HIGHLIGHTS
(Expressed in millions, except per share amounts and ratios)
--------------------------------------------------------------------------------
Year Ended April 30, 1999 2000 % Change
--------------------------------------------------------------------------------
Net Sales $2,009 $2,134 6%
Gross Profit $1,019 $1,103 8%
Operating Income $ 322 $ 348 8%
Net Income $ 202 $ 218 8%
Earnings Per Share - Basic and Diluted $ 2.93 $ 3.18 9%
Cash Dividends Paid Per Common Share $ 1.15 $ 1.21 5%
EBITDA $ 377 $ 410 9%
Business Value Added $ 106 $ 111 4%
Return on Average Invested Capital 19.8% 18.4%
Return on Average Common Stockholders' Equity 23.6% 22.4%
QUARTERLY FINANCIAL INFORMATION
(Expressed in millions, except per share amounts)
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
Earnings
Per Share- Cash Dividends Market Price (High-Low)
Net Gross Net Basic and Paid Per Per Common Share
Sales Profit Income Diluted Common Share Class A Class B
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal 2000 $2,134 $1,103 $ 218 $3.18 $ 1.21 $63.38 - $45.00 $68.50 - $46.38
Quarters
First 437 231 38 0.56 0.295 62.25 - 56.25 67.25 - 61.50
Second 642 321 73 1.06 0.295 63.38 - 54.75 68.38 - 57.81
Third 557 284 55 0.80 0.31 63.25 - 50.56 68.50 - 54.00
Fourth 498 267 52 0.76 0.31 55.00 - 45.00 57.63 - 46.38
Fiscal 1999 $2,009 $1,019 $ 202 $2.93 $ 1.15 $71.00 - $51.88 $77.25 - $54.94
Quarters
First 441 227 37 0.54 0.28 58.25 - 51.88 64.25 - 54.94
Second 572 287 67 0.97 0.28 65.00 - 54.75 71.00 - 58.38
Third 516 260 50 0.72 0.295 71.00 - 62.69 77.25 - 68.06
Fourth 480 245 48 0.70 0.295 67.88 - 52.31 73.69 - 56.44
</TABLE>
<PAGE>
FINANCIAL TABLE OF CONTENTS
17
Selected Financial Data
18
Management's Discussion and Analysis
25
Consolidated Statement of Income
26
Consolidated Balance Sheet
28
Consolidated Statement of Cash Flows
29
Consolidated Statement of Stockholders' Equity
30
Notes to Consolidated Financial Statements
37
Report of Management
37
Report of Independent Accountants
<PAGE>
SELECTED FINANCIAL DATA
Year Ended April 30,
(Expressed in millions, except per share amounts and ratios)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Sales $1,363 1,490 1,644 1,606 1,672 1,793 1,824 1,906 2,009 2,134
Gross Profit $ 642 714 777 768 815 864 885 956 1,019 1,103
Operating Income $ 223 234 255 240 268 274 287 307 322 348
Net Income $ 145 146 156 129 149 160 169 185 202 218
Weighted Average Shares used to
calculate Earnings Per Share
- Basic 83.3 82.7 82.7 78.7 69.0 69.0 69.0 68.9 68.6 68.5
- Diluted 83.3 82.7 82.7 78.7 69.0 69.0 69.0 69.0 68.7 68.6
Earnings Per Share
- Basic and Diluted $ 1.74 1.76 1.88 1.63 2.15 2.31 2.45 2.67 2.93 3.18
Cash Dividends Paid
Per Common Share $ 0.72 0.78 0.86 0.93 0.97 1.02 1.06 1.10 1.15 1.21
Invested Capital
----------------
Average Invested Capital $ 743 823 925 900 835 875 929 948 1,049 1,238
Average Common
Stockholders' Equity $ 616 686 765 629 493 578 671 756 854 974
Total Assets $1,083 1,194 1,311 1,234 1,286 1,381 1,428 1,494 1,735 1,802
Long-Term Debt $ 112 114 154 299 247 211 63 50 53 41
Other Key Measures
------------------
Gross Margin 47.1% 47.9% 47.3% 47.8% 48.8% 48.2% 48.5% 50.2% 50.7% 51.7%
Operating Margin 16.4% 15.7% 15.5% 15.0% 16.0% 15.3% 15.8% 16.1% 16.0% 16.3%
Effective Tax Rate 33.8% 34.6% 35.6% 37.4% 39.8% 37.8% 38.0% 37.6% 36.5% 36.5%
Return on Average
Invested Capital 20.5% 18.8% 18.0% 15.4% 19.5% 19.7% 19.4% 20.4% 19.8% 18.4%
Return on Average Common
Stockholders' Equity 23.5% 21.3% 20.4% 20.4% 30.1% 27.5% 25.2% 24.3% 23.6% 22.4%
Total Debt to Total Capital 14.8% 15.5% 16.4% 43.6% 35.7% 29.6% 23.6% 16.7% 24.5% 20.3%
Total Cash Dividends
Paid to Net Income 41.7% 44.4% 45.8% 57.5% 45.3% 44.2% 43.3% 41.2% 39.3% 38.1%
Cash Flows from Operations $ 134 156 193 221 197 167 176 220 213 241
EBITDA $ 256 271 299 286 311 320 337 358 377 410
</TABLE>
Notes:
1. Includes the operations of Dansk International Designs Ltd., Fetzer
Vineyards, and Sonoma-Cutrer Vineyards since their acquisitions on July 2,
1991, August 31, 1992, and April 15, 1999, respectively.
2. Fiscal 1994 net income and earnings per share were reduced by $32 million
and $0.41, respectively, from the cumulative effect of accounting changes.
3. On October 15, 1993, the company sold Brown-Forman Enterprises, its credit
card processing operations, resulting in an after-tax gain of $18 million.
4. Weighted average shares, earnings per share, and cash dividends paid per
common share have been adjusted for a 3-for-1 common stock split in fiscal
1994.
5. Return on Average Invested Capital is defined as the sum of net income
(excluding extraordinary items) and after-tax interest expense, divided by
average invested capital. Invested capital is the sum of all interest-
bearing debt and preferred and common equity.
6. Return on Average Common Stockholders' Equity is defined as the sum of
income applicable to common stock divided by average common stockholders'
equity.
7. Total Debt to Total Capital is defined as debt divided by the sum of debt
and preferred and common equity.
8. EBITDA is defined as earnings before interest, taxes, depreciation and
amortization, and as such represents a measure of the company's cash flow.
It should be considered in addition to, but not as a substitute for, other
measures of financial performance that are in accordance with generally
accepted accounting principles.
9. Certain prior year amounts have been reclassified to conform with the
current year presentation, resulting in the restatement of net sales,
gross profit, gross margin, and operating margin for years prior to
fiscal 2000.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
In the discussion below, and in the Chairman's letter, we review Brown-Forman's
consolidated financial condition and results of operations for the fiscal years
ended April 30, 1998, 1999 and 2000. We also discuss factors that may affect the
company's future financial condition. Please read this section along with
Brown-Forman's consolidated financial statements for the year ended April 30,
2000, and the related notes.
When we make forward-looking statements about Brown-Forman's anticipated
financial performance, business prospects, new products, or similar matters, we
do not guarantee that the results indicated will actually be achieved. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. To comply with the terms of the safe harbor, we have
prepared a non-exclusive list of important risk factors that could cause our
actual results to differ materially from anticipated results. You can find this
list in Part II, Item 7 of the company's Annual Report on Form 10-K, into which
this discussion is incorporated by reference.
CONSOLIDATED SALES AND EARNINGS
Fiscal 2000 Compared to 1999
Net sales reached record levels in fiscal 2000, growing $125 million, or 6%.
Sales of wine and spirits increased 7%, primarily driven by higher volumes for
the Jack Daniel's family of brands, Korbel Champagne, and Fetzer Wines, as well
as the addition of Sonoma-Cutrer. Sales from the consumer durables segment
improved 5%, reflecting higher revenues from dinnerware and collectibles.
Net Sales
Dollars in Millions
1998 1999 2000
------ ------ ------
Wine and Spirits $1,367 $1,447 $1,543
Consumer Durables 539 562 591
------ ------ ------
Total $1,906 $2,009 $2,134
====== ====== ======
Total change +5% +5% +6%
International sales of $357 million were down 1% in fiscal 2000, largely due to
a weakening of foreign currencies, including the euro, against the U.S. dollar.
The abolition of intra-European duty-free trade, a significant retail channel,
also dampened our beverage sales overseas. Sales in the United States,
representing 81% of our revenues (excluding excise taxes), grew 9% in fiscal
2000.
Gross profit performance is a key measure by which we gauge the quality of
volume growth. Fiscal 2000 gross profit growth of 8% outpaced the rate of sales
growth, reflecting a continuing shift toward higher margin products, selected
price increases, and stable costs.
Gross Profit
Dollars in Millions
1998 1999 2000
------ ------ ------
Wine and Spirits $ 690 $ 742 $ 812
Consumer Durables 266 277 291
------ ------ ------
Total $ 956 $1,019 $1,103
====== ====== ======
Total change +8% +7% +8%
By focusing marketing efforts on high-margin products and realizing
manufacturing efficiencies, the company's gross margin achieved a record level
of nearly 52% in fiscal 2000.
Operating income for fiscal 2000 improved $26 million, or 8%. Profits from wine
and spirits grew $20 million, due principally to strong results by Jack Daniel's
and Fetzer. Operating income for the consumer durables segment increased $6
million in fiscal 2000, reflecting broad improvement across product lines and
channels of distribution.
Operating Income
Dollars in Millions
1998 1999 2000
---- ---- ----
Wine and Spirits $271 $284 $304
Consumer Durables 35 38 44
---- ---- ----
Total $307 $322 $348
==== ==== ====
Total change +7% +5% +8%
18
<PAGE>
Earnings per share reached a record $3.18, up 9% over fiscal 1999, fueled by
strong operating income growth.
1998 1999 1999
---- ---- ----
Earnings Per Share $2.67 $2.93 $3.18
Change +9% +10% +9%
Fiscal 1999 Compared to 1998
Net sales grew $103 million, or 5%, in fiscal 1999. Sales of wine and spirits
increased 6%, fueled by worldwide growth of Jack Daniel's and our premium wine
brands. Sales from the consumer durables segment increased 4%, primarily due to
higher revenues from Lenox fine china and collectibles.
Gross profit growth of 7% outpaced the rate of sales growth, reflecting a
continuing shift toward higher margin products, selected price increases, and
stable costs.
Operating income improved 5% during fiscal 1999. Profits from wine and spirits
grew $13 million, attributable to higher volumes, price increases, and improved
product mix, which allowed the company to significantly increase investments in
brand-building activities. The consumer durables segment achieved a $3 million
increase in operating income, primarily reflecting profitable growth in Lenox
fine china and collectible products.
Earnings per share grew 10% over fiscal 1998 to $2.93 per share. Earnings growth
resulted primarily from improved operating income, lower interest expense, and a
more favorable tax rate.
BUSINESS VALUE ADDED
Brown-Forman's foremost goal is to increase the value of our shareholders'
investment. To assist us in achieving this objective, we evaluate performance
and compensate our management based on a measure we call Business Value Added
(BVA). BVA represents the company's after-tax operating income less a capital
charge for net operating assets employed, recognizing not only the profits
generated by the company but also the investment required to produce those
profits.
Dollars in Millions
1998 1999 1999
---- ---- ----
Business Value Added $ 98 $106 $111
Change +13% +9% +4%
Strong 13% growth in fiscal 1998 BVA reflected leverage gained from expanding
operating earnings at a faster rate than invested capital. BVA growth rates have
slowed since fiscal 1998, due primarily to dilution from acquiring Sonoma-
Cutrer as well as initial repayments of a $200 million deferred tax liability
that will extend over a four-year period ending in fiscal 2003. Adjusted for
these items, BVA would have increased 10% in fiscal 1999 and 15% in fiscal 2000.
Returns on average invested capital and stockholders' equity were similarly
influenced by these same factors. As a result, the company's returns are
trending lower, but remain at very healthy rates.
1998 1999 2000
---- ---- ----
Return on Average Invested Capital 20.4% 19.8% 18.4%
19
<PAGE>
1998 1999 2000
---- ---- ----
Return on Average Common Stockholders' Equity 24.3% 23.6% 22.4%
COMPANY OUTLOOK
We believe the outlook for Brown-Forman's growth is very positive. Current
market conditions for premium wine and spirits brands are especially favorable
in the U.S. -- the company's primary market -- and, despite challenges posed by
weakening international currencies, prospects remain promising in other
important markets as well. In order to capitalize on these opportunities, we
plan to further increase the marketing investments behind our beverage brands.
We will also continue to penetrate new markets by expanding our global sales,
marketing, and distribution resources, as well as developing new products within
promising market segments.
The outlook is also positive for our consumer durables business. Lenox is the
leader in the U.S. market for fine china dinnerware, and is continuing to create
value for shareholders by capitalizing on its portfolio of powerful brand names.
We continue to focus on products within categories that offer significant growth
opportunities, including casual dining and gift giving.
Expanding Brown-Forman's portfolio of premium brands represents another
opportunity for growth, as evidenced by two recent investments.
On June 15, 2000, the company agreed to form a global alliance with Altia Group
Ltd to market and sell Finlandia Vodka. Brown-Forman will acquire 45% of
Finlandia Vodka Worldwide Ltd (FVW), which owns the Finlandia trademark and the
rights to market Finlandia Vodka, at a purchase price of approximately $83
million. FVW will employ Brown-Forman as Finlandia's distributor or
representative in all markets other than Finland and the Nordic countries, the
Baltic States, the Czech Republic and Poland. Brown-Forman is currently
Finlandia's distributor in the United States. The acquisition is expected to
result in modest earnings per share dilution for Brown-Forman over the next two
fiscal years. During the three-year period ending December 31, 2006,
Brown-Forman may be required to acquire all or some of Altia's remaining 55%
interest in FVW.
Separately, on May 17, 2000, we reached an agreement with Glenmorangie plc to
become the sales and marketing representatives for the Glenmorangie and Ardberg
Single Malt Scotch brands in certain global markets, including Continental
Europe, the Far East, Australia, Mexico, Canada, the Carribean, and South
America. Brown-Forman already held the distribution rights to those brands in
the U.S. In connection with this arrangement, the company is purchasing shares
representing approximately 10% of the voting rights of Glenmorangie plc at a
cost of $15 million.
WINE AND SPIRITS SEGMENT
Summary of Operating Performance
(Dollars expressed in millions)
1998 1999 2000
------ ------ ------
Net Sales $1,367 $1,447 $1,543
% Change 3% 6% 7%
Gross Profit $ 690 $ 742 $ 812
% Change 7% 8% 9%
Advertising Expenses $ 176 $ 191 $ 206
% Change 13% 9% 8%
SG&A Expenses $ 242 $ 267 $ 303
% Change 5% 10% 14%
Operating Income $ 271 $ 284 $ 304
% Change 6% 5% 7%
EBITDA $ 302 $ 314 $ 341
% Change 5% 4% 8%
Gross Margin 50.5% 51.3% 52.6%
Operating Margin 19.8% 19.6% 19.7%
Fiscal 2000 Compared to 1999
Net sales improved $96 million, or 7%, due principally to higher volumes for the
Jack Daniel's family of brands, Korbel Champagne, Fetzer and Finlandia, as well
as the addition of Sonoma-Cutrer and Tuaca.
Influenced by a weakening euro and other foreign currencies, dollar-denominated
revenues outside the U.S. declined 1% in fiscal 2000. International sales in
fiscal 2000 represented 26% of total wine and spirits sales (excluding excise
taxes) compared to 28% in fiscal 1999.
Gross profit expanded $70 million, as our gross margin increased from 51.3% to
52.6%. Higher margins reflect the realization of cost efficiencies and modest
price increases, as well as an improving product mix. Several new and developing
brands contributed to growth in gross profit, including Woodford Reserve,
Sonoma-Cutrer, Tuaca, Glenmorangie, Don Eduardo, and McPherson Wines.
20
<PAGE>
Advertising expenses increased 8%, reflecting a sustained commitment to brand-
building and future growth. Selling, general, and administrative expenses rose
14%, primarily due to incremental costs associated with the acquisition of
Sonoma-Cutrer, as well as significant investments to improve our processes and
systems.
Dollars in Millions
1998 1999 2000
---- ---- ----
Wine and Spirits Advertising $176 $191 $206
Change +13% +9% +8%
Operating income improved 7% in fiscal 2000, fueled by strong worldwide
performance for the Jack Daniel's family of brands, as well as U.S. growth for
Fetzer and Bolla wines, Southern Comfort, and Finlandia Vodka.
Fiscal 1999 Compared to 1998
Net sales grew $80 million, or 6%, primarily reflecting another record year for
sales of Jack Daniel's. Fetzer Wines and Korbel Champagnes also contributed
significantly to the growth in sales.
Gross profit grew 8% during fiscal 1999. Price increases, favorable product mix,
and manufacturing efficiencies combined to improve the gross margin for our wine
and spirits segment from 50.5% to 51.3%.
Advertising expenses grew 9%, reflecting a substantial increase in spending to
build consumer equity for our premium brands, particularly Jack Daniel's,
Fetzer, and Finlandia. Selling, general, and administrative expenses increased
10%, reflecting significant technology investments and expansion of the sales
infrastructure for international markets.
Operating income increased 5%, largely as a result of higher profits from the
Jack Daniel's, Korbel, and Fetzer brands.
Business Environment for Wine and Spirits
Societal attitudes toward drinking and governmental policy reflecting those
attitudes heavily influence the business environment for wine and spirits. This
is true both in Brown-Forman's largest market, the United States, and around the
world.
Brown-Forman strongly opposes abusive drinking and contributes significant
amounts of money to programs aimed at understanding and curbing alcohol abuse,
especially drunk driving and teenage drinking. We also support and abide by
voluntary industry marketing and advertising guidelines. Brown-Forman and other
beverage alcohol producers take a prominent role in encouraging responsible
consumption of their products and in warning against alcohol abuse. Brown-Forman
plays a leading role in several social awareness organizations around the world
that fight alcohol abuse, encourage self-regulation of marketing and sales
practices, and partner with government health officials.
Brown-Forman participates in political trade association activity with other
distillers and vintners to achieve a more favorable political and social
environment in the U.S. and foreign countries for the sale of our products. In
the U.S., some cities have enacted ordinances banning billboard advertising of
alcohol beverages. Although there is no law banning television advertising of
liquor, most television networks and local affiliated stations currently decline
to accept such distilled spirits advertising. Distillers seek equal access to
advertise distilled spirits on television in common with brewers and vintners.
State laws on distribution and taxation often discriminate against spirit-based
low-alcohol products such as Jack Daniel's Country Cocktails in comparison with
competing products such as beer, wine and malt- and wine-based coolers.
Brown-Forman opposes such discriminatory laws and seeks a level playing field
for alcohol products containing similar percentages of alcohol content.
Brown-Forman also works to secure favorable trade, legislative, and regulatory
treatment in foreign markets, including open access to foreign markets for
U.S.-made wine and spirits through international trade pacts.
Beverage alcohol sales are particularly sensitive to higher tax rates. In the
U.S., no legislation to increase federal excise taxes on distilled spirits is
currently pending, but a future tax increase cannot be ruled out. Similarly,
state legislatures periodically increase beverage alcohol taxes and there are
even local taxes in a few states. The cumulative effect of such tax increases
over time hurts sales. With more than half of the shelf price going to taxes
(approximately 58% of the price of a typical bottle of bourbon), distilled
spirits are the highest taxed consumer product in the U.S. Brown-Forman works
for reasonable excise tax reductions to remedy this situation. Tax rates and
advertising restrictions also affect the beverage alcohol markets outside the
U.S., but to date the impact of those changes in any one market is not
significant to the company's overall business.
21
<PAGE>
The creation of the European Union and the consequent reduction of trading
barriers and adoption of a single currency affect Brown-Forman's business in
Europe. We may find increased pressure on the wholesale price of our products
with the greater transparency of pricing in euros and increased electronic
cross-border trading.
In the publicity surrounding the many lawsuits against the tobacco industry (and
the onset of litigation against the gun industry), some commentators have
suggested that other industries, such as alcohol, fast foods and automobiles,
may be next. However, we do not believe the legal theories that created
liability for the tobacco companies apply to beverage alcohol. Most importantly,
the products are different. When used as intended, beverage alcohol is not
harmful to otherwise healthy consumers. Brown-Forman encourages our customers to
enjoy our products responsibly and in moderation. Unlike tobacco, moderate
consumption of beverage alcohol is believed to convey health benefits to many
consumers. In particular, scientists and health care experts report that
beverage alcohol may have positive cardiovascular health benefits for many
otherwise healthy adults. Although Brown-Forman does not recommend that
consumers drink beverage alcohol for health reasons, the potential health
benefits of responsible beverage alcohol consumption are another important
distinction between alcohol and tobacco. The dangers of alcohol abuse are
commonly known and have never been concealed by alcohol producers. Indeed,
distillers are at the forefront of efforts to combat drunk driving and underage
drinking. Lastly, state and federal governments stringently regulate the
content, manufacture, marketing, and sale of beverage alcohol, and in particular
the federal government requires the placement of a health warning label on the
beverage container.
Speculation continues about further consolidation among spirits manufacturers.
Although such consolidation theoretically could hinder the distribution and
marketing of our spirits products, to date that has not happened and it seems
unlikely that it will. Brown-Forman is a "brands company" that has not made
major investments in overseas distribution networks. Our wine and spirits brands
are typically sought after for distribution in overseas markets by other major
spirits companies and we expect that demand to continue.
CONSUMER DURABLES SEGMENT
Summary of Operating Performance
(Dollars expressed in millions)
1998 1999 2000
------ ------ ------
Net Sales $ 539 $ 562 $ 591
% Change 9% 4% 5%
Gross Profit $ 266 $ 277 $ 291
% Change 10% 4% 5%
Advertising Expenses $ 63 $ 71 $ 75
% Change 14% 14% 5%
SG&A Expenses $ 168 $ 168 $ 172
% Change 7% -- 2%
Operating Income $ 35 $ 38 $ 44
% Change 17% 8% 16%
EBITDA $ 56 $ 63 $ 69
% Change 11% 12% 10%
Gross Margin 49.4% 49.4% 49.3%
Operating Margin 6.6% 6.8% 7.5%
Our consumer durables segment includes fine china, crystal, silver, pewter, and
luggage products marketed under the Lenox, Dansk, Gorham, Kirk Stieff, and
Hartmann brand names.
Fiscal 2000 Compared to 1999
Net sales increased $29 million, or 5%, in fiscal 2000, as china, crystal, and
stainless flatware lines all performed strongly. Several casual dinnerware
patterns introduced during the year were particularly successful, including new
lines designed for seasonal use. Revenues from the wholesale channel increased
more than 7%, while same-store sales for company-owned stores rose 5%. The Lenox
Collections direct marketing group continued to grow by reaching more consumers
through its successful catalogue, direct mail, and Internet venues. Hartmann
luggage also realized solid gains in sales and profits.
Gross profit increased $14 million, also 5%, as gross margins held constant
across most product lines.
Advertising expenses were up $4 million, due primarily to increased advertising
of collectible items and new casual dinnerware patterns. Selling, general, and
administrative expenses rose 2%, reflecting the continuation of strong cost
control measures. Management of costs, combined with a major reduction in
required working capital, has helped boost returns for our consumer durables
segment.
Operating income improved 16% for the year, with gains sourced broadly across
product lines and channels of distribution.
22
<PAGE>
Fiscal 1999 Compared to 1998
Net sales grew $23 million, or 4%, primarily reflecting increased revenues from
direct marketing and catalogue operations. Also, tableware sales experienced
solid gains in the wholesale and retail channels. These results were partially
offset by reduced demand for giftware and luggage products during the year.
Gross profit increased $11 million in fiscal 1999, holding steady at 49.4% of
net sales.
Advertising expenses grew 14%, due principally to increased advertising of
collectible products. Selling, general, and administrative expenses were flat
compared to fiscal 1998 as a result of strong cost controls.
Operating income improved $3 million, or 8%, primarily reflecting profitable
growth in tableware and collectible products, offset partially by a decline in
demand for giftware and luggage products.
LIQUIDITY AND CAPITAL RESOURCES
Our cash flows from operations continue to provide more than adequate capital to
meet operating and capital expenditure requirements, pay dividends, and fund
acquisition opportunities. We consider our ability to internally generate cash
to be a significant financial strength.
Free cash flow represents the cash remaining from operations after satisfying
working capital requirements and business reinvestment opportunities. A
consolidated statement of cash flows is summarized as follows:
(Expressed in millions)
1998 1999 2000
------ ------ ------
EBITDA $ 358 $ 377 $ 410
Interest expense, net (11) (4) (5)
Taxes on income (111) (116) (125)
Change in deferred taxes 19 (25) (51)
Other (35) (19) 12
------ ------ ------
Cash from operating activities 220 213 241
Additions to property, plant,
and equipment (44) (46) (78)
Acquisitions and other investments (2) (71) (41)
------ ------ ------
Free cash flow 174 96 122
Dividends (76) (79) (83)
Net change in debt (61) 101 (30)
Redemption of preferred stock -- (12) --
Acquisition of treasury stock (17) (13) --
------ ------ ------
Cash used for financing activities (154) (3) (113)
------ ------ ------
Increase in cash $ 20 $ 93 $ 9
====== ====== ======
Cash provided by operations increased $28 million in fiscal 2000, primarily
reflecting higher net income and successful efforts to lower the working capital
requirements for our consumer durables business, offset partially by a reduction
in deferred income taxes. Cash used for investing activities increased slightly
in fiscal 2000, reflecting higher levels of capital expenditures.
Cash provided by operations decreased $7 million in fiscal 1999, primarily
attributable to new U.S. tax regulations which resulted in a partial liquidation
of deferred income taxes. Cash used for investing activities increased $71
million in fiscal 1999, due primarily to the acquisition of Sonoma-Cutrer
Vineyards and technology investments.
We have a $300 million revolving credit agreement that expires in fiscal 2003.
At April 30, 2000, we had no outstanding borrowings under this agreement. At
April 30, 2000, we had $220 million remaining on our $250 million shelf
registration filing with the Securities and Exchange Commission.
CAPITAL EXPENDITURES
We invested $44 million in property, plant, and equipment in fiscal 1998, $46
million in fiscal 1999, and $78 million in fiscal 2000. These expenditures
primarily reflect the expansion and modernization of company-wide production
facilities. The company is currently making significant investments to increase
the capacity for distilling and warehousing Jack Daniel's whiskey.
Capital Expenditures
Dollars in Millions
1998 1999 2000
---- ---- ----
Wine and Spirits $31 $34 $63
Consumer Durables 13 12 15
---- ---- ----
Total $44 $46 $78
==== ==== ====
Capital expenditures for fiscal 2001 are expected to approximate $100 million,
up significantly from recent levels as we continue to expand the capacity of our
wine and spirits production facilities in response to growing consumer demand
for Jack Daniel's and our premium wine brands. Fiscal 2001 capital expenditure
requirements are expected to be met with internally generated funds.
23
<PAGE>
DIVIDENDS
Quarterly dividends were increased 5% in fiscal 2000 to $0.31, resulting in an
indicated annual dividend of $1.24 per common share. The increase was based on
the expectation of continued strong cash flow. Cash dividends paid as a
percentage of net income were 41% in fiscal 1998, 39% in fiscal 1999, and 38% in
fiscal 2000.
1998 1999 2000
----- ----- -----
Cash Dividends Paid per Common Share $1.10 $1.15 $1.21
DERIVATIVE FINANCIAL INSTRUMENTS
As a result of the growth of Brown-Forman's international business over the past
several years, the company's foreign currency receipts exceed its foreign
currency payments. To the extent this foreign currency exposure is not hedged,
the company's results of operations and financial position are negatively
impacted by a weakening of foreign currencies against the U.S. dollar and are
positively impacted by a strengthening of foreign currencies.
We use foreign currency options and forward contracts, with average maturities
of generally less than one year, as protection against the risk that the
eventual U.S. dollar cash flows resulting from the sale and purchase of goods in
foreign currencies will be adversely affected by changes in exchange rates.
While these hedging instruments are subject to fluctuations in value from
movement in the foreign currency exchange rates, such fluctuations are offset by
the change in value of the underlying exposures being hedged. We are not a party
to leveraged derivatives and do not hold or issue financial instruments for
trading purposes.
We had outstanding foreign currency option and forward contracts, hedging
primarily European euro, British pound, and Japanese yen revenues, with notional
amounts totaling $84 million, $96 million, and $55 million at April 30, 1998,
1999 and 2000, respectively. The company's credit exposure is limited to the
fair value of the contracts ($1 million, $2 million, and $4 million at April 30,
1998, 1999, and 2000, respectively) rather than the notional amounts. Foreign
currency contracts are entered into with major financial institutions with
investment grade credit ratings, thereby decreasing the risk of credit loss.
YEAR 2000 ISSUE
Brown-Forman made significant investments to enhance its information technology
systems (IT systems) over the past few years, addressing Year 2000 issues while
providing a more robust and efficient IT platform for the future. The total cost
of these efforts was approximately $23 million. Of the total cost, $14 million
was attributable to new systems and thus capitalized. The other $9 million was
expensed as incurred. All costs were funded through operating cash flows. No
significant additional costs related to Year 2000 issues are anticipated, though
ongoing investments will be made to further enhance our IT systems.
MARKET RISKS
The company holds debt obligations, foreign currency forward and option
contracts, and commodity future contracts which are exposed to risk from changes
in interest rates, foreign currency exchange rates, and commodity prices,
respectively. We have established policies, procedures and internal processes
governing the management of these market risks. As of April 30, 2000, the
exposure to these market risks is not considered material.
ENVIRONMENTAL
Along with other responsible parties, we face environmental claims resulting
from the cleanup of several waste deposit sites. We have accrued our estimated
portion of cleanup costs and expect either the other responsible parties or
insurance to cover the remaining costs. We believe that any additional costs
incurred to satisfy environmental claims will not have a material adverse effect
on the company's financial position, results of operations, or cash flows.
24
<PAGE>
Brown-Forman Corporation
CONSOLIDATED STATEMENT OF INCOME
(Expressed in millions, except per share amounts)
--------------------------------------------------------------------------------
Year Ended April 30, 1998 1999 2000
--------------------------------------------------------------------------------
Net sales $1,906 $2,009 $2,134
Excise taxes 255 254 257
Cost of sales 695 736 774
--------------------------------
Gross profit 956 1,019 1,103
Advertising expenses 239 263 281
Selling, general, and administrative expenses 410 434 474
--------------------------------
Operating income 307 322 348
Interest income 3 6 10
Interest expense 14 10 15
--------------------------------
Income before income taxes 296 318 343
Taxes on income 111 116 125
--------------------------------
Net income $ 185 $ 202 $ 218
================================
Earnings per share - Basic and Diluted $ 2.67 $ 2.93 $ 3.18
================================
Weighted average shares used to calculate earnings per share:
Basic 68.9 68.6 68.5
Diluted 69.0 68.7 68.6
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
Brown-Forman Corporation
CONSOLIDATED BALANCE SHEET
(Expressed in millions, except share and per share amounts)
--------------------------------------------------------------------------------
April 30, 1998 1999 2000
--------------------------------------------------------------------------------
Assets
------
Cash and cash equivalents $ 78 $ 171 $ 180
Accounts receivable, less allowance for doubtful accounts
of $11 in 1998, $11 in 1999 and $12 in 2000 265 274 294
Inventories:
Barreled whiskey 187 191 202
Finished goods 179 189 184
Work in process 88 89 80
Raw materials and supplies 48 56 48
-------------------------
Total inventories 502 525 514
Other current assets 24 29 32
-------------------------
Total Current Assets 869 999 1,020
Property, plant and equipment, net 281 348 376
Intangible assets, less accumulated amortization
of $130 in 1998, $135 in 1999 and $146 in 2000 250 264 270
Other assets 94 124 136
-------------------------
Total Assets $1,494 $1,735 $1,802
=========================
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE>
--------------------------------------------------------------------------------
April 30, 1998 1999 2000
--------------------------------------------------------------------------------
Liabilities
-----------
Commercial paper $ 107 $ 226 $ 220
Accounts payable and accrued expenses 233 242 280
Current portion of long-term debt 7 18 6
Accrued taxes on income 8 -- 1
Deferred income taxes 27 31 15
-------------------------
Total Current Liabilities 382 517 522
Long-term debt 50 53 41
Deferred income taxes 150 137 95
Accrued postretirement benefits 55 57 58
Other liabilities and deferred income 40 54 38
-------------------------
Total Liabilities 677 818 754
-------------------------
Stockholders' Equity
--------------------
Capital Stock:
Preferred $0.40 cumulative, $10 par value;
1,177,948 authorized and outstanding shares
redeemed in 1999 at $10.25 per share plus
unpaid accrued dividends 12 -- --
-------------------------
Class A common stock, voting, $0.15 par value;
authorized shares, 30,000,000;
issued shares, 28,988,091 4 4 4
Class B common stock, nonvoting, $0.15 par value;
authorized shares, 60,000,000;
issued shares, 40,008,147 6 6 6
Retained earnings 821 945 1,080
Cumulative translation adjustment (9) (8) (12)
Treasury stock, at cost
(310,000, 490,000 and 484,000 Class B common
shares in 1998, 1999, and 2000, respectively) (17) (30) (30)
-------------------------
Common Stockholders' Equity 805 917 1,048
-------------------------
Total Stockholders' Equity 817 917 1,048
-------------------------
Total Liabilities and Stockholders' Equity $1,494 $1,735 $1,802
=========================
27
<PAGE>
Brown-Forman Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in millions; amounts in brackets are reductions of cash)
--------------------------------------------------------------------------------
Year Ended April 30, 1998 1999 2000
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 185 $ 202 $ 218
Adjustments to reconcile net income to net cash
provided by (used for) operations:
Depreciation 42 46 52
Amortization 9 9 10
Deferred income taxes 19 (25) (51)
Other (14) (5) (14)
Change in assets and liabilities, excluding
the effects of businesses acquired or sold:
Accounts receivable (2) (5) (20)
Inventories (52) (8) 8
Other current assets 7 2 (3)
Accounts payable and accrued expenses 24 8 38
Accrued taxes on income 2 (8) 1
Accrued postretirement benefits 1 2 1
Other liabilities and deferred income (1) (5) 1
-------------------------
Cash provided by operating activities 220 213 241
-------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (44) (46) (78)
Disposals of property, plant and equipment 13 2 5
Acquisition of business, net of cash acquired -- (54) (27)
Other (15) (19) (19)
-------------------------
Cash (used for) investing activities (46) (117) (119)
-------------------------
Cash flows from financing activities:
Net change in commercial paper (48) 119 (6)
Proceeds from long-term debt 1 -- --
Reduction of long-term debt (14) (18) (24)
Dividends paid (76) (79) (83)
Acquisition of treasury stock (17) (13) --
Redemption of preferred stock -- (12) --
-------------------------
Cash (used for) financing activities (154) (3) (113)
-------------------------
Net increase in cash and cash equivalents 20 93 9
Cash and cash equivalents, beginning of year 58 78 171
-------------------------
Cash and cash equivalents, end of year $ 78 $171 $180
=========================
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
Brown-Forman Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
For the Years Ended April 30, 1998, 1999 and 2000
(Expressed in millions, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
Common Stock Cumulative
Preferred Class Class Retained Translation Treasury
Total Stock A B Earnings Adjustment Stock
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1997 $ 730 $ 12 $ 4 $ 6 $ 712 $(4) $ --
Net income 185 185
Foreign currency translation
adjustment (5) (5)
-------
Comprehensive income 180
Cash dividends
Preferred, per share $0.40 (1) (1)
Common, per share $1.10 (75) (75)
-------
Total cash dividends (76)
Acquisition of treasury stock
(310,000 Class B common shares) (17) (17)
---------------------------------------------------------------------------------------------
Balance, April 30, 1998 817 12 4 6 821 (9) (17)
Net income 202 202
Foreign currency translation
adjustment 1 1
-------
Comprehensive income 203
Cash dividends
Common, per share $1.15 (79) (79)
Acquisition of treasury stock
(180,000 Class B common shares) (13) (13)
Redemption of preferred stock (12) (12)
Tax benefit related to stock-based
compensation plans 1 1
---------------------------------------------------------------------------------------------
Balance, April 30, 1999 917 -- 4 6 945 (8) (30)
Net income 218 218
Foreign currency translation
adjustment (4) (4)
-------
Comprehensive income 214
Cash dividends
Common, per share $1.21 (83) (83)
---------------------------------------------------------------------------------------------
Balance, April 30, 2000 $1,048 $ -- $ 4 $ 6 $1,080 $(12) $ (30)
=============================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars expressed in millions, except per share and per option amounts)
1. ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of all majority-owned
subsidiaries. Investments in affiliates in which the company has the ability to
exercise significant influence, but not control, are accounted for by the equity
method. All other investments in affiliates are carried at cost. Intercompany
transactions are eliminated.
Cash Equivalents
----------------
Cash equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.
Inventories
-----------
Inventories are stated at the lower of cost or market. Approximately 86% of
consolidated inventories are valued using the last-in, first-out (LIFO) method.
All remaining inventories are valued using the first-in, first-out and average
cost methods.
If the LIFO method had not been used, inventories would have been $104, $110,
and $110 higher than reported at April 30, 1998, 1999, and 2000, respectively.
A substantial portion of barreled whiskey will not be sold within one year
because of the duration of the aging process. All barreled whiskey is classified
as a current asset in accordance with industry practice. Bulk wine inventories
are classified as work in process.
Warehousing, insurance, ad valorem taxes, and other carrying charges applicable
to barreled whiskey are included in inventory costs.
Long-Lived Assets
-----------------
Property, plant, and equipment are stated at cost. Provision for depreciation is
made on the basis of estimated useful lives of depreciable assets, principally
using the straight-line method.
Intangible assets, principally the excess of purchase price over the fair value
of identifiable net assets of acquired businesses, are stated at cost less
accumulated amortization. These assets are amortized using the straight-line
method over their estimated useful lives, not exceeding forty years.
Revenue Recognition
-------------------
The company recognizes revenue when goods are shipped.
Advertising Costs
-----------------
Advertising costs are charged to expense as incurred, except for direct-response
advertising costs, which are capitalized and amortized over periods not
exceeding one year.
Foreign Currency Translation
----------------------------
The U.S. dollar is the functional currency for substantially all of the
company's consolidated operations. For these operations, all gains and losses
from currency transactions are included in income currently. For certain foreign
equity investments, the functional currency is the local currency. The
cumulative translation effects for the equity investments using functional
currencies other than the U.S. dollar are included in the cumulative translation
adjustment in stockholders' equity.
Earnings Per Share
------------------
Basic earnings per share (basic EPS) is calculated using net income reduced by
dividends on preferred stock, divided by the weighted average number of common
shares outstanding during the year. Diluted earnings per share (diluted EPS) is
calculated in the same manner, except that the denominator also includes
additional common shares that would have been issued if outstanding stock
options had been exercised, as determined by application of the treasury stock
method. Preferred stock dividends were $0.40 per share in 1998 and $0.20 per
share in 1999.
On October 1, 1998, the company redeemed all 1,177,948 outstanding shares of its
preferred stock for $10.25 per share. The $0.25 per share excess of the
redemption cost over the carrying amount of the preferred shares was deducted
from net income to determine net income applicable to common stock for 1999.
Treasury Stock
--------------
As of April 30, 2000, the company holds approximately 484,000 shares of its
Class B common stock as treasury stock. The company intends to use these shares
to satisfy future exercises of employee stock options.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities; disclosure of contingent
assets and liabilities at the date of the financial statements; and the reported
amounts of revenues and expenses during the period. Actual results could differ
from these estimates.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Other
-----
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
Statement No. 133 requires that all derivatives be measured at fair value and
recognized in the balance sheet as either assets or liabilities. Statement No.
133 also requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
formal documentation, designation, and assessment of the effectiveness of
derivatives that receive hedge accounting.
In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which makes Statement No. 133 effective for fiscal years
beginning after June 15, 2000. The company plans to adopt Statement No. 133 as
of May 1, 2001. The adoption is not expected to have a material impact on the
company's consolidated financial statements.
30
<PAGE>
2. ACQUISITION OF SONOMA-CUTRER VINEYARDS
In April 1999, the company acquired a majority interest in Sonoma-Cutrer
Vineyards, Inc. for $69, net of $32 of monetary assets (cash and tax benefits
receivable, offset by assumed debt) received. In April 2000, the company
acquired substantially all of the remaining minority interest for $27. The
acquisition has been accounted for as a purchase. The excess of the acquisition
costs over the fair value of the identifiable tangible and intangible net assets
acquired was $37, which is being amortized over forty years.
The operating results of Sonoma-Cutrer have been consolidated with the company
since April 1999. Consolidated pro forma operating results for 1998 and 1999
would not have been materially different from the actual amounts reported for
those years.
During certain periods prior to November 30, 2001, the company has the option to
purchase or may be required by the minority shareholders of Sonoma-Cutrer to
purchase the remaining minority interest at a total cost of $3.
3. COMMITMENTS
Rental payments for real estate, vehicles, and office, computer, and
manufacturing equipment under operating leases amounted to approximately $28 in
1998 and 1999, and $26 in 2000. The company has commitments related primarily to
minimum lease payments of $20 in 2001, $14 in 2002, $9 in 2003, $6 in 2004, $4
in 2005, and $4 thereafter.
The company has contracted with various growers and wineries to supply portions
of its future grape and bulk wine requirements. While most of these contracts
call for prices to be determined by market conditions, certain contracts provide
for minimum purchase prices.
4. CREDIT FACILITIES
The company has a $300 revolving credit agreement with various domestic and
international banks that expires in fiscal 2003. The most restrictive of the
agreement's covenants requires the company to maintain a minimum level of net
worth. At April 30, 2000, net worth exceeded the required level, as defined in
the agreement, by $730. At April 30, 2000, the company had no outstanding
borrowings under this agreement. At April 30, 2000, the company also had
available for issuance $220 of debt securities under a shelf registration filing
with the Securities and Exchange Commission.
5. DEBT
At April 30, the company's long-term debt consisted of the following:
April 30, 1998 1999 2000
-----------------------------------------------------------------
6.82% to 7.38% medium-term notes,
due 2005 $ 30 $ 30 $ 30
Variable rate industrial
revenue bonds, due through 2026 10 10 10
Other 17 31 7
--------------------------
57 71 47
Less current portion 7 18 6
--------------------------
$ 50 $ 53 $ 41
==========================
Long-term debt payments of $6 are required in 2001. No additional payments are
required until 2006. Cash paid for interest was $15 in 1998, $11 in 1999, and
$15 in 2000. Excluding the effect of the interest rate agreement discussed
below, the weighted average interest rates on commercial paper were 5.6% at
April 30, 1998, 4.9% at April 30, 1999, and 6.1% at April 30, 2000. The weighted
average interest rates on the variable rate industrial revenue bonds were 4.3%,
4.1%, and 5.2% at April 30, 1998, 1999, and 2000, respectively.
The company sold an option in 1990 to swap interest rates that effectively
eliminated the call feature on certain 9.375% notes for the period April 1, 1995
to April 1, 1998. This option was exercised April 1, 1995, effectively
converting $100 of commercial paper from floating interest rate obligations to
9.375% fixed rate obligations for the period April 1, 1995 to April 1, 1998. The
option on this swap was sold in order to manage the level of fixed and floating
rate debt. The premium received on the sale of this option was amortized as a
reduction of interest expense through April 1, 1998.
6. FOREIGN CURRENCY RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
The company uses foreign currency options and forward contracts, with average
maturities of generally less than one year, as protection against the risk that
the eventual U.S. dollar cash flows resulting from the sale and purchase of
goods in foreign currencies will be adversely affected by changes in exchange
rates. While these hedging instruments are subject to fluctuations in value from
movement in the foreign currency exchange rates, such fluctuations are offset by
the change in value of the underlying exposures being hedged. The company is not
a party to leveraged derivatives and does not hold or issue financial
instruments for trading purposes.
The company had outstanding foreign currency option and forward contracts,
hedging primarily European euro, British pound, and Japanese yen revenues, with
notional amounts totaling $84, $96, and $55 at April 30, 1998, 1999, and 2000,
respectively. The company's credit exposure is limited to the fair value of the
contracts (see Note 7) rather than the notional amounts. Foreign currency
contracts are entered into with major financial institutions with investment
grade credit ratings, thereby decreasing the risk of credit loss.
31
<PAGE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents and commercial paper approximates
the carrying amount due to the short maturities of these instruments. The fair
value of long-term debt is estimated using discounted cash flows based on the
company's incremental borrowing rates for similar types of borrowings. The fair
value of foreign currency contracts is based on quoted market prices. A
comparison of the fair values and carrying amounts of these instruments is as
follows:
1999 2000
--------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------------------------
Assets:
Cash and
cash equivalents $171 $171 $180 $180
Foreign currency
contracts 1 2 1 4
Liabilities:
Commercial paper 226 226 220 220
Long-term debt 71 73 47 47
8. BALANCE SHEET INFORMATION
April 30, 1998 1999 2000
--------------------------------------------------------------------------------
Property, plant, and equipment
------------------------------
Land $ 17 $ 60 $ 74
Buildings 206 228 234
Equipment 423 454 491
------------------------------------
646 742 799
Less accumulated depreciation 365 394 423
------------------------------------
$281 $348 376
====================================
Accounts payable
and accrued expenses
--------------------
Accounts payable, trade $ 90 $ 76 $ 79
Accrued expenses:
Compensation and commissions 50 59 76
Excise and other non-income taxes 18 21 14
Interest 4 3 3
Advertising 19 20 53
Other 52 63 55
------------------------------------
143 166 201
------------------------------------
$233 $242 $280
====================================
9. TAXES ON INCOME
Taxes on income are composed of the following:
--------------------------------------------------------------------------------
1998 1999 2000
--------------------------------------------------------------------------------
Current:
Federal $ 73 $126 $160
Foreign 5 6 4
State and local 14 9 12
------------------------------------
92 141 176
------------------------------------
Deferred:
Federal 16 (21) (43)
State and local 3 (4) (8)
------------------------------------
19 (25) (51)
------------------------------------
$111 $116 $125
====================================
United States and foreign components of income before income taxes are as
follows:
--------------------------------------------------------------------------------
1998 1999 2000
--------------------------------------------------------------------------------
United States $261 $283 $307
Foreign 35 35 36
------------------------------------
$296 $318 $343
====================================
The following is a reconciliation of the effective tax rates with the United
States' statutory rate:
Percent of Income Before Taxes
--------------------------------------------------------------------------------
1998 1999 2000
--------------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State taxes, net of U.S.
Federal tax benefit 3.7 2.2 2.2
Income taxed at other than U.S.
Federal statutory rate (1.7) (1.7) (1.2)
Tax benefit of Foreign
Sales Corporation (0.8) (1.1) (1.0)
Nondeductible amortization 1.0 1.0 1.0
Other, net 0.4 1.1 0.5
-------------------------------------
37.6% 36.5% 36.5%
=====================================
32
<PAGE>
Deferred tax assets and liabilities are composed of the following:
April 30, 1998 1999 2000
--------------------------------------------------------------------------------
Deferred tax assets:
Postretirement and other benefits $ 40 $ 42 $ 44
Accrued liabilities and other 16 15 19
-----------------------------------
Total deferred tax assets 56 57 63
-----------------------------------
Deferred tax liabilities:
Intercompany transactions 168 134 84
Property, plant, and equipment 23 38 36
Undistributed foreign earnings 17 17 17
Pension plans 23 26 31
Other 2 10 5
-----------------------------------
Total deferred tax liabilities 233 225 173
-----------------------------------
Net deferred tax liability $177 $168 $110
===================================
Deferred income taxes were not provided on undistributed earnings ($112, $133,
and $136 at April 30, 1998, 1999, and 2000, respectively) of certain foreign
subsidiaries because such undistributed earnings are expected to be reinvested
indefinitely overseas. If these amounts were not considered permanently
reinvested, additional deferred taxes of approximately $24, $28, and $30 would
have been provided in 1998, 1999, and 2000, respectively.
Cash paid for income taxes was $90 in 1998, $150 in 1999, and $174 in 2000.
10. PENSION AND POSTRETIREMENT BENEFITS
The company sponsors various defined benefit pension and postretirement plans
covering most full-time employees. Information about these plans is presented
below.
Components of net periodic pension benefit income:
Pension
--------------------------------------------------------------
1998 1999 2000
--------------------------------------------------------------
Service cost $ 9 $10 $12
Interest cost 18 19 21
Expected return on plan assets (29) (33) (38)
Amortization of:
Unrecognized prior service cost 1 1 1
Unrecognized net asset (3) (3) (3)
-----------------------
Net periodic benefit income $(4) $(6) $(7)
=======================
Prior service costs are amortized on a straight-line basis over the average
remaining service period of employees expected to receive benefits.
Components of net periodic postretirement benefit cost:
Postretirement
--------------------------------------------------------------
1998 1999 2000
--------------------------------------------------------------
Service cost $ 1 $ 1 $ 1
Interest cost 3 3 3
-----------------------
Net periodic benefit cost $ 4 $ 4 $ 4
=======================
Change in benefit obligation:
Pension Postretirement
------------------------------------------------------------------------
1999 2000 1999 2000
------------------------------------------------------------------------
Obligation at beginning of year $284 $327 $ 42 $ 46
Service cost 10 12 1 2
Interest cost 19 21 3 3
Plan amendments 5 1 -- --
Actuarial loss (gain) 23 (17) 2 (4)
Benefits paid (14) (15) (2) (2)
----------------------------------
Obligation at end of year $327 $329 $ 46 $ 45
==================================
Change in plan assets:
Pension Postretirement
------------------------------------------------------------------------
1999 2000 1999 2000
------------------------------------------------------------------------
Fair value at beginning of year $407 $478 $ -- $ --
Actual return on plan assets 84 52 -- --
Company contributions 1 1 2 2
Benefits paid (14) (15) (2) (2)
----------------------------------
Fair value at end of year $478 $516 $ -- $ --
==================================
Plan assets consist primarily of stocks and bonds.
Selected information for plans with accumulated benefit obligations in excess of
plan assets:
Pension Postretirement
------------------------------------------------------------------------
1999 2000 1999 2000
------------------------------------------------------------------------
Projected benefit obligation $(28) $(30) $(46) $(45)
Accumulated benefit obligation (24) (25) (46) (45)
Fair value of plan assets 2 3 -- --
33
<PAGE>
Funded status:
Pension Postretirement
------------------------------------------------------------------------
1999 2000 1999 2000
------------------------------------------------------------------------
Funded status $151 $188 $(46) $(45)
Unrecognized net gain (99) (130) (10) (12)
Unrecognized prior service cost 11 10 (1) (1)
Unrecognized transition asset (12) (9) -- --
----------------------------------
Net amount recognized $ 51 $ 59 $(57) $(58)
==================================
Net amounts recognized in the consolidated balance sheet:
Pension Postretirement
------------------------------------------------------------------------
1999 2000 1999 2000
------------------------------------------------------------------------
Prepaid benefit cost $ 68 $ 79 $ -- $ --
Accrued benefit liability (22) (24) (57) (58)
Intangible asset 5 4 -- --
----------------------------------
Net amount recognized $ 51 $ 59 $(57) $(58)
==================================
Weighted-average assumptions:
Pension
--------------------------------------------------------------
1998 1999 2000
--------------------------------------------------------------
Discount rate 7.0% 6.5% 7.8%
Expected return on plan assets 10.0% 10.0% 10.0%
Rate of compensation increase 4.0% 4.0% 4.5%
Postretirement
--------------------------------------------------------------
1998 1999 2000
--------------------------------------------------------------
Discount rate 7.0% 6.5% 7.8%
Health care cost trend rates:
Present rate before age 65 7.0% 6.6% 6.3%
Present rate age 65 and after 6.3% 6.1% 5.9%
The health care cost trend rates are projected to decline gradually to 5.0% by
2004 and to remain at that level thereafter. Assumed health care cost trend
rates have a significant effect on the amounts reported for postretirement
medical plans. A one percentage point increase in assumed health care cost trend
rates would have increased the accumulated postretirement benefit obligation as
of April 30, 2000 by $4 and the aggregate service and interest costs for 2000 by
$1. A one percentage point decrease in assumed health care cost trend rates
would have decreased the accumulated postretirement benefit obligation as of
April 30, 2000 by $5 and the aggregate service and interest costs for 2000 by
$1.
11. BUSINESS SEGMENT INFORMATION
The company is organized into two operating segments, as defined by FASB
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" -- wine and spirits, and consumer durables. These two segments
reflect the two categories of products from which the company derives its
revenues. The wine and spirits segment includes the production, importing, and
marketing of wines and distilled spirits. The consumer durables segment includes
the manufacture and sale of china, crystal, ceramic and crystal collectibles,
silver, pewter, luggage, and leather accessories.
The accounting policies of the segments are the same as the policies described
in Note 1. There are no intersegment revenues.
The following tables reconcile segment operating results and asset information
to consolidated amounts.
1998 1999 2000
--------------------------------------------------------------------------------
Net sales:
Wine and spirits $1,367 $1,447 $1,543
Consumer durables 539 562 591
-----------------------------------------------
Consolidated $1,906 $2,009 $2,134
===============================================
Earnings before interest, taxes, depreciation,
and amortization (EBITDA):
Wine and spirits $ 302 $ 314 $ 341
Consumer durables 56 63 69
-----------------------------------------------
Consolidated $ 358 $ 377 $ 410
===============================================
Operating income:
Wine and spirits $ 271 $ 284 $ 304
Consumer durables 35 38 44
Amounts not allocated to segments:
Interest expense, net (10) (4) (5)
-----------------------------------------------
Consolidated income
before income taxes $ 296 $ 318 $ 343
===============================================
Depreciation and amortization:
Wine and spirits $ 30 $ 30 $ 37
Consumer durables 21 25 25
-----------------------------------------------
Consolidated $ 51 $ 55 $ 62
===============================================
34
<PAGE>
Total assets:
Wine and spirits $1,013 $1,275 $1,349
Consumer durables 481 460 453
-----------------------------------------------
Consolidated $1,494 $1,735 $1,802
===============================================
Additions to long-lived assets:
Wine and spirits $ 31 $ 99 $ 69
Consumer durables 13 19 19
---------------------------------------------
Consolidated $ 44 $ 118 $ 88
===============================================
The following table presents geographic information about net sales:
1998 1999 2000
--------------------------------------------------------------------------------
Net sales:
United States $1,577 $1,649 $1,777
Other countries 329 360 357
-----------------------------------------------
$1,906 $2,009 $2,134
===============================================
Net sales are attributed to countries based on location of customer. Long-lived
assets located outside the United States are not significant.
12. CONTINGENCIES
In the normal course of business, various suits and claims are brought against
the company, some of which seek significant damages. Many of these suits and
claims take years to adjudicate, and it is difficult to predict their outcome.
In the opinion of management, based on advice from legal counsel, none of these
suits or claims will have a material adverse effect on the company's
consolidated financial position, results of operations, or cash flows.
13. ENVIRONMENTAL
The company, along with other responsible parties, faces environmental claims
resulting from the cleanup of several waste deposit sites. The company has
accrued its estimated portion of cleanup costs and expects other responsible
parties and insurance to cover the remaining costs. The company believes that
any additional costs incurred by the company will not have a material adverse
effect on the company's consolidated financial position, results of operations,
or cash flows.
14. STOCK OPTIONS
Under the Brown-Forman Corporation Omnibus Compensation Plan (the Plan), the
company may grant stock options and other stock-based incentive awards for a
total of 3,400,000 shares of common stock to eligible employees until April 30,
2005. All shares delivered under the Plan will be issued from treasury stock
acquired on the open market by the company.
Stock options are granted at an exercise price of not less than the fair value
of the underlying stock on the date of the grant. Except for the stock options
granted on September 1, 1999, discussed below, stock options granted under the
Plan generally become exercisable after a period of three years from the first
day of the fiscal year of grant and expire seven years thereafter. The fair
values of the options granted during 1998, 1999, and 2000 were $12.24, $13.74,
and $16.37 per option, respectively. Fair values were estimated using the
Black-Scholes pricing model with the following assumptions:
1998 1999 2000
--------------------------------------------------------------
Risk-free interest rate 6.2% 5.5% 5.9%
Expected volatility 18.1% 17.4% 21.6%
Expected dividend yield 2.2% 2.2% 2.2%
Expected life (years) 6 6 6
On September 1, 1999, the company made a special grant of 486,250 stock options
with an exercise price of $100 per share, which become exercisable on May 1,
2006 and expire on September 1, 2007. The fair value of these options was $5.77
per option, using the Black-Scholes pricing model with the following
assumptions: a risk-free interest rate of 6.0%, expected volatility of 18.0%, an
expected dividend yield of 2.2%, and an expected life of 8 years.
As of April 30, 2000, no other stock-based awards have been granted under the
Plan.
The company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for stock
options. Accordingly, no compensation expense has been recognized. Had
compensation expense for the stock options been determined based on the fair
value at the grant dates consistent with the methodology prescribed under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," the company's net
income would have been reduced by $0.9 in 1998, $1.5 in 1999, and $2.6 in 2000.
The company's basic and diluted earnings per share would have been reduced by
$0.01 per share in 1998, $0.02 per share in 1999, and $0.04 per share in 2000.
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The following table summarizes option activity for the three years ended April
30, 2000. All options are for an equivalent number of shares of Class B common
stock.
Weighted
Options Average
Outstanding Exercise Price
--------------------------------------------------------------------------------
Balance, April 30, 1997 153,152 $ 36.13
Granted 250,277 49.13
Forfeited (15,677) 42.09
------------------------------------------
Balance, April 30, 1998 387,752 44.27
Granted 245,880 61.25
Forfeited (18,043) 45.18
------------------------------------------
Balance, April 30, 1999 615,589 51.03
Granted 804,268 85.09
Exercised (6,154) 36.13
Forfeited (14,164) 95.46
------------------------------------------
Balance, April 30, 2000 1,399,539 70.22
==========================================
The following table summarizes the status of stock options outstanding as of
April 30, 2000, by exercise price:
Remaining
Exercise Price Options Contractual Options
Per Option Outstanding Life (Years) Exercisable
-------------- ----------- ------------ -----------
$ 36.13 132,330 6.0 132,330
49.13 231,201 7.0 --
61.25 245,830 8.0 --
62.25 316,678 9.0 --
100.00 473,500 7.3 --
----------- -----------
1,399,539 132,330
=========== ===========
15. SUBSEQUENT EVENTS
On May 17, 2000, the company reached an agreement with Glenmorangie plc to
become the sales and marketing representatives for the Glenmorangie and Ardberg
Single Malt Scotch brands in certain global markets, including Continental
Europe, the Far East, Australia, Mexico, Canada, the Carribean, and South
America. In connection with this arrangement, the company is purchasing shares
representing approximately 10% of the voting rights of Glenmorangie plc at a
cost of $15.
On June 15, 2000, the company agreed to form a global alliance with Altia Group
Ltd to market and sell Finlandia Vodka. Brown-Forman will acquire 45% of
Finlandia Vodka Worldwide Ltd (FVW), which owns the Finlandia trademark and the
rights to market Finlandia Vodka, at a purchase price of approximately $83. FVW
will employ Brown-Forman as Finlandia's distributor or representative in all
markets other than Finland and the Nordic countries, the Baltic States, the
Czech Republic, and Poland. Brown-Forman is currently Finlandia's distributor in
the United States. During the three-year period ending December 31, 2006,
Brown-Forman may be required to acquire all or some of Altia's remaining 55%
interest in FVW.
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REPORT OF MANAGEMENT
We are responsible for the presentation of the information contained in the
consolidated financial statements and for its integrity and objectivity. Our
statements have been prepared in accordance with generally accepted accounting
principles and include amounts based on our best estimates and judgments with
appropriate consideration given to materiality. We also prepared the related
financial information and are responsible for its accuracy and consistency with
the financial statements.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants. We have made available to
PricewaterhouseCoopers LLP all the company's financial records and related data,
as well as the minutes of stockholders', directors', and other appropriate
meetings. Furthermore, we believe that all representations made to
PricewaterhouseCoopers LLP during the audit were valid and appropriate.
We are responsible for establishing and maintaining a system of internal control
designed to provide reasonable assurance at reasonable cost that financial
records are reliable for preparing financial statements and that assets are
properly accounted for and safeguarded. The company has an internal audit
function that is intended to provide a review and monitoring process that allows
the company to be reasonably sure that the system of internal control operates
effectively. In addition, as part of the audit of the financial statements,
PricewaterhouseCoopers LLP completed a study and evaluation of selected internal
accounting controls to establish a basis for reliance thereon in determining the
nature, timing, and extent of audit tests to be applied. We have considered the
internal auditors' and PricewaterhouseCoopers LLP's recommendations concerning
the system of internal control and have taken actions that we believe are cost-
effective in the circumstances to respond appropriately to these
recommendations. We believe that as of April 30, 2000, the system of internal
control is adequate to accomplish the objectives discussed herein.
We also recognize our responsibility for fostering a strong ethical climate so
that the company's affairs are conducted according to the highest standards of
personal and corporate conduct. This responsibility is characterized and
reflected in the company's Code of Conduct, which is publicized throughout the
company. The Code of Conduct addresses, among other things, the necessity of
ensuring open communication within the company; the disclosure of potential
conflicts of interests; the compliance with all applicable domestic and foreign
laws, including those relating to financial disclosure; and the maintenance of
the confidentiality of proprietary information. The company has a systematic
program to assess compliance with the Code of Conduct.
The Board of Directors, through its Audit Committee, composed solely of
directors who are not employees of the company, meets with management, the
internal auditors, and the independent accountants to ensure that each is
properly discharging its respective responsibilities. Both the independent
accountants and the internal auditors have free access to the Audit Committee,
without management present, to discuss the results of their work, including
internal accounting controls and the quality of financial reporting.
/s/ Owsley Brown II
Owsley Brown II
Chairman of the Board
and Chief Executive Officer
/s/ Steven B. Ratoff
Steven B. Ratoff
Executive Vice President
and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
BROWN-FORMAN CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Brown-Forman
Corporation and Subsidiaries ("the Company") at April 30, 1998, 1999 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 2000, in conformity with accounting
principles generally accepted in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
May 25, 2000, except as to Note 15,
for which the date is June 15, 2000
37
