is a leading producer and supplier of brandy, rum, wine and spirits to other beverage alcohol manufacturers; produces, imports and markets premium branded spirits; bottles beverage alcohol and other beverages on a contract basis and under its own labels; and produces vinegar and cooking wine.
The Company's net sales and gross margins (gross profit as a percentage of net sales) vary depending on the mix of business among the Company's products. Historically, gross margins have been highest in bulk alcohol products and premium branded spirits and lower in bottling operations and vinegar and cooking wine operations. Within its bottling operations, sales and gross margins have varied substantially based upon the mix of business from the Company's "Type A" and "Type B" bottling customers. Type A bottling customers pay the Company to purchase their raw materials and these costs are passed through to the customer. Type B bottling customers supply their own raw materials and are only charged for bottling charges. Although gross profit per case for the Company's Type A and Type B bottling customers is approximately equal, given the same case volume, net sales and cost of goods sold with respect to products bottled for Type A bottling customers are higher, and gross margins are lower, than for Type B bottling customers. As a result, significant fluctuations in volume of Type A bottling customers can distort the Company's gross margin.
The size and timing of purchase orders and product shipments can cause operating results to fluctuate significantly from quarter to quarter, particularly since some customers purchase bulk alcohol products in significant quantities or place significant orders for contract bottling services, distilled spirits, vinegar and cooking wine. Additionally, some Company products generate higher profit margins than others, and changes in the Company's product mix will therefore, cause gross margins to fluctuate. Certain aspects of the Company's business are also seasonal, with increased demand for the Company's contract bottling services from April to October and increased production of the Company's bulk alcohol products from November to June, corresponding to the Florida citrus-harvest. As a result of these factors, the Company's operating results may vary significantly from quarter to quarter.
Net sales represent the Company's gross sales less excise taxes. Excise taxes are generally payable on products bottled by the Company. In addition, excise taxes are payable on sales of industrial alcohol to certain customers. Accordingly, excise taxes vary from period to period depending upon the Company's product and customer mix.
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES. Net sales were $99.8 million in 2001, an increase of 7.3% from net sales of $93.0 million in 2000.
Net sales of bulk alcohol products were $39.7 million in 2001, an increase of 6.1% from net sales of $37.5 million in 2000. The increase resulted primarily from increased sales of wine products due to the Monarch Acquisition. Unit sales of citrus spirits decreased 9.9% and unit sales of wine products increased 6.7% in 2001 compared to 2000. These changes resulted from the Monarch Acquisition, as Monarch was a major purchaser of the Company's citrus spirits for use in producing fortified citrus wine.
Net sales of premium branded spirits were $18.5 million in 2001, an increase of 15.1% from net sales of $16.1 million in 2000. This increase reflected the continued success of the Company's Cruzan Rums and Cruzan Flavored Rums. Sales of the Company's Cruzan Rums and Cruzan Flavored Rums increased 13.8% and 59.6%, respectively, in 2001 compared to 2000. The strong sales increases in Cruzan Rums and Cruzan Flavored Rums were offset by a large decrease in sales of Porfidio tequila. As of September 30, 2001, the Company was out of stock of Porfidio tequila. The Company has not received a shipment of Porfidio tequila since March 2001, and cannot predict when or whether shipments of Porfidio will resume. During June 2001, Mexican regulatory authorities alleged that the Porfidio distillery violated certain regulations related to the sale of tequila and have prohibited the export of Porfidio tequila. The allegations have been denied by the Porfidio distillery. However, the decrease in sales of Porfidio tequila has not had, and is not expected to have, a material adverse effect on the Company's consolidated results of operations. In addition, as a result of a trademark dispute with the Company, the producer of Antiqueno Aguardiente, one of the Company's premium branded spirits products, suspended shipments of the product to the Company in June 2001. Sales of the product amounted to $1.6 million in Fiscal 2001. As of November 2001, the Company was out of stock of Antiqueno Aguardiente. The Company cannot predict when or whether shipments of this product will resume. However, the decrease in sales of Antiqueno Aguardiente has not had, and is not expected to have, a material adverse effect on the Company's consolidated results of operations.
Net sales of the Company's bottling operations were $20.6 million in 2001, an increase of 22.7% from net sales of $16.8 million in 2000. The unit volume of the Company's bottling operations increased 46.2% in 2001 as a result of a bottling contract with a new customer.
Net sales of vinegar and cooking wine were $20.9 million in 2001, an increase of 1.8% from net sales of $20.5 million in 2000.
GROSS PROFIT. Gross profit was $32.1 million in 2001, an increase of 11.1% from gross profit of $28.9 million in 2000. Gross margin increased to 32.2% in 2001 from 31.0% in 2000. The increase in gross margin was primarily attributable to a change in product mix as a result of the Monarch Acquisition. This increase was partially offset by a charge relating to inventory valuation to more accurately reflect the value of certain slow-moving case goods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $20.7 million in 2001, an increase of 15.6% from $17.9 million in 2000. The increase was primarily attributable to (1) increased selling, administrative and marketing expenses related to the Company's premium branded spirits business, and (2) increased amortization expense.
OPERATING INCOME. The following table sets forth the operating income (loss) by operating segment of the Company for 2001 and 2000 and the percent change for the periods.
As a result of the above factors, operating income was $11.4 million in 2001, an increase of 3.9% over operating income of $11.0 million in 2000.
The Company's premium branded spirits segment experienced an operating loss of $840,000 in 2001 compared to operating income of $120,000 in 2000. The operating loss reflected the Company's continuing efforts to increase market share by reinvesting segment gross profits in selling and marketing expenses, as well as the decrease in sales of Porfidio tequila discussed above.
The Company's bottling operations segment reported operating income of $221,000 in 2001 compared to an operating loss of $1,022,000 in 2000. The swing to profitability reflected volume increases as a result of a new major bottling contract.
INTEREST INCOME. The Company earns interest income on its cash, short-term investments and notes receivable. The decrease in interest income in 2001 was attributable to lower interest rates and lower average amounts of cash, short-term investments and notes receivable outstanding compared to 2000.
INTEREST EXPENSE. Interest expense was $4.8 million in 2001 and $5.0 million in 2000. The decrease in interest expense was due to lower interest rates during 2001 compared to 2000.
INCOME TAX EXPENSE. The Company's effective income tax rate was 20.1% in 2001 and 24.6% in 2000. The low tax rate was attributable to the Company's Virgin Islands subsidiary, which has a 90% exemption from United States federal income taxes through September 2020 (see Note 9 to the Consolidated Financial Statements). In addition, in 2001 the Company benefited from the new Extraterritorial Income Exclusion Credit.
FISCAL 2000 COMPARED TO FISCAL 1999
NET SALES. Net sales were $93.0 million in 2000, an increase of $21.2% from net sales of $76.7 million in 1999.
Net sales of bulk alcohol products were $37.5 million in 2000, an increase of 11.7% from net sales of $33.5 million in 1999. The increase resulted from increased sales of bulk alcohol resulting from the Monarch Acquisition. Unit sales of citrus spirits decreased 53.9% and unit sales of fortified citrus wine increased 59.1% in 2000 compared to 1999. These changes resulted from the Monarch Acquisition. Monarch was a major purchaser of the Company's citrus spirits for use in producing fortified citrus wine.
Net sales of premium branded spirits were $16.1 million in 2000, an increase of 32.9% from net sales of $12.1 million in 1999. Sales increases reflect the continued expansion of the Company's distribution network and the success of its Cruzan Flavored Rums and Porfidio Tequila brands.
Net sales of the Company's bottling operations were $16.8 million in 2000, a decrease of 5.4% from net sales of $17.8 million in 1999. The unit volume of the Company's bottling operations decreased 1.8% in 2000. The decrease in volume was primarily attributable to a decrease in business with the Company's largest Type A bottling customer. The Company believes that the business with this Type A bottling customer will not return to historic levels.
Net sales of vinegar and cooking wine were $20.5 million in 2000, an increase of 85.7% from net sales of $11.0 million in 1999. The increase in net sales was primarily attributable to increased sales of cooking wine resulting from the Monarch Acquisition. The Company has recently expanded its vinegar production capacity by building additional facilities.
GROSS PROFIT. Gross profit was $28.9 million in 2000, an increase of 21.6% from gross profit of $23.7 million in 1999. Gross margin increased to 31.0% in 2000 from 30.9% in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $17.9 million in 2000, an increase of 19.0% from $15.0 million in 1999. The increase was primarily attributable to (1) increased marketing expenses and new employees related to the Company's premium branded spirits business; (2) expenses incurred during the integration of the Monarch Acquisition, and (3) increased amortization expense.
OPERATING INCOME. The following table sets forth the operating income (loss) by operating segment.
As a result of the above factors, operating income was $11.0 million in 2000, an increase of 26.1% over operating income of $8.7 million in 1999.
INTEREST INCOME. The Company earns interest on its cash, short-term investments and notes receivable. The increase in interest income in 2000 was attributable to higher average amounts of cash, short-term investments and notes receivable outstanding compared to 1999.
INTEREST EXPENSE. Interest expense was $5.0 million in 2000 and $3.6 million in 1999. The increase in interest expense was due to higher levels of debt outstanding due to the Monarch Acquisition and higher interest rates during 2000 compared to 1999.
INCOME TAX EXPENSE. The Company's effective income tax rate was 24.6% in 2000 and 24.3% in 1999. The low tax rate is attributable to the Company's Virgin Islands subsidiary, which has a 90% exemption from United States federal income taxes (see Note 9 to the Company's consolidated financial statements).
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's principal use of cash in its operating activities is for purchasing raw materials to be used in its manufacturing operations, purchasing imported products for its premium branded spirits business and carrying inventories and the subsequent receivables. The Company's source of liquidity has historically been cash flow from operations and its line of credit. Some of the Company's manufacturing operations are seasonal and the Company's borrowings on its line of credit vary during the year. For example, the Company uses citrus molasses as its primary raw material in the production of citrus brandy and spirits at its two Florida distilleries. The Company buys citrus molasses, a byproduct of citrus juice production, from local manufacturers of citrus juice and concentrate during the citrus harvest, which generally runs from November to June. The Company generally begins purchasing citrus molasses in November and builds inventory of citrus brandy and spirits. The Company must manufacture and build inventory while raw materials are available due to the short life of the citrus molasses it purchases. Another seasonal business of the Company is its contract bottling services. Demand for contract bottling services is highest from April through October. Management believes that cash provided by its operating and financing activities will provide adequate resources to satisfy its working capital, liquidity and anticipated capital expenditure requirements for both its short-term and long-term capital needs.
OPERATING ACTIVITIES
Net cash provided by operating activities in 2001 was $9.5 million, which resulted from $11.9 million in net income adjusted for noncash items, less $2.4 million representing the net change in operating assets and liabilities.
INVESTING AND FINANCING ACTIVITIES
Net cash used in investing activities in 2001 was $7.3 million, which resulted primarily from capital expenditures. The Company's capital expenditures were $6.6 million in 2001 and $5.8 million in 2000. The increase in capital expenditures was primarily attributable to increasing the Company's wine production capacity, vinegar production capacity and warehouse storage capacity.
Net cash provided by financing activities in 2001 was $.1 million, which resulted primarily from a $6.5 million increase in borrowings under the revolving credit facility, offset by $6.1 million of payments on long-term debt.
In October 2001, the Company's previous long-term debt and line of credit were replaced with a $70 million credit agreement between the Company and a syndicate of lenders. The new credit agreement consists of (1) a $30 million revolving credit facility which expires in October 2004, and (2) a term loan with an initial amount of $40 million which matures on September 30, 2006. Borrowings under the revolving credit facility were $19 million at September 30, 2001. See Note 8 to the Company's consolidated financial statements for additional information related to the Company's long-term debt.
The Company's bank debt was $59.0 million as of September 30, 2001, and its ratio of total debt to equity was 1.2 to 1.
The Company's share of the undistributed earnings of its Bahamian and Virgin Islands subsidiaries was approximately $8.4 million and $25.1 million, respectively, as of September 30, 2001. No provision has been made for taxes which would result from the remittance of such undistributed earnings, as the Company intends to reinvest these earnings indefinitely. See Note 9 to the Company's consolidated financial statements for additional information on income taxes related to these subsidiaries.
Based on current plans and business conditions, management expects that its cash and cash equivalents, together with any amounts generated from operations and available borrowings, will be sufficient to meet the Company's cash requirements for at least the next 12 months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 ( SFAS 142), "Goodwill and Other Intangible Assets." SFAS 142 supercedes APB Opinion No. 17, "Intangible Assets," and requires goodwill and other intangible assets that have an indefinite useful life to no longer be amortized; however, these assets must be reviewed at least annually for impairment. Application of SFAS 142 is required starting with fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001. The Company intends to adopt SFAS 142 effective October 1, 2001. The Company has not completed its assessment of the effect of SFAS 142.
EFFECTS OF INFLATION AND CHANGING PRICES
The Company uses natural gas in its distilling operations and during the first two quarters of Fiscal 2001, experienced significant increases in its energy costs. During the third and fourth quarters, energy costs moderated. Where competitively feasible, management has increased selling prices to offset the effects of energy cost increases, but the Company may not be able to recover all energy cost increases.
Except as noted above, the Company's results of operations and financial condition have not been significantly affected by inflation and changing prices. The Company has been able, subject to normal competitive conditions, to pass along rising costs through increased selling prices.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company carries certain variable rate debt and thus is exposed to the impact of interest rate changes. The table above summarizes the Company's market risk associated with debt obligations as of September 30, 2001.
In the event of an adverse change in interest rates, management would likely take certain actions to further mitigate its exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, the table above assumes no such actions.
The Company had no financial instruments or derivative financial instruments held for trading purposes as of September 30, 2001.
See Note 8 to the Company's consolidated financial statements for additional information related to Company's financing arrangements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial statement schedules of the Company and its subsidiaries, and the report of independent auditors, are listed at Item 14.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement for its 2002 annual stockholders' meeting.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement for its 2002 annual stockholders' meeting.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement for its 2002 annual stockholders' meeting.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement for its 2002 annual stockholders' meeting.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
See "Index to Financial Statements and Financial Statement Schedules".
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of Fiscal 2001.
(c) Exhibits
See "Index to Exhibits".
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of West Palm Beach, State of Florida, on the 13th day of December, 2001.
TODHUNTER INTERNATIONAL, INC. By: /s/A. Kenneth Pincourt, Jr. ----------------------------- A. Kenneth Pincourt, Jr., Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
TODHUNTER INTERNATIONAL, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders Todhunter International, Inc. and Subsidiaries West Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of Todhunter International, Inc. and subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Todhunter International, Inc. and subsidiaries as of September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
West Palm Beach, Florida November 16, 2001
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND 2000
See Notes to Consolidated Financial Statements.
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
See Notes to Consolidated Financial Statements.
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
See Notes to Consolidated Financial Statements.
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
See Notes to Consolidated Financial Statements.
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Todhunter International, Inc. (the "Company") is a leading producer and supplier of brandy, rum, wine and spirits to other beverage alcohol manufacturers; produces, imports and markets premium branded spirits; bottles beverage alcohol and other beverages on a contract basis and under its own labels; and produces vinegar and cooking wine. The Company operates four production facilities in the United States and one in St. Croix, United States Virgin Islands and purchases products for resale from other producers.
OWNERSHIP: Angostura Limited ("Angostura"), a Trinidad-based distiller, has reported that, as a result of open market and private purchases, it beneficially owned shares, representing approximately 54% of the Company's common stock at September 30, 2001.
A summary of the Company's significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Todhunter International, Inc. and all of its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies (generally 20-50% ownership), are accounted for by the equity method.
ACCOUNTING ESTIMATES: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION: The Company recognizes revenue when its product is shipped, at which time title passes to the customer. Revenues from contract bottling services are recognized at the time the bottling process is completed. Excise taxes on products sold are billed directly to customers and are included in sales at the same time the product sold is recognized as revenue.
CASH EQUIVALENTS: The Company considers certificates of deposit and other short-term investments with an original maturity of three months or less to be cash equivalents. The Company maintains depository accounts in excess of FDIC insured limits. The Company has not experienced any credit losses in such accounts and does not anticipate any losses.
SHORT-TERM INVESTMENTS: The Company has investments in certificates of deposit, corporate bonds, and U. S. Government securities, which mature within one year of purchase. All of the Company's short-term investments are classified as held-to-maturity and are carried at amortized cost.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the various classes of depreciable assets. Estimated lives are as follows:
FINANCIAL INSTRUMENTS: The Company has a derivative financial instrument to reduce the Company's interest rate risk. The derivative instrument consists of an interest rate cap agreement with a bank, which is being accounted for as a cash flow hedge under Financial Accounting Standard No. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The Company's policy is not to hold or issue derivative financial instruments for trading purposes.
Effective for fiscal year 2000, the Company adopted Financial Accounting Standard No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, which requires companies to report all derivative instruments on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. If a derivative is not a hedge, it must be adjusted to fair value through income. If a derivative is a hedge, and depending on the nature of the hedge, any change in the fair value of the derivative is either (1) offset against the change in fair value of the hedged asset, liability, or firm commitments through earnings, or (2) recognized in other comprehensive income until the hedged item is recognized in earnings or the term of the hedge expires. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings.
AMORTIZATION: Amortization is computed on the straight-line basis over the estimated lives of the capitalized assets. Estimated lives are as follows:
IMPAIRMENT OF LONG-LIVED ASSETS: In accordance with FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.
INCOME TAXES: Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
PREFERRED STOCK: The Company has authorized 2,500,000 shares of $.01 par value preferred stock. No terms are stated as to dividend, liquidation or other rights applicable to these shares.
RECLASSIFICATIONS: Certain amounts in the 2000 consolidated financial statements have been reclassified to conform with the 2001 presentation.
RECENT PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting No. 142 ("SFAS 142"), GOODWILL AND OTHER INTANGIBLE ASSETS.
SFAS 142 Supercedes APB Opinion No. 17, INTANGIBLE ASSETS, and requires goodwill and other intangible assets that have an indefinite useful life to no longer be amortized; however, these assets must be reviewed at least annually for impairment. Application of SFAS 142 is required starting with fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001. Due to the complexity of this new standard and its recent issuance, the Company is continuing to evaluate whether it will adopt SFAS 142 effective October 1, 2001.
NOTE 2. INVENTORIES
The major components of inventories as of September 30, 2001 and 2000 are:
NOTE 3. NOTES RECEIVABLE
Notes receivable consist of the following as of September 30, 2001 and 2000:
NOTE 4. NOTES RECEIVABLE FROM AFFILIATE
The Company has an unsecured $3.5 million note receivable from British Fidelity Holdings Limited, an affiliate through common ownership. The note bears interest at 6% with principal and interest payments of $20,000 due monthly through July 2005, and the remaining balance of $3,305,560 due in August 2005. The Company has recorded $36,797 and $52,072 of the principal balance in other current assets for fiscal years 2001 and 2000 respectively. The note is guaranteed by British Fidelity Assurance, Ltd.
NOTE 5. PROPERTY AND EQUIPMENT
The major classifications of property and equipment as of September 30, 2001 and 2000 are:
NOTE 6. OTHER ASSETS
Other assets, net of accumulated amortization, consist of the following as of September 30, 2001 and 2000:
NOTE 7. ACCRUED EXPENSES
Accrued expenses consist of the following as of September 30, 2001 and 2000:
NOTE 8. FINANCING ARRANGEMENTS
Long-term debt consists of the following as of September 30, 2001 and 2000:
(i) In October 2001, the Company entered into a $70 million credit agreement, which consists of $40 million term loans and $30 million revolving loan facilities. The credit agreement is collateralized by principally all assets located in the United States of America. The new credit agreement replaced all borrowings under the previous finance agreements and increased the Company's borrowing capacity from $59 million, under the previous credit agreement to $70 million. The Company is restricted from paying dividends to stockholders. Also, the Company is required to maintain unencumbered cash or marketable securities of $4 million at the end of each fiscal quarter and to maintain a minimum fixed charge and interest coverage ratios among other financial covenants. (ii) In addition to the quarterly principal payments, the Company may be required to make additional principal payments based on results of the Company's domestic operating profits as defined in the agreement.
In fiscal year 2000, the Company recognized an extraordinary loss of $1,168,790, net of an income tax benefit of $382,075 on its early extinguishment of debt.
Maturities of long-term debt as of September 30, 2001 are as follows:
On January 14, 2000, the Company entered into an interest rate cap agreement. The agreement caps the applicable Eurodollar rate under the credit agreement at 7.5%. At September 30, 2001 the underlying applicable Eurodollar rate was 2.63%. The Company paid $250,000 for this cap, which has a term of two years. The notional amount of this agreement at September 30, 2001 was $44,000,000. For the year ended September 30, 2001, the Company has recorded unrealized income of $177,500 related to this agreement which has been reflected in the accumulated other comprehensive loss.
NOTE 9. INCOME TAXES
Income tax expense before extraordinary item consists of the following for the years ended September 30, 2001, 2000 and 1999:
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the deferred tax assets and liabilities relate to the following as of September 30, 2001 and 2000:
No valuation allowance has been recorded as of September 30, 2001 or 2000.
Income tax expense differed from the amounts computed by applying the statutory federal income tax rate to income before income taxes and extraordinary item as a result of the following for the years ended September 30, 2001, 2000 and 1999:
Generally, the operating income of the Company's Bahamian subsidiary is not subject to United States income taxes as there are no income taxes in the Commonwealth of the Bahamas. The Company sold all of its remaining operating assets in the Bahamas in fiscal year 2000 for $3.5 million. Certain passive income of the Bahamian subsidiary is subject to United States income taxes.
The Virgin Islands subsidiary, through the Industrial Development Commission of the Government of the Virgin Islands of the United States, has received a 90% exemption from income taxes on operating income. This exemption is effective through September 2020. The per share effect of this exemption on earnings on a basic and diluted basis for the years ended September 30, 2001, 2000 and 1999, respectively, is as follows:
With respect to the Bahamian and Virgin Islands subsidiaries, no provision has been made for taxes, which would result from the remittance of such undistributed earnings as the Company intends to reinvest these earnings indefinitely. The Company's share of the undistributed earnings of the Bahamian and Virgin Islands subsidiaries was approximately $8,400,000 and $21,500,000, respectively, as of September 30, 2001. The undistributed earnings of the Bahamian subsidiary have been reduced by any previously taxed income.
NOTE 10. LEASES
The Company occupies office space under a non-cancelable operating lease which expires in 2006. Initial base rent was $32,199 through 2000 and increased to $33,036 monthly, thereafter. The lease contains two renewal options of five years each.
Future minimum lease payments under this non-cancelable operating lease as of September 30, 2001 is as follows:
Rent expense for office space (including the Company's share of common area expenses, real estate and sales taxes) amounted to $400,538, $309,832 and $303,770 for the years ended September 30, 2001, 2000 and 1999, respectively.
NOTE 11. STOCK OPTIONS
On August 11, 1992, the Company adopted a stock option plan for the grant of options to key employees. Option prices may not be less than 85% of the fair market value of the Company's common stock on the date of grant for nonqualified options or 100% of such fair market value for qualified stock options. As of September 30, 2001, 1,400,000 shares are reserved for issuance under the option plan. Options granted have vesting periods ranging from 3 to 5 years. During the year ended September 30, 1999, the Company received a total of $78,000 upon the exercise of stock options for 13,000 shares. There were no stock options exercised during the years ended September 30, 2001 and 2000.
The Company applies Accounting Principles Board Opinion Number 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related interpretations in accounting for options granted, which requires compensation expense for the Company's options to be recognized only if the market price of the underlying stock exceeds the exercise price on the date of grant. Accordingly, the Company has not recognized compensation expense for its options granted after 1994. SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, issued in October 1995, requires pro forma disclosures for option grants made after December 31, 1994, when accounting for stock-based compensation plans in accordance with APB 25.
If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per common share would have been reduced to the pro forma amounts shown below:
The pro forma effects are determined as if compensation costs were recognized using the fair value based accounting method. The fair values of options granted during 1999 and 1998 were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 4.75% and 4.75%; expected lives of 10 years; expected volatility of 29% and 30%; and a zero percent dividend yield. The weighted-average fair value of options granted during 1999 and 1998 was $3.98 and $4.67, respectively.
A reconciliation of the Company's stock option activity, and related information, for the years ended September 30, 2001, 2000 and 1999 follows:
The following table summarizes information about the stock options at September 30, 2001:
The exercise price of options granted has been made at grant date fair value.
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily in the beverage alcohol industry in the United States. The Company reports its operating results in five segments:
Bulk Alcohol Products (citrus brandy, citrus spirits, rum, cane spirits, fortified citrus wine, purchased distilled products and byproducts) Premium Branded Spirits (primarily rum and flavored rum) Bottling Operations (contract bottling services and proprietary and private label products) Vinegar and Cooking Wine (bulk vinegar, bulk cooking wine, vinegar stock and proprietary and private label case goods) Corporate Operations and Other (primarily corporate related items).
The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on income before income taxes, equity in losses of equity investee, interest income and expense. Material intersegment sales and transfers have been eliminated.
Summarized financial information concerning the Company's reportable segments is shown in the following table. "Corporate Operations and Other" includes corporate related items and the results of certain nonmaterial operations.
Net sales, operating income (loss), identifiable assets, depreciation and amortization and capital expenditures for the Company's operating segments for the years ended September 30, 2001, 2000 and 1999 are as follows:
Sales and operating income for the years ended September 30, 2001, 2000, and 1999 and identifiable assets as of the end of each period classified by geographic area, were as follows:
Included in net sales for the United States are export sales, primarily to Eastern Europe, Canada and the Caribbean, totaling approximately $6,400,000, $5,700,000 and $4,400,000 for the years ended September 30, 2001, 2000 and 1999.
NOTE 13. PENSION PLAN
The Company has a defined contribution retirement plan which covers substantially all United States employees. On January 31, 2000, the Plan Trustees approved the modification of the then existing plan. Effective January 1, 2000, the plan was restated as a discretionary 401(k) Profit Sharing Plan and has been renamed the Todhunter International, Inc. Compensation Deferral Plan (the "restated plan"). Under the restated plan, participants may make elective contributions to the restated plan in amounts up to 15% of their eligible compensation. Participants are immediately vested in any elective contributions and its related earnings, if any. Generally, employer contributions to the plan begin to vest to the benefit of the participant after three years of service. Participants are entitled, upon retirement, to their vested portion of the retirement fund assets. The Company contributed approximately $915,998, $644,749 and $644,022 to the plan for the years ended September 30, 2001 2000 and 1999, respectively.
Under the old plan, the Company contributed 6.0% of an employee's total compensation, plus 5.5% of compensation in excess of the Social Security tax wage base. An employee's compensation in excess of $160,000 was disregarded in determining the Company's contribution. Generally, employer contributions to the plan began to vest to the benefit of the participant after three years of service. Participants were entitled, upon retirement, to their vested portion of the retirement fund assets.
NOTE 14. INVESTMENT IN PREMIER WINES & SPIRITS, LTD.
In 1997, the Company acquired a 45% interest in Premier Wines & Spirits, Ltd., ("Premier"), a wholesale liquor distributor in the United States Virgin Islands, for $450,000. This investment is being accounted for using the equity method. The Company had sales to Premier of approximately $1,946,000, $2,069,000 and $1,808,000 for the years ended September 30, 2001, 2000 and 1999, respectively. Included in trade receivables is approximately $416,000 and $709,000 as of September 30, 2001 and 2000, respectively, related to these sales. The Company has outstanding advances to Premier of $587,019 and $437,019 as of September 30, 2001 and 2000, respectively, which are included in investments in and advances to equity investees. These advances are unsecured and bear interest at 8.5%. Interest payments are due monthly or on demand in accordance with the terms of the agreement. Principal is payable on demand.
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
The carrying amounts approximate fair values as of September 30, 2001 and 2000 for cash and cash equivalents, short-term investments, trade receivables, other receivables and accounts payable because of the short-term maturities of those instruments.
NOTES RECEIVABLE: The fair value of the Company's notes receivable has been determined based on available market information and management's estimate of current market conditions of similar instruments.
LONG-TERM DEBT: The fair value of the Company's long-term debt is estimated based on the current rates offered to the Company for debt of the same remaining maturities with similar collateral requirements.
NOTE 16. NET INCOME PER COMMON SHARE
Basic net income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period.
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
NOTE 18. ACQUISITION OF MONARCH WINE COMPANY
In November 1999, the Company completed the purchase of the assets of Monarch Wine Company of Atlanta, Georgia, a privately held company. The purchase price was approximately $23.8 million in cash. Monarch specializes in the manufacturing of wines, including custom blended wines and cooking wines for the food industry and base wines for producers of vinegar and beverage alcohol.
The assets acquired and liabilities assumed with this acquisition were as follows:
The Company assumed a non-cancelable lease on Monarch's plant facility which has since been abandoned by the Company. The net present value of this lease at the date of purchase was recorded as a liability and increased goodwill, accordingly.
The purchase price of $23.8 million includes $22.5 million of goodwill, which is being amortized over 20 years.
NOTE 19. SALE OF BAHAMIAN OPERATIONS
In September 2000, the Company sold all of its remaining operating assets in the Bahamas to British Fidelity Holdings Limited, an affiliate through common ownership, for $3.5 million. The Company received a note receivable (see Note 4) for $3.5 million and recorded a loss of $78,838 on the transaction.
NOTE 20. LEGAL PROCEEDINGS
The Bureau of Alcohol, Tobacco and Firearms of the United States Department of the Treasury (the "BATF") has advised the Company that it is conducting an investigation of shipments made by various U.S. Alcohol producers to certain countries formerly included in the Soviet Union. In connection with this investigation, a federal grand jury in the District of New Jersey has issued subpeonas to several employees of the Company. To date, the Company has voluntarily complied with these subpeaonas and cooperated with the investigation. The BATF has indicated that it believs that certain of the Company's shipments may not have conformed to the specifications previously approved by the BATD, and that this nonconformity may have violated U.S. law. However, the Company has not been advised that it has been designated a target of the investigation and it believes that its business has been conducted in accordance with applicable law. The Company cannot predict whether or to what extent it may be subject to fines or other penalties if it is found to have violated any such laws, however, the Company does not expect any such fines or other penalties, if any, to have a material adverse effect on the Company's financial condition or results of operations.
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors Todhunter International, Inc. West Palm Beach, Florida
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated financial statements Schedule II for the years ended September 30, 2001, 2000, and 1999 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.
/s/ McGladrey & Pullen, LLP
West Palm Beach, Florida November 16, 2001
TODHUNTER INTERNATIONAL, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
TODHUNTER INTERNATIONAL, INC. INDEX TO EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of Todhunter International, Inc. (1)
3.2 Amended and Restated By-Laws of Todhunter International, Inc. (6)
4.1 Form of Todhunter International, Inc. Common Stock Certificate (1)
10.6 Todhunter International, Inc. 1992 Stock Option Plan, as amended (3)
10.8 Lease, dated March 24, 1988, as amended, between Todhunter International, Inc. and Especially West Palm Beach, Inc. (1)
10.8(a) Amendment to Lease, dated January 1, 1997, between Todhunter International, Inc. and Florida Acquisition Fund Esperante, Ltd. (4)
10.16 Asset Purchase Agreement dated as of September 27, 1999, among Todhunter International, Inc. and Adams Wine Company d/b/a Monarch Wine Company of Georgia, and Howard J. Weinstein, David Paszamant, Jay Paszamant and Matthew Paszamant (5)
10.18 Executive Employment Agreement dated as of July 15, 1999, between Thomas A. Valdes and Todhunter International, Inc. (6)
10.19 Executive Employment Agreement dated as of July 15, 1999, between Jay S. Maltby and Todhunter International, Inc. (6)
10.20 Executive Employment Agreement dated as of July 15, 1999, between A. Kenneth Pincourt, Jr. and Todhunter International, Inc. (6)
10.21 Executive Employment Agreement dated as of July 15, 1999, between D. Chris Mitchell and Todhunter International, Inc. (6)
10.22 Amended and Restated Credit Agreement dated as of October 19, 2001, by and among Todhunter International, Inc., and each of the Financial Institutions Initially a Signatory thereto, and SouthTrust Bank (8)
11.1 Statement of Computation of Per Share Earnings (7)
21.1 Subsidiaries of Todhunter International, Inc. (2)
23.1 Consent of McGladrey & Pullen, LLP (8)
(1) Incorporated herein by reference to the Company's Registration Statement on Form S-1 (File No. 33-50848).
(2) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended September 30, 1995.
(3) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended September 30, 1997.
(4) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended September 30, 1998.
(5) Incorporated herein by reference to the Company's Current Report on Form 8-K for November 17, 1999.
(6) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended September 30, 1999.
(7) Filed herewith and incorporated herein by reference to Note 16 of notes to consolidated financial statements, included in Item 8 of the Company's Annual Report on Form 10-K for the year ended September 30, 2001.
(8) Filed herewith.