Castle Brands Inc.
Annual Report 2006

Plain-text annual report

2 0 0 6 A N N U A L R E P O R T Castle Brands Inc. Annual Report 2006 M I S S I O N S T A T E M E N T As one of the few small public companies in the global beverage alcohol industry, our mission is to develop and grow our current portfolio of premium brands and to complement these brands through a combination of acquisitions, agency relationships and new product development. We position our brands in the high-end segments of leading internationally recognized product categories. Everything we do is based on our core values: To be bold in our demands on ourselves; to be clear in our relationships with all of the individuals and organizations with which we interact; and to conduct our business with integrity and style. page one Castle Brands Inc. Chairman’s Letter Mark Andrews Chairman and Chief Executive Officer D e a r S h a r e h ol de r : Last year, we made significant progress in the implementation of our long-term strategy. We achieved a 68% growth in revenue, 94% growth in gross profit and a 57% increase in case sales over the prior year. We also dramatically increased our organizational capability by making very strong additions to our executive management team, substantially expanded our distribution network into all fifty states and a number of foreign countries, and completed our initial public offering on April 6, 2006. Our impressive growth last fiscal year was driven by our dedication to building one of the best premium portfolios in the industry, supported by a dedicated sales force whose abilities and expertise we believe rival those of our biggest competitors. We placed intense emphasis on distribution, reinforcing our sales infrastructure and investing effectively behind our brands. This strategy helped us make great strides in our key domestic and international markets. Our strong organic sales growth led to increased sales in four of the fastest-growing premium categories in the industry: vodka, rum, Irish whiskey and liqueurs. In addition, the establishment of Gosling-Castle Partners, Inc., our newly formed global export venture with the Gosling family, significantly expanded our portfolio of brands. Also during the last year, we had the benefit of a full year’s results of Pallini Limoncello. We were able to efficiently integrate these brands into our existing portfolio, further emphasizing the scalability of our organization and business model. It is important to note that sales of both Gosling’s rums and Pallini liqueurs increased significantly last year with Castle Brands as their new importer. We also increased our gross margin percentage by almost five percentage points and lowered general and administrative expense as a percentage of revenue. We continued to increase sales and marketing spending to build our brands, but these expenditures decreased significantly as a percentage of revenue and on a per case basis as a result of our strong growth. page two Annual Report 2006 We are leveraging our position as one of the few small public companies in the spirits industry to build a portfolio of exceptional premium brands. We select the categories in which we participate based on their growth trends and economic potential. In each category, we believe that our emerging brands of today will become the premium branded spirit success stories of tomorrow. While heavy investment in our brand building activities and our sales and marketing infrastructure in fiscal 2006 led to a planned operating loss of $11.9 million, we believe we are well on track to experience continued substantial top-line growth as part of our long-term business strategy. We have built a sales and operating platform and are investing in our brands with a focus on what we intend to become. With our listing on the American Stock Exchange in April, we became one of the few small public global spirits companies in the world. This accomplishment provided the capital for us to continue to grow our current brands aggressively. It also provides us with a public currency, which positions us to actively pursue acquisition possibilities within the spirits industry. The organic growth of our current brands, augmented by the strategic acquisition of complementary brands, affords us two effective routes to achieve our sales, financial and valuation objectives. Upon the closing of our public offering, our cash position increased significantly, all of our preferred stock and related dividends were converted into common stock, 46% of our convertible notes payable were converted into common stock, our other indebtedness was reduced and our shareholders’ equity dramatically increased. As a result, we believe that becoming a public company has put Castle Brands on stronger financial ground. We are very proud of what we accomplished in the 2006 fiscal year. The significant time and effort put forth to achieve these results are attributable to many groups of dedicated people: You, our shareholders, our Board of Directors, our many business partners and all of the talented and productive people at Castle Brands, who put their hearts and minds into the shared pursuit of making our company the brand builder it is today and the even more substantial company we intend to become. We thank you most sincerely for your support and we assure you that we will continue to aggressively pursue our objective of building shareholder value. M A R K A N D R E W S Chairman and Chief Executive Officer page three Castle Brands Inc. Building Our Brands Our current portfolio is strongly focused in the premium segments of four of the fastest growing categories in the spirits industry. Vodk a No spirit has the recognized flexibility of vodka. As the spirit at the heart of the cocktail renaissance, vodka’s popularity allows it to be enjoyed in a wide variety of drinks and situations. Our Boru Vodka reflects the boldness and vision associated with its namesake, Brian Boru, the legendary High King of Ireland. It takes its quality and character from fine grain and the pure water for which Ireland is famous. It is distilled five times for smoothness and filtered through ten feet of charcoal for increased purity. Our flavor extensions are made with the same commitment to quality. Boru Citrus, Boru Orange and Boru Crazzberry flavored vodkas have allowed us to enhance the visibility and flexibility of the Boru brand. In early 2007, we plan to introduce the very handsomely redesigned bottle that is pictured in this Annual Report. We believe that Boru Vodka will continue to represent a growth engine for our company. Ru m The history and rich lore surrounding rum is unmatched by any spirit category in the world. From its association with the seas and those who set sail on them, rum instantly commands images of excitement and adventure. Our offerings in this category are led by the highly regarded Gosling’s family of rums, consisting of Gosling’s Black Seal, Gosling’s Gold Bermuda Rum and Gosling’s Old Rum. In addition, we produce Sea Wynde, a premium pot-still rum with rich and robust character. In the coming years, we anticipate that our rums will continue to reach new heights of popularity among consumers who are looking for flavorful, top-quality brands in this important category. page four Annual Report 2006 Castle Brands’ portfolio is positioned to capitalize on key drivers of growth in the spirits industry including: An increased preference for spirits over beer and wine ; a keen interest in trading up to premium brands; and increased consumer identification with particular spirits brands to convey status and provide affordable luxury. I r i s h Wh i sk e y Irish whiskey is one of the most rapidly growing segments of the whisky category. Unlike most Scotch whiskies, Irish whiskey is typically distilled three times, rather than twice, and no peat is used to dry the malted barley. This produces a light, sweet, aromatic whiskey, which is immediately appealing to a wide range of consumers. We believe that our single malt Knappogue Castle Whiskey, with its distinctive vintage dating based on the year of distillation, is an exceptional product with unmatched character. Another truly unique product, which was created by our Chairman’s father, is our Knappogue Castle 1951, distilled in 1951 and aged for 36 years in sherry casks. In response to growing demand for premium Irish whiskey, we expanded our portfolio in 2001 to include our family of Clontarf Irish Whiskeys. Clontarf is available in three expressions: single malt, reserve and a classic blend. We look forward to developing our brands within this rapidly growing segment of the spirits industry. L iqu e u r s & C o r di a l s A broad, varied and growing category, liqueurs and cordials represent a very important opportunity for growth. Each product within this category of our portfolio has a unique character and delicious flavor profile. The demand for Irish creams prompted us to launch Brady’s Irish Cream Liqueur, which boasts fresh dairy cream, Irish whiskey and natural flavors. Our portfolio also includes Celtic Crossing Liqueur, which has developed a devoted and growing customer base that appreciates its distinct combination of Irish spirits, cognac and honey flavor. Though limoncello is well known in Italy, as the exclusive U.S. distributor of Pallini Limoncello and its flavor extensions, we believe that we are a leader in the growth of this refreshing and versatile drink in America. Because all of our brands can be enjoyed on their own or in a wide variety of innovative cocktails, new consumers from different demographics are drawn to our brands every day. We selectively seek brands with substantial growth potential to complement our existing portfolio. We believe that the market contains a wide range of opportunities for us, and we look forward to growing our family of brands through a combination of acquisitions, agency relationships and product development. page five Castle Brands Inc. Given the investment in our expanded executive team and our sales force, combined with the impressive list of distributors who now represent us all across the U. S ., Castle Brands has built a very scalable platform for growth, positioning us to manage far more case sales without material incremental personnel cost. Our Company Keith Bellinger President and Chief Operating Officer Over the last year, we significantly strengthened and enhanced our company’s capabilities by selectively adding very experienced industry leaders to our executive management team and by making important additions to our sales, marketing, and finance groups. In May of last year, we hired Keith Bellinger to be our President and Chief Operating Officer. Keith brings 19 years of experience in the beverage alcohol industry to Castle Brands. His most recent position before joining Castle Brands was President of the Northern Business Unit of Allied Domecq North America, one of Allied’s largest business units globally with annual sales of over 4 million cases. We have also recruited two very capable leaders who report to Keith, Con Constandis who now runs our business in the United States, Canada and Latin America, and John Soden who is in charge of our international business. Con was previously Chief Operating Officer of Allied Domecq U.S. and prior to that was with Seagram’s in a number of senior management positions both in the U.S. and Europe. John was General Manager of Woodford Bourne, a wine and spirits importer in Ireland and prior to that was with C&C PLC, a large global drinks company. With Keith, Con and John, we have the industry experience, management skills and industry relationships to become a much larger company. In March 2006, we also added Seth Weinberg as our General Counsel. Prior to joining our company, Seth was an attorney in the corporate department of Kramer, Levin. Seth brings a wealth of corporate and securities law experience to the company as well as extensive mergers and acquisitions expertise. In the United States, we now have seven experienced Regional Managers who are assisted by sales personnel in key markets. Collectively, this sales force sold approximately 2 million cases a year in their previous jobs. In addition, an important milestone achieved during the year was the completion of our distribution page six Annual Report 2006 network in the U.S. We now have very strong distributors in all fifty states. With our current sales force and distributor network, we believe we are very well positioned to grow substantially in the U.S. without major additions to our sales force or new distributors. Given the investment we have made in our expanded executive team and our sales force, combined with the impressive list of distributors who represent us all across the country, Castle Brands has built a very scalable platform for growth. We should be able to effectively manage far more case sales without material incremental personnel cost. The United States continued to be a key market for the company in fiscal 2006, where we saw sales reaching 56% of total nine-liter cases sold globally. U.S. case volume totaled 149,898, representing a more than 100% increase over the 74,190 sold in the 2005 fiscal year. Castle Brands’ Boru Vodka benefited greatly from America’s intense interest in the imported vodka category, driving a 60% increase in Boru Vodka case volume in the U.S. for fiscal 2006. The biggest percentage gain for our company in the U.S. was seen in the rum category, with over a 400% lift in nine-liter case volume for the fiscal year due to the addition of the Gosling’s rums. Our case sales of liqueurs grew 45%, while Irish whiskey grew 71%. Our international sales, which totaled 44% of total case volume for fiscal 2006, were up from 95,870 in 2005 to 117,154 in our 2006 fiscal year, an increase of 22%. Rum was the fastest growing category for our company’s international business, due to the addition of Gosling’s. We are very proud of what we were able to achieve during our 2006 fiscal year. We met our annual objectives, growing our brands and supporting them with outstanding sales personnel and an increased marketing effort. This not only resulted in improved net sales and market share but also positioned Castle Brands very well as we look to expand our presence in our key U.S. and international markets. Castle Brands has seen the impressive results that expanded sales reach, improved marketing, sound acquisitions and the right strategic alliances can deliver to the growth of our business. You can expect us to pursue more of the same moving forward, with an unwavering focus towards building shareholder value. page seven Castle Brands Inc. Castle Brands Inc. Since 1998, we have invested over $60 million to develop our operating platform, acquire and grow our portfolio of distinctive premium spirits brands, and build strong U. S . and international routes to market. We expect to capitalize on this investment in the years ahead. A Promising Future • We are in the second year of an ambitious five-year business plan designed to develop Castle Brands into a top-tier performer within the premium segments of the spirits industry. • Over the coming years, we will continue our intense focus on expanding the growth of our current portfolio in our core growth markets, while seizing opportunities for our products in attractive new markets. • We are actively pursuing potential new premium brands in targeted categories. Our objective is to be the “partner of choice” for family-owned brands seeking a better route to market. We also expect that major beverage alcohol companies will be willing to sell “non-core” brands, which we may be able to build significantly with incremental focus and energy. • Because our executive team, sales force, distribution network and support systems are largely in place, we expect to see important improvement in key metrics, such as total revenue, gross margin percentage, sales and marketing spend as a percent of revenue, and general and administrative expense as a percent of revenue, as sales increase. page eight C O M M O N S T O C K The common stock of Castle Brands Inc. is traded on the American Stock Exchange under the symbol “ROX.” D I S C L A I M E R This Annual Report contains forward-looking information. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be significantly impacted by certain risks and uncertainties described herein and in the Company’s Annual Report on Form 10-K for the year ended March 31, 2006 filed with the Securities and Exchange Commission. Corporate Information Richard C. Morrison Former Managing Director Babson Capital Management Frederick M. R. Smith Consultant Credit Suisse First Boston Kevin P. Tighe Partner Tighe Patton Armstrong Teasdale, PLLC N O T I C E O F A N N U A L M E E T I N G The annual meeting of stockholders will be held on September 20, 2006 at 10:00 am, EST at the American Stock Exchange, 86 Trinity Place, New York, NY 10006. T R A N S F E R A G E N T Continental Stock Transfer and Trust Company 17 Battery Place, 8th Floor New York, NY 10004 (212) 845-3212 C O R P O R A T E C O U N S E L Patterson Belknap Webb and Tyler LLP 1133 Avenue of Americas New York, NY 10036 (212) 336-2000 C O R P O R A T E H E A D Q U A R T E R S Castle Brands Inc. 570 Lexington Avenue, 29th Floor New York, NY 10022 (646) 356-0200 O F F I C E R S Mark Andrews Chairman of the Board and Chief Executive Officer Keith A. Bellinger President and Chief Operating Officer Constantine Constandis Managing Director–Americas and SVP–Global Strategic Planning John Soden Managing Director–International Operations Matthew F. MacFarlane Chief Financial Officer T. Kelley Spillane SVP–U.S. Sales Seth B. Weinberg General Counsel and Secretary D I R E C T O R S Mark Andrews Chairman of the Board and Chief Executive Officer Castle Brands Inc. John F. Beaudette President MHW, Ltd. Robert J. Flanagan Executive Vice President Clark Enterprises Inc. Phillip Frost, M.D. Vice Chairman Teva Pharmaceutical Industries Ltd. Colm Leen Group Finance Director and Secretary Carbery Group designed by curran & connors, inc. / www.curran-connors.com Castle Brands Inc. | 570 Lexington Avenue, 29th Floor | New York, NY 10022 | 646-356-0200 www.castlebrandsinc.com 

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