UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2005
Commission file number 002-26821
BROWN-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 40210
Louisville, Kentucky (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (502) 585-1100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------
Class A Common Stock (voting) $0.15 par value New York Stock Exchange
Class B Common Stock (nonvoting) $0.15 par value New York Stock Exchange
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No[ ]
The aggregate market value, as of the last business day of the most recently
completed second fiscal quarter, of the voting and nonvoting equity held by
nonaffiliates of the registrant was approximately $2,600,000,000.
The number of shares outstanding for each of the registrant's classes of
Common Stock on May 31, 2005 was:
Class A Common Stock (voting) 56,782,037
Class B Common Stock (nonvoting) 65,194,890
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2005 Annual Report to Stockholders are incorporated
by reference into Parts I, II, and IV of this report. Portions of the Proxy
Statement of Registrant for use in connection with the Annual Meeting of
Stockholders to be held July 28, 2005 are incorporated by reference into Part
III of this report.
PART I
Item 1. Business
(a) General development of business:
Brown-Forman Corporation ("we," "us," or "our" below) was incorporated under the
laws of the State of Delaware in 1933, successor to a business founded in 1870
as a partnership and subsequently incorporated under the laws of the
Commonwealth of Kentucky in 1901. Through the first 85 years, we were primarily
a bourbon company, marketing brands such as Early Times and Old Forester.
Starting in the mid-1950s, we began a series of acquisitions, including the
purchase of Jack Daniel's Tennessee Whiskey in 1956, and the subsequent
acquisitions of Canadian Mist Canadian whisky, Southern Comfort liqueur,
Finlandia vodka, and Tuaca liqueur. Beginning in the 1990s, we also acquired
premium wine companies including Fetzer Vineyards California wines, Bolla
Italian wines, and California's Sonoma-Cutrer Vineyards.
Our principal executive offices are located at 850 Dixie Highway, Louisville,
Kentucky 40210 (mailing address: P.O. Box 1080, Louisville, Kentucky
40201-1080), and our telephone number is (502) 585-1100.
(b) Financial information about segments:
Information regarding net sales, operating income, and total assets of each of
our two business segments is in Note 12 of Notes to Consolidated Financial
Statements on page 51 of our 2005 Annual Report to Stockholders, which
information is incorporated into this report by reference in response to Item 8.
(c) Narrative description of business:
The two segments comprising our operations are described below.
Beverages
- ---------
We manufacture, bottle, import, export, and market a wide variety of alcoholic
beverage brands. We also manufacture and market new and used oak barrels. Our
principal beverage brands are:
Spirits Wines
------- -----
Jack Daniel's Fetzer
Southern Comfort Bolla
Finlandia Five Rivers
Gentleman Jack Fontana Candida
Jack Daniel's Single Barrel Jekel
Jack Daniel's Ready-to-Drinks Bel Arbor
Canadian Mist Sonoma-Cutrer
Early Times Bonterra
Old Forester Korbel*
Pepe Lopez Mariah*
Tuaca Michel Picard*
Woodford Reserve
Amarula*
Appleton*
Ardbeg*
Don Eduardo*
Glenmorangie*
Glen Moray*
* Brands represented in the U.S and other select markets by Brown-Forman
2
Our primary spirits brand is Jack Daniel's, which is the fourth-largest premium
spirits brand and the largest selling American whiskey brand in the world
according to volume statistics recently published by a leading trade
publication. Our other leading brands are Southern Comfort, the largest selling
liqueur in the United States, and Canadian Mist, the third-largest selling
Canadian whisky worldwide, according to the recently published volume statistics
referenced above. Our largest wine brands are Fetzer Vineyards and Bolla, two of
the leading premium wine brands in the United States generally selling in the
$6-9 per bottle price range according to information published by a leading
consumer market research firm. That same firm cites Korbel as the largest
selling premium champagne in the retail channel in the United States. We believe
the statistics used to rank these products are reasonably accurate.
Our strategy is to market high quality products that satisfy the preferences of
consumers of legal drinking age and to support those products with extensive
international, national, and regional marketing programs. These programs are
intended to extend consumer brand recognition and brand loyalty.
In the United States, we sell spirits and wines either through wholesale
distributors or directly to state governments in those states that control
alcohol sales. The contracts that we have with many of our distributors have
formulas which determine reimbursement to distributors if we terminate them; the
amount of reimbursement is based primarily on the distributor's length of
service and a percentage of its purchases over time. Some states have statutes
which limit our ability to terminate distributor contracts. Outside the United
States, we typically distribute our products by selecting the best local
distributor for our brands in each specific market. Our principal export markets
are the United Kingdom, Germany, Spain, Italy, Australia, France, South Africa,
Canada, Japan, and China.
The principal raw materials used in manufacturing and packaging distilled
spirits are corn, rye, malted barley, glass, cartons, and wood for new white oak
barrels, which are used for storage of bourbon and Tennessee whiskey. Currently,
none of these raw materials is in short supply, and there are adequate sources
from which they may be obtained.
The principal raw materials used in the production of wines are grapes and
packaging materials. Grapes are primarily purchased under contracts with
independent growers and, from time to time, are adversely affected by weather
and other forces which may limit production. We believe that our relationships
with our growers are good.
The industry is highly competitive and there are many brands sold in the
consumer market. Trade information indicates that we are one of the largest wine
and spirit suppliers in the United States in terms of revenues.
3
The Alcohol and Tobacco Tax and Trade Bureau of the United States Treasury
Department regulates the wine and spirits industry with respect to production,
blending, bottling, sales, advertising and transportation of industry products.
Also, each state regulates advertising, promotion, transportation, sale, and
distribution of such products.
Under federal regulations, whiskey must be aged for at least two years to be
designated "straight whiskey." We age our straight whiskeys for a minimum of
three to six years. Federal regulations also require that "Canadian" whisky must
be manufactured in Canada in compliance with Canadian laws and must be aged in
Canada for at least three years. We believe we are in compliance with these
regulations.
Due to aging requirements, production of whiskeys is scheduled to meet demand
three to six years in the future. Accordingly, inventories are larger in
relation to sales and total assets than would be normal for most other
businesses.
Consumer Durables
- -----------------
Our Consumer Durables business consists of a portfolio of consumer brands that
have a rich heritage in the domestic market. We sell fine china dinnerware,
crystal stemware and giftware, stainless steel flatware, and silver-plated and
metal giftware under the Lenox and Gorham brands. Dansk is our contemporary
tabletop, housewares and giftware brand. We sell premium casual dinnerware and
fine china giftware and collectibles under the Lenox trademark, and sterling
silver flatware and sterling silver giftware under the Gorham and Kirk Stieff
trademarks. Hartmann is our luggage, business case, and personal leather
accessories brand. In addition, in the direct response channel, we sell
collectibles, jewelry, and home decor products in the United States under the
Lenox brand and outside the United States primarily under the Brooks & Bentley
brand.
In February 2005, we announced that we were exploring strategic alternatives for
Lenox., Inc., including a possible sale. (Lenox, Inc. represents the major part
of our Consumer Durables segment). We expect to conclude this study this summer.
We market our products domestically through authorized department stores,
home-specialty stores, price clubs, and independent gift, collectible and
jewelry shops, and through our company-owned stores, catalogs, mail-order, and
the internet. The following table provides information about company-owned store
openings and closures for the two most recent fiscal years:
Lenox Dansk Hartmann Total
As of April 30, 2003 63 46 7 116
Opened -- -- 1 1
Closed (5) (5) (1) (11)
---- ---- ---- -----
As of April 30, 2004 58 41 7 106
Converted 15 (15) -- --
Closed (10) (26) -- (36)
---- ---- ---- -----
As of April 30, 2005 63 -- 7 70
==== ==== ==== =====
4
We also sell our products domestically through strategic partnerships with third
party companies and the incentive, premium, business gift, and military exchange
distribution channels, and internationally through authorized retailers, duty
free stores, and distributors. We sell collectibles, jewelry, and home decor
products both domestically and in the United Kingdom through the direct response
channel, including mail-order, catalogs and the internet. In the wholesale
channel, company-employed sales representatives and, where appropriate,
independent commissioned sales representatives and independent distributors sell
our consumer durables products.
We believe we are the largest domestic marketer of fine tabletop products. We
are also a leading domestic marketer of fine quality luggage, business cases,
and personal leather accessories. We compete with a number of other suppliers in
the wholesale and direct response channels. We also face competition from
lifestyle retail stores that market their own brands.
Clay and feldspar are the principal raw materials used to manufacture china
products. Gold and platinum are significant raw materials used to decorate china
products. Fine silver is the principal raw material used to manufacture sterling
silver giftware and sterling flatware products. Steel is the principal raw
material used to manufacture stainless steel flatware. Leather and nylon, tweed,
and wool fabric are the principal raw materials used to manufacture luggage,
business cases and personal leather accessories. We anticipate that these raw
materials will be in adequate supply. However, the acquisition price of gold,
platinum, fine silver, and steel is influenced significantly by worldwide
economic events and commodity trading.
Our revenues are traditionally greater in the second and third quarters of the
fiscal year, primarily because of seasonal holiday buying.
Other Information
- -----------------
We own numerous valuable trademarks that are essential to our business.
Registrations of trademarks can generally be renewed indefinitely as long as the
trademarks are in use. We have authorized, through licensing arrangements, the
use of some of our trademarks on promotional items for the primary purpose of
enhancing brand awareness.
As of April 30, 2005, we employed about 6,100 persons, including approximately
1,300 employed on a part-time or temporary basis. We believe our employee
relations are good.
For information on the effects of compliance with federal, state, and local
environmental regulations, refer to Note 14, "Environmental Matters," on page 52
of our 2005 Annual Report to Stockholders, which information is incorporated
into this report by reference.
Our Web site address is www.brown-forman.com. Please note that our Web site
address is provided as an inactive textual reference only. Our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to these reports are available free of charge on our Web site as soon
as reasonably practicable after we electronically file those reports with the
Securities and Exchange Commission. The information provided on our Web site is
not part of this report, and is therefore not incorporated by reference unless
such information is otherwise specifically referenced elsewhere in this report.
5
We have posted on our Web site (www.brown-forman.com) our Corporate Governance
Guidelines, our Code of Conduct that applies to all directors and employees, and
our Code of Ethics that applies specifically to our senior financial officers.
We have also posted on our Web site the charters of our Audit and Compensation
Committees. Copies of these materials are also available free of charge by
writing to our Corporate Secretary, Michael B. Crutcher, 850 Dixie Highway,
Louisville, Kentucky 40210 or e-mailing him at Michael_Crutcher@b-f.com.
(d) Financial information about geographic areas:
Geographic information about net sales and long-lived assets is in Note 12 of
Notes to Consolidated Financial Statements on page 51 of our 2005 Annual Report
to Stockholders, which information is incorporated into this report by reference
in response to Item 8.
Item 2. Properties
Significant properties by business segments are as follows:
Beverages
- ---------
Owned facilities:
- Office facilities:
- Corporate offices (including renovated historic structures)
- Louisville, Kentucky
- Production and warehousing facilities:
- Lynchburg, Tennessee
- Louisville, Kentucky
- Collingwood, Ontario
- Shively, Kentucky
- Woodford County, Kentucky
- Frederiksted, St. Croix, U.S. Virgin Islands
- Monterey County, California
- San Luis Obispo County, California
- Sonoma County, California
- Livorno, Italy
- Lucca, Italy
- Pedemonte, Italy
- Soave, Italy
Leased facilities:
- Production and bottling facility in Dublin, Ireland
- Wine production and warehousing facility in Mendocino County, California
The lease terms expire at various dates and are generally renewable.
We believe that the facilities are in good condition and are adequate for the
business.
6
Consumer Durables
- -----------------
Owned facilities:
- Office facilities:
- Lenox Corporate, Wholesale and Brand Organization - Lawrenceville,
New Jersey
- Lenox Direct Response and Business Technology Organization (includes
retail store and warehouse) - Langhorne, Pennsylvania
- Production and office facilities (each of which includes a retail store):
- Lenox - Pomona, New Jersey; and Kinston, North Carolina
- Hartmann - Lebanon, Tennessee
- Warehousing facilities:
- Lenox/Dansk/Gorham - Hagerstown, Maryland
Leased facilities:
- Office facilities:
- Brooks & Bentley - Kent, England
- Warehousing facilities:
- Lenox - South Brunswick, New Jersey (includes a retail store and
clearance center)
- Lenox Direct Response - Bristol Township, Pennsylvania
- Retail stores:
- The Segment operates 63 Lenox stores in 27 states. In addition, the
Segment operates 7 Hartmann luggage outlet stores in 6 states.
- Showrooms:
- Lenox/Dansk/Gorham - New York, New York; Dallas, Texas; and
Atlanta, Georgia
The lease terms expire at various dates and are generally renewable.
We believe that the facilities are in good condition and are adequate for the
business.
7
Item 3. Legal Proceedings
Beverages
- ---------
Brown-Forman Corporation and many other manufacturers of spirits, wine, and beer
are defendants in a series of essentially similar class action lawsuits seeking
damages and injunctive relief for alleged marketing of beverage alcohol to
underage consumers. Nine lawsuits have been filed to date, the first three
against eight defendants, including Brown-Forman: Hakki v. Adolph Coors Company,
et.al., District of Columbia Superior Court No. CD 03-9183 (November 2003);
Kreft v. Zima Beverage Co., et.al., District Court, Jefferson County, Colorado,
No. 04cv1827 (December 2003); and Wilson v. Zima Company, et.al., U.S. District
Court for the Western District of North Carolina, Charlotte Division, No.
3:04cv141 ( January 2004). Two virtually identical suits with allegations
similar to those in the first three lawsuits were filed in Cleveland, Ohio, in
April and June, 2004, respectively, against the original eight defendants as
well as an additional nine manufacturers of spirits and beer, and are now
consolidated as Eisenberg v. Anheuser-Busch, U.S. District Court for the
District of Northern Ohio, No. 1:04cv1081. Five similar suits were filed in
2005: Elizabeth H. Sciocchette v. Advanced Brands, Albany County, New York
Supreme Court No. 102205 (February 16, 2005); Roger and Kathy Bertovich v.
Advanced Brands, Hancock County, West Virginia, Circuit Court No. 05-C-42M
(February 17, 2005); Jacquelin Tomberlin v. Adolph Coors, Dane County (Madison,
Wisconsin) Circuit Court, (February 23, 2005); Viola Alston v. Advanced Brands,
Wayne County, Michigan, Circuit Court No. 05-509294, (March, 30, 2005), and
Craig Konhauzer v. Adolph Coors Company, Broward County Florida Circuit Court,
No. 05004875 (March 30, 2005). In addition, Brown-Forman received in February,
2004, a pre-lawsuit notice under the California Consumer Protection Act
indicating that the same lawyers intend to file a lawsuit there against many
industry defendants, including Brown-Forman, presumably on the same facts and
legal theories.
The suits allege that the defendants have engaged in deceptive marketing
practices and schemes targeted at underage consumers, negligently marketed their
products to the underage, and fraudulently concealed their alleged misconduct.
Plaintiffs seek class action certification on behalf of: (a) a guardian class
consisting of all persons who were or are parents of children whose funds were
used to purchase beverage alcohol marketed by the defendants which were consumed
without their prior knowledge by their children under the age of 21 during the
period 1982 to present; and (b) an injunctive class consisting of the parents
and guardians of all children currently under the age of 21.
The lawsuits seek: (1) a finding that defendants engaged in a deceptive scheme
to market alcoholic beverages to underage persons and an injunction against such
alleged practices; (2) disgorgement and refund to the guardian class of all
proceeds resulting from sales to the underage since 1982; and (3) judgment to
each guardian class member for a trebled award of actual damages, punitive
damages, and attorneys fees. The lawsuits, either collectively or individually,
if ultimately successful, represent significant financial exposure.
Brown-Forman, in coordination with other defendants, is vigorously defending
itself in these cases, four of which are pending on motions to dismiss.
Consumer Durables
- -----------------
On August 23 and 26, 2004, plaintiffs purporting to represent a class of
consumers who purchased tableware sold in the United States from May 1, 2001,
through the present filed suit against Federated Department Stores, the May
Department Stores Company, Waterford Wedgwood U.S.A., and Brown-Forman's Lenox,
Inc. subsidiary. In November 2004, plaintiffs filed a consolidated complaint
alleging that the defendants violated Section 1 of the Sherman Act by conspiring
to fix prices and to boycott sales to Bed Bath & Beyond. The cases are
consolidated in the U.S. District Court for the Northern District of California,
Nos. C-04-3514VRW and C-04-3622VRW. Plaintiffs seek to recover an undisclosed
amount of damages, trebled in accord with the anti-trust laws, as well as costs,
attorney fees and injunctive relief. Lenox, Inc. denies the allegations of the
complaint and intends to defend the cases vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
None.
8
Executive Officers of the Registrant
Principal Occupation and
Name Age Business Experience
---- --- ---------------------------------
Owsley Brown II 62 Chairman and Chief Executive Officer
of the company since 1995.
Paul C. Varga 41 President and Chief Executive
Officer of Brown-Forman Beverages
(a division of Brown-Forman) since
August 2003. Global Chief Marketing
Officer for Brown-Forman Beverages
from 2000 to July 2003. Director of
Marketing for Brown-Forman Spirits-
North American Group from 1998 to
2000.
James D. Hanauer 50 Chief Executive Officer of Lenox,
Incorporated (a subsidiary of
Brown-Forman) since January 2004.
President of Brown-Forman Distillery
Company (a division of Brown-Forman)
from 1996 to January 2004.
Phoebe A. Wood 52 Executive Vice President and Chief
Financial Officer of the company
since February 2001. Vice President
and Chief Financial Officer for
Propel, Inc. (a subsidiary of
Motorola) from August 2000 to
February 2001.
Michael B. Crutcher 61 Vice Chairman, General Counsel, and
Secretary since August 2003. Senior
Vice President, General Counsel, and
Secretary from 1989 to August 2003.
James S. Welch, Jr. 46 Vice Chairman, Strategy and Human
Resources since August 2003. Senior
Vice President and Executive
Director of Human Resources from
1999 to August 2003.
9
James L. Bareuther 59 Executive Vice President of and
Chief Operating Officer of Brown-
Forman Beverages since August 2003.
President of Brown-Forman Spirits
Americas from July 2001 to August
2003. Executive Vice President,
Spirits Marketing and Sales, North
American Group - Brown-Forman
Beverages Worldwide from 1994 to
July 2001.
Jane C. Morreau 46 Vice President and Controller since
August 2002. Director of Business
Planning & Analysis from 1997 to
July 2002.
10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our Class A and Class B Common Stock is traded on the New York Stock Exchange
(symbols "BFA" and "BFB," respectively).
Holders of record of Common Stock at April 30, 2005:
Class A Common Stock (Voting) 3,466
Class B Common Stock (Nonvoting) 4,191
For the other information required by this item, refer to the section entitled
"Quarterly Financial Information" at the front of the 2005 Annual Report to
Stockholders, which information is incorporated into this report by reference.
Item 6. Selected Financial Data
For the information required by this item, refer to the section entitled
"Selected Financial Data" on page 26 of the 2005 Annual Report to Stockholders,
which information is incorporated into this report by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For the information required by this item, refer to the section entitled
"Management's Discussion and Analysis" on pages 27 through 38 of the 2005 Annual
Report to Stockholders, and the section entitled "Important Information on
Forward-Looking Statements" on page 58 of the 2005 Annual Report to
Stockholders, which information is incorporated into this report by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
For the information required by this item, refer to the section entitled "Market
Risks" beginning on page 36 of the 2005 Annual Report to Stockholders, which
information is incorporated into this report by reference.
Item 8. Financial Statements and Supplementary Data
For the information required by this item, refer to the Consolidated Financial
Statements, Notes to Consolidated Financial Statements, Reports of Management,
and Report of Independent Registered Public Accounting Firm on pages 39 through
55 of the 2005 Annual Report to Stockholders, which information is incorporated
into this report by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
11
Item 9A. Controls and Procedures
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
Brown-Forman (its principal executive and principal financial officers) have
evaluated the effectiveness of the company's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")) as of the end of the period covered by this report.
Based on that evaluation, the CEO and CFO concluded that the company's
disclosure controls and procedures: are effective to ensure that information
required to be disclosed by the company in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the SEC's rules and forms; and include controls
and procedures designed to ensure that information required to be disclosed by
the company in such reports is accumulated and communicated to the company's
management, including the CEO and the CFO, as appropriate, to allow timely
decisions regarding required disclosure. There has been no change in the
company's internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting.
For the other information required by this item, refer to 'Management's Report
on Internal Control over Financial Reporting" and "Report of Independent
Registered Public Accounting Firm" on pages 54 and 55 of the 2005 Annual Report
to Stockholders, which information is incorporated into this report by
reference.
PART III
Item 10. Directors and Executive Officers of the Registrant
For the information required by this item, refer to the following sections of
our definitive proxy statement for the Annual Meeting of Stockholders to be held
July 28, 2005, which information is incorporated into this report by reference:
(a) "Election of Directors" on pages 6 through 8 (for information on directors);
(b) "Corporate Governance Guidelines, Committee Charters and Codes" on page 11
(for information on our Code of Ethics); (c) the last paragraph on page 15 (for
information on delinquent Section 16 filings); and (d) "Audit Committee" on
pages 17 through 19. Also, see the information with respect to "Executive
Officers of the Registrant" under Part I of this report, which information is
incorporated herein by reference.
We will post any amendments to our Code of Ethics that applies to our chief
executive officer, principal financial officer, controller and principal
accounting officer, and any waivers that are required to be disclosed by the
rules of either the SEC or NYSE on our Web site.
Item 11. Executive Compensation
For the information required by this item, refer to the following sections of
our definitive proxy statement for the Annual Meeting of Stockholders to be held
July 28, 2005, which information is incorporated into this report by reference:
(a) "Executive Compensation" on pages 20 through 27; (b) "Retirement Plan
Descriptions" on page 28; and (c) "Director Compensation" on page 29.
12
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Equity Compensation Plan Information
In July 2004, shareholders approved the 2004 Omnibus Compensation Plan as the
successor to both the 1994 Omnibus Compensation Plan providing equity awards to
employees and the Non-Employee Directors ("NED") Plan providing equity awards to
non-employee directors. At the time the NED Plan was discontinued, it had not
been submitted to shareholders. The following table provides information on
these plans:
Number of securities
Number of securities to be Weighted-average exercise remaining available
issued upon exercise of price of outstanding for future issuance
outstanding options, options, warrants and under equity compensation
Plan category warrants and rights rights(1) plans
Equity compensation plans
approved by security holders 4,971,625 $37.68 5,281,775
Equity compensation plans not
approved by security holders 175,650 $32.48 -- (2)
--------- ------ ---------
Total 5,147,275 $37.50 5,281,775
========= ====== =========
<FN>
(1) The difference in weighted-average exercise price between plans is primarily due to a premium-priced, broad-based grant made
to employees under the stockholder-approved plan. In most cases, grant dates and grant prices are the same under both plans.
(2) No further awards can be made under the Non-Employee Directors plan.
</FN>
For the other information required by this item, refer to the section entitled
"Stock Ownership" on pages 14 through 16 of our definitive proxy statement for
the Annual Meeting of Stockholders to be held July 28, 2005, which information
is incorporated into this report by reference.
Item 13. Certain Relationships and Related Transactions
For the information required by this item, refer to the section entitled
"Transactions with Management" on page 31 of our definitive proxy statement for
the Annual Meeting of Stockholders to be held July 28, 2005, which information
is incorporated into this report by reference.
Item 14. Principal Accountant Fees and Services
For the information required by this item, refer to the section entitled "Fees
Paid to Independent Auditor" on page 18 of our definitive proxy statement for
the Annual Meeting of Stockholders to be held July 28, 2005, which information
is incorporated into this report by reference.
13
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1 and 2 - Index to Consolidated Financial Statements and Schedule:
Reference
Annual
Form 10-K Report to
Annual Report Stockholders
Page Page(s)
Incorporated by reference to our Annual Report to
Stockholders for the year ended April 30, 2005:
Consolidated Statement of Income for the
years ended April 30, 2003, 2004, and 2005* -- 39
Consolidated Balance Sheet at April 30, 2004 and 2005* -- 40
Consolidated Statement of Cash Flows for the
years ended April 30, 2003, 2004, and 2005* -- 41
Consolidated Statement of Stockholders' Equity
for the years ended April 30, 2003, 2004, and 2005* -- 42
Notes to Consolidated Financial Statements* -- 43 - 53
Reports of Management* -- 54
Report of Independent Registered Public Accounting Firm* -- 55
Important Information on Forward-Looking Statements -- 58
Consolidated Financial Statement Schedule:
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule S-1 --
II - Valuation and Qualifying Accounts S-2 --
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted either
because they are not required under the related instructions, because the
information required is included in the consolidated financial statements and
notes thereto, or because they are inapplicable.
* Incorporated by reference to Item 8 in this report.
(a) 3 - Exhibits: Filed with this report:
Exhibit Index
- -------------
10(f) Form of Restricted Stock Agreement, as amended.
10(g) Form of Employee Stock Appreciation Right Award.
10(h) Form of Non-Qualified Stock Option Award.
14
10(i) Form of Non-Employee Director Stock Appreciation Right Award.
10(j) Form of Non-Employee Director Non-Qualified Stock Option Award.
10(k) Summary of Director and Named Executive Officer Compensation.
13 Brown-Forman Corporation's Annual Report to Stockholders for the
year ended April 30, 2005, but only to the extent set forth in
Items 1, 5, 6, 7, 7A, 8 and 9A of this Annual Report on Form 10-K
for the year ended April 30, 2005.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP independent registered public
accounting firm.
31.1 CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
31.2 CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
32 CEO and CFO Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(not considered to be filed).
Previously Filed:
Exhibit Index
- -------------
3(i) Restated Certificate of Incorporation of registrant, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 10-Q filed on March 4, 2004.
3(ii) By-laws of Registrant, as amended on May 26, 2005, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 8-K filed on May 27, 2005.
4 Form of Indenture dated as of March 1, 1994 between Brown-Forman
Corporation and The First National Bank of Chicago, as Trustee,
which is incorporated into this report by reference to Brown-Forman
Corporation's Form S-3 (Registration No. 33-52551) filed on
March 8, 1994.
10(a) Brown-Forman Corporation Supplemental Excess Retirement Plan, which
is incorporated into this report by reference to Brown-Forman
Corporation's Form 10-K filed on July 23, 1990.
10(b) A description of the Brown-Forman Savings Plan, which is
incorporated into this report by reference to page 10 of
Brown-Forman's definitive proxy statement filed on June 27, 1996
in connection with its 1996 Annual Meeting of Stockholders.
15
10(c) The description of the terms of $250,000,000 of 2-1/8% Notes due
2006 and $350,000,000 of 3% Notes due 2008, which description is
incorporated by reference into this report by reference to the
Indenture filed with Brown-Forman Corporation's Form S-4
(Registration No. 333-104657) on April 21, 2003.
10(d) Brown-Forman Corporation 2004 Omnibus Compensation Plan, which is
incorporated into this report by reference to Brown-Forman's
definitive proxy statement filed on June 30, 2004 in connection
with its 2004 Annual Meeting of Stockholders.
10(e) Five-Year Credit Agreement, dated as of July 30, 2004, among
Brown-Forman Corporation, the Lenders named therein, Bank of
America, N.A., as Syndication Agent, Citibank, N.A., HSBC Bank USA
and National City Bank of Kentucky, as Documentation Agents, and
JPMorgan Chase Bank, as Administrative Agent, which is incorporated
into this report by reference to Brown-Forman Corporation's
Form 10-Q filed on September 2, 2004.
14 Code of Ethics, which is incorporated into this report by reference
to Brown-Forman Corporation's Form 10-K filed on July 2, 2004.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BROWN-FORMAN CORPORATION
(Registrant)
/s/ OWSLEY BROWN II
------------------------------------
Date: June 28, 2005 By: Owsley Brown II
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on June 28, 2005 as indicated:
/s/ INA BROWN BOND /s/ RICHARD P. MAYER /s/ OWSLEY BROWN II
- --------------------------------------- --------------------------------- -----------------------------------------
By: Ina Brown Bond By: Richard P. Mayer By: Owsley Brown II
Director Director Director, Chairman of the Board
and Chief Executive Officer
/s/ BARRY D. BRAMLEY /s/ STEPHEN E. O'NEIL /s/ PATRICK BOUSQUET-CHAVANNE
- --------------------------------------- --------------------------------- -----------------------------------------
By: Barry D. Bramley By: Stephen E. O'Neil By: Patrick Bousquet-Chavanne
Director Director Director
/s/ GEO. GARVIN BROWN III /s/ WILLIAM M. STREET /s/ DACE BROWN STUBBS
- --------------------------------------- --------------------------------- -----------------------------------------
By: Geo. Garvin Brown III By: William M. Street By: Dace Brown Stubbs
Director Director, Former President, Director
Brown-Forman Corporation
/s/ JANE C. MORREAU /s/ PHOEBE A. WOOD /s/ OWSLEY BROWN FRAZIER
- --------------------------------------- --------------------------------- -----------------------------------------
By: Jane C. Morreau By: Phoebe A. Wood By: Owsley Brown Frazier
Vice President and Controller Executive Vice President and Director, Former Vice Chairman
(Principal Accounting Officer) Chief Financial Officer Brown-Forman Corporation
(Principal Financial Officer)
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Brown-Forman Corporation:
Our audits of the consolidated financial statements, of management's assessment
of the effectiveness of internal control over financial reporting and of the
effectiveness of internal control over financial reporting referred to in our
report dated June 22, 2005 appearing in the 2005 Annual Report to Stockholders
of Brown-Forman Corporation and Subsidiaries (which report, consolidated
financial statements and assessment are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the financial statement schedule
listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Louisville, Kentucky
June 22, 2005
S-1
BROWN-FORMAN CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended April 30, 2003, 2004, and 2005
(Expressed in thousands)
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Additions
Balance at Charged to Balance at
Beginning Costs End
Description of Period and Expenses Deductions of Period
----------- ---------- ------------ ---------- ----------
2003
Allowance for Doubtful Accounts $15,621 $ 3,828 $ 7,419(1) $12,030
Accrued Restructuring Costs 13,038 -- 6,192(2) 6,846
2004
Allowance for Doubtful Accounts $12,030 $ 4,324 $ 4,923(1) $11,431
Accrued Restructuring Costs 6,846 2,200 6,219(2) 2,827
2005
Allowance for Doubtful Accounts $11,431 $ 5,349 $ 4,859(1) $11,921
Accrued Restructuring Costs 2,827 -- 1,490(2) 1,337
(1) Doubtful accounts written off, net of recoveries.
(2) Employee termination benefit payments, write-offs of impaired machinery and
equipment (net of recoveries), and other cash expenditures related to the
closing of three manufacturing plants.
S-2
Exhibit 10(f)
BROWN-FORMAN 2004 OMNIBUS COMPENSATION PLAN
RESTRICTED STOCK AGREEMENT
Capitalized terms used below have the definitions assigned to them in
the Brown-Forman 2004 Omnibus Compensation Plan effective July 22, 2004
(the "Plan"), or as defined below.
SUMMARY
Participant: [Name]
Award Date: [Date]
Performance Period [Date] through [Date]
Share Calculation Date: As soon as practicable following the
Performance Period
Restriction Ending Date: [Date]
Target Dollar Award: $[Value]
Class of Shares: Brown-Forman Corporation Class B Common
Award Price per Share: $[Price]
THIS AWARD, effective as of the Award Date set out above, represents the award
of bonus opportunity to be delivered in the form of Restricted Stock by
Brown-Forman Corporation, a Delaware corporation (the "Company") to the
Participant named above, who is an employee of the Company or one or more of its
subsidiaries, pursuant to the Plan.
1. Award. The Plan Administrator shall designate a Target Dollar Award amount
for each Participant within 90 days of the beginning of the Performance Period,
and shall designate Performance Measures for the Performance Period, which may
be the same measures as those used for Short-Term Bonus. In arriving at a Target
Dollar Award, the Plan Administrator has the right, but not the requirement, to
solicit input from the Participant as to the target dollars to be delivered as
Restricted Stock. Shortly after the end of the Performance Period, the Target
Dollar Award will be adjusted for actual performance against the approved
Performance Measures (the "Adjusted Dollars", which shall never be less than $0
nor more than two times the Target Dollar Award), and the Adjusted Dollars will
be converted into Restricted Shares of Class B Common Stock by dividing the
Adjusted Dollars by the Award Date Price per Share, rounding up to the next
whole share. Restricted Shares shall be issued in the name of the Participant,
legended with the appropriate restriction, and held in escrow by the Company or
its agent. Upon the vesting of the Restricted Stock, and the satisfaction of
applicable withholding requirements under IRC Section 10(C), the Company shall
issue or cause to be delivered to the participant one or more unlegended stock
certificates in respect of such Restricted Stock.
2. Term; Vesting. The term of this Award is for a period of five years from the
first day of the Performance Period of the Award. The participant must remain
continuously employed by the Company for a period of five fiscal years beginning
with the fiscal year of the Award and extending through the Restriction Ending
Date in order to be considered vested in the Award, except as provided in
Section 3 below. Assuming continued employment, following the Restriction Ending
Date the restrictions will be removed and the unrestricted vested shares shall
be delivered to the Participant.
3. Termination of Employment. In the event the Participant does not remain
continuously employed by the Company until the Restriction Ending Date, the
following rules will apply:
Participants terminating voluntarily and Participants who are discharged for
Cause will forfeit all Restricted Stock.
In the event of retirement, death, or involuntary termination for reasons other
than discharge for Cause, the Participant may be entitled, at the discretion of
the Plan Administrator, to receive a pro-rated portion of each Restricted Stock
Award, with the Restricted Stock released from restrictions at a time determined
by the Plan Administrator, but in no circumstances later than described in
Section 2 above.
4. Change in Control. In the event of a Change in Control of the Company, as
defined in the Plan, all restrictions shall be immediately removed and the
unrestricted shares shall be delivered to the Participant as soon as practicable
following such Change in Control.
5. Rights as a Stockholder. During the Performance Period prior to the issuance
of Restricted Stock, the Participant has no rights as a stockholder (including,
but not limited to, the right to receive regular quarterly dividends or dividend
equivalents). However, following the issuance of Restricted Stock after the end
of the Performance Period, the Participant will have the same stockholder rights
as other holders of Class B Common stock except that vesting and the right to
sell the shares is restricted as provided herein. Dividends (or dividend
equivalents) are payable to the Participant following the issue of Restricted
Stock during the restriction period, unless the payment of such dividends
creates issues (as determined by the Plan Administrator) under any IRS or SEC
regulations including IRC Section 162(m), in which case they will be accrued and
paid out at the time the underlying Restricted Stock becomes free of
restrictions (or at such later date as the Plan Administrator determines such
issues are no longer present).
6. Restrictions on Transfer. This Award and the restricted Stock may not be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution.
7. Recapitalization. If there is any change in the Company's Shares through the
declaration of stock dividends, a recapitalization, stock splits, or through
merger, consolidation, exchange of Shares, or otherwise, or in the event of an
extraordinary dividend or other corporate transaction, the Plan Administrator
may adjust the number and class of Shares subject to this Award (including by
making a different kind or class of securities subject to the Award), as well as
the Award Price per Share, to prevent dilution or enlargement of rights.
8. Beneficiary Designation. The Participant may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under this Award is to be paid in case of his or her death
before he or she receives any or all of such benefit. Each such designation
shall revoke all prior designations by the Participant, shall be in a form
prescribed by the Company, and will be effective only when delivered during the
Participant's lifetime to the Company at its executive offices, addressed to the
attention of the Compensation Department in Louisville, Kentucky.
9. Continuation of Employment. This Award shall not confer upon the Participant
any right to continued employment by the Company, nor shall this Award interfere
in any way with the Company's right to terminate the Participant's employment at
any time. A transfer of the Participant's employment between the Company and any
of its subsidiaries, or between any divisions or subsidiaries of the Company
shall not be deemed a termination of employment.
10. Miscellaneous.
A) This Award and the Participant's rights under it are subject to all the terms
and conditions of the Plan and this Restricted Stock Program, as they may be
amended from time to time, as well as to such rules as the Plan Administrator
may adopt. The Plan Administrator may impose such restrictions on this Award as
it may deem advisable, including, without limitation, restrictions under
applicable Federal securities laws, under the requirements of any stock exchange
or market upon which such Shares are then listed and/or traded, and under any
blue sky or state securities laws applicable to such Shares. The Restricted
Stock shall be subject to the requirements that, if at any time the Plan
Administrator shall determine that (i) the listing, registration or
qualification of Class B Common Stock subject or related thereto upon any
securities exchange or under any federal or state law, or (ii) the consent or
approval of any governmental body, or (iii) an agreement by the Participant with
respect to the disposition of shares of Class B Common Stock is necessary or
desirable as a condition of, or in connection with, the delivery or purchase of
shares pursuant thereto, then in such event, the grant of Restricted Stock shall
not be effective unless such listing, registration, qualification, consent,
approval or agreement shall have been effected or obtained free of any
conditions not acceptable to the Plan Administrator.
The Plan Administrator may administer, construe, and make all determinations
necessary or appropriate to the administration of the Plan and this Award, all
of which shall be binding upon the Participant.
B) Subject to the provisions of the Plan, the Board of Directors may terminate,
amend, or modify the Plan; provided, however, that no such termination,
amendment, or modification of the Plan may in any way adversely affect the
Participant's rights under this Award, without the written consent of the
Participant. This Agreement may not be modified, amended or waived except by an
instrument in writing signed by both parties hereto. The waiver by either party
of compliance with any provision of this Agreement shall not operate or be
construed as a waiver of any other provision of this Agreement, or of any
subsequent breach by such party of a provision of this Agreement.
C) The Company may deduct or withhold, or require the Participant to remit to
the Company, an amount sufficient to satisfy Federal, state, and local taxes
(including the Participant's FICA obligation) required by law to be withheld
with respect to any exercise of the Participant's rights under this Award.
The Participant may remit sufficient cash to the Company to satisfy the
withholding requirement or, subject to the approval of the Plan Administrator,
the Participant may elect to satisfy the withholding requirement, in whole or in
part, by having the Company withhold Shares having an aggregate Fair Market
Value, on the date the tax is to be determined, equal to the amount required to
be withheld. Such elections shall be irrevocable, shall be in writing, and shall
be signed by the Participant before the day that the transaction becomes
taxable.
D) The Participant agrees to take all steps necessary to comply with all
applicable Federal and state securities law in exercising his or her rights
under this Award.
E) This Award shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
F) The Company's obligations under the Plan and this Award shall bind any
successor to the Company, whether succession results from a direct or indirect
purchase, merger, consolidation, or otherwise, of all or substantially all of
the business and/or assets of the Company.
G) To the extent not preempted by Federal law, this Award shall be governed by,
and construed in accordance with, the laws of the State of Delaware.
H) At all times when IRC Section 162(m) applies, all Awards to Designated
Executive Officers shall comply with its requirements, unless the Plan
Administrator determines that compliance is not desired or necessary for any
Award or Awards. To that end, the Plan Administrator may make such adjustments
it deems appropriate for a specific Award or Awards, except that a
performance-based Award cannot be replaced by a non-performance-based Award if
performance goals are not achieved, nor can the characterization of an Executive
Officer as a Designated Executive Officer, once made, change for a given
Performance Period.
I) This Award is subject to the terms of the Plan and Administrative Guidelines
promulgated under it from time to time. In the event of a conflict between this
document and the Plan, the Plan document as well as any determinations made by
the Plan Administrator as authorized by the Plan document, shall govern.
J) The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Award to be executed as of the
Grant Date.
Brown-Forman Corporation
By:_______________________________
Bruce S. Cote
Vice President,
Director HR Employee Services
Accepted:
__________________________________
Participant
Exhibit 10(g)
BROWN-FORMAN 2004 OMNIBUS COMPENSATION PLAN
EMPLOYEE STOCK APPRECIATION RIGHT AWARD
Capitalized terms used below have the definitions assigned to them in
the Brown-Forman 2004 Omnibus Compensation Plan, effective July 22, 2004
(the "Plan"), or as defined herein.
SUMMARY
Participant: [Name]
Grant Date: [Date]
First Exercise Date: [Date]
Expiration Date: [Date]
Number of Shares: [Number]
Class of Shares: Brown-Forman Corporation Class B Common
Grant Price: $[Price]
THIS AWARD, effective as of the Grant Date set out above, represents the grant
of a stock appreciation right by Brown-Forman Corporation, a Delaware
corporation (the "Company") to the Participant named above, who is an employee
of the Company or one or more of its subsidiaries, pursuant to the Plan.
1. Grant of Stock Appreciation Right. The Company hereby grants to the
Participant a Stock-Settled Stock Appreciation Right (the "SSAR"), subject to
the terms and conditions set out within this Award and to the terms of the Plan.
2. Value of the SSAR. The SSAR shall entitle the Participant, upon exercise of
the SSAR (in whole or in part), to receive from the Company an amount (payable
in the form of Class B Common Shares) determined by multiplying:
A) the appreciated value of one Class B Common Share, calculated as the Fair
Market Value of one Class B Common Share on the date of exercise minus the Grant
Price as shown above; by
B) the number of Class B Common Shares with respect to which the SSAR is
exercised.
3. Term. The term of this Award is for a period of ten years from the first day
of the fiscal year of grant. To exercise the SSAR, the Participant must remain
continuously employed by the Company for at least three years from the first day
of the fiscal year of grant, except as provided in Section 6 below. Assuming
continuous employment, the SSAR will become exercisable on the First Exercise
Date shown above, and it must be exercised before the close of business on the
Expiration Date shown above.
4. How to Exercise the SSAR. The SSAR may be exercised by delivery of written
notice in a prescribed form to the Company at its executive offices, addressed
to the attention of the Compensation Department in Louisville, Kentucky. Such
notice shall state the Participant's intention to exercise the SSAR and shall
provide the number of Class B Common Shares as to which the SSAR is to be
exercised. Such written notice must be signed by the Participant or his or her
legal representative. SSAR's may be exercised in whole or in part, but not for
fewer than 500 shares at any one time, unless the SSAR being exercised has less
than 500 remaining shares.
As soon as practicable after the receipt of the Participant's written notice to
exercise the SSAR (in whole or in part), the Company shall cause to be delivered
to the Participant or his or her legal representative, as the case may be, one
or more certificates for the Class B Common Shares due to the Participant upon
exercise. The Class B Common Share certificate(s) shall be issued in the
Participant's name (or, at the discretion of the Participant, jointly in the
name of the Participant and the Participant's spouse).
5. Form of Payment. The Company shall satisfy its obligation upon the
Participant's exercise of the SSAR (in whole or in part) in Class B Common
Shares based upon the Fair Market Value or the Company's Class B Common Shares
on the date of exercise, as determined by the Plan Administrator in its sole
discretion. Notwithstanding the foregoing, no fractional Share shall be
distributed in settlement of the SSAR and any portion of the SSAR which would be
settled in a fractional Share shall be rounded up to a whole Share with no
additional payment to be made in cash except as otherwise permitted by the
Internal Revenue Service under an exemption from the application of IRC Section
409A.
6. Termination of Employment. In the event the Participant does not remain
continuously employed by the Company during the term of the SSAR, the following
rules will apply:
A) Retirement. Retirement means termination of employment on or after reaching
age 55 with at least five (5) full years of service, or on or after reaching age
65 with any service. If the Participant terminates employment by reason of
Retirement, the SSAR will continue in force until the earlier of (a) the
Expiration Date; or (b) the end of seven years following the date of Retirement.
Retirement does not affect the First Exercise Date.
B) Death. If the Participant dies, the SSAR will immediately become exercisable
(if not already exercisable) but the SSAR must be exercised by the earlier of
(a) the Expiration Date or (b) the end of five years following the date of
death. An exercisable SSAR shall be exercised by the person(s) named as the
Participant's beneficiary(ies), or, if the Participant has not named one or more
beneficiaries, by whoever has acquired the Participant's rights by will or by
the laws of descent and distribution.
C) Termination for Cause. A SSAR granted to a Participant who is terminated for
cause, as defined in the Plan, shall expire immediately as of the date and time
that the Participant is notified of the termination and may not be exercised.
D) Voluntary Termination. A SSAR granted to a Participant who terminates
employment voluntarily shall continue in force until the earlier of (a) the
Expiration Date or (b) the end of thirty days following the date of termination.
Voluntary Termination does not affect the First Exercise Date.
E) Termination for any Other Reasons. If the Participant's employment terminates
for any reason other than those set out in items A through D immediately above,
and in the absence of any action by the Plan Administrator, the SSAR shall
expire immediately as of the time and date of termination, and may not be
exercised. However, the Plan Administrator, in its sole discretion, based on the
facts and circumstances of such termination, may accelerate the First Exercise
Date of all or any portion of the SSAR, and/or may delay the expiration of all
or any portion of the SSAR to any date not later than the Expiration Date.
7. Change in Control or Potential Change in Control. In the event of a Change in
Control or Potential Change in Control of the Company, as defined in the Plan,
the First Exercise Date and the Participant's rights with respect to the SSAR
shall be governed by the terms of Article 11 of the Plan.
8. Rights as a Shareholder. The Participant has no rights as a shareholder
(including, but not limited to, the right to receive dividends or dividend
equivalents, or to vote on shareholder issues) with respect to Shares
potentially available upon exercise of the SSAR. Shareholder rights accrue only
to holders of Shares issued and delivered pursuant to exercise of the SSAR.
9. Restrictions on Transfer. The SSAR may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, the SSAR shall be exercisable during
the Participant's lifetime only by the Participant or the Participant's duly
appointed legal representative.
10. Recapitalization. If there is any change in the Company's Shares through the
declaration of Share dividends or through recapitalization resulting in Share
splits or through merger, consolidation, exchange of Shares, or otherwise, the
Plan Administrator may adjust the number and class of Shares subject to the
SSAR, as well as the Grant Price, to prevent dilution or enlargement of rights.
11. Beneficiary Designation. The Participant may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under this Award is to be paid in case of his or her death
before he or she receives any or all of such benefit. Each such designation
shall revoke all prior designations by the Participant, shall be in a form
prescribed by the Company, and will be effective only when delivered during the
Participant's lifetime to the Company at its executive offices, addressed to the
attention of the Compensation Department in Louisville, Kentucky.
12. Continuation of Employment. This Award shall not confer upon the Participant
any right to continued employment by the Company, nor shall this Award interfere
in any way with the Company's right to terminate the Participant's employment at
any time. A transfer of the Participant's employment between the Company and any
of its subsidiaries, or between any divisions or subsidiaries of the Company
shall not be deemed a termination of employment.
13. Tax Consequences. By accepting the SSAR, the Participant acknowledges that
(i) he or she understands that upon either the grant or the exercise of the
SSAR, he or she may recognize adverse tax consequences, and (ii) he or she
understands that the Company may deduct or withhold, or require the Participant
to remit to the Company, an amount of Class B Common Shares sufficient to
satisfy Federal, state, and local taxes (including the Participant's FICA
obligation) required by law to be withheld with respect to any exercise of the
Participant's rights under this Award. You are encouraged to consult with a
qualified tax advisor concerning the SSAR. In addition, the Participant agrees
that the SSAR shall be administered and settled as required for the SSAR to be
deemed not to be deferred compensation subject to the provisions of IRC Section
409A as provided in Internal Revenue Service Notice 2005-1.
14. Miscellaneous.
A) This Award and the Participant's rights under it are subject to all the terms
and conditions of the Plan, as the same may be amended from time to time, as
well as to such rules as the Plan Administrator may adopt. The Plan
Administrator may impose such restrictions on any Shares acquired pursuant to
the exercise of the SSAR as it may deem advisable, including, without
limitation, restrictions under applicable Federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws applicable
to such Shares. The Plan Administrator in conjunction with the Company's
compliance officer may designate periods during which the SSAR may not be
exercised by Participants.
The Plan Administrator may, in its sole discretion, administer, construe, and
make all determinations necessary or appropriate to the administration of the
Plan and the SSAR, all of which shall be binding upon the Participant.
B) Subject to the provisions of the Plan, the Board of Directors may terminate,
amend, or modify the Plan; provided, however, that no such termination,
amendment, or modification of the Plan may in any way adversely affect the
Participant's rights under this Award, without the written consent of the
Participant.
C) The Participant agrees to take all steps necessary to comply with all
applicable Federal and state securities law in exercising his or her rights
under this Award.
D) This Award shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
E) The Company's obligations under the Plan and this Award, with respect to the
SSAR, shall bind any successor to the Company, whether succession results from a
direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.
F) To the extent not preempted by Federal law, this Award shall be governed by,
and construed in accordance with, the laws of the State of Delaware.
G) At all times when IRC Section 162(m) applies, all Awards to Designated
Executive Officers shall comply with its requirements, unless the Plan
Administrator determines that compliance is not desired or necessary for any
Award or Awards. To that end, the Plan Administrator may make such adjustments
it deems appropriate for a specific Award or Awards, except that a
performance-based Award cannot be replaced by a non-performance-based Award if
performance goals are not achieved, nor can the characterization of an Executive
Officer as a Designated Executive Officer, once made, change for a given
Performance Period.
H) This Award is subject to the terms of the Plan and Administrative Guidelines
promulgated under it from time to time. In the event of a conflict between this
document and the Plan, the Plan document as well as any determinations made by
the Plan Administrator as authorized by the Plan document, shall govern.
IN WITNESS WHEREOF, the parties have caused this Award to be executed as of the
Grant Date.
Brown-Forman Corporation
By:_______________________
Bruce S. Cote
Vice President,
Director HR Employee Services
Exhibit 10(h)
BROWN-FORMAN 2004 OMNIBUS COMPENSATION PLAN
EMPLOYEE NONQUALIFIED STOCK OPTION AWARD
Capitalized terms used below have the definitions assigned to them in
the Brown-Forman 2004 Omnibus Compensation Plan, effective July 22, 2004
(the "Plan"), or as defined herein.
SUMMARY
Optionee: [Name]
Grant Date: [Date]
First Exercise Date [Date]
Expiration Date [Date]
Option Shares [Number]
Class of Shares Brown-Forman Corporation Class B Common
Option Price per Share $[Price]
THIS AWARD, effective as of the Grant Date set out above, represents the grant
of a nonqualified stock option by Brown-Forman Corporation, a Delaware
corporation (the "Company") to the Optionee named above, who is an employee of
the Company or one or more of its subsidiaries, pursuant to the Plan.
1. Grant of Option. The Company hereby grants to the Optionee an option (the
"Option") to purchase, subject to the terms and conditions set out within this
Award and to the terms of the Plan, the number of Option Shares shown above, of
the Class of Shares shown above, at the Option Price per Share shown above. The
Option Price is the Fair Market Value of a Share on the Grant Date.
2. Term. The term of this Award is for a period of ten years from the first day
of the fiscal year of grant. To exercise the option, the Optionee must remain
continuously employed by the Company for at least three years, except as
provided in Section 3 below. Assuming continuous employment, the Option will
become exercisable on the First Exercise Date shown above, and it must be
exercised before the close of business on the Expiration Date shown above.
Options may be exercised in whole or in part, but not for fewer than 500 shares
at any one time, unless fewer than 500 shares then remain subject to the Option
and the Option is then being exercised as to all such remaining shares.
3. Termination of Employment. In the event the Optionee does not remain
continuously employed by the Company during the term of the Option, the
following rules will apply:
A) Retirement. Retirement means termination of employment on or after reaching
age 55 with at least 5 full years of service, or on or after reaching age 65
with any service. If the Optionee terminates employment by reason of Retirement,
the Option will continue in force until the earlier of (a) the Expiration Date;
or (b) the end of seven years following the date of retirement. Retirement does
not affect the First Exercise Date.
B) Death. If the Optionee dies, the Option will immediately become exercisable
(if not already exercisable) but the Option must be exercised by the earlier of
(a) the Expiration Date or (b) the end of five years following the date of
death. Exercisable options may be exercised by the person(s) named as the
Optionee's beneficiary (ies), or, if the Optionee has not named one or more
beneficiaries, by whoever has acquired the Optionee's rights by will or by the
laws of descent and distribution.
C) Termination for Cause. Options granted to an Optionee who is terminated for
cause expire immediately at as of the date and time that the Optionee is
notified of the termination and may not be exercised.
D) Voluntary Termination. Options granted to an Optionee who terminates
employment voluntarily will continue in force until the earlier of (a) the
Expiration Date or (b) the end of thirty days following the date of termination.
Voluntary Termination does not affect the First Exercise Date.
E) Termination for any Other Reasons. If the Optionee's employment terminates
for any reason other than those set out in items A through D immediately above,
and in the absence of any action by the Plan Administrator, the option shall
expire immediately as of the time and date of termination, and may not be
exercised. However, the Plan Administrator, in its sole discretion, based on the
facts and circumstances of such termination, may accelerate the First Exercise
Date of all or any portion of the option, and/or may delay the expiration of all
or any portion of the option to any date not later than the Expiration Date.
4. Change in Control or Potential Change in Control. In the event of a Change in
Control or Potential Change in Control of the Company, as defined in the Plan,
the First Exercise Date and the Optionee's rights with respect to this Option
shall be governed by the terms of Article 11 of the Plan.
5. Rights as a Stockholder. The Optionee has no rights as a stockholder
(including, but not limited to, the right to receive dividends or dividend
equivalents, or to vote on shareholder issues) with respect to Shares
potentially available upon the exercise of unexercised options. Stockholder
rights accrue only to holders of Shares issued and delivered pursuant to an
Option exercise.
6. Restrictions on Transfer. This Option may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, this Option shall be exercisable
during the Optionee's lifetime only by the Optionee or the Optionee's duly
appointed legal representative.
7. Recapitalization. If there is any change in the Company's Shares through the
declaration of stock dividends or through recapitalization resulting in stock
splits or through merger, consolidation, exchange of Shares, or otherwise, the
Plan Administrator may adjust the number and class of Shares subject to this
Option, as well as the Option Price, to prevent dilution or enlargement of
rights.
8. How to Exercise Option. This Option may be exercised by delivery of written
notice in a prescribed form to the Company at its executive offices, addressed
to the attention of the Compensation Department in Louisville, Kentucky. Such
notice: (a) shall be signed by the Optionee or his legal representative; (b)
shall specify the number of full Shares then elected to be purchased with
respect to the Option; (c) shall covenant that all Shares acquired shall be sold
or transferred in compliance with all applicable securities laws; and (d) shall
be accompanied by payment in full of the Option Price of the Shares to be
purchased.
The Option Price upon exercise of this Option shall be payable to the Company in
full either: (a) in cash or its equivalent (such equivalence being at the sole
discretion of the Plan Administrator); or (b) by tendering previously acquired
shares having an aggregate Fair Market Value at the time of exercise equal to
the total Option Price (provided that the Shares which are tendered must have
been held by the Optionee for at least six months prior to their tender); or (c)
by a combination of (a) and (b). Subject to approval by the Plan Administrator,
in lieu of actually tendering previously acquired shares, the Optionee may
furnish a written attestation in form and substance acceptable to the Plan
Administrator attesting to the Optionee's ownership of the shares he would be
tendering.
The Plan Administrator also may allow the Optionee to exercise pursuant to a
"funded exercise" procedure, as permitted under Federal Reserve Board's
Regulation T, subject to applicable securities law restrictions, or by any other
means which the Plan Administrator, in its sole discretion, determines to be
consistent with the Plan's purpose and applicable law.
As promptly as practicable after the receipt of notice and payment upon
exercise, the Company shall cause to be delivered to the Optionee or his legal
representative, as the case may be, one or more certificates for the Shares so
purchased. The Share certificate(s) shall be issued in the Optionee's name (or,
at the discretion of the Optionee, jointly in the name of the Optionee and the
Optionee's spouse).
9. Beneficiary Designation. The Optionee may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under this Award is to be paid in case of his or her death
before he or she receives any or all of such benefit. Each such designation
shall revoke all prior designations by the Optionee, shall be in a form
prescribed by the Company, and will be effective only when delivered during the
Optionee's lifetime to the Company at its executive offices, addressed to the
attention of the Compensation Department in Louisville, Kentucky.
10. Continuation of Employment. This Award shall not confer upon the Optionee
any right to continued employment by the Company, nor shall this Award interfere
in any way with the Company's right to terminate the Optionee's employment at
any time. A transfer of the Optionee's employment between the Company and any of
its subsidiaries, or between any divisions or subsidiaries of the Company shall
not be deemed a termination of employment.
11. Miscellaneous.
A) This Option Award and the Optionee's right under it are subject to all the
terms and conditions of the Plan, as the same may be amended from time to time,
as well as to such rules as the Plan Administrator may adopt. The Plan
Administrator may impose such restrictions on any Shares acquired pursuant to
the exercise of this Option as it may deem advisable, including, without
limitation, restrictions under applicable Federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws applicable
to such Shares. The Plan Administrator in conjunction with the Company's
compliance officer may designate periods during which options may not be
exercised by employee Optionees.
The Plan Administrator may administer, construe, and make all determinations
necessary or appropriate to the administration of the Plan and this Option
Award, all of which shall be binding upon the Optionee.
B) Subject to the provisions of the Plan, the Board of Directors may terminate,
amend, or modify the Plan; provided, however, that no such termination,
amendment, or modification of the Plan may in any way adversely affect the
Optionee's rights under this Award, without the written consent of the Optionee.
C) The Company may deduct or withhold, or require the Optionee to remit to the
Company, an amount sufficient to satisfy Federal, state, and local taxes
(including the Participant's FICA obligation) required by law to be withheld
with respect to any exercise of the Optionee's rights under this Award.
Subject to the approval of the Plan Administrator, the Optionee may elect to
satisfy the withholding requirement, in whole or in part, by having the Company
withhold Shares having an aggregate Fair Market Value, on the date the tax is to
be determined, equal to the amount required to be withheld. Such elections shall
be irrevocable, shall be in writing, and shall be signed by the Optionee before
the day that the transaction becomes taxable.
D) The Optionee agrees to take all steps necessary to comply with all applicable
Federal and state securities law in exercising his or her rights under this
Award.
E) This Award shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
F) The Company's obligations under the Plan and this Award, with respect to this
Option, shall bind any successor to the Company, whether succession results from
a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.
G) To the extent not preempted by Federal law, this Award shall be governed by,
and construed in accordance with, the laws of the State of Delaware.
H) At all times when IRC Section 162(m) applies, all Awards to Designated
Executive Officers shall comply with its requirements, unless the Plan
Administrator determines that compliance is not desired or necessary for any
Award or Awards. To that end, the Plan Administrator may make such adjustments
it deems appropriate for a specific Award or Awards, except that a
performance-based Award cannot be replaced by a non-performance-based Award if
performance goals are not achieved, nor can the characterization of an Executive
Officer as a Designated Executive Officer, once made, change for a given
Performance Period.
I) This Award is subject to the terms of the Plan and Administrative Guidelines
promulgated under it from time to time. In the event of a conflict between this
document and the Plan, the Plan document as well as any determinations made by
the Plan Administrator as authorized by the Plan document, shall govern.
IN WITNESS WHEREOF, the parties have caused this Award to be executed as of the
Grant Date.
Brown-Forman Corporation
By:_______________________________
Bruce S. Cote
Vice President,
Director HR Employee Services
Exhibit 10(i)
BROWN-FORMAN 2004 OMNIBUS COMPENSATION PLAN
NON-EMPLOYEE DIRECTOR STOCK APPRECIATION RIGHT AWARD
Capitalized terms used below have the definitions assigned to them in
the Brown-Forman 2004 Omnibus Compensation Plan, effective July 22, 2004
(the "Plan"), or as defined herein.
SUMMARY
Participant: [Name]
Grant Date: [Date]
First Exercise Date: [Date]
Expiration Date: [Date]
Number of Shares: [Number]
Class of Shares: Brown-Forman Corporation Class B Common
Grant Price: $[Price]
THIS AWARD, effective as of the Grant Date set out above, represents the grant
of a stock appreciation right by Brown-Forman Corporation, a Delaware
corporation (the "Company") to the Participant named above, who is a
Non-Employee Director of the Company pursuant to the Plan.
1. Grant of Stock Appreciation Right. The Company hereby grants to the
Participant a Stock-settled Stock Appreciation Right (the "SSAR"), subject to
the terms and conditions set out within this Award and to the terms of the Plan.
2. Value of the SSAR. The SSAR shall entitle the Participant, upon exercise of
the SSAR (in whole or in part), to receive from the Company an amount (payable
in the form of Class B Common Shares) determined by multiplying:
A) the appreciated value of one Class B Common Share, calculated as the Fair
Market Value of one Class B Common Share on the date of exercise minus the Grant
Price as shown above; by
B) the number of Class B Common Shares with respect to which the SSAR is
exercised.
3. Term. The term of this Award is for a period of ten years from the first day
of the fiscal year of grant. The SSAR will become exercisable on the First
Exercise Date shown above, and it must be exercised before the close of business
on the Expiration Date shown above.
4. How to Exercise the SSAR. The SSAR may be exercised by delivery of written
notice in a prescribed form to the Company at its executive offices, addressed
to the attention of the Compensation Department in Louisville, Kentucky. Such
notice shall state the Participant's intention to exercise the SSAR and shall
provide the number of Class B Common Shares as to which the SSAR is to be
exercised. Such written notice must be signed by the Participant or his or her
legal representative. SSAR's may be exercised in whole or in part, but not for
fewer than 500 shares at any one time, unless the SSAR being exercised has less
than 500 remaining shares.
As soon as practicable after the receipt of the Participant's written notice to
exercise the SSAR (in whole or in part), the Company shall cause to be delivered
to the Participant or his or her legal representative, as the case may be, one
or more certificates for the Class B Common Shares due to the Participant upon
exercise. The Class B Common Share certificate(s) shall be issued in the
Participant's name (or, at the discretion of the Participant, jointly in the
name of the Participant and the Participant's spouse).
5. Form of Payment. The Company shall satisfy its obligation upon the
Participant's exercise of the SSAR (in whole or in part) in Class B Common
Shares based upon the Fair Market Value or the Company's Class B Common Shares
on the date of exercise, as determined by the Plan Administrator in its sole
discretion. Notwithstanding the foregoing, no fractional Share shall be
distributed in settlement of the SSAR and any portion of the SSAR which would be
settled in a fractional Share shall be rounded up to a whole Share with no
additional payment to be made in cash except as otherwise permitted by the
Internal Revenue Service under an exemption from the application of IRC Section
409A.
6. Termination of Service. In the event the Participant does not remain a
Non-Employee Director of the Company during the term of the SSAR, the following
rules will apply:
A) Voluntary Retirement. If the Board Service of the Participant terminates by
reason of Voluntary Retirement from Board Service, the SSAR will continue in
force until the earlier of (a) the Expiration Date; or (b) the end of seven
years following the date of Retirement.
B) Death. If the Participant dies, the SSAR must be exercised by the earlier of
(a) the Expiration Date or (b) the end of five years following the date of
death. An exercisable SSAR shall be exercised by the person(s) named as the
Participant's beneficiary(ies), or, if the Participant has not named one or more
beneficiaries, by whoever has acquired the Participant's rights by will or by
the laws of descent and distribution.
C) Termination for any Other Reasons. If the Participant's service terminates
for any reason other than those set out in items A through B immediately above,
and in the absence of any action by the Plan Administrator, the SSAR shall
expire immediately as of the time and date of termination, and may not be
exercised. However, the Plan Administrator, in its sole discretion, based on the
facts and circumstances of such termination, may delay the expiration of all or
any portion of the SSAR to any date not later than the Expiration Date.
7. Change in Control or Potential Change in Control. In the event of a Change in
Control or Potential Change in Control of the Company, as defined in the Plan,
the First Exercise Date and the Participant's rights with respect to the SSAR
shall be governed by the terms of Article 11 of the Plan.
8. Rights as a Shareholder. The Participant has no rights as a shareholder
(including, but not limited to, the right to receive dividends or dividend
equivalents, or to vote on shareholder issues) with respect to Shares
potentially available upon exercise of the SSAR. Shareholder rights accrue only
to holders of Shares issued and delivered pursuant to exercise of the SSAR.
9. Restrictions on Transfer. The SSAR may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, the SSAR shall be exercisable during
the Participant's lifetime only by the Participant or the Participant's duly
appointed legal representative.
10. Recapitalization. If there is any change in the Company's Shares through the
declaration of Share dividends or through recapitalization resulting in Share
splits or through merger, consolidation, exchange of Shares, or otherwise, the
Plan Administrator may adjust the number and class of Shares subject to the
SSAR, as well as the Grant Price, to prevent dilution or enlargement of rights.
11. Beneficiary Designation. The Participant may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under this Award is to be paid in case of his or her death
before he or she receives any or all of such benefit. Each such designation
shall revoke all prior designations by the Participant, shall be in a form
prescribed by the Company, and will be effective only when delivered during the
Participant's lifetime to the Company at its executive offices, addressed to the
attention of the Compensation Department in Louisville, Kentucky.
12. Continuation of Service. This Award shall not confer upon the Participant
any right to continued service as a director of the Company, nor shall this
Award interfere in any way with the Company's right to terminate the
Participant's service at any time.
13. Tax Consequences. By accepting the SSAR, the Participant acknowledges that
(i) he or she understands that upon either the grant or the exercise of the
SSAR, he or she may recognize adverse tax consequences, and (ii) he or she
understands that the Company may deduct or withhold, or require the Participant
to remit to the Company, an amount of Class B Common Shares sufficient to
satisfy Federal, state, and local taxes (including the Participant's FICA
obligation) required by law to be withheld with respect to any exercise of the
Participant's rights under this Award. You are encouraged to consult with a
qualified tax advisor concerning the SSAR. In addition, the Participant agrees
that the SSAR shall be administered and settled as required for the SSAR to be
deemed not to be deferred compensation subject to the provisions of IRC Section
409A as provided in Internal Revenue Service Notice 2005-1.
14. Miscellaneous.
A) This Award and the Participant's rights under it are subject to all the terms
and conditions of the Plan, as the same may be amended from time to time, as
well as to such rules as the Plan Administrator may adopt. The Plan
Administrator may impose such restrictions on any Shares acquired pursuant to
the exercise of the SSAR as it may deem advisable, including, without
limitation, restrictions under applicable Federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws applicable
to such Shares. The Plan Administrator in conjunction with the Company's
compliance officer may designate periods during which the SSAR may not be
exercised by Participants.
The Plan Administrator may, in its sole discretion, administer, construe, and
make all determinations necessary or appropriate to the administration of the
Plan and the SSAR, all of which shall be binding upon the Participant.
B) Subject to the provisions of the Plan, the Board of Directors may terminate,
amend, or modify the Plan; provided, however, that no such termination,
amendment, or modification of the Plan may in any way adversely affect the
Participant's rights under this Award, without the written consent of the
Participant.
C) The Participant agrees to take all steps necessary to comply with all
applicable Federal and state securities law in exercising his or her rights
under this Award.
D) This Award shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
E) The Company's obligations under the Plan and this Award, with respect to the
SSAR, shall bind any successor to the Company, whether succession results from a
direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.
F) To the extent not preempted by Federal law, this Award shall be governed by,
and construed in accordance with, the laws of the State of Delaware.
G) At all times when IRC Section 162(m) applies, all Awards to Designated
Executive Officers shall comply with its requirements, unless the Plan
Administrator determines that compliance is not desired or necessary for any
Award or Awards. To that end, the Plan Administrator may make such adjustments
it deems appropriate for a specific Award or Awards, except that a
performance-based Award cannot be replaced by a non-performance-based Award if
performance goals are not achieved, nor can the characterization of an Executive
Officer as a Designated Executive Officer, once made, change for a given
Performance Period.
H) This Award is subject to the terms of the Plan and Administrative Guidelines
promulgated under it from time to time. In the event of a conflict between this
document and the Plan, the Plan document as well as any determinations made by
the Plan Administrator as authorized by the Plan document, shall govern.
IN WITNESS WHEREOF, the parties have caused this Award to be executed as of the
Grant Date.
Brown-Forman Corporation
By:_______________________
Bruce S. Cote
Vice President,
Director HR Employee Services
Exhibit 10(j)
BROWN-FORMAN 2004 OMNIBUS COMPENSATION PLAN
NON-EMPLOYEE DIRECTOR'S NONQUALIFIED STOCK OPTION AWARD
Capitalized terms used below have the definitions assigned to them in
the Brown-Forman 2004 Omnibus Compensation Plan effective July 22, 2004
(the "Plan"), or as defined herein.
SUMMARY
Optionee: [Name]
Grant Date: [Date]
First Exercise Date [Date]
Expiration Date [Date]
Option Shares [Number]
Class of Shares Brown-Forman Corporation Class B Common
Option Price per Share $[Price]
THIS AWARD, effective as of the Grant Date set out above, represents the grant
of a nonqualified stock option by Brown-Forman Corporation, a Delaware
corporation (the "Company") to the Optionee named above, who is a Non-Employee
Director of the Company pursuant to the Plan.
1. Grant of Option. The Company hereby grants to the Optionee an option (the
"Option") to purchase, subject to the terms and conditions set out within this
Award and to the terms of the Plan, the number of Option Shares shown above, of
the Class of Shares shown above, at the Option Price per Share shown above. The
Option Price is the Fair Market Value of a Share on the Grant Date.
2. Term. The term of this Award is for a period of ten years from the first day
of the fiscal year of grant. The Option is immediately exercisable following the
Grant Date shown above, and it must be exercised before the earlier of the close
of business on the Expiration Date shown above or the applicable date (if any)
set forth in section 3 below. Options may be exercised in whole or in part, but
not for less than 500 shares at any one time, unless fewer than 500 shares then
remain subject to the Option and the Option is then being exercised as to all
such remaining shares.
3. Termination of Service. In the event the Optionee does not remain a
Non-Employee Director of the Company during the term of the Option, the
following rules will apply:
A) Voluntary Retirement. If the Board Service of the Optionee terminates by
reason of his or her Voluntary Retirement from board service, the Option will
continue in force until the earlier of (a) the Expiration Date; or (b) the end
of seven years following the date of such termination.
B) Death. If the Optionee dies, the Option must be exercised by the earlier of
(a) the Expiration Date; or (b) the end of five years following the date of
death. The Option may be exercised by the person(s) named as the Optionee's
beneficiary(ies), or, if the Optionee has not named one or more beneficiaries,
by whoever has acquired the Optionee's rights by will or by the laws of descent
and distribution.
C) Termination for any Other Reasons. If the Optionee's Board Service terminates
for any reason other than those set out in items A through B immediately above,
and in the absence of any action by the Plan Administrator, the option shall
expire immediately as of the date of termination, and may not be exercised after
that date. However, the Plan Administrator, in its sole discretion, based on the
facts and circumstances of such termination, may delay the expiration of all or
any portion of the option to any date not later than the Expiration Date.
4. Change in Control. In the event of a Change in Control of the Company, the
Optionee's right to exercise this option shall immediately become 100% vested as
of the date that the definition of Change in Control has been fulfilled, and
shall remain exercisable until the Expiration Date.
The Plan Administrator, with the approval of the Board, may modify the Option
before the effective date of the Change in Control, but no modification may
adversely affect the Optionee's rights under this Award without the written
consent of the Optionee.
5. Rights as a Stockholder. The Optionee has no rights as a stockholder
(including, but not limited to, the right to receive dividends or dividend
equivalents, or to vote on shareholder issues) with respect to Shares
potentially available upon the exercise of unexercised options. Stockholder
rights accrue only to holders of Shares issued and delivered pursuant to an
Option exercise.
6. Restrictions on Transfer. This Option may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, this Option shall be exercisable
during the Optionee's lifetime only by the Optionee or the Optionee's duly
appointed legal representative.
7. Recapitalization. If there is any change in the Company's Shares through the
declaration of stock dividends or through recapitalization resulting in stock
splits or through merger, consolidation, exchange of Shares, or otherwise, the
Plan Administrator may adjust the number and class of Shares subject to this
Option, as well as the Option Price, to prevent dilution or enlargement of
rights.
8. How to Exercise Option. This Option may be exercised by delivery of written
notice in a prescribed form to the Company at its executive offices, addressed
to the attention of the Compensation Department in Louisville, Kentucky. Such
notice: (a) shall be signed by the Optionee or his legal representative; (b)
shall specify the number of full Shares then elected to be purchased with
respect to the Option; (c) shall covenant that all Shares acquired shall be sold
or transferred in compliance with all applicable securities laws; and (d) shall
be accompanied by payment in full of the Option Price of the Shares to be
purchased.
The Option Price upon exercise of this Option shall be payable to the Company in
full either: (a) in cash or its equivalent (such equivalence being at the sole
discretion of the Plan Administrator); or (b) by tendering previously acquired
shares having an aggregate Fair Market Value at the time of exercise equal to
the total Option Price (provided that the Shares which are tendered must have
been held by the Optionee for at least six months prior to their tender); or (c)
by a combination of (a) and (b). Subject to approval by the Plan Administrator,
in lieu of actually tendering previously acquired shares, the Optionee may
furnish a written attestation in form and substance acceptable to the Plan
Administrator attesting to the Optionee's ownership of the shares he or she
would be tendering.
The Plan Administrator may allow the Optionee to exercise pursuant to a "funded
exercise" procedure, as permitted under Federal Reserve Board's Regulation T,
subject to applicable securities law restrictions, or by any other means which
the Plan Administrator, in its sole discretion, determines to be consistent with
the Plan's purpose and applicable law.
As promptly as practicable after the receipt of notice and payment upon
exercise, the Company shall cause to be delivered to the Optionee or his legal
representative, as the case may be, one or more certificates for the Shares so
purchased. The Share certificate(s) shall be issued in the Optionee's name (or,
at the discretion of the Optionee, jointly in the name of the Optionee and the
Optionee's spouse).
9. Beneficiary Designation. The Optionee may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under this Award is to be paid in case of his or her death
before he or she receives any or all of such benefit. Each such designation
shall revoke all prior designations by the Optionee, shall be in a form
prescribed by the Company, and will be effective only when delivered during the
Optionee's lifetime to the Company at its executive offices, addressed to the
attention of the Compensation Department in Louisville, Kentucky.
10. Continuation of Service. This Award shall not confer upon the Optionee any
right to continued service as a director of the Company, nor shall this Award
interfere in any way with the Company's right to terminate the Optionee's
service as a director at any time.
11. Miscellaneous.
A) This Option Award and the Optionee's right under it are subject to all the
terms and conditions of the Plan, as the same may be amended from time to time,
as well as to such rules as the Plan Administrator may adopt. The Plan
Administrator may impose such restrictions on any Shares acquired pursuant to
the exercise of this Option as it may deem advisable, including, without
limitation, restrictions under applicable Federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws applicable
to such Shares.
The Plan Administrator may administer, construe, and make all determinations
necessary or appropriate to the administration of the Plan and this Option
Award, all of which shall be binding upon the Optionee.
B) The Board of Directors may terminate, amend, or modify the Plan; provided,
however, that no such termination, amendment, or modification of the Plan may in
any way adversely affect the Optionee's rights under this Award, without the
written consent of the Optionee.
C) The Company may deduct or withhold, or require the Optionee to remit to the
Company, an amount sufficient to satisfy Federal, state, and local taxes
(including the Participant's FICA obligation) required by law to be withheld
with respect to any exercise of the Optionee's rights under this Award.
Subject to the approval of the Plan Administrator, the Optionee may elect to
satisfy the withholding requirement, in whole or in part, by having the Company
withhold Shares having an aggregate Fair Market Value, on the date the tax is to
be determined, equal to the amount required to be withheld. Such elections shall
be irrevocable, shall be in writing, and shall be signed by the Optionee before
the day that the transaction becomes taxable.
D) The Optionee agrees to take all steps necessary to comply with all applicable
Federal and state securities law in exercising his or her rights under this
Award.
E) This Award shall be subject to all applicable laws, rules, and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
F) The Company's obligations under the Plan and this Award, with respect to this
Option, shall bind any successor to the Company, whether succession results from
a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.
G) To the extent not preempted by Federal law, this Award shall be governed by,
and construed in accordance with, the laws of the State of Delaware.
(H) This Award is subject to the terms of the Plan and Administrative Guidelines
promulgated under it from time to time. In the event of a conflict between this
document and the Plan, the Plan document as well as any determinations made by
the Plan Administrator as authorized by the Plan document, shall govern.
IN WITNESS WHEREOF, the Company has caused this Award to be executed as of the
Grant Date.
Brown-Forman Corporation
By:_______________________________
Bruce S. Cote
Vice President
Director HR Employee Services
Exhibit 10(k)
Summary of Director and Named Executive Officer Compensation
DIRECTOR COMPENSATION
Directors who are employees of Brown-Forman do not receive additional
compensation for serving as directors. The following sets forth a summary of
compensation for non-employee directors.
1. Annual Retainer:
(a) $27,500 in cash, payable in six installments over the course of the board
service year. Directors may elect in advance of their board service year
to receive stock options in lieu of cash payments for all or part of
their retainer.
(b) $25,000 in the Black-Scholes value of stock options on Class B Common
Stock.
2. Board Meeting Fee: $4,000 per meeting attended in person. $2,000 for
telephonic participation.
3. Committee Meeting Fee: $3,500 per meeting attended in person. $2,000 for
telephonic participation.
4. Additional Committee Chairman Meeting Fee: $3,000 for personal attendance.
$1,000 for telephonic participation.
5. Audit Committee Chairman Review: $2,500 per quarterly review with outside
auditors conducted independently of Audit Committee Meeting.
6. International Travel Supplement: $3,000 per meeting, for directors who travel
directly from (and immediately back to) an overseas location for a meeting.
7. Expense reimbursement: Directors are reimbursed for their reasonable and
necessary expenses incurred in connection with attending Board and Committee
meetings. The product promotion allowance for outside directors is $2,000 per
year. Directors are also covered under the company's Travel Accident
Insurance and D & O Liability insurance programs.
In May, 2005, Mr. Patrick Bousquet-Chavanne joined the Board for the months of
May, June and July, which is the final one-fourth of the Board Service Year.
Accordingly, he was granted one-fourth of the cash and stock option retainer
shown above, and will receive meeting fees as shown above for all meetings
attended from May 2005 forward.
NAMED EXECUTIVE OFFICER COMPENSATION
The following table sets forth the current annualized base salaries of
Brown-Forman's named executive officers. All of Brown-Forman's executive
officers are at-will employees. Base salary increases are determined annually by
the Compensation Committee of the Board of Directors and become effective on
August 1 of each year:
Owsley Brown II $990,000
Paul C. Varga $645,833
Phoebe A. Wood $522,003
James L. Bareuther $475,000
Michael B. Crutcher $455,000
[Note: The amounts shown above are current monthly salary as of June 30, 2005
converted to an annual equivalent. These amounts differ slightly from actual
salary received during fiscal 2005 as shown in the 2005 proxy statement.]
Cash Bonuses are awarded each year based on short-term (one-year) and long-term
(three-year) performance against goals set in the first 90 days of each
performance period. Goals may be based on operating income, Business Value Added
(after-tax operating income less a capital charge), or other metrics allowed by
the 2004 Omnibus Compensation Plan approved by shareholders in July 2004 (or its
predecessor plan for older long-term performance periods). The actual
performance against those goals results in an adjustment to the target award
opportunity for short-term and long-term cash bonus that was set within the
first 90 days of the performance period for each Executive Officer.
On May 26, 2005, after considering management's presentation and recommendations
based on the performance of the corporation and its two business segments as
well as all other matters and information deemed appropriate, the Compensation
Committee of the Board of Directors approved the following bonus payments for
the short-term and long-term performance periods that ended concurrent with the
close of the fiscal year, April 30, 2005:
Amount of
Named Amount of F2005 F2003-F2005
Executive Officer Title Short-Term Bonus Long-Term Bonus
Owsley Brown II Chairman of the Board and CEO $1,750,000 $1,129,490
Paul C. Varga President and CEO, Brown-Forman $ 800,000 $ 362,168
Beverages
Phoebe A. Wood EVP and Chief Financial Officer $ 460,000 $ 511,146
James L. Bareuther EVP and COO, Brown-Forman Beverages $ 440,000 $ 692,572
Michael B. Crutcher Vice-Chair, General Counsel and $ 460,000 $ 632,799
Secretary
Exhibit 13
FINANCIAL HIGHLIGHTS
(Expressed in millions, except per share amounts and ratios)
- --------------------------------------------------------------------------------
Year Ended April 30, 2004 2005 % Change
- --------------------------------------------------------------------------------
Net Sales $2,577 $2,729 6%
Gross Profit $1,298 $1,400 8%
Operating Income $ 400 $ 418 4%
Net Income $ 254 $ 308 21%
Earnings Per Share
- Basic $ 2.09 $ 2.53 21%
- Diluted $ 2.08 $ 2.52 21%
Cash Dividends Per Common Share $ 0.80 $ 0.92 14%
Return on Average Invested Capital 15.5% 17.4%
Return on Average Common Stockholders' Equity 27.1% 25.7%
Gross Margin 50.4% 51.3%
Operating Margin 15.5% 15.3%
QUARTERLY FINANCIAL INFORMATION
(Expressed in millions, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Market Price
Per Common Share Per Common Share
---------------- ----------------
Net Gross Net Basic Diluted Class A Class B
Sales Profit Income EPS EPS Declared Paid High Low High Low
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 2005 $2,729 $1,400 $308 $2.53 $2.52 $0.915 $0.915 $56.65 $44.20 $55.96 $42.80
Quarters
First 578 298 51 0.42 0.42 0.425 0.213 49.75 46.34 49.60 45.53
Second 780 401 101 0.83 0.83 0.000 0.213 50.11 44.20 50.00 42.80
Third 758 375 95 0.78 0.78 0.490 0.245 51.88 46.20 50.09 44.90
Fourth 613 326 61 0.50 0.49 0.000 0.245 56.65 50.68 55.96 48.13
Fiscal 2004 $2,577 $1,298 $254 $2.09 $2.08 $0.800 $0.800 $52.25 $38.25 $50.00 $37.55
Quarters
First 532 271 30 0.25 0.25 0.375 0.188 42.20 38.25 41.43 37.55
Second 724 364 87 0.72 0.72 0.000 0.188 43.63 39.13 42.75 38.25
Third 696 344 80 0.65 0.65 0.425 0.213 50.60 43.00 47.90 42.00
Fourth 625 319 57 0.47 0.46 0.000 0.213 52.25 48.75 50.00 45.92
Amounts have been restated to reflect the retroactive adoption of
FASB Statement No. 123(R), "Share-Based Payment."
Compound Annual Growth in Total Shareholder Return
(As of April 30, 2005 and assuming dividend reinvestment)
Brown-Forman S&P 500
(Class B) Index
------- -------
One year ended April 30, 2005 +21% +6%
Five years ended April 30, 2005 +18% (3%)
Ten years ended April 30, 2005 +15% +10%
Fifteen years ended April 30, 2005 +15% +11%
CONTENTS
Page
Selected Financial Data 26
Management's Discussion and Analysis 27
Consolidated Statement of Income 39
Consolidated Balance Sheet 40
Consolidated Statement of Cash Flows 41
Consolidated Statement of Stockholders' Equity 42
Notes to Consolidated Financial Statements 43
Reports of Management 54
Report of Independent Registered Public Accounting Firm 55
Important Information On Forward-Looking Statements 58
25
SELECTED FINANCIAL DATA
(Expressed in millions, except per share amounts and ratios)
Year Ended April 30,
Operations 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
- ---------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Sales $1,801 1,831 1,915 2,020 2,146 2,194 2,223 2,376 2,577 2,729
Gross Profit $ 862 884 956 1,019 1,104 1,152 1,132 1,180 1,298 1,400
Operating Income $ 274 287 305 320 344 368 347 372 400 418
Net Income $ 160 169 184 200 216 230 224 242 254 308
Weighted Average Shares used to
calculate Earnings Per Share
- - Basic 138.0 138.0 137.9 137.2 137.0 137.0 136.7 134.7 121.4 121.7
- - Diluted 138.0 138.0 138.0 137.4 137.2 137.1 137.0 135.1 122.0 122.5
Earnings Per Share
- Basic $ 1.15 1.22 1.33 1.46 1.57 1.68 1.64 1.79 2.09 2.53
- Diluted $ 1.15 1.22 1.33 1.45 1.57 1.68 1.64 1.79 2.08 2.52
Cash Dividends Declared
Per Common Share $ 0.51 0.53 0.55 0.58 0.61 0.64 0.68 0.73 0.80 0.92
Invested Capital
- ----------------
Average Invested Capital $ 875 929 948 1,050 1,240 1,361 1,476 1,606 1,728 1,844
Average Common
Stockholders' Equity $ 578 671 757 855 976 1,111 1,241 1,290 936 1,198
Total Assets at April 30 $1,381 1,428 1,494 1,735 1,802 1,939 2,016 2,264 2,376 2,624
Long-Term Debt at April 30 $ 211 63 50 53 41 40 40 669 630 352
Total Debt at April 30 $ 267 225 164 297 267 244 207 836 680 631
Other Key Measures
- ------------------
Cash Flow from Operations $ 167 176 220 213 241 232 249 243 304 396
Gross Margin 47.9% 48.3% 49.9% 50.5% 51.4% 52.5% 50.9% 49.7% 50.4% 51.3%
Operating Margin 15.2% 15.7% 15.9% 15.8% 16.0% 16.8% 15.6% 15.7% 15.5% 15.3%
Effective Tax Rate 37.8% 38.0% 37.6% 36.5% 36.4% 36.3% 34.4% 34.1% 33.4% 35.3%
Return on Average
Invested Capital 19.7% 19.3% 20.3% 19.7% 18.1% 17.6% 15.6% 15.4% 15.5% 17.4%
Return on Average Common
Stockholders' Equity 27.5% 25.2% 24.2% 23.4% 22.1% 20.7% 18.1% 18.7% 27.1% 25.7%
Total Debt to Total Capital 29.6% 23.6% 16.7% 24.4% 20.2% 17.0% 13.6% 49.6% 38.3% 32.5%
Dividend Payout Ratio 44.2% 43.5% 41.5% 39.5% 38.5% 38.1% 41.4% 41.1% 38.2% 36.1%
Notes:
1. Includes the consolidated results of Sonoma-Cutrer Vineyards, Finlandia
Vodka Worldwide, and Tuoni e Canepa since their acquisitions in April 1999,
December 2002, and February 2003, respectively.
2. Weighted average shares, earnings per share, and cash dividends declared
per common share have been adjusted for a 2-for-1 common stock split in
January 2004.
3. We define Return on Average Invested Capital 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.
4. We define Return on Average Common Stockholders' Equity as income applicable
to common stock divided by average common stockholders' equity.
5. We define Total Debt to Total Capital as total debt divided by the sum of
total debt and stockholders' equity.
6. We define Dividend Payout Ratio as cash dividends divided by net income.
7. Prior year amounts, beginning in 1997 (the year we started granting stock
options) have been restated to reflect the retroactive adoption of FASB
Statement No. 123(R), "Share-Based Payment," during fiscal 2005.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
In the discussion below, we review Brown-Forman's consolidated financial
condition and results of operations for the fiscal years ended April 30, 2003,
2004, and 2005. We also make statements relating to our anticipated financial
performance and other forward-looking statements and discuss factors that may
affect the company's future financial condition and performance. We have
prepared a non-exclusive list of risk factors that could cause actual results to
differ materially from our anticipated results. Please read this Management's
Discussion and Analysis section in conjunction with our consolidated financial
statements for the year ended April 30, 2005, the related notes, and the
important information regarding forward-looking statements on page 58.
In December 2004, the Financial Accounting Standards Board issued Statement No.
123(R), "Share-Based Payment" ("SFAS 123(R)"), which requires companies to
expense the fair value of stock options and other forms of stock-based
compensation. We adopted SFAS 123(R) during the fourth quarter of fiscal 2005 by
retroactively adjusting our financial statements for all periods since fiscal
1997, when we first began granting stock options. Prior year amounts presented
in this Management's Discussion and Analysis section have also been restated to
reflect the adoption of SFAS 123(R).
EXECUTIVE OVERVIEW
Brown-Forman Corporation is a diversified producer and marketer of fine quality
consumer products. Our company consists of two business segments: Beverages and
Consumer Durables. In fiscal 2005, the Beverages segment generated approximately
98% of the company's total operating income and Consumer Durables generated the
remaining 2%, excluding the effect of the latter segment's $37 million charge
for impaired goodwill.
Beverages Segment
Our Beverages segment includes various categories of beverage alcohol products,
such as Tennessee, Canadian, and Kentucky whiskies; Kentucky bourbon; California
sparkling wine; tequila; table wine; liqueurs; vodka; rum; and ready-to-drink
products, most of which are marketed and sold on a global basis. The segment's
largest and most important market is the United States, where approximately 60%
of its net sales are generated. While sales in the U.S. grew a modest 3% in
fiscal 2005 and remain a significant percentage of overall beverage revenues,
they have declined from approximately 64% a year ago, reflecting impressive
international growth in fiscal 2005. Europe, the segment's second most important
geography, posted net sales growth of 24% in fiscal 2005 and now represents
approximately 29% of the segment's total net sales. The rest of the world,
representing 11% of the segment's net sales, registered 20% growth in fiscal
2005.
Beverages Fiscal 2005 Net Sales By Geography:
United States 60%
Europe 29%
Rest of the World 11%
Consumer demand for premium and super-premium brands in the U.S. continued to
expand this past year, and our brands' performance reflected that trend.
Favorable demographic trends and growing consumer interest in spirits-based
cocktails are key factors helping to create the encouraging environment for
premium spirits brands in the U.S. The large international brewers have
acknowledged a loss in market share over the last few years to wine and spirits
brands, particularly in the all-important on-premise segment. While we
anticipate that this positive environment will continue in the U.S., we
recognize that consumer preferences can change very quickly, and are prepared to
respond if these favorable industry dynamics do not continue.
27
International expansion of our beverage brands has provided much of the growth
for the company over the past decade. The most important export markets for our
beverages are the United Kingdom, Germany, Spain, Italy, Australia, France,
South Africa, Canada, Japan, and China. As we grow our business outside of the
United States, our reported financial results are increasingly affected by
changing foreign exchange rates -- in terms of both revenue from goods sold in
local currencies and the costs of goods and services purchased in local
currencies. On a net basis, the company sells more in local currency than it
purchases, thus exposing financial results to the negative impact of a
strengthening U.S. dollar. To mitigate this, we regularly purchase short-term
foreign currency forward and option contracts. However, over the long term,
reported profits from this segment could be adversely affected if the U.S.
dollar strengthens against other currencies.
The segment's most important category consists of premium global brands,
including Jack Daniel's, Southern Comfort, and Finlandia. This category grew net
sales 13% in fiscal 2005 and represented approximately two-thirds of the
segment's total sales.
Beverages Fiscal 2005 Net Sales by Category:
Premium Global 68%
Mid-Priced Regional 27%
Super-Premium Developing 5%
Jack Daniel's Tennessee Whiskey remains the most important brand within the
Beverages segment and our premium global category, and is one of the largest and
most profitable spirits brands in the world. Global volume growth for Jack
Daniel's accelerated in fiscal 2005 to 9%, the strongest growth rate registered
for the brand in over two decades. In the U.S., where approximately 55% of Jack
Daniel's cases are sold, consumer demand continued to expand in fiscal 2005.
Increased levels of advertising and promotional support, the healthy environment
for premium spirits domestically, and the brand's overall positioning have
combined to provide impressive growth in volumes and profits. A significant
percentage of our company's total earnings are derived from the brand. Jack
Daniel's sustainability and growth is vital to the company's overall performance
and it will remain our major focus for the foreseeable future. A significant
decline in volume or selling price for the brand would have a material negative
impact on our overall earnings.
Southern Comfort, the second most important brand in our Beverages segment,
delivered strong volume and profit growth in fiscal 2005. The brand's two
largest markets, the U.S. and U.K., both performed well, and trends improved in
fiscal 2005 in many of the brand's other international markets.
During the year, we completed the acquisition of the remaining 20% equity
interest of Finlandia Vodka Worldwide, Ltd. In contrast to Jack Daniel's and
Southern Comfort, the vast majority of Finlandia cases are sold outside of the
U.S., where volumes grew at a high single-digit rate in fiscal 2005. This
brand's performance is expected to be an important contributor to the long-term
growth of our Beverages segment.
The segment's super-premium developing category, representing 5% of Beverages
net sales, consists of a portfolio of high-margin brands that we believe have
significant growth opportunities around the world. Consumer demand for
super-premium beverage brands has outpaced that for premium and mid-priced
brands in recent years. Sonoma-Cutrer Chardonnay, Tuaca liqueur, and Woodford
Reserve bourbon all posted solid double-digit volume growth at attractive
margins in fiscal 2005. We believe the brands in this category will emerge as
meaningful contributors to the segment's profits in the years ahead.
Most of the brands comprising the segment's mid-priced regional category, which
represents approximately 27% of Beverages net sales, continue to struggle. Our
large off-premise driven category leaders, such as Canadian Mist, Early Times,
Bolla, and Fetzer, are particularly susceptible to the heightened price
competition and discounting that has occurred in their respective categories. In
addition, we have not significantly benefited from recent lower domestic grapes
costs because of our long-term grape purchase commitments. It will be at least
two more harvests before we begin to realize meaningful savings from lower-cost
grapes for our largest wine brand, Fetzer. We continue to test different
combinations of price support, advertising, and promotional spending behind
these mid-priced regional brands and are encouraged by these early results. But
we recognize that delivering growth from this category of brands will require
patience and creativity.
The global distribution landscape for our beverage brands has continued to
evolve. Our company employs a variety of distribution models around the world,
and our preference for a particular arrangement or partnership depends on
several factors, including the company's appraisal of a market's long-term
competitive dynamics and the stage of development of our portfolio in a market.
In several parts of the world, the company owns and operates its own
distribution network, while in many others, including the U.S., we use third
parties to distribute our portfolio of beverage brands. During fiscal 2005, we
entered into a number of new distribution arrangements around the world,
including Russia, Canada, Brazil, U.S., and many markets in Continental Europe,
to improve brand building by choosing the most effective distribution
arrangement in each market.
28
Consumer Durables
Our Consumer Durables segment includes tabletop, collectibles, and luggage
products marketed under the Lenox, Dansk, Gorham, Kirk Stieff, and Hartmann
brand names. Sales in our fine china business rely on three primary channels:
department and specialty stores; company-owned retail outlet stores; and
direct-to-the-consumer through catalogs, direct mail, and the Internet. The
financial results from this segment have been disappointing over the past
several years, reflecting weakness throughout the U.S. tabletop and giftware
industry. Consumer demand for the products sold by this segment has changed
significantly in recent years as a result of more casual lifestyles and industry
consolidation, which has reduced the number of traditional department stores
selling our product. The sluggish economy has hurt sales, as purchases of fine
china are discretionary and can be deferred in uncertain economic times. In
addition, much of the segment's growth in the 1990's was led by the
direct-to-consumer division, Lenox Collections. Unfortunately, this channel,
which has the highest profit margins in the segment, has weakened considerably
over the past two years. Despite the difficult environment for this segment, we
continued to expand into new wholesale channels of distribution, particularly
home-specialty stores, and we benefited from new product introductions such as
the "kate spade" tabletop line during fiscal 2005. Our management team continues
to implement specific actions aimed at increasing cash flow by reducing fixed
costs, increasing production efficiencies, and closing unprofitable retail
locations. Because of these initiatives, in fiscal 2005, the segment contributed
an incremental $50 million to the company's net cash flow.
However, as a result of difficulties experienced within this segment, combined
with our desire to focus our resources on opportunities for our beverage
business, in February 2005 we announced that we were exploring strategic
alternatives for Lenox, Inc., including a possible sale. (Lenox, Inc. represents
the major part of the Consumer Durables segment.) We expect to conclude this
study this summer.
Outlook
We are optimistic about the earnings outlook for fiscal 2006, due to the
favorable environment for premium spirits, the many opportunities we see to
leverage our fine portfolio of brands, and the talents of some of the best brand
builders in the business. We currently expect fiscal 2006 earnings to be $2.70
to $2.80 per share. Excluding the net impact of the Glenmorangie gain (see Note
17 on page 53) and asset impairment charges from fiscal 2005 (net positive
effect of $0.06 per share), earnings per share are projected to grow 10-14%.
CONSOLIDATED SUMMARY OF OPERATING PERFORMANCE
Fiscal 2005 Compared to Fiscal 2004
Consolidated net sales reached record levels in fiscal 2005, growing 6%, or $152
million, to over $2.7 billion. This sales growth reflects acceleration in demand
for our premium spirits brands around the world and the benefits of a weaker
U.S. dollar. Beverages sales increased 10%, driven by favorable currency trends
and volume growth and price increases for our premium global spirits brands.
Sales of our Consumer Durables segment declined 9%, driven by the weak
environment in the U.S. tabletop and giftware industry, as consumer demand
dropped across all three channels of distribution -- wholesale, retail, and
direct-to-consumer.
Consolidated international sales of $729 million (net of excise taxes of $178
million) rose 16% in fiscal 2005, reflecting the strengthening of foreign
currencies against the U.S. dollar and higher volumes of Jack Daniel's, Southern
Comfort, and Finlandia. Sales in the United States, representing 68% of our
revenues (excluding excise taxes) were flat. Growth for our large premium global
spirits brands and smaller, super-premium developing brands, both of which
benefited from the favorable demographic trends and an increase in market share
for spirits, was offset by declines in sales for Consumer Durables and several
of our mid-priced regional brands.
Consolidated gross profit is a key performance measure for us. The same factors
described above that drove revenue growth also drove the 8% increase in gross
profit. Gross margin improved for the second consecutive year, from 50.4% to
51.3%. This improvement was driven by our higher margin Beverages segment, which
comprised 83% of the company's overall gross profit in fiscal 2005 compared to
79% in fiscal 2004. Beverages gross margin also improved for the year, driven by
benefits from favorable foreign exchange, price increases, and a continuing
favorable mix shift toward higher-margin brands.
Fiscal Gross
Year Margin
------ ------
1996 47.9%
1997 48.3%
1998 49.9%
1999 50.5%
2000 51.4%
2001 52.5%
2002 50.9%
2003 49.7%
2004 50.4%
2005 51.3%
Consolidated operating income for fiscal 2005 improved 4%, or $18 million. A $63
million increase in operating profits from Beverages was driven by solid gains
for Jack Daniel's, Southern Comfort, and Finlandia; benefits from a weaker U.S.
dollar; and the absence of legal settlement expenses incurred in fiscal 2004.
These gains were partially offset by a $45 million decline in operating income
from our Consumer Durables segment, $37 million of which is a goodwill
impairment charge associated with the Lenox retail business.
Operating Income
Dollars in Millions
2003 2004 2005
---- ---- ----
Beverages $342 $383 $446
Consumer Durables 30 17 (28)
---- ---- ----
Total $372 $400 $418
==== ==== ====
Total change +7% +8% +4%
29
Diluted earnings per share reached a record $2.52, up 21% over fiscal 2005,
representing the largest percentage increase in earnings per share in ten years.
This strong earnings performance was fueled by healthy underlying growth for our
premium spirits brands, benefits from a weaker U.S. dollar, gain on the sale of
the company's investment in Glenmorangie plc, and the absence of legal
settlement expenses incurred in the previous year. Tempering the growth in
earnings for the year was a significant decline in profits from the Consumer
Durables segment and the negative impact on reported earnings of a strategic
reduction in trade inventories for several of the company's beverage brands. To
reflect more accurately the underlying operations of the company, management
believes the following adjustments to reported earnings per share growth are
important, indicating the base business grew 10% in fiscal 2005:
Growth
vs. 2004
Reported Diluted EPS Growth 21%
Glenmorangie gain (18%)
Asset impairments 15%
Foreign exchange benefits (9%)
Trade inventory adjustment 4%
Absence of fiscal 2004 settlement expenses (3%)
-----
Adjusted Diluted EPS Growth 10%
=====
BASIC AND DILUTED EARNINGS PER SHARE. In Note 15 to our financial statements, we
describe our 2004 Omnibus Compensation Plan and how we issue stock options under
it. In Note 1, under "Stock Options," we describe how the plan is designed to
avoid the dilution of earnings per share.
Fiscal 2004 Compared to Fiscal 2003
Consolidated net sales grew 8%, or $201 million. Beverage sales increased 11%,
driven by favorable foreign currency trends, solid volume growth and price
increases for our premium spirits brands, the addition of new markets to our
distribution agreement for Finlandia and its related agency brands, and the
company's new distribution arrangement in the United Kingdom. Sales of our
Consumer Durables segment improved 1%.
Consolidated gross profit increased $118 million, or 10%, reflecting the
expansion of consumer demand around the world for Jack Daniel's coupled with
significant margin improvement on both Jack Daniel's and Southern Comfort
(boosted by higher prices, the new U.K. distribution arrangement, and positive
foreign exchange trends). Partially mitigating our gross profit growth in fiscal
2004 were lower volumes for our mid-priced regional brands and soft retail and
direct-to-consumer trends for the Consumer Durables segment.
Consolidated operating income for fiscal 2004 improved 8%, or $28 million. A $41
million increase in profits from the Beverages segment was driven primarily by
solid gains for both Jack Daniel's and Southern Comfort and benefits from a
weaker U.S. dollar, partially offset by the settlement of a lawsuit with Diageo
Great Britain Limited regarding the distribution of Jack Daniel's in the United
Kingdom. This increase in operating income from Beverages was partially offset
by a $13 million decline in operating income for Consumer Durables, reflecting
the challenging environment for tabletop and collectible products.
Diluted earnings per share increased 16% to $2.08 per share in fiscal 2004.
Healthy underlying growth for our premium spirits brands, benefits from a weaker
U.S. dollar, and the effects of the March 2003 share repurchase ($0.14 per share
benefit) boosted earnings for the year. Tempering this growth was a significant
decline in profits from the Consumer Durables segment, higher pension costs, and
legal settlement expenses.
OTHER KEY PERFORMANCE MEASURES
Our primary goal is to increase the value of our shareholders' investment.
Long-term growth in the market value of our stock is a good indication of our
success in delivering attractive returns to shareholders.
TOTAL SHAREHOLDER RETURN. A $100 investment in our Class B stock five years ago
would have grown to $225 by the end of fiscal 2005, assuming reinvestment of all
dividends and ignoring personal taxes and transaction costs. This represents an
annualized return of 18% over the five-year period, compared to a decline of 3%
for the S&P 500. A more recent investment in Brown-Forman also outperformed the
market, with our Class B stock yielding a return of 21% over the one-year period
ended April 30, 2005, compared to 6% for the S&P.
RETURN ON AVERAGE INVESTED CAPITAL. Our return on average invested capital
improved nearly 2 percentage points in fiscal 2005 to 17.4%, reflecting higher
earnings from operations, foreign currency benefits, the gain on the sale of
Glenmorangie shares, and prudent management of invested capital. We believe our
return on invested capital will continue to improve, given our positive outlook
for earnings growth and careful management of our investment base.
Return on average common stockholders' equity remained at healthy levels in
fiscal 2005. Average common stockholders equity returned to a more normalized
level following a decrease in fiscal 2004, reflecting the impact of the March
2003 share repurchase.
2003 2004 2005
---- ---- ----
Return on Average Invested Capital 15.4% 15.5% 17.4%
Return on Average Common Stockholders' Equity 18.7% 27.1% 25.7%
30
BEVERAGES SEGMENT
Summary of Operating Performance
(Dollars in millions) 2003 2004 2005
------ ------ ------
Net Sales $1,795 $1,992 $2,195
% Change 11% 11% 10%
Gross Profit $ 900 $1,024 $1,156
% Change 6% 14% 13%
Advertising Expenses $ 230 $ 265 $ 293
% Change 8% 15% 11%
SG&A Expenses $ 335 $ 373 $ 419
% Change 9% 11% 13%
Other Expense (Income) $ (7) $ 3 $ (2)
Operating Income $ 342 $ 383 $ 446
% Change 4% 12% 16%
Gross Margin 50.1% 51.4% 52.7%
Operating Margin 19.0% 19.3% 20.3%
Our Beverages segment includes strong brands representing a wide range of
varietal wines, Champagnes, and spirits such as whiskey, bourbon, vodka,
tequila, rum, and liqueur. This segment's largest market is the United States,
which generally prohibits wine and spirits manufacturers from selling their
products directly to consumers. Instead, we sell our products to wholesale
distributors, who then sell the products to retailers, who in turn sell to
consumers. We use a similar tiered distribution model in most markets outside
the United States.
Distributors and retailers normally keep some of our products on hand as
inventory, making it possible for retailers to sell more (or less) of our
products to the consumer than distributors buy from us during any given time
period. Because we generally record revenues when we ship our products to
distributors, our sales do not necessarily reflect actual consumer demand during
any particular period. Ultimately, of course, consumer demand is critical in
determining our financial results. Thus, it is important to consider that demand
in assessing our performance. Depletions, which are defined as nine-liter case
movements from distributors to retailers, are generally used in the wine and
spirits industry as the most accurate approximation of consumer demand on a
national and international basis.
Fiscal 2005 Compared to Fiscal 2004
Net sales approximated $2.2 billion in fiscal 2005, increasing $203 million, or
10%. The major drivers of this growth were:
Growth
vs. 2004
Foreign exchange benefits 3%
Initial shipments of low carbohydrate wines 1%
Trade inventory adjustment (1%)
Underlying revenue growth: 7%
Volume 5%
Price/Mix 2%
-----
Total 10%
=====
We believe that disclosing the 7% underlying revenue growth for fiscal 2005 is
important because it more accurately reflects the segment's base performance.
Fiscal 2005 was another strong year for Jack Daniel's Tennessee Whiskey, as
volume increased for the thirteenth consecutive year. Consumer demand
accelerated globally as the brand grew 680,000 cases, or 9%, to 7.9 million
cases, the highest absolute annual case volume increase in the brand's long
history. The brand's volume was particularly strong in the U.S., growing in the
upper-single digits, while registering double-digit gains outside the U.S., with
significant contributions from the United Kingdom, Continental Europe, South
Africa, and China. Results for Southern Comfort were also excellent, as the
brand grew 5% for the year, or over 100,000 cases, the fastest rate of growth
for the brand in 15 years. Notable strength for Southern Comfort was registered
in the U.S., U.K., South Africa, and Australia. Worldwide depletions for
Finlandia rose 7% in fiscal 2005, led by 30% volume growth in Poland and
continued solid performance in the very competitive U.S. market, driven by a new
package rollout and the introduction of a new flavor, Mango. All three of these
global premium spirits brands achieved record sales and profit levels in fiscal
2005.
31
With the exception of Korbel Champagnes, depletions for mid-priced regional
brands in our beverage portfolio (Canadian Mist, Early Times, Fetzer, and Bolla)
posted declines for the year, though the rates of decline slowed compared to
those of the prior year. Almost all of the segment's super-premium developing
brands, including Woodford Reserve, Sonoma-Cutrer, and Tuaca, posted strong
double-digit volume growth. Ready-to-drink (RTD) volumes continued their robust
performance, expanding 12% for the year, fueled primarily by excellent growth in
Australia.
The following table highlights worldwide depletion results for our major brands
during fiscal 2005:
Nine-Liter % Change
Cases (000s) vs. 2004
------------ -----------
Jack Daniel's 7,885 9%
Total RTDs(1) 2,845 12%
Southern Comfort 2,285 5%
Fetzer 2,210 (13%)
Canadian Mist 2,115 (2%)
Finlandia 1,845 7%
Bolla 1,290 (10%)
Korbel Champagnes 1,165 2%
(1) RTD (ready-to-drink) volumes include Jack Daniel's, Southern Comfort, and
Finlandia RTD products but exclude Jack Daniel's Original Hard Cola, which
was marketed and sold by SABMiller during fiscal 2004 and which we
discontinued during fiscal 2005.
Gross profit expanded 13%, or $132 million. This growth was fueled by the same
factors that boosted revenue growth, though underlying gross profit growth was
much stronger, reflecting volume and margin improvement for Jack Daniel's,
Southern Comfort, and Finlandia. The following chart identifies the major
factors driving gross profit growth:
Growth
vs. 2004
Foreign exchange benefits 4%
Initial shipments of low carbohydrate wines 1%
Trade inventory adjustment (2%)
Underlying gross profit growth: 10%
Volume 6%
Price/Mix 4%
-----
Total 13%
=====
We believe that disclosing the 10% underlying gross profit growth for fiscal
2005 is important because it more accurately reflects the segment's base
performance. The gross margin for our Beverages business increased from 51.4% in
fiscal 2004 to 52.7% in fiscal 2005. The major factors driving this improvement
were the weaker U.S. dollar, price increases on selected brands, and a favorable
shift in mix toward higher-margin brands.
Advertising expenses were up 11% as we continued our long track record of
reinvesting substantial dollars to build our brands. Although healthy increases
behind three of our major premium global brands, Jack Daniel's, Southern
Comfort, and Finlandia, accounted for most of the increase in advertising
investments in fiscal 2005, we also increased investments behind our
super-premium developing brands, including Woodford Reserve, Tuaca, Amarula, Don
Eduardo, and Sonoma-Cutrer. In addition, advertising investments made in support
of the introduction of the segment's low carbohydrate wines, One.6 Chardonnay
and One.9 Merlot, and the negative impact of the weaker U.S. dollar on spending
outside of the U.S. contributed to the increase in advertising expense. We
estimate that, on a constant exchange basis, our advertising costs were up 8%
for the year, following a robust 10% increase (on a constant exchange basis) in
fiscal 2004.
Selling, general, and administrative expenses were up 13%, influenced by the
following factors:
Growth
vs. 2004
Expected growth 4%
Incremental compensation expense 3%
Higher pension and postretirement costs 1%
Foreign exchange 1%
All other 4%
-----
Total 13%
=====
The "All other" caption above includes items such as expenses associated with
compliance with Sarbanes-Oxley legislation and enhanced NYSE listing standards,
the development of the company's global distribution strategy, and third-party
advisory fees related to the exploration of strategic alternatives for the Lenox
business.
Other income improved $5 million in fiscal 2005 due to the absence of $10
million in legal settlement expenses incurred in the prior year. Partially
offsetting this item was a $3 million asset impairment charge associated with a
minority interest in a small Mexican tequila company.
Operating income reached a record $446 million in fiscal 2005, growing $63
million, or 16%, over fiscal 2004. This is the strongest operating income growth
rate the Beverages segment has experienced since the early 1980s. Positive
factors driving operating income growth were strong performances from our
premium spirits brands (fueled in part by the accompanying significant increase
in our brand-building investments), the benefits of a weaker U.S. dollar, and
the absence of litigation settlement expenses incurred last year. These gains
were only partially offset by lower profits from our mid-priced regional wine
and spirits brands and higher selling, general, and administrative expenses.
32
Fiscal 2004 Compared to Fiscal 2003
Net sales improved 11%, or $197 million, fueled by record sales and profit
levels for both Jack Daniel's and Southern Comfort, reflecting higher volumes,
positive foreign exchange trends, and price increases. Jack Daniel's registered
growth for the twelfth consecutive year, as the brand surpassed actual volume of
seven million cases, growing 6% for the year. Results for Southern Comfort were
also strong, as growth in the U.S., U.K., and South Africa was only partially
offset by weaker performance in Continental Europe. Volumes for Finlandia were
also up, reflecting the addition of new markets in late fiscal 2003 and the
introduction of a new package in the U.S. in the second half of the fiscal year.
Partially offsetting these gains were lower volumes for our wine and spirits
brands (Canadian Mist, Early Times, Fetzer, and Bolla) in the highly competitive
mid-priced category.
Gross profit grew 14%, or $124 million, surpassing a milestone of $1 billion.
This growth was sourced from the same factors that generated revenue growth.
Gross margin for our Beverages business increased from 50.1% in fiscal 2003 to
51.4% in fiscal 2004. The major factors driving this improvement were the weaker
U.S. dollar, price increases on selected major wine and spirits brands, a higher
mix of Jack Daniel's volume, and a higher mix of volumes in the high-margin U.K.
market.
Advertising expenses increased 15% as we significantly increased brand building
activities behind our premium spirits brands and several of our developing
brands, including Woodford Reserve, Tuaca, and Appleton. The weaker U.S. dollar
also drove up our costs for advertising outside of the U.S. compared to fiscal
2003.
Selling, general, and administrative expenses were up 11%, influenced by the
consolidation of Finlandia Vodka Worldwide and Tuoni e Canepa in our financial
statements, higher pension and postretirement expenses, incremental sales and
marketing personnel in the U.K. to support a new distribution arrangement, and
various reorganization costs. Excluding these factors, SG&A grew a modest 4%.
Other expense was up $10 million in fiscal 2004 due to the settlement of a
lawsuit with Diageo Great Britain Limited involving the distribution of Jack
Daniel's in the United Kingdom.
Operating income grew 12%, or $41 million, primarily reflecting healthy
underlying growth for premium spirits brands (fueled in part by the double-digit
increase in our brand-building investments) and the benefits of a weaker U.S.
dollar. These positive factors were tempered by expenses associated with the
Diageo litigation settlement, restructuring charges, and incremental pension
expenses.
BUSINESS ENVIRONMENT FOR WINE AND SPIRITS
GOVERNMENT POLICIES, PUBLIC ATTITUDES: Our ability to market and sell our
beverage alcohol products depends heavily on society's attitudes towards
drinking and government policies that flow from those attitudes. This is true in
the United States, our largest market, and around the world.
Illegal alcohol consumption by underage drinkers and abusive drinking by a
minority of drinkers give rise to public issues of great significance. We
strongly oppose underage and abusive drinking, and we contribute significant
resources to programs aimed at understanding and curbing underage drinking and
other forms of alcohol abuse, especially drunk driving. As a society, we are
more likely to curb alcohol abuse through better education about beverage
alcohol and setting a good example of moderate drinking than by restricting
alcohol advertising and sales or imposing punitive taxation. We and other
beverage alcohol producers take a prominent role in encouraging responsible
consumption of our products and in warning against alcohol abuse. We observe
voluntary industry marketing and advertising guidelines. We support social
awareness organizations that fight alcohol abuse and educate consumers about
appropriate beverage alcohol consumption, often in partnership with public
health officials.
Anti-alcohol groups in the U.S. and Europe increasingly advocate governmental
actions that would be unfavorable for our business. Legal or regulatory measures
against beverage alcohol (including its advertising and promotion) could hurt
our sales. Especially in the U.S., distilled spirits are at a marked
disadvantage to beer and wine in taxation, network television advertising, and
number and type of sales outlets. Achieving greater cultural acceptance of our
products and parity with beer and wine in access to consumers are major goals
that we share with other distillers.
LEVELING THE PLAYING FIELD: Among the objectives we seek are:
- greater access to television advertising for distilled spirits;
- fairer product distribution rules, including Sunday sales, and laws that
permit product tasting, so that our customers can try our beverage products
and purchase them more conveniently;
- freedom to advertise our products outdoors (some municipal ordinances
discriminate against billboard advertising of beverage alcohol); and
- improved access to foreign markets, many of which have discriminatory tax or
other non-tariff barriers to U.S. spirits imports.
TAXES: Like all goods, beverage alcohol sales are sensitive to higher tax rates.
No legislation to increase U.S. federal excise taxes on distilled spirits is
currently pending, but future tax increases are always possible. From time to
time, state legislatures increase beverage alcohol taxes. The cumulative effect
of such tax increases over time hurts sales. Because combined federal and state
taxes currently account for more than 50% of the price of a typical bottle of
bourbon, we work for reasonable excise tax reductions. Over the past year, the
industry has defeated tax increase proposals in a number of states, but with
several states continuing to face budget problems, we do not expect the threat
of state tax increases to abate next fiscal year. Increased tax rates and
advertising restrictions also affect beverage alcohol markets outside the U.S.
To date, those changes have not been significant to our overall business, but
that could change.
THE LITIGATION CLIMATE: A law firm has filed nine state class action lawsuits
against spirits, beer, and wine manufacturers, including Brown-Forman, alleging
that our marketing causes illegal consumption of alcohol by those under the
legal drinking age. We dispute these allegations and will defend these cases
vigorously. However, adverse developments in these or similar lawsuits could
hurt our beverage business, and the overall industry.
DISTRIBUTION STRATEGY: Brown-Forman uses a number of different business models
to market and distribute our products overseas. However, we largely rely on
other spirits producers to distribute and market our products outside the U.S.
Although consolidation among spirits producers could hinder the distribution of
our spirits and wine products in the future, to date this has rarely happened.
Other spirits companies typically seek to distribute our premium spirits and
wine brands, and we expect that demand to continue.
EXCHANGE RATES: The strength of foreign currencies relative to the U.S. dollar
affects revenues and costs in our international beverage business. This year,
our corporate earnings benefited from a weaker U.S. dollar, particularly in the
U.K. and Australia. We have entered into foreign currency forward and option
contracts to limit the downside risk to foreign exchange fluctuations in fiscal
2006. If the U.S. dollar appreciates significantly, the effect on our business
would be negative for any unhedged portion of our business.
33
CONSUMER DURABLES SEGMENT
Summary of Operating Performance
(Dollars in millions) 2003 2004 2005
------ ------ ------
Net Sales $ 581 $ 585 $ 534
% Change (4%) 1% (9%)
Gross Profit $ 280 $ 274 $ 244
% Change (1%) (2%) (11%)
Advertising Expenses $ 91 $ 89 $ 78
% Change 8% (3%) (12%)
SG&A Expenses $ 156 $ 161 $ 155
% Change (9%) 4% (4%)
Goodwill impairment -- -- $ 37
Other Expense (Income) $ 3 $ 7 $ 2
Operating Income (Loss) $ 30 $ 17 $ (28)
% Change 81% (45%) n/m
Gross Margin 48.2% 46.9% 45.6%
Operating Margin 5.2% 2.9% (5.2%)
Our Consumer Durables segment includes fine china, crystal, silver, and luggage
products marketed under the Lenox, Dansk, Gorham, Kirk Stieff, and Hartmann
brand names. Nearly 60% of our Consumer Durables sales are made directly to
consumers through owned retail stores, direct mail, and the Internet. The
remaining sales for this segment represent sales to department stores, specialty
stores, and other distributors. This segment's financial performance is
generally more vulnerable to changes in economic conditions in the U.S. than
that of our Beverages segment.
Fiscal 2005 Compared to Fiscal 2004
Net sales declined $51 million, or 9%, in fiscal 2005, reflecting weak
underlying trends in the U.S. for tabletop and giftware products. Reported sales
benefited from the full-year impact of the successful introduction of "kate
spade" co-branded patterns and incremental revenue for Hartmann luggage.
However, these gains were insufficient to offset the overall softness
experienced across all three channels of distribution -- wholesale, retail, and
direct-to-consumer.
Gross profit fell $30 million in fiscal 2005 due to the same factors that
contributed to the decline in sales. Gross margin also dropped to 45.6% in
fiscal 2005 from 46.9% in fiscal 2004, reflecting the decline in the mix of
high-margin direct-to-consumer channel, a significant increase in liquidation
activity associated with the closing of all 41 Dansk retail stores, and
aggressive discounting designed to reduce inventory levels at our Lenox retail
outlets. In addition, a shift in product mix and a negative foreign exchange
impact contributed to the 1.3 percentage point reduction in the segment's
margin.
Advertising expenses were down for the second consecutive year, as the segment
sought to reduce spending in the domestic direct mail, catalog, and Internet
businesses in response to lower consumer response rates. Selling, general, and
administrative expenses declined 4%, reflecting tight control of spending, lower
fixed costs, and benefits associated with restructuring actions implemented over
the past two fiscal years.
34
Goodwill impairment charge of $37 million reflects the revised outlook for the
Lenox retail outlet business in light of changing consumer buying patterns. The
charge represents the excess of the book value of the goodwill over the
estimated fair value calculated by discounting projected future cash flows based
on the revised long-term outlook for the business.
Other expenses decreased $5 million in fiscal 2005, reflecting a gain on the
sale of a closed distribution facility and the absence of expenses incurred in
fiscal 2004 related to a new distribution center and a write-down of impaired
real estate associated with previous plant closures.
Operating loss of $28 million was unfavorable $45 million compared to the prior
year. Excluding the effect of the $37 million impairment charge related to the
retail business, the segment's operating profit in fiscal 2005 of $9 million was
down sharply compared to fiscal 2004 operating income of $17 million. Lower net
sales across all three Lenox channels of distribution were only partially offset
by reductions in advertising spending and aggressive management of selling,
general, and administrative expenses. While Lenox profits declined, Hartmann
contributed $3 million of the company's operating income growth for the year.
Fiscal 2004 Compared to Fiscal 2003
Net sales increased $4 million, or 1%, in fiscal 2004 as the segment expanded
into new wholesale channels of distribution, including home-specialty stores.
Sales also benefited from the successful introduction of the "kate spade"
tabletop line. These increases were partially offset by revenue declines in both
the segment's retail outlet stores (we closed 11 outlet stores in fiscal 2004)
and direct-to-consumer division.
Gross profit declined $6 million, or 2%, in fiscal 2004, despite a modest
increase in sales, reflecting a negative shift in channel and product mix,
aggressive discounting designed to lower inventory levels at our retail outlets,
the unfavorable impact of foreign exchange on product sourced from overseas, and
$1 million of higher postretirement-related expenses. As a result, the segment's
overall gross margin declined from 48.2% to 46.9%.
Advertising expenses were down 3% in fiscal 2004, due primarily to a decision to
decrease consumer direct mail and catalog advertising in response to the decline
in consumer response rates. Selling, general, and administrative expenses
increased 4%, driven by $3 million of severance expenses and $2 million of
incremental postretirement expenses. Excluding these items, selling, general,
and administrative expenses were essentially flat compared to fiscal 2003. Other
expenses increased $4 million in fiscal 2004, reflecting a write-down for
impaired real estate associated with previous plant closures and start-up costs
related to a new distribution center.
Operating income fell $13 million, or 45%, largely reflecting lower consumer
response rates in direct mail and several charges incurred in the year,
including severance, a write-down for impaired real estate associated with
previous plant closures, and start-up costs related to the new distribution
center.
LIQUIDITY AND CAPITAL RESOURCES
Our ability to generate cash from operations consistently is one of our most
significant financial strengths. Our strong cash flows enable us to pay
dividends, pursue brand-building programs, and make strategic acquisitions that
we believe will enhance shareholder value. Investment grade ratings of A2 from
Moody's and A from Standard & Poor's provide us with financial flexibility when
accessing global credit markets. Cash flows from operations are more than
adequate to meet our expected operating and capital requirements. In fiscal
2005, cash from operations enabled us to fund our capital investments, eliminate
commercial paper borrowings, and pay $111 million in dividends to our
shareholders.
Cash Flow Summary
(Dollars in millions) 2003 2004 2005
------ ------ ------
Operating activities $ 243 $ 304 $ 396
Investing activities:
Sale of investment in affiliate -- -- 93
Additions to property, plant,
and equipment (119) (56) (49)
Acquisition of businesses (99) -- (64)
Other (8) (7) 4
------ ------ ------
(226) (63) (16)
Financing activities:
Dividends (99) (97) (111)
Net issuance (repayment) of debt 596 (162) (50)
Acquisition of treasury stock (561) -- (3)
Other 3 14 11
------ ------ ------
(61) (245) (153)
------ ------ ------
Change in cash $ (44) $ (4) $ 227
====== ====== ======
Cash provided by operations increased $92 million, from $304 million in fiscal
2004 to $396 million in fiscal 2005, reflecting higher earnings and reductions
in working capital. The decrease in working capital reflects higher current
liabilities due in part to an increase in accrued incentive compensation related
to our record performance in fiscal 2005 combined with an increase in
advertising investments in our Beverages segment.
Cash used for investments dropped significantly in fiscal 2005, to $16 million,
a decrease of $47 million compared to fiscal 2004. The $93 million in proceeds
received on the sale of our shares in Glenmorangie plc was offset by capital
investments and the $64 million acquisition of the final 20% equity stake in
Finlandia.
In comparing fiscal 2004 with fiscal 2003, cash provided by operations increased
$61 million in fiscal 2004, reflecting higher earnings and a reduction in the
single largest item on our balance sheet -- inventory.
35
Cash used for investments returned to a more normal level in fiscal 2004,
decreasing $163 million, reflecting lower levels of capital investment and the
2003 acquisitions of a 35% equity stake in Finlandia and the final interest in
Tuaca.
Investments in property, plant, and equipment were $119 million in fiscal 2003,
$56 million in fiscal 2004, and $49 million in fiscal 2005. Following record
spending levels in fiscal 2003, which included the purchase of $39 million in
California vineyard properties that were previously leased via a third-party
financing arrangement, spending returned to more modest levels in fiscal 2004
and fiscal 2005. Expenditures over the three-year period included investments to
improve efficiencies of our production and distribution facilities for both our
Beverages and Consumer Durables businesses.
Capital Expenditures
Dollars in Millions
2003 2004 2005
---- ---- ----
Beverages $ 91 $ 39 $ 44
Consumer Durables 28 17 5
---- ---- ----
Total $119 $ 56 $ 49
==== ==== ====
We expect capital expenditures for fiscal 2006 to be in the $60-$70 million
range, moderately higher than our spending over the past two fiscal years. This
increase reflects investments to expand capacity of our production and
distribution facilities to meet accelerating consumer demand for Jack Daniel's.
In addition, we will continue to prioritize and fund investments that improve
the efficiency of our production operations and enhance the quality of our
brands. We expect to fund fiscal 2006 capital expenditures from cash provided by
operations.
In March 2003, we repurchased 7.9 million shares of our common stock for $561
million, including transaction costs, through a "Dutch auction" tender offer.
(That amount does not include $11 million for 155,000 shares that were tendered
but not delivered to us. We are pursuing our legal rights in this matter.) We
financed the repurchase by issuing $600 million in debt, of which $250 million
is due in 2006 and $350 million is due in 2008. We expect to meet those
obligations through cash from operations.
We have access to short-term capital markets through the issuance of commercial
paper, backed by a bank credit agreement for $400 million, which expires in
fiscal 2010. The credit agreement provides us with an immediate and continuing
source of liquidity. At April 30, 2005, we had no outstanding borrowings under
this agreement.
We maintain an SEC shelf registration that gives us prompt access to longer-term
financing. At April 30, 2005, we had $220 million available on our $250 million
shelf registration.
LONG-TERM OBLIGATIONS
We have long-term obligations related to contracts, leases, and borrowing
arrangements that we enter into in the normal course of business (see Notes 4
and 6 to the accompanying consolidated financial statements). The following
table summarizes the amounts of those obligations as of April 30, 2005 and the
years in which those obligations must be paid:
Long-Term Obligations 2007- After
(Dollars in millions) Total 2006 2010 2010
----- ---- ---- ----
Long-term debt $ 633 $280 $350 $ 3
Interest on long-term debt 36 15 20 1
Grape purchase obligations 174 33 103 38
Operating leases 56 22 25 9
Postretirement benefit obligations(1) n/a n/a n/a n/a
----- ---- ---- ----
Total $ 899 $350 $498 $ 51
===== ==== ==== ====
(1) As of April 30, 2005, we have unfunded pension and other postretirement
benefit obligations of $202 million. Because the specific periods in which
those obligations will be funded are not determinable, no amounts related
to those obligations are reflected in the above table. Historically, we
have generally funded these obligations with the minimum annual
contribution required by ERISA, but we may elect to contribute more than
the minimum amount in future years.
We expect to meet these obligations with internally generated funds.
MARKET RISKS
We have foreign currency forward and option contracts, commodity futures and
option contracts, and debt obligations that are exposed to risk from changes in
foreign currency exchange rates, commodity prices, and interest rates,
respectively. The sensitivity of these instruments to market fluctuations is
discussed below. See Note 4 to our consolidated financial statements for
information regarding our grape purchase obligations, which are also exposed to
commodity price risk, and "Critical Accounting Policies" (page 37) for a
discussion of the exposure of our pension and other postretirement plans to
risks related to interest rates.
Inflationary, deflationary, and recessionary conditions affecting these market
risks also affect the demand for and pricing of our products. See "Important
Information Regarding Forward-Looking Statements" (page 58) for further
discussion details.
FOREIGN EXCHANGE. As a result of continued growth in international sales, our
annual foreign currency revenues now exceed our foreign currency expenses by
approximately $300 million. To the extent that this foreign currency exposure is
not hedged, our results of operations and financial position are positively
affected when the U.S. dollar weakens against foreign currencies and negatively
affected when the dollar strengthens. However, we routinely use foreign currency
forward and option contracts to hedge our foreign exchange risk. Provided the
contracts remain effective in hedging the foreign exchange risk, we do not
recognize any unrealized gains or losses on the contracts in earnings until the
underlying hedged transactions are recognized in earnings. At April 30, 2005,
our foreign currency hedges had a total notional value of $212 million and a net
unrealized loss of $3 million. Assuming the contracts remain effective hedges,
we estimate that if the value of the U.S. dollar averaged 10% higher in fiscal
2006 than the fiscal 2005 effective rates for the currencies in which we do
business, our fiscal 2006 operating income would decrease by $5 million.
Conversely, a 10% average decline in the value of the dollar would increase
operating income by $26 million.
36
COMMODITY PRICES. We are subject to commodity price volatility caused by
weather, supply conditions, geopolitical and economic variables, and other
unpredictable external factors. We use futures contracts and options to manage
the volatility of pricing for certain commodities, primarily corn. At April 30,
2005, we had outstanding hedge positions on approximately 4 million bushels of
corn with a negligible net unrealized loss. We estimate that a 10% decline in
commodity prices would result in a negligible incremental loss on these
contracts.
INTEREST RATES. Essentially all of our debt has a fixed interest rate. However,
our short-term investments and commercial paper obligations are exposed to the
risk of changes in interest rates. At April 30, 2005 balance, only our
short-term investments had exposure to market interest rates, as we had no
commercial paper outstanding. Assuming a one percentage point increase in
interest rates, our net interest expense would decrease by $3 million.
ENVIRONMENTAL MATTERS
In Note 14 to our financial statements, we describe fully our exposure to
environmental claims and our responsibility for our environmental cleanup costs
in the U.S.
CRITICAL ACCOUNTING POLICIES
Our financial statements reflect certain estimates involved in applying the
following critical accounting policies that entail uncertainties and
subjectivity. Using different estimates could have a material effect on our
operating results, financial condition, and changes in financial condition.
BRANDS AND GOODWILL. We have obtained most of our brands through acquisitions
from other companies. (See Note 2 to the accompanying consolidated financial
statements for recent acquisitions.) Upon acquisition, the purchase price is
first allocated to identifiable assets and liabilities, including intangible
brand names, based on estimated fair value, with any remaining purchase price
recorded as goodwill. Goodwill and brand names with indefinite lives are not
amortized. As of April 30, 2005, we consider all of our brand names to have
indefinite lives.
We assess our brand names and goodwill for impairment at least annually to
ensure that future cash flows continue to exceed the related book value. A brand
name is impaired if its book value exceeds its fair value. Goodwill is evaluated
for impairment if the book value of its reporting unit exceeds its fair value.
Fair value is determined using discounted future cash flows, with consideration
of market values for similar assets when available. If the fair value of an
evaluated asset is less than its book value, the asset is written down to its
estimated fair value.
Considerable management judgment is necessary to assess impairment and estimate
fair value. The assumptions used in our evaluations, such as forecasted growth
rates and cost of capital, are consistent with our internal projections and
operating plans.
37
PROPERTY, PLANT, AND EQUIPMENT. We depreciate our property, plant, and equipment
on a straight-line basis using our estimates of useful life, which are 20 to 40
years for buildings and improvements, 3 to 10 years for machinery, equipment,
furniture, and fixtures, and 3 to 7 years for capitalized software.
We assess our property, plant, and equipment and other long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of the asset or asset group may not be recoverable. Fair value is
determined using discounted future cash flows, with consideration of market
values for similar assets when available. If the fair value of an evaluated
asset is less than its book value, we write it down to its estimated fair value.
Considerable management judgment is necessary to assess impairment and estimate
fair value. Assumptions used in these evaluations are consistent with our
internal projections and operating plans.
PENSION AND OTHER POSTRETIREMENT BENEFITS. We sponsor various defined benefit
pension plans as well as postretirement plans providing retiree health care and
retiree life insurance benefits. Benefits are based on such factors as years of
service and compensation level during employment. The benefits expected to be
paid are expensed over the employees' expected service. This requires us to make
certain assumptions to determine the expected benefit, such as interest rates,
return on plan assets, the rate of salary increases, expected service, and
health care cost trend rates.
The assets, obligations, and assumptions used to measure pension and retiree
medical expenses are determined as of January 31 of the preceding year
("measurement date"). Because obligations are measured on a discounted basis,
the discount rate is a significant assumption. It is based on interest rates for
high-quality, long-term corporate debt at each measurement date. The expected
return on pension plan assets is based on our historical experience and our
expectations for long-term rates of return. The other assumptions also reflect
our historical experience and management's best judgment regarding future
expectations. We review our assumptions on each annual measurement date. For
fiscal 2005, we have reduced the discount rate from 6.0% to 5.8%. Pension and
postretirement benefit expense for fiscal 2006 is estimated to be approximately
$27 million, compared to $15 million for fiscal 2005.
INCOME TAXES. Our annual tax rate is based on our income and the statutory tax
rates in the various jurisdictions in which we operate. The increase in the
effective rate to 35.3% for fiscal 2005 primarily reflects the nondeductibility
of goodwill impairment charges recorded during the year. Excluding the impact of
impairment charges, the effective tax rate declined to 32.4%, reflecting a shift
in profits to lower tax jurisdictions.
Significant judgment is required in evaluating our tax positions. We establish
reserves when we believe that certain positions are likely to be challenged and
that we may not succeed, despite our belief that our tax return positions are
fully supportable. We adjust these reserves in light of changing facts and
circumstances, such as the progress of a tax audit. We believe current reserves
are appropriate for all known contingencies; however, a favorable or unfavorable
change in this estimate may occur in the near future.
Several years can elapse before a particular matter for which we have
established a reserve is resolved. While it is often difficult to predict the
final outcome or the timing of resolution of any particular tax matter, we
believe that our reserves reflect the likely outcome of known tax contingencies.
Our effective tax rate includes the impact of reserve provisions and changes to
reserves that we consider appropriate, as well as related interest. Unfavorable
settlement of any particular issue could require use of our cash. Favorable
resolution would be recognized as a reduction to our effective tax rate in the
year of resolution.
On October 22, 2004, the American Jobs Creation Act ("the Act") was signed into
law. The Act contains provisions that might affect Brown-Forman's future
effective tax rate, including a special one-time 85% dividends received
deduction for certain repatriated foreign earnings. The company could make this
one-time election with respect to funds repatriated during either fiscal 2005 or
2006. The deduction is subject to a number of limitations and requirements,
including adoption of a specific domestic reinvestment plan for the repatriated
funds. We did not repatriate any dividends during fiscal 2005. We are
investigating whether to do so in fiscal 2006 but do not expect to complete this
evaluation until late in fiscal 2006.
The Act also creates a deduction for income from qualified domestic production
activities that will be phased in from 2005 through 2010, effective for our
fiscal years 2006 through 2011. In return, the Act also provides for a two-year
phase-out of the existing extraterritorial income exclusion ("the ETI
exclusion") for foreign sales that was viewed to be inconsistent with
international trade protocols by the European Union. The new deduction for
domestic production activities is subject to certain limitations and
interpretations, so we are not yet in a position to determine with reasonable
certainty the potential impact on the effective tax rate of future years.
However, we anticipate the combined net effect of the phase-out of the ETI
exclusion and the phase-in of the new deduction for domestic production
activities to result in an immaterial increase in our effective tax rate for
fiscal year 2006.
CONTINGENCIES. We operate in a litigious environment, and we get sued in the
normal course of business. Sometimes plaintiffs seek substantial damages.
Significant judgment is required in predicting the outcome of these suits and
claims, many of which take years to adjudicate. We accrue estimated costs for a
contingency when we believe that a loss is probable, and adjust the accrual as
appropriate to reflect changes in facts and circumstances.
A law firm has sued Brown-Forman and many other manufacturers and marketers of
spirits, wines, and beer in a series of nine very similar class action lawsuits
seeking damages and injunctive relief from alleged marketing of beverage alcohol
to underage consumers. The suits allege that the defendants engage in deceptive
and negligent marketing practices targeting underage consumers. They seek to
recover on behalf of parents those funds that their children spent on the
illegal purchase of alcohol as well as disgorgement of all profits from the
alleged illegal sales. Brown-Forman is vigorously defending these cases, four of
which are pending on motions to dismiss. It is not possible at this time to
predict the outcome of these claims but an unfavorable result in these or
similar class action lawsuits could have a material adverse impact on our
business.
38
Brown-Forman
CONSOLIDATED STATEMENT OF INCOME
(Expressed in millions, except per share amounts)
- --------------------------------------------------------------------------------
Year Ended April 30, 2003 2004 2005
- --------------------------------------------------------------------------------
Net sales $2,376 $2,577 $2,729
Excise taxes 318 364 417
Cost of sales 878 915 912
--------------------------------
Gross profit 1,180 1,298 1,400
Advertising expenses 321 354 371
Selling, general, and administrative expenses 491 534 574
Goodwill impairment -- -- 37
Other expense (income), net (4) 10 --
--------------------------------
Operating income 372 400 418
Gain on sale of investment in affiliate -- -- 72
Interest income 3 2 7
Interest expense 8 21 21
--------------------------------
Income before income taxes 367 381 476
Income taxes 125 127 168
--------------------------------
Net income $ 242 $ 254 $ 308
================================
Earnings per share
- Basic $ 1.79 $ 2.09 $ 2.53
- Diluted $ 1.79 $ 2.08 $ 2.52
The accompanying notes are an integral part of the consolidated financial
statements.
39
Brown-Forman
CONSOLIDATED BALANCE SHEET
(Expressed in millions, except share and per share amounts)
- --------------------------------------------------------------------------------
April 30, 2004 2005
- --------------------------------------------------------------------------------
Assets
- ------
Cash and cash equivalents $ 68 $ 295
Accounts receivable, less allowance for doubtful
accounts of $11 in 2004 and $12 in 2005 348 344
Inventories:
Barreled whiskey 218 249
Finished goods 185 192
Work in process 111 89
Raw materials and supplies 43 44
---------------------
Total inventories 557 574
Current portion of deferred income taxes 67 71
Other current assets 43 33
---------------------
Total Current Assets 1,083 1,317
Property, plant, and equipment, net 515 501
Prepaid pension cost 118 130
Investment in affiliates 45 15
Trademarks and brand names 247 334
Goodwill 315 282
Other assets 53 45
---------------------
Total Assets $2,376 $2,624
=====================
Liabilities
- -----------
Accounts payable and accrued expenses $ 271 $ 311
Accrued taxes on income 48 48
Commercial paper 50 --
Current portion of long-term debt -- 279
---------------------
Total Current Liabilities 369 638
Long-term debt, less unamortized
discount of $3 in 2004 and $1 in 2005 630 352
Deferred income taxes 112 132
Accrued pension and other postretirement benefits 137 156
Other liabilities 33 36
---------------------
Total Liabilities 1,281 1,314
---------------------
Commitments and contingencies
Stockholders' Equity
- --------------------
Common Stock:
Class A, voting, $0.15 par value;
authorized shares, 57,000,000;
issued shares, 56,841,000 9 9
Class B, nonvoting, $0.15 par value;
authorized shares, 100,000,000;
issued shares, 69,188,000 10 10
Additional paid-in capital 28 34
Retained earnings 1,218 1,415
Treasury stock, at cost
(4,441,000 and 4,141,000 common shares
in 2004 and 2005, respectively) (156) (147)
Accumulated other comprehensive loss:
Cumulative translation adjustment 16 27
Pension liability adjustment (32) (38)
Unrealized gain on cash flow hedge contracts 2 --
---------------------
Total accumulated other comprehensive loss (14) (11)
---------------------
Total Stockholders' Equity 1,095 1,310
---------------------
Total Liabilities and Stockholders' Equity $2,376 $2,624
=====================
The accompanying notes are an integral part of the consolidated financial
statements.
40
Brown-Forman
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in millions; amounts in brackets are reductions of cash)
- --------------------------------------------------------------------------------
Year Ended April 30, 2003 2004 2005
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 242 $ 254 $ 308
Adjustments to reconcile net income to net cash
provided by (used for) operations:
Gain on sale of investment in affiliate -- -- (72)
Goodwill impairment -- -- 37
Depreciation 55 56 58
Stock-based compensation expense 6 6 7
Deferred income taxes (17) (2) (5)
Other 1 4 4
Change in assets and liabilities, excluding
the effects of businesses acquired or sold:
Accounts receivable (30) (23) 4
Inventories 2 25 (17)
Other current assets (4) (13) 10
Accounts payable and accrued expenses (18) (25) 42
Accrued taxes on income 12 4 --
Noncurrent assets and liabilities (6) 18 20
-------------------------
Cash provided by operating activities 243 304 396
-------------------------
Cash flows from investing activities:
Proceeds from sale of investment in affiliate,
net of disposal costs -- -- 93
Additions to property, plant, and equipment (119) (56) (49)
Acquisition of businesses, net of cash acquired (99) -- (64)
Computer software expenditures (8) (5) (5)
Trademark and patent expenditures (1) (2) (1)
Disposals of property, plant, and equipment 1 -- 10
-------------------------
Cash (used for) investing activities (226) (63) (16)
-------------------------
Cash flows from financing activities:
Net change in commercial paper -- (117) (50)
Proceeds from long-term debt 596 -- --
Debt issuance costs (4) -- --
Reduction of long-term debt -- (45) --
Proceeds from exercise of stock options 7 12 9
Excess tax benefits from stock options -- 2 2
Dividends paid (99) (97) (111)
Acquisition of treasury stock (561) -- (3)
-------------------------
Cash (used for) financing activities (61) (245) (153)
-------------------------
Net increase (decrease) in cash and cash equivalents (44) (4) 227
Cash and cash equivalents, beginning of year 116 72 68
-------------------------
Cash and cash equivalents, end of year $ 72 $ 68 $295
=========================
Supplemental disclosure of cash paid for:
Interest $ 5 $ 21 $ 21
Income taxes $130 $129 $174
The accompanying notes are an integral part of the consolidated financial
statements.
41
Brown-Forman
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars expressed in millions, except per share amounts)
- --------------------------------------------------------------------------------
Year Ended April 30, 2003 2004 2005
- --------------------------------------------------------------------------------
Class A Common Stock:
Balance at beginning of year $ 4 $ 4 $ 9
Stock split (2-for-1 in 2004) -- 5 --
---------------------------
Balance at end of year 4 9 9
---------------------------
Class B Common Stock:
Balance at beginning of year 6 6 10
Retirement of treasury stock -- (1) --
Stock split (2-for-1 in 2004) -- 5 --
---------------------------
Balance at end of year 6 10 10
---------------------------
Additional Paid-in Capital:
Balance at beginning of year 18 23 28
Stock-based compensation expense 6 6 7
Adjustment for stock option exercises (1) (3) (3)
Excess tax benefits from stock options -- 2 2
---------------------------
Balance at end of year 23 28 34
---------------------------
Retained Earnings:
Balance at beginning of year 1,349 1,492 1,218
Retirement of treasury stock -- (420) --
Stock split (2-for-1 in 2004) -- (10) --
Loss on issuance of treasury stock (1) (4) (3)
Adjustment for stock option exercises 1 3 3
Net income 242 254 308
Cash dividends ($0.73, $0.80, and $0.92 per
share in 2003, 2004, and 2005, respectively) (99) (97) (111)
---------------------------
Balance at end of year 1,492 1,218 1,415
---------------------------
Treasury Stock, at cost:
Balance at beginning of year (40) (593) (156)
Acquisition of treasury stock (561) -- (3)
Treasury stock issued under compensation plans 8 16 12
Retirement of treasury stock (567,000 Class A
and 5,414,000 Class B shares in 2004) -- 421 --
---------------------------
Balance at end of year (593) (156) (147)
---------------------------
Accumulated Other Comprehensive Income (Loss):
Balance at beginning of year (19) (83) (14)
Net other comprehensive income (loss) (64) 69 3
---------------------------
Balance at end of year (83) (14) (11)
---------------------------
Total Stockholders' Equity $849 $1,095 $1,310
===========================
Comprehensive Income:
Net income $242 $254 $308
Other comprehensive income (loss):
Foreign currency translation adjustment 13 18 11
Pension liability adjustment, net of
tax of $52, $31, and $4 in 2003
2004, and 2005, respectively (76) 47 (6)
Amounts related to cash flow hedges:
Reclassification to earnings,
net of tax of $4, $3, and $2 in 2003,
2004, and 2005, respectively 6 5 3
Net loss on hedging instruments,
net of tax of $4, $1, and $3 in 2003,
2004, and 2005, respectively (7) (1) (5)
---------------------------
Net other comprehensive income (loss) (64) 69 3
---------------------------
Total Comprehensive Income $178 $323 $311
===========================
Class A Common Shares Outstanding (in thousands):
Balance at beginning of year 28,891 28,420 56,841
Acquisition of treasury stock (471) -- (59)
Stock split (2-for-1 in 2004) -- 28,421 --
---------------------------
Balance at end of year 28,420 56,841 56,782
---------------------------
Class B Common Shares Outstanding (in thousands):
Balance at beginning of year 39,457 32,147 64,747
Acquisition of treasury stock (7,436) -- --
Stock split (2-for-1 in 2004) -- 32,147 --
Treasury stock issued under compensation plans 126 453 359
---------------------------
Balance at end of year 32,147 64,747 65,106
---------------------------
Total Common Shares Outstanding (in thousands) 60,567 121,588 121,888
===========================
The accompanying notes are an integral part of the consolidated financial
statements.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars expressed in millions, except per share and per option amounts)
1. ACCOUNTING POLICIES
References to "FASB" are to the Financial Accounting Standards Board, the
private-sector organization that establishes financial accounting and reporting
standards, including Statements of Financial Accounting Standards ("SFAS").
PRINCIPLES OF CONSOLIDATION. Our consolidated financial statements include the
accounts of all wholly-owned and majority-owned subsidiaries. We use the equity
method to account for investments in affiliates over which we can exercise
significant influence (but not control). We carry all other investments in
affiliates at cost. We eliminate all intercompany transactions.
CASH EQUIVALENTS. Cash equivalents include bank demand deposits and all highly
liquid investments with original maturities of three months or less.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We evaluate the collectibility of accounts
receivable based on a combination of factors. When we are aware of circumstances
that may impair a specific customer's ability to meet its financial obligations,
we record a specific allowance to reduce the net recognized receivable to the
amount we reasonably believe will be collected. For all other customers, we
recognize allowances for doubtful accounts based on the length of time the
receivables are outstanding, the current business environment, and our
historical collection experience for customers of similar nature and background.
INVENTORIES. We state inventories at the lower of cost or market, with
approximately 80% of consolidated inventories being valued using the last-in,
first-out (LIFO) method. Other inventories are valued using the first-in,
first-out (FIFO) method. If the FIFO method had been used, inventories would
have been $146 and $137 higher than reported at April 30, 2004 and 2005,
respectively. FIFO cost approximates current replacement cost.
Whiskey must be barrel-aged for several years, so we bottle and sell only a
portion of our whiskey inventory each year. Following industry practice, we
classify all barreled whiskey as a current asset. We include warehousing,
insurance, ad valorem taxes, and other carrying charges applicable to barreled
whiskey in inventory costs.
We classify bulk wine inventories as work in process.
PROPERTY, PLANT, AND EQUIPMENT. We state property, plant, and equipment at cost
less accumulated depreciation. We calculate depreciation on a straight-line
basis over the estimated useful lives of the assets as follows: 20 to 40 years
for buildings and improvements, 3 to 10 years for machinery, equipment,
furniture, and fixtures, and 3 to 7 years for capitalized software costs.
FOREIGN CURRENCY TRANSLATION. The U.S. dollar is the functional currency for
most of our consolidated operations. For those operations, we report all gains
and losses from foreign currency transactions in current income. The local
currency is the functional currency for some foreign operations. For those
investments, we report cumulative translation effects in the cumulative
translation adjustment to stockholders' equity.
REVENUE RECOGNITION. We recognize revenue on our retail and other
direct-to-consumer sales when the product is delivered to the customer. We
recognize revenue on wholesale sales when title and risk of loss pass to the
distributor, which typically is at the time the product is shipped. Certain
sales contain customer acceptance provisions that grant a right of return on the
basis of either subjective criteria or specified objective criteria. Revenue is
recorded net of the estimated cost of sales returns and allowances.
COST OF SALES. Cost of sales includes the costs of receiving, producing,
inspecting, warehousing, insuring, and shipping goods sold during the period.
43
SHIPPING AND HANDLING FEES AND COSTS. We report the amounts we bill to our
customers for shipping and handling as net sales, and we report the costs we
incur for shipping and handling as cost of sales.
ADVERTISING COSTS. We expense most advertising costs as we incur them, but we
capitalize and amortize certain direct-response advertising costs over periods
not exceeding one year. Capitalized advertising costs totaled $9 and $6 at April
30, 2004 and 2005, respectively.
SALES INCENTIVES. We offer sales discounts and provide consideration to certain
of our distributors under cooperative advertising arrangements. Discounts, which
are recorded as a reduction of net sales, totaled $120, $125, and $132 for 2003,
2004, and 2005, respectively. The cost of cooperative advertising arrangements,
which are recorded as advertising expenses, totaled $10, $9, and $9 for 2003,
2004, and 2005, respectively.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses include the costs associated with our sales force,
administrative staff and facilities, and other expenses related to the
non-production functions of our business.
EARNINGS PER SHARE. We calculate basic earnings per share as net income divided
by the weighted average number of common shares outstanding during the year. We
calculate diluted earnings per share the same way, except that the denominator
also includes the additional common shares that would have been issued if
outstanding stock options had been exercised, as determined by applying the
treasury stock method.
The following table presents information concerning basic and diluted earnings
per share:
Year Ended April 30, 2003 2004 2005
- --------------------------------------------------------------------------------
Basic and diluted net income $242 $254 $308
Share data (in thousands):
Basic average common shares outstanding 134,748 121,359 121,746
Effect of dilutive stock options 378 627 761
------------------------------
Diluted average common shares outstanding 135,126 121,986 122,507
==============================
Basic earnings per share $1.79 $2.09 $2.53
Diluted earnings per share $1.79 $2.08 $2.52
STOCK OPTIONS. In December 2004, the FASB issued SFAS 123(R), "Share-Based
Payment," which requires companies to expense the fair value of stock options
and other forms of stock-based compensation. We adopted SFAS 123(R) during the
fourth quarter of fiscal 2005 by retroactively adjusting our financial
statements for all periods since fiscal 1997, when we first began granting stock
options.
Our stock option plan requires that we purchase shares to satisfy stock option
requirements, thereby avoiding future dilution of earnings that would occur from
issuing additional shares. We acquire treasury shares from time to time in
anticipation of these requirements. We intend to hold enough treasury stock so
that the number of diluted shares never exceeds the original number of shares
outstanding at the inception of the stock option plan (as adjusted for any share
issuances unrelated to the plan). The extent to which the number of diluted
shares exceeds the number of basic shares is determined by how much our stock
price has appreciated since the options were granted, not by how many treasury
shares we have acquired.
ESTIMATES. To prepare financial statements that conform with generally accepted
accounting principles, our management must make informed estimates that affect
how we report revenues, expenses, assets, and liabilities, including contingent
assets and liabilities. Actual results could (and probably will) differ from
these estimates.
2. ACQUISITIONS
The following are major acquisitions made over the past three years, each of
which was accounted for as a purchase.
FINLANDIA. In December 2004, we acquired the remaining capital stock of
Finlandia Vodka Worldwide Ltd. ("FVW") from the Altia Corporation of Finland
("Altia") for $64. The value of FVW consists primarily of the Finlandia brand
name, which has an indefinite useful life. As a result of this transaction, we
have preliminarily allocated an additional $84 to the Finlandia brand name,
which is partially offset by a deferred income tax liability of $25, and $5 to
various other net assets.
As previously disclosed, we acquired 45% of FVW in 2000 and an additional 35% in
2002. The 2002 acquisition agreement granted Altia an option to require
Brown-Forman to buy its remaining interest in FVW during a two-year window
beginning December 31, 2004. The recent transaction reflects Altia's exercise of
that option.
TUACA. In February 2003, we acquired the remaining 55% interest in Distillerie
Tuoni e Canepa ("T&C") for $27 in cash (net of cash acquired) and a promissory
note of $33 that was paid in March 2004. T&C is the Italy-based owner and
producer of Tuaca liqueur, which we have distributed in the United States since
1999. This increased our total investment in T&C to $77, which we have allocated
to the individual assets and liabilities acquired. The investment consists
primarily of indefinite-lived intangible assets, including the Tuaca brand name
and goodwill. For financial reporting purposes, we have assigned a value of $20
to the Tuaca brand name and $64 to goodwill.
The operating results of both FVW and T&C have been consolidated with our
financial statements since we acquired majority ownership during fiscal 2003.
(We previously accounted for our investments in those companies using the equity
method). Consolidated pro forma operating results for the fiscal year ended
April 30, 2003 would not have been materially different from the actual amounts
reported for that period.
44
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the changes in the amounts recorded as goodwill over
the past two years:
Consumer
Beverages Durables Total
--------- -------- --------
Goodwill:
Balance as of April 30, 2003 $181 $130 $311
Purchase price allocation adjustment (1) -- (1)
Foreign currency translation adjustment 5 -- 5
------------------------------
Balance as of April 30, 2004 185 130 315
Impairment -- (37) (37)
Foreign currency translation adjustment 4 -- 4
------------------------------
Balance as of April 30, 2005 $189 $ 93 $282
==============================
The $37 impairment charge shown above reflects our lowered expectations for the
future prospects of the Lenox retail outlet business in light of changing
consumer buying patterns. The amount represents the excess of the previously
recorded book value of the goodwill over the fair value, as estimated using
discounted projected future cash flows based on the revised long-term outlook
for the business.
Our other intangible assets consist of trademarks and brand names. As of April
30, 2005, we consider all of our trademarks and brand names to have indefinite
useful lives.
4. COMMITMENTS
We have contracted with various growers and wineries to supply some of our
future grape and bulk wine requirements. Many of these contracts call for prices
to be determined by market conditions, but some contracts provide for minimum
purchase prices that may exceed market prices. We have purchase obligations
related to these contracts of $33 in 2006, $39 in 2007, $30 in 2008, $20 in
2009, $14 in 2010, and $38 after 2010.
We made rental payments under operating leases for real estate, vehicles, and
office, computer, and manufacturing equipment of $32 in 2003, $35 in 2004, and
$31 in 2005. We have commitments related to minimum lease payments of $22 in
2006, $13 in 2007, $7 in 2008, $3 in 2009, $2 in 2010, and $9 after 2010.
5. CREDIT FACILITIES
We have a committed revolving credit agreement with various domestic and
international banks for $400, which expires in fiscal 2010. Its most restrictive
covenant requires that our consolidated total debt to consolidated net worth not
exceed a ratio of 2 to 1. At April 30, 2005, we were well within this covenant's
parameters. At April 30, 2005, we also had $220 of debt securities available for
issuance under an SEC shelf registration.
6. DEBT
Our long-term debt consisted of the following:
April 30, 2004 2005
- --------------------------------------------------------------------------------
2.125% notes, due in fiscal 2006 $249 $249
3.0% notes, due in fiscal 2008 348 349
6.82% to 7.38% notes, due in fiscal 2006 30 30
Variable rate industrial
revenue bonds, due through 2026 3 3
-------------------------------
630 631
Less current portion -- 279
-------------------------------
$630 $352
===============================
45
Debt payments required over the next five fiscal years consist of $280 in 2006
and $350 in 2008. The weighted average interest rates on the variable-rate
industrial revenue bonds were 1.2% and 1.6% at April 30, 2004 and 2005,
respectively. In addition to long-term debt, we had commercial paper outstanding
with weighted average interest rate of 1.0% at April 30, 2004.
7. FOREIGN CURRENCY RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
We use foreign currency options and forward contracts, generally with average
maturities of less than one year, as protection against the risk that the
eventual U.S. dollar cash flows resulting from our forecasted sales and
purchases of goods and services in foreign currencies will be adversely affected
by changes in exchange rates. We designate these derivative financial
instruments as cash flow hedges.
We formally assess (both at inception and at least quarterly) whether the
derivative financial instruments are effective at offsetting changes in the cash
flows of the hedged transactions. We defer the effective portion of a
derivative's change in fair value in Accumulated Other Comprehensive Income
(Loss) until the underlying hedged transaction is recognized in earnings. We
recognize any ineffective portion of the change in fair value immediately in
earnings. No material gains or losses were recognized in earnings due to the
ineffectiveness of cash flow hedges.
We had outstanding foreign currency option and forward contracts, hedging
primarily British pound, Australian dollar, euro, and South African rand
revenues, with notional amounts totaling $188 and $212 at April 30, 2004 and
2005, respectively. Our credit exposure is, however, limited to the contracts'
fair value (see Note 8) rather than their notional amounts. We minimize credit
exposure by entering into foreign currency contracts only with major financial
institutions that have earned investment grade credit ratings.
8. 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.
We estimate the fair value of long-term debt using discounted cash flows based
on our incremental borrowing rates for similar debt. 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:
April 30, 2004 2005
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Assets:
Cash and
cash equivalents $ 68 $ 68 $295 $295
Foreign currency
contracts 6 6 -- --
Liabilities:
Foreign currency
contracts -- -- 1 1
Commercial paper 50 50 -- --
Long-term debt 630 623 631 618
9. BALANCE SHEET INFORMATION
April 30, 2004 2005
- --------------------------------------------------------------------------------
Property, plant, and equipment:
Land $ 92 $ 89
Buildings 346 340
Equipment 538 543
Construction in process 24 26
-------------------------------
1,000 998
Less accumulated depreciation 485 497
-------------------------------
$515 $501
===============================
Accounts payable and accrued expenses:
Accounts payable, trade $ 92 $ 99
Accrued expenses:
Advertising 37 43
Compensation and commissions 65 91
Excise and other non-income taxes 20 24
Self-insurance claims 12 11
Interest 4 4
Other 41 39
-------------------------------
179 212
-------------------------------
$271 $311
===============================
46
10. TAXES ON INCOME
We incur income taxes on our domestic and foreign operations. The following
table, based on the locations of the taxable entities from which sales were
derived (rather than the location of customers), presents the domestic and
foreign components of our income before income taxes:
Year Ended April 30, 2003 2004 2005
- --------------------------------------------------------------------------------
United States $299 $298 $322
Foreign 68 83 154
------------------------------------
$367 $381 $476
====================================
The income shown above was determined according to financial accounting
standards. Because those standards sometimes differ from the tax rules used to
calculate taxable income, there are differences between: (a) the amount of
taxable income and pretax financial income for a year; and (b) the tax bases of
assets or liabilities and their amounts as recorded in our financial statements.
As a result, we recognize a current tax liability for the estimated income tax
payable on the current tax return, and deferred tax liabilities (income tax
payable on income that will be recognized on future tax returns) and deferred
tax assets (income tax refunds from deductions that will be recognized on future
tax returns) for the estimated effects of the differences mentioned above.
Deferred tax assets and liabilities as of the end of each of the last two years
were as follows:
April 30, 2004 2005
- --------------------------------------------------------------------------------
Deferred tax assets:
Postretirement and other benefits $ 30 $ 37
Accrued liabilities and other 9 6
Inventories 52 57
-----------------------------------
Total deferred tax assets 91 100
-----------------------------------
Deferred tax liabilities:
Trademarks and brand names 68 96
Property, plant, and equipment 48 48
Undistributed foreign earnings 17 17
Other 3 --
-----------------------------------
Total deferred tax liabilities 136 161
-----------------------------------
Net deferred tax liability $ 45 $ 61
===================================
Deferred tax liabilities were not provided on undistributed earnings of certain
foreign subsidiaries ($243 and $265 at April 30, 2004 and 2005, respectively)
because we expect these undistributed earnings to be reinvested indefinitely
overseas. If these amounts were not considered permanently reinvested,
additional deferred tax liabilities of approximately $41 and $45 would have been
provided as of April 30, 2004 and 2005, respectively.
Total income tax expense for a year includes the tax associated with the current
tax return ("current tax expense") and the change in the net deferred tax
liability ("deferred tax expense"). Total income tax expense for each of the
last three years was as follows:
Year Ended April 30, 2003 2004 2005
- --------------------------------------------------------------------------------
Current:
Federal $114 $100 $135
Foreign 13 20 19
State and local 16 13 20
------------------------------------
143 133 174
------------------------------------
Deferred:
Federal (14) (1) (2)
Foreign (2) (2) (3)
State and local (2) (3) (1)
------------------------------------
(18) (6) (6)
------------------------------------
$125 $127 $168
====================================
Our consolidated effective tax rate may differ from current statutory rates due
to the recognition of amounts for events or transactions that have no tax
consequences. The following table reconciles our effective tax rate to the
federal statutory tax rate in the United States:
Percent of Income Before Taxes
- --------------------------------------------------------------------------------
Year Ended April 30, 2003 2004 2005
- --------------------------------------------------------------------------------
U.S federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of U.S.
federal tax benefit 2.5 1.8 1.4
Income taxed at other than U.S.
federal statutory rate (2.1) (1.4) (2.0)
Tax benefit from export sales (1.7) (2.1) (2.1)
Impairment charges -- -- 2.9
Other, net 0.4 0.1 0.1
-------------------------------------
Effective rate 34.1% 33.4% 35.3%
=====================================
11. PENSION AND OTHER POSTRETIREMENT BENEFITS
We sponsor various defined benefit pension plans as well as postretirement plans
providing retiree health care and retiree life insurance benefits. The following
discussion provides information about our obligations related to these plans,
the assets dedicated to meeting the obligations, and the amounts we recognized
in our financial statements as a result of sponsoring these plans. We use a
measurement date of January 31 to determine the amounts of the plan obligations
and assets presented below.
47
OBLIGATIONS. We provide eligible employees with pension and other postretirement
benefits based on such factors as years of service and compensation level during
employment. The pension obligation shown below ("projected benefit obligation")
consists of: (a) benefits earned by employees to date based on current salary
levels ("accumulated benefit obligation"); and (b) benefits to be received by
the employees as a result of expected future salary increases. (The obligation
for medical and life insurance benefits is not affected by future salary
increases). This table shows how the present value of our obligation changed
during each of the last two years.
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
Year Ended April 30, 2004 2005 2004 2005
- --------------------------------------------------------------------------------
Obligation at beginning of year $449 $511 $ 79 $ 79
Service cost 14 17 2 2
Interest cost 29 30 5 4
Actuarial loss (gain) 38 23 (4) (3)
Retiree contributions -- -- 1 1
Benefits paid (19) (22) (4) (5)
----------------------------------------
Obligation at end of year $511 $559 $ 79 $ 78
========================================
Service cost represents the present value of the benefits attributed to service
rendered by employees during the year. Interest cost is the increase in the
present value of the obligation due to the passage of time. Actuarial loss
(gain) is the change in value of the obligation resulting from experience
different from that assumed or from a change in an actuarial assumption. (The
actuarial assumptions used are discussed at the end of this note).
As shown in the previous table, our pension and other postretirement benefit
obligations were reduced by benefit payments in 2005 of $22 and $5,
respectively. Expected benefit payments over the next ten years are as follows:
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
2006 $ 23 $ 4
2007 24 4
2008 26 4
2009 27 4
2010 28 4
2011-2015 162 26
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the
Act") was enacted in December 2003. The Act provides a federal subsidy to plan
sponsors for certain qualifying prescription drug benefits covered under the
sponsor's postretirement medical benefit plans. The Act reduced our
postretirement benefit expense by $2 during 2005 and reduced our benefit
obligation by $16.
48
ASSETS. We specifically invest certain assets in order to fund our pension
benefit obligations. Our investment goal is to earn a total return that over
time will grow assets sufficient to fund our plans' liabilities, after providing
appropriate levels of contributions and accepting prudent levels of investment
risk. In order to achieve this goal, plan assets are invested primarily in funds
or portfolios of funds actively managed by outside managers. Investment risk is
managed to prudent levels by company policies that require diversification of
asset classes, manager styles and individual holdings. We measure and monitor
investment risk through quarterly and annual performance reviews, and periodic
asset/liability studies.
Asset allocation is the most important method for achieving our investment goals
and is based on our assessment of the plans' long-term return objectives and the
appropriate balances needed for liquidity, stability and diversification. The
allocation of our pension plan assets at fair value on January 31, 2004 and
2005, and the target allocation for 2006, by asset category, are as follows:
Asset Allocation
- --------------------------------------------------------------------------------
Actual Actual Target
2004 2005 2006
- --------------------------------------------------------------------------------
Equity securities 73% 71% 70%
Debt securities 15 16 15
Real estate 4 5 5
Other 8 8 10
----------------------------------------
Total 100% 100% 100%
========================================
This table shows how the fair value of the pension plan assets changed during
each of the last two years. (We do not have assets set aside for postretirement
medical or life insurance benefits).
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
Year Ended April 30, 2004 2005 2004 2005
- --------------------------------------------------------------------------------
Fair value at beginning of year $334 $421 $ -- $ --
Actual return on plan assets 97 23 -- --
Retiree contributions -- -- 1 1
Company contributions 9 13 3 4
Benefits paid (19) (22) (4) (5)
----------------------------------------
Fair value at end of year $421 $435 $ -- $ --
========================================
Consistent with our funding policy, we expect to contribute $8 to our pension
plans and $7 to our other postretirement benefit plans in 2006.
FUNDED STATUS. The funded status of a plan refers to the difference between its
assets and its obligations. This amount differs from the amount recognized on
the balance sheet because, as discussed below, certain changes in the present
value of the obligation and the fair value of the plan assets are amortized over
several years for accounting purposes. This table reconciles the funded status
of the plans to the net amount recognized on the balance sheet.
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
April 30, 2004 2005 2004 2005
- --------------------------------------------------------------------------------
Assets $ 421 $ 435 $ -- $ --
Obligations (511) (559) (79) (78)
--------------------------------------
Funded status (90) (124) (79) (78)
Unrecognized net loss 187 226 7 5
Unrecognized prior service cost 8 7 5 4
Other -- -- 1 1
--------------------------------------
Net amount recognized on balance sheet $ 105 $ 109 $(66) $(68)
======================================
The unrecognized net loss for the pension plans primarily relates to the
difference between the actual cumulative return on plan assets versus the
expected cumulative return. (See below for assumptions regarding expected return
on plan assets).
The net amount is recognized on the consolidated balance sheet as follows:
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
April 30, 2004 2005 2004 2005
- --------------------------------------------------------------------------------
Prepaid pension cost $118 $130 $ -- $ --
Accrued postretirement benefits (71) (88) (66) (68)
Other assets 5 3 -- --
Accumulated other comprehensive loss 53 64 -- --
--------------------------------------
Net amount recognized on balance sheet $105 $109 $(66) $(68)
======================================
This table compares our pension plans that have assets in excess of their
accumulated benefit obligations with those whose assets are less than their
obligations. (As discussed above, we have no assets set aside for postretirement
medical or life insurance benefits).
Accumulated Projected
Benefit Benefit
Plan Assets Obligation Obligation
- -------------------------------------------------------------------------------
April 30, 2004 2005 2004 2005 2004 2005
- -------------------------------------------------------------------------------
Plans with assets in
excess of accumulated
benefit obligation $292 $306 $259 $285 $292 $321
Plans with accumulated
benefit obligation in
excess of assets 129 129 200 217 219 238
------------------------------------------------
Total $421 $435 $459 $502 $511 $559
================================================
49
PENSION (INCOME) EXPENSE. This table shows the components of the pension
(income) expense recognized during each of the last three years. The amount for
each year includes amortization of the prior service cost, net loss, and the
transition asset that was unrecognized as of the beginning of the year.
Pension Benefits
- --------------------------------------------------------------------------------
Year Ended April 30, 2003 2004 2005
- --------------------------------------------------------------------------------
Service cost $ 13 $ 14 $ 17
Interest cost 27 29 30
Expected return on plan assets (49) (44) (43)
Amortization of:
Unrecognized prior service cost 1 1 1
Unrecognized net loss -- -- 4
Unrecognized transition asset (2) (1) --
-----------------------------------------
Net (income) expense $(10) $ (1) $ 9
=========================================
The prior service cost represents the cost of retroactive benefits granted in
plan amendments and is amortized on a straight-line basis over the average
remaining service period of the employees expected to receive the benefits. The
net loss results from experience different from that assumed or from a change in
actuarial assumptions, and is amortized over at least that same period. The
unrecognized transition asset was amortized on a straight-line basis through
2004.
The pension (income) expense recorded during the year is estimated at the
beginning of the year. As a result, the amount is calculated using an expected
return on plan assets rather than the actual return. The difference between
actual and expected returns is included in the unrecognized net loss at the end
of the year.
OTHER POSTRETIREMENT BENEFIT EXPENSE. This table shows the components of the
postretirement medical and life insurance benefit expense that we recognized
during each of the last three years.
Medical and Life Insurance Benefits
- --------------------------------------------------------------------------------
Year Ended April 30, 2003 2004 2005
- --------------------------------------------------------------------------------
Service cost $2 $2 $2
Interest cost 5 5 4
Amortization of unrecognized net loss -- 1 --
-----------------------------------------
Net expense $7 $8 $6
=========================================
ASSUMPTIONS AND SENSITIVITY. We use various assumptions to determine the
obligations and (income) expense related to our pension and other postretirement
benefit plans. The assumptions used in computing benefit plan obligations as of
the end of the last two years were as follows:
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
In Percent 2004 2005 2004 2005
- --------------------------------------------------------------------------------
Discount rate 6.00 5.80 6.00 5.80
Rate of salary increase 4.00 4.00 -- --
Expected return on plan assets 8.75 8.75 -- --
50
The assumptions used in computing benefit plan (income) expense during each of
the last three years were as follows:
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
In Percent 2003 2004 2005 2003 2004 2005
- --------------------------------------------------------------------------------
Discount rate 7.00 6.50 6.00 7.00 6.50 6.00
Rate of salary increase 4.00 4.00 4.00 -- -- --
Expected return on plan assets 9.50 8.75 8.75 -- -- --
The discount rate represents the interest rate used to discount the cash-flow
stream of benefit payments to a net present value as of the current date. A
lower assumed discount rate increases the present value of the benefit
obligation.
The assumed rate of salary increase reflects the expected annual increase in
salaries as a result of inflation, merit increases, and promotions. A lower
assumed rate decreases the present value of the benefit obligation.
The expected return on plan assets represents the long-term rate of return that
we assume will be earned over the life of the pension assets, considering the
distribution of those assets among investment categories and the related
historical rates of return.
The assumed healthcare cost trend rates as of the end of the last two years were
as follows:
Medical and Life Insurance Benefits
- --------------------------------------------------------------------------------
In Percent 2004 2005
- --------------------------------------------------------------------------------
Healthcare cost trend rates:
Present rate before age 65 8.88 8.32
Present rate age 65 and after 10.38 9.57
We project healthcare cost trend rates to decline gradually to 5.5% by 2010 and
to remain level after that. Assumed healthcare cost trend rates have a
significant effect on the amounts reported for postretirement medical plans. A
one percentage point increase/decrease in assumed healthcare cost trend rates
would have increased/decreased the accumulated postretirement benefit obligation
as of April 30, 2005 by $7 and the aggregate service and interest costs for 2005
by $1.
12. BUSINESS SEGMENT INFORMATION
We do business in two operating segments - Beverages and Consumer Durables. Our
Beverages segment produces, imports, and markets beverage alcohol products. Our
Consumer Durables segment manufactures and sells china, crystal, ceramic and
crystal collectibles, silver, luggage, and leather accessories. Segment
accounting policies are the same as the policies described in Note 1. We have no
intersegment revenues.
The following tables reconcile segment operating results and asset information
to consolidated amounts.
2003 2004 2005
- --------------------------------------------------------------------------------
Net sales:
Beverages $1,795 $1,992 $2,195
Consumer Durables 581 585 534
-----------------------------------------------
Consolidated net sales $2,376 $2,577 $2,729
===============================================
Segment profit (loss):
Beverages $ 342 $ 383 $ 446
Consumer Durables 30 17 (28)
Amounts not allocated to segments:
Gain on sale of investment
in affiliate -- -- 72
Interest expense, net (5) (19) (14)
-----------------------------------------------
Consolidated income
before income taxes $ 367 $ 381 $ 476
===============================================
Depreciation and amortization:
Beverages $ 38 $ 40 $ 42
Consumer Durables 17 16 16
-----------------------------------------------
Consolidated depreciation
and amortization $ 55 $ 56 $ 58
===============================================
Goodwill:
Beverages $ 181 $ 185 $ 189
Consumer Durables 130 130 93
-----------------------------------------------
Consolidated goodwill $ 311 $ 315 $ 282
===============================================
Total assets:
Beverages $1,809 $1,924 $2,249
Consumer Durables 455 452 375
-----------------------------------------------
Consolidated total assets $2,264 $2,376 $2,624
===============================================
Our investments in affiliates are included in the Beverages segment's assets.
Long-lived assets located outside the United States are not significant.
2003 2004 2005
- --------------------------------------------------------------------------------
Additions to long-lived assets:
Beverages $ 96 $ 42 $48
Consumer Durables 32 21 7
-----------------------------------------------
$128 $ 63 $55
===============================================
51
The following table presents net sales by product category:
2003 2004 2005
- --------------------------------------------------------------------------------
Net sales:
Spirits $1,400 $1,639 $1,824
Wines 395 353 371
Tabletop and Gift 554 557 502
Luggage 27 28 32
-----------------------------------------------
$2,376 $2,577 $2,729
===============================================
The following table presents geographic information about net sales:
2003 2004 2005
- --------------------------------------------------------------------------------
Net sales:
United States $1,824 $1,823 $1,822
Other countries 552 754 907
-----------------------------------------------
$2,376 $2,577 $2,729
===============================================
Net sales are attributed to countries based on where customers are located.
13. CONTINGENCIES
We operate in a litigious environment, and we get sued in the normal course of
business. Sometimes plaintiffs seek substantial damages. Significant judgment is
required in predicting the outcome of these suits and claims, many of which take
years to adjudicate. We accrue estimated costs for a contingency when we believe
that a loss is probable, and adjust the accrual as appropriate to reflect
changes in facts and circumstances.
A law firm has sued Brown-Forman and many other manufacturers and marketers of
spirits, wines, and beer in a series of nine very similar class action lawsuits
seeking damages and injunctive relief from alleged marketing of beverage alcohol
to underage consumers. The suits allege that the defendants engage in deceptive
and negligent marketing practices targeting underage consumers. They seek to
recover on behalf of parents those funds that their children spent on the
illegal purchase of alcohol as well as disgorgement of all profits from the
alleged illegal sales. Brown-Forman is vigorously defending these cases, four of
which are pending on motions to dismiss. It is not possible at this time to
predict the outcome of these claims but an unfavorable result in these or
similar class action lawsuits could have a material adverse impact on our
business.
14. ENVIRONMENTAL MATTERS
We face environmental claims resulting from the cleanup of several manufacturing
or waste disposal sites in the United States. We accrue for losses associated
with environmental cleanup obligations when such losses are probable and can be
reasonably estimated. At some sites, there are other potentially responsible
parties who are expected to bear part of the costs, in which cases our accrual
is based on our estimate of our share of the total costs. A portion of the
cleanup costs with respect to certain sites is expected to be paid by insurance.
The estimated recovery of cleanup costs from insurers is recorded as an asset
when receipt is deemed probable.
We do not believe that any additional environmental cleanup costs we incur will
have a material adverse effect on our consolidated financial position, results
of operations, or cash flows.
15. STOCK OPTIONS
Under our 2004 Omnibus Compensation Plan ("the Plan"), we can grant stock
options and other stock-based incentive awards for a total of 5,946,000 shares
of common stock to eligible employees until July 22, 2014. As of April 30, 2005,
awards for 5,282,000 shares remain available for issuance under the Plan. Shares
delivered to employees are limited by the Plan to shares that we purchase for
this purpose. No new shares may be issued.
52
We grant stock options at an exercise price of not less than the fair value of
the underlying stock on the grant date. Except for the stock options granted at
an exercise price of $50 per share (discussed below), stock options granted
under the Plan become exercisable after three years from the first day of the
fiscal year of grant and expire seven years after that date. The grant-date fair
values of these options granted during 2003, 2004, and 2005 were $7.77, $9.29,
and $10.78 per option, respectively. Fair values were estimated using the
Black-Scholes pricing model with the following assumptions:
2003 2004 2005
- --------------------------------------------------------------
Risk-free interest rate 3.9% 3.6% 4.0%
Expected volatility 24.1% 24.6% 24.0%
Expected dividend yield 2.0% 1.9% 1.9%
Expected life (years) 6 6 6
We have also granted 1,060,000 stock options with an exercise price of $50 per
share that become exercisable on May 1, 2006, and expire on September 1, 2007.
The fair value of these options was $2.89 per option, using the Black-Scholes
pricing model and assuming 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
eight years.
We also grant restricted shares of common stock under the Plan. As of April 30,
2005, there are approximately 36,000 restricted shares outstanding, with a
remaining restriction period of six years.
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment," which
requires companies to expense the fair value of stock options and other forms of
stock-based compensation. We adopted SFAS 123(R) during the fourth quarter of
fiscal 2005 by retroactively adjusting our financial statements for all periods
since fiscal 1997, when we first began granting stock options. The adoption of
SFAS 123(R) increased (decreased) deferred tax assets, additional paid-in
capital, and retained earnings as of April 30, 2003 by $9, $23, and ($14),
respectively. It also reduced previously reported net income for both 2003 and
2004 by $4, and reduced basic and diluted earnings per share for both 2003 and
2004 by $0.03.
The accompanying statements of income reflect compensation expense related to
stock-based incentive awards on a pre-tax basis of $6 in 2003 and 2004 and $7 in
2005, partially offset by deferred income tax benefits of $2 in 2003 and 2004
and $3 in 2005.
A summary of option activity under the Plan as of April 30, 2005, and changes
during the year then ended is presented below. All options are for an equivalent
number of shares of Class B common stock.
Weighted Weighted
Shares Average Exercise Average Remaining Aggregate
(in thousands) Price Per Option Contractual Term Intrinsic Value
- --------------------------------------------------------------------------------------------------------
Outstanding at May 1, 2004 4,851 $35.67
Granted 635 46.58
Exercised (322) 27.67
Forfeited or expired (17) 41.73
------------------------------------------------------------------------
Outstanding at April 30, 2005 5,147 $37.50 5.4 $93
------------------------------------------------------------------------
Exercisable at April 30, 2005 2,056 $29.44 4.5 $54
------------------------------------------------------------------------
The total intrinsic value of options exercised during 2003, 2004, and 2005 was
$3, $8, and $7, respectively.
As of April 30, 2005, there was $11 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average period of
2.6 years.
16. RESTRUCTURING COSTS
During 2002, we accrued $17 of costs related to our decision to close three
manufacturing plants in the Consumer Durables segment. The $17 included $9 of
severance costs for 600 terminated employees, $5 of other estimated cash
expenditures, and $3 of losses on impaired machinery and equipment. We closed
one plant during fiscal 2002 and the other two during fiscal 2003. We have
replaced the output of these plants by shifting a portion of production to two
of our other facilities and by outsourcing the remainder. During 2004, we
accrued an additional $2 for anticipated losses on the sale of buildings and
equipment. We have charged $18 of costs against the accrual through April 30,
2005, including $9 of severance costs, $5 of other cash expenditures, and $4 of
losses on impaired machinery and equipment, leaving a remaining accrual balance
of $1 as of April 30, 2005.
17. SALE OF INVESTMENT IN AFFILIATE
During 2005, we sold our equity stake in Glenmorangie plc for proceeds of $93
(net of disposal costs), resulting in a pre-tax gain of $72. Under pre-existing
contracts, Brown-Forman continues to have distribution and marketing rights for
Glenmorangie brands in the U.S. and other select markets and marketing and
representation rights for the brands in several European markets.
53
REPORTS OF MANAGEMENT
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Our management is responsible for the preparation, presentation, and integrity
of the financial information presented in this Annual Report. The consolidated
financial statements were prepared in conformity with accounting principles
generally accepted in the United States of America (GAAP), including amounts
based on management's best estimates and judgments. In management's opinion, the
consolidated financial statements fairly present the Company's financial
position, results of operations, and cash flows.
The Audit Committee of the Board of Directors, which is composed of independent
directors, meets regularly with the independent registered public accounting
firm, PricewaterhouseCoopers LLP (PwC), the internal auditors, and
representatives of management to review accounting, internal control structure,
and financial reporting matters. The internal auditors and PwC have full and
free access to the Audit Committee. As set forth in our Code of Conduct and
Compliance Guidelines, we are firmly committed to adhering to the highest
standards of moral and ethical behaviors in all of our business activities.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is also responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.
Under our supervision, and with the participation of management, we conducted an
evaluation of the effectiveness of the Company's internal control over financial
reporting based on the framework and criteria in "Internal Control - Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management concluded that the Company's
internal control over financial reporting was effective as of April 30, 2005.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of April 30, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
which also audited the Company's consolidated financial statements in their
report that appears on page 55.
/s/ Owsley Brown II
Owsley Brown II
Chairman of the Board
and Chief Executive Officer
/s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President
and Chief Financial Officer
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF BROWN-FORMAN CORPORATION:
We have completed an integrated audit of Brown-Forman Corporation's 2005
consolidated financial statements and of its internal control over financial
reporting as of April 30, 2005 and audits of its 2004 and 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
CONSOLIDATED FINANCIAL STATEMENTS: In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of income, cash flows and
of stockholders' equity present fairly, in all material respects, the financial
position of Brown-Forman Corporation and its subsidiaries (the "Company") at
April 30, 2005 and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended April 30, 2005, in
conformity with accounting principles generally accepted in the United States of
America. 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 the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements 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 our opinion.
As discussed in Note 15 to the consolidated financial statements, the Company
changed the manner in which it accounts for stock-based compensation as of
February 1, 2005.
INTERNAL CONTROL OVER FINANCIAL REPORTING: Also, in our opinion, management's
assessment, included in Management's Report on Internal Control over Financial
Reporting appearing on page 54, that the Company maintained effective internal
control over financial reporting as of April 30, 2005, based on criteria
established in "Internal Control - Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated,
in all material respects, based on those criteria. Furthermore, in our opinion,
the Company maintained, in all material respects, effective internal control
over financial reporting as of April 30, 2005, based on criteria established in
"Internal Control - Integrated Framework" issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
June 22, 2005
55
IMPORTANT INFORMATION ON FORWARD-LOOKING STATEMENTS
This annual report contains statements, estimates, and projections that
constitute "forward looking statements" as defined under U.S. federal securities
laws. Generally, the words "expect," "believe," "intend," "estimate," "will,"
"anticipate," "project," and similar expressions identify a forward-looking
statement, which speaks only as of the date the statement is made. Except as
required by law, we do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
We believe that the expectations and assumptions with respect to our
forward-looking statements are reasonable. But by their nature, forward-looking
statements involve known and unknown risks, uncertainties and other factors that
in some cases are out of our control. These factors could cause our actual
results to differ materially from Brown-Forman's historical experience or our
present expectations or projections. Here is a non-exclusive list of such risks
and uncertainties:
- changes in general economic conditions, particularly in the United
States where we earn the majority of our profits;
- a strengthening U.S. dollar against foreign currencies, especially
the British Pound;
- reduced bar, restaurant, hotel and travel business in the wake of
terrorist attacks, such as occurred on 9/11;
- attempts to limit alcohol sales and marketing through either regulation or
litigation, including developments in the class action lawsuits filed against
other beverage alcohol producers and us, alleging that our advertising causes
illegal alcohol consumption by those under the legal drinking age;
- a dramatic change in consumer preferences, social trends or cultural
trends that results in the reduced consumption of our premium
spirits brands;
- tax increases, whether at the federal or state level;
- increases in the price of grain and grapes;
- continued depressed retail prices and margins in our wine business
because of our excess wine inventories, existing grape contract
obligations, and a world-wide oversupply of grapes; and
- the effects on our Consumer Durables business of the general economy,
department store business, response rates in our direct marketing
business, and profitability of mall outlet operations.
58
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Percentage State or
of Voting Jurisdiction
Name Securities Owned of Incorporation
- ---- ---------------- ----------------
AMG Trading, L.L.C. 100% Delaware
Brown-Forman Beverages Australia Pty. Ltd. 100% Australia
Brown-Forman Beverages North Asia, L.L.C. 100% Delaware
B-F Korea, L.L.C. 100% Delaware
Brown-Forman Beverages Poland 100% Poland
Brown-Forman Beverages UK, Ltd. 100% United Kingdom
Brown-Forman Relocation Corp. 100% Kentucky
Brown-Forman Thailand, L.L.C. 100% Delaware
Canadian Mist Distillers, Limited 100% Ontario, Canada
Early Times Distillers Company 100% Delaware
Fetzer Vineyards 100% California
Fratelli Bolla International Wines, Inc. 100% Kentucky
Hartmann Incorporated 100% Delaware
Heddon's Gate Investments, L.L.C. 100% Delaware
Jack Daniel's Properties, Inc. 100% Delaware
Lenox, Incorporated 100% New Jersey
Mt. Eagle Corporation 100% Delaware
Sonoma-Cutrer Vineyards, Inc. 100% California
Southern Comfort Properties, Inc. 100% California
Washington Investments, L.L.C. 100% Kentucky
Woodford Reserve Stables, L.L.C. 100% Kentucky
Longnorth Limited 100% (1) (3) Ireland
Clintock Limited 100% (1) (4) Ireland
Brooks & Bentley Limited 100% (2) United Kingdom
DID, Incorporated 100% (2) Delaware
Voldgade Investment Holdings A/S 100% (3) Denmark
Pitts Bay Trading Limited 75% (4) Bermuda
BFC Tequila Limited 67% (4) Ireland
Drake Investments, Inc. 100% (5) Delaware
Jack Daniel Distillery,
Lem Motlow, Prop., Inc. 100% (5) Tennessee
Brown-Forman Korea Ltd. 100% (6) Korea
Fratelli Bolla, S.p.A. 100% (7) Italy
Brown-Forman Worldwide (Shanghai) Co., Ltd. 100% (8) China
Alkometa s.r.o. 100% (9) Czech Republic
Finlandia Polska 100% (9) Poland
Brown-Forman Beverages Worldwide,
Comercio de Bebidas Ltda. 100% (10) Brazil
Brown-Forman Worldwide, L.L.C. 100% (10) Delaware
JDPI Investments, L.L.C. 100% (11) Delaware
Amercain Investments C.V. 100% (12) Netherlands
Brown-Forman Beverages Africa, Ltd. 100% (13) Bermuda
Finlandia Vodka Worldwide Ltd. 100% (14) Finland
Distillerie Tuoni e Canepa Srl 100% (15) Italy
The companies listed above constitute all active subsidiaries in which
Brown-Forman Corporation owns, either directly or indirectly, the majority of
the voting securities. No other active affiliated companies are controlled by
Brown-Forman Corporation.
(1) Includes qualifying shares assigned to Brown-Forman Corporation.
(2) Owned by Lenox, Incorporated.
(3) Owned by Amercain Investments C.V.
(4) Owned by Longnorth Limited.
(5) Owned by Jack Daniel's Properties, Inc.
(6) Owned by B-F Korea, L.L.C.
(7) Owned by Fratelli Bolla International Wines, Inc.
(8) Owned by Brown-Forman Beverages North Asia, L.L.C.
(9) Owned by Finlandia Vodka Worldwide Ltd.
(10) Owned 99% by Brown-Forman Corporation and 1% by Early Times Distillers
Company.
(11) Owned 99% by Jack Daniel's Properties, Inc. and 1% by Fetzer Vineyards.
(12) Owned 95% by Brown-Forman Corporation and 5% by Heddon's Gate
Investments, L.L.C.
(13) Owned 99% by Clintock Limited and 1% by Longnorth Limited.
(14) Owned 80% by Voldgade Investment Holdings A/S and 20% by Brown-Forman
Beverages UK, Ltd.
(15) Owned 55% by Fratelli Bolla International Wines, Inc. and 45% by
Voldgade Investment Holdings A/S.
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 33-12413 and 33-52551) and Form S-8 (No. 333-08311,
333-38649, 333-74567, 333-77903, 333-88925 and 333-89294) of Brown-Forman
Corporation and Subsidiaries of our report dated June 22, 2005 relating to the
financial statements, management's assessment of the effectiveness of internal
control over financial reporting and the effectiveness of internal control over
financial reporting, which appears in the Annual Report to Stockholders, which
is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated June 22, 2005 relating to the
financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Louisville, Kentucky
June 28, 2005
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Owsley Brown II, certify that:
1. I have reviewed this Annual Report on Form 10-K of Brown-Forman Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: June 28, 2005 By: /s/ Owsley Brown II
Owsley Brown II
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Phoebe A. Wood, certify that:
1. I have reviewed this Annual Report on Form 10-K of Brown-Forman Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: June 28, 2005 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Brown-Forman Corporation ("the Company")
on Form 10-K for the period ended April 30, 2005, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), each of the
undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in the capacity as an
officer of the Company, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: June 28, 2005
/s/ Owsley Brown II
Owsley Brown II
Chief Executive Officer and Chairman
/s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President
and Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
This certificate is being furnished solely for purposes of Section 906 and is
not being filed as part of the Report.