United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULYOCTOBER 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 1-123
BROWN-FORMAN CORPORATIONBrown-Forman Corporation
(Exact name of Registrant as specified in its Charter)
Delaware 61-0143150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
850 Dixie Highway
Louisville, Kentucky 40210
(Address of principal executive offices) (Zip Code)
(502) 585-1100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: September 3,November 30, 1998
Class A Common Stock ($.15 par value, voting) 28,988,091
Class B Common Stock ($.15 par value, nonvoting) 39,698,14739,601,947
BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Statement of Income
Three months ended JulyOctober 31, 1997 and 1998 3
Six months ended October 31, 1997 and 19971998 3
Condensed Consolidated Balance Sheet
July 31,April 30, 1998 and April 30,October 31, 1998 4
Condensed Consolidated Statement of Cash Flows
ThreeSix months ended JulyOctober 31, 19981997 and 19971998 5
Notes to the Condensed Consolidated Financial Statements 6 - 76-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 118-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 1113
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 122. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 1214
Signatures 1315
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended JulySix Months Ended
October 31, October 31,
1997 1998 1997 1998
------ ------ ------ -------
Net sales $445.8 $428.1$554.2 $577.8 $982.3 $1,023.6
Excise taxes 55.7 56.371.1 72.7 127.4 128.4
Cost of sales 156.9 154.3205.0 208.5 359.3 365.4
------ ------ ------ -------
Gross profit 233.2 217.5278.1 296.6 495.6 529.8
Selling, general, and
administrative expenses 104.6 98.2103.6 111.5 201.8 216.1
Advertising expenses 68.5 60.672.8 77.5 133.4 146.0
------ ------ ------ -------
Operating income 60.1 58.7101.7 107.6 160.4 167.7
Interest income 1.0 0.70.6 1.5 1.3 2.5
Interest expense 2.5 3.94.0 3.2 7.9 5.7
------ ------ ------ -------
Income before income taxes 58.6 55.598.3 105.9 153.8 164.5
Taxes on income 21.4 21.137.4 38.6 58.5 60.0
------ ------ ------ -------
Net income 37.2 34.4
Less preferred60.9 67.3 95.3 104.5
Less: Preferred stock
dividend requirements 0.1 0.1 0.2 0.2
Preferred stock
redemption premium -- 0.3 -- 0.3
------ ------ ------ -------
Net income applicable to common
stock $ 37.160.8 $ 34.366.9 $ 95.1 $ 104.0
====== ====== ====== =======
Earnings per share
- basicBasic and dilutedDiluted $ .540.88 $ .500.97 $ 1.38 $ 1.51
====== ====== ====== =======
Shares (in thousands) used in the
calculation of earnings per share
- basic 68,686Basic 68,996 68,664 68,996 68,674
- diluted 68,750 69,038Diluted 69,020 68,735 69,021 68,741
Cash dividends declared
per common share $ .280.27 $ .270.28 $ 0.54 $ 0.56
====== ====== ====== =======
See notes to the condensed consolidated financial statements.
3
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
July 31, April 30, October 31,
1998 1998
(Unaudited)
-------- --------------- -------
Assets
- ------
Cash and cash equivalents $ 93.278.3 $ 78.3122.7
Accounts receivable, net 236.8 264.5 350.9
Inventories:
Barreled whiskey 183.1 187.0 183.2
Finished goods 200.6 178.6 201.5
Work in process 72.9 88.4 94.2
Raw materials and supplies 57.5 48.1 -------- --------58.7
------- -------
Total inventories 514.1 502.1 537.6
Other current assets 22.0 23.9 -------- --------25.1
------- -------
Total current assets 866.1 868.8 1,036.3
------- -------
Property, plant and equipment, net 280.1 281.1 281.5
Intangible assets, net 247.9 249.8 246.1
Other assets 103.5 94.2 -------- --------107.0
------- -------
Total assets $1,497.6 $1,493.9 ======== ========$1,670.9
======= =======
Liabilities
- -----------
Commercial paper $ 97.1107.1 $ 107.1203.1
Accounts payable and accrued expenses 215.7 233.3 282.7
Current portion of long-term debt 7.5 7.58.3
Accrued taxes on income 25.9 7.6 8.7
Deferred income taxes 27.4 27.4
Dividends payable 19.3 --
-------- --------------- -------
Total current liabilities 392.9 382.9 530.2
Long-term debt 49.8 49.841.6
Deferred income taxes 144.7 149.7 134.2
Accrued postretirement benefits 55.4 56.1 55.4
Other liabilities and deferred income 34.0 38.8 -------- --------34.6
------- -------
Total liabilities 677.5 676.6 796.7
Stockholders' Equity
- --------------------
Preferred stock 11.8 11.8--
Common stockholders' equity:
Common stock 10.3 10.3
Retained earnings 820.8 821.2 Accumulated other comprehensive income
-cumulative888.2
Cumulative translation adjustment (5.6) (8.8) (3.8)
Treasury stock (310,000 and 358,900 Class B
common shares)shares at April 30 and October 31,
respectively) (17.2) (17.2)
-------- --------(20.5)
------- -------
Common stockholders' equity 808.3 805.5 -------- --------874.2
------- -------
Total stockholders' equity 820.1 817.3 -------- --------874.2
------- -------
Total liabilities and stockholders' equity $1,497.6 $1,493.9 ======== ========$1,670.9
======= =======
Note: The balance sheet at April 30, 1998, has been taken from the audited
financial statements at that date, and condensed.
See notes to the condensed consolidated financial statements.
4
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions; amounts in parentheses are reductions of cash)
ThreeSix Months Ended
JulyOctober 31,
1997 1998
1997
----------- ------
Cash flows from operating activities:
Net income $ 37.295.3 $ 34.4104.5
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 11.5 10.321.2 23.2
Amortization 2.4 2.34.7 4.7
Deferred income taxes (5.0) 4.37.3 (15.5)
Other (6.3) (4.7)(7.9) (5.0)
Changes in assets and liabilities:
Accounts receivable 27.7 39.7(69.0) (86.4)
Inventories (12.0) (9.0)(56.4) (35.5)
Other current assets 1.9 (7.3)(1.9) (1.2)
Accounts payable and accrued expenses (17.6) (13.2)60.9 49.1
Accrued taxes on income 18.3 9.26.0 1.1
------ ------
Cash provided by operating activities 58.1 66.060.2 39.0
Cash flows from investing activities:
Additions to property, plant, and equipment (9.7) (9.2)(20.8) (22.2)
Disposals of property, plant, and equipment 0.1 --9.9 0.9
Other (4.2) (0.5)(7.1) (8.1)
------ ------
Cash used for investing activities (13.8) (9.7)(18.0) (29.4)
Cash flows from financing activities:
Net change in commercial paper (10.0) (53.7)0.1 96.0
Proceeds from long-term debt 0.8 --
Reduction of long-term debt (13.6) (7.4)
Acquisition of treasury stock -- (3.0)
Redemption of preferred stock -- (12.1)
Dividends paid (19.4) (18.7)(37.5) (38.7)
------ ------
Cash used forprovided by (used for) financing activities (29.4) (72.4)(50.2) 34.8
------ ------
Net increase (decrease) in cash and cash equivalents 14.9 (16.1)(8.0) 44.4
------ ------
Cash and cash equivalents, beginning of period 58.2 78.3 58.2
------ ------
Cash and cash equivalents, end of period $ 93.250.2 $ 42.1122.7
====== ======
See notes to the condensed consolidated financial statements.
5
BROWN-FORMAN CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In these notes, "we," "us," and "our" refer to Brown-Forman Corporation.
1. Condensed Consolidated Financial Statements
We prepared these unaudited condensed consolidated statements using our
customary accounting practices as set out in our 1998 annual report on Form 10-K
(the "1998 Annual Report"). We made all of the adjustments (which includes only
normal, recurring adjustments) needed to present this data fairly.
We condensed or left out some of the information found in financial statements
prepared according to generally accepted accounting principles ("GAAP"). You
should read these financial statements together with the 1998 Annual Report,
which does conform to GAAP.
2. Inventories
We use the last-in, first-out method to determine the cost of almost all of our
inventories. If the last-in, first-out method had not been used, inventories
would have been $107.5 million higher than reported as of July 31, 1998, and
$104.4 million higher than reported as of April 30, 1998, and $107.9
million higher than reported as of October 31, 1998.
3. 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. We expect either the other responsible parties or
insurance to cover the remaining costs. We do not believe that any additional
costs we incur to satisfy environmental claims will have a material adverse
effect on our financial condition or results of operations.
4. Contingencies
We get sued in the ordinary course of business. Some suits and claims seek
significant damages. Many of them take years to resolve, which makes it
difficult for us to predict their outcomes. We believe, based on our legal
counsel's advice, that none of the suits and claims pending against us will have
a material adverse effect on our financial condition or results of operations.
5. Earnings Per Share
Basic earnings per share is calculated using net income reduced by dividend
requirements on preferred stock, divided by the weighted average number of
common shares outstanding during the period. Diluted earnings per share 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 during the period. The dilutive effect of
outstanding stock options is determined by application of the treasury stock
method.
6
6. Comprehensive Income
Effective May 1, 1998, we adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." The adoption of SFAS
No.130No. 130 did not have a material impact on our consolidated financial statements.
Comprehensive income, which is defined as the change in equity from transactions
and other events from nonowner sources, for the three months ended July 31, 1998
and 1997 was as follows (in millions):
Three Months Ended Six Months Ended
October 31, October 31,
1997 1998 1997 1998
------ ------ ------ -------
Net income $ 37.260.9 $ 34.467.3 $ 95.3 $ 104.5
Foreign currency translation adjustment 3.2 (0.5) 1.8 (1.0) 5.0
------ ------ ------ -------
Comprehensive income $ 40.460.4 $ 33.969.1 $ 94.3 $ 109.5
====== ====== ====== =======
7. New Accounting PronouncementsPronouncement
In June 1997,1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information," which
is effective for fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for reporting information about a company's operating
segments and requires certain disclosures about a company's products and
services, the geographic areas in which it operates and its major customers.
Although we have not determined the effect that adoption of SFAS No. 131 may
have on the format of our financial statement disclosures, it will have no
effect on our financial condition or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans but does not change the
measurement or recognition of those plans. Thus, the adoption of SFAS No. 132
will have no effect on our financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires
that all derivatives be measured at fair value and recognized in the balance
sheet as either assets or liabilities. SFAS No. 133 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. The adoption of SFAS No. 133 is not expected to
have a material impact on our consolidated financial statements.
8. Subsequent EventRedemption of Preferred Stock
On July 23,October 1, 1998, our Board of Directors voted to redeemwe redeemed all outstanding shares of the company's
preferred stock on October 1, 1998, at a total redemption cost of approximately $12.1 million. The
$0.3 million excess of the redemption cost over the $11.8 million carrying
amount of the preferred shares was deducted from net income to determine net
income applicable to common stock for the three and six month periods ended
October 31, 1998.
7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion and analysis along with our 1998 Annual
Report. Note that the results of operations for the threesix months ended JulyOctober 31,
1998, do not necessarily indicate what our operating results for the full fiscal
year will be. In this Item, "we," "us," and "our" refer to Brown-Forman
Corporation.
Risk Factors Affecting Forward-Looking Statements:
From time to time, we may make forward-looking statements related to our
anticipated financial performance, business prospects, new products, and similar
matters. We make several such statements in the discussion and analysis which
follows, but 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
note that the following non-exclusive list of important risk factors could cause
our actual results and experience to differ materially from the anticipated
results or other expectations expressed in those forward-looking statements:
Generally: We operate in highly competitive markets. Our business is subject
to changes in general economic conditions, changes in consumer preferences, the
degree of acceptance of new products, and the uncertainties of litigation. As
our business continues to expand outside the United States, our financial
results are more exposed to foreign exchange rate fluctuations and the health of
foreign economies. Our operations could also be adversely impacted by
incomplete or untimely resolution of the "Year 2000" issue.
Beverage Risk Factors: The U.S. beverage alcohol business is highly sensitive
to tax increases; an increase in federal or state excise taxes (which we do not
anticipate at this time) would depress our domestic beverage business. Our
current outlook for our domestic beverage business anticipates continued success
of Jack Daniel's Tennessee Whiskey, Southern Comfort, and our other core spirits
brands. Current expectations for our foreign beverage business could prove to
be optimistic if the U.S. dollar strengthens against other currencies or if
economic conditions deteriorate in the principal countries to which we export
our beverage products, including Germany, the United Kingdom, Japan, and
Australia. The wine and spirits business, both in the United States and abroad,
is also sensitive to political and social trends. Legal or regulatory measures
against beverage alcohol (including its advertising and promotion) could
adversely affect sales. Product liability litigation against the alcohol
industry, while not currently a major risk factor, could become significant if
new lawsuits were filed against alcohol manufacturers. Current expectations for
our global beverage business may not be met if consumption trends do not
continue to increase. Profits could also be affected if grain or grape prices
increase.
8
Consumer Durables Risk Factors: Earnings projections for our consumer durables
segment anticipate a continued strengthening of our Lenox and Hartmann
businesses. These projections could be offset by factors such as poor consumer
response rates at Lenox Collections, a soft retail environment at outlet malls,
further department store consolidation, or weakened demand for tableware,
giftware and/or leather goods.
Results of Operations:
FirstSecond Quarter Fiscal 1999 Compared to FirstSecond Quarter Fiscal 1998
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Three Months Ended
JulyOctober 31,
%1997 1998 1997 Change
------- ------------- ------ ------
Net Sales
- ---------Sales:
Wine & Spirits $391.7 $401.2 2 %
Consumer Durables 162.5 176.6 9 %
------ ------
Total $554.2 $577.8 4 %
Gross Profit:
Wine & Spirits $197.5 $207.2 5 %
Consumer Durables 80.6 89.4 11 %
------ ------
Total $278.1 $296.6 7 %
Operating Income (Expense):
Wine & Spirits $ 335.183.5 $ 317.4 687.4 5 %
Consumer Durables 110.7 110.7 --
------- -------22.0 24.7 13 %
Corporate (3.8) (4.5) 19 %
------ ------
Total $ 445.8 $ 428.1 4
Gross Profit
- ------------
Wine & Spirits $ 177.9 $ 164.8 8
Consumer Durables 55.3 52.7 5
------- -------
Total $ 233.2 $ 217.5 7
Operating Income (Loss)
- -----------------------
Wine & Spirits $ 68.6 $ 65.1 5
Consumer Durables (3.1) (1.5) N/M
Corporate (5.4) (4.9) 10
------- -------
Total $ 60.1 $ 58.7 2$101.7 $107.6 6 %
Net Income $ 37.260.9 $ 34.4 8
- ----------67.3 10 %
Earnings per Share - Basic and Diluted $ 0.540.88 $ 0.50 8
- --------------------------------------0.97 10 %
Effective Tax Rate 36.5% 38.0% - ------------------36.5%
Sales for our wine and spirits segment increased 6%2%, largely due to growth in
international sales ofby
Jack Daniel's in the United States and Fetzer,key international markets as well as
a solid performanceworldwide volume gains by many of our beverage brandsFetzer and Bolla wines, offset partially by
volume declines in the United States.some other spirits brands. Gross profit and operating income
from the wine and spirits segment both increased 8% and 5%, respectively, for the quarter. These results primarily reflect the strong performance by our major
brands,quarter, reflecting
increased revenues, an improved mix of higher-margin product sales, and
more favorable raw
materialproduction costs.
9
Revenues from our consumer durables segment increased 9% for the quarter,
reflecting a strong performance by the catalog and manufacturingdirect marketing operations
of Lenox Collections and an increase in sales of fine china to department
stores. Gross profit and operating income for the segment improved 11% and 13%,
respectively, due principally to the increase in higher-margin Lenox Collections
sales.
Net interest expense declined from last year's second quarter due to lower net
debt balances. The reduction in the company's consolidated effective tax rate
reflects lower effective state tax rates.
Results of Operations:
Six Months Fiscal 1999 Compared to Six Months Fiscal 1998
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Six Months Ended
October 31,
1997 1998 Change
------- -------- ------
Net Sales:
Wine & Spirits $ 709.1 $ 736.3 4 %
Consumer Durables 273.2 287.3 5 %
------- --------
Total $ 982.3 $1,023.6 4 %
Gross Profit:
Wine & Spirits $ 362.3 $ 385.1 6 %
Consumer Durables 133.3 144.7 9 %
------- --------
Total $ 495.6 $ 529.8 7 %
Operating Income (Expense):
Wine & Spirits $ 148.6 $ 156.0 5 %
Consumer Durables 20.5 21.6 5 %
Corporate (8.7) (9.9) 14 %
------- --------
Total $ 160.4 $ 167.7 5 %
Net Income $ 95.3 $ 104.5 10 %
Earnings per Share - Basic and Diluted $ 1.38 $ 1.51 10 %
Effective Tax Rate 38.0% 36.5%
Sales of our wine and spirits increased 4% for the six months ended October 31,
driven by strong worldwide growth by Jack Daniel's and by volume gains for
Fetzer in international markets. Gross profit and operating income from the
wine and spirits segment improved 6% and 5%, respectively, reflecting increased
sales as well as favorable production costs. A portion of the gain in gross
profit was reinvested in advertising and marketing programs designed to
strengthen our brands.
910
Revenues from our consumer durables segment were flatincreased 5% for the quarter as lower
volumesperiod, largely
due to volume gains for the wholesale and retail operations were offset by continued growth
of the catalog and direct marketing operations of Lenox Collections. Gross profit for the segment
increased 5%improved 9%, however, principally reflecting the greaterdriven by higher revenues and an increased mix of higher-margin Lenox Collections sales.high-margin
collectible products. The 5% growth in operating lossincome for the quartersegment
reflects the gross profit gains, partially offset by higher advertising expense for the segment as well
as costs incurred to introduce new Hartmann products. We expect the segment's revenues and operating
results to improve over the remainder of the fiscal year.product lines.
Net interest expense declineddecreased from last year's first quarteryear due to lower net debt balances.
The reductiondecline in the company's consolidated effective tax rate reflects lower
effective state tax rates.
As discussed in Note 7 to the accompanying condensed consolidated financial
statements, we are required to adopt SFAS No. 133 by May 1, 2000. The adoption
of SFAS No. 133 is not expected to have a material impact on our consolidated
financial statements.
Liquidity and Financial Condition
Cash and cash equivalents increased by $14.9$44.4 million during the threesix months ended
JulyOctober 31, 1998, as cash provided by operationsoperating and financing activities
exceeded cash used for investing and financing activities. Cash provided by operations
totaled $58.1$39.0 million, primarily reflecting net income for the period and a decreasean
increase in accounts payable and accrued expenses related largely to grape
purchases. Those amounts were partially offset by an increase in accounts
receivable due to the normal seasonality of revenues.revenues, an increase in inventories
in anticipation of future sales growth, and a partial liquidation of deferred
income taxes in compliance with new U.S. tax regulations. Cash of $13.8$29.4 million
was used for investing activities, consisting mostly of expenditures to expand
and modernize our production facilities and enhance our information systems.
Cash used forprovided by financing activities was $29.4$34.8 million, as weprimarily reflecting
short-term borrowings offset partially by dividend payments. Cash provided by
financing activities was also reduced by $12.1 million used excess
funds to reduce our debt and to pay dividends.
On July 23, 1998, our Board of Directors voted to redeem all outstanding shares
ofour
preferred stock on October 1, 1998, at1998.
Dividends
The Board of Directors increased the quarterly cash dividend 5.4% from $0.28 to
$0.295 per share on both Class A and Class B common stock, payable January 1,
1999. As a total redemption cost of
approximately $12.1 million.
We have conductedresult, the indicated annual cash dividend per share rose from $1.12
to $1.18.
Year 2000 Issue
Until recently, computer programs generally were written using two digits rather
than four to define the applicable year. Accordingly, programs may recognize a
comprehensive review of our information systems to identify
those systems which may be affected by the "Year 2000" issue and we have
developed an implementation plan to resolve the issue. In preparing our systems
fordate using "00" as the year 2000, we expect to incur internal staff costs1900 instead of as wellthe year 2000. This problem may
affect the company's information technology systems (IT systems), such as
external
consultingfinancial, order entry, inventory control and other costs during fiscal years 1999forecasting systems, and 2000.non-IT
systems that contain computer chips, such as production equipment and security
systems. It may also affect the technology systems of third party vendors and
customers, and of governmental entities upon which the company's business
ordinarily relies.
11
The cost of new
systems software will be capitalized. Other costs of the project will be
expenses as incurred.
Because we have replaced or updated many of our information systems in recent
years, the costs to be incurred inCompany is addressing the Year 2000 issueissues in three phases: assessment,
design of appropriate remediation, and implementation. For our IT systems, we
have substantially completed the assessment and remediation design phases and
are in the implementation phase, which consists of replacing or repairing non-
compliant systems, testing the new systems and training employees to use them.
We expect to complete the implementation phase by the summer of 1999. Also, we
have begun assessing the Year 2000 compliance of our non-IT systems and we
expect to complete this assessment by the end of this fiscal year. We plan to
complete the design and implementation of any remediation necessary with respect
to these non-IT systems by the summer of 1999. In addition, we are assessing
the Year 2000 preparedness of important customers and suppliers and are
monitoring their remediation efforts.
The total cost of Year 2000 issues is currently estimated at approximately $20
million. Of the total estimated cost, we expect that approximately one-half will
be attributable to new systems and thus capitalized. The other one-half will be
expensed as incurred. All costs are expected to be funded through operating
cash flows. Through October 31, 1998, we have incurred approximately $11
million, of which $7 million has been capitalized and $4 million has been
expensed.
We expect to manage the Year 2000 issues in a timely manner and, based on our
efforts to date, we believe that substantial disruptions in our business
operations due to Year 2000 non-compliance of our systems are unlikely.
However, it is not possible to anticipate all possible future outcomes,
especially since third parties are involved. Thus, there could be circumstances
in which the company would be unable to process customer orders, produce or ship
products, invoice customers, collect payments, receive customary governmental
approvals or authorizations as they relate to our business, or perform other
normal business activities. To address these risks, we have begun and intend to
continue developing contingency plans designed to mitigate potential disruptions
in operations, including stockpiling raw materials and finished goods,
identifying alternative sources of supplies, creating back-up order processing
and invoicing procedures, and other appropriate measures. We expect to complete
development and testing of these contingency plans by October 1999.
The costs, expected completion dates and risks described above represent
management's best estimates. However, there can be no guarantee that these
estimates will prove to be accurate. Actual results could differ significantly.
If we do not successfully complete anticipated replacements and other
remediation to our IT systems, if unanticipated disruptions in our non-IT
systems occur, or if any of our significant vendors or customers do not
successfully achieve Year 2000 compliance on a timely basis, our operations or
financial results could be adversely affected in the future.
12
Euro Conversion
On January 1, 1999, the euro will be adopted as the national currency of certain
member countries of the European Union. The euro will be used as a non-cash
transaction currency during a transition period ending January 1, 2002, after
which euro-denominated bills and coins will be issued and the countries' former
currencies will be withdrawn from circulation. Because Europe is one of our
markets, the euro conversion raises issues such as the modification of
information systems to accommodate euro-denominated transactions, the
recalculation of currency risk, and the competitive impact of cross-border price
transparency. However, we do not expect the euro conversion to have a material
impact on ourthe company's financial condition or results of operations or cash flows. This expectation assumes that our existing forecast of
costs to be incurred contemplates all significant actions required and that we
will not be obligated to incur significant Year 2000 related costs on behalf of
our customers or suppliers.
10
operations.
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. We expect either the other responsible parties or
insurance to cover the remaining costs. We do not believe that any additional
costs we incur to satisfy environmental claims will have a material adverse
effect on our financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Since April 30, 1998, there have been no material changes in the company's
interest rate, foreign currency and commodity price exposures, the types of
derivative financial instruments used to hedge those exposures, or the
underlying market conditions.
1113
PART II - OTHER INFORMATION
Item 4. Submission2. Changes in Securities
On October 1, 1998, the Corporation redeemed all issued and outstanding shares
of Mattersits preferred stock, par value $10.00 per share (the "Preferred Stock"), for
a redemption price of $10.25 per share. This redemption was carried out
pursuant to a Voteresolutions approved by the Board of Security Holders
At the Annual Meeting of Stockholders of the company heldDirectors on July 23, 1998 and
a notice of redemption dated August 1, 1998 mailed to all holders of Preferred
Stock. The Corporation's Restated Certificate of Incorporation, as amended (the
"Certificate") provided that, once redeemed, the following matter was voted upon:
ElectionPreferred Stock could not be
re-issued and shall be retired. Coincident with the redemption, the Corporation
filed a Certificate of Barry D. Bramley, Geo. Garvin Brown III, Owsley Brown II,
Donald G. Calder, Owsley Brown Frazier, Richard P. Mayer, Stephen E. O'Neil,
William M. Street, and James S. WelchCancelation with the Delaware Secretary of State, thereby
effectively deleting all references to servethe Preferred Stock from the
Corporation's Certificate. The Certificate of Cancelation is filed as directors untilan
exhibit to this report.
On December 3, 1998, pursuant to resolutions adopted by the next
annual electionBoard of directors, or untilDirectors
on November 19, 1998, the Corporation filed a successor has been elected and
qualified.
For Withheld
Barry D. Bramley 27,267,259 10,758
Geo. Garvin Brown III 27,271,665 6,352
Owsley Brown II 27,271,665 6,352
Donald G. Calder 27,267,765 10,252
Owsley Brown Frazier 27,268,974 9,043
Richard P. Mayer 27,271,665 6,352
Stephen E. O'Neil 27,265,885 12,132
William M. Street 27,271,665 6,352
James S. Welch 27,271,624 6,393Restated Certificate of
Incorporation with the Delaware Secretary of State, which Restated Certificate
of Incorporation is filed as an exhibit to this report. The Restated
Certificate eliminates all references to the Preferred Stock as well as
incorporates all other amendments made to the Certificate since last restated.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Exhibit
------ ------- -------
3(i)(a) Certificate of Cancelation
3(i)(b) Restated Certificate of Incorporation
27 Financial Data Schedule
(b) Reports on Form 8-K: During the quarter for which this report is filed,
the Registrant filed a Current Report on Form 8-K, dated June 1, 1998,
regarding an amendment to the Registrant's by-laws which lifted the
mandatory retirement age to 70 for non-employee directors.
12None
14
SIGNATURES
As required by the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned authorized officer.
BROWN-FORMAN CORPORATION
(Registrant)
Date: September 3,December 10, 1998 By: /s/ Steven B. Ratoff
--------------------
Steven B. Ratoff
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as Principal Financial Officer)
1315