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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002 COMMISSION FILE NUMBER 1-13453
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TODHUNTER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-1284057
(State of Incorporation) (IRS Employer
Identification Number)
222 LAKEVIEW AVENUE, SUITE 1500, WEST PALM BEACH, FL 33401
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 655-8977
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of Title 17, Code of Federal
Regulations) is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Aggregate market value of the voting stock held by non-affiliates of
the registrant as of December 5, 2002 (computed by reference to the last
reported sale price of the registrant's Common Stock on the American Stock
Exchange on such date): $21,401,996.
The number of shares outstanding of the registrant's Common Stock, $.01
par value per share, as of December 5, 2002, was 5,572,234.
There were no shares of Preferred Stock outstanding as of December 5,
2002.
Documents Incorporated by Reference: Part III - Portions of the
registrant's definitive proxy statement to be filed within 120 days of the end
of the registrant's fiscal year in conjunction with the registrant's 2003 annual
stockholders' meeting.
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INTRODUCTORY NOTE
THIS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
2002 (THE "FORM 10-K") CONTAINS "FORWARD-LOOKING STATEMENTS," AS DEFINED IN
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"). FORWARD-LOOKING STATEMENTS ARE STATEMENTS OTHER THAN HISTORICAL
INFORMATION OR STATEMENTS OF CURRENT CONDITION AND RELATE TO FUTURE EVENTS OR
THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. SOME FORWARD-LOOKING STATEMENTS
MAY BE IDENTIFIED BY USE OF SUCH TERMS AS "BELIEVES," "ANTICIPATES," "INTENDS"
OR "EXPECTS." SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. THE FOLLOWING IS A LIST OF FACTORS, AMONG OTHERS,
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY
THE FORWARD-LOOKING STATEMENTS: CHANGES IN BUSINESS CONDITIONS IN CERTAIN MARKET
SEGMENTS AND THE GENERAL ECONOMY; COMPETITIVE FACTORS, INCLUDING INCREASED
COMPETITION AND PRICE PRESSURES; AVAILABILITY OF THIRD-PARTY COMPONENT PRODUCTS
AT REASONABLE PRICES; INCREASED EXCISE TAXES; FOREIGN CURRENCY EXPOSURE; CHANGES
IN PRODUCT MIX BETWEEN AND AMONG PRODUCT LINES; LOWER THAN EXPECTED CUSTOMER
ORDERS AND QUARTERLY SEASONAL FLUCTUATIONS OF THOSE ORDERS; AND PRODUCT SHIPMENT
INTERRUPTIONS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
PART I
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 2002," "Fiscal
2001" and "Fiscal 2000" 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 November 26, 2002, it beneficially owned 2,984,313 shares,
representing 53.6% of the Company's outstanding Common Stock, $.01 par value per
share (the "Common Stock"). Angostura has also reported that, effective November
26, 2002, it entered into an agreement with A. Kenneth Pincourt, Jr., the former
Chairman and Chief Executive Officer of the Company, to purchase from Mr.
Pincourt 595,985 shares, representing 10.7% of the Company's outstanding Common
Stock, on January 31, 2003. See also Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Retirement of
Chairman and Chief Executive Officer.
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 5 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.
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BUSINESS SEGMENTS
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 Cruzan Estate Rums and Cruzan
Flavored Rums)
- Bottling Operations (contract bottling services and proprietary and
private label products)
- Vinegar and Cooking Wine (bulk vinegar, bulk cooking wine, vinegar
stock and proprietary and private label case goods)
- 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 13 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
and internationally. The Company also purchases distilled products for resale,
including grain alcohol, which is denatured and packaged and sold as industrial
alcohol to hospitals, universities, fragrance producers and other manufacturers.
The Company is the largest supplier of 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's principal premium brands include
Cruzan Estate Rums and Cruzan Flavored Rums. The Company produces, bottles,
imports, develops and markets a line of premium branded spirits in the United
States and exports 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.
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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 and fruit juices. 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 rum production facilities are located in St. Croix, United States
Virgin Islands.
DISTILLING. The Company begins its distilling process with citrus or
cane molasses, which is fermented for approximately two to four days. Once
fermented, the product has an average alcohol content of 9% by volume, which is
increased to approximately 95% through distillation. The alcohol is 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, cooking wine and juices, two lines that are used to bottle proprietary
and private label products and
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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 and premium branded spirits.
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, malt, balsamic and apple cider, are produced
at the Lake Alfred and Louisville facilities, which have a combined capacity of
10 million grain gallons per year. Cooking wine is produced by the controlled
fermentation of red or white grape juice into wine. 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 54% of the raw materials used in the Company's distilling
operations in Fiscal 2002. Cane molasses, which is used in the production of rum
and cane spirits, accounted for the remaining 46%. 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 2002, two suppliers each accounted for more than 10% of all 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 produces, imports, markets and sells premium branded
spirits to wholesalers in the United States and internationally. The Company's
marketing and promotional programs for its premium brands are directed at
consumers, retailers and wholesalers. 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
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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. Sales of the Company's premium branded spirits and
proprietary and private label products 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.
Beverage alcohol produced and bottled by the Company is subject to
substantial federal excise taxes. As of September 30, 2002, 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, 2002, the Company had approximately 420 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 36 of the Company's 55 Virgin Islands
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employees. 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 13 to
the Company's consolidated financial statements for additional information about
the Company's foreign and domestic operations and export sales.
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 five principal
buildings with approximately 260,000 total square feet on 30 acres. The Virgin
Islands facility consists of seven principal buildings with approximately
120,000 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. LEGAL PROCEEDINGS
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders during the fourth quarter
of Fiscal 2002.
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PART II
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.
PERIOD HIGH LOW
------ ---- ---
Fiscal 2001
First quarter $ 7.19 $ 5.38
Second quarter 9.95 6.94
Third quarter 9.05 7.80
Fourth quarter 9.15 7.70
Fiscal 2002
First quarter 8.75 8.30
Second quarter 9.60 8.75
Third quarter 12.00 9.50
Fourth quarter 10.90 10.20
The number of stockholders of record as of December 5, 2002 was 38. In
addition, based upon a list of non-objecting beneficial owners, there were at
least 574 beneficial owners at January 22, 2002.
No dividends were paid to stockholders during Fiscal 2001 and Fiscal
2002. 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.
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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.
YEAR ENDED SEPTEMBER 30,
------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF INCOME DATA:
Net sales $ 99,759 $ 99,771 $ 92,987 $ 76,733 $ 75,096
Cost of goods sold 68,620 67,688 64,117 53,000 53,006
---------- ---------- ---------- ---------- ----------
Gross profit 31,139 32,083 28,870 23,733 22,090
Selling, general and administrative expenses 22,539 20,534 17,772 15,023 13,937
---------- ---------- ---------- ---------- ----------
Operating income 8,600 11,549 11,098 8,710 8,153
Other income (expense):
Interest income 754 864 901 715 655
Interest expense (3,073) (4,893) (5,115) (3,608) (3,946)
Other, net 288 244 (178) 181 660
---------- ---------- ---------- ---------- ----------
Income before income taxes and extraordinary item 6,569 7,764 6,706 5,998 5,522
Income tax expense 1,122 1,561 1,649 1,458 808
---------- ---------- ---------- ---------- ----------
Income before extraordinary item 5,447 6,203 5,057 4,540 4,714
Extraordinary item, net of income tax benefit - - (1,169) - -
---------- ---------- ---------- ---------- ----------
Net income $ 5,447 $ 6,203 $ 3,888 $ 4,540 $ 4,714
========== ========== ========== ========== ==========
Net income per share
Basic
Income before extraordinary item $ 0.99 $ 1.12 $ 0.92 $ 0.91 $ 0.95
Extraordinary item - - (0.21) - -
---------- ---------- ---------- ---------- ----------
Net income $ 0.99 $ 1.12 $ 0.71 $ 0.91 $ 0.95
========== ========== ========== ========== ==========
Diluted
Income before extraordinary item $ 0.97 $ 1.12 $ 0.91 $ 0.91 $ 0.95
Extraordinary item - - (0.21) - -
---------- ---------- ---------- ---------- ----------
Net income $ 0.97 $ 1.12 $ 0.70 $ 0.91 $ 0.95
========== ========== ========== ========== ==========
Weighted average shares outstanding
Basic 5,527 5,514 5,514 4,964 4,950
Diluted 5,624 5,527 5,550 4,982 4,985
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 55,315 $ 51,889 $ 40,372 $ 36,246 $ 37,807
Total assets 137,883 133,588 126,548 97,167 96,997
Short-term debt 4,000 4,000 8,000 6,000 1,888
Long-term debt 53,017 55,685 51,334 28,000 42,581
Stockholders' equity 67,069 61,221 54,841 51,193 41,004
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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 2002 compared to Fiscal 2001, and Fiscal 2001 compared to Fiscal 2000,
and (ii) financial liquidity and capital resources for Fiscal 2002. 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 Cruzan Estate Rums and Cruzan Flavored
Rums); Bottling Operations (contract bottling services and proprietary and
private label products); Vinegar and Cooking Wine (bulk vinegar, bulk cooking
wine, vinegar stock and proprietary and private label case goods); 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 13 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.
YEAR ENDED SEPTEMBER 30,
------------------------
2002 2001 2000
-------- -------- --------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 68.8 67.8 69.0
-------- -------- --------
Gross margin 31.2 32.2 31.0
Selling, general and administrative expenses 22.6 20.6 19.1
-------- -------- --------
Operating income 8.6 11.6 11.9
Other income (expense), net (2.0) (3.8) (4.7)
-------- -------- --------
Income before income taxes and extraordinary item 6.6 7.8 7.2
Income tax expense (1.1) (1.6) (1.8)
-------- -------- --------
Income before extraordinary item 5.5 6.2 5.4
Extraordinary item - - (1.2)
-------- -------- --------
Net income 5.5% 6.2% 4.2%
======== ======== ========
YEAR ENDED SEPTEMBER 30, % CHANGE
------------------------ ------------------
2002 2001 2000 02/01 01/00
NET SALES (IN THOUSANDS)
Bulk alcohol products $ 35,447 $ 39,727 $ 37,457 (10.8) 6.1
Premium branded spirits 24,698 18,547 16,119 33.2 15.1
Bottling operations 18,661 20,644 16,823 (9.6) 22.7
Vinegar and cooking wine 20,953 20,853 20,477 0.5 1.8
Corporate operations and other - - 2,111 - (100.0)
--------- --------- ---------
$ 99,759 $ 99,771 $ 92,987 0.0 7.3
========= ========= =========
9
The following table provides unit sales volume data for certain Company
products.
YEAR ENDED SEPTEMBER 30, % CHANGE
------------------------ ----------------
2002 2001 2000 02/01 01/00
------ ------ ------ ------ -----
(IN THOUSANDS)
Bulk alcohol products:
Distilled products, in proof gallons
Citrus brandy 1,170 1,450 1,446 (19.3) 0.3
Citrus spirits 504 560 621 (9.9) (9.9)
Rum 4,413 4,672 4,557 (5.5) 2.5
Cane spirits 605 581 531 4.0 9.5
Fortified citrus wine, in gallons 10,072 11,736 10,999 (14.2) 6.7
Premium branded spirits, in cases 587 355 289 65.2 22.9
Bottling operations, in cases 5,571 6,346 4,342 (12.2) 46.2
Vinegar
Bulk, in 100 grain gallons 5,453 6,217 5,175 (12.3) 20.1
Cases 667 671 612 (0.7) 9.6
Drums, in 100 grain gallons 1,733 1,143 1,510 51.6 (24.3)
Cooking Wine
Bulk, in gallons 3,113 2,838 2,385 9.7 19.0
Cases 648 750 692 (13.6) 8.3
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.
10
RESULTS OF OPERATIONS
FISCAL 2002 COMPARED TO FISCAL 2001
NET SALES. Net sales were $99.8 million in 2002 and 2001.
Net sales of bulk alcohol products were $35.4 million in 2002, a
decrease of 10.8% from net sales of $39.7 million in 2001. The decrease resulted
primarily from decreased sales of citrus brandy, citrus spirits, rum and
fortified wine. The Company's bulk alcohol product sales have declined primarily
due to increased competition.
Net sales of premium branded spirits were $24.7 million in 2002, an
increase of 33.2% from net sales of $18.5 million in 2001. In 2002, net sales of
premium branded spirits included $1.9 million of bulk tequila sales and $1.5
million of new Cruzan ready-to-drink products. Bulk tequila sales represent the
liquidation of inventory that was held to produce Porfidio tequila. During the
third quarter of 2002, the Company introduced a new line of Cruzan products in
the ready-to-drink category, sales of which are included in the Company's
premium branded spirits segment. The Company sold approximately 134,000 cases of
this new product, representing net sales of $1.5 million through September 30,
2002. Sales of the Company's Cruzan ready-to-drink products are highly seasonal
and there can be no assurance that sales of these products will continue at this
level in the future. In addition, due to more competition within the
ready-to-drink product category, the gross margin on the Cruzan ready-to-drink
products is lower than other premium branded spirits in this segment. The
Company is repositioning its Cruzan ready-to-drink products for the 2003
spring/summer season and is pursuing opportunities in the export market.
Excluding bulk tequila and Cruzan ready-to-drink product sales, net sales of
premium branded spirits were $21.2 million in 2002, an increase of 20.1% from
net sales of $17.6 million in 2001.
Sales of the Company's Cruzan Estate Rums and Cruzan Flavored Rums
increased $0.8 million and $4.4 million, or 19.1% and 51.2%, respectively, in
2002 compared to 2001. These sales increases were partially offset by a decrease
in sales of Porfidio tequila. Sales of Porfidio tequila were $1.5 million in
2001. However, the decrease in sales of Porfidio tequila has not had a material
adverse effect on the Company's consolidated results of operations.
Net sales of the Company's bottling operations were $18.7 million in
2002, a decrease of 9.6% from net sales of $20.6 million in 2001. The unit
volume of the Company's bottling operations decreased 12.2% in 2002 as a result
of decreased business with a large bottling customer. In addition, during 2002
the Company lost a contract bottling customer that represented approximately 48%
of its 2002 unit volume in bottling operations. Management believes that this
loss in volume will be partially offset by increased business with new and
existing customers and that total bottling operations volume may decline by
approxiately 25% in 2003.
Net sales of vinegar and cooking wine were $21.0 million in 2002, an
increase of 0.5% from net sales of $20.9 million in 2001.
GROSS PROFIT. Gross profit was $31.1 million in 2002, a decrease of
2.9% from gross profit of $32.1 million in 2001. Gross margin decreased to 31.2%
in 2002 from 32.2% in 2001. The decrease in gross margin was primarily
attributable to a change in product mix as the unit volume of higher margin bulk
alcohol products declined.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $22.5 million in 2002, an increase of 9.8% from
$20.5 million in 2001. Effective October 1, 2001, the Company adopted SFAS
142, which requires that goodwill and certain other intangible assets no
longer be amortized. There was no goodwill amortization in 2002 compared to
$1.3 million in 2001. Excluding goodwill amortization in 2001, selling,
general and administrative expenses were $22.5 million in 2002, an increase
of 17.1% from $19.2 million in 2001. The increase was primarily attributable
to increased selling, general and administrative expenses related to the
Company's premium branded spirits business of $1.9 million, which included
increased marketing expenses of $1.1 million and $0.3 million of
non-recurring legal expenses, and increased corporate overhead of $1.0
million, which included increases in insurance, personnel costs and $0.4
million of non-recurring taxes and forfeitures related to the BATF settlement
with respect to export shipments of bulk alcohol products (see Note 21 to the
consolidated financial statements).
OPERATING INCOME. The following table sets forth the operating income
(loss) by operating segment of the Company for 2002 and 2001 and the percent
change for the periods.
11
YEAR ENDED SEPTEMBER 30,
------------------------
2002 2001 % CHANGE
---- ---- --------
(IN THOUSANDS)
Bulk Alcohol Products $ 10,539 $ 12,781 (17.5)
Premium Branded Spirits (331) (840) -
Bottling Operations 129 221 (41.4)
Vinegar and Cooking Wine 4,602 4,739 (2.9)
Corporate Operations and Other (6,339) (5,352) -
------------------------
$ 8,600 $ 11,549 (25.5)
========================
As a result of the above factors, operating income was $8.6 million in 2002, a
decrease of 25.5% from operating income of $11.5 million in 2001.
The Company's premium branded spirits segment experienced operating
losses of $331,000 in 2002 and $840,000 in 2001. The operating losses
reflected the Company's continuing efforts to increase market share by
reinvesting segment gross profits in selling and marketing expenses, as well
as legal expenses and decreased sales of Porfidio tequila discussed above.
INTEREST EXPENSE. Interest expense was $3.1 million in 2002 and $4.8
million in 2001. The decrease in interest expense was due to a lower average
debt level and lower interest rates during 2002 compared to 2001.
INCOME TAX EXPENSE. The Company's effective income tax rate was 17.1%
in 2002 and 20.1% in 2001. The low tax rate was attributable to a 90% exemption
of the Company's Virgin Islands subsidiary from U.S. Virgin Islands income
taxes. The exemption is effective through September 2020 (see Note 10 to the
Consolidated Financial Statements). In addition, in 2002 and 2001 the Company
benefited from the new Extraterritorial Income Exclusion.
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 Estate Rums and
Cruzan Flavored Rums. Sales of the Company's Cruzan Estate Rums and Cruzan
Flavored Rums increased 13.8% and 59.6%, respectively, in 2001 compared to
2000. The strong sales increases in Cruzan Estate Rums and Cruzan Flavored
Rums were partially offset by a 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. 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 2001.
As of November 2001, the Company was out of stock of Antiqueno Aguardiente.
The Company entered into a settlement agreement with the producer of
Antiqueno Aguardiente in April 2002. Pursuant to the settlement agreement,
the Company has been reappointed exclusive U.S. importer of Antiqueno
Aguardiente for a four-year period. The Company resumed sales of Antiqueno
Aguardiente in June 2002. Management believes that the decreases in sales of
Porfidio tequila and Antiqueno Aguardiente have not had, and are 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.
12
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $20.5 million in 2001, an increase of 15.5% from
$17.8 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.
YEAR ENDED SEPTEMBER 30,
------------------------
2002 2001 % CHANGE
---- ---- --------
(IN THOUSANDS)
Bulk Alcohol Products $ 12,781 $ 13,696 (6.7)
Premium Branded Spirits (840) 120 -
Bottling Operations 221 (1,022) -
Vinegar and Cooking Wine 4,739 3,673 29.0
Corporate Operations and Other (5,352) (5,369) -
---------- ----------
$ 11,549 $ 11,098 4.1
========== ==========
As a result of the above factors, operating income was $11.5 million in 2001, an
increase of 4.1% over operating income of $11.1 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 EXPENSE. Interest expense was $4.9 million in 2001 and $5.1
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 a 90%
exemption of the Company's Virgin Islands subsidiary from U.S. Virgin Islands
income taxes. The exemption is effective through September 2020 (see Note 10
to the Consolidated Financial Statements). In addition, in 2001 the Company
benefited from the new Extraterritorial Income Exclusion.
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
13
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 2002 was $12.3 million,
which resulted from $11.6 million in net income adjusted for noncash items, and
a $0.7 million net change in operating assets and liabilities.
INVESTING AND FINANCING ACTIVITIES
Net cash used in investing activities in 2002 was $0.7 million,
including capital expenditures of $6.0 million partially offset by a net
redemption of short-term investments of $5.1 million.
Net cash used in financing activities in 2002 was $3.2 million, which
resulted primarily from a $1.5 million increase in borrowings under the
revolving credit facility, offset by $4.2 million of payments on long-term debt
and $.9 million in refinancing costs.
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 current 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.
See Note 9 to the Company's consolidated financial statements for additional
information related to the Company's long-term debt.
The Company's bank debt was $56.5 million as of September 30, 2002, and
its ratio of total debt to equity was 1.06 to 1.
The Company's share of the undistributed earnings of its Bahamian and
Virgin Islands subsidiaries was approximately $7.5 million and $27.9 million,
respectively, as of September 30, 2002. No provision has been made for taxes
which would result from the remittance of such undistributed earnings, as the
Company intends to reinvest these earnings indefinitely. See Note 10 to the
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.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described
in Note 1 to the Company's consolidated financial statements located in Item 8
of this Annual Report on Form 10-K. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, and expenses, and the related
disclosures of contingent assets and liabilities. Actual results could differ
from those estimates under different assumptions or conditions. The Company
believes that the following critical accounting policy is subject to estimates
and judgments used in the preparation of its consolidated financial statements:
The Company has goodwill and intangible assets associated with business
acquisitions. The Company reviews these assets for impairment annually and
whenever an event occurs or circumstances change that would more likely than not
reduce the fair value of these assets below their carrying value. If the fair
value of these assets
14
is less than their carrying value, then an impairment loss would be recognized
equal to the excess of the carrying value over the fair value of the asset.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 retains the fundamental provisions of SFAS No. 121 but eliminates the
requirement to allocate goodwill to long-lived assets to be tested for
impairment. This statement also requires discontinued operations to be carried
at the lower of cost or fair value less costs to sell and broadens the
presentation of discontinued operations to include a component of an entity
rather than a segment of a business. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The Company does not expect the
adoption of this statement to have a material impact on its results of
operations or financial position.
RETIREMENT OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER
During November 2002, the Company announced the retirement of A.
Kenneth Pincourt, Jr., its Founder, Chairman and Chief Executive Officer. The
Company has entered into an agreement with Mr. Pincourt, setting forth the terms
of his retirement. Under this agreement, the Company elected to accelerate
retirement benefits and continue to pay compensation and provide related
benefits through July 15, 2004. The Company will record a charge for these items
during the first quarter of its 2003 fiscal year. The effect of this charge, net
of income tax benefits, will be approximately $1 million or $.18 per common
share. In addition, the Company's majority shareholder, Angostura, Ltd., has
entered into an agreement with Mr. Pincourt to purchase 595,985 shares of common
stock.
EFFECTS OF INFLATION AND CHANGING PRICES
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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Analysis
September 30, 2002
Expected Maturity Date
------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
Assets
Notes receivable:
Fixed rate $ 118,165 $ 521,768 $ 3,432,289 $ 100,750 $ 109,218 $ 195,435 $ 4,477,625
Average interest
rate 6.40% 6.37% 6.27% 8.12% 8.13% 8.14% 7.24%
Liabilities
Long-term debt:
Variable rate $ 4,000,000 $ 24,500,000 $ 4,000,000 $ 24,517,009 $ - $ - $ 57,017,009
Average interest
rate 4.57% 5.06% 4.57% 4.70% -% -% 4.72%
Market Risk Analysis
September 30, 2002
Expected Maturity Date
----------------------
Fair Value
------------
Assets
Notes receivable:
Fixed rate $ 4,619,131
Average interest
rate -
Liabilities
Long-term debt:
Variable rate $ 57,017,009
Average interest
rate -
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, 2002.
In the event of an adverse change in interest rates, management
would likely take certain actions to further mitigate the Company's exposure.
However, due to the uncertainty of the actions that would be taken and their
possible effects, this analysis assumes no such actions. The Company had no
financial instruments or derivative financial instruments held for trading
purposes as of September 30, 2002.
15
See Note 9 to the Company's consolidated financial statements for
additional information related to Company's financing arrangements.
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 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
PART III
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 2003 annual stockholders'
meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from
the Company's definitive proxy statement for its 2003 annual stockholders'
meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about the Company's equity
compensation plans as of September 30, 2002. All outstanding awards relate to
the Company's Common Stock. For additional information about the Company's
equity compensation plans, see note 12 to our consolidated financial statements.
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
-------------------------- --------------------- --------------------- --------------------------
(a) (b) (c)
Equity Compensation 482,500(2) 8.64(2) 742,000(2)
Plans Approved by
Security Holders(1)
Equity Compensation
Plans Not Approved by
Security Holders 60,000 9.06 0
--------------------- --------------------- --------------------------
Total 542,500(2) 8.69(2) 742,000(2)
--------------------- --------------------- --------------------------
----------
(1) All of the shares reported in this row reflect stock options granted under
the Company's 1992 Employee Stock Option Plan, as amended.
(2) During November 2002, the Company announced the retirement of A. Kenneth
Pincourt, Jr., its Chairman and Chief Executive Officer. The Company has
entered into an agreement with Mr. Pincourt setting forth the terms of his
retirement. Under this agreement, all of Mr. Pincourt's options to purchase
110,000 shares of Common Stock were canceled. This Equity Compensation Plan
Information table does not reflect such cancellation. Were the table to
reflect such cancellation as of September 30, 2002, the figures in the
"Equity Compensation Plans Approved by Security Holders" row would be:
(column (a)) 372,500; (column (b)) $8.13; and (column (c)) 852,000, and the
figures under the "Total" row would be: (column (a)) 432,500; (column (b))
$8.26; and (column (c)) 852,000.
The other information required by Item 12 is incorporated by reference
from the Company's definitive proxy statement for its 2003 annual stockholders'
meeting.
17
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 2003 annual stockholders'
meeting.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, management, including
our Chief Executive Officer and our Chief Financial Officer, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our Chief Executive Officer
and our Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic SEC reports. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
CHANGES IN INTERNAL CONTROLS
In addition, management, including our Chief Executive Officer and our
Chief Financial Officer, reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
PART IV
ITEM 15. 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
2002.
The Company filed a Current Report on Form 8-K dated November 26, 2002.
This Form 8-K reported information under Item 5 (Other Events and
Required FD Disclosure).
(c) Exhibits
See "Index to Exhibits."
18
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 12th day of December, 2002.
TODHUNTER INTERNATIONAL, INC.
By: /s/ Jay S. Maltby
-------------------------------------
Jay S. Maltby, Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Chairman of the Board, Chief
/s/ Jay S. Maltby Executive Officer and President December 12, 2002
---------------------------- (Principal Executive Officer)
Jay S. Maltby
/s/ Troy Edwards Treasurer and Chief Financial Officer December 12, 2002
---------------------------- (Principal Financial
Troy Edwards and Accounting Officer)
/s/ Godfrey D. Bain Director December 12, 2002
----------------------------
Godfrey D. Bain
/s/ Donald L. Kasun Director December 12, 2002
----------------------------
Donald L. Kasun
/s/ Edward F. McDonnell Director December 12, 2002
----------------------------
Edward F. McDonnell
/s/ K. Ian McLachlan Director December 12, 2002
----------------------------
K. Ian McLachlan
/s/ D. Chris Mitchell Director December 12, 2002
----------------------------
D. Chris Mitchell
/s/ Leonard G. Rogers Director December 12, 2002
----------------------------
Leonard G. Rogers
/s/ Thomas A. Valdes Director December 12, 2002
----------------------------
Thomas A. Valdes
19
CERTIFICATION REQUIRED BY THE
CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jay S. Maltby, certify that:
1. I have reviewed this annual report on Form 10-K of Todhunter International,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 18, 2002
/s/ Jay S. Maltby
-------------------------------------
Jay S. Maltby
Chairman of the Board, Chief Executive
Officer and President
20
CERTIFICATION REQUIRED BY THE
CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Troy Edwards, certify that:
1. I have reviewed this annual report on Form 10-K of Todhunter International,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 18, 2002
/s/ Troy Edwards
----------------------------------
Troy Edwards
Chief Financial Officer, Treasurer
and Controller
21
TODHUNTER INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
----
a) Financial Statements
Independent Auditor's Report 23
Consolidated balance sheets as of September 30, 2002 and 2001 24
Consolidated statements of income for the years ended September 30, 2002, 2001 and 2000 26
Consolidated statements of stockholders' equity for the years ended September 30, 2002, 2001 and 2000 27
Consolidated statements of cash flows for the years ended September 30, 2002, 2001 and 2000 29
Notes to consolidated financial statements 32
b) Financial Statement Schedule
Independent Auditor's Report 52
Schedule II Valuation and Qualifying Accounts 53
All other schedules have been omitted as not required, not applicable,
not deemed material or because the information is included in the notes
to the Registrant's consolidated finanical statements.
22
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Todhunter International, Inc.
West Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of Todhunter
International, Inc. and subsidiaries as of September 30, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended September 30, 2002. 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, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS.
/s/ McGladrey & Pullen, LLP
West Palm Beach, Florida
November 26, 2002
23
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2001
ASSETS 2002 2001
------ ------------- -------------
Current Assets
Cash and cash equivalents $ 13,946,736 $ 5,624,029
Short-term investments 3,397,033 8,533,851
Trade receivables 13,505,737 14,719,578
Other receivables 2,696,743 3,058,471
Inventories 27,854,925 27,483,329
Notes receivable, current maturities 118,165 109,770
Deferred income taxes 1,992,000 1,544,000
Other current assets 3,078,437 2,311,338
------------- -------------
TOTAL CURRENT ASSETS 66,589,776 63,384,366
Investments in and Advances to Equity Investees 1,584,628 1,729,103
Notes Receivable, less current maturities 584,687 663,785
Notes Receivable From Affiliates, less current maturities 3,774,773 3,560,923
Property and Equipment, less accumulated depreciation
2002 $47,590,112; 2001 $43,729,941 42,185,217 41,468,262
Goodwill 20,524,404 20,524,404
Amortized Intangible Assets 2,040,181 1,505,548
Other Assets 598,838 751,773
------------- -------------
$ 137,882,504 $ 133,588,164
============= =============
See Notes to Consolidated Financial Statements.
24
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
------------------------------------ -------------- --------------
Current Liabilities
Current maturities of long-term debt $ 4,000,000 $ 4,000,000
Accounts payable 4,051,379 5,169,242
Accrued expenses 3,223,293 2,325,704
-------------- --------------
TOTAL CURRENT LIABILITIES 11,274,672 11,494,946
Long-Term Debt, less current maturities 53,017,009 55,684,549
Deferred Income Taxes 4,710,000 3,874,000
Other Liabilities 1,811,459 1,314,036
-------------- --------------
70,813,140 72,367,531
-------------- --------------
Commitments
Stockholders' Equity
Preferred stock, par value $.01 per share; authorized
2,500,000 shares, no shares issued - -
Common stock, par value $.01 per share; authorized
10,000,000 shares; issued 2002 5,669,434 and 2001 5,612,934 shares 56,694 56,129
Additional paid-in capital 18,664,449 18,326,014
Retained earnings 49,086,001 43,639,270
Accumulated other comprehensive loss - (63,000)
-------------- --------------
67,807,144 61,958,413
Less cost of 99,200 shares of treasury stock (737,780) (737,780)
-------------- --------------
67,069,364 61,220,633
-------------- --------------
$ 137,882,504 $ 133,588,164
============== ==============
25
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
-------------- -------------- --------------
Sales $ 128,967,429 $ 129,553,185 $ 123,999,796
Less excise taxes 29,208,688 29,782,588 31,013,099
-------------- -------------- --------------
NET SALES 99,758,741 99,770,597 92,986,697
Cost of goods sold 68,619,983 67,687,409 64,116,593
-------------- -------------- --------------
GROSS PROFIT 31,138,758 32,083,188 28,870,104
Selling, general and administrative expenses 22,538,523 20,534,146 17,772,345
-------------- -------------- --------------
OPERATING INCOME 8,600,235 11,549,042 11,097,759
-------------- -------------- --------------
Other income (expense):
Interest income 754,312 863,927 901,285
Interest expense (3,072,820) (4,893,217) (5,115,911)
Equity in income (losses) of equity investees (144,474) (10,562) (297,329)
Other, net 431,676 254,432 119,833
-------------- -------------- --------------
(2,031,306) (3,785,420) (4,392,122)
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 6,568,929 7,763,622 6,705,637
-------------- -------------- --------------
Income tax expense (benefit):
Current 734,198 2,222,052 2,073,878
Deferred 388,000 (661,000) (425,000)
-------------- -------------- --------------
1,122,198 1,561,052 1,648,878
-------------- -------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM 5,446,731 6,202,570 5,056,759
Extraordinary item - early extinguishment of
debt, net of income tax benefit of $382,075 - - 1,168,790
-------------- -------------- --------------
NET INCOME $ 5,446,731 $ 6,202,570 $ 3,887,969
============== ============== ==============
Net income per common share:
Basic:
Income before extraordinary item $ 0.99 $ 1.12 $ 0.92
Extraordinary item - - (0.21)
-------------- -------------- --------------
$ 0.99 $ 1.12 $ 0.71
============== ============== ==============
Diluted:
Income before extraordinary item $ 0.97 $ 1.12 $ 0.91
Extraordinary item - - (0.21)
-------------- -------------- --------------
$ 0.97 $ 1.12 $ 0.70
============== ============== ==============
Common shares and equivalents outstanding:
Basic 5,526,781 5,513,734 5,513,734
============== ============== ==============
Diluted 5,624,164 5,527,410 5,550,216
============== ============== ==============
See Notes to Consolidated Financial Statements.
26
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Common Stock
--------------------------- Additional
Shares Paid-in
Issued Amount Capital
------------ ------------ ------------
Balance, October 1, 1999 5,612,934 $ 56,129 $ 18,326,014
Net income - - -
Unrealized loss on interest rate cap - - -
------------ ------------ ------------
Balance, September 30, 2000 5,612,934 56,129 18,326,014
Net income - - -
Net unrealized income on interest rate cap - - -
------------ ------------ ------------
Balance, September 30, 2001 5,612,934 56,129 18,326,014
Issuance of common stock 56,500 565 338,435
Net income - - -
Net unrealized income on interest rate cap - - -
------------ ------------ ------------
Balance, September 30, 2002 5,669,434 $ 56,694 $ 18,664,449
============ ============ ============
See Notes to Consolidated Financial Statements.
27
Accumulated Treasury Stock
Other -------------------------------
Retained Comprehensive Shares
Earnings Income (Loss) Acquired Amount
-------------- -------------- -------------- --------------
Balance, October 1, 1999 $ 33,548,731 $ - 99,200 $ (737,780)
Net income 3,887,969 - - -
Unrealized loss on interest rate cap - (240,500) - -
-------------- -------------- -------------- --------------
Balance, September 30, 2000 37,436,700 (240,500) 99,200 (737,780)
Net income 6,202,570 - - -
Net unrealized income on interest rate cap - 177,500 - -
-------------- -------------- -------------- --------------
Balance, September 30, 2001 43,639,270 (63,000) 99,200 (737,780)
Issuance of common stock - - -
Net income 5,446,731 - - -
Net unrealized income on interest rate cap - 63,000 - -
-------------- -------------- -------------- --------------
Balance, September 30, 2002 $ 49,086,001 $ - 99,200 $ (737,780)
============== ============== ============== ==============
Total Total
Stockholders' Comprehensive
Equity Income
-------------- --------------
Balance, October 1, 1999 $ 51,193,094 $ 4,539,936
Net income 3,887,969 3,887,969
Unrealized loss on interest rate cap (240,500) (240,500)
-------------- --------------
Balance, September 30, 2000 54,840,563 $ 3,647,469
==============
Net income 6,202,570 $ 6,202,570
Net unrealized income on interest rate cap 177,500 177,500
-------------- --------------
Balance, September 30, 2001 61,220,633 $ 6,380,070
==============
Issuance of common stock 339,000
Net income 5,446,731 $ 5,446,731
Net unrealized income on interest rate cap 63,000 63,000
-------------- --------------
Balance, September 30, 2002 $ 67,069,364 $ 5,509,731
============== ==============
28
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------- -------------
Cash Flows From Operating Activities
Net income $ 5,446,731 $ 6,202,570 $ 3,887,969
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 5,252,962 4,709,087 4,447,504
Amortization 355,200 1,626,371 1,237,777
Equity in losses of equity investees 144,474 10,562 297,329
Deferred income taxes 388,000 (661,000) (425,000)
Other (30,370) 3,191 35,952
Changes in assets and liabilities, net of
effects of purchases and sales
(Increase) decrease in:
Receivables 1,575,569 450,927 (1,911,422)
Inventories (371,596) (3,953,751) (1,023,212)
Other assets (767,099) 734,049 (1,207,133)
Increase (decrease) in:
Accounts payable (1,117,863) 92,862 (139,552)
Accrued expenses 897,589 334,277 (920,201)
Other liabilities 497,423 130,182 111,892
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,271,020 9,679,327 4,391,903
------------- ------------- -------------
Cash Flows From Investing Activities
Proceeds from sale of property and equipment 61,088 142,966 63,797
Principal payments received on notes receivable 106,853 3,511,912 1,790,095
Purchase of property and equipment (6,000,633) (6,634,699) (5,827,694)
Disbursements for notes receivable (250,000) (9,300) (342,019)
Purchase of short-term investments (3,397,033) (8,533,851) (4,843,348)
Redemption of short-term investments 8,533,851 4,843,348 2,547,365
Purchase of Monarch Wine Company - - (23,761,906)
Purchase of minority interest in subsidiary - (671,860) (100,000)
Other 215,934 (72,504) (409,419)
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (729,940) (7,423,988) (30,883,129)
------------- ------------- -------------
(Continued)
29
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------- -------------
Cash Flows From Financing Activities
Net borrowings under line of credit arrangements $ 1,500,000 $ 6,487,019 $ 8,512,981
Proceeds from issuance of common stock 339,000 - -
Purchase of interest rate cap - - (250,000)
Disbursements for loan costs (889,833) (227,501) (612,450)
Proceeds from long-term borrowings - - 56,947,037
Principal payments on long-term borrowings (4,167,540) (6,136,694) (40,125,794)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,218,373) 122,824 24,471,774
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 8,322,707 2,378,163 (2,019,452)
Cash and cash equivalents:
Beginning 5,624,029 3,245,866 5,265,318
------------- ------------- -------------
Ending $ 13,946,736 $ 5,624,029 $ 3,245,866
============= ============= =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 2,728,397 $ 4,812,818 $ 6,158,135
============= ============= =============
Income taxes $ 1,688,788 $ 2,465,758 $ 1,407,187
============= ============= =============
Supplemental Schedule of Noncash Investing
and Financing Activities
(Continued)
30
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------- -------------
Supplemental Schedule of Noncash Investing
and Financing Activities, continued
Acquisition of Monarch Wine Company:
Cash purchase price $ - $ - $ 23,761,906
============= ============= =============
Working capital acquired $ - $ - $ 2,006,792
Goodwill - - 22,528,351
Operating lease on plant facility assumed,
such facility was abandoned - - (773,237)
------------- ------------- -------------
$ - $ - $ 23,761,906
============= ============= =============
Sale of Bahamian operations:
Notes receivable exchanged for assets $ - $ - $ 3,500,000
============= ============= =============
Accounts receivable $ - $ - $ 215,033
Inventory - - 1,393,768
Property and equipment - - 1,469,600
Other current assets - - 121,775
Other assets - - 511,958
Other current liabilities assumed - - (133,296)
Loss realized - - (78,838)
------------- ------------- -------------
$ - $ - $ 3,500,000
============= ============= =============
Investment in Premier Wines & Spirits, Ltd.
for note receivable $ - $ - $ 1,000,000
============= ============= =============
See Notes to Consolidated Financial Statements.
31
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 53.6% of the Company's common stock
at September 30, 2002.
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 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.
TRADE RECEIVABLES: The Company records trade receivables at cost, which
approximates fair value at the respective balance sheet dates. The Company
estimates its allowance for doubtful accounts based on a combination of
historical and current information regarding the balance of trade
receivables, as well as the current composition of the pool of trade
receivables. The Company determines status on trade receivables based on the
contractual terms of the original sale. Trade receivables that management
believes to be uncollectible are written off upon such determination.
32
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
Years
-------
Land improvements 3 to 20
Buildings and improvements 3 to 40
Machinery and equipment 3 to 33
FINANCIAL INSTRUMENTS: The Company had a derivative financial instrument to
reduce the Company's interest rate risk, which was canceled in 2001. The
derivative instrument consisted of an interest rate cap agreement with a
bank, which was 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:
Years
-------
Trademarks 20 - 40
Deferred loan costs 5
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.
33
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 2001 and 2000 consolidated
financial statements have been reclassified to conform with the 2002
presentation.
NOTE 2. RECENT ACCOUNTING 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 was required starting with fiscal years
beginning after December 15, 2001. Early application was permitted for entities
with fiscal years beginning after March 15, 2001. The Company adopted SFAS 142
effective October 1, 2001. As required by SFAS 142, the Company has completed
the transitional goodwill impairment test and has concluded that there was no
impairment to goodwill as of October 1, 2001. The following table presents the
adjusted net income and earnings per share of the Company, adding back the
goodwill amortization net of income taxes, for the years ended September 30,
2002, 2001 and 2000, as if the Company had adopted SFAS 142 as of October 1,
1999.
2002 2001 2000
------------- ------------- -------------
(in thousands)
Reported Net Income $ 5,446,731 $ 6,202,570 $ 3,887,969
Add back: Goodwill amortization, net - 809,581 663,934
------------- ------------- -------------
Adjusted net income $ 5,446,731 $ 7,012,151 $ 4,551,903
============= ============= =============
Basic Earning Per Share:
Reported net income $ 0.99 $ 1.12 $ 0.71
Goodwill amortization - 0.15 0.12
------------- ------------- -------------
Adjusted net income $ 0.99 $ 1.27 $ 0.83
============= ============= =============
Diluted Earnings Per Share:
Reported net income $ 0.97 $ 1.12 $ 0.70
Goodwill amortization - 0.15 0.12
------------- ------------- -------------
Adjusted net income $ 0.97 $ 1.27 $ 0.82
============= ============= =============
34
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 2 RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30 "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions". SFAS No. 144 retains the
fundamental provisions of SFAS No. 121 but eliminates the requirement to
allocate goodwill to long-lived assets to be tested for impairment. This
statement also requires discontinued operations to be carried at the lower of
cost or fair value less costs to sell and broadens the presentation of
discontinued operations to include a component of an entity rather than a
segment of a business. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years, with
early application encouraged. The Company does not expect the adoption of this
statement to have a material impact on its results of operations or financial
position.
NOTE 3. INVENTORIES
The major components of inventories as of September 30, 2002 and 2001 are:
2002 2001
------------ ------------
Finished goods $ 16,470,057 $ 16,879,276
Work in process 1,513,786 598,648
Raw materials and supplies 9,871,082 10,005,405
------------ ------------
$ 27,854,925 $ 27,483,329
============ ============
NOTE 4. NOTES RECEIVABLE
Notes receivable consist of the following as of September 30, 2002 and 2001:
2002 2001
------------ ------------
8% note, collateralized by real property, monthly principal
and interest payments of $10,313 through April 2009 $ 631,760 $ 701,897
Other 32,025 34,861
------------ ------------
663,785 736,758
Less current maturities 79,098 72,973
------------ ------------
$ 584,687 $ 663,785
============ ============
35
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 5. NOTES RECEIVABLE FROM AFFILIATES
Notes receivable from affiliates consist of the following as of September 30,
2002 and 2001:
2002 2001
------------ ------------
6% note, unsecured from British Fidelity Holdings Limited,
an affilliate through common ownership. Monthly principal
and interest payments of $20,000 due through July 2005, with
remaining balance of $3,305,560 due in August 2005. This note
is guaranteed by British Fidelity Assurance, Ltd. $ 3,416,793 $ 3,450,674
7% note, unsecured from BF Enterprises Limited, an affilliate
through common ownership. Monthly interest payments
through July 2004. Principal due on demand on August 1, 2004 397,047 147,046
------------ ------------
3,813,840 3,597,720
Less current matruities 39,067 36,797
------------ ------------
$ 3,774,773 $ 3,560,923
============ ============
NOTE 6. PROPERTY AND EQUIPMENT
The major classifications of property and equipment as of September 30, 2002 and
2001 are:
2002 2001
------------ ------------
Land $ 5,086,665 $ 4,640,086
Land improvements 1,378,005 1,378,005
Buildings and improvements 17,934,298 17,190,201
Machinery and equipment 65,376,361 61,989,911
------------ ------------
89,775,329 85,198,203
Less accumulated depreciation 47,590,112 43,729,941
------------ ------------
$ 42,185,217 $ 41,468,262
============ ============
36
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 7. AMORTIZED INTANGIBLE ASSETS
Amortized Intangible Assets consist of the following as of September 30, 2002,
2001 and 2000:
2002 2001 2000
----------------------------- ----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------ -------------- ------------
Trademarks $ 1,302,000 $ 426,951 $ 1,302,000 $ 386,751 $ 1,502,000 $ 436,552
Deferred loan costs 1,729,783 564,651 839,950 249,651 612,450 112,283
-------------- ------------ -------------- ------------ -------------- ------------
$ 3,031,783 $ 991,602 $ 2,141,950 $ 636,402 $ 2,114,450 $ 548,835
============== ============ ============== ============ ============== ============
Aggregate amortization expenses were $355,200, $287,567 and $172,483 for the
years ended 2002, 2001 and 2000, respectively.
Estimated amortization expenses as of September 30, 2002 are as follows:
Year Ending
September 30, Amount
------------- -----------
2003 $ 339,200
2004 339,200
2005 339,070
2006 308,120
2007 40,000
-----------
$ 1,365,590
===========
NOTE 8. ACCRUED EXPENSES
Accrued expenses consist of the following as of September 30, 2002 and 2001:
2002 2001
----------- -----------
Accrued payroll and related expenses $ 1,833,255 $ 1,645,788
Other 1,390,038 679,916
----------- -----------
$ 3,223,293 $ 2,325,704
=========== ===========
37
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 9. FINANCING ARRANGEMENTS
Long-term debt consists of the following as of September 30, 2002 and 2001:
2002 2001
------------ ------------
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 September 30, 2002
was 4.57%. Future minimum quarterly principal installments
of $1,000,000 through September 30, 2006 with any
remaining balance due on September 30, 2006 $ 36,000,000 $ 40,000,000
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 September 30, 2002 was 5.15%. The revolving
lines of credit terminate in October 2004 20,500,000 19,000,000
Other 517,009 684,549
------------ ------------
57,017,009 59,684,549
Less current maturities 4,000,000 4,000,000
------------ ------------
$ 53,017,009 $ 55,684,549
============ ============
(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
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.
38
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 9. FINANCING ARRANGEMENTS (CONTINUED)
Maturities of long-term debt as of September 30, 2002 are as follows:
Year Ending
September 30, Amount
------------- ------------
2003 $ 4,000,000
2004 24,500,000
2005 4,000,000
2006 24,517,009
------------
$ 57,017,009
============
NOTE 10. INCOME TAXES
Income tax expense before extraordinary item consists of the following for the
years ended September 30, 2002, 2001 and 2000:
2002 2001 2000
------------ ------------ --------------
Current income tax expense (benefit):
Federal $ 756,092 $ 2,032,885 $ 1,887,250
State (21,894) 189,167 186,628
------------ ------------ --------------
734,198 2,222,052 2,073,878
------------ ------------ --------------
Deferred income tax expense (benefit):
Federal 357,000 (596,000) (377,000)
State 31,000 (65,000) (48,000)
------------ ------------ --------------
388,000 (661,000) (425,000)
------------ ------------ --------------
Total income tax expense before
extraordinary item $ 1,122,198 $ 1,561,052 $ 1,648,878
============ ============ ==============
39
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES (CONTINUED)
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,
2002 and 2001:
2002 2001
----------- -----------
Deferred tax liabilities:
Property and equipment, principally due
to differences in depreciation $ 4,027,000 $ 3,610,000
Goodwill, principally due to differences in amortization 683,000 264,000
----------- -----------
4,710,000 3,874,000
----------- -----------
Deferred tax assets:
Inventories, principally due to additional costs inventoried
for tax purposes pursuant to the Tax Reform Act of 1986 1,307,000 854,000
Differences related to anticipated future expenses and
allowances 265,000 499,000
Deferred compensation 420,000 191,000
----------- -----------
1,992,000 1,544,000
----------- -----------
Net deferred income tax liability $ 2,718,000 $ 2,330,000
=========== ===========
No valuation allowance has been recorded as of September 30, 2002 or 2001.
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, 2002, 2001 and 2000:
2002 2001 2000
----------- ----------- ------------
Computed "expected" tax expense $ 2,233,436 $ 2,639,632 $ 2,279,916
Nondeductible operating losses
Bahamian subsidiary 229,574 141,288 189,374
Effect of income tax subsidy on
earnings of Virgin Islands subsidiary (930,907) (1,090,153) (1,040,427)
Nondeductible losses of equity investee - - 101,092
Effect of extraterritorial deduction on
income tax (208,392) (224,654) -
Other (201,513) 94,939 118,923
----------- ----------- ------------
Total income tax expense on income
before extraordinary item $ 1,122,198 $ 1,561,052 $ 1,648,878
=========== =========== ============
40
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES (CONTINUED)
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, 2002, 2001 and 2000,
respectively, is as follows:
2002 2001 2000
--------- --------- ---------
Basic $ 0.18 $ 0.20 $ 0.19
Diluted 0.18 0.20 0.19
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 $7,500,000 and $27,900,000,
respectively, as of September 30, 2002. The undistributed earnings of the
Bahamian subsidiary have been reduced by any previously taxed income.
NOTE 11. LEASES
The Company occupies office space under noncancelable operating leases which
expire between September 2004 and December 2006. One of the leases contains two
renewal options of five years each.
Future minimum lease payments under these noncancelable operating leases as of
September 30, 2002 are as follows:
Year Ending
September 30, Amount
------------- -----------
2003 $ 436,032
2004 436,032
2005 396,432
2006 396,432
2007 99,108
-----------
$ 1,764,036
===========
Rent expense for office space (including the Company's share of common area
expenses, real estate and sales taxes) amounted to $485,206, $400,538 and
$309,832 for the years ended September 30, 2002, 2001 and 2000, respectively.
41
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 12. 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, 2002, 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, 2002, the Company received a total of $339,000 upon the
exercise of stock options for 56,500 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:
2002 2001 2000
------------- ------------- -------------
Net income, as reported $ 5,446,731 $ 6,202,570 $ 3,887,969
Net income, pro forma 5,179,845 5,935,684 3,442,853
Earnings per common share,
as reported (Basic) 0.99 1.12 0.71
Earnings per common share,
as reported (Diluted) 0.97 1.12 0.70
Earnings per common share,
pro forma (Basic) 0.94 1.08 0.62
Earnings per common share,
pro forma (Diluted) 0.92 1.07 0.62
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.
42
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 12. STOCK OPTIONS (CONTINUED)
A reconciliation of the Company's stock option activity, and related
information, for the years ended September 30, 2002, 2001 and 2000 follows:
2002 2001 2000
---------------------------- --------------------------- ---------------------------
WEIGHTED Weighted Weighted
NUMBER AVERAGE Number Average Number Average
OF EXERCISE of Exercise of Exercise
OPTIONS PRICE Options Price Options Price
------------ ------------ ------------ ------------ ------------ ------------
Outstanding,
beginning of year 599,000 $ 8.43 599,000 $ 8.43 599,000 $ 8.43
Granted - - - - - -
Exercised (56,500) 6.00 - - - -
Forfeited - - - - - -
============ ============ ============ ============ ============ ============
Outstanding,
end of year 542,500 $ 8.69 599,000 $ 8.43 599,000 $ 8.43
============ ============ ============ ============ ============ ============
Exercisable,
end of year 408,500 $ 8.87 398,000 $ 8.59 311,000 $ 8.65
============ ============ ============ ============ ============ ============
The following table summarizes information about the stock options at September
30, 2002:
NUMBER NUMBER
OUTSTANDING AT EXERCISABLE AT
SEPTEMBER 30, SEPTEMBER 30, EXPIRATION
EXERCISE PRICE 2002 2002 DATE
-------------- -------------- -------------- ------------
12.2500 60,000 60,000 April 2004
8.1250 87,500 87,500 February 2006
9.0625 60,000 60,000 May 2008
8.1250 335,000 201,000 December 2008
-------------- --------------
542,500 408,500
============== ==============
The exercise price of options granted has been made at grant date fair value.
43
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 13. 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 Cruzan Estate Rums and Cruzan Flavored Rums)
Bottling Operations (contract bottling services and proprietary and private
label products) Vinegar and Cooking Wine (bulk vinegar, bulk cooking wine,
vinegar stock and proprietary and private label case goods) 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.
44
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 13. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
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, 2002, 2001 and 2000 are as follows:
(in thousands) 2002 2001 2000
------------ ------------ ------------
Net Sales
Bulk Alcohol Products $ 35,447 $ 39,727 $ 37,457
Premium Branded Spirits 24,698 18,547 16,119
Bottling Operations 18,661 20,644 16,823
Vinegar and Cooking Wine 20,953 20,853 20,477
Corporate Operations and Other - - 2,111
------------ ------------ ------------
$ 99,759 $ 99,771 $ 92,987
============ ============ ============
Operating Income (Loss)
Bulk Alcohol Products $ 10,539 $ 12,781 $ 13,696
Premium Branded Spirits (331) (840) 120
Bottling Operations 129 221 (1,022)
Vinegar and Cooking Wine 4,602 4,739 3,673
Corporate Operations and Other (6,339) (5,352) (5,369)
------------ ------------ ------------
$ 8,600 $ 11,549 $ 11,098
============ ============ ============
Identifiable Assets
Bulk Alcohol Products $ 71,974 $ 68,235 $ 62,969
Premium Branded Spirits 8,778 8,902 7,764
Bottling Operations 23,081 24,107 22,239
Vinegar and Cooking Wine 20,010 21,010 21,152
Corporate Operations and Other 14,040 11,334 12,424
------------ ------------ ------------
$ 137,883 $ 133,588 $ 126,548
============ ============ ============
Depreciation and Amortization
Bulk Alcohol Products $ 3,005 $ 3,229 $ 2,845
Premium Branded Spirits 88 271 104
Bottling Operations 1,612 1,471 1,474
Vinegar and Cooking Wine 473 1,140 928
Corporate Operations and Other 430 224 334
------------ ------------ ------------
$ 5,608 $ 6,335 $ 5,685
============ ============ ============
Capital Expenditures
Bulk Alcohol Products $ 4,269 $ 3,328 $ 3,964
Premium Branded Spirits 166 205 68
Bottling Operations 1,166 2,481 857
Vinegar and Cooking Wine 247 549 754
Corporate Operations and Other 153 72 185
------------ ------------ ------------
$ 6,001 $ 6,635 $ 5,828
============ ============ ============
Goodwill
Bulk Alcohol Products $ 9,471 $ 9,471 $ 10,072
Premium Branded Spirits - - -
Bottling Operations - - -
Vinegar and Cooking Wine 11,053 11,053 11,748
Corporate Operations and Other - - -
------------ ------------ ------------
$ 20,524 $ 20,524 $ 21,820
============ ============ ============
45
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 13. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Sales and operating income for the years ended September 30, 2002, 2001, and
2000 and identifiable assets as of the end of each period classified by
geographic area, were as follows:
U. S. VIRGIN
ISLANDS AND
UNITED STATES THE BAHAMAS CONSOLIDATED
------------- -------------- --------------
September 30, 2002:
Net sales $ 88,617,308 $ 11,141,433 $ 99,758,741
Operating income 5,372,667 3,227,568 8,600,235
Identifiable assets 95,698,471 42,184,033 137,882,504
September 30, 2001:
Net sales $ 87,489,403 $ 12,281,194 $ 99,770,597
Operating income 7,519,943 4,029,099 11,549,042
Identifiable assets 94,024,629 39,563,535 133,588,164
September 30, 2000:
Net sales $ 79,405,802 $ 13,580,895 $ 92,986,697
Operating income 7,843,670 3,254,089 11,097,759
Identifiable assets 89,271,882 37,273,566 126,545,448
Included in net sales for the United States are export sales, primarily to
Eastern Europe, Canada and the Caribbean, totaling approximately $6,400,000,
$6,400,000 and $5,700,000 for the years ended September 30, 2002, 2001 and 2000.
NOTE 14. PENSION PLAN
The Company has a defined contribution retirement plan which covers
substantially all United States employees. 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 based on their eligible compensation. Participants are
immediately vested in any elective contributions and 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 $1,043,311, $915,998 and
$644,749 to the plan for the years ended September 30, 2002, 2001 and 2000,
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 $170,000 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.
46
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 15. 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 $2,007,654, $1,946,000 and
$2,069,000 for the years ended September 30, 2002, 2001 and 2000, respectively.
Included in trade receivables is approximately $455,000 and $416,000 as of
September 30, 2002 and 2001, respectively, related to these sales. The Company
has outstanding advances to Premier of $587,019 as of September 30, 2002 and
2001, respectively, which are included in investments in and advances to equity
investees. These advances are unsecured and bear interest at 8.5%. On November
1, 2002 the interest rate was reduced to 6.0%. Interest payments are due monthly
or on demand in accordance with the terms of the agreement. Principal is payable
on demand.
NOTE 16. 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, 2002 and 2001
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.
Carrying Amount Fair Value
------------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Financial assets:
Notes receivable, including note
receivable from affiliate $ 4,477,625 $ 4,187,432 $ 4,619,131 $ 4,270,294
Financial liabilities:
Long-term debt $ 57,017,009 $ 59,684,549 $ 57,017,009 $ 59,684,549
47
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 17. 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.
2002 2001 2000
------------- ------------- -------------
Net income $ 5,446,731 $ 6,202,570 $ 3,887,969
============= ============= =============
Determination of shares:
Weighted average number of common shares outstanding 5,526,781 5,513,734 5,513,734
Shares issuable on exercise of stock options, net of
shares assumed to be repurchased 97,383 13,676 36,482
------------- ------------- -------------
Average common shares outstanding for diluted
computation 5,624,164 5,527,410 5,550,216
============= ============= =============
Net income per common share:
Basic:
Income before extraordinary item $ 0.99 $ 1.12 $ 0.92
Extraordinary item - - (0.21)
------------- ------------- -------------
Net income $ 0.99 $ 1.12 $ 0.71
============= ============= =============
Diluted:
Income before extraordinary item $ 0.97 $ 1.12 $ 0.91
Extraordinary item - - (0.21)
------------- ------------- -------------
Net income $ 0.97 $ 1.12 $ 0.70
============= ============= =============
48
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter First Second Third Fourth
------- ---------- ---------- ----------- ----------
(In thousands, except per share and gross margin data)
2002:
Net sales $ 24,469 $ 23,496 $ 26,809 $ 24,985
Gross profit 7,556 7,142 8,644 7,797
Gross margin 30.8% 30.4% 32.2% 31.2%
Net income 1,490 1,725 1,755 477*
Net income per share:
Basic 0.27 0.31 0.32 0.09
Diluted 0.27 0.31 0.31 0.08
2001:
Net sales $ 22,263 $ 25,474 $ 26,093 $ 25,941
Gross profit 7,691 7,777 8,928 7,687
Gross margin 34.5% 30.5% 34.2% 29.6%
Net income 1,244 1,487 1,919 1,553
Net income per share:
Basic 0.23 0.27 0.35 0.27
Diluted 0.23 0.27 0.35 0.27
2000:
Net sales $ 20,462 $ 23,458 $ 23,722 $ 25,345
Gross profit 6,507 7,276 7,976 7,111
Gross margin 31.8% 31.0% 33.6% 28.1%
Income before extraordinary item 1,290 1,329 1,319 1,119
Net income 121 1,329 1,319 1,119
Net income per share:
Basic 0.02 0.24 0.24 0.21
Diluted 0.02 0.24 0.24 0.20
* In the fourth quarter of 2002, the Company incurred increased marketing
expenses, increased its reserves for deferred compensation and recorded a
loss in an equity investment.
49
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 19. 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:
Current assets acquired $ 2,937,219
Goodwill 22,528,351
Current liabilities assumed (930,427)
Noncancelable operating lease on plant facility assumed (773,237)
--------------
$ 23,761,906
==============
The Company assumed a noncancelable 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.
NOTE 20. 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 5)
for $3.5 million and recorded a loss of $78,838 on the transaction.
NOTE 21. LEGAL PROCEEDINGS
The Bureau of Alcohol, Tobacco and Firearms of the United States Department of
the Treasury (the "BATF") had advised the Company that it was conducting an
investigation of shipments made by various U. S. alcohol producers to certain
countries formerly included in the Soviet Union. The BATF had indicated that it
believed that certain of the Company's export shipments may not have conformed
to the specifications required by the BATF, and that this nonconformity may have
violated U.S. Law.
In June 2002, the Company entered into agreements with the BATF providing for
the following: (1) the Company agreed to pay a total of $400,000 in taxes and
forfeitures, which was paid in June 2002; (2) the Company agreed to a four-day
suspension (which was served in July 2002) of the Company's federal basic permit
at its Florida facilities; and (3) the BATF has indicated that it will not seek
any further actions against or penalties from the Company with respect to the
shipments in question.
The Company believes that the agreements with the BATF have not and will not
have a material adverse effect on the Company's financial condition or results
of operation.
50
TODHUNTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 22. SUBSEQUENT EVENT
During November 2002, the Company announced the retirement of A. Kenneth
Pincourt, Jr., its Founder, Chairman and Chief Executive Officer. The Company
has entered into an agreement with Mr. Pincourt, setting forth the terms of his
retirement. Under this agreement, the Company elected to accelerate retirement
benefits and continue to pay compensation and provide related benefits through
July 15, 2004. The Company will record a charge for these items during the first
quarter of its 2003 fiscal year. The effect of this charge, net of income tax
benefits, will be approximately $1 million or $.18 per common share. In
addition, the Company's majority shareholder, Angostura, Ltd., has entered into
an agreement with Mr. Pincourt to purchase 595,985 shares of common stock.
51
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, 2002, 2001, and 2000 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 26, 2002
52
TODHUNTER INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Year Ended September 30,
-------------------------------------------
2002 2001 2000
------------ ------------- ------------
Inventory Reserve:
Balance, beginning of period $ 723,007 $ 9,689 $ 222,844
Charged to costs and expenses 108,633 1,163,318 -
Deductions (418,094) (450,000) (213,155)
------------ ------------- ------------
Balance, end of period $ 413,546 $ 723,007 $ 9,689
============ ============= ============
53
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(7)
10.23 Agreement and General Release of All Claims between Todhunter
International, Inc. and A. Kenneth Pincourt, Jr., dated as of November
26, 2002(8)
11.1 Statement of Computation of Per Share Earnings(9)
21.1 Subsidiaries of Todhunter International, Inc.(2)
23.1 Consent of McGladrey & Pullen, LLP(10)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002(10)
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002(10)
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (File No. 33-50848).
(2) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1995.
(3) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1997.
(4) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1998.
(5) Incorporated herein by reference to the Company's Current Report on
Form 8-K for November 17, 1999.
(6) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1999.
(7) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 2001.
(8) Incorporated herein by reference to the Company's Current Report on Form
8-K for November 26, 2002.
54
(9) Filed herewith and incorporated herein by reference to Note 17 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,
2002.
(10) Filed herewith.
55